TaxProf Blog

Editor: Paul L. Caron
Pepperdine University School of Law

Monday, June 13, 2016

Former Qwest CEO Nacchio Denied Tax Deduction For $45 Million Forfeiture Of Insider Trading Profits

Insider TradingNacchio v. United States, Nos. 2015-5114 & 2015-5115 (Fed. Cir. June 10, 2016):

This is a tax case arising out of a criminal conviction for insider trading. Joseph P. Nacchio and Anne M. Esker (“Nacchio”) filed this action in the Court of Federal Claims seeking an income tax credit of $17,974,832 for taxes paid on trading profits of $44,632,464.38, which Nacchio was later ordered to forfeit to the United States following his conviction for insider trading with respect to those profits. The government opposed Nacchio’s request, contending that his forfeiture payment was a nondeductible penalty or fine and that he was estopped from seeking tax relief because of his criminal conviction. The parties filed cross-motions for summary judgment.

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June 13, 2016 in Celebrity Tax Lore, New Cases, Tax | Permalink | Comments (0)

Brooks:  Using Facts Of Tax Cases To Reveal Something About Who We Are

Kim Brooks (Dalhousie), The High Cost of Transferring the Dream:

This paper is part of a larger project where I use the facts in tax decisions to reveal something about who we are. It looks through a small window into the lives of the people who find themselves caught between our collective and their individual expenditure aspirations. More specifically, it explores the circumstances in which individuals find that their outstanding tax debts pose a threat to their ability to maintain ownership of their home.

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June 13, 2016 in New Cases, Scholarship, Tax | Permalink | Comments (0)

Medtronic Wins $2 Billion Transfer Pricing Tax Court Case

MedtronicBloomberg BNA, Tax Court Slams IRS ‘Medtronic'Analysis, Says $2B Too Much:

The IRS grossly underrated the contributions of Medtronic Inc.'s Puerto Rican affiliate to the quality of the company's products, the U.S. Tax Court ruled, finding for the medical device maker in its $2 billion transfer pricing dispute (Medtronic v. Commissioner, T.C. Memo. 2016-112 (June 9, 2016)).

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June 13, 2016 in New Cases, Tax | Permalink | Comments (0)

Sunday, June 5, 2016

Snow Day Excuses Late Tax Court Petition Filing

Snow DayAs the West Coast bakes in record heat:  Guralnik v. Commissioner, 146 T.C. No. 15 (June 2, 2016):

On February 13, 2015, P sent his petition to this Court via Federal Express First Overnight service, which was not then a “designated delivery service” under I.R.C. sec. 7502(f)(2). P’s petition was required to be filed “within 30 days of a determination under this section.” I.R.C. sec. 6330(d)(1).

On the last date for timely filing of the petition, Tuesday, February 17, 2015, all Federal Government offices in the District of Columbia, including the Tax Court, were officially closed on account of Winter Storm Octavia. For that reason, P’s petition could not be delivered to the Court on that day. P’s petition was delivered to the Court and filed on Wednesday, February 18, 2015, when the Court reopened for business.

Fed. R. Civ. P. 6(a)(3)(A) provides that, “if the clerk’s office is inaccessible * * * on the last day for filing * * *, then the time for filing is extended to the first accessible day that is not a Saturday, Sunday, or legal holiday.” Tax Court Rule 25(a), dealing with computation of time, does not address how time shall be computed when the Clerk’s Office is inaccessible. Tax Court Rule 1(b), however, provides: “Where in any instance there is no applicable rule of procedure, the Court or the Judge before whom the matter is pending may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure to the extent that they are suitably adaptable to govern the matter at hand.”

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June 5, 2016 in New Cases, Tax | Permalink | Comments (1)

Wednesday, May 18, 2016

Tax Court:  Accountant Cannot Deduct Law School Tuition

Tax Court Logo 2Santos v. Commissioner, T.C. Memo. 2016-100 (May 17, 2016):

Santos earned a bachelor’s degree in accounting [from Indiana University (Bloomington)]. In 1990, he began working as a tax-return preparer. In 1995, he became an “enrolled agent”, a person authorized to represent taxpayers before the IRS. In 1996, Santos earned a master’s degree in taxation [from San Francisco State University]. He began offering other services to his clients, including accounting and financial planning.

At some point Santos enrolled in law school [John F. Kennedy University College of Law]. He was attending law school in 2010. During that year, he paid tuition and fees of $20,275. He graduated from law school in 2011. In July 2011, he took the California bar examination. ... In December 2014, he was admitted to the State Bar of California and admitted to practice before the U.S. Tax Court.

In 2015, Santos started a law firm, Santos and Santos Law Offices, with his father. The firm performs multiple services including legal representation, tax planning, accounting, and financial planning. ...

Whether Santos is entitled to a deduction of $20,275 for his law school tuition and fees remains at issue. ...

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May 18, 2016 in Legal Education, New Cases, Tax | Permalink | Comments (9)

Sunday, April 10, 2016

Atheists Try Again To Strike § 107 Housing Allowance for 'Ministers of the Gospel'

Law 360, Atheists Try Again To Strike Clergy Housing Tax Exemption:

An atheist group on Wednesday filed a suit in a Wisconsin federal court alleging that a tax exemption for housing allowances paid to ministers violates the Establishment Clause of the U.S. Constitution after an earlier challenge was dismissed for lack of standing.

A lawsuit filed by the Freedom From Religion Foundation in 2011 was dismissed by the Seventh Circuit in 2014 because the staff members never requested tax refunds. In the new complaint filed Wednesday, the foundation claims that following the appellate court's dismissal, its staff members sought a refund of income taxes paid on housing allowances received from the group but were denied by the Internal Revenue Service. 

The suit seeks an end to Tax Code Section 107, which provides that a housing allowance paid to a “minister of the gospel” is not included in taxable income. The provision is discriminatory because it is provided exclusively to religious clergy, the group says.

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April 10, 2016 in New Cases, Tax | Permalink | Comments (3)

Thursday, March 24, 2016

Jury Rejects Fraud Claim Against Thomas Jefferson Law School

Thomas Jefferson Logo (2015)San Diego Union-Tribune, Jury Rejects Fraud Claim Against Law School:

A San Diego Superior Court jury on Thursday disagreed with a former law student who claimed the Thomas Jefferson School of Law willfully misrepresented employment data to perspective students.

The jury was split, 9-3, in the school's favor.

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March 24, 2016 in Legal Education, New Cases | Permalink | Comments (12)

Monday, March 21, 2016

8th Circuit Affirms Exotic Dancer's Tax Fraud Sentence, Holds $1.1 Million From Customer Were Payments For Sex, Not Gifts

ExoticUnited States v. Fairchild, No. 14-3517 (8th Cir. Mar. 17, 2016):

In 2009, Internal Revenue Service (IRS) Special Agent Daniel Wright opened an investigation on Fairchild and her husband. Agent Wright discovered that Fairchild and her husband had not filed income tax returns since 2004. Agent Wright obtained records from Fairchild's two primary bank accounts dating back to January 1, 2005. These bank records showed that a number of large cashier's checks had been deposited into her accounts. Specifically, there were 37 deposits of checks from David Karlen totaling $1,103,647.84. Fairchild's accounts reflected another six checks totaling $50,000 from Paul Pietz deposited into two main accounts in 2008. The bank records also showed $210,348.39 in total cash deposits from 2005 to 2008.

