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 >>

Just Because You Say It’s Debt Doesn’t Mean It Is: Substance Over Form in Action

substance over formTax law focuses on substance, not form, so the labels applied to a transaction don’t control its tax treatment. Among the most common examples of this principle are cases in which debt is treated as an equity investment for tax purposes. Courts generally look at a variety of factors to determine whether what purports to be debt should be treated as an equity investment, and some of the cases are close calls. Others are not, as in Rutter v. Commissioner, No. 15840-14, 2017 U.S. Tax Ct. Memo LEXIS 174 (Sept. 7, 2017), which the Tax Court decided last week.

Rutter involved a prominent scientist who had a history of success in the biotechnology field.… Read More

A Little Sauce for the Gander: The Ninth Circuit Holds that a Bankruptcy Trustee Can Recoup Tax Payments from the IRS as Fraudulent Transfers Under Applicable State Law

Zazzali v. United StatesMost states have a version of the Uniform Fraudulent Transfer Act, or its predecessor, the Uniform Fraudulent Conveyance Act; these statutes permit creditors to set aside a variety of transfers made by debtors, including transfers made with an intent to hinder, delay or defraud creditors and transferees, as well as transfers made for less than fair value while the debtor was insolvent. The IRS is a frequent and enthusiastic litigant under these state statutes, which it relies upon to collect delinquent taxes from third parties who received a taxpayer’s property.

On August 31st, the Ninth Circuit ruled that the IRS is also subject to these laws, holding that a bankruptcy trustee could rely on state law to recoup tax payments made to the IRS.… Read More

Micro-Captive Insurers: The Tax Court Disallows Deductions Following Trial

micro captive insurance programsMicro-captive insurance schemes have caught the attention of the IRS; last year it issued a notice indicating that these arrangements have a potential for tax avoidance or evasion and designating them as transactions of interest. Notice 2016-66, 2016-47 I.R.B. 745. In a micro-captive structure, a business owner sets up an affiliated insurance company; the tax structure then works as follows:

  • The business pays premiums to the related party insurer, and it claims a business expense deduction on the premiums;
  • If the insurer limits its premium income, it can qualify to pay tax only on its investment income, not on the premiums that it receives by making an election under section 831(b) of the Internal Revenue Code;
  • The premiums accumulate creating a pool to pay claims; over time, the business may be able to reduce or eliminate its existing commercial coverage.
Read More

Not So Strict Construction: The Fifth Circuit Examines Conservation Easements

Conservation EasementsQualified conservation easements have generated a significant volume of litigation; the IRS takes a strict approach to enforcement, and there are a lot of technical details that taxpayers can trip over. On August 11th, a divided Fifth Circuit panel issued an interesting decision that ruled in favor of the taxpayer, while disavowing the customary approach of strictly construing the requirements for a deduction in the government’s favor. BC Ranch II, L.P. v. Comm’r, No. 16-60668, 2017 U.S. App. LEXIS 14947 (5th Cir. Aug. 11, 2017).


The case involved a conservation easement on the Bosque Canyon Ranch, located in the Texas Hill country.… Read More

Almost Anyone Can Be a Felon: The Troubling Scope of Tax Obstruction, Part II

tax obstructionPart I of this Post, found here, discussed the background and holdings of United States v. Marinello, 839 F.3d 209 (2d Cir. 2016), cert. granted, No. 16-1144, 85 U.S.L.W. 3602, 2017 U.S. LEXIS 4267 (Jun. 27, 2017). This post focuses on the implications of the Second Circuit’s construction of the omnibus clause of section 7212(a) of the Internal Revenue Code and on the potential ways in which the Supreme Court might narrow that construction.

To recap, Marinello was charged and convicted with a felony, known as “tax obstruction” under section 7212(a) (corruptly obstructing or impeding the due administration of title 26).… Read More

Almost Anyone Can Be a Felon: The Troubling Scope of Tax Obstruction, Part I

tax obstructionCarlo Marinello ran a small business in upstate New York. He also ran into tax trouble.

Marinello was charged and convicted for the willful failure to file personal tax returns and corporate tax returns for his business over a series of years, which are misdemeanor charges under the Internal Revenue Code. See I.R.C. § 7203. The government also charged Marinello with a felony, known as “tax obstruction.” Under section 7212(a) of the Code, tax obstruction occurs in two situations:

  • Under the first clause of the statute, someone commits a felony if he “corruptly or by force or threats of force (including any threatening letter or communication) endeavors to intimidate or impede any officer or employee of the United States acting in an official capacity under this title.” I.R.C.
Read More

Tax Procedure: A Minority Shareholder Is Responsible For Corporate Taxes Following the Majority Shareholders’ Fraud

Transferee liabilityWilliam Kardash was a minority shareholder in a Florida company involved in the construction industry; the majority shareholders were skimming cash from the company, apparently without his knowledge or complicity. Kardash wound up with a significant tax bill for the company’s taxes, as the Eleventh Circuit ruled that he was liable as a transferee under section 6901 of the Internal Revenue Code and applicable state law. Kardash v. Comm’r, No. 16-14254, 2017 U.S. App. LEXIS 14389 (11th Cir. Aug. 4, 2017).

Transferee liability represents one of several theories that the IRS can use to hold one person liable for another person’s taxes.… Read More

Tax Procedure: Mootness and Merits Review in Collection Due Process Cases

tax courtWhen the IRS loses a pro se case in Tax Court, it’s noteworthy. When it loses to a prisoner who allegedly made frivolous tax filings, and the court issues a precedential opinion, something strange is going on. Last week that happened in a collection due process case. Vigon v. Comm’r, No. 28788-14L, 2017 U.S. Tax Ct. LEXIS 37 (July 24, 2017).

When the IRS files a notice of federal tax lien or a notice of intent to levy against a taxpayer’s property, it is required to provide the taxpayer with notice of his right to a collection due process hearing.… Read More

Tax Refund Claims: ACA Reinsurance Mandate Payments Are Not Taxes that Can Be Recovered through a Refund Action

Affordable care act, taxWhat is a tax? The Supreme Court has indicated that taxes are “pecuniary burdens laid upon individuals or their property, regardless of their consent, for the purpose of defraying the expenses of government or of undertakings authorized by it.” New York v. Feiring, 313 U.S. 283, 285 (1941). But the label that Congress applies counts too; that means something that looks like a tax may not be treated like a tax because Congress chose to call it something else. This point is illustrated by a recent district court case decided under the Affordable Care Act, which held that a mandatory reinsurance contribution imposed upon a self-funded, self-administered group health plan was not a tax recoverable through a refund action.… Read More

Tax Procedure: Sometimes Even Bad Advice Is Helpful

bad adviceBad tax advice can be expensive, but sometimes it’s better than no advice at all.

Last week, the Tax Court issued an opinion in a complicated international tax case that illustrates the principle that incorrect advice can still help a taxpayer, as it may support a defense to a penalty. Grecian Magnesite Mining, Indus. & Shipping Co. v. Comm’r, No. 19215-12, 2017 U.S. Tax Ct. LEXIS 36 (July 13, 2017).

In Grecian Magnesite, the taxpayer was a foreign corporation formed in the Hellenic Republic and based in Athens. 2017 U.S. Tax Ct. LEXIS 36 at *3. The taxpayer had an interest in Premier Chemicals, LLC (“Premier”), which was its sole connection to the United States.… Read More