Publications

Altera And Cost-Sharing Requirements Under Section 482: Another Tax Court Rebuke to the IRS

By Jerald David August
Business Entities
January - February 2016 Edition

In Altera Corp., the Tax Court, per the majority opinion issued by Judge L. Paige Marvel, invalidated the 2003 final regulations on cost-sharing arrangements (CSAs).Following a brief introduction to Altera, this article will examine the application of the principles contained in the transfer pricing rules, and in particular, the regulations pertaining to cost-sharing agreements (for intangibles) and the government’s prior defeats in this area in Xilinx, Inc. and VERITAS Software. The discussion will then focus in depth on the Tax Court’s Altera decision and the impact that it will have on CSAs. The court’s emphasis on the fact that the IRS did not have a sufficient factual basis to include SBCs as an element of what a CSA must take into account poses challenges to the issuance of “legislative” regulations currently under consideration and also into the future. Indeed, another consequence of the Tax Court’s analysis invalidating the CSA regulation with respect to SBCs is whether other legislative regulations previously issued also suffer from the same infirmity. This article will be continued with the publication of a future second part focusing on the legislative rule-making process and the burden that the IRS must carry to prove that a particular regulation was not arbitrary and capricious, and compare that burden with the issuance of interpretative regulations.

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This Will Keep You Up at Night: Firm and Partner Liability for Other Professionals’ Noncompliance

By Megan L Brackney
Tax Controversy Corner
January – February 2016 Edition

A recent district court decision involving the IRS’s assessment of over $11 million in penalties against a law firm for failing to provide information caught the attention of many tax practitioners. This column discusses that case, Callister Nebeker & McCullough,¹ as well as other areas in which a law firm or accounting firm, or the partners of a firm, can be liable for the noncompliance of partners and employees.² Specifically, this column discusses firm liability for list maintenance and reportable transaction penalties under Code Secs. 6707 and 6708, sanctions against firms and persons with principal authority under Circular 230 and Code Sec. 6694 and firm liability for promoter penalties under Code Secs. 6700 and 6701. The theme that runs through these provisions for penalties and sanctions is that a firm can minimize its liability by having procedures in place to ensure compliance before any violation occurs. This article concludes with some suggestions for law firm procedures, both to keep problems from occurring in the first place and to demonstrate reasonable cause if a partner or employee commits a violation.

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The Fifth Amendment Privilege Against Self-Incrimination and Tax Returns: Oil and Water or Peanut Butter and Jelly?

By Bryan C. Skarlatos
Journal of Tax Practice & Procedure
February - March 2016 Edition

Tax returns require a wealth of specific financial information that sometimes can be used against a taxpayer in a criminal investigation or prosecution. If a taxpayer is engaged in an illegal business, such as gambling or drugs, the disclosure that the taxpayer earns a lot of money, or has substantial assets, can be an important element of proof against the taxpayer. In less obvious cases, the fact that taxpayer will suddenly report substantial income that was not disclosed on prior returns, or will have a change of inventory valuation that will not match prior returns, or has a foreign bank account that had not been previously reported, could be used as a link in the chain of evidence leading to a tax prosecution relating to those prior tax returns. In such cases, taxpayers must carefully consider whether they have a Fifth Amendment privilege not to provide such incriminating information and, if so, how that privilege can be asserted. 

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Time Will Not make This Problem Disappear: The Open-Ended Statute of Limitations for Taxpayers with Delinquent Foreign Information Returns

By Megan L Brackney
ABA Tax Times - Vol. 35 No. 2
February 2016 Edition

Although section 6501(c)(8) has been in the Code for several years, many tax practitioners remain unaware of this exception to the general three-year statute of limitations for assessment of tax for delinquent foreign information returns. This exception can significantly influence a taxpayer’s decision as to whether, and how, to correct past non-compliance. This article first discusses the exception, and then describes the alternative methods for late filing of foreign information returns.

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Personal Trusts Under New York Law

By Ian Weinstock
Practical Guidance At Lexis Practice Advisor
January 2016 Edition

Trusts are extremely flexible vehicles that individuals and entities can use to achieve a variety of purposes that involve one party holding property on behalf of another party. This practice note will focus on the uses of personal trusts for estate planning in New York. New York has a very well-developed trust law, as you would expect based on its rich history as a center of banking and finance and, of course, its large population of wealthy individuals. This practice note will provide you with a considerable amount of background information on New York trust law to make sure you have a suitable understanding of the legal terrain, and then will delve into a number of practical trust drafting and administration issues. This practice note will be of particular use to (i) junior New York attorneys practicing in the trusts and estates (T & E) field, (ii) more seasoned New York attorneys whose practice is not focused on T & E but who occasionally encounter trusts, and (iii) non-New York T & E lawyers who are interested in what makes New York trust law distinctive.

