Superior Trading LLC v. Commissioner, which consolidated several pending petitions, represented the Tax Court’s first consideration of the Distressed Asset Debt/Distressed Asset Trust (“DAD”/”DAT”) transaction cases. The Superior Trading transaction, a DAD transaction, operated through the contribution of significantly distressed, but not yet worthless, foreign assets to a partnership owned by the taxpayer seeking the tax loss. Under prior law, no election under section 754 was made at the time of the contribution which allowed the high basis, or purported face value, of the distressed assets to carry over to the partnership following the contribution. The contributed partnership interest was then redeemed, triggering recognition of the contributed built in loss which then passed through to the taxpayer.
The Court characterized the transaction as tax motivated on the first page of the opinion, comparing it to the widely litigated Son-of-Boss transactions. On the substantive issues, the Court found that the taxpayer failed to show that the distressed foreign assets had a tax basis prior to their contribution to the partnership. The Court then applied the step transaction doctrine to collapse the contribution of the debt to the partnership, and the redemption of that interest, into a single transaction. It characterized that transaction as a sale of the assets and further held that the taxpayers failed to prove the amount paid for the asset, thus again denying the recognition of any tax basis in the assets. The Court also rejected the taxpayer’s good faith and reasonable cause defenses and upheld the imposition of accuracy-related penalties.
Read the opinion here:
Superior Trading LLC v. Commissioner, 137 T.C. No. 6 (2011)
Ronald L. Buch, Jr., a partner at Bingham McCutcheon LLP, has been nominated by President Obama to serve as a Judge on the United States Tax Court. Congratulations Ron.
Read the White House press release here.
See Ron’s professional profile here.
In a decision presenting several novel questions and two questions of first impression, the Tax Court (Judge Kroupa) has ruled that the amortization of intangibles (FCC cellular licenses) under Section 197 requires that the holder be engaged in an active trade or business as defined under Section 162 (as distinguished, for example, from the definition under Section 174).
The other question of first impression addressed in the opinion was whether the pledge of stock in a related S corporation is excluded from the at-risk amount because it was “property used in the business” for purposes of recognizing losses. The taxpayer argued that because stock represents an ownership interest and can be sold without affecting corporate assets, it is inherently separate from a business and the pledge of such stock is “unrelated to the business” for purposes of satisfying that requirement under the At-Risk rules of Section 465.
Tax practitioners who practice regularly before the Office of Appeals should note the Court’s clarification of what is required to claim equitable estoppel on reliance of the oral representations of an Appeals Officer. The Taxpayer’s sought to rely upon a settlement offer that was not memorialized in a fully executed closing agreement. The Court denied that claim because the taxpayer’s failed to demonstrate either the traditional three elements for equitable estoppel or the specific requirement of “affirmatively reckless conduct” specific to the Sixth Circuit Court of Appeals (to which the case was appealable).
Read the entire opinion here:
Broz v Commissioner 137 T.C. No. 5 (2011)