SCOTUS Reports

Tag: 2016

  • Exelon Corp. v. Comm’r, 147 T.C. No. 9 (2016): Tax Treatment of Like-Kind Exchanges and Sale-Leaseback Transactions

    Exelon Corp. v. Commissioner, 147 T. C. No. 9 (2016) (United States Tax Court, 2016)

    In Exelon Corp. v. Commissioner, the U. S. Tax Court ruled that Exelon’s sale-leaseback transactions, intended to defer tax on a $1. 6 billion gain from selling power plants, did not qualify as like-kind exchanges under IRC Section 1031. The court held these transactions were loans in substance, not leases, due to the circular flow of funds and lack of genuine ownership risk. This decision reaffirmed the IRS’s challenge against tax avoidance through structured finance deals, impacting how such transactions are structured and reported for tax purposes.

    Parties

    Exelon Corporation, as successor by merger to Unicom Corporation and subsidiaries, was the petitioner. The Commissioner of Internal Revenue was the respondent.

    Facts

    In 1999, Unicom Corporation, a predecessor to Exelon, sold two fossil fuel power plants, Collins and Powerton, for $4. 813 billion, resulting in a taxable gain of $1. 6 billion. To manage this gain, Unicom pursued a like-kind exchange under IRC Section 1031, engaging in sale-leaseback transactions with City Public Service (CPS) and Municipal Electric Authority of Georgia (MEAG). These transactions involved leasing replacement power plants in Texas and Georgia, which were then immediately leased back to CPS and MEAG, with funds set aside for future option payments. Unicom invested its own funds fully into these deals, expecting to defer the tax on the sale and claim various tax deductions related to the replacement properties.

    Procedural History

    Exelon filed its tax returns for 1999 and 2001, claiming the like-kind exchange and related deductions. The IRS issued notices of deficiency in 2013, disallowing the deferred gain and deductions, and imposing accuracy-related penalties under IRC Section 6662. Exelon contested these determinations by timely filing petitions with the U. S. Tax Court. The court conducted a trial, considering extensive evidence and expert testimonies, and ultimately issued its opinion on September 19, 2016.

    Issue(s)

    Whether the substance of Exelon’s transactions with CPS and MEAG was consistent with their form as like-kind exchanges under IRC Section 1031?

    Whether Exelon is entitled to depreciation, interest, and transaction cost deductions for the 2001 tax year related to these transactions?

    Whether Exelon must include original issue discount income in its 2001 tax return related to these transactions?

    Whether Exelon is liable for accuracy-related penalties under IRC Section 6662 for the 1999 and 2001 tax years?

    Rule(s) of Law

    IRC Section 1031(a)(1) allows nonrecognition of gain or loss on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for like-kind property intended for similar use. The regulations specify that “like kind” refers to the nature or character of the property.

    The substance over form doctrine allows courts to disregard the form of a transaction and treat it according to its true nature for tax purposes. Under this doctrine, transactions structured as leases may be recharacterized as loans if they lack genuine ownership attributes.

    IRC Section 6662 imposes accuracy-related penalties for negligence or disregard of rules and regulations, which can be avoided if the taxpayer had reasonable cause and acted in good faith.

    Holding

    The court held that the transactions between Exelon and CPS/MEAG were not true leases but loans, as they did not transfer the benefits and burdens of ownership to Exelon. Consequently, Exelon failed to satisfy the requirements of IRC Section 1031 for a like-kind exchange, and it was not entitled to the claimed depreciation, interest, and transaction cost deductions for the 2001 tax year. Exelon was required to include original issue discount income for the 2001 tax year and was liable for accuracy-related penalties under IRC Section 6662 for both 1999 and 2001 tax years.

    Reasoning

    The court applied the substance over form doctrine, concluding that the transactions were more akin to loans due to the circular flow of funds and lack of genuine ownership risk. The court analyzed the likelihood of CPS and MEAG exercising their purchase options at the end of the leaseback period, finding it reasonably likely given the return conditions and economic incentives. The court disregarded the Deloitte appraisals as unreliable due to interference from Exelon’s legal counsel and failure to account for return conditions, which significantly increased the likelihood of option exercise.

    The court also considered the economic substance doctrine but resolved the case on substance over form grounds, finding that Exelon did not acquire a genuine leasehold or ownership interest in the replacement properties. The court rejected Exelon’s reliance on its tax adviser’s opinions as a defense against penalties, citing the adviser’s involvement in the transaction structuring and the flawed appraisals.

    Disposition

    The court sustained the IRS’s determinations, requiring Exelon to recognize the 1999 gain from the power plant sales, disallowing the claimed deductions for 2001, requiring the inclusion of original issue discount income for 2001, and upholding the accuracy-related penalties for both years. The case was set for further proceedings under Tax Court Rule 155 to determine the exact amounts.

    Significance/Impact

    The Exelon Corp. decision reinforces the IRS’s stance against tax avoidance through structured finance transactions, particularly sale-leaseback deals intended to qualify as like-kind exchanges. It clarifies that such transactions must transfer genuine ownership risks and benefits to be respected as leases for tax purposes. The decision impacts how corporations structure similar transactions, emphasizing the need for genuine economic substance over mere tax deferral strategies. It also highlights the importance of independent appraisals and the potential pitfalls of relying on advisers who are involved in transaction structuring.

  • CRI-Leslie, LLC v. Commissioner, 147 T.C. No. 8 (2016): Application of Section 1234A to Section 1231 Property

    CRI-Leslie, LLC v. Commissioner, 147 T. C. No. 8, 2016 U. S. Tax Ct. LEXIS 24 (U. S. Tax Court 2016)

    In CRI-Leslie, LLC v. Commissioner, the U. S. Tax Court ruled that forfeited deposits from a canceled sale of business-use real property do not qualify for capital gain treatment under I. R. C. Section 1234A. The court clarified that Section 1234A applies only to capital assets, not to Section 1231 property used in a trade or business. This decision underscores the distinction between capital assets and business-use property for tax purposes, impacting how similar transactions are treated under the tax code.

    Parties

    CRI-Leslie, LLC, with Donald W. Wallace as the Tax Matters Partner (TMP), was the petitioner. The respondent was the Commissioner of Internal Revenue. The case was brought before the United States Tax Court.

