Tax Court: No Partnership Return, No FPAA

Posted on March 20, 2012 by admin

The Tax Court continues to define the broad limits of TEFRA. Petitioner argued that the notice of deficiency was invalid because the item at issue was a partnership item and thus a Final Partnership Administrative Adjustment should have been issued. The Court ruled that TEFRA does not apply where the taxpayer has not filed a partnership return and the partnership does not qualify as a partnership under TEFRA. The Court rejected the petitioner’s motion to dismiss for lack of jurisdiction.

Read the opinion here:
Huff v. Commissioner 138 T.C. No. 11 (2012)

WSJ: IRS Drops NYSE Executive Compensation Case

Posted on March 5, 2012 by admin

The March 2 print edition of the Wall Street Journal reports that the IRS has abandoned its effort to disallow $161 million of deductions taken by the New York Stock Exchange for compensation paid to former CEO Richard Grasso.

In 2003, Richard Grasso resigned under controversy when his massive pay package of the then not-for-profit NYSE was made public. A number of legal actions ensued including an IRS examination of the stock exchange. Under audit, the IRS disallowed approximately $161 million of deductions taken for compensation allocated to the former executive between 2001 and 2003.

In 2009, the NYSE challenged the government’s determination and submitted its protest to the IRS Office of Appeals. The Wall Street Journal reports that after two years in the appeals process, in November of 2011 the IRS concluded that there was no tax deficiency for the challenged years and ultimately resolved the matter in favor of the NYSE.

Tax Court: Non-Profit Not Subject to Excise Tax on Plan Reversion

Posted on March 2, 2012 by admin

The United States Tax Court, in a division opinion authored by Judge Haines, found that a non-profit organization, Research Corporation, was not subject to excise tax under Section 4980 on a $4.4 million reversion from a defined benefit retirement plan. The court held that Research Corporation was never subject to tax under subtitle A and the plan was not a qualified plan subject to the excise tax. The court also held that it did not have jurisdiction to issue a refund for excise taxes already paid.

Read the opinion here:
Research Corporation v. Commissioner, 138 T.C. No. 7 (2012)

Federal Circuit: Section 1031 Strategy Not Patent Worthy

Posted on March 1, 2012 by admin

Following its own precedent and the clarifying guidance set forth by the U.S. Supreme Court in Bilski v. Kappos, 130 S.Ct. 3218 (2010), the Federal Circuit Court of Appeals affirmed the District Court’s determination which invalidated 41 patent claims by American Master Lease, LLC for investment strategies designed to reduce the incidence of tax using qualified like-kind exchanges under Section 1031 of the Internal Revenue Code.

Read the opinion here:
Fort Properties, Inc. v. American Master Lease, LLC, Docket No. 09-1242 (Fed. Cir. February 27, 2012)

IRS Updates Instructions for Schedule UTP

Posted on February 12, 2012 by admin

Every tax trial begins with a tax position that at least one party (often the government) thinks is uncertain. It isn’t much of a stretch to suggest that future tax trials will have some relationship to an uncertain tax position once reported on Schedule UTP. Accordingly, we hope to keep you up to date with changes affecting this form currently required of corporate taxpayers with assets of $100 million or more, but which will come to include taxpayers with as little as $10 million in assets by 2014.

On February 3, the IRS revised the instructions for Schedule UTP, applicable to returns for the 2011 tax year. Notable changes include the treatment of changing members in a consolidated group, reserves affected by changed circumstances, the treatment of interest and penalties, and specific references to FIN 48 (which presumably should be read as ASC 740 for those familiar with the FASB codification).

One significant change in the instructions for schedule UTP in 2011 is the treatment of new and old members of a consolidated group. A new instruction advises:

If, after a subsidiary member leaves the consolidated group, the subsidiary, or a related party of the subsidiary, records a reserve in an audited financial statement with respect to one of the subsidiary’s tax positions in its former group’s prior return, the subsidiary should report the tax position on Part II of the Schedule UTP filed with its 2011 tax return, if it files a separate return. If the subsidiary is included in the return of another consolidated group that is required to file Schedule UTP, the common parent of that consolidated group should report the tax position on Part II of the Schedule UTP filed with its 2011 tax return.

A new example in the instructions, Example 11, explains how to record the uncertain tax position of a party subject to a corporate merger.

On June 30, 2011, MergerCo merges into AcquiringCo in a transaction in which AcquiringCo survives. MergerCo’s tax year ends on that date. After the merger, AcquiringCo records a reserve with respect to a tax position that is taken on MergerCo’s final return in its audited financial statements. That tax position must be reported on Part I of the Schedule UTP filed with MergerCo’s 2011 tax return even though the reserve was recorded by AcquiringCo. AcquiringCo should not report the tax position on the Schedule UTP filed with its 2011 tax return because MergerCo’s final return is a prior year tax return on which the tax position was reported.

