Tax Controversy

Real Estate Gift Tax

August 18, 2008 | Mike Habib, EA

Tiered discount allowed in real estate FLP gift tax case In Astleford, a memorandum decision, the Tax Court permitted a taxpayer to apply a tiered discount in the context of a family limited partnership owning interests in real estate.

Facts. On 8/1/96, Mrs. Astleford formed the Astleford Family Limited Partnership (“AFLP”) to facilitate the continued ownership, development, and management of various real estate investments and partnership interests she owned and to facilitate gifts that she intended to make to her three adult children. On the same day, Mrs. Astleford transferred to AFLP ownership of an elder care facility. Also on the same day, Mrs. Astleford gave each of her three children a 30% limited partner interest in AFLP and retained for herself a 10% general partner interest.

On 12/1/97, Mrs. Astleford made additional capital contributions to AFLP by transferring to AFLP a 50% interest in Pine Bend Development Co. (“Pine Bend”), a general partnership, and her interest in 14 other real estate properties. The Pine Bend general partnership agreement did not contain any provisions relating to the transfers of interests in Pine Bend or whether such transferred interests would be general partner or assignee interests. Pine Bend owned 3,000 acres of land of which 1,187 acres consisted of agricultural farmland (“Rosemount property”).

Cost of Goods Deductibility

August 18, 2008 | Mike Habib, EA

Deduction for cost of goods sold limited to negotiated discount price IRS concluded in this ILM that the step transaction doctrine applied to the repayment to companies of the difference between the full list price of merchandise and the negotiated discount price, and therefore the companies’ deduction for cost of goods sold (COGS) was limited to the negotiated price.

Facts. U.S. companies paid the full list price for merchandise and were reimbursed for the difference between the full list price and the negotiated discount price.

IRS analysis. The Service concluded that this transaction met all three tests applied by the courts in determining whether the step transaction doctrine should be invoked:

CA LLC Fee Invalid

August 13, 2008 | Mike Habib, EA

California LLC fee again held invalid

Ventas Finance I LLC v. Calif. FTB, Cal. Ct. App., Dkt. Nos. A116277; A117751, 08/11/2008

The California Court of Appeal once again has ruled invalid the state fee imposed on limited liability companies (LLCs) under former Rev. & Tax. Cd. § 17942 (the “§ 17942 fee”). Affirming the lower court, the Appeal Court held that the § 17942 fee as applied to Ventas, an LLC that conducted business in California and other states, was not fairly apportioned and, therefore, violated the Commerce Clause because the levy was based on total income without apportionment to income attributable to, or derived from, California sources. The court rejected the Franchise Tax Board’s (FTB’s) request for judicial reformation of the former statute to allow an apportioned fee refund since Ventas did business in California and other states unlike in the earlier Northwest case (that held the fee invalid) where the LLC conducted no California business. However, the court concluded that neither federal due process nor any principle of California law requires the FTB to refund the entire amount that Ventas paid. Consequently, the refund should be limited to the amount Ventas paid for the years in issue that exceeds the amount that would have been assessed, without violating the Commerce Clause, using a method of fair apportionment. The postjudgment order awarding attorney fees was also reversed, and remanded for the lower court to redetermine eligibility and the amount of reasonable fees in light of the partial reversal of the lower court’s judgment.

IRS Demutualization Ruling

August 12, 2008 | Mike Habib, EA

Court rebuffs IRS and allows policyholder to escape gain on demutualization

Eugene A. Fisher et al. v. U.S. (Ct Cl 8/6/2008) 102 AFTR 2d ¶ 2008-5150

The Court of Federal Claims has applied a variation of the open transaction doctrine with the result that a policyholder had no gain to report when it chose a cash option in connection with a demutualization of an insurance company. Under this option, the shares awarded to the policyholder were immediately sold by the company and the proceeds were then paid to the policyholder in cash. IRS said that the policyholder was taxable on the full amount of the gain without being able to allocate any of his basis in the contract to offset the sales proceeds. The Court allowed the policyholder to use his basis in the contract (which greatly exceeded the amount of the sales proceeds) to fully offset the proceeds and thus to report no gain.

Tax Shelter IRS Resolution

August 8, 2008 | Mike Habib, EA

New IRS settlement initiative for LILO and SILO transactions

Mike Habib, EA

IRS recently announced a settlement initiative for Lease-In/Lease-Out (LILO) and Sale-in/Lease-Out (SILO) transactions. Under this initiative, more than 45 of the nation’s largest corporations that participated in these shelters will receive a letter with an offer. Shelter participants will have 30 days to make a decision to accept the offer. Taxpayers would have to concede 80% of certain claimed tax breaks but they would not be hit with accuracy-related penalties.

Charitable Contribution

August 7, 2008 | Mike Habib, EA

Proposed regs explain strict charitable contribution substantiation & appraisal rules Preamble to Prop Reg 08/06/2008; Prop Reg § 1.170A-15, Prop Reg § 1.170A-16, Prop Reg § 1.170A-17, Prop Reg § 1.170A-18

Mike Habib, EA

IRS has issued proposed regs explaining the charitable contribution substantiation changes made by the American Jobs Creation Act of 2004 (AJCA) and the Pension Protection Act of 2006 (PPA). The proposed regs, which would be effective for contributions made after the date final regs are issued, also would provide guidance on what constitutes qualified appraisals and qualified appraisers for purposes of the substantial rules for noncash gifts.

CWA Central Withholding

August 5, 2008 | Mike Habib, EA

IRS issues new version of Central Withholding Agreement form

Mike Habib, EA

The IRS has issued a June 2008 version of Form 13930, Application for Central Withholding Agreement.

Passive Activity Losses

August 5, 2008 | Mike Habib, EA

IRS may require reporting of PAL activity groupings

Mike Habib, EA

Notice 2008-64, 2008-31 IRB 268

Innocent spouse relieved of tax

August 3, 2008 | Mike Habib, EA

Innocent spouse relieved of tax from embezzlement and forgery

Yakubik, TC Summary Opinion 2008-74

Mike Habib, EA The Tax Court recently held that the IRS abused its discretion in not granting equitable innocent spouse relief to a husband whose wife embezzled funds from her employer and forged checks taken from her stepfather.

Kansas Tax Relief

August 3, 2008 | Mike Habib, EA

IRS explains how to claim (or elect out of) 50% Kansas bonus depreciation Notice 2008-67, 2008-32 IRB

Mike Habib, EA

The Food, Conservation and Energy Act of 2008, popularly known as the Farm Act, provided temporary GO Zone-style tax relief for taxpayers in Kiowa County, Kansas, and surrounding areas, who were affected by the storms and tornadoes that began on May 4, 2007. This relief includes 50% bonus depreciation (Kansas additional first year depreciation) for qualified Recovery Assistance (RA) property placed in service by the taxpayer on or after May 5, 2007, during the tax year that includes May 5, 2007. IRS has issued detailed guidance explaining how to claim (or elect out of) this Kansas bonus depreciation.