Tax Procedure: Sometimes Substance Over Form Means Equity is Debt

Substance over form 2The notion that substance controls over form does some heavy lifting in the tax world. Among other things, it separates real losses from fake ones; it tells us when debt is really equity; and, as the Ninth Circuit ruled earlier this month, sometimes it can tell us that equity is really debt. Hewlett-Packard Co. v. Comm’r, Nos. 14-73047 & 14-73048, 2017 U.S. App. LEXIS 22536 (9th Cir. Nov. 9, 2017).

In Hewlett-Packard, the taxpayer purchased preferred stock issued by a Dutch company that invested in notes which featured certain interest payments that were contingent upon future events. Hewlett-Packard, 2017 U.S.… Read More

Be A Little Subtle: A Look at Bad Tax Planning

tax planningAggressive tax planning can be bad, as it can come back to haunt you. Aggressive tax planning that is obvious is worse, as the taxpayer can be left to defend an indefensible position.

Robert Smith learned the hard way: In June 2009, Smith sold his company, National Coupling, and retired; he received a $600,000 bonus, $248,246 from the sale of his stock, and $181,170 from two life insurance policies that his company had owned. Smith v. Comm’r, No. 21707-15, T.C. Memo 2017-218, 2017 Tax Ct. Memo LEXIS 217, **3 (Nov. 6, 2017). Mr. Smith expected to receive patent rights to a sprinkler design as well, but that was not addressed in the sale documents.… Read More

Don’t Try This at Home: Equitable Doctrines Are for Governments, Not for Taxpayers

tax, equitable doctrineThe IRS utilizes a variety of equitable doctrines to recast transactions for tax purposes, including step transaction, substance over form, economic substance, and sham transaction, and they are quite effective for unwinding efforts to escape tax. State and local tax authorities utilize these doctrines as well. While taxpayers may think that turnabout is fair play, the doctrines don’t work that way, as was illustrated by the Tax Court last week. See Messina v. Comm’r, Nos. 25510-15 & 25567-15, T.C. Memo 2017-213, 2017 Tax Ct. Mem. LEXIS 214 (Oct. 30, 2017).

Messina involved two taxpayers, Mr. Messina and Mr. Kirkland, who each owned a 40% interest in an S corporation.… Read More

Thoughts on the Manafort & Gates Indictment: Focused on FBAR Violations

FBAR, Manafort and Gates indictmentOn Monday, October 30, 2017, Special Counsel Robert Mueller unsealed the indictment against former Trump campaign chairman Paul Manafort and his business associate, Richard Gates. The twelve count indictment (available here) charges Manafort and Gates with multiple offenses relating to the pair’s alleged advocacy on behalf of the Government of Ukraine and Ukrainian political parties and the treatment of funds received in connection with these activities.

In particular, the indictment alleges that Manafort and Gates, acting through foreign nominees, opened numerous offshore bank accounts and deposited some $75 million in proceeds from their Ukraine-related work into these accounts. Manafort allegedly wired a portion of the funds to the United States, where he used them to buy, inter alia, $849,215 worth of men’s clothing from a single store in a little over five years, $655,500 worth of landscaping services for a Hamptons property, and a $2.85 million condominium in Manhattan.… Read More

Heal Thyself: A Look at Audits of Hospital Organizations Under Section 501(r)

affordable care act, tax, 5901(r)Love it or loathe it, the Affordable Care Act brought big changes to health care.

One of those changes has not received the attention it deserves. The act amended section 501 of the Internal Revenue Code to impose certain specific requirements on “hospital organizations,” which are exempt organizations that operate one or more facilities that are “required by a State to be licensed, registered, or similarly recognized as a hospital.” I.R.C. § 501(r)(2)(A)(i).

The fact that these requirements are included in section 501 of the Code is significant, as it means that a hospital organization needs to comply to maintain tax-exempt status.… Read More

Win Some, Lose Some: The Pennsylvania Supreme Court on Uniformity

PA, taxThe Pennsylvania Supreme Court sustained Nextel’s challenge to the statutory cap on the net loss carryforward deduction, but the company went home empty-handed. Nextel Communs. of the Mid-Atlantic, Inc. v. Commonwealth, No. 6 EAP 2016, 2017 Pa. LEXIS 2456 (Pa. Oct. 18, 2017), rev’g, 129 A.3d 1 (Pa. Commw. 2015).

To recap, in November of 2015, Nextel won a major victory in Commonwealth Court, as its challenge to the structure of the net loss carryover deduction as a violation of the uniformity clause was sustained. Nextel argued that the statute, which limited the deduction to the greater of a percentage of taxable income or a flat dollar amount, allowed certain corporations to escape tax altogether, thereby violating the uniformity clause of the Pennsylvania Constitution.… Read More

Flirting with Disaster: A Look at How Tax-Exempt Status Can Be Revoked

Non Profit, Tax-ExemptWhen a non-profit loses its tax-exempt status under the Internal Revenue Code, it is frequently the end of the organization.

Sometimes the problem is easily resolved; an exempt organization that has its status revoked because it failed to file its annual returns on Form 990 can be reinstated retroactively if it acts promptly. See Rev. Proc. 2014-11, 2014-3 I.R.B. 411; see also Rev. Proc. 2017-5, 2017-1 I.R.B. 230. But in most other cases, the loss of the exemption is a disaster:

  • First, the organization will be liable for income taxes that were not part of its budget.
  • Second, its sources of funding will likely disappear, as donors will no longer receive a tax deduction, and governmental grants may be conditioned upon tax-exempt status.
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Transferee Liability: Another Vote for Substance Over Form Under State Law

midcoThe IRS uses transferee liability to make Peter pay Paul’s taxes.

To accomplish this, the government relies upon both federal and state law:

  • Section 6901 of the Internal Revenue Code authorizes the IRS to collect taxes from transferees who are liable “at law or in equity” and to do so “in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred.” I.R.C. § 6901(a). This permits the IRS to issue a tax assessment against a transferee who received a taxpayer’s property.
  • Section 6901 of the Code is simply a procedural device; it does not create liability.
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Tax Procedure: Corporate Inversion Regulation Invalidated

Corporate InversionCorporate inversions have been controversial for some time. In these transactions, a U.S. company is acquired by a foreign corporation that has its tax residence in a jurisdiction with a lower corporate tax rate. Many in Congress considered these transactions to be abusive; in response, the American Jobs Creation Act of 2004 added section 7874 to the Internal Revenue Code.

Last week, a district judge in Texas invalidated an inversion regulation that the Treasury Department issued under section 7874, holding that the regulation had been promulgated in violation of the Administrative Procedure Act (the “APA”). Chamber of Commerce of the United States v.Read More

Tax Procedure: Sometimes It’s Who You Know, Not What You Know

testimony, tax courtA sophisticated taxpayer avoided liability for an accuracy-related penalty in connection with a foreign currency options shelter because he relied upon advice from a friend and former colleague. Tucker v. Comm’r, 2017 Tax Ct. Memo LEXIS 184 (Sept. 18, 2017). While Tucker also addresses economic substance issues surrounding the shelter, the penalty determination is more intriguing.

The taxpayer, Keith Tucker, had an accounting degree and a law degree. 2017 Tax Ct. Memo LEXIS 184 at *2. After working in the tax practice at KPMG, he moved on to a variety of different business positions, serving as an investment banker, working in private equity, and holding positions as a financial services executive.… Read More