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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:


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)

Wednesday, January 23, 2013

Texas Heirs Bring Estate Planning Malpractice Action

Texas Lawyer:  Oilman's Family Sues Lawyers, Firms, Accountants:

The beneficiaries of a multimillion-dollar trust have sued an estate-planning attorney, his firm and an accounting firm, alleging professional malpractice related to a tax plan that led to litigation with the IRS.

But in an unusual twist, the beneficiaries also sued the firm and lawyers to whom their estate-planning attorney referred them for representation in that litigation before the U.S. Tax Court against the IRS. That Tax Court litigation [Hurford v. Commissioner, T.C. Memo. 2008-278] allegedly cost the plaintiffs more than $1 million in legal fees.

"As a result of the Defendants' representations, negligence and misconduct, Plaintiffs have incurred exorbitant fees and costs in the tax transactions, legal fees in pursuing litigation before the Tax Court, other expenses, and taxes, penalties and interest that otherwise would not have been owed," according to the petition in G. Michael Hurford, et al. v. Joseph B. Garza, et al.

January 23, 2013 in New Cases, Tax | Permalink | Comments (1) | TrackBack (0)

Tuesday, January 22, 2013

IRS Suspends Regulation of Tax Return Preparers After Friday's Court Defeat

IRS LogoFollowing up on my post, Court Says IRS Lacks Authority to Regulate Tax Preparers

As of Friday, Jan. 18, 2013, the U.S. District Court for the District of Columbia has enjoined the IRS from enforcing the regulatory requirements for registered tax return preparers. In accordance with this order, tax return preparers covered by this program are not currently required to register with the IRS, to complete competency testing or secure continuing education. The ruling does not affect the regulatory practice requirements for CPAs, attorneys, enrolled agents, enrolled retirement plan agents or enrolled actuaries.

The IRS, working with the Department of Justice, continues to have confidence in the scope of its authority to administer this program. It is considering how best to address the court’s order and will take further action shortly. Please continue to check this site as additional information becomes available.

January 22, 2013 in IRS News, New Cases, Tax | Permalink | Comments (1) | TrackBack (0)

Saturday, December 8, 2012

Supreme Court Grants Cert to Decide Whether Estate Tax Marital Deduction Applies to Same-Sex Couple

The Supreme Court yesterday granted certiorari to decide whether the denial of an estate tax marital deduction to the surviving spouse of a lesbian couple under the Defense of Marriage Act violates the equal protection clause.

December 8, 2012 in New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Friday, November 30, 2012

2d Circuit Reverses Tax Shelter Convictions of Two Former Ernst & Young Partners

Ernst & YoungUnited States v. Coplan, No. 10-583 (2d Cir. Nov. 29, 2012):

We consider here the fate of four partners and employees of Ernst & Young, LLP (“E&Y”), one of the largest accounting firms in the world, who appeal their convictions in connection with the development and defense of five “tax shelters” that were sold or implemented by E&Y between 1999 and 2001. At issue, among other things, is the scope of criminal liability in a conspiracy to defraud the United States under 18 U.S.C. § 371 and the sufficiency of the evidence with respect to the criminal intent of certain defendants.

The defendants in these consolidated actions are three tax attorneys, Robert Coplan, Martin Nissenbaum, and Richard Shapiro, and one accountant, Brian Vaughn, formerly employed by E&Y. A fifth defendant, Charles Bolton, was an investment advisor who owned and operated various asset-management companies. Coplan, Nissenbaum, Shapiro, and Vaughn (jointly, the “trial defendants”) appeal from separate judgments of conviction entered by the United States District Court for the Southern District of New York (Sidney H. Stein, Judge) on February 17, 2010, following a 10-week jury trial on charges of conspiracy to defraud the Government, tax evasion, obstruction of the Internal Revenue Service (“IRS”), and false statements to the IRS. Bolton appeals from a judgment of conviction entered by the District Court on April 14, 2010, following his plea of guilty to a single conspiracy charge.

For the reasons that follow, we reverse the convictions of Shapiro and Nissenbaum on Counts One, Two, and Three, and the conviction of Nissenbaum on Count Four, and we affirm the convictions of Coplan and Vaughn in their entirety. We affirm the District Court’s order sentencing Bolton principally to 15 months of imprisonment, but we vacate and remand the portion of the judgment that imposed a fine of $3 million. ....

Dissent:  I respectfully dissent from so much of the Majority Opinion as finds the evidence insufficient to support (1) the convictions of defendants Richard Shapiro and Martin Nissenbaum of conspiracy, in violation of 18 U.S.C. § 371, to (a) defraud the United States by impairing the lawful functions of an agency of the United States government, to wit, the Internal Revenue Service ("IRS"), (b) commit tax evasion, see 26 U.S.C. § 7201, and (c) make false statements to the IRS, see 18 U.S.C. § 1001 (Count One); and (2) those two defendants' convictions of attempted tax evasion in violation of 26 U.S.C. § 7201 (Counts Two and Three).

November 30, 2012 in New Cases, Tax | Permalink | Comments (1) | TrackBack (0)

Thursday, September 27, 2012

Gerzog: Another Turn with Turner

Tax AnalystsWendy C. Gerzog (Baltimore), Another Turn with Turner, 136 Tax Notes 1613  (Sept. 24, 2012):

In its latest Estate of Turner opinion [138 T.C. No. 14 (Mar. 29, 2012)], the Tax Court decided whether a pecuniary formula marital deduction clause could shield the inclusion of family limited partnership assets in the decedent’s estate.

All Tax Analysts content is available through the LexisNexis® services.