    Facts

    CRI-Leslie, LLC, a Florida limited liability company treated as a TEFRA partnership for federal income tax purposes, owned the Radisson Bay Harbor Hotel in Tampa, Florida, which it acquired in 2005 for $13. 8 million. The hotel was used in CRI-Leslie’s trade or business, and the company reported deductions for operating expenses and depreciation related to the hotel on its 2008 tax return. In 2006, CRI-Leslie entered into a purchase and sale agreement with RPS, LLC, to sell the hotel for $39 million, later amended to $39. 2 million. RPS, LLC, failed to close the purchase, and the agreement terminated in 2008, resulting in CRI-Leslie retaining $9,700,000 in forfeited deposits. CRI-Leslie reported these deposits as net long-term capital gain on its 2008 tax return. The Commissioner issued a notice of final partnership administrative adjustment (FPAA) recharacterizing the gain as ordinary income.

    Procedural History

    The Commissioner issued the FPAA to CRI-Leslie’s partners on November 20, 2013, for the 2008 tax year, adjusting the partnership’s income by increasing ordinary income and decreasing net long-term capital gain by $9,700,000. CRI-Leslie petitioned the U. S. Tax Court for review. The case was submitted fully stipulated under Tax Court Rule 122, and the court’s jurisdiction was appealable to the Court of Appeals for the Eleventh Circuit.

    Issue(s)

    Whether CRI-Leslie, LLC, is entitled to capital gain treatment under I. R. C. Section 1234A for the $9,700,000 in forfeited deposits from the canceled sale of the Radisson Bay Harbor Hotel, a property used in its trade or business, in the 2008 tax year?

    Rule(s) of Law

    I. R. C. Section 1234A provides that gain or loss from the termination of a right or obligation with respect to property that is a capital asset in the hands of the taxpayer shall be treated as gain or loss from the sale of a capital asset. I. R. C. Section 1221(a) defines a capital asset but excludes property used in the taxpayer’s trade or business, including real property, from this definition. I. R. C. Section 1231 covers gains and losses from the sale or exchange of certain property used in a trade or business but treats such gains as long-term capital gains if there is a net gain.

    Holding

    The U. S. Tax Court held that CRI-Leslie, LLC, is not entitled to capital gain treatment under I. R. C. Section 1234A for the $9,700,000 in forfeited deposits because the Radisson Bay Harbor Hotel was Section 1231 property used in its trade or business, not a capital asset as required by Section 1234A.

    Reasoning

    The court’s reasoning was based on the plain meaning of Section 1234A, which applies only to capital assets, as defined in Section 1221(a). The court noted that the hotel property, being used in CRI-Leslie’s trade or business, was explicitly excluded from the definition of a capital asset under Section 1221(a)(2). The court rejected CRI-Leslie’s argument that Congress intended Section 1234A to apply to Section 1231 property, finding no evidence in the legislative history to support such an interpretation. The court emphasized that if Congress had intended to include Section 1231 property within the scope of Section 1234A, it could have used language similar to that in Sections 1234 and 1234B, which apply to property with the same character as the underlying asset. The court also reviewed relevant caselaw and found no support for extending Section 1234A to Section 1231 property. The court concluded that the plain meaning of the statute must govern, and thus, the forfeited deposits were to be treated as ordinary income.

    Disposition

    The court entered a decision for the respondent, the Commissioner of Internal Revenue, affirming the recharacterization of the $9,700,000 in forfeited deposits as ordinary income rather than capital gain.

    Significance/Impact

    The CRI-Leslie decision clarifies the scope of I. R. C. Section 1234A, limiting its application to capital assets and excluding Section 1231 property used in a trade or business. This ruling impacts how taxpayers treat gains from the termination of rights or obligations related to business-use property, potentially affecting tax planning strategies and the characterization of income from similar transactions. The decision reinforces the importance of statutory interpretation based on the plain meaning of tax code provisions and underscores the distinction between capital assets and Section 1231 property for tax purposes. Subsequent courts have followed this interpretation, solidifying the precedent in tax law.

  • Renee Vento v. Commissioner of Internal Revenue, 147 T.C. No. 7 (2016): Foreign Tax Credit and Virgin Islands Taxation

    Renee Vento v. Commissioner of Internal Revenue, 147 T. C. No. 7 (2016)

    In Vento v. Commissioner, the U. S. Tax Court ruled that U. S. citizens who mistakenly paid income taxes to the Virgin Islands could not claim a foreign tax credit against their U. S. tax liability. The petitioners, who were not bona fide Virgin Islands residents, had filed returns and paid taxes there based on an erroneous belief of residency. The court held that the payments did not qualify as “taxes paid” under the applicable regulations and were not creditable under Section 901 of the Internal Revenue Code. This decision clarifies the scope of the foreign tax credit and the tax treatment of U. S. citizens with respect to Virgin Islands taxation.

    Parties

    Renee Vento, Gail Vento, and Nicole Mollison were the petitioners at the trial level, and the Commissioner of Internal Revenue was the respondent. The case was heard by the United States Tax Court.

    Facts

    Renee Vento, Gail Vento, and Nicole Mollison, all U. S. citizens and sisters, resided in California, the Virgin Islands, and Nevada respectively when they filed their petitions. Throughout 2001, they lived in the U. S. , where they worked, attended school, or cared for children. Despite making estimated tax payments to the U. S. Treasury for 2001, they did not file U. S. Federal income tax returns for that year. Instead, they filed individual territorial income tax returns with the Virgin Islands Bureau of Internal Revenue (BIR) in October 2002, each including a payment of tax. These payments were later transferred to the BIR by the U. S. Treasury under Section 7654. The petitioners conceded that they were not bona fide residents of the Virgin Islands for 2001 and had no income sourced there. Renee Vento filed an amended return with the BIR requesting a refund, but it was marked as “closed” without a refund being issued.

    Procedural History

    The Commissioner issued notices of deficiency to the petitioners on October 14, 2005, determining deficiencies in their Federal income tax for 2001, along with additions to tax and penalties. The petitioners filed petitions with the U. S. Tax Court contesting these deficiencies. Some adjustments in the notices involved partnership items, which were struck upon the Commissioner’s motion and dismissed. The remaining issue was whether the petitioners were entitled to foreign tax credits under Section 901 for their payments to the Virgin Islands. The case was submitted fully stipulated under Rule 122 of the Tax Court Rules of Practice and Procedure.