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March 21, 2016 in New Cases, Tax | Permalink | Comments (1)

Wednesday, December 30, 2015

5th Circuit:  Texas Can Deny Tax Breaks To Films It Doesn’t Like

MacheteWall Street Journal Law Blog:  Texas Can Deny Tax Breaks to Films it Doesn’t Like, Appeals Court Rules, by Jacob Gershman:

Texas has leeway under the First Amendment to deny tax breaks to films deemed insulting to the state, a federal appeals court ruled [Machete Prooductions LLC v. Page, No. 15-50120 (5th Cir. Dec. 28, 2015)] ...

Last year the producers behind the sequel to the 2010 gory action comedy “Machete” sued Texas for denying them tax breaks under a state program that encourages film production in the state. ...

The state denied it infringed on any constitutional speech rights. And a lower court agreed in a ruling handed down earlier this year. On Monday the Louisiana-based Fifth U.S. Circuit Court of Appeals affirmed that decision.

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December 30, 2015 in Celebrity Tax Lore, New Cases, Tax | Permalink | Comments (1)

Wednesday, December 23, 2015

Lederman:  On The PATH To A More Judicial Tax Court

Ledderman (2016)Following up on Friday's post, Tax Extenders Bill Puts Tax Court In Constitutional Limbo:  TaxProf Blog op-ed:  On the PATH to a More Judicial Tax Court, by Leandra Lederman (Indiana-Bloomington):

The recently enacted Protecting Americans from Tax Hikes (PATH) Act of 2015 includes a subtitle containing several sections addressing the U.S. Tax Court. This post focuses primarily on Congress’s “clarification” of what the Tax Court is not, but it also briefly addresses some changes the new law makes to Tax Court administration.

Since 1969, when Congress enacted Internal Revenue Code (Code) section 7441, making the Tax Court an Article I court, the Tax Court has faced issues resulting from its lack of a clear place in the federal government structure. The clarifying amendment in the PATH Act adds a third sentence at the end of section 7441 (highlighted in bold below), which makes the provision read as follows:

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December 23, 2015 in Congressional News, New Cases, Scholarship, Tax | Permalink | Comments (0)

Friday, December 18, 2015

Tax Extenders Bill Puts Tax Court In Constitutional Limbo

Tax Court Logo 2University of Chicago Law School Faculty Blog: Tinkering with the Tax Court, by Daniel Hemel:

The House of Representatives voted 318-109 on Thursday to approve a package of tax breaks that will cost an estimated $680 billion over the next decade. ... [O]ne provision in the package that has drawn little attention so far could have significant implications for the United States Tax Court. The provision, buried on page 231 of the 233-page bill, puts the 19-member court in a state of constitutional limbo. The provision is entitled “Clarification Relating to United States Tax Court,” and it amends the Internal Revenue Code to add the following language:

The Tax Court is not an agency of, and shall be independent of, the executive branch of the Government.

The provision appears to have been added in response to the D.C. Circuit’s 2014 decision in Kuretski v. Commissioner.

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December 18, 2015 in New Cases, Tax | Permalink | Comments (0)

Wednesday, December 16, 2015

Tax Court:  92 Year Old Sumner Redstone Liable For Gift Tax On 1972 Gift

Hollywood Reporter, Sumner Redstone Loses to IRS in Tax Case Four Decades in the Making:

As the 92-year-old billionaire Sumner Redstone witnesses a vicious court fight over his mental condition, the U.S. Tax Court has released a decision [Redstone v. Commissioner, T.C. Memo. 2015-237 (Dec. 9, 2015)] that delves into the beginnings of his media empire, his connection to the early-1970s Watergate scandal and four decades of in-fighting in the Redstone family.

The case is extraordinary, to say the least. The core question in Redstone's dispute with the Internal Revenue Service pertains to whether his 1972 transfer of stock to his children was a taxable "gift" or not. Ultimately, the Tax Court affirms a tax deficiency of $737,625, but lets him off the hook for fraud. ...

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December 16, 2015 in Celebrity Tax Lore, New Cases, Tax | Permalink | Comments (2)

Monday, December 14, 2015

Gay Stetson Law Prof Challenges IRS's Denial Of Deduction For In-Vitro Fertilization, Surrogacy Expenses

MorrisseyTampa Tribune, Gay Parents Sue After IRS Denies Tax Deduction for In-Vitro Fertilization, Surrogate:

Is being gay, in a long-term committed relationship, the same as being biologically infertile? That’s the argument being made by a Stetson law professor in a lawsuit against the federal government.

Joseph F. Morrissey, who teaches constitutional and business law at Stetson, is seeking to overturn a ruling by the IRS that denied him and his partner a tax deduction. The deduction would have been for costs associated with their use of in-vitro fertilization and a surrogate who gave birth to their twin sons.

An IRS revenue agent who denied the claim said Morrissey’s sexual orientation was a “choice,” according to the lawsuit filed in U.S. District Court in Tampa. ...

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December 14, 2015 in IRS News, Legal Education, New Cases, Tax | Permalink | Comments (0)

Tuesday, December 8, 2015

U.S. Supreme Court To Decide If California Franchise Tax Board Can Be Held Liable By Nevada Court For Fraud Committed During Audit Of Taxpayer

Supreme Court (2014)National Law Journal, Nevada Inventor's Tax Dispute Tests Power of State Courts:

Two veterans of the U.S. Supreme Court bar sparred on Monday over the validity of a 36-year-old precedent that allows states to be sued in other states' courts.

Las Vegas-based inventor Gilbert Hyatt, represented by Farr & Taranto's H. Bartow Farr, is fighting to hold onto a million-dollar judgment he won in Nevada state courts against the Franchise Tax Board of California. The Nevada Supreme Court found the board liable for fraud committed during an audit that discovered the more than $10 million that Hyatt owed to California before he moved to Nevada in 1992.

Jessica Berch (Concordia) & Chad DeVeaux (Concordia), Franchise Tax Bd. v. Hyatt: State Sovereign Immunity, Our Federalism, and Jerry Springer:

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December 8, 2015 in New Cases, Tax | Permalink | Comments (0)

Thursday, November 19, 2015

NY Court: Ethics Rules Bar Whistleblower Suit By Former Vanguard Tax Lawyer Alleging Mutual Fund Giant Evaded $1 Billion in Taxes

VanguardFollowing up on my previous posts (links below): Philadelphia Inquirer, Danon Barred From Whistleblower's Cut in Vanguard NY Case:

A New York State Supreme Court justice has ruled that a former Vanguard Group tax lawyer cannot expect to collect a whistleblower's cut of potential back state taxes owed by the mutual-fund giant because he was employed by Vanguard at the time he secretly filed the complaint.