September 27, 2012 in New Cases, Scholarship, Tax | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 25, 2012

Forbes: Judge Shoots Down Another Forbes 400 Member's Tax Shelter

Forbes:  Judge Shoots Down Another Forbes 400 Member's Tax Shelter, by Janet Novack:

A California federal district court judge on Friday rejected, on summary judgment, a bid by billionaire Broadcom co-founder Henry Nicholas, III,  to claim hundreds of millions in tax losses from a shelter marketed more than a decade ago by myCFO, Inc. the  wealth advisory firm started by Forbes 400 member James  Clark, co-founder of Netscape,  and backed by venture capitalist John Doerr. [Broadwood Investment Fund LLC v. United States, No. 08-0295 (C.D. CA Sept. 21, 2012).]  An attorney for Nicholas, BakerHostetler partner  Jeffrey H. Paravano,  said Monday that Friday’s ruling will be appealed.

The Nicholas case involves what the IRS has branded the distressed asset/debt or “DAD” shelter. In this ploy,  a U.S. taxpayer  purchases (through a partnership) junk foreign debt for pennies on the dollar and then claims big paper tax losses—losses that are real, but that were sustained by a foreign lender, not the U.S. taxpayer. DAD was marketed to the ultra-wealthy in 2001 and 2002 after the IRS began cracking down on even more brazen tax gambits, such as the notorious Son of Boss shelter. New 400 member Shahid Khan, owner of the NFL’s Jacksonville Jaguars, is currently suing BDO Seidman for, among other things, selling him DAD shelters for both 2002 and 2003.  In October 2004,  Congress changed the tax code to bar partnerships from being used to transfer foreign losses to U.S. taxpayers, thus clearly outlawing DAD after that point.

September 25, 2012 in New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 29, 2012

Federal Circuit Denies Patent Protection for § 1031 Like-Kind Exchange Strategy

Fort Properties, Inc. v. American Master Lease, LLC (No. 2009-1242) (Fed. Cir. Feb. 27, 2012):

The investment tool disclosed in the '788 patent is designed to invoke the benefits of § 1031. In particular, the claims require the aggregation of a number of properties into a "real estate portfolio." The property interests in this portfolio are then divided into shares and sold to investors much in the same way that a company sells stock. These divided property interests are called "deedshares." Each deedshare can be encumbered by its own mortgage debt, which provides flexibility to real estate investors attempting to structure their debts in a way that complies with § 1031.

We view the present case as similar to Bilski. Specifically, like the invention in Bilski, claims 1-31 of the '788 patent disclose an investment tool, particularly a real estate investment tool designed to enable tax-free exchanges of property. This is an abstract concept. Under Bilski, this abstract concept cannot be transformed into patentable subject matter merely because of connections to the physical world through deeds, contracts, and real property. 

February 29, 2012 in New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 22, 2012

8th Circuit Denies Accountant's Use of 'John Edwards Sub S Tax Shelter' -- Is Warren Buffett Next?

The Eighth Circuit yesterday affirmed the district court's denial of an accountant's attempted use of the 'John Edwards Sub S tax shelter' and required him to treat $91,044 per year as his compensation (and thus subject to the 15.3% Social Security and Medicare taxes), rather than the $24,000 he claimed as wages. (During the years in question, the accountant treated $175,470 and $203,651 as Sub S distributions.)  David E. Watson, P.C. v. United States, No. 11-1589 (8th Cir. Feb. 21, 2012):

(1) Watson was an exceedingly qualified accountant with an advanced degree and nearly 20 years experience in accounting and taxation; (2) he worked 35-45 hours per week as one of the primary earners in a reputable firm, which had earnings much greater than comparable firms; (3) LWBJ had gross earnings over $2 million in 2002 and nearly $3 million in 2003; (4) $24,000 is unreasonably low compared to other similarly situated accountants; (5) given the financial position of LWBJ, Watson's experience, and his contributions to LWBJ, a $24,000 salary was exceedingly low when compared to the roughly $200,000 LWBJ distributed to DEWPC in 2002 and 2003; and (6) the fair market value of Watson's services was $91,044. Based on the record, the district court did not clearly err.

Warren Buffett famously draws only a $100,000 salary from Berkshire Hathaway -- although he does not avoid the 12.4% Social Security tax because this is roughly the amount of the FICA wage base ($110,000 in 2012), Buffett is avoiding the 2.9% Medicare tax on the value of his services in excess of $100,000. (Hat Tip: Monty Meyer.) Prior TaxProf Blog coverage:

February 22, 2012 in New Cases, Tax | Permalink | Comments (3) | TrackBack (1)

Thursday, February 2, 2012

Tax Prof Amicus Brief in Affordable Care Act Litigation

Jordan Barry (San Diego), Patricia Cain (Santa Clara), Bryan Camp (Texas Tech) & Keith Fogg (Villanova) have filed Amicus Curiae Brief in Health and Human Services v. Florida (Affordable Care Act Litigation) on Behalf of Tax Law Professors in Support of Vacatur:

This amicus brief, filed in HHS v. Florida (the Affordable Care Act litigation), has two principal goals.

First, it seeks to aid the Court by giving it an overview of the tax determination and tax collection processes. This background is intended to help the Court understand the relationship between new Internal Revenue Code Section 5000A (which contains both the individual mandate itself and the penalty that enforces it) and the rest of the Internal Revenue Code.

Second, it seeks to correct what we see as an error in the lower courts' analysis of Section 5000A. Section 7421, also known as the Anti-Injunction Act, prohibits lawsuits that restrain the assessment or collection of taxes. Accordingly, whether the 5000A penalty is a tax for purposes of Section 7421 is of great importance for this case. Several judges who concluded that the 5000A penalty is not a tax for purposes of Section 7421, including the majority in the DC Circuit, reached that conclusion, in part, because they thought it significant that Congress limited the IRS‘s ability to collect the 5000A penalty. We think that approach is misguided in this particular case for three reasons. First, these limitations strongly imply that Congress thought the 5000A penalty constitutes a tax for purposes of key tax administrative provisions. Second, 5000A is structured to avoid every procedure that a taxpayer could use to challenge a liability before paying it. Third, in light of the specific limitations that Congress imposed on its collection, the 5000A penalty looks increasingly like a true tax measure, regardless of its label.

