Tag Archives: Tax Court

Tax Court: Related Party S Corps Can “Share” Distributions to Preserve Losses

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The Tax Court found that shareholders in two related S corporations may receive a distribution of intangible assets from one of their S corporations and contribute those assets into another one of their S corporations in order to increase their basis in the latter entity and realize the losses generated by that entity.

The court followed its opinions in Ruckriegel v. Commissioner, T.C. Memo. 2006-78; Yates v.
Commissioner, T.C. Memo. 2001-280; and Culnen v. Commissioner, T.C. Memo. 2000-139, rev’d and remanded on another issue, 28 Fed. Appx. 116 (3d Cir. 2002) noting that “the fact that funds lent to an S corporation originate with another entity owned or controlled by the shareholder of the S corporation does not preclude a finding that the loan to the S corporation constitutes an ‘actual economic outlay’ by the shareholder.”

The Court noted that “so long as the underlying distributions and contributions actually occurred” it was of no consequence that the petitioner’s actions may have been motivated by tax considerations.

Read the opinion here:
Maguire v. Commissioner, TC Memo 2012-160

Tax Court: Donation of Conservation Easement Denied

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A recent Tax Court opinion offers two new elements for consideration when making a charitable donation of a conservation easement under Section 170.

In Mitchell v. Commissioner, the Tax Court denied taxpayer’s deduction for the charitable contribution of a qualified conservation easement. The court found that where a mortgage subordination agreement is not in place at the time of the donation, the subordination requirement of the regulations has not been satisfied. The court also ruled that the so-remote-as-to-be-negligible standard of Treas. Reg. Sec. 1.170A-14(g)(3) does not to apply to determine whether a donation has satisfied the requirements of Treas. Reg. Sec. 1.170A-14(g)(2) (subordination of the easement).

Read the opinion here:
Mitchell v. Commissioner, 138 T.C. No. 16 (2012)

4th Circuit: Denial of Transferee Liability for Intermediary Transaction Tax Shelter Affirmed

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The Fourth Circuit Court of Appeals affirmed the Tax Court’s decision in favor of four taxpayers who were alleged to have participated in what the IRS describes as an Intermediary Transaction tax shelter. The majority opinion, authored by Circuit Judge Davis, held that the Tax Court properly identified and applied the controlling legal principles and did not commit clear error in its factual findings.

At issue was the application of IRC § 6901 which provides for collection of liabilities from transferees in certain transactions. The transaction that prompted the allegedly transferred tax liability was the sale of a closely held C corporation. The IRS characterized the sale as substantially similar to an abusive tax shelter as described in Notice 2001-16, later modified by Notice 2008-111 (Intermediary Transaction).

The IRS attacked this transaction by asserting transferee liabilities under IRC § 6901 against the four former shareholders of the dissolved corporation. As noted by the Tax Court, section 6901 does not independently impose a tax liability but rather is a procedural device by which the IRS may collect unpaid tax owned by the transferor of an asset to a transferee. Thus, the transferee liability argument was pursued only as a basis for attaching the tax liability of the corporation to the former individual shareholders. The primary tax argument advanced by the IRS was that the sale of the company resulted in a direct distribution of proceeds (and corresponding tax liabilities) to the taxpayers.

In a 33-page memorandum decision, the Tax Court denied the government’s attempt to assert transferee liability against the former shareholders. The Tax Court followed the U.S. Supreme Court’s guidance in Commissioner v. Stern, 357 U.S. 39 (1958), which defined the application of the predecessor section to section 6901, and found that the former shareholders were not liable for the transferred assets under laws of the state of North Carolina.

The appellate tribunal examined Stern closely noting that the Supreme Court had interpreted section 6901 as requiring a two-part analysis. The first was a procedural finding that section 6901 applied as a matter of federal law. The second analytical step was to determine if the transferee was liable for the transferor’s debts under state law. The Court of Appeals agreed with the Tax Court and found that section 6901 applied as a matter of procedural law but that the government had failed to prove that the former shareholders were liable for the transferee’s debts under state law. Since the governing state law did not establish a liability for the former shareholders, the IRS could not use section 6901 to collect the alleged tax liability.

Read the entire opinion here:
Starnes v. Commissioner, Nos. 11-1636 et. al. (4th Cir. May 31, 2012)

Tax Court: Donation of Conservation Easement Upheld

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The Tax Court affirmed the proposition that a conservation easement is still a Congressionally sanctioned charitable contribution under IRC §170(h). Conservation easements and the corresponding charitable contribution deduction for the donation of such easements have been a topic of heightened scrutiny by the IRS in recent years. So much so, that we might have forgotten that there is a legitimate basis in public policy for this deduction.

In Butler v. Commissioner, the IRS sought to disallow deductions related to conservation easements that protected thousands of acres of undeveloped rural property and impose penalties upon the donors who made the contribution. The Tax Court, however, found for the taxpayers on the validity of the qualified conservation contributions, made some adjustments to the valuation of the properties based on the testimony of several experts, and dismissed the penalties.

