Friday, April 28, 2017
This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses a rare Tax Court victory for a taxpayer who succeeded in being treated as a real estate professional for purposes of the passive loss rules.
A.M. real estate pro, P.M. stockbroker
The IRS wins most cases in Tax Court involving taxpayers whose real estate rental losses have been disallowed. The tax law, after all, is stacked against taxpayers wanting those losses. They are automatically passive unless the taxpayer passes two stern tests:
- The taxpayer has to work at least 750 hours during the year in a “real estate trades or businesses,” and
- The taxpayer has to work more in real estate than in anything else.
This “real estate professional” rule usually filters out taxpayers with day jobs outside of real estate.
Yesterday’s taxpayer victory in Tax Court on this issue is a notable exception. The taxpayer worked mornings on her rentals. Then she went to her other job. Judge Paris takes up the story:
April 28, 2017 in New Cases, Tax, Weekly Tax Roundup | Permalink
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Saturday, February 25, 2017
Following up on last week's post, Sixth Circuit Reverses IRS, Tax Court: 'Citizens Can't Comply With Tax Laws They Can’t See': Wall Street Journal Tax Report, The Secret to Avoiding Taxes on $6 Million: Exports and an IRA:
In less than a decade, two brothers turned a $3,000 investment into $6 million. Thanks to a federal appeals court, they won’t owe income taxes on this monster return.
To lower their taxes, the brothers paired a common retirement account with an obscure export incentive. The Internal Revenue Service challenged these moves in court, arguing that even if the transactions didn’t break the letter of tax law, they violated the spirit of it.
But the transactions were upheld by the U.S. Sixth Circuit Court of Appeals. The decision, Summa Holdings Inc. v. Commissioner, provides new ballast for taxpayers who use legal techniques in ways the Internal Revenue Service objects to.
“It says that if there are two ways to structure a transaction and one incurs less tax, then the IRS can’t force the taxpayer into the other one,” says Robert Willens, an independent tax expert based in New York. ...
February 25, 2017 in New Cases, Tax | Permalink
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Monday, February 20, 2017
Summa Holdings v. Commissioner, No. 16-1712 (Feb. 16, 2017):
Caligula posted the tax laws in such fine print and so high that his subjects could not read them. Suetonius, The Twelve Caesars, bk. 4, para. 41 (Robert Graves, trans., 1957). That’s not a good idea, we can all agree. How can citizens comply with what they can’t see? And how can anyone assess the tax collector’s exercise of power in that setting? The Internal Revenue Code improves matters in one sense, as it is accessible to everyone with the time and patience to pore over its provisions.
In today’s case, however, the Commissioner of the Internal Revenue Service denied relief to a set of taxpayers who complied in full with the printed and accessible words of the tax laws. The Benenson family, to its good fortune, had the time and patience (and money) to understand how a complex set of tax provisions could lower its taxes.
February 20, 2017 in IRS News, New Cases, Tax | Permalink
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Saturday, February 18, 2017
Wall Street Journal, Michael Jackson’s Estate Faces Demand for Big Tax Payment: Dispute With IRS Centers on Valuation of the Singer’s Name and Likeness Rights at Time of His Death:
When pop star Michael Jackson died in 2009, weeks before a planned comeback tour, how much was the man in the mirror worth? The answer is far from black and white.
After coming to agreements on the value of some of the King of Pop’s more concrete assets in a legal fight that began four years ago, the estate’s executors are facing off with the Internal Revenue Service in U.S. Tax Court on Monday, primarily over the valuation of the singer’s name and likeness rights at the time of his death.
Depending on the outcome of the case, the estate could be on the hook for more than $500 million in taxes and $200 million in penalties, according to the IRS’s notice to the estate of its deficiency.
February 18, 2017 in Celebrity Tax Lore, New Cases, Tax | Permalink
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Saturday, February 4, 2017
Battat v. Commissioner, 148 T.C. No. 2 (Feb. 2, 2017):
Ps filed a motion to disqualify all Tax Court Judges and to declare unconstitutional I.R.C. sec. 7443(f), which authorizes the President to remove Tax Court Judges “after notice and opportunity for public hearing, for inefficiency, neglect of duty, or malfeasance in office, but for no other cause.”