This brief assumes that Section 7421 is jurisdictional, as the Court has previously held. This brief does not address arguments that the 5000A penalty is a tax for purposes of Section 7421 by virtue of other Code sections, such as Section 6671 or Section 6201. These arguments are ably presented in the brief filed by the court-appointed amicus curiae and the brief filed on behalf of former IRS commissioners Mortimer Caplin and Sheldon Cohen. Special thanks to Michael de Leeuw and the rest of the Fried Frank team.

February 2, 2012 in New Cases, Tax | Permalink | Comments (1) | TrackBack (0)

DOJ Indicts Swiss Bank for Hiding $1.2 Billion from the IRS

DOJThe Justice Department yesterday indicted Swiss bank Wegelin on tax charges:

February 2, 2012 in New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Monday, January 30, 2012

Hickman: Impressions From the Home Concrete Oral Argument

Tax AnalystsKristin E. Hickman (Minnesota), Home Concrete: Impressions From the Oral Argument. 134 Tax Notes 579 (Jan. 30, 2012):

In this article, Hickman, who filed an amicus brief in Home Concrete, discusses the case, the history of litigation leading up to it, and the oral argument; she believes the case is too close to call for either party.

All Tax Analysts content is available through the LexisNexis® services.

January 30, 2012 in New Cases, Tax, Tax Analysts | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 24, 2012

2d Circuit Rejects GE's $62 Million Castle Harbour Tax Shelter

TIFD III-E Inc. v. United States, G.E. LogoNo. 10-70-CV (S.D.N.Y. Jan. 24, 2012):

The United States appeals from a judgment of the United States District Court for the District of Connecticut (Underhill, J.) invalidating two notices of Final Partnership Administrative Adjustments issued by the Internal Revenue Service. The district court so ruled because it concluded that the taxpayer-plaintiff’s characterization of two tax-exempt Dutch banks as its partners in Castle Harbour LLC was proper under Internal Revenue Code § 704(e)(1). The district court also concluded that, even if the banks did not qualify as partners under § 704(e)(1), the government was not entitled to impose a penalty pursuant to § 6662. The Court of Appeals (Leval, J.) holds that the evidence compels the conclusion that the banks do not qualify as partners under § 704(e)(1), and that the government is entitled to impose a penalty on the taxpayer for substantial understatement of income. The judgment of the district court is REVERSED....

We appreciate and have benefitted from the District Court’s conscientious, thoughtful and comprehensive analysis on remand. Ultimately, however, the issue whether the term “capital interest” in § 704(e)(1) includes an interest that is overwhelmingly in the nature of debt is one of law, which of course we review de novo. We respectfully disagree with the district court’s analysis. As we now review the question arising under § 704(e)(1), we conclude that the same evidence which, on our last review, compelled the conclusion that the banks’ interest was so markedly in the nature of debt that it does not qualify as bona fide equity participation also compels the conclusion that the banks’ interest was not a capital interest under § 704(e)(1)....

The taxpayer has failed to point to substantial authority supporting its treatment of the banks as partners. We find that a penalty for substantial understatement of income was therefore properly assessed.

January 24, 2012 in New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 18, 2012

Tax Court Rejects Founder's $45 Million OPIS Tax Shelter v. Commissioner, T.C. Memo. 2012-16 (Jan. 17, 2012):

This Court has not previously considered an Offshore Portfolio Investment Strategy (OPIS) transaction. The question before us is whether petitioners are entitled to deduct certain capital losses claimed from their participation in the OPIS transaction. We hold that they are not because the transaction lacks economic substance. We must also decide whether petitioners are liable for gross valuation misstatement penalties and negligence penalties under § 6662(a). We hold they are liable for the penalties.

Petitioners claimed an artificial loss of over $45 million. This is exactly the type of “too good to be true” transaction that should cause a savvy, experienced businessman to seek independent advice. See Neonatology Associates, P.A. v. Commissioner, 299 F.3d at 234 (“When, as here, a taxpayer is presented with what would appear to be a fabulous opportunity to avoid tax obligations, he should recognize that he proceeds at his own peril.”). ... Petitioners’ decision to rely exclusively on KPMG in structuring, facilitating and reporting their OPIS transaction was therefore not reasonable. Petitioners did not take their position in good faith and thus lacked reasonable cause for that position. Accordingly, we sustain respondent’s determination that petitioners are liable for accuracy-related penalties for 1998 and 1999.

January 18, 2012 in Celebrity Tax Lore, New Cases, Tax | Permalink | Comments (0) | TrackBack (1)

Wednesday, January 4, 2012

Three Swiss Bankers Indicted for Helping U.S. Taxpayers Hide $1.2 Billion From the IRS in Offshore Accounts

DOJThe U.S. Attorney for the Southern District of New York yesterday announced the indictment of three Swiss bankers with Wegelin & Co. for conspiring with U.S. taxpayers to hide more than $1.2 billion in assets from the IRS.

(Hat Tip: Ann Murphy.)

January 4, 2012 in New Cases, News, Tax | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 28, 2011

DOJ Sues Hal Steinbrenner for Return of 'Erroneous' $670k Tax Refund

HalBloomberg, Yankees Co-Owner Harold Steinbrenner Target of U.S. Suit Over Tax Refund:

New York Yankees co-owner and managing partner Harold Steinbrenner was sued by the U.S. Justice Department over an “erroneous” $670,494 tax refund he received in 2009. The complaint, filed Dec. 27 in Tampa, Florida federal court, seeks to reclaim the funds issued to Steinbrenner on Dec. 28, 2009. The refund stemmed from disputes between Steinbrenner and the IRS over the 2001 tax year and audits of the Major League Baseball team’s parent company for 2001 and 2002, according to court papers.