    Issue(s)

    Whether the petitioners are entitled to credits under Section 901 of the Internal Revenue Code against their U. S. tax liabilities for 2001 for payments made to the Virgin Islands, given that they were not bona fide residents of the Virgin Islands and had no income sourced there?

    Rule(s) of Law

    Section 901 of the Internal Revenue Code allows U. S. citizens, resident aliens, and domestic corporations to credit foreign income taxes paid against their U. S. income tax liabilities. However, the credit is only available for “taxes paid,” which must be compulsory amounts paid in satisfaction of a legal obligation. Section 1. 901-2(e) of the Income Tax Regulations specifies that an amount is not considered a “tax paid” if it is reasonably certain to be refunded or if it exceeds the taxpayer’s liability under foreign law, unless the taxpayer’s interpretation of the law was reasonable and all effective and practical remedies to reduce the liability were exhausted. Additionally, Section 904 limits the amount of creditable foreign tax to prevent credits from offsetting U. S. tax on U. S. -source income.

    Holding

    The U. S. Tax Court held that the petitioners were not entitled to credits under Section 901 against their U. S. income tax liabilities for the amounts paid as tax to the Virgin Islands for their 2001 taxable year. The court found that the petitioners failed to establish that their payments qualified as “taxes paid” under Section 1. 901-2(e) of the Income Tax Regulations, as they did not demonstrate a reasonable interpretation of the law or exhaustion of all effective and practical remedies to secure a refund from the Virgin Islands. Furthermore, the court held that the Section 904 limitation applies to taxes paid to the Virgin Islands, and the petitioners did not establish that their claimed credits did not exceed the applicable limitation.

    Reasoning

    The court’s reasoning centered on three main points. First, the petitioners did not meet their burden of proving that their payments to the Virgin Islands were “taxes paid” under Section 1. 901-2(e) of the Income Tax Regulations. They failed to show that their interpretation of the law as bona fide residents was reasonable, especially given the concerns raised by the IRS and Congress about similar claims and the lack of evidence that they relied on competent advice. Additionally, they did not exhaust all effective and practical remedies to reduce their Virgin Islands tax liability, as only one petitioner requested a refund, and the extent of her efforts was unclear. Second, the court rejected the petitioners’ argument that Section 904 did not apply to taxes paid to the Virgin Islands, finding that the limitation applies to all foreign taxes, including those paid to U. S. possessions. The petitioners did not establish that they had any foreign source income, which would have been necessary to generate a Section 904 limitation sufficient to allow the claimed credits. Third, the court concluded that Congress did not intend for taxes paid by U. S. citizens or residents to the Virgin Islands to be creditable under Section 901, as the coordination rules of Section 932 provide sufficient means to prevent double taxation. The court noted that the petitioners’ unusual situation of paying tax to the Virgin Islands without Virgin Islands income might have presented an opportunity to exploit a loophole in the statutory framework, but the court’s decision was based on the petitioners’ failure to meet the requirements for claiming a foreign tax credit.

    Disposition

    The U. S. Tax Court entered decisions under Rule 155 denying the petitioners’ claims for foreign tax credits under Section 901 for their payments to the Virgin Islands for the 2001 taxable year.

    Significance/Impact

    The Vento decision clarifies the scope of the foreign tax credit under Section 901 and its interaction with the tax coordination rules for the Virgin Islands under Section 932. It establishes that U. S. citizens or residents who mistakenly pay tax to the Virgin Islands based on an erroneous claim of residency cannot claim a foreign tax credit for those payments, even if they face double taxation. The decision reinforces the importance of meeting the requirements for claiming a foreign tax credit, including demonstrating a reasonable interpretation of the law and exhausting all effective and practical remedies to reduce foreign tax liability. The case also highlights the challenges faced by the IRS in preventing double taxation when a U. S. possession retains taxes paid by U. S. citizens who were not legally obligated to pay them. The decision may prompt further scrutiny of claims to Virgin Islands residency and the application of the foreign tax credit to payments made to U. S. possessions.

  • Weiss v. Comm’r, 147 T.C. 179 (2016): Timeliness of Collection Due Process Hearing Requests

    Weiss v. Commissioner of Internal Revenue, 147 T. C. 179 (U. S. Tax Court 2016)

    In Weiss v. Commissioner, the U. S. Tax Court clarified that the 30-day period for requesting a Collection Due Process (CDP) hearing starts from the mailing date of the IRS levy notice, not the date printed on the notice. This ruling ensures that taxpayers have the full 30 days to request a hearing, impacting how the IRS and taxpayers manage collection actions and the suspension of the collection statute of limitations.

    Parties

    Charles J. Weiss, the petitioner, filed a petition against the Commissioner of Internal Revenue, the respondent, in the U. S. Tax Court. Weiss sought review of the IRS’s determination to uphold a notice of intent to levy against him for unpaid federal income tax liabilities for the tax years 1986 through 1991.

    Facts

    Charles J. Weiss owed over $550,000 in federal income tax liabilities for the years 1986 to 1991. In an effort to collect these liabilities, the IRS prepared a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (levy notice) dated February 11, 2009. An IRS Revenue Officer (RO) attempted to hand-deliver the notice on February 11 but was prevented by Weiss’s dog. The RO then mailed the notice on February 13, 2009, using the original February 11-dated notice. Weiss’s wife received the notice on February 17, 2009. Weiss filed a request for a CDP hearing on either March 13 or 14, 2009, which was received by the IRS on March 16, 2009. Weiss argued that he intentionally filed the request late to receive an equivalent hearing, which would not suspend the collection statute of limitations.

    Procedural History

    The IRS issued a notice of determination on May 6, 2011, sustaining the proposed levy. Weiss timely petitioned the U. S. Tax Court for review. The Tax Court reviewed the IRS’s determination for abuse of discretion, focusing on whether the CDP hearing request was timely filed based on the mailing date of the levy notice.