For those interested in the mechanics of tax litigation, Butler is instructive on two additional points. First, the petitioners prevailed in shifting the burden of proof to the government on select issues under Section 7491(a) – a feat more often considered than accomplished. Second, the court ruled on the admissibility of an expert report prepared by an expert who died before the trial began. Petitioners sought to have the deceased expert’s report admitted as evidence of fair market value, invoking alternative exceptions to the hearsay rule under Federal Rules of Evidence 804(b)(1) and 807. The court denied petitioners’ requests but admitted the report for the limited purpose of establishing reasonable cause to avoid penalties under Section 6664.

Read the opinion here:
Butler v. Commissioner, T.C. Memo. 2012-72

Tax Court: HP’s Tax Credit Generator Denied on Debt/Equity Grounds

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The Tax Court, in a memorandum opinion by Judge Goeke, characterized Hewlett-Packard’s investment in a foreign corporation as a loan rather than equity for federal income tax purposes, thereby denying HP the benefit of foreign tax credits generated by the foreign entity. Though the court found for the government, it declined to consider the government’s arguments that the economic substance doctrine or the step-transaction doctrine applied and rested its decision solely on a debt/equity analysis.

The court adopted the Ninth Circuit’s 11 factor debt/equity analysis to determine the merits of the debt according to the Golsen rule, which requires the Tax Court to follow the law of the federal circuit where an appeal would lie. The Ninth Circuit analysis is notable because Hewlett-Packard has a pending suit in a U.S. District Court in the Ninth Circuit seeking a refund of foreign tax credits generated in other tax years attributable to the same transaction in question in the Tax Court case.

To the best of our knowledge, this is the first court decision to address a Tax Credit Generator transaction.

Read the entire opinion here:
Hewlett-Packard Company v. Commissioner, T.C. Memo 2012-135

Tax Court: Untimely CDP Petition Confers Jurisdiction for Interest Abatement Claim

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In an opinion that may be instructive to tax practitioners reluctant to advance alternative theories for relief, the Tax Court held that it had jurisdiction to review the denial of a request for interest abatement that arose out of an untimely petition for review of a collection due process hearing.

The pro se petitioner had a collection due process hearing. In the hearing, petitioner challenged the underlying tax liability, renewed a claim for innocent spouse relief and requested abatement of interest. The Appeals Officer upheld the collection action against the petitioner in a written determination which also included a final determination as to petitioners request for interest abatement. Petitioner petitioned the Tax Court for review of the collection determination but failed to file the petition within the 30 day statute of limitations under Section 6330(d). Respondent filed a motion to dismiss for lack of jurisdiction. Petitioner appeared at the trial session to challenge respondent’s motion and raised the same claims in a hearing before the court that she raised in the appeals hearing. The Court heard petitioners claims and gave the parties an opportunity to brief the issue. On brief, petitioner once again raised all three claims that she made at the Office of Appeals.

Upon review of the parties’ arguments and the Appeals Officer’s case activity file, the Court found that it did not have jurisdiction to review the merits of the collection action and granted respondent’s motion to dismiss on that claim. However, the Court found that the final determination on the collection action also constituted a final determination as to petitioner’s request for interest abatement under Section 6404. The statute of limitations for review of a request for interest abatement is 180 days. The Court held that even though the petition was not timely to grant jurisdiction under Section 6330 it was timely as a request for review of an interest abatement and conferred jurisdiction upon the Court independent of the collection due process proceedings. The Court ordered further proceedings to determine whether respondent’s determination on the interest abatement claim was an abuse of discretion.

Read the opinion here:
Gray v. Commissioner, 138 T.C. No. 13 (2012)

Tax Court: Premature FPAA on Computational Items Invalid, Jurisdiction Denied

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There are few areas of the tax code as complex and potentially confusing as the rules for TEFRA partnership proceedings. Even the most steely-eyed tax pros wince at the details. Nonetheless, TEFRA is at the heart of many of the transactions that the IRS has challenged over the course last decade and the courts are still sifting through the details.

In Rawls Trading, LP v. Commissioner the government sought a stay of proceedings on a Final Partnership Administrative Adjustment (FPAA) issued to one of three partnerships involved in a single tax-advantaged transaction. Respondent argued that the FPAA was issued prematurely and that the court should stay its proceedings until determinations were made on FPAAs issued to the two related partnerships which were party to the transaction. Petitioners argued for a consolidated hearing on all three FPAAs. The Tax Court chose a third path and raised the question of jurisdiction.

The FPAA for the upper tier partnership, which the government wanted stayed, contained only computational adjustments.  All of the adjusted items were held in the lower tier partnerships and the upper tier partnership FPAA only noted the consequences those adjustments on a pass-through basis.  The Court reasoned that if the adjustments on the upper tier partnership were only computational and the FPAA did not contain items that were subject to the Court’s determination in a deficiency proceeding then there was nothing for the court to determine in a deficiency proceeding. The Court made exactly such a finding and determined that the FPAA was invalid as filed. The Court dismissed the FPAA for lack of jurisdiction noting that it could not stay proceedings on an FPAA that did not confer jurisdiction on its own merits.

Yes, there is a little more to it than that, but Judge Vasquez does a better job of navigating the labyrinth of TEFRA to reach that conclusion in his opinion than I can in this short column. Nonetheless, this is an important decision in the field of TEFRA procedure and adds yet another layer of complexity to this already challenging area of the law.

Read the full opinion here:
Rawls, LP v. Commissioner, 138 T.C. No. 12 (2012)

Tax Court: No Partnership Return, No FPAA

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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)

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

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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)