Like-Kind Exchanges: The Tax Court Upholds a Reverse Deferred Exchange that Took Over Two Years

like kind exchange, deferredLike-kind exchanges under section 1031 of the Internal Revenue Code permit a taxpayer to defer the recognition of gain associated with the disposition of property used in a trade or business or held for investment purposes, thereby deferring tax liability associated with the disposition of property. I.R.C. § 1031(a)(1). The rationale for the deferral of taxes is that the taxpayer’s economic position remains unchanged: She had funds invested in a particular type of property both before the exchange and afterwards. See Comm’r v. P.G. Lake, Inc., 356 U.S. 260, 268 (1958).

There are a variety of technical rules under section 1031: For example, inventory held for sale won’t qualify for like-kind treatment, and neither will securities, such as stocks or bonds.… Read More

Criminal Fines, Civil Forfeitures and Collected Proceeds; More on Mandatory Whistleblower Awards Under the Internal Revenue Code

whistleblower, taxThis will provide further analysis of the Tax Court’s opinion in Whistleblower 21276-13W v. Comm’r, 147 T.C. No. 4, 2016 U.S. Tax Ct. LEXIS 20 (Aug. 3, 2016). As discussed previously, the court held that in calculating a mandatory whistleblower award under section 7623(b)(1) of the Code, criminal fines and civil forfeitures count, even though they cannot be used to pay an award because they are committed to other purposes. This result rested upon the court’s construction of the term “collected proceeds” in section 7623(b)(1), which drives the determination of a mandatory award. The relevant portion of the Code provides for a mandatory award to be calculated as “at least 15 percent but not more than 30 percent of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action (including any related actions) or from any settlement in response to such action .… Read More

Whistleblowers: Criminal Fines and Civil Forfeitures are Included in The “Collected Proceeds” Used to Calculate a Mandatory Award Under the Internal Revenue Code

whistleblower, taxThe Secretary of the Treasury has long had discretionary authority to provide awards to whistleblowers. This authority, which dates to the nineteenth century, is currently codified in Section 7623(a) of the Internal Revenue Code, I.R.C. § 7623(a). Congress became dissatisfied with the discretionary program and added provisions for mandatory awards in December 2006. See I.R.C. § 7623(b). Whistleblowers will qualify for a mandatory award “if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000.” I.R.C. § 7623(b)(5)(B). If the target is an individual, then his taxable income must also exceed $200,000 for each taxable year at issue.… Read More

Whistleblowers: Exploring the Link Between Increased Tax Collection and an Award under Section 7623 of the Internal Revenue Code

whistleblower, tax, award, causationDiscovery disputes are often dull as they rarely raise cutting edge legal issues concerning the substantive rights of the litigants. But when they do, they can be very interesting.

Last week, the Tax Court issued a precedential decision in a discovery dispute. It was interesting (and presumably precedential) because it raised a complex issue concerning a whistleblower’s right to an award under Section 7623 of the Code: if the target ceases to engage in a tax evasion scheme because of IRS scrutiny resulting from a whistleblower’s submission and additional tax is collected, is an award warranted? Whistleblower 11099-13W, 147 T.C.… Read More

A Guilty Plea in a Tax Evasion Case May Not Sustain a Civil Tax Deficiency

tax court, evasionBohdan Senyszyn was an IRS revenue agent who dabbled in real estate with a local developer. After the developer filed a civil case alleging he had embezzled from their ventures, the IRS took a hard look at Mr. Senyszyn’s tax returns:

  • As part of the investigation, an IRS agent concluded that Mr. Senyszyn had embezzled $252,726 from the developer and failed to report it.
  • Senyszyn was charged with tax evasion (among other crimes) in an information filed in September 2007.
  • Simultaneously, Mr. Senyszyn agreed to plead guilty; his plea agreement provided that he “knowingly and willfully did not include about $252,726.00 in additional income that he acquired in 2003.”
  • Senyszyn entered a plea of guilty in accordance with his plea agreement.
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Tax Procedure: Transferee Liability and Interest

Transfer liabilityTransferee liability is an unpleasant surprise, as it means you are saddled with someone else’s tax bill.

Section 6901 of the Internal Revenue Code authorizes the IRS to assess a transferee for the liability of another taxpayer for a variety of taxes, including income taxes, estate taxes, and gift taxes. I.R.C. § 6901(a). The potential liability of a transferee is determined under a two-part test:

  • First, the IRS must establish that the potential target is a “transferee,” which is determined under federal law.
  • Next, the IRS must establish that the transferee is liable under relevant state law, typically a fraudulent conveyance or fraudulent transfer statute.
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Self-Employment Tax Reaches Retirement Income

Mary_Kay_Pink_CadillacThe Internal Revenue Code taxes “self-employment income.” I.R.C. § 1401(a), (b). The tax “is the counterpart of the taxes imposed on wages of employees by the Federal Insurance Contributions Act.” Steffens v. Comm’r, 707 F.2d 478, 481 (11th Cir. 1983) (citations omitted). Recently, the 11th Circuit addressed an unusual issue: whether distributions from retirement plans maintained by Mary Kay, Inc. for its independent contractors are subject to self-employment tax. Peterson v. Comm’r, Nos. 14-15773; 14-15774; 2016 U.S. App. LEXIS 12574 (11th Cir. July 8, 2016).

The Taxpayer, Christine Peterson, was a Mary Kay sales consultant who started to work for the company in the summer of 1982 and earned a pink Cadillac by the following year.… Read More

Interest Netting: The Impact of Mergers on Section 6621(d)

mergerUnder the Internal Revenue Code, corporations pay a higher rate of interest on underpayments than they receive on overpayments. See I.R.C. § 6621(a)(1), (2), (c)(1). For a corporate taxpayer that has both underpayments and overpayments, this can produce unfair results. To ameliorate the problem, Congress enacted Section 6621(d):

To the extent that, for any period, interest is payable under subchapter A and allowable under subchapter B on equivalent underpayments and overpayments by the same taxpayer of tax imposed by this title, the net rate of interest under this section on such amounts shall be zero for such period.

I.R.C. § 6621(d).… Read More

State and Local Taxation: Nextel, Slight Reprise

PA TaxOne of the more important Pennsylvania tax cases decided last year was Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, 129 A.3d 1 (Pa. Commw. 2015). Decided under the Corporate Net Income Tax, Nextel held that the net loss carryover provision of 72 P.S. § 7401(3)4.(c)(1)(A) violated the Uniformity Clause of the Pennsylvania Constitution because it treated taxpayers with small operating losses more favorably by permitting them to offset their losses against all of their taxable income, while taxpayers with large losses could not. Nextel, 129 A.3d at 9. Specifically, in the 2007 tax year, which was at issue in Nextel, taxpayers could deduct the greater of $3,000,000 or 12.5% of taxable income.… Read More

Real Estate Tax Assessments: Ambush by Hearsay Is Not Appropriate

Property TaxWegmans was recently ambushed in a real estate tax assessment appeal: the trial court resorted to an old appraiser’s report to undercut its position and sustain a higher tax assessment. And to make matters worse, it was an appraiser’s report that Wegmans had commissioned.

Last week, the Commonwealth Court reversed, serving up a reminder that the rules of evidence apply in tax cases too. Millcreek Twp. Sch. Dist. v. Erie Cty. Bd. of Assessment Appeals, No. 39 C.D. 2015, 2016 Pa. Commw. LEXIS 260 (Pa. Commw. June 13, 2016).

Wegmans owned two pieces of property in Millcreek Township, Erie County that gave rise to the case.… Read More