About James R. Malone, Jr.

Jim Malone is a tax attorney in Philadelphia. A Principal at Post & Schell, he focuses his practice on federal, state and local tax controversies. Learn more about Post & Schell's Tax Controversy Practice >>

Exempt Organizations: The New Excise Tax on Excess Compensation

excise tax, healthcare, tax billOn December 22, 2016, the Tax Cuts and Jobs Act (the “Act”) became law. While cutting certain tax rates, the Act also imposed a new tax: There is now an excise tax applicable to exempt organizations on “excess compensation.” This new tax will apply to the following: “(1) so much of the remuneration paid (other than any excess parachute payment) by an applicable tax-exempt organization for the taxable year with respect to employment of any covered employee in excess of $1,000,000, plus (2) any excess parachute payment paid by such an organization to any covered employee.” Pub. L. No. 115-97, § 13602 (to be codified at I.R.C.… Read More

Exemption Revoked: One Hospital’s Joint Venture Mishap

hospital joint ventureIntroduction

Joint ventures between non-profit hospitals and for-profit enterprises are fairly common in the health care industry. The arrangements, however, require careful attention, or the non-profit may put its tax exemption at risk.

PLR 201744019, released by the IRS in November 2017, illustrates the problem: On August 7, 2017, the IRS retroactively revoked the exempt status of a hospital operator as of February 1, 2011 after concluding that an agreement that it reached sometime during the 20th century meant that it was not operated exclusively for charitable purposes. The joint venture was a whole-hospital arrangement in which the exempt organization leased its land, property, and equipment to a for-profit management company which then operated in the organization’s name.… Read More

Lawyers Blaming Lawyers: A Trust Fund Tax Tale

Spizz-v.-United-StatesEmployers serve as tax collectors under the Internal Revenue Code: In addition to paying its own FICA and FUTA obligations, an employer must withhold FICA and income tax from its employees’ pay. See I.R.C. §§ 3102 (FICA “shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid”); 3402 (“every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with tables or computational procedures prescribed by the Secretary”).

For good measure, Congress included a mechanism to ensure compliance; if an employer fails to withhold and pay over the tax, responsible parties affiliated with the employer can be assessed with the trust fund recovery penalty under section 6672 of the Code, which makes these individuals liable if they willfully fail to assure that the taxes are paid.… Read More

Top 5 Tax Controversy Posts of 2017

2017 bankTax Controversy Posts covered a number of interesting developments in 2017. The five most popular included a tax shelter case, a look at a particularly disastrous exempt organization audit, an Affordable Care Act case, and two transferee cases. They are linked below.

My personal favorite is #4, where the Ninth Circuit held that a bankruptcy trustee could use one of the favorite tools of the IRS, transferee liability, to recoup tax payments made by the debtor.

-Jim Malone

#1. Tax Shelters: The Government Prevails Against Santander
The IRS and the Tax Division of the Department of Justice have expended significant effort fighting tax shelters, and they have enjoyed many successes in that endeavor. … Read More

An Ounce of History: The Sixth Circuit Addresses Refund Claims for Excise Taxes

Excise Tax, Worldwide equipment v. US, sixth circuitThe Internal Revenue Code imposes excise taxes on certain types of goods and services. For example, there are retail excise taxes on certain fuels, and on heavy trucks and trailers. I.R.C. §§ 4041, 4051. There are manufacturer’s excise taxes that are imposed on a variety of products, including fishing rods and firearms. I.R.C. §§ 4161(a), 4181. Excise taxes are also imposed upon communications services and on air passenger and air freight services. I.R.C. §§ 4251, 4261, 4271.

These taxes are actually born by the purchaser, and that creates a complication: If the entity collecting the tax seeks a refund, the federal government could also be subject to duplicate claims from the purchasers who actually paid the tax.… Read More

Seize the Day: The Vagaries of the Pennsylvania Tax Refund Limitations Period

Mission-Funding-Alpha-v.-CommonwealthCarpe diem, the Latin exhortation to “seize the day” (or more accurately pluck it) has been a favorite theme of poets ranging from Horace to Andrew Marvell. And for Pennsylvania taxpayers, it happens to be good advice concerning tax refunds, because the seemingly straight-forward limitations provision for refund claims continues to confound courts, lawyers, and taxpayers.

Here’s what it says:

For a tax collected by the Department of Revenue, a taxpayer who has actually paid tax, interest or penalty to the Commonwealth or to an agent or licensee of the Commonwealth authorized to collect taxes may petition the Department of Revenue for refund or credit of the tax, interest or penalty.

Read More

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