According to the complaint, Hal Steinbrenner paid his taxes in 2008, and then filed an amended 2001 tax return in 2009 seeking a refund because of a $6.8 million net operating loss carried back from 2002. The IRS paid the refund -- and then said that the refund claim should have been filed by March 1, 2009, more than five months before Hal Steinbrenner sought the refund.

December 28, 2011 in Celebrity Tax Lore, New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

10th Circuit Rejects Billionaire Philip Anschutz's Tax Shelter

AnschutzThe Tenth Circuit yesterday affirmed the Tax Court's disallowance of billionaire Philip Anschutz's use of variable prepaid forward contracts with Donaldson, Lufkin & Jenrette to avoid $144 million in capital gains taxes. Anschutz Co. v. Commissioner, No 11-9001 (Dec, 27, 2011).

Prior TaxProf Blog coverage:

December 28, 2011 in New Cases, Tax | Permalink | Comments (1) | TrackBack (0)

Friday, December 23, 2011

Supreme Court Briefing in Home Concrete (6-Year SOL and Overstatement of Basis)

The briefing is now completed in United States v. Home Concrete & Supply, LLC, No. 11-139, which is scheduled for oral argument in the U.S. Supreme Court on Jan. 17, 2012.

December 23, 2011 in New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Monday, December 19, 2011

Federal Judge Allows IRS to Troll Through State Records for Unreported Gifts of Real Estate

Forbes, Federal Judge Green Lights IRS Search For California Gift Tax Cheats, by Janet Novack:

A federal district court judge has given the IRS permission to serve a “John Doe” summons on the California State Board of Equalization demanding the names of residents who transferred property to their children or grandchildren for little or no money, from 2005 to 2010. [In the Matter of the Tax Liabilities of John Does, No. 2:10-mc-00130 (E.D. CA Dec. 15, 2011)] The IRS wants those names as part of a crackdown on what it believes is the widespread failure to file required tax returns when real property is passed between family members.

The IRS has already received information about intra-family property transfers from county or state officials in Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington state and Wisconsin. But officials of California’s BOE said state law prohibited them from disclosing the information without a court approved summons.

In an affidavit filed in the California case in October, Josephine Bonaffini, the Federal/State Coordinator for the IRS’ Estate and Gift Tax Program, said the agency has so far examined 658 taxpayers identified as transferring property to relatives and concluded that 238 of them should have, but didn’t, file [gift tax returns].

Prior TaxProf Blog posts:

December 19, 2011 in New Cases, Tax | Permalink | Comments (2) | TrackBack (0)

Friday, December 16, 2011

Western Union, IRS Settle $2 Billion Transfer Pricing Case

Western UnionWestern Union has settled a $2 billion transfer pricing case with the IRS for $220 million (in addition to a $250 million tax deposit made with the IRS in 2010 connected to the potential liability).

December 16, 2011 in IRS News, New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Sunday, November 27, 2011

Tax Court: Glam Metal, Hair Bands, Ecdysiasts, and Deciduous Calisthenics

Tax Court Logo 2Willson v. Commissioner, T.C. Summ. Op. 2011-132 (Nov. 23, 2011):

Robert Willson opened a bar in 1986, and it gave him nothing but trouble. He’s seen lawsuits, endless repairs, and even a catastrophic fire. One might say the City of Des Moines did him a favor when it finally condemned the land in 2000 to expand its airport--right around the time Willson began serving a federal prison term. But the Commissioner wouldn’t let things be and says that the condemnation triggered a large capital gain that Willson didn’t correctly report. This meant the bar would give him one more headache--because, though Willson represented himself at trial, the facts as he described them would be worthy of an advanced exam problem in tax accounting....

Willson did his best to explain in as plain a way as possible the history of the property and what he spent on it. We will try to return the favor by minimizing taxspeak. . . .

[T]he bar became a local mecca for a type of “rock and roll” called “glam metal.” While the Court took no expert testimony on the nature of such groups, it did allow into the record Willson’s own explanation of this genre of musical entertainment. We also took judicial notice that “hair bands” had lost much of their popularity with the coming of something called “grunge rock” (another type of “rock and roll” music) in the early nineties. This was important to Willson’s business because “hair bands,” with such unlikely names as Head East, Great White, and Saturn Cats could still draw large crowds to a bar on the outskirts of Des Moines but had become affordable providers of live entertainment. Willson even invited one of these “hair bands” to be a sort of artist-in-residence. One night in 1994, a few band members did something to a smoke machine that sparked an enormous fire. This fire engulfed everything except the parking lots, the shed, and the property’s original house. It also forced Willson to make a choice--sell to the City as part of its airport expansion, or rebuild. Willson was unable to sell, so he had to rebuild. He rented out the old house to a tenant who installed minor improvements (e.g., poles) and opened an establishment felicitously--and paronomastically--called the “Landing Strip,” in which young lady ecdysiasts engaged in the deciduous calisthenics of perhaps unwitting First Amendment expression. . . .

Des Moines began moving to condemn the bar and the land sometime in 1999. Willson closed the bar doors by May 5, when he transferred the property to his lawyer for safekeeping until the matter with the City was resolved. His criminal troubles-- something to do with money and drugs and possibly the bar--were reaching the point where Willson was about to begin serving a federal prison term, and he authorized his lawyer to act for him in dealing with the City while he was imprisoned. ...

Despite his legal problems, however, Willson did manage to file his 2000 tax return. The Commissioner determined that he had underreported his income. Willson timely filed a petition to contest the Commissioner’s determination, but trial was postponed for several years while he served out his sentence. The one remaining issue is Willson’s adjusted basis in the property at the time of the condemnation. ...