    Issue(s)

    Whether the 30-day period for requesting a CDP hearing under I. R. C. § 6330(a)(3)(B) begins on the date the levy notice is mailed or the date printed on the notice when these dates differ?

    Rule(s) of Law

    The Internal Revenue Code section 6330(a)(3)(B) provides that a taxpayer may request a CDP hearing within 30 days of receiving a notice of intent to levy. The regulations under 26 C. F. R. § 301. 6330-1(b)(1) and (c)(1) state that the 30-day period commences the day after the date of the CDP Notice. The Tax Court has established that the mailing date of the notice controls when it is later than the date on the notice itself.

    Holding

    The U. S. Tax Court held that the 30-day period for requesting a CDP hearing under I. R. C. § 6330(a)(3)(B) is calculated from the date the levy notice is mailed, not the date printed on the notice. Therefore, Weiss’s request for a CDP hearing, filed within 30 days of the mailing date, was timely.

    Reasoning

    The court reasoned that when the date on a levy notice is earlier than the mailing date, the mailing date governs the start of the 30-day period. This principle ensures that taxpayers have the full 30 days to request a hearing, consistent with the court’s prior rulings on notices of deficiency and notices of determination in CDP cases. The court cited Bongam v. Commissioner to support its reasoning, emphasizing a broad, practical construction of jurisdictional provisions to favor taxpayer rights. The court rejected Weiss’s argument that the mismatch between the notice’s date and mailing date should invalidate the notice, as such mismatches have not historically led to invalidation. Additionally, the court found no merit in Weiss’s claim of prejudice or estoppel, noting his implausible testimony and the fact that he sought to avoid collection action.

    Disposition

    The U. S. Tax Court upheld the IRS’s determination to sustain the proposed levy action against Weiss.

    Significance/Impact

    Weiss v. Commissioner clarifies the starting point for the 30-day period to request a CDP hearing, ensuring that taxpayers have the full period to respond based on the mailing date of the levy notice. This ruling impacts IRS collection procedures and taxpayer rights, reinforcing the importance of the mailing date in determining the timeliness of CDP hearing requests. Subsequent courts have followed this precedent, affecting how the IRS administers collection actions and how taxpayers engage with the CDP process.

  • Estate of Bartell v. Comm’r, 147 T.C. 140 (2016): Reverse Like-Kind Exchanges Under Section 1031

    Estate of Bartell v. Commissioner, 147 T. C. 140 (2016)

    In Estate of Bartell v. Commissioner, the U. S. Tax Court ruled that Bartell Drug Co. ‘s reverse like-kind exchange of properties qualified for tax deferral under Section 1031. The company had used a third-party facilitator to hold title to the replacement property, enabling the exchange to proceed without immediate recognition of gain. This decision reinforces the flexibility afforded to taxpayers in structuring exchanges, affirming the use of facilitators to park property in reverse exchanges.

    Parties

    Estate of George H. Bartell, Jr. , deceased, George David Bartell and Jean Louise Bartell Barber, co-personal representatives, and Estate of Elizabeth Bartell, deceased, George David Bartell and Jean Louise Bartell Barber, co-personal representatives, et al. (Petitioners) v. Commissioner of Internal Revenue (Respondent)

    Facts

    In 1999, Bartell Drug Co. (Bartell Drug), an S corporation owned by the petitioners, entered into an agreement to purchase the Lynnwood property from a third party, Mildred Horton. In anticipation of structuring a like-kind exchange under Section 1031 of the Internal Revenue Code (IRC), Bartell Drug assigned its rights under the purchase agreement to EPC Two, LLC (EPC Two), a single-purpose entity formed to facilitate the exchange. EPC Two purchased the Lynnwood property on August 1, 2000, with financing guaranteed by Bartell Drug. Bartell Drug managed the construction of a drugstore on the Lynnwood property using the loan proceeds and leased the property from EPC Two upon substantial completion of construction in June 2001. In late 2001, Bartell Drug contracted to sell its existing Everett property and assigned its rights in both the sale agreement and the agreement with EPC Two to Section 1031 Services, Inc. (SS), another qualified intermediary. SS sold the Everett property, applied the proceeds to acquire the Lynnwood property, and transferred title to Bartell Drug on December 31, 2001.

    Procedural History

    The IRS examined Bartell Drug’s 2001 corporate return and proposed adjustments disallowing tax deferral treatment under Section 1031. Petitioners contested this determination by filing petitions with the U. S. Tax Court. The Tax Court consolidated the cases for trial and issued its opinion on August 10, 2016, holding that the transaction qualified as a like-kind exchange under Section 1031.

    Issue(s)

    Whether Bartell Drug’s disposition of the Everett property and acquisition of the Lynnwood property in 2001 qualified for nonrecognition treatment under Section 1031 of the IRC as a like-kind exchange?

    Rule(s) of Law

    Section 1031 of the IRC allows taxpayers to defer recognition of gain or loss on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment. The essence of an exchange is the reciprocal transfer of property between owners, and a taxpayer cannot engage in an exchange with itself. Caselaw has afforded taxpayers significant latitude in structuring such exchanges, including the use of third-party facilitators to hold title to the replacement property.

    Holding

    The Tax Court held that Bartell Drug’s disposition of the Everett property and acquisition of the Lynnwood property in 2001 qualified for nonrecognition treatment under Section 1031 as a like-kind exchange, with EPC Two treated as the owner of the Lynnwood property during the period it held title.

    Reasoning

    The court’s reasoning centered on the application of existing caselaw to reverse exchanges. It relied on cases such as Alderson v. Commissioner and Biggs v. Commissioner, which established that a third-party exchange facilitator need not assume the benefits and burdens of ownership of the replacement property to be treated as its owner for Section 1031 purposes. The court rejected the IRS’s contention that EPC Two must have held the benefits and burdens of ownership to be considered the owner, emphasizing that the facilitator’s role was to hold bare legal title to facilitate the exchange. The court also noted that Bartell Drug’s temporary possession of the Lynnwood property under a lease from EPC Two did not preclude the transaction from qualifying as a like-kind exchange. The court recognized the flexibility historically afforded to taxpayers in structuring Section 1031 exchanges and concluded that the transaction at issue fell within this scope.