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Global Tax Enforcement In 2016: What You Need To Know

By Jay R. Nanavati
January 2016 Edition
Law360

The investigation and prosecution of tax evasion has, in the last decade, grown from a specialized subcategory of law enforcement into a first-tier policy concern for the global community. Starting with the U.S. government’s crackdown on Swiss bank UBS in 2008, there has been a steady drumbeat of news about prosecutions of financial institutions, bankers and taxpayers. This drumbeat has coincided with the public’s frustration with the slow growth of most of the world’s economies over the last decade and the related problem of governments’ budgetary troubles. Cracking down on offshore tax evasion is a relatively uncontroversial source of new revenue.

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The ‘Good Faith and Cause’ Defense to Penalties

By Henry Stow Lovejoy
The CPA Journal
January 2016 Edition

The gold standard for a “good faith and reasonable cause” defense to a tax penalty is reliance on advice from a professional tax advisor who is informed of all the relevant facts. But recent cases that have disallowed “hobby loss” deductions for operating a horse farm demonstrate that professional tax advice is not the only way to establish good faith and reasonable cause. These cases suggest that if taxpayers are serious about an activity, they can avoid an accuracy-related penalty.

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The Key to Transferee Liability in Midco Cases: Did the Taxpayers Know Or Have Reason to Know of the Unpaid Taxes?

By Caroline Rule
Journal of Tax Practice & Procedure
October – November 2015 Edition

So-called “Midco” transactions have been used by taxpayers who wish to sell appreciated property owned in a C Corporation while attempting to avoid the double tax inherent in causing a C Corporation to sell stock and then distribute the proceeds to shareholders. By selling the corporate stock to a Midco entity—i.e., an entity that has favorable tax attributes such as tax losses or tax credits—the parties hope to avoid a least one level of the double tax. Typically, the sellers and the Midco agree to split the resulting tax savings. Unfortunately, in many cases, the Midco’s tax attributes prove to be illusory or nonexistent, leaving the Midco with a large tax liability when it ultimately sells the property. Even more unfortunately, the Midco is often a shell corporation that distributes all of the money it receives from the transaction, leaving it insolvent when the tax bill arrives. When this happens, the IRS seeks to recover the unpaid tax from the seller of the corporate stock under transferee liability theories pursuant to Code Sec. 6901.

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The Key to Transferee Liability in Midco Cases: Did the Taxpayers Know Or Have Reason to Know of the Unpaid Taxes?

By Bryan C. Skarlatos
Journal of Tax Practice & Procedure
October – November 2015 Edition

So-called “Midco” transactions have been used by taxpayers who wish to sell appreciated property owned in a C Corporation while attempting to avoid the double tax inherent in causing a C Corporation to sell stock and then distribute the proceeds to shareholders. By selling the corporate stock to a Midco entity—i.e., an entity that has favorable tax attributes such as tax losses or tax credits—the parties hope to avoid a least one level of the double tax. Typically, the sellers and the Midco agree to split the resulting tax savings. Unfortunately, in many cases, the Midco’s tax attributes prove to be illusory or nonexistent, leaving the Midco with a large tax liability when it ultimately sells the property. Even more unfortunately, the Midco is often a shell corporation that distributes all of the money it receives from the transaction, leaving it insolvent when the tax bill arrives. When this happens, the IRS seeks to recover the unpaid tax from the seller of the corporate stock under transferee liability theories pursuant to Code Sec. 6901.

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Tax Issues with Revocable Trusts at the Grantor's Death

By Ian Weinstock
CPA Journal
September 2015 Edition 

Revocable trusts are an increasingly popular substitute for wills, and for good reason: In many jurisdictions, funding a revocable trust during life can result in substantial time and cost savings after death by avoiding the state law probate system. A funded revocable trust can also be useful in incapacity planning during the grantor's life. Even an unfunded revocable trust that operates only as a receptacle for the pourover of an estate provides certain advantages after the grantor's death, including keeping the details of the grantor's testamentary dispositions private. This article addresses the recurring tax and reporting issues that arise when the grantor of a revocable trust dies.

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