Supreme Court Hears Oral Arguments in Woods: TEFRA Penalties and Outside Basis

The Supreme Court recently heard oral arguments in the Woods case.  The issue involved is whether the government can invoke TEFRA jurisdiction in a TEFRA proceeding at the partnership level to determine valuation overstatement penalties related to a partner's outside overstatement of basis in circumstances in which the partnership entity is found to have been a sham.  The issue turns on whether a penalty can be imposed on items such as outside basis, which are not partnership items in a TEFRA proceeding, leaving the taxpayer to present a reasonable cause and good faith defense to the penalty after the TEFRA proceeding is completed and the tax and penalty are paid, in a refund case.

The audio of the oral agruments before the Supreme Court in the Woods case can be found on the SCOTUS web sit.

Supreme Court Web Site

Sergio Garcia Wins Partial Victory in Tax Court

Pro golfer Sergio Garcia won a significant partial victory recently in  U.S. Tax Court.  In his case, Garcia v. Commissioner, 140 T.C. No. 6 (Docket 13649, Filed March 14, 2013), the IRS initially asserted that all of Sergio's endorsement income from TaylorMade was U.S. personal services income subject to U.S. tax.  Sergio, a resident of Switzerland, claimed that 85% of his contract with TaylorMade reflected his personal image and worldwide celebrity inconic status so that that income, as royalty income under the U.S.-Swiss tax treaty was exempt from U.S. income tax.

The Tax Court analyzed competing expert opinions from each side as to what the correct proportion of the endorsement income was attributable to personal services (personal appearances and golf tournament participation, etc.) and what was due to his name and likeness.  The Tax Court found that Sergio was the only "Global Icon" in TaylorMade's stable of golfers, which it defined as a premiere golfer who consistently ranks among the world''s best players, and who connects emotionally with golfers in all regions of the world, and who is a "TaylorMade Ambassador".  The Tax Court then refused to rely completely on either side's experts and instead looked to its own recent allocation case involving fellow PGA professional Retief Goosen.  In that case, Goosen v. Commissioner, 136 T.C. 547, the Tax Court found the allocation between personal services income and royalty income to be 50.50.  Here it distinguished Sergio's status and found that a 50-50 split was not appropriate for Sergio because he was TaylorMade's only "Global Icon" during the years at issue and a more prominent image status that was marketing more heavily by TaylorMade, in addition to having Sergio committed to using TaylorMade products on a "head to toe" basis, more extensively than Retief Goosen's contract.  But the Tax Court shaved the percentage of royalty income in Sergio's case down from 85% to 65%, and held that all of the U.S. source personal compensation under the endorsement agreement allocation and otherwise was subject to U.S. income taxation.

For a copy of this case, or any questions, please contact Curtis Elliott at 704-973-5328 or go to ceclaw.com

Third Circuit Invalidates Historic Credit Partnership

On August 27, 2012 a three (3) judge panel of the Third Circuit Court of Appeals, in Historic Boardwalk Hall, LLC v. Commissione of Internal Revenue, 2012 WL 3641769 (No. 11-1832, 8/27/12), held that a historic tax credit partnership funded by the Pitney Bowes corporation, was not a valid partnership for federal income tax purposes and denied the investor partner the allocation of historic tax credits.  The Third Circuit found that although Pitney Bowes invested over $18 million as purported capital contributions to renovate the Atlantic City Convention Center, it's entrepreneurial upside and downside as a partner did not exist in substance.  Pitney's partnership interest included a 3% preferred return and it held 99% of the cash flow and profits but the Third Circuit said it was protected against any appreciable risk of loss because the historic credits returned its investment and the New Jersey Sports Authority had a right to call its partnership interest at the net present value of capital out of pocket rather than a full market price for its residual partnership interest.

It is not clear yet whether a petition for en bang reconsideration by the full Third Circuit would be made, but the decision will be controversial and will foster much discussion in the tax professional literature in the coming days and months. 

Stay tuned.

NEW INNOCENT SPOUSE GUIDELINES ISSUED

The IRS recently issued important new guidelines for innocent spouse relief under IRC section 6015 to override prior guidelines under Rev. Proc. 2001-61.  The new guidelines, issued under Notice 2012-8, liberalize innocent spouse treatment where factors such as spousal abuse and excessive control of finances and financial information by the non-requesting spouse exist.  Additionally, an objective standard is adopted to determine whether the requesting spouse will suffer economic hardship, and guidelines as to the weight of the factors to consider are provided.  Moreover, the new guidelines provide for more streamlined review of innocent spouse cases, and for reconsideration of pending cases on the Tax Court docket which are not yet scheduled for trial in which equitable relief under IRC Section 6015(f) is at issue.

These new guidelines are effective immediately pending the finalization of the new proposed revenue procedure.  For any questions, please do not hesitate to contact Curtis Elliott at 704-372-6322.

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.