Tax Court: Capital Gains, Casualty Losses and Ecdysiasts

It only takes a couple of paragraphs to recognize a Tax Court opinion drafted by Judge Mark V. Holmes whose distinctive style is inimitable.  In his latest effort, Judge Holmes expounds on sub-genres of hard rock and heavy metal music and flexes his vocabulary to describe what ordinary folks like us might just call a “strip club.”  The taxpayer’s incarceration, risk management techniques, and references to Great White and Head East only added to the tale.  All of this because of an incorrectly reported capital gain following a condemnation action. Taxation should always be so fun.

The 17 page Summary Opinion (which disposed of the taxpayer’s action but cannot be cited for precendent) had us reaching for the dictionary more than once as illustrated by the following sentence:

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.

We couldn’t even find “paranomasia” (the root for the adverb above) in our three and a half inch thick Webster’s Unabridged Dictionary of the English Language.  Fortunately the internet offered up the answer, which the curious can find here. All in a day’s work for Judge Holmes.

In the end, the taxpayer did get a bit of a break on the capital gain asserted by the IRS in the notice of deficiency but you’ll have to run the math yourself to know exactly how much as decision was entered under Tax Court Rule 155.

Read the opinion (and get the depreciation formula for the taxpayer’s gain) here.
Willson v. Commissioner, T.C. Summ 2011-132

(h/t: TaxProfBlog)

New York Times: Lauder Family Artfully Shelters Taxes

David Kocieniewski, a leading tax reporter for the New York Times, reports that Ronald S. Lauder and his family, heirs to the Estée Laduer fortune, employ a variety of strategies available only to the rich to reduce their tax liability. The article is interesting for covering certain high net worth strategies that have been investigated by the Internal Revenue Service in recent years, but I’m not sure if Mr. Kocieniewski doesn’t overreach a little bit in his discussion of Mr. Lauder’s father’s valuation case in the United States Tax Court. Mr. Kocieniewski writes:

“When Mr. Lauder’s father, Joseph, died in 1983, family members fought the I.R.S. for more than a decade to reduce their estate tax. The dispute involved a block of shares bequeathed to the family — the estate valued it at $29 million, while the I.R.S. placed it at $89.5 million. A panel of judges ultimately decided on $50 million, a decision that saved the estate more than $20 million in taxes.”

Presumably Mr. Kocieniewski is referring to Estate of Lauder v. Commissioner, T.C. Memo 1994-527 which was the third of three memorandum opinions written by Judge Hamblen on behalf of the Tax Court with regard to the Lauder case. It was this third opinion that focused on the valuation of Mr. Lauder’s estate.

Here’s the bone. The entire case, all three opinions, was about the proper valuation of Mr. Lauder’s estate. However, Mr. Kocieniewski writes that because Judge Hamblen determined the proper valuation of the estate was less than the IRS asserted the litigation “saved the estate more than $20 million in taxes.” Isn’t also possible that the IRS valuation was inflated, inaccurate or maybe simply incorrect? (It seems that Judge Hamblen felt as much.) In which case, Mr. Lauder’s estate didn’t “save” any taxes at all but rather paid the proper tax due.

Certainly valuation cases are complicated, and there were several procedural and substantive issues addressed in the Lauder litigation, but the implication that anyone who prevails in the face of a tax liability incorrectly asserted by the IRS is “saving” taxes seems a bit much.  Unfortunately, we cannot share the text of the Lauder estate opinions here without violating a copyright but if you have the tools to investigate them yourself the citations are: Estate of Lauder v. Commissioner, T.C. Memo 1992-736; Estate of Lauder v. Commissioner, T.C. Memo 1992-736; and the above-mentioned Estate of Lauder v. Commissioner, T.C. Memo 1994-527.

If you would like to read Mr. Kocieniewski’s article you can find it here.

Finally, a post script to Mr. Sheldon Cohen, whose comments in the article about the social value of certain tax benefits for benefactors of the arts are well taken.

Bloomberg Reports: IRS Examining Harvard

The IRS has another initiative underway to uncover taxpayers who may not have been closely examined before. Bloomberg Business reports that the Internal Revenue Service is reviewing more than 30 major colleges and universities for potential deficiencies in unrelated business income tax (UBIT). The focus of the government’s inquiries is on hotels and other properties which may be generating income subject to UBIT. The Bloomberg article emphasizes Harvard but also notes that Notre Dame, Purdue, the University of Texas at Austin, Texas A&M, the University of North Carolina, and the University of Georgia may also be under review.

Read the article here.

Second Circuit Denies Altria’s SILO/LILO Refund Claim

The Second Circuit Court of Appeals affirmed the trial jury’s decision denying Altria Group’s claim for a tax refund based on four sale in, lease out (SILO) and lease in, lease out (LILO) transactions in 1996 and 1997.

The jury denied the tax refunds based on the judicial theory of substance over form. The district court denied Altria’s post trial motions to overturn the verdict as a matter of law and for a new trial. What is notable about this case is not only that the Second Circuit affirmed the jury decision but affirmed the application of the substance over form doctrine as the rationale for the decision. Prior to this decision, these transactions and other similar transactions have largely been decided under the economic substance doctrine.

Read the opinion here:
Altria Group, Inc. v. United States

NLJ Reports: No Tax LL.M. Program for USC

In yet another diversion from our usual theme of reporting tax decisions, we take a minute to note that we may have reached critical mass for tax LL.M. programs. Dean Rasmussen suggests that USC abandoned its plan to open an LL.M. program in taxation because it would not improve potential students job prospects. While the value of an LL.M. in tax is open to debate, I do know of some tax firms that require it to join their practice and many that prefer it. It looks like folks in Los Angeles will have to look north or east to find a quality program.

Read the National Law Journal article here.