Articles Posted in Tax Law

by
The American Recovery and Reinvestment Act of 2009 provides a cash grant to entities that “place[] in service” certain renewable energy facilities. The amount is determined using the basis of the tangible personal property of the facility. Alta placed windfarm facilities into service and sought $703 million in grants. The government awarded $495 million. Alta filed suit, seeking an additional $206 million. The government counterclaimed, asserting that it had overpaid $59 million. The difference was attributable to the calculation of basis. The portion of the purchase prices attributable to grant-ineligible tangible property (real estate, transmission equipment, and buildings) must be deducted: Alta argued that the entire remainder can be allocated to grant-eligible tangible personal property, with none allocated to intangibles. The Claims Court found in favor of Alta, rejecting the government’s argument that basis must be calculated using the residual method of 26 U.S.C. 1060, which applies to the acquisition of a business. The court reasoned that no intangible goodwill or going concern value could have attached to the windfarms at the time of the transaction. The Federal Circuit vacated. The Alta purchase prices were well in excess of their development and construction costs (book value), and the transactions involved numerous related agreements, such as the leasebacks and grant-related indemnities. Goodwill and going concern value could have attached, so those assets constitute a “trade or business” within the meaning of section 1060; the transactions count as “applicable asset acquisitions.” View "Alta Wind v. United States" on Justia Law

by
During the savings-and-loan crisis in the 1970s and 1980s, many “thrift” institutions failed. The Federal Savings and Loan Insurance Corporation, as insurer and regulator, encouraged healthy thrifts to take over failing ones in “supervisory mergers.” FSLIC provided incentives, including allowing acquiring thrifts to operate branches in states other than their home states and “RAP” rights. Regulations mandated that each thrift maintain a minimum capital of at least 3% of its liabilities, an obstacle for healthy thrifts acquiring failing ones. RAP permitted acquiring thrifts to use Generally Accepted Accounting Principles to treat failing thrifts’ excess liabilities as “supervisory goodwill,” which could be counted toward the acquiring thrifts’ minimum regulatory capital requirement and amortized over 40 years. Home Savings entered into supervisory mergers. Branching and RAP rights are considered intangible assets for tax purposes and are generally subject to abandonment loss and amortization deductions. In 2008, Home’s successor, WMI, sought a refund for tax years 1990, 1992, and 1993 based on the amortization of RAP rights and the abandonment of Missouri branching rights, proffering valuation testimony from its expert, Grabowski, about fair market value. The Ninth Circuit found WMI did “not prove[], to a reasonable degree of certainty, Home’s cost basis in the Branching and RAP rights.” WMI also filed suit in the Claims Court, seeking a refund for tax years 1991, 1994, 1995, and 1998, based on the amortization of RAP rights and the abandonment of Florida, Illinois, New York, and Ohio branching rights, with a valuation report from Grabowski. The Federal Circuit affirmed the Claims Court's rejection of the claims; Grabowski’s assumptions about the nature of RAP rights were inconsistent with market realities and, at times, unsupported. View "WMI Holdings Corp. v. United States" on Justia Law

Posted in: Banking, Tax Law

by
Income earned by Americans typically is taxed in the U.S., regardless of where it is earned. European countries only tax income earned within their borders. To address possible “double taxation” the U.S. generally provides credits for taxes paid to foreign governments; European systems typically exempt from taxation income earned abroad. Congress, believing that the exemption method puts American companies at a trade disadvantage, has enacted various tax regimes, then received push-back from its European trading partners, who claimed each was an effective export subsidy. The 2000 ETI Act, intended to ease the burden of the tax revisions on domestic producers, was rejected in the World Trade Organization (WTO). Congress responded with the 2004 American Jobs Creation Act (AJCA), 118 Stat. 1418. Section 101 repeals the ETI provision that excluded extraterritorial income from taxation, effective for “transactions after December 31, 2004.” Section 101(d), provides: In the case of transactions during 2005 or 2006, the amount includible in gross income by reason of the amendments made by this section shall not exceed the applicable percentage of the amount which would have been so included but for this subsection. In 2005, WTO found that the ACJA improperly maintained prohibited ETI subsidies through transitional and grandfathering measures. Congress repealed section 101(f), effective for “taxable years beginning after” May 17, 2006. It did not repeal or revise section 101(d). Pursuant to a 2006 Agreement, DWA recognized qualifying extraterritorial income for 2006, invoked section 101(d), and excluded 60% from gross income. The IRS allowed the exclusion. DWA subsequently sought refunds for 2007-2009, claiming the section 101(d) exclusion. The Federal Circuit, disagreeing with the IRS and the Claims Court, held that section 101(d) unambiguously provides transitional relief for all extraterritorial income received from transactions entered into in 2005 and 2006, even income received in later years. View "DWA Holdings LLC v. United States" on Justia Law