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November 19, 2015 in New Cases, Tax | Permalink | Comments (0)

Monday, November 9, 2015

Microsoft, IRS Spar Over Long-Running Tax Probe

Microsoft IRSSeattle Times, Microsoft, IRS Spar Over Long-Running Probe of its Taxes:

Microsoft and the Internal Revenue Service sparred in court Friday over the agency’s power to investigate taxpayers.

Microsoft, seeking a court order to overturn a portion of an IRS probe into its books, says the tax agency’s reliance on outside lawyers in the investigation sets a dangerous precedent for taxpayer confidentiality, and could embolden the agency to use powers Congress never intended to it have.

The government’s lawyers counter that a ruling in favor of Microsoft may curtail the IRS’s ability to bring in outside experts to help make sense of complex tax matters, sabotaging the system the government relies on to make sure companies pay the appropriate amount of tax. ...

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November 9, 2015 in IRS News, New Cases, Tax | Permalink | Comments (0)

Wednesday, October 21, 2015

Rasmusen: How I Came To Be Suing Citigroup For $2.4 Billion As A Tax Whistleblower

RasmussenTaxProf Blog op-ed:  How I Came To Be Suing Citigroup for $2.4 Billion  as a Tax Whistleblower, by Eric Rasmusen (Indiana University, Kelley School of Business):

Back in 2011 I wrote an article on General Motors and Tax Code Section 382 with J. Mark Ramseyer, who teaches corporations and Japanese law, for  The Cato Papers on Public Policy.  The U.S. Treasury had issued a series “EESA Notices” (e.g. IRS Notice 2009-14) saying that it interpreted Section 382 as saying that the U.S. Treasury would not be counted as a “shareholder” in thinking about whether an ownership change had occurred.  There was no such exception in the statute, and Treasury offered no reasoning, so we were outraged. It mattered because if Section 382 applies, then after an ownership change a corporation loses its Net Operating Losses (NOL’s), the past losses it can carry forward to set off against future income in profitable years to reduce income tax.

Our article was “real science” in that ultimately we  changed our mind, concluding that GM had not yet underpaid its taxes. GM fell into a legitimate exception, because of two special features: (1) It had gone into Chapter 11, and (2) The U.S. Treasury was a major creditor, and and “old and cold” one who had not lent money intending to convert it to shares later.  Thus, this ownership change counted as a reorganization. I struggled a bit, because the formal ownership transfer occurred as a 363 sale rather than a real Chapter 11 reorganization, but Mark convinced me that it still counted as a reorganization.  Section 382 would still have been triggered if the U.S. government had sold its stock within 3 years but it waited long enough to avoid the trigger (perhaps having read our article?).

Citigroup and AIG were a different matter. They didn’t go into bankruptcy,so they weren’t reorganizations. In the case of Citigroup, the government hadn’t bought over 50% of the shares, but combined with a new issue to the public at the same time, Citigroup did go over the Section 382 threshold.

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October 21, 2015 in New Cases, Tax | Permalink | Comments (6)

Saturday, September 5, 2015

Tax Court: Snow Day Is A Legal Holiday For Tax Filing Purposes

Snow DayGuralnik v. Commissioner, No. 4358-15L (Sept. 3, 2015):

[I]n the case at hand the closing of both District and Federal government offices, specifically including the Tax Court, because of a winter snowstorm, together with the fact that the Tax Court does not maintain an after-hours "drop-box" and does not presently allow petitions to be filed electronically, means that the Tax Court's clerk's office was inaccessible on the day of the winter snowstorm. Under such circumstances we find it inconceivable that Congress would have intended, absent a specific statutory provision requiring otherwise, to bar a taxpayer who fails to anticipate on a Friday that the Government will decide to close a filing office on the first workday of the following week on account of a snowstorm. See In re Swine Flu Immunization Prod. Liab. Litig., 880 F.2d at 1445; United Mine Workers v. Dole, supra. Because there is no such specific statutory provision requiring otherwise, we will deny respondent's motion, as supplemented.

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September 5, 2015 in New Cases, Tax | Permalink | Comments (0)

Saturday, August 22, 2015

9th Circuit's Mortgage Interest Deduction Decision Adds To Tax Code's Marriage Penalty

9th CircuitFollowing up on last week's post, Ninth Circuit Gives Unmarried Couples Double The Mortgage Interest Deduction Available To Married Couples:  

Forbes, Does Ninth Circuit Mortgage Interest Decision Create Special Rights?, by Peter J. Reilly:

is kind of ironic for the Ninth Circuit, which played such a big role in advancing marriage equality, to be issuing a decision that discourages registered  domestic partners from marrying. That is an effect of the decision in the case Bruce Voss and Charles Sophy vs. IRS, although I imagine it is an unintended consequence.  It almost seems as if the Ninth Circuit  has instituted that conservative trope — special rights for homosexuals — with this decision. Closer analysis would show it would be more like special rights for homosexuals and geezers. ...

Thanks to the Ninth Circuit’s recent decision, there is now a new marriage penalty for couples with large mortgages.  The amount of the penalty depends on how much the mortgage exceeds $1.1 million, its interest rate and the marginal tax rate of the taxpayers.  My back of the envelope computation would put the maximum penalty at not a lot more than $20,000. ...

A committed unmarried couple who did some serious planning could really go to town exploiting the fact that they are considered unrelated for federal income tax purposes.  

Wall Street Journal, Another Reason Not to Get Married: Recent Court Ruling in California Gives Unmarried Couples a Big Tax Break:

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August 22, 2015 in New Cases, Tax | Permalink | Comments (3)

Wednesday, August 19, 2015

Divided D.C. Circuit Says Anti-Injunction Act Bars Challenge To IRS's Bank Reporting Regulation

In Florida Bankers Association v. Department of the Treasury, No. 14-5036 (D.C. Cir. Aug. 15, 2015), a sharply divided D.C. Circuit held that the Anti-Injunction Act (26 U.S.C. § 7421(a)) barred a challenge by two bank associations to tax regulations requiring U.S. banks to report to the IRS interest earned by non-resident aliens (even though such interest is not subject to U.S. tax). In a blistering dissent, Judge Henderson argues that the majority's decision is directly contrary to the Supreme COurt's recent decision in Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124 (2015), and two prior D.C. Circuit decisions. For a detailed discussion of the opinion see Patrick J. Smith (Ivins, Phillips & Barker, Washington, D.C.), D.C. Circuit Majority Opinion in Florida Bankers Not Consistent with Supreme Court’s Direct Marketing Decision (Part 1, Part 2).  (Hat Tip: Kristin Hickman.)

August 19, 2015 in New Cases, Tax | Permalink | Comments (0)

Thursday, August 13, 2015

Tax Court Petition: Can Boston Bruins (And Other Pro Sports Teams) Deduct 100% Of Meal Expenses At Away Games; Is Hotel A Team's 'Business Premises'?

BruinBloomberg BNA, Boston Bruins Raise Controversy by Arguing That Meals Are Deductible, Team Is "World Class", by Syd Gernstein:

[A] recent case filed in the U.S. Tax Court, Jacobs v. Commissioner, No. 19009-15 (petition filed July 27, 2015), caught my eye. 