In the Tax Reform Act of 1969 (1969 Act), Pub. L. No. 91-172, sec. 951, 83 Stat. at 730, Congress deleted from I.R.C. sec. 7441 the designation of the Tax Court as an independent agency within the executive branch. In 1971 we said that under the 1969 Act the Tax Court is no longer within the executive branch. Burns, Stix Friedman & Co. v. Commissioner, 57 T.C. 392 (1971). Ps also adopt the view that the Tax Court is not within the executive branch and contend that, as a result, the President’s limited removal authority violates separation of powers principles. In Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), the Court of Appeals held that the Tax Court is within the executive branch. The following year Congress amended I.R.C. sec. 7441 because of concerns about statements made by the Court of Appeals in Kuretski.
February 4, 2017 in New Cases, Tax | Permalink
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Friday, January 20, 2017
This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) describes how the Tax Court's treatment of a plastic surgeon's claim that his interest in a surgery center was a passive activity, distinct from his medical practice.
Plastic surgeon gets his passive loss reconstructed
Losing for Winning. A plastic surgeon convinced the Tax Court that his interest in a surgery center was “passive,” defeating an IRS attempt to group it with his medical practice. But the IRS got a partial win out of the deal.
The surgeon, who we will refer to as Dr. H., performed much of his surgery on an outpatient basis. He could not perform surgery requiring general anesthesia in his office. Hospital surgery space was scarce so he began plans to build a surgery center to accommodate patients needing anesthesia, but not an overnight hospital stay.
He dropped the plans when he was approached by a group of other surgeons asking him to invest in a surgery center, MBJ, that they were building. He ended up with a 1/8 interest in it. Tax Court Judge Buch explains how that works:
January 20, 2017 in New Cases, Tax, Weekly Tax Roundup | Permalink
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Wednesday, January 4, 2017
National Law Journal, Plaintiffs Firm Stuck With $1M Tax Bill After Trying to Deduct Private Jet Travel:
California plaintiffs firm Engstrom, Lipscomb & Lack owes more than $1 million in federal corporate taxes and penalties relating to business expenses from two personal aircraft, according to a federal appeals court’s ruling this week.
The U.S. Court of Appeals for the Ninth Circuit on Wednesday upheld a finding by a U.S. Tax Court judge that Los Angeles-based Engstrom owed $1.12 million after claiming unsubstantiated travel expense deductions relating to 119 flights taken from 2008 to 2010 [Engstrom, Lipscomb & Lack v. Commissioner, No. 15-70591 (9th Cir. Dec. 28, 2016), aff'g T.C. Memo. 2014-221].
Engstrom founding partner Walter Lack and Thomas Girardi, of Los Angeles plaintiffs firm Girardi Keese, made payments to a corporation they set up called G&L Aviation in order to split the cost of a Gulfstream IV and a Beechcraft King Air 350 turboprop. Lack and Girardi have partnered on several cases including the litigation portrayed in the 2000 film “Erin Brockovich.”
January 4, 2017 in New Cases, Tax | Permalink
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Friday, December 30, 2016
This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses how deductions of a zombie corporations eventually die.
Corporations may have an indefinite life, but not their deductions.
I’ll just keep that company around in case I need it for something. Sometimes clients who sell a business want to preserve the corporation that held the business. While there are occasionally reasons to do so — for example, to deal with potential liabilities — more often such zombie corporations become an annoyance, and clients dissolve them when they realize they have to pay annual state charter fees and tax return fees.
Other taxpayers have other ideas. A human relations consultant who lost his primary client kept his S corporation around for years after the revenue stopped coming in. While there was no revenue, there was no shortage of expenses. The taxpayer claimed a 2009 loss on his K-1 of $5,795 on revenue of zero. Without revenue, what kind of expenses would there be? This kind, according to Tax Court Judge Morrison:
December 30, 2016 in New Cases, Tax, Weekly Tax Roundup | Permalink
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Friday, December 16, 2016
This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses how Sec. 263A can apply to a cash-basis farmer.
Sec. 263A – it’s not just for inventories.
Nuts. Few farmers worry much about the so-called “inventory capitalization” rules of Sec. 263A. After all, they don’t have inventories. A California almond grower learned in Tax Court yesterday how Sec. 263A can sneak up even on a cash-basis farmer.