by
In returns for 1995, 1996, and 1997, Stephens a shareholder of SF, a subchapter S corporation, reported "passive activity" passthrough income and passive activity losses (deductible from passive activity income) and passive activity credits (claimed against taxes allocable to passive activities). The IRS audited SF’s returns and Stephens’s individual returns for 1995 and 1996; the 1997 return was audited separately. The IRS concluded that Stephens had materially participated in some SF activities, finalized its audit of the 1995 and 1996 returns, and, in 2009, sent Stephens a notice of deficiency, as proposed in 2003 and 2008. Stephens did not contest the notice but made payment and never filed a formal refund claim, allegedly believing he could carry over the disallowed passive activity losses to 1997. The IRS extended the deadline for a 1997 refund claim to 2008. In 2009, Stephens mailed an amended 1997 return, seeking to carry over the 1995 and 1996 passive activity losses. In 2011, Stephens asserted the mitigation provisions, which, in specified circumstances, “permit a taxpayer who has been required to pay inconsistent taxes to seek a refund” otherwise barred by section 7422(a) (requiring that a “claim for refund or credit has been duly filed”) or section 6511(a), specifying the limitations period for refund claims. The IRS proposed to disallow the Stephenses’ refund claim as untimely and rejected an equitable recoupment argument. The Federal Circuit affirmed the dismissal of the Stephenses suit, concluding that a timely refund claim was a “prerequisite for a refund suit.” View "Stephens v. United States" on Justia Law

by
In returns for 1995, 1996, and 1997, Stephens a shareholder of SF, a subchapter S corporation, reported "passive activity" passthrough income and passive activity losses (deductible from passive activity income) and passive activity credits (claimed against taxes allocable to passive activities). The IRS audited SF’s returns and Stephens’s individual returns for 1995 and 1996; the 1997 return was audited separately. The IRS concluded that Stephens had materially participated in some SF activities, finalized its audit of the 1995 and 1996 returns, and, in 2009, sent Stephens a notice of deficiency, as proposed in 2003 and 2008. Stephens did not contest the notice but made payment and never filed a formal refund claim, allegedly believing he could carry over the disallowed passive activity losses to 1997. The IRS extended the deadline for a 1997 refund claim to 2008. In 2009, Stephens mailed an amended 1997 return, seeking to carry over the 1995 and 1996 passive activity losses. In 2011, Stephens asserted the mitigation provisions, which, in specified circumstances, “permit a taxpayer who has been required to pay inconsistent taxes to seek a refund” otherwise barred by section 7422(a) (requiring that a “claim for refund or credit has been duly filed”) or section 6511(a), specifying the limitations period for refund claims. The IRS proposed to disallow the Stephenses’ refund claim as untimely and rejected an equitable recoupment argument. The Federal Circuit affirmed the dismissal of the Stephenses suit, concluding that a timely refund claim was a “prerequisite for a refund suit.” View "Stephens v. United States" on Justia Law

by
A 2004 IRS regulation excluded medical residents from the FICA tax student exception for services provided after April 1, 2005. In 2010, the IRS decided that residents could qualify for the exception for tax periods ending before April 1, 2005, such that “hospitals and [medical] residents who had filed protective refund claims for tax periods before April 1, 2005[,] would be able to obtain refunds of the FICA taxes.” Former residents sued, alleging that the Hospital had not filed protective refund claims 1995-2001. The Hospital and residents entered into a settlement: the Hospital agreed to pay the residents $6,632,000, stating that the payment “can be appropriately characterized as a refund for the amount of FICA taxes previously withheld.” The Hospital then sued the United States, alleging that Internal Revenue Code 3102(b) entitled it to indemnification for the settlement. The Claims Court dismissed, holding that section 3102(b) is not a money-mandating source of substantive law, as required for Tucker Act jurisdiction, 28 U.S.C. 1491(a)(1). The Federal Circuit reversed. Section 3102(b), which states “[e]very employer required so to deduct the tax shall be liable for the payment of such tax, and shall be indemnified against the claims and demands of any person for the amount of any such payment made by such employer,” is reasonably amenable to an interpretation that mandates the government to reimburse FICA taxes paid by an employer. View "New York and Presbyterian Hospital v. United States" on Justia Law

by
Determination of tax year for theft loss depends on multiple factors. The Adkinses invested in securities through a company that was actually operating a “pump and dump” scheme. At their 2000 peak, the Adkinses’ investments were valued at $3.6 million. In 2001, the value of their investments declined to $9,849. In 2002, the Adkinses, discovering the fraud, submitted a claim to the National Association of Securities Dealers. Their hearing was postponed pending federal indictments, which were handed down in 2004. While the charges were pending, in 2006, the Adkinses claimed a tax-year 2004 deduction for a $2,118,725 theft loss under 26 U.S.C. 165, with excess refund portions carried back over 2001– 2003. The IRS disallowed the Adkinses’ refund claims for all tax years but 2002. The Claims Court concluded that the Adkinses agreed, citing 26 C.F.R. 1.165-1(d)(3) because the Adkins had not shown that, in 2004, they could have “ascertained with reasonable certainty that they would not receive reimbursement of their losses.” The Federal Circuit vacated. Unless the plaintiff has chosen abandonment (or settlement or adjudication) as the factual predicate for their loss date, the existence of an ongoing lawsuit or arbitration is only one factor to be considered among many in determining the tax year for the loss. View "Adkins v. United States" on Justia Law

