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

Like-Kind Exchanges: The Tax Court Upholds a Reverse Deferred Exchange that Took Over Two Years

like kind exchange, deferredLike-kind exchanges under section 1031 of the Internal Revenue Code permit a taxpayer to defer the recognition of gain associated with the disposition of property used in a trade or business or held for investment purposes, thereby deferring tax liability associated with the disposition of property. I.R.C. § 1031(a)(1). The rationale for the deferral of taxes is that the taxpayer’s economic position remains unchanged: She had funds invested in a particular type of property both before the exchange and afterwards. See Comm’r v. P.G. Lake, Inc., 356 U.S. 260, 268 (1958).

There are a variety of technical rules under section 1031: For example, inventory held for sale won’t qualify for like-kind treatment, and neither will securities, such as stocks or bonds.… Read More

No Quick Exit: Judgment on the Pleadings Denied in A Tax Shelter Penalty Case

tax shelterSections 6111 and 6112 of the Internal Revenue Code currently impose certain reporting obligations on individuals who are involved in “reportable transactions,” including an obligation to file information returns and maintain lists of participants. The current code provisions were substantially revised in 2004. Historically, Sections 6111 and 6112 were aimed at “tax shelter organizer[s].” See I.R.C. § 6111(a) (2003). Both the historical and the current versions of Sections 6111 and 6112 of the Code are reinforced by Sections 6707 and 6708 of the Code, which provide for the imposition of significant penalties in the event of a violation.

Last week, a district court issued an interesting decision, denying a motion for judgment on the pleadings filed by a law firm challenging penalties assessed for violations of Sections 6111 and 6112.… Read More

A Switch in Time: The Sixth Circuit Examines the Limitations Period for the Prohibited Allocation Excise Tax


ESOPCongress has long favored employee stock ownership plans (ESOPs) and it has created tax incentives to promote them. But a troubling pattern emerged: a small business owner, such as a lawyer or an accountant in a solo practice, would convert her business into an S Corporation. Then she would contribute all of the shares to an ESOP, which would allocate the shares to the owner’s retirement account. The income generated in the practice passed through to the ESOP untaxed because the practice was an S Corporation. The ESOP was exempt from tax at the plan level, and the owner was exempt from tax on the income associated with the stock until the stock was distributed to her at retirement.… Read More