TAX CONTROVERSIES TODAY: Tax Court Rejects IRS Challenge to "Midco" Transac...

TAX CONTROVERSIES TODAY: Tax Court Rejects IRS Challenge to "Midco" Transac...: The U.S. Tax Court has again rejected the IRS's challenge to a so called "midco" transaction on the basis of imposing transferee liability u...

Tax Court Rejects IRS Challenge to "Midco" Transaction

The U.S. Tax Court has again rejected the IRS's challenge to a so called "midco" transaction on the basis of imposing transferee liability upon the shareholder, a trust, which sold its stock in a C corporation.  The Tax Court in Frank Sawyer Trust of May 1972, T.C. Memo 2011-298 (No. 5526-07) held that state fraudulent conveyance law did not apply to the stock sale transaction, and that the tax doctrine of substance over form was not applicable. The Service has been challenging these so called "midco" transactions over the past few years, in which an intermediary buyer purchases the stock of the C corporation's shareholders at a one level of capital gains tax to the stock seller, then the buyer consolidates the new target and liquidates the assets against midco losses and sells the assets to another market buyer.

IRS TO RELEASE GUIDANCE ON FOREIGN FINANCIAL ASSET REPORTING

Income tax returns for 2011 must have attached new Form 8938, which is the "Statement of Foreign Financial Assets."  The new 8938 is intended to supplement the "check a box" yes or no answer on Form 1040 Schedule B asking whether the taxpayer had ownership or control over any foreign bank account. For 8938 asks for more broad information about the taxpayer's foreign situated assets exceeding $100,000 on 12/31 of the tax year or $150,000 on any day of the tax year.  The IRS just issued T.D. 9567, announcing that Form 8938 instructions are forthcoming. 

A failure to file Form 8938 can result in a $10,000 penalty or a penalty of $50,000 if there is a continued failure to file after IRS notification.  This form is not a replacement for, but is an separate filing requirement that will be in addition to the required FBAR report to be filed with the U.S. Treasury.

META DATA SUBJECT TO SUMMONS

The IRS Chief Counsel's Office has issued a memorandum indicating that the relevancy requirement imposed upon summons issued administratively can be met by agents seeking a document's original meta data insofar as the credibility of the document may be in issue, as to the time place and manner of document authorship and modification.  The memorandum was issued 11/18/11 (See No. 201146017).  Taxpayers and their representatives might expect to see more requests for meta data files in future IRS examinations.

TAX CONTROVERSIES TODAY: Tax Seminar Announcement

TAX CONTROVERSIES TODAY: Tax Seminar Announcement: Mark your calendars for October 26, 2011 in Charlotte, for the seminar for lawyers and CPA's, "Recent Developments in IRS Tax Enforcement" ....

New CID Annual Review of IRS Criminal Tax Enforcement

On July 25, 2011, the Treasury Inspector General's Office for Tax Administration issued its annual review of IRS Criminal Tax enforcement trends.  The Report noted that CID investigations were up by 12.3% for legal source income cases, and that CID completed 4,325 investigations, thereby surpassing its goal of 3,900 investigations.  CID also reduced the average amount of time involved in a case from 425 days the prior year to 365 days for fiscal year 2010, an improvement in efficiency of over 8%.  The CID's budget was increased from $598 million in fiscal 2009 to $607 million in fiscal 2010.  The federal conviction rate for recommended prosecutions is at 90.2%, and 2,184 convictions were obtained in fiscal 2010.  CID staffing increased from 2,725 in fiscal 2009 to 2,751 in fiscal 2010.  CID also exceeded its fiscal 2010 goal of initiating 4,000 investigations by actually opening 4,706 criminal investigations.  Tax related prosecution referrals numbered 1,507 in fiscal 2010.

DAD Tax Shelter Invalidated By Tax Court

The U.S. Tax Court, in Superior Trading, LLC, et. al. v. Commissioner, 137 T.C. No. 6, held that a purported partnership in Brazilian consumer receivables allegedly contributed by the original holder with high basis, built in losses, was not a true tax partnership and denied the investor partner's ability to claim losses with respect to those assets.  The Tax Court found that the two purported partners did not share a common purpose of managing and collecting the receivables for profit, but the purported contributing partner had no interest in continuing with the activity, and that it's purported redemption within a year of the purported partnership's formation was subject to step transaction analysis.  This case is the Tax Court's first repudiation of the DAD tax shelter.  Penalties were also imposed in the case.