The Commissioner, however, doesn’t divide the $160,000 cost of the real estate between the land and the buildings. This is a critical mistake. ...

(Hat Tip: Bob Kamman.)

November 27, 2011 in New Cases, Tax | Permalink | Comments (1) | TrackBack (1)

Friday, November 25, 2011

For First Time, Tax Court Approves Use of Geithner/Turbo Tax Defense

Tax Court Logo 2The Tax Court on Wednesday for perhaps the first time accepted a taxpayer's use of the Geithner/TurboTax defense in allowing a patent attorney to blame mistakes in his use of tax preparation software to excuse him for penalties for failing to report income on his return. Olsen v. Commissioner, T.C. Summ. Op. 2011-131 (Nov. 233, 2011):

Petitioner works as a patent attorney for the Department of Energy at a national laboratory, holds a Government security clearance, and is subject to detailed and periodic background investigations.

In 2007, petitioner's wife received interest income from a trust created by her mother's estate. The funds were attributable to litigation resolved in favor of the estate. As a beneficiary of the trust, petitioner's wife received a Schedule K-1, Beneficiary's Share of Income, Deductions, Credits, etc., reporting the interest income. Prior to this instance, the couple had never received a Schedule K-1 and were unfamiliar with the form.

Petitioner usually takes the lead in preparing the couple's joint Federal income tax returns. He prepared the couple's joint income tax return for 2007 using tax return preparation software. Because he had never dealt with a Schedule K-1 in the past, petitioner upgraded his tax preparation software to a more sophisticated version as a precaution to ensure proper treatment of the unfamiliar form.

Using the upgraded software's interview process, petitioner correctly entered the name and tax identification number of the trust, properly reporting the source of income. While transcribing the remaining information, however, he made a data entry error that prevented the amount of interest income from being correctly displayed on Schedule E, Supplemental Income and Loss, of his Federal tax return. Petitioner reviewed the Federal tax return before filing, including using the verification features in his tax preparation software, but did not discover the error. ...

This Court has observed that "Tax preparation software is only as good as the information one inputs into it." Bunney v. Commissioner, 114 T.C. 259, 267 (2000). An isolated transcription error, however, is not inconsistent with a finding of reasonable cause and good faith. Reg. § 1.6664-4(b)(1).

We found petitioner to be forthright and credible, and we credit his testimony at trial. We conclude that he made an isolated error in transcribing the information from his wife's Schedule K-1 while using the tax return preparation software. [Fn.4] It is clear that his mistake was isolated as he correctly reported the source of the income, and he did not repeat any similar error in preparing his tax return.

Fn.4: We note that petitioner holds a Government security clearance and is subject to periodic background investigations, which, as he is well aware, provide substantial motivation for him to properly report income on his tax return.

The most important factor in deciding whether a taxpayer acted with reasonable cause and in good faith is the extent of the taxpayer's effort to assess the proper tax liability. ... Under the unique facts and circumstances of this case, we hold that petitioner acted with reasonable cause and in good faith within the meaning of § 6664(c)(1). Accordingly, petitioner is not liable for the accuracy-related penalty under § 6662(a) as determined by respondent in the notice of deficiency.


Prior TaxProf Blog coverage:

November 25, 2011 in New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 15, 2011

Judge Grants Daugerdas Hearing on Juror Misconduct in Tax Shelter Conviction

Am Lawyer Following up on my prior post, Daugerdas Seeks New Trial in Tax Shelter Case Based on Juror Misconduct: Bloomberg, Daugerdas Judge Grants Hearing on Juror Conduct in Tax Case:

A judge will hold a hearing to determine whether to grant a new trial to Paul Daugerdas, a former lawyer at the defunct firm Jenkens & Gilchrist, and three others convicted in a 10-year tax-shelter scheme.

U.S. District Judge William Pauley in Manhattan said today he will hold an evidentiary hearing on the conduct of Catherine Conrad, Juror No. 1 in the 10-week trial. He didn’t set a date. The defendants claim Conrad hid details of her background from the court, including a law degree, at least four arrests and the fact that she was serving a sentence of probation for shoplifting.

November 15, 2011 in New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Supreme Court Grants Cert in Equal Protection Tax Case

The Supreme Court yesterday granted certiorari in Armour v. Indianapolis, No. 11-161:

Issue: Whether the Equal Protection Clause precludes a local taxing authority from refusing to refund payments made by those who have paid their assessments in full, while forgiving the obligations of identically situated taxpayers who chose to pay over a multi-year installment plan.

November 15, 2011 in New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 9, 2011

D.C. Circuit ObamaCare Case: 'The Tax Code Is Never a Walk in the Park'

Orin Kerr (George Washington), The Case for Not Deciding the Constitutionality of the Mandate:

Judge Kavanaugh wrote a separate opinion in the DC Circuit’s mandate case that many readers will overlook: It’s based on the tax code, and the opinion itself acknowledges that its analysis is dense and difficult. (“The Tax Code is never a walk in the park. . . . I caution the reader that some of the following is not for the faint of heart.”) At the same time, Kavanaugh’s opinion closes with a very interesting prudential case for not deciding the merits of the mandate, and instead deciding the case on Anti-Injunctive Act grounds (see starting at page 51). Among them, Kavanaugh argues that if the Court doesn’t decide the issue now, it may never have to decide the issue because the statute could be easily amended to make the mandate easily constitutional under the taxing power.

(Hat Tip: Greg McNeal.)

November 9, 2011 in New Cases, Tax | Permalink | Comments (1) | TrackBack (0)

Monday, November 7, 2011

Principal, Wells Fargo Lose $100 Million Tax Shelter Cases

Des Moines Register, Principal, Wells Fargo Lose High-Stakes Court Battles:

Two companies with strong ties to Des Moines have lost their fights to avoid paying more than $100 million in taxes to the federal government.