At issue is whether the Boston Bruins hockey club may deduct 100% of the costs it incurred to provide its players and staff with meals while travelling to away games. The case poses the IRS and Tax Court with some fairly interesting questions concerning the deductibility of employee fringe benefits. ...

And, although it is not clear on the face of the Bruins’ Tax Court petition, I think it is this employer operated eating facility exception that the Bruins are going to rely on to argue that the meals are 100% deductible.

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August 13, 2015 in New Cases, Tax | Permalink | Comments (5)

Monday, August 10, 2015

Ninth Circuit Gives Unmarried Couples Double The Mortgage Interest Deduction Available To Married Couples

Tax Court Logo 2A split Ninth Circuit panel on Friday reversed the Tax Court and held, contrary to the IRS's position, that the § 163(h)(3) limitations on the deductibility of mortgage interest ($1 million of acquisition indebtedness plus $100,000 of home equity indebtedness) are applied on a per-taxpayer basis (for a total of $2.2 of mortgage debt), as contended by celebrity psychiatrist Charles Sophy and his domestic partner, Bruce Voss, who owned homes in Beverly Hills and Rancho Mirage, California, as joint tenants.  Voss v. Commissioner, Nos. 12-73257 & 12-73261 (Aug. 7, 2015). (The Tax Court had upheld the IRS's position that §163(h)(3) applies on a per-residence basis (and thus limited to $1.1 of mortgage debt.  Sophy v. Commissioner, 138 T.C. 204 (2012).)

Judge Ikuta dissented:

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August 10, 2015 in New Cases, Tax | Permalink | Comments (8)

Tuesday, July 28, 2015

Hickman: The Tax Court Delivers An APA-Based Smackdown

Hickman 2014 2TaxProf Blog op-ed:   Altera Corp. & Subs. v. Commissioner: The Tax Court Delivers An APA-Based Smackdown, by Kristin Hickman (Minnesota):

Since the Supreme Court decided the Mayo Foundation case in 2011, the government has done everything it can to limit the scope of the Supreme Court’s 2011 Mayo Foundation decision.  Even though the Mayo Foundation Court declined “to carve out an approach to administrative review good for tax law only” and otherwise signaled fealty to general administrative law norms in the tax context, the IRS and the Department of Justice have repeatedly pursued a narrow construction of Mayo Foundation, and the Tax Court has often been happy to play along.  Not today.

In Altera Corp. & Subs. v. Comm’r,, 145 T.C. No. 3 (July 27, 2015) the Tax Court unanimously invalidated regulations under Section 482 requiring participants in qualified cost-sharing arrangements to include stock-based compensation costs in the cost pool in order to comply with the arm’s length standard, on grounds that the regulations were not the product of reasoned decisionmaking as required by Administrative Procedure Act (APA) § 706(2)(A) and Motor Vehicle Manufacturers Association of the United States v. State Farm Mutual Automobile Insurance Co.,, 463 U.S. 29 (1983), known in administrative law circles as State Farm.  From top to bottom, the Altera opinion reads like a treatise on general administrative law requirements and norms.  Without delving into the policy details of the regulation at issue, the following paragraphs summarize the Tax Court’s opinion and its potential implications.

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July 28, 2015 in New Cases, Scholarship, Tax | Permalink | Comments (2)

Wednesday, July 22, 2015

Who’s Right on Marijuana? Justice Or The IRS?

Vapor RoomFollowing up on my previous post, 9th Circuit: Marijuana Dispensaries Cannot Deduct Business Expenses, Must Pay Taxes On 100% Of Their Gross Income:  Newsweek, Who’s Right on Marijuana? Justice Or the IRS?:

In downtown Washington, D.C., the Department of Justice asserts that marijuana enterprises are free to exist, while immediately across 10th Street, the IRS tells those businesses they are illegal drug-trafficking operations ineligible for the benefits other corporate entities enjoy.

Which is it? Right now, it is both. This dual status presents commercial challenges for marijuana businesses, carrying serious consequences for individuals, patients, investors, law enforcement, courts, accountants and others.

Last week, one challenge—the issue of tax deductions for marijuana enterprises—had its day in court. In Olive v. Commissioner of Internal Revenue [CIR], the U.S. Court of Appeals for the Ninth Circuit reviewed whether a medical marijuana enterprise in California—Vapor Room Herbal Center in San Francisco—could deduct business expenses under U.S. tax law (the Internal Revenue Code).

The case made its way to the Ninth Circuit on appeal from a decision from the United States Tax Court. The Tax Court previously ruled in favor of the commissioner of the IRS because Vapor Room Herbal Center was a business that “consist[ed] of trafficking in controlled substances” (26 U.S.C. § 280E). Section 280E of the tax code limits businesses from deducting business expenses under such circumstances.

The Ninth Circuit upheld the Tax Court decision. The appeals court outlined two clear reasons (among others) why Vapor Room Herbal Center could not deduct business expenses.

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July 22, 2015 in IRS News, New Cases, Tax | Permalink | Comments (1)

Tax Court Throws Marvel For $16 Million Loss In NOL Adjustment Case

MarvelMarvel Entertainment Group v. Commissioner, 145 T.C. No. 2 (July 21, 2015):

MEG was an affiliated group that filed consolidated returns. On Dec. 27, 1996, certain MEG member entities filed for bankruptcy under 11 U.S.C. ch. 11 and subsequently excluded cancellation of indebtedness (COD) income from their respective gross incomes under I.R.C. sec. 108(a)(1)(A) for MEG’s short taxable year ending Oct. 1, 1998. Pursuant to I.R.C. sec. 108(b)(2)(A), MEG reduced each member entity’s allocable share of consolidated net operating loss (CNOL) by each member entity’s previously excluded COD income. MEG carried forward into its successor affiliated group a $47,424,026 CNOL and used this amount to offset income of the successor group for its taxable years ending Dec. 31, 2003 and 2004.

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July 22, 2015 in New Cases, Tax | Permalink | Comments (0)

Wednesday, July 8, 2015

Estate of Former Detroit Pistons Owner Settles $2.8 Billion Gift, Estate & GST Deficiency Claim For 11 Cents On The Dollar

DavidsonFollowing up on my previous post, IRS Hits Estate of Former Detroit Pistons Owner With $2 Billion Tax Bill:  the IRS settled for $320 million of the $2.8 billion in gift, estate, and Generation-skipping taxes it sought from the estate of William Davidson, the former owner of the Detroit Pistons. Estate of Davidson v. Commissioner, No. 13748-13 (July 6, 2015).

Born in Detroit, Davidson built Auburn Hills-based Guardian Industries into one of the world’s leading makers of glass, automotive and building products. He went on to own the Detroit Pistons, the WNBA’s Detroit Shock and NHL’s Tampa Bay Lightning. He died March 13, 2009, at age 86, with a net worth estimated at more than $3 billion.

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July 8, 2015 in New Cases, Tax | Permalink | Comments (0)

Sunday, July 5, 2015

Will Christian Colleges (And Law Schools) Lose Their Tax Exemption After Obergefell?