Most farmers deduct their input costs when they buy them under “cash basis” accounting. That’s a sweet deal, as other producers have to capitalize their input costs — raw materials, supplies, labor, etc. — into the cost of the goods they produce, recovering the costs only at the time the production is sold.
Sec. 263A, enacted with the 1986 tax reforms, requires producers to capitalize indirect costs into inventory that formerly were expensed. Most farmers aren’t required to keep inventories, so they don’t waste time worrying about inventory capitalization.
December 16, 2016 in New Cases, Tax, Weekly Tax Roundup | Permalink
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Friday, November 25, 2016
This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses the importance of not paying other creditors before you pay payroll taxes to the IRS.
No good deed goes unpunished if you owe payroll taxes.
IRS>Employees. Pay the payroll taxes to the IRS, no matter who else you have to stiff. That’s the lesson of a sad court case out of Houston last week.
Dr. McClendon ran Family Practice Associates for 20 years. Sometime along the way his CFO started keeping the payroll taxes the practice was supposed to remit to the IRS for himself, until by 2009 $10 million was unpaid. The U.S. District Court Judge takes up the story (my emphasis, citations omitted):
Family Practice stopped operating and remitted its remaining receivables to the IRS to pay toward the tax liability. Dr. McClendon made a $100,000 personal loan to Family Practice “for the restricted purpose of . . . using the funds to pay the May 15, 2009 payroll.” Family Practice used that loan to pay its employees.
November 25, 2016 in New Cases, Tax, Weekly Tax Roundup | Permalink
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Saturday, October 22, 2016
Friday, October 21, 2016
Note from Paul Caron: As I explained on August 1, due to my growing other commitments, I have taken steps to reduce the amount of time I devote to TaxProf Blog. I previously have announced that:
Today, I am pleased to announce that Joe Kristan, CPA & Shareholder, Roth & Company (Des Moines, Iowa), and editor of Tax Update Blog, one of my favorite tax blogs, has taken over the weekly tax roundup. (I took a side trip to meet with Joe when I went to my son's first Grinnell College soccer game in 2009.) I am delighted that Joe is adding a new feature to the roundup: a discussion of one of the week's important tax developments (often a Tax Court decision).
In this week's inaugural post, Joe discusses Hicks v. Commissioner, T.C. Summ. Op. 2016-68 (Oct. 17, 2016), in Good Records Do Not a Business Mile Make:
Good Records, Bad Facts. A Tax Court case this week shows that no matter how good your records are, they don’t help if they meticulously document why your expenses aren’t deductible.
The taxpayers, whose surname name we abbreviate here as “H,” had an unusual Schedule C. Judge Carluzzo explains:
Petitioners, or at least one of them, established SC Management in 2005. According to petitioner, its stated purpose was to manage the careers of the H family. Although the exact services that the business was intended to provide with respect to the career(s) of each family member are less than clear, it appears that each family member agreed to contribute a portion of income earned from outside sources to SC Management in return for whatever services the family member received. During the years in issue the income shown on the Schedules C is attributable to amounts petitioner and one of his children earned.
October 21, 2016 in New Cases, Tax, Weekly Tax Roundup | Permalink
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Monday, October 3, 2016
Byers v. United States Tax Court, No. 15-1605 (D.C. D.C. Sept. 30, 2016) (citations omitted):
Plaintiff Ronald E. Byers, proceeding pro se, brings this action against the United States Tax Court (“Tax Court” or “Defendant”) pursuant to the Freedom of Information Act (“FOIA”). Relying predominately on the D.C. Circuit’s recent decision in Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), cert. denied, 135 S. Ct. 2309 (2015), Mr. Byers argues that, for the purposes of FOIA, the Tax Court is an agency of the federal government’s Executive Branch. Thus, Mr. Byers asks this Court to order the Tax Court to turn over a wide range of records identified in his FOIA request. The Tax Court moves to dismiss the Complaint. Courts of the United States are specifically exempted from FOIA, and the Tax Court argues that Mr. Byers’s Complaint should be dismissed because the Tax Court is a court, not an agency. The resolution of the Tax Court’s motion to dismiss turns on a single legal question: Is the Tax Court a court or an agency for the purposes of FOIA?