Principal Life Insurance and Wells Fargo were part of two separate but similar efforts to claim unearned tax credits through an elaborate series of cash transactions disguised as investments, a Des Moines Register review of thousands of pages of court transcripts, exhibits and other records shows.

November 7, 2011 in New Cases, Tax | Permalink | Comments (0) | TrackBack (1)

Thursday, November 3, 2011

IRS Acquiesces in O’Donnabhain: Gender Reassignment Surgery Is a Deductible Medical Expense

IRS LogoAction on Decision, 2011-03 (O’Donnabhain v. Commissioner, 134 T.C. 34 (2010)), 2011-47 I.R.B. 1 (Nov. 21, 2011):

Issue: Whether hormone therapy and sex reassignment surgery constitute medical care within the meaning of §§ 213(d)(1)(A) and (9)(B).

Discussion: Section 213 of the Internal Revenue Code allows a deduction for the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer. Medical care, as defined in § 213(d)(1)(A), includes amounts paid for the treatment of disease. Section 213(d)(9)(B) excludes from the definition of medical care any procedure that is directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease.

Ms. O’Donnabhain paid expenses for hormone therapy and sex reassignment surgery to treat her gender identity disorder disease and deducted the costs of the treatment as medical expenses. The IRS disallowed her deduction based on the view that hormone therapy and sex reassignment surgery did not treat a medically recognized disease or promote the proper function of the body. See CCA 200603025. Ms. O’Donnabhain petitioned the Tax Court to reverse the IRS administrative determination and allow her deduction for the expenses of hormone therapy and sex reassignment surgery.

The Tax Court agreed with Ms. O’Donnabhain that her gender identity disorder is a disease within the meaning of §§ 213(d)(1)(A) and (9)(B). The court cited four bases for its conclusion: 1) the disorder is widely recognized in diagnostic and psychiatric reference texts; 2) the texts and all three experts testifying in the case consider the disorder a serious medical condition; 3) the mental health professionals who examined Ms. O’Donnabhain found that her disorder was a severe impairment; and, 4) the Courts of Appeal generally consider gender identity disorder a serious medical condition. The court held that because hormone therapy and sex reassignment surgery treat the taxpayer’s disease they are medical care, and the expenses for that medical care are deductible under § 213.

The Tax Court rejected the IRS administrative position reflected in CCA 200603025. The Service will follow the O’Donnabhain decision. The Service will no longer take the position reflected in CCA 200603025.

In O’Donnabhain, the Tax Court agreed wuth the IRS that the taxpayer's breast augmentation surgery was directed at improving her appearance and did not meaningfully promote the proper function of her body or treat disease within the meaning of § 213(d)(9)(B), and thus was “cosmetic surgery” excluded from the definition of deductible “medical care” by § 213(d)(9)(A). For more, see:

November 3, 2011 in IRS News, New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 25, 2011

Tax Court: 'Student Incentive Expenses' Are Not Deductible

Tax Court Logo 2Farias v. Commissioner, T.C. Memo. 2011-248 (Oct. 24, 2011):

Petitioner claimed that as a teacher she occasionally used "candy and sugar" as student incentives. A number of the receipts she offered to substantiate these expenses also include other food items and household goods. Petitioner also testified that she purchased a U.S. savings bond that was presented to a student in recognition of community service provided to the school.

There is no evidence that the school required the purchase of the candy or the savings bond for petitioner's students. These expenses were not necessary to petitioner's job; and no matter how well intentioned, gifts to students are not deductible as business expenses.

October 25, 2011 in New Cases, Tax | Permalink | Comments (2) | TrackBack (1)

Wednesday, October 5, 2011

DOJ Wins Three Tax Shelter Cases on Same Day

DOJ Logo Department of Justice Press Release, Justice Department Prevails in Three Tax Shelter Cases on Same Day: Federal Courts Deny Hundreds of Millions in Tax Breaks to Billionaire Dallas Banker, Principal Life Insurance Co. and Wells Fargo & Co. (Oct. 4, 2011):

Three federal courts have issued decisions in favor of the United States in three separate cases involving abusive tax shelters, the Justice Department announced today.  All of the court opinions were issued on Sept. 30, 2011.

  • In Southgate Master Fund LLC v. United States, the U.S. Court of Appeals for the Fifth Circuit, based in New Orleans, affirmed a lower court ruling that a company formed by billionaire Dallas banker D. Andrew Beal and others was a sham partnership that must be disregarded for federal income tax purposes. ...
  • In Pritired 1 LLC v. United States, Judge John A. Jarvey of the U.S. District Court for the Southern District of Iowa prohibited Principal Life Insurance Co. from claiming more than $20 million in foreign tax credits that the company had sought based on a complex transaction involving a $300 million payment to two French banks. ...
  • Finally, in WFC Holdings Corporation v. United States, Judge John R. Tunheim of the U.S. District Court for the District of Minnesota disallowed a tax refund claim for more than $80 million filed by a subsidiary of Wells Fargo & Co.

October 5, 2011 in New Cases, Tax | Permalink | Comments (0) | TrackBack (1)

Tuesday, October 4, 2011

Forbes: 5th Circuit Nixes Billionaire Beal's $1.1 Billion Tax Shelter

Following up on Saturday's post, 5th Circuit Rejects $1.1b Tax Losses Claimed by Andrew Beal in DAD Tax Shelter:  Forbes, Appeals Court Nixes Billionaire Beal's $1.1 Billion Tax Shelter, by Janet Novack:

The 5th Circuit Federal Court of Appeals Friday nixed billionaire Texas banker Andrew Beal’s attempt to claim $1.1 billion in tax losses based on an investment of just $19 million in distressed Chinese debt. But in unanimously upholding a 2009 district court decision disallowing the losses, the three-member appeals panel  agreed with the lower court that Beal isn’t liable for penalties since he had “good cause” to believe his ploy might work.  The appeals decision described the penalty issue as  a “close one.”

