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Archive for Matthew Roberts

King of Pop, Michael Jackson’s Estate Wins Big At Tax Court

The King of Pop, Michael Jackson’s, Estate Wins Big At Tax Court

Two things are virtually certain in life:  death and taxes.  But, one more should be added to the list where the two converge—an IRS audit.  Indeed, this scenario played out all too well for the “King of Pop,” Michael Jackson’s, estate as shown in the United States Tax Court’s recent 271-page memorandum opinion.  See Estate of Jackson v. Comm’r, T.C. Memo. 2021-48.

Although the lengthy opinion boiled down to general valuation and estate tax principles, it was noteworthy for several reasons.  First, the Tax Court explicitly found that the IRS’ expert had perjured himself during trial, resulting in a significant discounting of his offered opinions to the court. Second, the Tax Court was called upon to value significant intangible assets of Mr. Jackson at the time of his death, including his image and likeness.  Third, the opinion offers additional insights into how estates, unlike individuals, bear the burden of showing non-compliance with Section 6751(b) of the Code.  Each of these are discussed more fully below.

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Split-Dollar Life Insurance Arrangements And The Tax Code

Split-Dollar Life Insurance Arrangements And The Tax Code

A recent Tax Court decision in De Los Santos v. Commissioner illustrates the complexity of split-dollar life insurance arrangements.  Taxpayers who participate in these or other types of life insurance arrangements should consult knowledgeable tax counsel to ensure that arrangement is reported properly on all applicable tax returns.

In 2003, the Treasury Department issued final regulations addressing the taxation of split-dollar life insurance arrangements. Split-dollar life insurance arrangements of the sort involved in this case fall into one of two categories—“compensatory arrangements” or “shareholder arrangements.”  Reg. § 1.61-22(b)(2)(ii), (iii).  In both types, the “owner” of the life insurance contract pays the premiums, and the “non-owner” has a current interest in the policy.

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Does The IRS’ First Time Abatement Rule Apply To Tax-Exempt Organizations?

Does The IRS’ First Time Abatement Rule Apply To Tax-Exempt Organizations?

The Section 6652(c) Penalty

Section 6033(a)(1) of the Internal Revenue Code (the “Code”) generally requires “every organization exempt from taxation under section 501(a) . . . [to] file an annual return.”  For tax-exempt organizations, the annual return is IRS Form 990, Return of Organization Exempt From Income Tax, Form 990-EZ, Short Form Return of Organization Exempt from Federal Income Tax, or IRS Form 990-N, Annual Electronic Filing Requirement for Small Exempt Organizations.  If the organization fails to file a timely and accurate return with the IRS, the IRS is permitted to impose a civil penalty against the organization under Section 6652(c) of the Code.

The daily rate of the civil penalty in addition to the maximum penalty that can be imposed generally depends on the size of the tax-exempt organization.  For returns required to be filed in 2020, smaller organizations can be assessed civil penalties of up to $20 per day not to exceed the lesser of $10,500 or 5% of the gross receipts of the organization.  But, for larger organizations—i.e., those with gross receipts exceeding $1,067,000—the daily rate of the civil penalty can increase to $105 per day up to a maximum of $54,000.

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What Is The Proper Characterization Of A Foreign Entity For Federal Tax Purposes: Chief Counsel Memo. 2021-002 Offers Some Clues

What Is The Proper Characterization Of A Foreign Entity For Federal Tax Purposes: Chief Counsel Memo. 2021-002 Offers

To Elect or Not to Elect?

Treasury Regulations provide default rules for the proper tax characterization of both domestic and foreign entities.[i] Generally, a business entity that is not classified as a corporation under certain prescribed rules (referred to as “eligible entities”) can elect their tax characterization for federal tax purposes.[ii]

For example, an eligible entity (domestic or foreign) with two members can generally elect to be characterized as either a corporation or a partnership for federal tax purposes.  Conversely, an eligible entity with only one owner can elect to be characterized as either a corporation or a disregarded entity.

Tax Consequences of not Making an Election

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Federal Court Concludes That FBAR Penalties Are Not Subject To The Flora Rule

Federal Court Concludes That FBAR Penalties Are Not Subject To The Flora Rule

It has been more than 60 years since the Supreme Court held that, under 28 U.S.C. § 1346(a)(1), taxpayers seeking to file federal tax claims against the government in federal court must pay the full amount of tax prior to filing suit.  See Flora v. U.S., 362 U.S. 145, 177 (1960).  As a result, many taxpayers with large tax assessments often find it more difficult to obtain judicial review of IRS actions, particularly where important procedural rights are lost due to inaction.

But, by its own terms, 28 U.S.C. § 1346(a)(1) only applies to “internal-revenue taxes” and claims related to “internal-revenue laws.”  Clearly, federal income taxes and penalties within Title 26 of the United States Code (i.e., the “I.R.C.”) may fall within these definitions.  However, do other statutory provisions outside the I.R.C. also fall within the purview of 28 U.S.C. § 1346(a)(1) and the Flora rule?

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Be Careful What You Tell The IRS: Federal Appeals Court Upholds Criminal Obstruction Charge

Be Careful What You Tell The IRS: Federal Appeals Court Upholds Criminal Obstruction Charge

Section 7212 makes it unlawful for any person to attempt to interfere with the administration of the laws of the Internal Revenue Code.  For example, that provision makes it unlawful for any person to make certain threats against an Internal Revenue Service (IRS) employee.  Moreover, the “omnibus clause” of Section 7212 prohibits corrupt acts designed to obstruct or impede the due administration of the Internal Revenue Code.  Those who violate Section 7212 may face felony charges with up to a maximum of three years in prison.

