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.

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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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