Friday’s decision is the first from an appeals court involving what the government calls the “distressed asset debt” or “DAD” shelter.  The government has asserted in court papers that Beal, who is worth an estimated $7 billion, used DAD multiple times to “stockpile over $4 billion in artificial losses to shelter future income.” Beal’s lawyers did not respond Sunday to a request for comment, but he has consistently contended his tax moves were proper. (The full decision, Southgate Master Fund Limited, is available here through TaxProf blog, which first reported it yesterday.) ...

Last month,  U.S. Tax Court Judge Robert A. Wherry Jr. gave thumbs down to another group of DAD tax shelters—these marketed by Harvard trained tax lawyer John E. Rogers to less wealthy investors (primarily small businessmen and doctors) in 2003 and 2004. In a ruling here deciding 15 cases, the judge also upheld the IRS’ imposition of penalties on those taxpayers. ...

Son-of-BOSS has been consistently disallowed by the courts. In his recent decision giving thumbs down to the DAD deals Rogers had structured, U.S. Tax Court Judge Wherry put the relationship of Son-of-BOSS and DAD in some  perspective. He wrote:

“It seems only fitting that after devoting countless hours in the last decade to adjudicating Son-of-BOSS transactions, we have now progressed to deciding the fate of DAD deals. And true to the poet’s sentiment that `The Child is father of the Man’, the DAD deal seems to be considerably more attenuated in its scope, and far less brazen in its reach, than the Son-of-BOSS transaction.”

Less brazen, perhaps. But Wherry still imposed penalties on those who bought into DAD.

October 4, 2011 in New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Friday, September 30, 2011

5th Circuit Rejects $1.1b Tax Losses Claimed by Andrew Beal in DAD Tax Shelter

The Fifth Circuit yesterday affirmed the district court's rejection of $1.1 billion in losses claimed by D. Andrew Beal, #39 on Forbes list of the 400 Richest AmericansSouthgate Master Fund LLC v. United States, No. 09-11166 (5th Cir. Sept. 30, 2011):

We affirm in all respects the district court’s judgment disposing of this petition for a readjustment of partnership tax items under § 6226. The plaintiff, Southgate Master Fund, L.L.C., was formed for the purpose of facilitating the acquisition of a portfolio of Chinese nonperforming loans (“NPLs”). A partnership for tax purposes, Southgate’s disposition of its portfolio of NPLs generated more than $1 billion in paper losses, about $200 million of which were claimed as a deduction by one of its partners in tax year 2002. The Internal Revenue Service determined that Southgate was a sham partnership that need not be respected for tax purposes and that Southgate’s allocation of the $200 million loss to the deducting partner should be disallowed. The district court upheld these determinations. After laying out the pertinent factual background in Part I, we explain in Part II why the district court was correct to do so. The Service further determined that the accuracy-related penalties in §§ 6662(b)(1)–(3) applied to the underpayments of tax resulting from Southgate’s treatment of its losses. On this point, the district court disagreed, disallowing the accuracy-related penalties on the ground that Southgate had reasonable cause for, and acted in good faith with respect to, the tax positions that resulted in the underpayments of tax. Although this issue is a close one, we affirm the district court’s decision to disallow the penalties.

(Hat Tip: Richard Jacobus.)

September 30, 2011 in New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 27, 2011

Supreme Court Grants Certiorari on 6-Year SOL and Overstatement of Basis

Tax Appellate Blog, Supreme Court Agrees to Hear Home Concrete Case to Address Six-Year Statute Issues:

The Court this morning granted certiorari in the Home Concrete case from the Fourth Circuit [Home Concrete & Supply LLC v. United States, No. 09-2353 (4th Cir. Feb. 7, 2011)], thus paving the way for a definitive, nationwide resolution of the issues presented in the Intermountain cases.  ... The government’s opening brief in Home Concrete is due November 14.  The case will likely be argued in January, or possibly February, and the Court will issue its decision before the end of June 2012.

(Hat Tip: Kristin Hickman.)

September 27, 2011 in New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Sunday, September 18, 2011

WSJ: 9th Circuit Approves Charitable Freeze to Hedge Against IRS Valuation Fight

Wall Street Journal Tax Report, IRS Loses a Gift-Tax Battle, by Laura Saunders:

Wealthy taxpayers who want to make large gifts to family members recently got good news: A federal appeals court affirmed a popular technique to sidestep gift taxes.

The decision, Estate of Petter v. Commissioner, was published in August by the Ninth Circuit in San Francisco. It joins earlier rulings on related issues by the Eighth and Fifth circuits. All the cases originated in Tax Court, but appeals go to the federal circuit court in which the taxpayer lives.

"These decisions make it easier for senior family members to transfer hard-to-value assets to heirs and charity with reduced gift-tax risk," says John Porter of Baker Botts in Houston, who argued all the cases. These and other victories have made him a rock star in the staid trust-and-estates bar. ...

[Valuation is] always an issue with large gifts, especially with real estate or a business. What if the IRS challenges an estimate and wants more gift taxes? Many taxpayers are loath to write a check, and some don't have ready cash. Petter offers a solution. ...

Estate planners advised Ms. Petter to transfer all the [$22 million of] UPS stock to a limited-liability company. Then she both gave and sold units of the LLC to two of her children in 2002. Ms. Petter claimed that putting the stock in the LLC entitled her to a 51% discount from its market value on the transfers made to her children. The IRS challenged that, and the two parties ultimately settled on a 36% discount.

The crux of the case: Was gift tax due once the discount dropped to 36% from 51%? ... But she had specified that in such a case they would bounce to her IRS-registered charity—with no gift tax due. The IRS didn't like that one bit, because it meant the penalty for an exaggerated discount was simply a donation to a charity, not a check to Uncle Sam.

