Tag Archives: Tax Court

Tax Court: Western Union/First Data Settles $2B Transfer Pricing Litigation

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On December 15, 2011, Western Union announced that it entered into an agreement with the Internal Revenue Service to settle a long standing transfer pricing dispute with its former parent company, First Data Corporation. According to documents filed with the Securities Exchange Commission, Western Union and First Data agreed to a total of $1.18 billion in transfer pricing related adjustments. The total adjustment included the recognition of $885 million of additional income in 2003 related to First Data’s restructuring plan, which transferred certain intangible assets out of the United States, and additional adjustments between 2004 and 2011 to reach the $1.18 billion total. Penalties were dropped.

Western Union and First Data will make approximately $470 million in payments to satisfy the adjustments under the settlement agreement. Western Union also announced that it will eliminate its tax reserve related to the case and should record a one-time tax benefit of approximately $200 million in 2011.

In March 2009, First Data Corporation filed a petition in the United States Tax Court disputing a notice of deficiency alleging more than $2 billion of transfer pricing related adjustments and penalties. The matter was notable not only for the size of the proposed adjustment but also for several other procedural and tactical moves that took place over the course of the dispute.

While undergoing an examination of its 2003 reorganization and the transfer pricing planning that accompanied that transaction, First Data also was subject to a John Doe Summons in which the IRS sought the names of merchants who transferred money outside the United States using First Data’s services (more particularly Western Union’s services). First Data resisted the Summons but a U.S. District Court judge in Denver ruled that First Data had to turn over the requested information.

Shortly before First Data’s petition was filed in the Tax Court, the Chief Counsel of the IRS issued a Technical Advice Memorandum (TAM), TAM 200907024, which held that the transfer of a portion of a taxpayer’s global delivery business overseas was fully attributable to identifiable intangible assets under section 936(h)(3)(b) therefore gave rise to a deemed royalty under section 367(d). The facts of the TAM were distinctly similar to those of the First Data case and were widely believed be drawn from the First Data examination. Some speculated, appropriately so, that the TAM was part of the IRS’s larger litigation strategy.

Tax Court: Look to IRC to Determine Executor for Notice of Deficiency

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In a division opinion, the Tax Court ruled that the beneficiary of an estate who signed the estate tax return and held property of the estate, but had not been appointed executor under state law, was the statutory executor of the estate under IRC Sec. 2203 for purposes of receiving and responding to a statutory notice of deficiency. As such, the Tax Court has jurisdiction to review the estate’s petition.

In an interesting practice note, the opinion also offered the parties guidance on the difference between a motion to dismiss and a motion for summary judgment under the Tax Court rules.

Read the opinion here:
Estate of Gudie, 137 T.C. No. 13 (2011)

Tax Court: Capital Gains, Casualty Losses and Ecdysiasts

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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

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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.

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)

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)