Transferee Liability: Another Vote for Substance Over Form Under State Law

midcoThe 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.
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Tax Procedure: Corporate Inversion Regulation Invalidated

Corporate InversionCorporate 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

Tax Procedure: Sometimes It’s Who You Know, Not What You Know

testimony, tax courtA 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

Tax Shelters: Denied a Claim for Foreign Tax Credits, Wells Fargo’s Effort to Claim a Deduction Fails

STARS, Wells FargoOn 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

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.
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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).

Background

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.
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