Posted in: Tax Law

by
8x8 provides telephone services via Voice over Internet Protocol (VoIP). Customers use a digital terminal adapter, containing 8x8’s proprietary firmware and software. Customers’ calls are switched to traditional lines and circuits when necessary; 8x8 did not pay Federal Communications Excise Tax (FCET) to the traditional carriers, based on an “exemption certificate,” (I.R.C. 4253). Consistent with its subscription plan, 8x8 collected FCET from its customers and remitted FCET to the IRS. In 2005, courts held that section 4251 did not permit the IRS to tax telephone services that billed at a fixed per-minute, non-distance-sensitive rate. The IRS ceased collecting FCET on “amounts paid for time-only service,” stated that VoIP services were non-taxable, and established a process seeking a refund of FCET that had been exacted on nontaxable services, stating stated that a “collector” can request a refund if the collector either “establishes that it repaid the amount of the tax to the person from whom the tax was collected”; or “obtains the written consent of such person to the allowance of such credit or refund.” The IRS denied 8x8’s refund claim. The Claims Court concluded that 8x8 lacked standing and granted the government summary judgment. The Federal Circuit affirmed; 8x8 did not bear the economic burden of FCET, but sought to recover costs borne by its customers, contrary to the Code. The court rejected an argument that FCET was “treated as paid” during the transfer of services to traditional carriers. View "8x8, Inc. v. United States" on Justia Law

by
Non-Russian investors could not invest directly in Russian sovereign debt but could invest in derivative credit-linked notes (CLNs), sold by banks. When Russia defaulted on its sovereign debt in 1998, CLNs lost nearly all of their value. The Russian Central Bank imposed currency exchange limitations that prevented the ruble from being freely traded. Tiger's hedge funds had purchased CLNs for more than $230 million. After the collapse, Tiger needed cash to pay off investors but was unable to sell its CLNs. Zimmerman believed that she could make money by obtaining devalued Russian debt in anticipation of a recovery of the ruble. Bracebridge, in which Zimmerman was a partner, established RRF, a hedge fund. FFIP, another fund managed by Bracebridge contributed RRF's first assets. Tiger transferred CLNs to RRF in exchange for an RRF ownership interest. Tiger sold its RRF partnership shares to FFIP for a discount, although the value of the shares had increased. RRF filed its 2000 tax return, allocating a loss to FFIP. FFIP’s 2001 losses flowed through to Zimmerman. In 2005, the IRS audited the parties, disallowed the loss RRF claimed for the sale of the Tiger CLNs, and imposed a 40% penalty. RRF and Bracebridge sought readjustment of partnership items under the Tax Equity and Fiscal Responsibility Act, I.R.C. 6221–6233. The Claims Court held that the limitations period for assessing taxes against RRF’s indirect partners had expired as to some, but not all, indirect partners and upheld the disallowance of the losses and imposition of penalties. The Federal Circuit affirmed, holding that the losses claimed on Zimmerman’s 2001 tax return are “attributable to” the loss claimed in RRF’s 2000 tax return, the limitations period for which was suspended by the 2005 Final Partnership Administrative Adjustment. Tiger’s contributions to RRF were not valid partnership contributions. View "Russian Recovery Fund Limited v. United States" on Justia Law

Posted in: Tax Law

by
In 2006, the IRS audited the Sandovals’ 2003-2005 tax returns. The Sandovals signed forms waiving their right to a notice of deficiency for the years 2003 and 2004, and consenting to extend the limitations period for the 2003 fiscal year through December 31, 2008. The Sandovals hired representation. On reconsideration, the IRS assessed deficiencies for 2003 and 2004 at $60,274 and $87,566. IRS agents continued to confer with the Sandovals’ representative to prepare amended returns. The Sandovals filed amended returns in 2008 for amounts they considered “substantially correct,” and requested abatements. They submitted checks and a letter from their representative stating that the checks should be applied to the Sandovals’ liability for 2003 and 2004, and that “any overpayment” should be contributed to other years’ outstanding amounts due. The IRS granted substantial abatements, such that the checks satisfied the Sandovals’ tax deficiencies from 2003 and 2004. In 2010, the Sandovals filed new amended returns for 2003 and 2004 seeking a full refund of funds remitted plus amounts applied as overpayments from other years, approximately $101,000. The IRS denied the claims. The Federal Circuit affirmed summary judgment for the IRS, rejecting arguments that the Sandovals withdrew consent to assessment without notice of deficiency and never received subsequent notice; the 2008 funds were applied after the three-year limitations period for assessment; or the 2008 funds were given as refundable deposits, not as tax payments. View "Sandoval-Lua v. United States" on Justia Law

Posted in: Tax Law