Listed Transactions: A Look at Basket Option Contracts

basket option contractThe IRS recently issued a notice formally designating basket option contracts as a listed transaction, which means that the IRS views these arrangements as tax avoidance transactions. See Notice 2015-73, 2015-46 I.R.B. 660 (Nov. 16, 2015). Notice 2015-73 supersedes Notice 2015-47, 2015-30 I.R.B. 76 (July 27, 2015).

The designation of a transaction as a listed transaction has a variety of adverse consequences. First, a taxpayer who has participated in a listed transaction has an obligation to make disclosures on her tax return. Treas. Reg. § 1.6011-4(a), (b)(2). Second, material advisors are required to report their involvement in the listed transaction, and must maintain lists of their clients and provide those lists to the IRS upon demand.… Read More

DOJ Tax Division and IRS Officials Describe Civil Tax Enforcement Priorities

CE1512CTF Print Brochure_1Speaking at the ABA’s Annual Criminal Tax Fraud and Tax Controversy Conference, senior officials from the Tax Division of the Department of Justice (DOJ) and the IRS Office of Chief Counsel described a variety of priorities for civil enforcement.

Consistent with prior indications that payroll taxes will be a significant area of focused criminal enforcement, Diana L. Erbsen, Deputy Assistant Attorney General for Appellate and Review, indicated that practitioners should anticipate civil actions for injunctive relief in payroll tax cases, followed by contempt proceedings to enforce those injunctions. Erbsen also indicated that the Financial Litigation Unit of the Office of Review, which focuses on collecting tax judgments, has received additional staff and is expected to be more active.… Read More

Bucking A Trend: Santander STARS Shelter Upheld

Santander Holdings United States v. United StatesStructured Trust Advantaged Repackaged Securities, or STARS, a tax shelter, has been the subject of significant litigation. STARS was a trust transaction that provided tax benefits to Barclays Bank PLC (its promoter) and foreign tax credits to U.S.-based participants. The government has argued that STARS lacked economic substance, and it has had partial wins in Bank of New York Mellon Corp. v. Commissioner, No. 14-704-ag(L), 2015 U.S. App. LEXIS 15993 (2d Cir. Sept. 9, 2015), and in Salem Financial Inc. v. United States, 786 F.3d 932, 937 (Fed. Cir. 2015), decided in May. Last week, another decision was issued, denying a summary judgment motion by another STARS participant.… 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

Tax Shelters: The Ninth Circuit Reverses a Grant of Summary Judgment in a Sham Partnership Case.

Earlier this week, the Ninth Circuit issued a terse (under 600 words) unpublished decision reversing the grant of summary judgment in a tax shelter case. Broadwood Inv. Fund LLC v. United States, 2015 U.S. App. LEXIS 13501 (9th Cir. Aug. 3, 2015). The court briefly indicated that the district court had erred because the taxpayers had provided sufficient evidence to raise a genuine issue of material fact on the question of intent, which was relevant to a determination whether the relevant partnership was a sham. Id., slip op. at *2-*3 (reversing Broadwood Inv. Fund LLC v. United States, 2012 U.S. Dist.… Read More

Labels Don’t Count: The Fifth Circuit Looks at Sham Partnerships.

When we think of federal tax law, we tend to think of statutes and regulations, but judicial principles developed through case law play an important role. One of the more important judicial principles in the area of taxation is the rule that the tax consequences of a transaction are based upon its substance, not its form.

The Fifth Circuit applied this principle last week in addressing two partnership transactions undertaken by Dow Chemical Company. Chemtech Royalty Assocs., L.P. v. United States, 2014 U.S. App. LEXIS 17490 (5th Cir. Sept. 10, 2014). In the transactions, Dow and a group of foreign banks set up two partnerships; after the IRS refused to treat the partnerships as legitimate entities, Dow filed a challenge to the final partnership administrative adjustment.… Read More

A Tax Opinion that Didn’t Carry the Day.

Although Congress codified the economic substance doctrine, courts continue to deal with an inventory of cases applying the doctrine under existing precedent. On June 24th, the Fifth Circuit decided an interesting one, Nevada Partners Fund, L.L.C. v. United States, 2013 U.S. App. LEXIS 12877 (June 24, 2013).

Nevada Partners involved a tax shelter that was driven by foreign currency transactions. The multi-tiered structure, as described by the Court, worked like this:

  • First, the investment manager established a group of LLCs. These included an LLC which would act as a holding company for two others. This first-tier LLC would be formed with a transitory partner and it would own 99% of a second LLC, which in turn would own 99% of a third LLC.
Read More

Holding a Bad Hand: The Third Circuit Addresses Economic Substance, Part I.

While tax law is driven in large measure by statutes and regulations, case law remains significant, particularly in the context of litigation involving tax shelters.

Historically, courts developed a variety of common law doctrines such as “substance over form,” “step transaction,” or “business purpose” that come into play in the context of transactions that are perceived to be abusive. Among the more prominent of these doctrines is the economic substance doctrine. While Congress took steps to codify the economic substance doctrine in 2010, it did so on a prospective basis, leaving a large number of pending tax cases to be governed by existing common law principles.Read More