    Disposition

    The Tax Court entered decisions for the petitioners, affirming that the transaction qualified for nonrecognition treatment under Section 1031.

    Significance/Impact

    The Estate of Bartell decision is significant for its affirmation of the use of third-party facilitators in reverse like-kind exchanges, providing clarity and guidance on the treatment of such transactions under Section 1031. It underscores the lenient approach courts have historically taken toward taxpayers’ attempts to come within the terms of Section 1031, particularly in the context of reverse exchanges. This ruling may encourage taxpayers to structure similar transactions, using facilitators to hold title to replacement property, thereby facilitating tax-deferred exchanges. However, it also highlights the importance of distinguishing between transactions structured with facilitators from the outset and those retrofitted to appear as exchanges after outright purchases, which may not qualify for Section 1031 treatment.

  • Whistleblower 21276-13W v. Commissioner of Internal Revenue, 147 T.C. 121 (2016): Definition of ‘Collected Proceeds’ in Whistleblower Awards

    Whistleblower 21276-13W v. Commissioner of Internal Revenue, 147 T. C. 121 (2016)

    In a landmark decision, the U. S. Tax Court expanded the definition of ‘collected proceeds’ under I. R. C. sec. 7623(b) to include criminal fines and civil forfeitures, not just tax payments. This ruling significantly broadens the scope of whistleblower awards, potentially increasing the financial incentives for reporting tax evasion and fraud. It clarifies that whistleblowers can receive awards based on a percentage of all proceeds collected by the government, not limited to those collected under Title 26.

    Parties

    Whistleblower 21276-13W and Whistleblower 21277-13W, petitioners, v. Commissioner of Internal Revenue, respondent.

    Facts

    The petitioners, a husband and wife, sought whistleblower awards under I. R. C. sec. 7623(b) for information leading to the detection of tax underpayments and violations of internal revenue laws. The targeted taxpayer pleaded guilty to conspiring to defraud the IRS, file false Federal income tax returns, and evade Federal income tax, in violation of 18 U. S. C. sec. 371. The taxpayer paid $74,131,694 to the Government, consisting of tax restitution of $20,000,001, a criminal fine of $22,050,000, a civil forfeiture of $15,821,000 representing gross fees received from U. S. clients, and relinquishment of claims to $16,260,693 previously forfeited. The IRS Whistleblower Office initially rejected the petitioners’ claims as untimely, but the Tax Court held in a prior decision that the claims were timely and ordered the parties to resolve their differences. The parties agreed that the petitioners were eligible for an award of 24% of the collected proceeds, but disagreed on whether the criminal fine and civil forfeitures constituted ‘collected proceeds’ under sec. 7623(b).

    Procedural History

    The IRS Whistleblower Office initially denied the petitioners’ claims for awards, administratively closing their cases. The petitioners appealed to the U. S. Tax Court. In Whistleblower 21276-13W v. Commissioner, 144 T. C. 290 (2015), the court held that the claims were timely, ordered the parties to attempt resolution, and retained jurisdiction. The parties subsequently agreed that the petitioners were eligible for an award of 24% of the collected proceeds, but could not agree on the amount of collected proceeds. The court then issued a supplemental opinion to address the issue of what constitutes ‘collected proceeds’ under sec. 7623(b).

    Issue(s)

    Whether criminal fines and civil forfeitures paid by a taxpayer in connection with a violation of internal revenue laws constitute ‘collected proceeds’ for purposes of calculating a whistleblower award under I. R. C. sec. 7623(b)?

    Rule(s) of Law

    I. R. C. sec. 7623(b)(1) provides that if the Secretary proceeds with any administrative or judicial action based on information brought to the Secretary’s attention by an individual, the individual shall receive an award of at least 15% but not more than 30% of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action. The term ‘collected proceeds’ is not statutorily defined.

    Holding

    The U. S. Tax Court held that criminal fines and civil forfeitures paid by the taxpayer in connection with violations of internal revenue laws constitute ‘collected proceeds’ for purposes of calculating a whistleblower award under I. R. C. sec. 7623(b).

    Reasoning

    The court’s reasoning focused on statutory interpretation and the plain meaning of the term ‘collected proceeds’. The court noted that the language of sec. 7623(b)(1) is plain and expansive, using terms such as ‘any administrative or judicial action’, ‘any related actions’, and ‘any settlement in response to such action’. The court rejected the Commissioner’s argument that ‘collected proceeds’ should be limited to amounts collected under Title 26, holding that internal revenue laws are not limited to those codified in Title 26. The court cited examples of internal revenue laws found outside Title 26 and noted that the term ‘proceeds’ is broad and general. The court also distinguished between the discretionary award program under sec. 7623(a), which requires awards to be paid from collected proceeds, and the mandatory award program under sec. 7623(b), which uses collected proceeds only for calculating the award amount. The court concluded that criminal fines and civil forfeitures, being part of the total amount brought in by the Government as a result of the whistleblower’s information, constitute ‘collected proceeds’ under sec. 7623(b).

    Disposition

    The court awarded the petitioners $17,791,607, representing 24% of the total $74,131,694 paid by the taxpayer, including the tax restitution, criminal fine, and civil forfeitures.

    Significance/Impact

    This decision significantly expands the scope of whistleblower awards under I. R. C. sec. 7623(b) by including criminal fines and civil forfeitures in the definition of ‘collected proceeds’. It provides a strong incentive for whistleblowers to come forward with information about tax evasion and fraud, as they may now receive awards based on a broader range of government collections. The decision clarifies the distinction between the discretionary and mandatory whistleblower award programs and reaffirms the court’s commitment to interpreting statutory language according to its plain meaning. The ruling may lead to increased whistleblower activity and more aggressive enforcement of tax laws by the IRS.

  • Whistleblower 11099-13W v. Commissioner of Internal Revenue, 147 T.C. 110 (2016): Discovery and Relevance in Whistleblower Award Cases

    Whistleblower 11099-13W v. Commissioner of Internal Revenue, 147 T. C. 110 (2016)

    In a significant ruling, the U. S. Tax Court granted a whistleblower’s motion to compel the IRS to produce documents related to an investigation prompted by the whistleblower’s tip. The case clarifies the scope of discovery in whistleblower award disputes under I. R. C. sec. 7623, emphasizing the importance of relevance in determining the discoverability of documents. This decision impacts how whistleblower claims are pursued, highlighting the court’s role in ensuring access to necessary information for claim adjudication.