October 3, 2016 in New Cases, Tax | Permalink
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Tuesday, September 27, 2016
Estate of Heller v. Commissioner, 147 T.C. No. 11 (Sept. 26, 2016):
James Heller, a resident of New York, New York, died on January 31, 2008. At that time he owned a 99% interest in James Heller Family, LLC (JHF). James Heller's daughter, Barbara H. Freitag, and his son, Steven P. Heller, each held a 0.5% interest in JHF. Harry H. Falk managed JHF, the only asset of which was an account (JHF Madoff account) with Bernard L. Madoff Investment Securities, LLC (Madoff Securities). ...
On December 11, 2008, Bernard Madoff, the chairman of Madoff Securities, was arrested, and the Securities and Exchange Commission issued a press release to alert the public that it had charged him with securities fraud relating to a multibillion-dollar Ponzi scheme. ... As a result of the Ponzi scheme, JHF's interest in the JHF Madoff account and the estate's interest in JHF became worthless.
The estate on April 1, 2009, timely filed Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, on which the estate reported a $26,296,807 gross estate, including the value of James Heller's 99% interest in JHF (i.e., $16,560,990). The estate also claimed a $5,175,990 theft loss deduction relating to the Ponzi scheme, the amount of which reflects the difference between the value of the estate's interest in JHF reported on the estate tax return and the estate's share of the amounts withdrawn from the JHF Madoff account. Respondent on February 9, 2012, issued the estate a notice of deficiency in which respondent determined that the estate was not entitled to the $5,175,990 theft loss deduction because the estate did not incur a theft loss during its settlement.
September 27, 2016 in New Cases, Tax | Permalink
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Thursday, September 22, 2016
United States v. Daugerdas, No. 14-2437 (2d Cir. Sept. 21, 2016):
Paul M. Daugerdas was a Certified Public Accountant (“CPA”) and tax attorney at Arthur Andersen through August of 9 1994; the law firm Altheimer & Gray from the end of 1994 through 1998; and the Chicago office of the law firm Jenkens & Gilchrist (“J&G”) from 1999 through April 2004. Throughout his career, Daugerdas developed, sold, and implemented a variety of tax‐reduction strategies for wealthy clients: the so‐called Short Sale Shelter, Short Option Shelter, Swaps Shelter, and HOMER Shelter. Besides Daugerdas’s employers, two other entities had significant involvement in this undertaking. The accounting firm BDO Seidman (“BDO”) referred its clients to J&G and helped to sell the shelters, and the investment bank Deutsche Bank. Alex Brown (“DB”) assisted J&G in the design of the shelters, held informational meetings with clients, and implemented the transactions that composed the shelters.
September 22, 2016 in New Cases, Tax | Permalink
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Thursday, August 25, 2016
Thursday, August 11, 2016
Tanzi v. Commissioner, T.C. Memo. 2016-148 (Aug. 9, 2016):
During the first half of 2011 the Tanzis were employed by Seminole State College. Dr. Tanzi taught math and communications classes as an adjunct professor, and Mrs. Tanzi was employed as a campus librarian.
Dr. Tanzi is highly educated—he holds a doctorate in communication. As he explained at trial, individuals holding such terminal degrees bear a lifelong burden of “developing knowledge, finding knowledge, exploring, [and] essentially selfeducating”. Dr. Tanzi therefore insists that all expenses paid in adding to his “general knowledge” should be deductible as unreimbursed employee business expenses. ...
August 11, 2016 in Legal Education, New Cases, Tax | Permalink
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Monday, August 1, 2016
The IRS has issued AOD 2016-02, 2016-31 IRB 193 (Aug. 1, 2016), acquiescing in the Ninth Circuit's decision in Voss v. Commissioner, 796 F.3d 1051 (9th Cir. 2015), which held 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 for unmarried couples), rather than on a per-residence basis (and thus limited to $1.1 of mortgage debt for married couples), as previously argued by the IRS and decided by the Tax Court (138 T.C. 204 (2012)).
August 1, 2016 in IRS News, New Cases, Tax | Permalink
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Monday, July 11, 2016
Indianapolis Business Journal, Pacers’ Legal Tenacity on Display in IRS Fight:
The legal fallout stemming from Melvin Simon’s decision to unload his half of the Indiana Pacers to his brother Herb just a few months before his September 2009 death is getting crazier by the day.