"The government said if Ms. Petter prevailed, it had no incentive to audit," says Carlyn McCaffrey, an attorney at McDermott, Will & Emery in New York. The IRS's real fear, says retired tax expert Tom Ochsenschlager, is that without audits, taxpayers could "get away with murder on valuations."

The courts sided with Ms. Petter, giving a lift to taxpayers and charities, if not the IRS.

September 18, 2011 in New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 6, 2011

11th Circuit Rejects Wesley Snipes' Tax Appeal

SNipes The U.S. Court of Appeals for the Eleventh Circuit today filed this 7-page opinion denying Wesley Snipe's motions for a new trial and to interview jurors who convicted him on Feb. 1, 2008 of three counts of willfully failing to file tax returns. United States v. Snipes, No. 5:06-cr-00022 (11th Cir. Sept. 6, 2011).  Mr. Snipes began serving his three year sentence on December 9, 2010. (Hat Tip: Ann Murphy.)

September 6, 2011 in New Cases, Tax | Permalink | Comments (1) | TrackBack (0)

Saturday, September 3, 2011

Tax Court Rejects DAT/DAD Tax Shelter

Tax Court Logo 2 The Tax Court on Thursday became the second court to reject the Distressed Asset Trust (DAT)/Distressed Asset Debt (DAD) tax shelter pioneered by John E. Rogers, a former tax partner at Seyfarth Shaw (Chicago).  Superior Trading LLC v. Commissioner, 137 T.C. No. 6 (Sept. 1, 2011).

(Hat Tip: Richard Jacobus.) Prior TaxProf Blog coverage:

September 3, 2011 in New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Friday, September 2, 2011

More on Adjunct Faculty as Employees, Not Independent Contractors

Tax Court Logo 2 Following up on Wednesday's post, Tax Court: Adjunct Prof Is Employee, Cannot Deduct Expenses on Schedule C: Jim Maule (Villanova), Employee or Independent Contractor? For Taxes, It Matters:

Whether a person who is performing services ends up characterized as an employee or as an independent contractor affects a variety of tax issues. For example, the payor’s withholding responsibilities differ, employees being subject to withholding but most independent contractors not being subject to withholding. As another example, if the person is an independent contractor, the person is subject to self-employment taxes barring the application of an exception, whereas the person’s status as an employee means that the social security and Medicare tax responsibility is split between the employee and the employer. A very recent case indicates yet another significance, namely, whether deductible expenses incurred in the performance of the services are deductible in computing adjusted gross income, on Schedule C, or are deductible as employee business expenses, on Schedule A, subject to the 2-percent-of-adjusted-gross-income floor. This recent case caught my eye because the taxpayer was performing services as an adjunct professor. ...

The taxpayer’s situation in Schramm is very similar to that of adjunct faculty generally. It certainly is very similar to the manner in which my Law School treats adjuncts. The major difference is that adjuncts are permitted to select textbooks rather than being told what textbook to use, though they do receive advice and recommendations on that point. It is possible that some of our adjunct faculty do not maintain home offices for their teaching activities, but I’ve never asked and I don’t think anyone has ever asked. Newly-hired adjunct faculty, of course, lack the permanency of relationship that existed in Schramm, though that factor alone will not change the outcome. Next time I speak with one of our adjuncts, I need to remember to ask if they receive a Form W-2 or a Form 1099. Strange that I’ve never had this conversation, but I’ve never been involved in the payroll side of things. Perhaps I’ll also ask if they have any deductible expenses related to their teaching, because the school does make available to adjuncts computers and similar equipment. My guess is that, like me, they do have computers used for teaching and other business purposes, and pay for an internet connection through which they connect to the on-line classrooms and exchange emails with students, other faculty, and law school administration.

September 2, 2011 in New Cases, Tax | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 31, 2011

Tax Court: Adjunct Prof Is Employee, Cannot Deduct Expenses on Schedule C

Tax Court Logo 2 The Tax Court decided yesterday that an adjunct professor (who was paid $20,000) was an employee of Nova Southeastern University. As a result, he could not deduct the claimed $2,785.63 of business expenses on Schedule C and instead had to report them as employee expenses on Schedule A subject to the 2% floor on miscellaneous itemized deductions. Schramm v. Commissioner, T.C. Memo. 2011-212 (Aug. 30, 2011).

August 31, 2011 in New Cases, Tax | Permalink | Comments (4) | TrackBack (0)

Monday, August 29, 2011

Enron's Ken Lay Wins Posthumous $3.9 Million Tax Court Victory

Enron Logo The late former Enron CEO Kenneth Lay won a posthumous $3.9 million victory over the IRS today in the Tax Court in a case argued by ABA Tax Section Chair President Charles H. Egerton (Dean Mead, Orlando).  Estate of Lay v. Commissioner, T.C. Memo. 2011-208 (Aug. 29, 2011):

This case involves a deficiency of $3,910,000 determined by respondent in the 2001 Federal income tax of Kenneth L. Lay and Linda P. Lay (the Lays). The deficiency is based upon respondent’s determination that the Lays received income as a result of the sale of two annuity contracts to Enron Corp. (Enron). For the reasons stated herein, we find that they did not receive the income determined by respondent and are not liable for the deficiency. ...

Enron paid Mr. and Mrs. Lay $10 million in exchange for the annuity contracts. Enron intended for the full amount of its payment to be consideration for the annuity contracts. The annuities transaction is well documented, and all actions of the parties to the transaction reflect that Enron purchased the annuity contracts for $10 million. The Lays properly reported the transaction on their 2001 tax return as a sale of their annuity contracts.

(Hat Tip: Bob Kamman.)

Update: Bloomberg, Enron CEO Kenneth Lay Bests IRS in Tax Court

August 29, 2011 in New Cases, Tax | Permalink | Comments (1) | TrackBack (1)