    Parties

    Whistleblower 11099-13W, as Petitioner, filed a petition for review against the Commissioner of Internal Revenue, as Respondent, in the United States Tax Court. The case was initiated in the Tax Court under Docket No. 11099-13W.

    Facts

    In year 1, the Petitioner filed a whistleblower claim with the IRS, alleging a tax evasion scheme (TES) by a target corporation and its affiliates, which involved manipulating inventory purchasing to artificially inflate the cost of goods sold due to the use of a last-in, first-out (LIFO) accounting method. The Petitioner was employed by a corporation affiliated with the target, which was involved in the commodities trading integral to the TES. The IRS acknowledged that the Petitioner’s claim identified a previously unknown issue and conducted an investigation into the target’s use of the TES. However, the IRS asserted that no adjustments were made to the target’s tax returns based on the Petitioner’s information. The IRS did make other adjustments to the target’s returns for the years in question, which resulted in the collection of additional taxes. The Petitioner argued that the information provided led to changes in the target’s inventory practices and increased tax payments.

    Procedural History

    The Petitioner filed a motion to compel the production of documents by the IRS, which had previously been ordered by the court on September 16, 2015. The IRS objected to the motion, primarily on the grounds of relevance. The court had previously ruled that the Commissioner could not unilaterally decide what constitutes an administrative record, and thus, the scope of discovery was broader than the IRS’s position. The court, in this case, granted the Petitioner’s motion to compel, finding that the requested documents were relevant to the whistleblower’s claim.

    Issue(s)

    Whether the requested documents, specifically the 31 information document requests (IDRs) and responses, are relevant and discoverable under the Tax Court’s rules of discovery in the context of a whistleblower’s claim under I. R. C. sec. 7623?

    Rule(s) of Law

    Under I. R. C. sec. 7623(b)(1), a whistleblower is entitled to an award if the IRS proceeds with an action based on information provided by the whistleblower. The IRS is deemed to have proceeded based on the whistleblower’s information when it “substantially contributes to an action against a person identified by the whistleblower. ” (26 C. F. R. sec. 301. 7623-2(b)(1)). The scope of discovery is governed by Tax Court Rule 70(b), which allows for the discovery of any matter not privileged and relevant to the subject matter involved in the pending case.

    Holding

    The U. S. Tax Court held that the IRS’s claim of lack of relevance presented an unsettled question of law regarding when the IRS proceeds on the basis of information provided by a whistleblower. The court determined that it would not resolve this legal question in the context of a discovery dispute and that the IRS had failed to carry its burden of showing that the requested documents were not relevant or discoverable. The court granted the Petitioner’s motion to compel production of the requested documents.

    Reasoning

    The court’s reasoning focused on the relevance of the requested documents in the context of the whistleblower’s claim. The court emphasized that relevance in discovery is broader than at trial and includes matters that are reasonably calculated to lead to the discovery of admissible evidence. The court rejected the IRS’s argument that the requested documents were not material because they did not directly relate to adjustments made based on the whistleblower’s specific allegations. The court noted that the Petitioner’s theory that the IRS’s investigation prompted changes in the target’s behavior, leading to increased tax payments, was a plausible interpretation of I. R. C. sec. 7623(b)(1). The court also considered the IRS’s failure to fully develop its legal argument regarding the meaning of “proceeds based on” and suggested that a motion for summary judgment would be the appropriate vehicle for resolving such legal questions. The court concluded that the IRS had not met its burden to show that the requested documents were not relevant or discoverable.

    Disposition

    The U. S. Tax Court granted the Petitioner’s motion to compel production of the requested documents, subject to the protective order governing pretrial discovery in the case.

    Significance/Impact

    This case is significant for its clarification of the scope of discovery in whistleblower award disputes under I. R. C. sec. 7623. It underscores the court’s role in ensuring that whistleblowers have access to necessary information to pursue their claims effectively. The decision also highlights the importance of relevance in discovery and the burden on the opposing party to show that requested documents are not discoverable. The ruling may encourage more robust discovery in whistleblower cases, potentially leading to increased transparency and accountability in the IRS’s handling of whistleblower claims. Furthermore, the case leaves open the interpretation of “proceeds based on” under I. R. C. sec. 7623(b)(1), which may be addressed in future litigation or regulatory guidance.

  • CGG Americas, Inc. v. Commissioner, 147 T.C. 78 (2016): Deductibility of Geological and Geophysical Expenses

    CGG Americas, Inc. v. Commissioner, 147 T. C. 78 (2016)

    In a significant ruling, the U. S. Tax Court held that geological and geophysical expenses incurred by CGG Americas, Inc. , a company that conducted marine surveys but did not own oil or gas interests, were deductible under I. R. C. section 167(h). The decision expands the scope of deductible expenses beyond traditional mineral interest owners, impacting how companies involved in oil and gas exploration can treat their costs for tax purposes.

    Parties

    CGG Americas, Inc. (Petitioner) v. Commissioner of Internal Revenue (Respondent). The case was heard in the U. S. Tax Court.

    Facts

    CGG Americas, Inc. (CGGA), a Texas corporation and a wholly owned subsidiary of a French company, conducted marine surveys of the outer continental shelf in the Gulf of Mexico during 2006 and 2007. These surveys utilized geophysical techniques, including seismic reflection, to detect or suggest the presence of oil and gas. CGGA licensed the data obtained from these surveys on a nonexclusive basis to customers, who were companies engaged in oil and gas exploration and development. The customers used the data to identify new exploration areas, determine the size and structure of oil and gas fields, plan development and production strategies, and decide where to drill wells. CGGA incurred various expenses, referred to as “survey expenses,” to conduct these surveys and process the data.

    Procedural History

    The Commissioner of Internal Revenue issued a notice of deficiency to CGGA, determining income-tax deficiencies for the tax years 2006 and 2007. CGGA filed a petition with the U. S. Tax Court seeking redetermination of these deficiencies. The parties stipulated facts and filed cross-motions for summary judgment. The Tax Court granted CGGA’s motion for summary judgment and denied the Commissioner’s cross-motion, holding that CGGA’s survey expenses were deductible under I. R. C. section 167(h).