Mel’s widow, Bren Simon, got the public spectacle rolling in March 2015 when she sued the IRS in an effort to overturn the agency’s determination that the terms of the deal were so tilted in Herb’s favor that Mel essentially gave him an $83 million gift.
That conclusion left Bren with a $21 million gift-tax bill, which she paid under protest but hopes to get refunded by winning the suit.
July 11, 2016 in Celebrity Tax Lore, New Cases, Tax | Permalink
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Tuesday, June 28, 2016
The Surly Subgroup: Tax Lawyers Kill $38 Billion Merger, by David J. Herzig (Valparaiso):
I remember one of my first days at GT [Greenberg Traurig] we were advising on a corporate merger. At the end of the process (of course), the M&A group asked tax to sign off on the deal. Everything was done and this was supposed to be a rubber stamp. Well, as you can guess by now, the tax consequences of the deal as structure were disastrous and the whole deal had to be restructured. I remember vividly the corporate lawyers saying as they walked out the door, this is why we never ask tax anything!
Today, a judge killed the proposed $38 billion merger between Energy Transfer Equity (“ETE”) and the Williams Companies. Chancery Court Vice Chancellor Sam Glasscock ruled that ETE could back out of the deal because of taxes. Latham & Watkins, actually, tax lawyers at three top firms (L&W, Gibson Dunn and Morgan Lewis and one law professor [Ethan Yale (Virginia)]) could not opine that the deal was tax neutral under 721 despite one law professor [Howard Abrams (San Diego)] and Cravath saying the deal worked. This opinion is a rather big deal for M&A lawyers. Usually, conditions precedent like this won’t allow one side to back out of a transaction. ...
I would love to hear others opinions here. But some off the cuff reactions I had were:
June 28, 2016 in New Cases, Tax | Permalink
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Monday, June 13, 2016
Nacchio 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.
June 13, 2016 in Celebrity Tax Lore, New Cases, Tax | Permalink
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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.
June 13, 2016 in New Cases, Scholarship, Tax | Permalink
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Sunday, June 5, 2016
As 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.”
June 5, 2016 in New Cases, Tax | Permalink
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Wednesday, May 18, 2016
Santos 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. ...
May 18, 2016 in Legal Education, New Cases, Tax | Permalink
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Sunday, April 10, 2016
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.
April 10, 2016 in New Cases, Tax | Permalink
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Monday, March 21, 2016
United 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.
March 21, 2016 in New Cases, Tax | Permalink
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Wednesday, December 30, 2015
Wednesday, December 23, 2015
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:
December 23, 2015 in Congressional News, New Cases, Scholarship, Tax | Permalink
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Friday, December 18, 2015
University 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.
December 18, 2015 in New Cases, Tax | Permalink
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Wednesday, December 16, 2015
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. ...
December 16, 2015 in Celebrity Tax Lore, New Cases, Tax | Permalink
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Monday, December 14, 2015
Tampa 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. ...
December 14, 2015 in IRS News, Legal Education, New Cases, Tax | Permalink
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Tuesday, December 8, 2015
Thursday, November 19, 2015
Monday, November 9, 2015
Seattle 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. ...
November 9, 2015 in IRS News, New Cases, Tax | Permalink
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Wednesday, October 21, 2015
TaxProf 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.
October 21, 2015 in New Cases, Tax | Permalink
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Saturday, September 5, 2015
Guralnik 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.
September 5, 2015 in New Cases, Tax | Permalink
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Saturday, August 22, 2015
Following 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:
August 22, 2015 in New Cases, Tax | Permalink
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Wednesday, August 19, 2015
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
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Thursday, August 13, 2015
Bloomberg 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.
August 13, 2015 in New Cases, Tax | Permalink
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Monday, August 10, 2015
A 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:
August 10, 2015 in New Cases, Tax | Permalink
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Tuesday, July 28, 2015
TaxProf 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.
July 28, 2015 in New Cases, Scholarship, Tax | Permalink
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Wednesday, July 22, 2015
Following 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.
July 22, 2015 in IRS News, New Cases, Tax | Permalink
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Marvel 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.
July 22, 2015 in New Cases, Tax | Permalink
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