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Archive for Cory Halliburton

Tax Exemption And Unrelated Business Income Tax (UBIT): The Framework (Part 1 of 3)

Tax Exemption And Unrelated Business Income Tax (UBIT): The Framework (Part 1 of 3)

This Insights blog is Part 1 of a 3-Part series that provides a focused overview of the unrelated business income tax rules for the nonprofit organization that is tax-exempt pursuant to section 501(c)(3) of the Internal Revenue Code (the “Code”).

This Part 1 sets the framework and provides an overview for the organizational and operational tests applicable to tax-exempt organizations and, without getting into too much detail (yet), the why or when the unrelated business income tax rules come into play for the organization.

General Rule For Tax Exemption Under Section 501(c)(3) of The Code

To be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in section 501(c)(3) of the Code. See 26 U.S.C. § 501(c)(3); 26 C.F.R. § 1.501(c)(3)-1(a)(1). If an organization fails to meet either the organizational test or the operational test, the organization is not qualified for tax exemption under section 501(c)(3) of the Code.

The Organizational Test

Section 1.501(c)(3)-(1) of the Treasury Regulations contains the organizational test:

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Syndicated Conservation Easements: IRS Scrutiny Continues

Syndicated Conservation Easements: IRS Scrutiny Continues

On May 2, 2022, the Wall Street Journal published two detailed articles authored by Richard Rubin on the subject of syndicated conservation easements: Conservation Tax-Break Deals Keep Flowing Despite IRS Crackdown (WSJ 2022.05.02) and How a Georgia Pine Farm Became a Significant Tax Deduction (WJS 2022.05.02). In the first article, the author notes that IRS data released in 2020 showed syndicated easement deductions climbing from $6 billion in 2016 to $9.2 billion in 2018. And, the author quotes the head of the IRS’s business and international division as stating, “We don’t feel like we’ve seen the full impact of our [the IRS’s] efforts just yet. . . . We view it as abusive and problematic, and we will continue to throw significant enforcement tools” at abusive syndicated conservation easement tax shelters.

In the second article, the author focuses on a specific 434-acre pine-tree farm in Georgia and its dedication for conservation purposes pursuant to a syndicated easement arrangement. The author writes, “In 2020, some McGinnis family members sold off three-fifths of the property for $310,000. By the end of 2021, the . . . land had been sold again, this time to a business that raised $10.7 million from investors in a land-conservation deal. That transaction could yield its investors millions of dollars more in tax deductions—as well as scrutiny from the Internal Revenue Service.” Rubin writes that billions of dollars of tax revenue are at stake in abusive syndicated conservation easement tax shelters.

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The IRS Collection Procedure Notice 518 (CP518)

The IRS Collection Procedure Notice 518 (CP518)

Overview of IRS Notice CP518

The IRS Collection Procedure Notice 518 (CP518) is a notification that the IRS believes a taxpayer—either a business or an individual—has failed to file a required return, either as of the initial deadline for filing or as of any extension deadline. Pursuant to 26 U.S.C. § 6212 and Treasury Regulation § 301.6212-1, the IRS uses CP518 as one of various progressive notifications to taxpayers for tax assessment or collection process. See IRS Guidance for CP 518 Business and IRS Guidance for CP 518 Individual.

Last Known Mailing Address

Pursuant to Section 6212, if the IRS determines that there is a deficiency in respect of any federal income tax, including any excise tax authorized by Chapter 42 of the Internal Revenue Code, the IRS is authorized to send a notice of deficiency to the taxpayer by certified mail or registered mail. The CP518 notice must include a notice to the taxpayer of the taxpayer’s right to contact a local office of the taxpayer advocate and the location and phone number of the appropriate office.

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Kohout v. Commissioner: Reconstructing Accounting, Voluminous Writings, And Passthrough Loss

CORY HALLIBURTON - Kohout v. Commissioner: Reconstructing Accounting, Voluminous Writings, And Passthrough Loss

The recent Tax Court case of Kohout v. Commissioner addresses several common evidentiary issues in the context of tax disputes.  A summary, chart, or calculation to prove the content of voluminous records may be appropriate and admissible, but the Tax Court, as seen in the Kohout opinion, is quite comfortable with the financial data in, for example, bank statements that are 58-pages in length. A summary of voluminous records must be an accurate compilation of the underlying data; thus, a constructed summary of reconstructed accounting data is a recipe for evidence that lacks credibility or that will be deemed inadmissible by the Tax Court. And, an accounting “reconstructionist” may attempt to reconstruct a taxpayer’s return through the taxpayer’s testimony or word, but the underlying records—bank statements and evidence of transfers—are a better and more probative source for the substance of a taxable transaction.  We dive into more detail below:

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Joint Committee On Taxation Report On Tax Treatment of Charitable Contributions

Joint Committee on Taxation Report on Tax Treatment of Charitable Contributions

Joint Committee on Taxation Report on Tax Treatment of Charitable Contributions

On March 11, 2022, the Joint Committee on Taxation published its 49-page report (the “Report”) relating to the federal tax treatment of charitable contributions. The Report was the subject of a public hearing held on March 17, 2022 where the Senate Committee on Finance considered economic issues relating to federal tax incentives for charitable giving and data relating to charitable contributions. See hearing at Hearing | Hearings | The United States Senate Committee on Finance.

Overall, the Report is a useful resource, although it is not “law” and there are many intricacies that the Report does not address or that may be addressed, just not in full detail. This Insights article provides a brief summation of some key statistics and content of the Report.

Key Statistics

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IRS’s Imperfect Designation of “Immediate Supervisor” Deemed Insufficient To Overturn Penalties

IRS’s Imperfect Designation of “Immediate Supervisor” Deemed Insufficient To Overturn Penalties

Tomato, Toma-toe: IRS’s Imperfect Designation of “Immediate Supervisor” Deemed Insufficient to Overturn Penalties Under Code Section 6751(b)(1)

Section 6751(b)(1) of the Internal Revenue Code provides that “[n]o penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination[.] . . .” 26 U.S.C. § 6751(b)(1). In the Tax Court opinion of Long Branch Land, LLC v. Commissioner, No. 7288-19, T.C. Memo. 2022-2 (U.S. Tax Ct. Jan. 13, 2022) (mem. op.), the court addressed what is meant by “immediate supervisor,” as that term is used in Section 6751(b)(1), as well as the doctrine of “presumption of regularity.”

In the case, Long Branch Land, LLC (“LBL”) claimed a $10,425,000 charitable contribution deduction for a conservation easement it granted to a charitable organization as well as a $3,475,000 charitable contribution deduction for LBL’s donation of a fee simple interest in real property associated with that easement. The IRS selected LBL’s return for examination.

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Market Value vs. Book Value – Proving Consequential Damages

Market Value vs. Book Value – Proving Consequential Damages

On January 14, 2022, the Texas Supreme Court issued its opinion in Signature Industrial Services, LLC v. Ogden, _ S.W.3d _ (Tex. Jan. 14, 2022) [20-0396). The court address the age-old question of How to measure consequential damages in a breach of contract case? In its 30-page opinion, the supreme court answered that basic question and a few others. This article focuses on the former. 

Facts: Signature Industrial Services, LLP (SIS) contracted with International Paper Company (IP) for SIS to provide services, with a total payment obligation of about $775,000. The scope of the project grew, and SIS invoiced $2.4 million in addition to what IP paid. See id. at 3. Before litigation between them ensued, SIS received an acquisition purchase offer of $42 million from a third party. IP was unaware of the potential purchase transaction. But, due allegedly to IP’s failure to make payment, SIS faced significant cash-flow issues which led to payroll taxes and other debts that SIS could not manage such that SIS “all but collapsed.” SIS and its president sued IP, alleging breach of contract and fraud claims. SIS then received three more offers from the prospective purchaser. The first was at the $42 million level, although with less cash up front. The latter two offers were around $10 million each. SIS rejected all of them and proceeded against IP. Id. at 4. 

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Document Retention For Engineering And Architecture Services Companies

Cory Halliburton - Freeman Law, Texas

Document retention.

That phrase reminds me of a Dilbert cartoon from about a decade ago that depicted the “pointy-haired boss” confronting Alice, the engineer, about her exceeding the company’s permitted email storage. The boss was depicted holding a white piece of paper. When Alice responded to his apparent sole work activity of carrying a piece of paper around the office, the boss emphatically informed her, “It’s not a piece of paper; it’s a document!

That cartoon apparently made the “keep permanent” category of my brain’s retention protocol.

Now, many years later, my law practice includes engineering, architecture and related professional services firms that have sought counsel about, among other things, document retention policies, procedures, and practices.  This article provides an overview of business and legal considerations for developing and implementing a document retention program, with a focus on a few unique considerations for engineering and related professional services firms.

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