    Issue(s)

    Whether geological and geophysical expenses incurred by a taxpayer that does not own mineral interests are deductible under I. R. C. section 167(h)?

    Whether expenses incurred by a taxpayer in connection with the exploration for, or development of, oil or gas by other taxpayers are deductible under I. R. C. section 167(h)?

    Rule(s) of Law

    I. R. C. section 167(h)(1) states: “Any geological and geophysical expenses paid or incurred in connection with the exploration for, or development of, oil or gas within the United States (as defined in section 638) shall be allowed as a deduction ratably over the 24-month period beginning on the date that such expense was paid or incurred. “

    Holding

    The Tax Court held that geological and geophysical expenses are not limited to expenses incurred by taxpayers that own mineral interests. Further, the court held that the survey expenses incurred by CGGA were deductible under I. R. C. section 167(h) because they were incurred in connection with the exploration for, or development of, oil or gas.

    Reasoning

    The court’s reasoning focused on the interpretation of the phrase “geological and geophysical expenses” in I. R. C. section 167(h). The Commissioner argued that these expenses were limited to those incurred by taxpayers owning mineral interests, based on historical judicial opinions and administrative rulings. However, the court found no clear limitation in these sources that would confine the phrase to mineral-interest owners. The court also considered legislative history, noting that while Congress may have primarily intended to benefit mineral-interest owners, the statutory text did not expressly limit the deduction to such owners. The court concluded that the absence of such a limitation, coupled with the legislative history’s equivocal nature, supported a broader interpretation of the phrase.

    Regarding the second issue, the court rejected the Commissioner’s argument that the expenses were not incurred in connection with CGGA’s own exploration activities. The court found that the survey expenses were integral to the oil and gas exploration process, even though the actual exploration was conducted by CGGA’s customers. The court reasoned that without CGGA’s surveys, the customers would have had to perform them, thus establishing a sufficient connection between the expenses and the exploration activities.

    The court’s decision was grounded in statutory interpretation, emphasizing the plain meaning of the statutory language and the lack of an express limitation to mineral-interest owners. The court also considered policy implications, noting that a broader interpretation would encourage exploration and development activities by allowing more companies to deduct their geological and geophysical expenses.

    Disposition

    The U. S. Tax Court granted CGGA’s motion for summary judgment and denied the Commissioner’s cross-motion for summary judgment. The court ordered that a decision be entered under Tax Court Rule of Practice & Procedure 155, reflecting the deductibility of CGGA’s survey expenses under I. R. C. section 167(h).

    Significance/Impact

    The decision in CGG Americas, Inc. v. Commissioner expands the scope of I. R. C. section 167(h) to include geological and geophysical expenses incurred by taxpayers who do not own mineral interests, as long as the expenses are connected to the exploration for, or development of, oil or gas. This ruling has significant implications for the oil and gas industry, as it allows companies involved in data acquisition and processing to deduct their expenses over a two-year period, potentially increasing investment in exploration activities. The case also highlights the importance of statutory interpretation in tax law, emphasizing that the absence of explicit limitations in the statutory text can lead to broader applications of tax provisions.

  • Green Gas Delaware Statutory Trust v. Commissioner of Internal Revenue, 147 T.C. 1 (2016): Eligibility and Substantiation of Nonconventional Source Fuel Credits under I.R.C. § 45K

    Green Gas Delaware Statutory Trust v. Commissioner of Internal Revenue, 147 T. C. 1 (2016) (United States Tax Court, 2016).

    The Tax Court ruled that Green Gas Delaware Statutory Trust and Pontiac Statutory Trust were ineligible for the majority of nonconventional source fuel credits under I. R. C. § 45K for 2005-2007, due to inadequate substantiation of landfill gas production and sales. The court clarified that untreated landfill gas qualifies as fuel, but the trusts failed to prove they had operational facilities capable of producing or selling the gas as required by law, and their documentation methods were deemed unreliable.

    Parties

    Green Gas Delaware Statutory Trust and Pontiac Statutory Trust (collectively, the Trusts) were the petitioners in this case. Methane Bio, LLC, served as the tax matters partner for Green Gas Delaware Statutory Trust, while Delaware Gas & Electric Inc. was the tax matters partner for Pontiac Statutory Trust. The Commissioner of Internal Revenue was the respondent.

    Facts

    The Trusts, formed under Delaware law, were involved in transactions purporting to produce and sell landfill gas (LFG) to Resource Technology Corp. (RTC), a related entity. Green Gas claimed credits under I. R. C. § 45K for LFG allegedly produced from 23 landfills in 2005, 2006, and 2007, while Pontiac Trust claimed credits for one landfill in 2006 and 2007. The Trusts entered into various agreements with RTC, including gas rights agreements (GRAs), gas sales agreements (GSAs), and operations and maintenance agreements (O&Ms), to facilitate the transactions. RTC faced financial distress and was under Chapter 7 bankruptcy by 2005, which impacted the Trusts’ operations and agreements.

    Procedural History

    The IRS issued Final Partnership Administrative Adjustments (FPAAs) to Green Gas for 2005, 2006, and 2007, and to Pontiac Trust for 2006 and 2007, disallowing the claimed fuel credits and imposing accuracy-related penalties under I. R. C. § 6662. The Trusts filed petitions in the U. S. Tax Court seeking redetermination of these adjustments. The cases were consolidated for trial, briefing, and opinion. The court denied the Trusts’ motion to shift the burden of proof to the Commissioner.

    Issue(s)

    Whether the Trusts are entitled to nonconventional source fuel credits under I. R. C. § 45K for the years in question, and whether they are liable for accuracy-related penalties under I. R. C. § 6662?

    Rule(s) of Law

    I. R. C. § 45K provides a credit for the production and sale of qualified fuels, such as gas produced from biomass, to an unrelated person. The facility producing the fuel must have been placed in service before July 1, 1998. The taxpayer must substantiate the production and sale of the qualified fuel to claim the credit. I. R. C. § 6662 imposes a penalty for substantial understatement of income tax or negligence.

