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

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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.

5th Circuit: Rejects Taxpayer Appeal of Distressed Asset Transaction

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The Fifth Circuit affirmed the decision of the District Court (Northern District of Texas) denying the tax losses of Texas banker D. Andrew Beal. The Court of Appeals affirmed the lower court’s finding that the partnership through which the losses were generated was a sham and that the losses should be disallowed. However, the Circuit Court also affirmed the trial court’s determination that penalties should not be allowed.

Read the opinion here:
Southgate Master Fund v. US.

Department of Justice Trumpets Victories

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The U.S. Department of Justice released a press release announcing victories in three tax cases on the same day. The press release characterizes all three cases as tax shelters. We will add all three cases, Southgate Master Fund LLC v. United States (5th Circuit), Pritired 1 LLC v. United States (S.D. Iowa), and WFC Holdings Corporation v. United States (D. Minn.) to the blog later this week.

Read the Department of Justice Press release here.

U.S. Supreme Court: Cert. Granted in 6 Year Statute of Limitations Case

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The U.S. Supreme Court has granted certiorari in Home Concrete & Supply v. United States, a decision of the 4th Circuit Court of Appeals on the much litigated application of the 6-year statute of limitations. Home Concrete was the first of the 6 year statute cases (also known as the Intermountain cases) to reach the Supreme Court. When the Court selected Home Concrete for hearing it was also presented with the opportunity to hear similar cases from the Federal Circuit (Grapevine) and 7th Circuit (Beard) but apparently has put those petitions on hold pending the decision in Home Conrete.

For more visit Tax Appellate Blog.

Tax Court: Tax Motivated Distressed Asset Transaction Disallowed

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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)

Tax Court: Intangible Amortization Requires an Active Trade or Business

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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)