Category Archives: Federal

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)

3rd Circuit: NJ Township Has No Standing for Class Action to Collect Hotel Occupancy Taxes

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The Third Circuit Court of Appeals affirmed the District Court’s decision that the Township of Lyndhurst, New Jersey did not have standing “in its capacity as a taxing authority” to pursue a class action against Priceline.com and other online hotel booking companies for unpaid hotel occupancy taxes.

Read the opinion here:
Township of Lyndhurst v. Priceline.com, Inc., No. 09-2053 (3rd Cir. August 2, 2011)

Tax Court: Accountant Cannot Deduct Imputed Expenses of His Own Labor

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In a Summary Opinion, Special Trial Judge Dean found that the petitioner, who testified that he was an accountant, could not deduct the time he spent doing web-site development for his own business. The court explained the distinction between imputed expenses (such as those claimed by the petitioner) and incurred expenses noting that only costs which are actually incurred or paid are deductible under sections 162 and 212 and finding for the respondent.

Read the opinion here:
Mondello v. Commissioner, T.C. Summ. 2011-97

D.C. Circuit: Issuance of an FPAA tolls Statute of Limitations for Individual Partners

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The Court of Appeals for the D.C. District reversed the Tax Court holding that a final partnership administrative adjustment (FPAA) issued after the initial three-year assessment period for partnerships under IRC §6229(a) had expired still tolls the period for assessment (statute of limitations) for individual partners under IRC §6501.  The Circuit Court relied upon the language of IRC § 6229(d), which suspends certain assessments following the issuance of an FPAA, and its previous holding in Andantech, L.L.C. v. Commissioner, 331 F.3d 972 (D.C. Cir. 2003).

Read the opinion here:
UTAM, Ltd. v Commissioner, Docket No. 10-1262 (D.C. Cir. June 21, 2011)

D.C. Circuit: Six Year Statute of Limitations Applies to Overstatements of Basis

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The Court of Appeals for the District of Columbia Circuit reversed the Tax Court on the question of whether or not the six year statute of limitations under sections 6229(c)(2) and 6501(e)(1)(A) applied to an overstatement of basis. The Court of Appeals followed the rationale of other recent government victories on this issue, see Grapevine (Fed. Cir.) and Beard (7th Cir.). The Court of Appeals also adopted the government’s argument that Chevron deference apply to the government’s regulation (adopted after litigation began) interpreting the application of the six year statute.

Read the opinion here.
Intermountain Insurance Service of Vail, LLC v. Commissioner, Docket No. 10-1204 (D.C. Cir. June 21, 2011)

For more about this opinion visit Tax Appellate Blog and Tax Prof Blog.

Tax Court: Penalties Apply for Taxpayer Who Does Not Show Reliance on Tax Advice

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In a reviewed opinion, the Tax Court has found that a sophisticated taxpayer (i.e., a hedge fund manager) could not avoid penalties by relying on the reasonable cause defense under Sec. 6664(c)(1) where the taxpayer presented no evidence that the omitted income was because he relied on advice given by the tax return preparer.

Read the opinion here:
Woodsum v. Commissioner, 136 T.C. No. 29 (2011)