In many cases, the question in Section 7212 cases is what conduct constitutes “obstruction”?  The recent decision in U.S. v. Avery, No. 19-2429, 2021 WL 1157846 (6th Cir. Mar. 26, 2021) provides some additional color on the scope of such language and is the topic of this Insight.

U.S. v. Avery.

Background

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IRS Practice Unit Focuses On Sale Of A Partnership Interest

IRS Practice Unit Focuses On Sale Of A Partnership Interest

It is a little known secret that IRS Large Business & International (“LB&I”) issues “Practice Units” from time to time. Often, these Practice Units are worth a read because they “are developed through internal collaboration and serve as both job aids and training materials . . . [to IRS examiners] on tax issues.”  A list of former Practice Units can be found here.

Recently, on March 12, 2021, IRS LB&I issued a 50-page Practice Unit on the “Sale of a Partnership Interest.”  This Insight discusses that Practice Unit.

General Concepts.

Subchapter K of the Internal Revenue Code (“Code”) houses the partnership tax rules.  Under these complex rules, a partnership is generally not a taxable entity—rather, the items from the partnership flow through and are reported by the partners on their respective income tax returns.  In this manner, a partnership is not treated as a separate entity but instead is treated more as an aggregate of its partners.  For federal tax purposes, this is known as the “aggregate theory” of partnership taxation.

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The Rahman Case Is A Cautionary Tale Of What Can Go Wrong Under The IRS Streamlined Filing Compliance Procedures

The Rahman Case Is A Cautionary Tale Of What Can Go Wrong Under The IRS Streamlined Filing Compliance Procedures

Introduction

The IRS recognizes that many taxpayers fail to timely and properly file income tax returns, information returns, and/or FBARs.  Sometimes these failures are honest mistakes; but, other times such failures may be due to willful conduct.

The distinction between willful and non-willful conduct is an important one for purposes of certain programs the IRS offers to non-compliant taxpayers, i.e., the Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures (“Streamlined Procedures”).  Taxpayers who have engaged in willful conduct are not permitted into the Streamlined Procedures.  This is significant because the lookback period for prior years’ unpaid income tax and the amount of the penalty is generally lower under the Streamlined Procedures.[1]

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IRS Announces Tax Relief To Texans Due To Severe Winter Weather

IRS Announces Tax Relief To Texans Due to Severe Winter Weather

One of the most devastating major winter storms in the history of the State of Texas has finally passed.  Recognizing the significant emotional and financial toll the storm has taken on Texans, the IRS recently released an announcement indicating that residents and businesses in all 254 Texas counties may qualify for tax relief.  See TX-2021-02 (Feb. 22, 2021).  This Insight summarizes some of the more noteworthy relief provisions.

Postponement of Certain Tax Deadlines

Both the Internal Revenue Code and the governing regulations provide authority for the IRS to provide relief to those affected by a federally declared disaster.  Exercising this authority, the IRS has declared that certain taxpayers “that reside or have a business in all 254 Texas counties qualify for tax relief.”  These taxpayers include:

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Recent Tax Court Decision: Economic Substance And The Step Transaction Doctrine

Recent Tax Court Decision: Economic Substance And the Step Transaction Doctrine

A recent Tax Court case illustrates the reach of the economic substance doctrine and the step transaction doctrine.  For the benefit of our readers, we have briefed the case below:

Complex Media, Inc. v. Comm’r, T.C. Memo. 2021-14 | February 10, 2021 | Halpern, J. | Dkt. Nos. 13368-15 and 19898-17

Short Summary: Taxpayer-corporation (Corp.) acquired the assets of a business from a third-party partnership (P’ship).  In exchange for the transferred assets, Corp. issued approximately 5 million shares of common stock.  Immediately thereafter, Corp. redeemed 1.875 million of the common shares held by P’ship in exchange for $2.7 million in cash and Corp’s obligation to make an additional payment of $300,000 a year later.  P’ship paid the cash and assigned its right to the additional payment to one of its partners in redemption of that partner’s interest in P’ship.  Corp. claimed an increased basis of $3 million in intangible assets it acquired from P’ship and amortized that additional basis under I.R.C. § 197(a). The IRS disallowed the deductions under I.R.C. § 197(a).

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How To Successfully Request IRS Penalty Relief

How To Successfully Request IRS Penalty Relief

Federal tax penalties have always been an IRS priority.  But, perhaps more so today than three decades ago.  For example, in 1987, the IRS reported that it had assessed penalties of approximately $14 billion.  Compare that figure with fiscal year 2019—a year in which the IRS assessed over $40 billion in penalties.  The number of penalty assessments (and corresponding government revenue) against taxpayers is only expected to grow in the near future.

IRS priority alone, however, has not been the sole cause of the staggering rise in penalties.  Indeed, congressional action has only buttressed this phenomenon.  In 1955, the Internal Revenue Code (the “Code”) housed approximately 14 penalties.  Today, the number of penalties hovers closer to 150.  Put simply, the IRS has an arsenal of various statutory provisions to use and penalize unwanted taxpayer conduct, from the late filing of a return or information return to the late payment of tax or even the negligent filing of a return.

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Starting A Business In Texas: Choice Of Entity

Starting A Business In Texas: Choice Of Entity

Business owners in the State of Texas face a lot of tough decisions.  Perhaps the most significant of these decisions is the choice of entity the business will utilize while conducting its operations.  Similar to many other states, the State of Texas offers its business owners and entrepreneurs several options.  This Insight provides a summary of the tax and non-tax implications of each potential entity.

Sole Proprietorship

It may surprise you to learn that starting a business in Texas sometimes does not require any formal organization paperwork at all.  For example, a business owner or entrepreneur may begin conducting business in Texas under his or her own name.[i]

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