Two new examples explain how to record tax positions that are new or revised because of changed circumstances. The first example, Example 2, addresses the treatment of a tax position a corporation reported on an earlier year return and determined was reasonably certain (i.e., not reported on Schedule UTP) but is then questioned by the IRS under examination. If the Corporation reevaluates the tax position and records a reserve for that prior year position in 2013, the corporation must report the tax position on the schedule UTP filed with its 2013 tax return even if the IRS identifies the tax position for examination prior to the recording of the reserve.

The second example addressing changed facts considers positions disclosed because of an expectation to litigate. New Example 5 instructs:

A corporation takes a position on its 2011 tax return for which no reserve is recorded because the corporation determines the tax position is correct. Circumstances change, and in 2013 the corporation determines that the tax position is uncertain, but does not record a reserve because of its expectation to litigate the position. That is, the Corporation or a related party determines the probability of settling with the IRS to be less than 50% and, under applicable accounting standards, no reserve was recorded because the corporation intends to litigate the tax position and has determined that it is more likely than not to prevail on the merits of the litigation. The corporation must report that position on Part II of the Schedule UTP filed with the 2013 tax return either if it records a reserve or if it does not record a reserve because it expects to litigate, even if that decision to record or not record occurs because of a change in circumstances in a later year.

Finally, the 2011 instructions offer new guidance on the treatment of interest and penalties when reporting tax positions on schedule UTP. A Corporation is not required to report accruals of interest on the tax reserve recorded with respect to a tax position taken on a pre-2010 tax return. Also, with regard to determining size and ranking of tax positions, if interest or penalties relating to the position is not separately identified in the books and records as associated with the position, the net amount of interest and penalties is not included in the size of a tax position used to rank the position or compute whether the position is a major tax position.

Read the new instructions here:
2011 Schedule UTP Instructions

2nd Circuit: District Court Reversed, Banks Not Partners in Castle Harbour, Penalties Imposed

Posted on January 30, 2012 by admin

Is this the last hurrah for GE Capital’s Castle Harbour transaction?

The story of GE Capital’s sophisticated tax deal with two Dutch banks finally may have come to a conclusion. In 1993, two Dutch banks, ING Bank N.V. and Rabo Merchant Bank N.V., purchased an interest in Castle Harbour LLC, a partnership in which TIFD III-E, Inc., a subsidiary of General Electric Capital Corp., served as the tax-matters partner. In short, Castle Harbour allowed GE to refinance a fleet of fully depreciated aircraft, allocate the taxable income from that fleet to its tax indifferent foreign partners (the banks) while preserving the economic benefits of the income for itself. Shifting the tax burden on the operating income to the foreign banks saved the GE subsidiary more than $60 million in U.S. taxes.

The IRS challenged the transaction in 2001 when it issued two Final Partnership Administrative Adjustments (FPAAs) against the tax-matters partner, TIFD III-E. The IRS alleged that the banks were not partners in Castle Harbour LLC. Litigation ensued. After a bench trial, the District Court for the District of Connecticut ruled in favor of the taxpayers finding that the banks were partners for tax purposes. The Second Circuit rejected the District Court’s finding and held that the partners did satisfy the totality of the circumstances test under Commissioner v. Culbertson, 337 U.S. 733 (1949). It then remanded the case to the District Court to address the taxpayer’s secondary argument, undecided in the first trial, that the partners qualified as partners under IRC Section 704(e). The District Court again found for the taxpayers and further determined that there was substantial authority for the taxpayer’s positions, thus the penalties asserted by the IRS did not apply.

In the this opinion, the Second Circuit has again rejected the District Court’s findings. The Court of Appeals held that the lower court erred and found that the banks did not have a capital interest in the partnership, as required by 704(e), and therefore were not partners. The appellate court further determined that the taxpayer did not offer substantial authority for its position and upheld the government’s penalty.

Given the determinations made by the Court of Appeals, it is hard to see how the taxpayers might establish grounds for a writ of certiorari. They have 90 days from the date of the order to file that petition.

Read the opinion here.
TIFD III-E, Inc. v. United States, Docket No. 10-70-cv (2nd Cir. January 24, 2012)

Supreme Court Hears the Home Concrete Arguments Today

Posted on January 17, 2012 by admin

For those who have been following the Intermountain cases, i.e., the series of Tax Court and Courts of Appeals cases dealing with the interpretation of the six-year statute of limitation for under reported income (trying not to blatantly pick a side with that language), the Supreme Court will hear oral arguments in Home Concrete today.

For great coverage of the issues and the arguments that may be presented today visit Tax Appellate Blog.

IRS Announces Another Offshore Voluntary Disclosure Program

Posted on January 10, 2012 by admin

The IRS seems to have taken a nod from the legendary Yankee backstop, Yogi Berra, because “it’s déjà vu all over again.”