White House Same Sex MarriageFollowing up on my previous post, Will Supreme Court's Same-Sex Marriage Decision Cost BYU Its Tax Exemption?:  Inside Higher Ed, The Supreme Court Ruling and Christian Colleges:

Friday's Supreme Court decision that states must authorize and recognize gay and lesbian marriages could create major legal challenges for religious colleges -- primarily evangelical Christian colleges that bar same-sex relationships among students and faculty members. Or the decision may not create much of a legal challenge at all. Or it may create challenges, but not soon.

Legal experts are divided. But the question of whether same-sex marriage as a national right changes the legal status of Christian colleges is no longer just theoretical.

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July 5, 2015 in Legal Education, New Cases | Permalink | Comments (14)

Monday, June 29, 2015

Seto: The Tax Implications of Obergefell v. Hodges

Seto (2014)TaxProf Blog op-ed:  The Tax Implications of Obergefell v. Hodges, by Theodore P. Seto (Loyola-L.A.):

In Obergefell v. Hodges, 576 U. S. ____ (June 26, 2015), the Supreme Court held that (1) state laws banning same-sex marriage are “invalid to the extent they exclude same-sex couples from civil marriage on the same terms and conditions as opposite-sex couples” and (2) “there is no lawful basis for a State to refuse to recognize a lawful same-sex marriage performed in another State on the ground of its same-sex character.” The decision’s most profound impact will undoubtedly be on individuals’ lives and relationships, not on their tax returns. Nevertheless, it has significant implications for the substance and administration of both state and federal tax law.

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June 29, 2015 in New Cases, Tax | Permalink | Comments (0)

Friday, June 26, 2015

Herzig: The Tax Implications Of Today's Supreme Court Same-Sex Marriage Decision

HerzigTaxProf Blog op-ed:  The Tax Implications Of Today's Supreme Court Same-Sex Marriage Decision, by David Herzig (Valparaiso):

Last June, in Windsor, the Supreme Court decided that section 3 of the Defense of Marriage Act (“DOMA”) was unconstitutional.  I wrote about that decision in an op-ed for TaxProf Blog.  The Supreme Court did not decide under section 2 whether states had to provide full-faith and credit to out-of-state marriages.  That secondary question was resolved today when the Supreme Court in a 5-4 decision held in Obergefell v. Hodges that the 14th Amendment of the Constitution guarantees a right to same-sex marriage.

I wrote an article for Slate in January predicting that the Supreme Court would rule in favor of same-sex marriage.  I based my theory on the tax consequences of ruling against same-sex marriage would have collateral damage.  “Couples that relied on their regional Circuit Court decisions for marriage recognition would no longer be married, and their marriages would not be recognized for federal income tax purposes. Under the current IRS ruling, they would not be treated as married in their state of domicile. Currently, without taking into account the pending 5th Circuit decision, this would mean residents of some 16 states would be affected.”

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June 26, 2015 in New Cases, Tax | Permalink | Comments (0)

Gamage: Reflections On The King v. Burwell Decision

Gamage (2014)TaxProf Blog op-ed:  Reflections on the King v. Burwell Decision, by David Gamage (UC-Berkeley):

And, so, another judicial threat to Obamacare bites the dust.  Yesterday, the Supreme Court issued its decision in King v. Burwell, affirming that Obamacare’s premium tax credits are to be available in all States.  The 6-3 majority opinion written by Chief Justice Roberts concludes that the key statutory text is ambiguous.  To resolve this ambiguity, the majority looks to the Act’s context and structure, and decides for the government.

Crucial to the majority’s reasoning is that the term “Exchange” is defined by the statute as a term of art, and—as so defined—all Exchanges are explicitly deemed as being established by a State.  Although the statutory language is beyond inelegant and creates substantial ambiguity, it would be improper to ignore that “Exchange” is a defined term.  When a statute explicitly defines terms, this has always been understood to trump what might otherwise be the ordinary meaning of those terms.  I thus find the majority’s reasoning persuasive.  Indeed, I have been arguing along similar lines since this controversy first arose, and Darien Shanske and I previously co-authored an essay that made this argument in greater depth:  Why the Affordable Care Act Authorizes Tax Credits on the Federal Exchanges, 71 State Tax Notes 229 (2014).

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June 26, 2015 in New Cases, Scholarship, Tax | Permalink | Comments (4)

Thursday, June 25, 2015

Grewal: King v. Burwell — The IRS Isn’t An Expert?

Grewal (2015)Tax Prof Blog Op-Ed:  The IRS Isn’t an Expert?, by Andy Grewal (Iowa):

Today, the Supreme Court issued its much-anticipated decision in King v. Burwell, holding that the Section 36B premium tax credit extends to taxpayers who acquire healthcare policies on federally established exchanges.  The decision probably will not bear much on core tax provisions, but the Court’s reasoning could have major implications for the IRS’s administration of the various social programs littered throughout the tax code.

To uphold the government’s position, the Court might have been expected to employ the familiar Chevron framework, under which it generally defers to agency interpretations of ambiguous statutory provisions.  However, in King, the Court refused to offer the IRS any deference on the question presented, even though it acknowledged the ambiguity in the contested statutory provision.  The meaning of the contested phrase, referring to credits for policies purchased on an Exchange established by the State, implicated major questions of health care policy, and “[t]his is not a case for the IRS.”  The IRS “has no expertise in crafting health insurance policy,” so the Court believed that it should resolve the ambiguity in the statutory scheme.  It ultimately did so through an examination of Section 36B and various related Affordable Care Act provisions.

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June 25, 2015 in New Cases, Tax | Permalink | Comments (9)

Monday, June 22, 2015

The IRS Scandal, Day 774: The D.C. Circuit Continues To Chip Away At The Anti-Injunction Act

Hickman 2014 2TaxProf Blog op-ed:  Z Street v. Koskinen: The D.C. Circuit Continues To Chip Away At The Anti-Injunction Act, by Kristin E. Hickman (Minnesota):

In Z Street v Koskinen, the D.C. Circuit considered the justiciability of a claim raised by Z Street, a nonprofit organization, that the IRS delayed considering Z Street’s application for tax exempt status under IRC § 501(c)(3) based solely upon the fact that Z Street’s activities contradicted government policy vis a vis Israel, and that the IRS thus violated Z Street’s First Amendment rights. IRC § 7428 allows an organization to seek declaratory judgment if the IRS fails to act upon its exemption application within 270 days. Z Street brought its challenge 32 days short of that date, prompting the IRS to claim that the Anti-Injunction Act, § 7421 precluded Z Street’s suit until the 270-day period for relief under IRC § 7428 had elapsed. 

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June 22, 2015 in IRS News, IRS Scandal, New Cases, Tax | Permalink | Comments (0)

Monday, June 15, 2015

Zelinsky: Preliminary Thoughts About The Enigma Of Wynne

ZelinskyTaxProf Blog op-ed:  Preliminary Thoughts About The Enigma of Wynne, by Edward Zelinsky (Cardozo):

Maryland’s county income tax does not grant a credit to Maryland residents for the out-of-state income taxes such residents pay on the income they earn outside of Maryland. In Comptroller of the Treasury of Maryland v. Wynne, the U.S. Supreme Court held that this failure causes the Maryland county income tax to violate the dormant Commerce Clause of the U.S. Constitution.