    Holding

    The court held that the Trusts were not entitled to the nonconventional source fuel credits for the majority of the landfills due to insufficient substantiation of LFG production and sales, and because they lacked the requisite rights in the facilities during the relevant periods. The court also upheld the accuracy-related penalties under I. R. C. § 6662.

    Reasoning

    The court analyzed the statutory requirements for the nonconventional source fuel credit, including the definitions of “qualified fuel,” “facility for producing qualified fuels,” and “placed in service. ” It determined that untreated landfill gas qualifies as fuel under § 45K, but the Trusts failed to establish that they had operational facilities capable of producing or selling LFG during the relevant periods. The court rejected the Trusts’ substantiation methods, including site visit logs, mathematical models, and equipment ratings, finding them unreliable. The court also found that the Trusts did not have the requisite legal rights in the facilities to claim the credits, especially after certain landfills were affected by RTC’s bankruptcy proceedings. The Trusts’ failure to keep adequate records and substantiate their claims led to the imposition of accuracy-related penalties.

    Disposition

    The court sustained the Commissioner’s determinations in the FPAAs, denying the Trusts’ claims for nonconventional source fuel credits and upholding the accuracy-related penalties.

    Significance/Impact

    This case clarifies the requirements for claiming nonconventional source fuel credits under I. R. C. § 45K, emphasizing the need for taxpayers to substantiate both the production and sale of qualified fuels and to have the requisite legal rights in the facilities. It also underscores the importance of maintaining adequate records to avoid penalties for negligence or substantial understatement of income tax. The decision may impact future cases involving similar tax credit schemes and the interpretation of “qualified fuel” and “facility for producing qualified fuels. “

  • Guralnik v. Commissioner, 146 T.C. 230 (2016): Computation of Time for Filing in Tax Court

    Guralnik v. Commissioner, 146 T. C. 230 (2016)

    In Guralnik v. Commissioner, the U. S. Tax Court ruled that a petition filed one day late due to a snowstorm-induced closure of the court was timely under the principles of Federal Rule of Civil Procedure 6(a)(3). This decision clarified how to compute filing deadlines when the court is inaccessible, ensuring that taxpayers are not unfairly penalized by circumstances beyond their control.

    Parties

    Felix Guralnik, Petitioner, v. Commissioner of Internal Revenue, Respondent. Guralnik was the petitioner at both the trial and appeal stages, while the Commissioner of Internal Revenue was the respondent throughout the litigation.

    Facts

    On January 16, 2015, the Commissioner of Internal Revenue mailed a Notice of Determination Concerning Collection Action(s) to Felix Guralnik regarding his outstanding federal income tax liabilities for 2003 and 2005. The notice informed Guralnik that he had 30 days to file a petition with the U. S. Tax Court to challenge the determination. Guralnik mailed his petition via Federal Express First Overnight service on February 13, 2015. The last day for timely filing was February 17, 2015, which coincided with a closure of all federal government offices in Washington, D. C. , including the Tax Court, due to Winter Storm Octavia. Guralnik’s petition was delivered and filed on February 18, 2015, the next day the court was open.

    Procedural History

    The Commissioner moved to dismiss Guralnik’s case for lack of jurisdiction, arguing that the petition was filed outside the 30-day period mandated by I. R. C. § 6330(d)(1). The case was assigned to a Special Trial Judge, who recommended denying the motion to dismiss. The Commissioner objected to the recommendation but did not challenge the factual findings. Guralnik and an amicus curiae supported the recommendation and advanced additional legal theories to sustain jurisdiction. The Tax Court reviewed these arguments and issued a final ruling.

    Issue(s)

    Whether the petition filed by Felix Guralnik on February 18, 2015, was timely under I. R. C. § 6330(d)(1) when the Tax Court was closed due to Winter Storm Octavia on the last day of the filing period?

    Rule(s) of Law

    The 30-day filing period prescribed by I. R. C. § 6330(d)(1) is jurisdictional and cannot be equitably tolled. I. R. C. § 7502 provides a “timely mailed, timely filed” rule for documents sent via U. S. mail or certain designated private delivery services. I. R. C. § 7503 extends filing deadlines when the last day falls on a Saturday, Sunday, or legal holiday. Fed. R. Civ. P. 6(a)(3)(A) extends the filing deadline to the next accessible day if the clerk’s office is inaccessible on the last day for filing.

    Holding

    The U. S. Tax Court held that Guralnik’s petition was timely filed on February 18, 2015, because the court was inaccessible due to Winter Storm Octavia on February 17, 2015, the last day of the filing period. The court applied the principle from Fed. R. Civ. P. 6(a)(3)(A), extending the filing deadline to the next accessible day that was not a Saturday, Sunday, or legal holiday.

    Reasoning

    The court rejected the arguments for equitable tolling and the application of the “timely mailed, timely filed” rule under I. R. C. § 7502 because Federal Express First Overnight service was not a designated delivery service at the time of mailing. The court also found that I. R. C. § 7503 did not apply because the closure due to the snowstorm was not considered a “legal holiday. ” However, the court adopted the principle from Fed. R. Civ. P. 6(a)(3)(A) under the authority of Tax Court Rule 1(b), which allows the court to prescribe procedure by giving weight to the Federal Rules of Civil Procedure when there is no applicable rule of procedure. The court reasoned that this rule was “suitably adaptable” to the situation at hand, ensuring that litigants are not penalized for the court’s closure due to unforeseen circumstances. The court’s decision was supported by the fact that similar principles had been adopted by other federal courts and were consistent with the court’s prior practice of filling procedural gaps with analogous civil rules.

    Disposition

    The court denied the Commissioner’s motion to dismiss for lack of jurisdiction, ruling that Guralnik’s petition was timely filed on February 18, 2015.

    Significance/Impact

    This case establishes a precedent for computing filing deadlines when the Tax Court is inaccessible due to weather or other unforeseen events. It ensures that taxpayers are not unfairly penalized by circumstances beyond their control, such as government closures. The ruling clarifies the application of Fed. R. Civ. P. 6(a)(3)(A) in the context of Tax Court procedures, potentially affecting future cases where similar issues arise. It also reinforces the Tax Court’s authority to adopt principles from the Federal Rules of Civil Procedure to fill procedural gaps, which could influence the development of Tax Court rules and practices.