On January 9, 2012, the IRS announced that it was “reopening” the Offshore Voluntary Disclosure Program (OVDP) for an indefinite period. This is the latest incarnation of foreign bank account disclosure initiatives undertaken by the IRS. Prior programs included the 2003 Offshore Voluntary Compliance Initiative (OVCI), the 2009 Offshore Voluntary Disclosure Program (OVDP), and the recently closed 2011 Offshore Voluntary Disclosure Initiative (OVDI). The IRS seems to have adopted the name of the 2009 program, i.e., OVDP, for this current initiative.

The current program will track many of the requirements of the 2011 OVDI program but with some important, if still undefined, differences. First, the current OVDP will be open for an indefinite period. The IRS does note, however, that it may announce a closing date at any time in the future. There is no deadline for filing a disclosure under the current program but again the IRS notes that it could change the terms of the program at any time. The IRS announcement for the new program also specifically suggests that it may increase penalties for all or some taxpayers, or certain defined classes of taxpayers. The IRS promises additional guidance on the new program within the next month and another update to the frequently asked questions (FAQs) published under the 2011 OVDI program.

One known change from the 2011 OVDI program is that penalties for taxpayers in the highest penalty bracket will be increased to 27.5% under the new program. The disclosure penalty rates for volunteers holding fewer assets in foreign account will remain at 5% and 12.5%, at least for the time being. Volunteers still must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. Volunteers who feel the penalty is disproportionate may still opt for an examination upon filing.

The current disclosure program, like its predecessors, is directed at U.S. taxpayers who hold interests in offshore or foreign bank accounts. U.S. taxpayers include U.S. citizens, dual citizens, permanent residents, and non-U.S. citizens who may be “substantially present” in the U.S. for tax purposes. The initiative tracks the annual requirement to file Foreign Bank Account Report (FBAR), Form TD F 90-22.1. The initiative covers any bank, securities, mutual fund or other financial instrument accounts held with a financial institution. It does not include individual bond holdings or stock certificates.

Finally, the press release notes the recognition by the IRS that dual citizens and others may be delinquent in meeting the FBAR filing requirements but still owe no U.S. tax. This long overdue recognition is accompanied by a promise that the IRS is developing procedures to allow these taxpayers to come into compliance with the law.

IRS Audit Rates Continue to Increase for High Income Earners

Posted on January 9, 2012 by admin

Last week the IRS announced performance statistics for fiscal year 2011, which ran from October 1, 2010 through September 30, 2011. The IRS collected $55.2 million from enforcement actions during that period. IRS enforcement actions include audits, assessments, collection actions, appeals, and litigation.

The IRS also reported that the number of million dollar earners subject to audit increased for the third straight year. Among those making more than $1 million, 1 in 8 faced an IRS audit during fiscal year 2011. “We are looking more at taxpayers at these income levels because we find more issues there,” said IRS Deputy Commissioner Steve Miller.

The same might be said for the IRS’s approach to large corporations. Corporations with assets in excess of $250 million also saw an increase in audit activity. The audit rate for those business climbed to 27.6%. Closely held corporations, specifically those electing under subchapter S of the Internal Revenue Code, also saw an increase in audit activity of 13% over 2010.

The impact of an IRS audit remains severe. More than 80% of of those audited by the Internal Revenue Service paid additional taxes according to the most recent information available.

U.S. District Court: California Must Turn Over Real Estate Information to the IRS

Posted on December 20, 2011 by admin

The U.S. District Court for the Eastern District of California has issued an order allowing the Internal Revenue Service to serve a John Doe Summons on the California State Board of Equalization. A John Doe Summons is defined by Section 7609(f) of the Internal Revenue Code and is used by the IRS to gather information from a third party about a class or group of taxpayers suspected of not complying with the internal revenue laws. It is called a John Doe Summons because the IRS doesn’t know the specific names of the alleged violators but is seeking to identify them through the summons process. John Doe Summons have been used to implicate taxpayers in domestic and international tax-advantaged transactions with banks like Wachovia, HSBC and UBS.

In this particular matter, the Internal Revenue Service is seeking information about the transfer of real estate between family members for less than full value. The IRS believes that such transfers are being used to avoid Federal Gift Tax liabilities. The investigation is most likely to affect decedents who passed away in 2010 or before and whose final Federal Estate Tax Return has not yet been filed or is still subject to audit because the lifetime gift tax exclusion for those years was only $1 million. The lifetime exclusion for 2011 and 2012 is more a robust $5 million dollars. Nonetheless, a Federal Gift Tax Return, Form 709, is required in any year which a gift of more than $13,000 is made. Failure to file a gift tax return is subject to a Section 6651 penalty.

The IRS targeted the California State Board of Equalization because it receives records of all California real property transfers to ensure compliance with Proposition 13, the well known California voter initiative which limits annual property tax assessment increases. The judge found that the IRS satisfied the technical requirements to serve the summons and ordered enforcement. The California BOE likely will be turning over the records at the beginning of the new year and you can expect the IRS to start initiating examinations based on what it collects sometime on 2012.

Read the order and memorandum here:
In the Matter of the Tax Liabilities of John Does, No. 2:10-mc-00130-MCE-EFB, (E.D. CA, December 15, 2011)