Wynne perpetuates an inherent problem of the Court’s dormant Commerce Clause doctrine: The Court declares some, ill-defined taxes such as the Maryland county income tax unconstitutionally discriminatory while other, economically equivalent taxes and government programs are apparently acceptable under the dormant Commerce Clause. A decision as enigmatic as it is important, Wynne raises as many questions as it answers. Among these are the continuing viability (or not) of external consistency and apportionment, concepts which have been central to the Court’s formulation of the dormant Commerce Clause. Wynne also undermines the Supreme Court’s traditional tolerance of the double state income taxation of dual residents.

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June 15, 2015 in New Cases, Scholarship, Tax | Permalink | Comments (5)

Wednesday, May 27, 2015

Tax Profs' Brief in Direct Marketing Association v. Brohl

Brief of Interested Law Professors in Direct Marketing Association v. Brohl (10th Circuit) (Joseph Bankman (Stanford), Jordan Barry (San Diego), Barbara Fried (Stanford), Alan Morrison (George Washington), Darien Shanske (UC-Davis), Kirk Stark (UCLA), John Swain (Arizona) & Dennis Ventry (UC-Davis)):

This case, Direct Marketing Association v. Brohl, was recently remanded by the U.S. Supreme Court to the Tenth Circuit Court of Appeals. The Tenth Circuit then requested a full supplemental briefing; amici law professors submitted this brief.

Like all states with a sales tax, Colorado faced – and faces – a voluntary compliance problem with the collection of its use tax. The use tax is a complement to the sales tax; in-state vendors collect and remit the sales tax, while in-state consumers are responsible for remitting the use tax on purchases made from out-of-state vendors that do not collect the sales tax. To this compliance challenge, Colorado turned to a third-party reporting solution. In broad strokes, the Colorado Statute imposes a modest requirement on one party to a taxable transaction – specifically on relatively large retailers who do not collect the use tax - to report information on their Colorado sales both to the consumer/taxpayer and to the taxing authorities.

Amici make three specific arguments.

 

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May 27, 2015 in New Cases, Tax | Permalink | Comments (0)

Saturday, May 23, 2015

WSJ: Tax Court OKs Use Of Crummey Trust To Give $1.6 Million Tax-Free To 60 Beneficiaries, Despite No-Contest Clause

Tax Court Logo 2Following up on last week's post, Tax Court Approves Crummey Trust With 60 Beneficiaries, Despite Religious Arbitration Clause:  Wall Street Journal Tax Report, A Way to Make Big Gifts to Family Without Tax: The Tax Court Cleared a Couple’s Use of Crummey Trusts to Give $1.6 million Free of U.S. Gift or Estate Tax:

In Mikel v. Commissioner, [T.C. Memo. 2015-64 (2015),] the court ruled against the Internal Revenue Service and allowed a New York couple to use Crummey trusts—named after a Methodist minister who was the plaintiff in a 1968 case—to make tax-free transfers of $1.6 million without dipping into their lifetime gift-tax exemptions.

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May 23, 2015 in New Cases, Tax | Permalink | Comments (0)

Tuesday, May 19, 2015

Supreme Court Denies Cert. In Case Challenging President's Authority To Remove A Tax Court Judge

Supreme Court (2014)Following up on my previous posts (links below):  the Supreme Court yesterday denied the taxpayers'  cert. petition arguing that the President’s authority under 26 U.S.C. §  7443(f) to remove Tax Court judges violates the Constitution’s separation of powers. Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014).

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May 19, 2015 in New Cases, Tax | Permalink | Comments (0)

Monday, May 18, 2015

5-4 Supreme Court Rules Against Maryland In Double Taxation Case (Comptroller v. Wynne)

Supreme Court (2014)A 5-4 Supreme Court ruled today that Maryland unconstitutionally failed to provide a full credit for  taxes paid to other states.  Comptroller v. Wynne, No. 13-485 (May 18, 2015).  Justice Aliton wrote the majority opinion, joined by Chief Justice Roberts and Justices Breyer, Kennedy, and Sotomayor.  There were three separate dissenting opinions:  Justice Ginsburg (joined by Justices Kagan and Scalia); Justice Scalia (joined in part by Justice Thomas); and Justice Thomas (joined in part by Justice Scalia).

The majority opinion cites the amicus brief filed by Tax Profs Michael Knoll (Pennsylvania) and Ruth Mason (Virginia), as well as Ruth Mason's article, Made in American for European Tax: The Internal Consistency Test, 49 B.C. L. Rev. 1277 (2008). 

For the Vanderbilt Law Review roundtable on the case, see here.  For press and blogosphere on today's decision, see:

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May 18, 2015 in New Cases, Tax | Permalink | Comments (0)

Friday, January 23, 2015

Tax Court: Payments for Donations of Eggs to Infertile Couples Constitute Income, Not Damages Excludable Under § 104

EggFollowing up on my previous posts (links below):  Perez v. Commissioner, 144 T.C. No. 4 (Jan. 22, 2014):

We acknowledge that this case has received some publicity in tax and nontax publications, which is why it is important to state clearly what it does not concern. It does not require us to decide whether human eggs are capital assets. It does not require us to figure out how to allocate basis in the human body, or the holding period for human-body parts, or the character of the gain from the sale of those parts. Fn.4

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January 23, 2015 in New Cases, Tax | Permalink | Comments (0)

Wednesday, January 14, 2015

8th Circuit Rejects Discrimination Claim by Tenured Tax Prof Over Her Termination Following Conviction For Tax Evasion

Magee Following up on my prior posts:

National Law Journal, Eighth Circuit Again Rejects Fired Hamline Prof’s Suit:

A federal appeals court for the second time has affirmed dismissal of a lawsuit brought against Hamline University and its former law dean by a professor who was fired after being found guilty of failing to file state tax returns.

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January 14, 2015 in Legal Education, New Cases, Tax | Permalink | Comments (2)

Thursday, January 1, 2015

The Top 10 Tax Cases (And Rulings) Of 2014

Top 10 (2014)Forbes:  The Top Ten Tax Cases (And Rulings) Of 2014, by Anthony J. Nitti (WithumSmith & Brown, Aspen, CO):

