The 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
Aggressive 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
The 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
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
The 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
When 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.
… Read More
The 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.
… Read More
Corporate 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
A 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
On September 15, 2017, the latest chapter in the Wells Fargo/STARS saga came to an end: Having earlier lost its claim for foreign tax credits associated with the STARS transaction, Wells Fargo’s alternative argument that it could deduct the foreign taxes it paid was also rejected. Wells Fargo & Co. v. United States, No. 09-CV-2764 (PJS/TNL), 2017 U.S. Dist. LEXIS 150064 (D. Minn. Sept. 15, 2017).
To summarize, STARS was a complex arrangement between Wells Fargo and a foreign bank comprised of two components: A trust structure in which income-producing assets were exposed to tax in the United Kingdom to generate foreign tax credits, and a loan to Wells Fargo.… Read More