Tax Seminar Announcement

Mark your calendars for October 26, 2011 in Charlotte, for the seminar for lawyers and CPA's, "Recent Developments in IRS Tax Enforcement".  The seminar will include a panel of leading experts in IRS civil and criminal tax controversies, including top civil litigators, white collar specialists, former assistant U.S. attorneys, and forensic CPA's and certified fraud examiners.

The panels will be broken into civil tax topics in the morning, including the new codified economic substance doctrine, recent penalty case developments, and IRS Appeals and Tax Court practice developments, and voluntary disclosure of offshore bank account problems.  The afternoon's panels will include handling a CID fraud investigation, grand jury proceedings, criminal tax trials and sentencing guidelines, and collateral consequences of a tax conviction.  The seminar is sponsored by Sterling Education Services, Inc., and further information can be found at http://www.store.sterlingeducation.com/seminar/11NC10251 .

Fourth Circuit Upholds 2 Year Statute of Limiations in Innocent Spouse Cases

The Fourth Circuit Court of Appeals has held in Octavia Jones v. Commissioner, No. 10-1985 (June 13, 2011) that the 2 year statute of limitations regulation asserted by the IRS in innocent spouse cases is valid for purposes of innnocent spouse equitable relief and that innocent spouse claims asserted after the 2 year period of initial collection activity by the IRS are time barred.  This reflects a split in the Circuits and the issue may be ripe for resolution by the U.S. Supreme Court.

For a copy of the case, please contact Curtis Elliott at Culp Elliott & Carpenter, PLLC, Charlotte, NC.  Our web site is http:www.ceclaw.com
 

4th CIRCUIT HOLDS 6 YEAR SOL NOT APPLICABLE TO PARTNERSHIP BASIS ISSUES

No sooner had the ink dried on the 7th Circuit's decision in Beard, that the Fourth Circuit Court of Appeals in Home Concrete & Supply et. al. v. United States (No. 09-2353, February 7, 2011) held that it will follow Colony, Inc. v. Commissioner, 357 U.S. 28 (1958) and will not defer to Treasury Reg. 301.6501(e)-1(e) even after the recent Supreme Court's decision in Mayo Foundation for Medical Education and Research v. United States, 562 U.S. __, No. 09-837, slip op. at 6-7 (Jan. 11, 2011).  Colony held that an overstatement of basis in assets resulting in an understatement of reported gain and gross income does not constitute an "omission" from gross income in extending the three (3) year statute of limitations to six (6) years under section 6501(e)(1)(A) of the Internal Revenue Code.  Consequently, there is now a significant split of authority among the Circuit Courts as to whether the retroactively promulgated Reg. 301.6501(e)-1(e) will have legal effect in the IRS's war on tax shelters, and in particular with respect to adjusted basis cases arising from partnership "liquidating" distributions of assets with overstated basis due to sham treatment or partnership lack of business purpose or economic substance.  Numerous cases involving this issue are pending in other Circuit Courts of Appeal and more is sure to come.

SEVENTH CIRCUIT OVERTURNS TAX COURT ON 6 YEAR STATUTE

On January 26th, the Seventh Circuit Court of Appeals overturned the U.S. Tax Court's prior rulings, and held that the IRS is entitled to apply a six (6) year statute of limitations to basis overstatements on income tax returns.  The Seventh Circuit found that the Supreme Court's decision in Colony Inc. v. Commissioner, 357 U.S. 28 (1958) was distinguishable and not controlling.  The Seventh Circuit's decision, entitled Beard v. Commissioner, ___ F.7th ___, No. 09-3741, 2011 WL 222249 (Jan. 26, 2011), is the IRS's first victory on the SOL issue in the Federal Circuit Courts of Appeal.  This issue is pending in several other Circuits so it is not likely to be the last word on the issue.  But the ruling effectively provides the IRS with a powerful argument for more time to challenge basis issues in its war on tax shelters, such as Son of Boss and other partnership basis strips.  For a copy of the case, direct your request to wce@ceclaw.com.