  1. Obamacare Endures Additional Attacks (Halbig v. Burwell, 758 F.3d 390 (D.C. Cir. 2014)/King v. Burwell, 759 F.3d 358 (4th Cir. 2014))
  2. Loving And Ridgely Take On The IRS (Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014)/Ridgely v. Lew, 2014 U.S. Dist. LEXIS 96447 (D. D.C. 2014))
  3. Aragona Trust Changes The Way We Look At Real Estate Professionals (Aragona Trust v. Commissioner, 142 T.C. 9 (2014))
  4. IRS Rules on Self-Employment Income Of LLC Members (CCA 201436049)
  5. Is The Sale Of A Right To Buy Land Ordinary Income Or Capital Gain? (Long v. Commissioner (11th Cir. 2014), rev'g T.C. Memo. 2013-233)
  6. The IRS (Finally) Figures Out The Real Estate Professional Rules (CCA 201427016)
  7. Buy A Building, Get An Immediate Deduction? (ABC Beverage Corp. v. United States, 113 AFTR 2d 2014-2536 (6th Cir. 2014))
  8. A Big Break For Home Builders (Shea v. Commissioner, 142 T.C. 3 (2014))
  9. Tax Court Further Muddies The 'Dealer Versus Investor' Issue (Allen v. US, 113 AFTR 2d 2014-2262 (DC CA 2014))
  10. IRA and Qualified Plan Rollovers Are More Treacherous Than You Realize (Bobrow v. Commissioner, T.C. Memo. 2014-21)

January 1, 2015 in New Cases, Tax | Permalink | Comments (0)

Tuesday, December 9, 2014

U.S. Sues Deutsche Bank Over $190 Million in Taxes

Monday, December 1, 2014

Taxpayers Ask Supreme Court to Decide President's Authority to Remove a Tax Court Judge

Supreme Court (2014)Following up on my previous posts (links below):  the taxpayers in Kuretski v. Commissioner, No. 13-1090 (D.C. Cir. June 20, 2014), on Wednesday filed a  cert. petition in the U.S. Supreme Court arguing that the President’s authority under 26 U.S.C. §  7443(f) to remove Tax Court judges violates the Constitution’s separation of powers.

December 1, 2014 in New Cases, Tax | Permalink | Comments (0)

Saturday, November 8, 2014

Supreme Court Grants Cert. to Hear Challenge to IRS's Expansion of Affordable Care Act Tax Credit

Supreme Court (2014)The Volokh Conspiracy:  Supreme Court to Hear King v. Burwell Challenge to IRS Tax Credit Rule, by Jonathan H. Adler (Case Western):

Friday the Supreme Court granted certiorari in King v. Burwell, one of four pending challenges to the IRS rule authorizing tax credits and cost-sharing subsidies for the purchase of health insurance in federally established exchanges. ...

With this grant, the Court has the opportunity to reaffirm the principle that the law is what Congress enacts, not what the administration or others wish Congress had enacted with the benefit of hindsight. Granting tax credits to those who need help purchasing health insurance may be a good idea, and may have bipartisan support, but the IRS lacks the authority to authorize such tax credits where Congress failed to do so. The PPACA only authorizes tax credits for the purchase of insurance  on exchanges “established by the State.”

Prior TaxProf Blog coverage:

(Hat Tip: Greg McNeal.)

November 8, 2014 in New Cases, Tax | Permalink | Comments (3)

Monday, November 3, 2014

District Court Refuses to Dismiss Suspended Practitioner's Lawsuit Against IRS Office of Professional Responsibility

IRS Logo 2In press reports last month, Karen Hawkins, Director of the IRS Office of Professional Responsibility ("OPR"), was quoted as saying that although she first "laughed" at the argument in Sexton v. Hawkins that OPR lacked jurisdiction over a suspended practitioner (a tax lawyer with a tax LL.M.), after  Ridgely v. Lew (more here) "there are some judges out there that would buy that now."  Last Thursday, the Federal District Court in Nevada rejected the Government's motion to dismiss Sexton's complaint againt the OPR.   Sexton v. Hawkins, No. 2:13-cv-00893 (D NV Oct. 30, 2014).

November 3, 2014 in IRS News, New Cases, Tax | Permalink | Comments (0)

Monday, October 6, 2014

Tax Court: Tenured Art Professor Has Separate Trade or Business as Artist

Crile v. Commissioner, T.C. Memo. 2014-202 (Oct. 2, 2014):

CrilePetitioner is an artist and a tenured professor of studio art. ... This opinion addresses the first of respondent’s theories and concludes that petitioner during the years in issue was engaged in a “trade or business” with the objective of making a profit from her activity as an artist. Respondent’s contentions concerning the substantiation of her expenses, the character of those expenses as “ordinary and necessary,” and her liability for penalties and additions to tax will be resolved in due course.

Petitioner has had a long, varied, and distinguished career as an artist. She has worked for more than 40 years in media that include oil, acrylic, charcoal, pastels, printmaking, lithograph, woodcut, and silkscreen. She has exhibited and sold her art through leading galleries; she has received numerous professional accolades, residencies, and fellowships; and she is a full-time tenured professor of studio art at Hunter College in New York City. Respondent agrees that petitioner has been a successful, though rarely a profitable, artist.

During the academic year petitioner devotes roughly 30 hours per week to her art, working mainly at a small studio in her Manhattan apartment. During the summer, she works full time on her art business at a larger studio in upstate New York. The amount of time it takes petitioner to create a finished work of art varies greatly--from one week to two years--depending on its size and complexity. During her career petitioner has created more than 2,000 pieces of art.

Petitioner’s artwork hangs in the permanent collections of at least 25 museums. These include the Metropolitan Museum of Art, the Guggenheim Museum, the Brooklyn Museum of Art, the Phillips Collection, the Hirshhorn Museum, and art museums at eight colleges and universities. Museums have a rigorous vetting process for acquiring art. Museum acquisitions boost an artist’s reputation in the eyes of collectors and may contribute to price increases for the artist’s other works.

Petitioner’s artwork has been acquired by for-profit as well as nonprofit entities. Corporations that have purchased petitioner’s art (several of which have since merged) include AT&T, Exxon, Texaco, Standard Oil of Ohio, Bank of America, Chase Manhattan Bank, Chemical Bank, Charles Schwab, General Mills, Westinghouse, General Telephone & Electronics, Frito-Lay, Cigna, and Prudential. Her works hang in the collections of six major New York law firms. Governmental entities that have acquired her art include the Federal Reserve Board, the Library of Congress, and the State Department (for display in U.S. embassies abroad). Such acquisitions, like museum acquisitions, place a “seal of approval” on an artist’s works and have the potential to make them more attractive to private collectors. ...

Petitioner has generated substantial income from sales of her artwork. Respondent stipulated that the total value of works sold during her career is at least $937,150. Galleries usually took a 50% commission. ...

All in all, the Court finds that petitioner sold, directly or through galleries, a total of 356 works of art during 1971-2013. These sales generated gross proceeds of approximately $1,197,150. After subtracting gallery commissions and other reductions, petitioner earned income of approximately $667,902 from sales of her art during these years. ...

To be promoted and gain tenure, a studio artist must exhibit art; the sale of art is not required. There is an expectation that a professor, once tenured, will continue to make and exhibit art. However, a tenured professor is no longer subject to annual performance evaluations, and the expectation to exhibit art is not rigorously enforced. Petitioner plans to continue her art business following her retirement from Hunter College. ...

Petitioner filed Federal income tax returns for all years in issue. On those returns she reported wage income between $85,999 and $106,058, and she reported other taxable income (interest, dividends, capital gains, pensions, and Social Security payments) between $17,658 and $67,046. On her Schedules C, she reported income and claimed the following expenses as deductions in connection with her activity as an artist during the years at issue:

Chart

Petitioner's theory for claiming deductions seems to have been that most experiences an artist has may contribute to her art and that most people with whom an artist socializes may become customers or otherwise advance her career. The trial established that a significant number of the deductions she claimed were not, within the meaning of section 162(a), "ordinary and necessary expenses" of conducting her art business but were "personal, living, or family expenses" non-deductible under section 262(a). The latter expenses appear to have included telephone and cable television bills, newspaper and magazine subscriptions, gratuities to doormen in her apartment building, taxicabs to the opera, museums, and social events, restaurant meals with friends and acquaintances, and international travel to gain inspiration from paintings in European museums. We have deferred to another day the calibration of petitioner's deductible business expenses. But it was clear to the Court that the economic losses she actually sustained in her art business were substantially smaller than the tax losses reported on her Schedules C, owing to the inclusion of many personal expenses when calculating her business income. ...

For any practitioner who teaches--whether a lawyer, an accountant, an economist, or an artist--there is an obvious intersection between the individual’s profession and his or her teaching. But the two activities have different job requirements and entail different skills.

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October 6, 2014 in Celebrity Tax Lore, New Cases, Tax | Permalink | Comments (5)

Tuesday, September 23, 2014

Camp: 9th Circuit on 'Willful Attempts to Evade or Defeat Taxes' Under Bankruptcy Code § 523(a)(1)(C)

From Bryan Camp (Texas Tech), Hawkins v. Franchise Tax Board, No. 11-16276 (9th Cir. Sept. 15, 2014):

The bankruptcy court had refused to allow the discharge of certain tax debts, holding that the debtor’s actions pre-bankruptcy were “willful attempts to evade or defeat taxes” within the meaning of 11 U.S.C. § 523(a)(1)(C). The basis for the holding was that the debtor lived a life of luxury even in the face of overwhelming tax liabilities that had accrued because the Service disallowed losses from the taxpayer’s tax shelters. The bankruptcy court found that the debtors personal living expenses from January 2004 to September 2006 exceeded their earned income by up to $2.35 million during that period. The district court affirmed.

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September 23, 2014 in New Cases, Tax | Permalink | Comments (0)

Monday, September 22, 2014

Tax Court Approves Taxpayer's Use of Predictive Coding to Respond to IRS's Discovery Request, Reducing Costs by 80%

In a case of first impression, the Tax Court has approved a taxpayer's use of predictive coding technology to respond to the IRS's discovery demand for tax information.  Dynamo Holdings LP v. Commissioner, 143 T.C. No. 9 (Sept. 17, 2014):

Predictive CodingRespondent requests that petitioners produce the electronically stored information (ESI) contained on two specified backup storage tapes or, alternatively, that they produce the tapes themselves (or copies thereof). Petitioners assert that it will take many months and cost at least $450,000 to fulfill respondent’s request because they would need to review each document on the tapes to identify what is responsive and then withhold privileged or confidential information. Petitioners request that the Court ... let them use predictive coding, a technique prevalent in the technological industry but not yet formally sanctioned by this Court, to efficiently and economically identify the nonprivileged information responsive to respondent’s discovery request [at a cost of $80,000]. ...

Although it is a proper role of the Court to supervise the discovery process and intervene when it is abused by the parties, the Court is not normally in the business of dictating to parties the process that they should use when responding to discovery. If our focus were on paper discovery, we would not (for example) be dictating to a party the manner in which it should review documents for responsiveness or privilege, such as whether that review should be done by a paralegal, a junior attorney, or a senior attorney. Yet that is, in essence, what the parties are asking the Court to consider--whether document review should be done by humans or with the assistance of computers. ...

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September 22, 2014 in IRS News, New Cases, Tax | Permalink | Comments (1)

Tax Court: Couple Failed to Report $30 Million Gift, But Not Liable for Penalty Due to Reliance on Advice From EY, WilmerHale

EYWHIn Cavallaro v. Commissioner, T.C. Memo. 2014-189 (Sept. 17, 2014), the Tax Court held that a Massachusetts couple failed to report a $30 million gift to their sons as a result of misvaluations in a merger of their company with their sons' company, but were not liable for penalties because they reasonably relied on the advice of Ernst & Young (now EY) and Hale & Dorr (now William Cutler Hale & Dorr).

Mr. and Mrs. Cavallaro made the requisite showing of reasonable cause. They had little to no advanced education, including no formal accounting, legal, or business education. Mr. and Mrs. Cavallaro hired advisers who were competent professionals with sufficient expertise to justify reliance. They engaged professionals from a well-known accounting firm and a well-known law firm to structure the tax-free merger of their S corporation, Knight Tool, with their sons' S corporation, Camelot Systems. As discussed above, the professionals initially had differing opinions regarding the ownership of the CAM/ALOT technology, and the issue was explicitly considered by those professionals. The team of advisers eventually structured the merger transaction according to the idea proposed by the Cavallaros' attorney Mr. Hamel at Hale & Dorr -- that is, that on the date of the merger, the CAM/ALOT technology belonged to Camelot and not to Knight (and therefore that no gift occurred) because of a prior transfer. They obtained the valuation report by Mr. Maio based on this assumption and allocated the post-merger stock accordingly.

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September 22, 2014 in IRS News, New Cases, Tax | Permalink | Comments (0)

Thursday, September 11, 2014

Fifth Circuit Denies Dow Chemical's $2 Billion Tax Shelter Deduction

DowThe Fifth Circuit yesterday disallowed $2 billion in deduction claimed by Dow Chemical in a tax shelter promoted by Goldman Sachs and King & Spalding.  Chemtech Royalty Associates v. United States, No. 13-30887 (5th Cir. Sept. 10, 2014). For more, see Reuters.

September 11, 2014 in New Cases, Tax | Permalink | Comments (0)

Friday, August 29, 2014

More on Tax Court Decision Siding With IRS on Taxation of Frequent Flyer Miles Issued By Citibank

CitiBank LogoFollowing up on Wednesday's post, Tax Court Approves the IRS's Taxation of Frequent Flyer Miles:  Sam Brunson (Loyola-Chicago), Tax Court: Frequent Flier Miles Are Income

What does the Tax Court decision mean to you? Let’s explore the ramifications of the Tax Court’s decision in an Explainer.

  • How can frequent flier miles be income? They’re not money.
  • Did I break the law all those times I got frequent flier miles and didn’t pay taxes on them?
  • Then why did the I.R.S. go after Mr. Shankar?
  • So I’m taxable on the receipt of frequent flier miles from a bank?
  • Okay, so if I get frequent flier miles from my bank, I’m taxable when I redeem them. How about if I get frequent flier miles from my credit card?
  • So how do I know whether I should include my frequent flier miles on my tax return?

Forbes, Tax Court Says Bank 'Thank You' Points Are Taxable Income
Forbes, Tax Court Sides With IRS In Tax Treatment Of Frequent Flyer Miles Issued By Citibank
Legal Times, Value of Bank's 'Thank You' Points is Taxable, Court Says

August 29, 2014 in New Cases, Tax | Permalink | Comments (2)