SCOTUS Reports

Tag: 2022

  • DelPonte v. Commissioner, 158 T.C. No. 7 (2022): Authority of IRS Chief Counsel in Innocent Spouse Relief Cases

    DelPonte v. Commissioner, 158 T. C. No. 7 (U. S. Tax Ct. 2022)

    In DelPonte v. Commissioner, the U. S. Tax Court clarified that the IRS Chief Counsel has final authority over innocent spouse relief claims raised for the first time in deficiency proceedings. Michelle DelPonte sought relief from joint tax liabilities from returns filed with her ex-husband, but the court denied her motion for decision based on a favorable determination by the IRS’s Cincinnati Centralized Innocent Spouse Operation (CCISO), ruling that Chief Counsel’s attorneys have the discretion to concede or settle such issues.

    Parties

    Michelle DelPonte, Petitioner, represented by Alvah Lavar Taylor, Jonathan T. Amitrano, and Lisa O. Nelson. Commissioner of Internal Revenue, Respondent, represented by Benjamin R. Poor and Paul Colleran.

    Facts

    Michelle DelPonte and William Goddard were married and filed joint tax returns for the years 1999, 2000, and 2001. During their marriage, Goddard, a lawyer, was involved in aggressive tax-avoidance schemes, leading to IRS notices of deficiency for those years. DelPonte was unaware of these deficiencies until 2010, as Goddard had filed petitions on her behalf without her knowledge, asserting innocent-spouse relief under I. R. C. § 6015. DelPonte subsequently ratified these petitions and sought innocent-spouse relief. The IRS’s Cincinnati Centralized Innocent Spouse Operation (CCISO) concluded she was eligible for relief under § 6015(c). However, the Office of Chief Counsel requested further information and did not accept CCISO’s determination, prompting DelPonte to move for entry of decision based on CCISO’s favorable determination.

    Procedural History

    Goddard filed petitions on DelPonte’s behalf in response to IRS notices of deficiency for the tax years 1999, 2000, and 2001, asserting innocent-spouse relief. DelPonte became aware of these proceedings in 2010, ratified the petitions, and sought relief under § 6015. The Office of Chief Counsel referred her request to CCISO, which determined she was entitled to relief under § 6015(c). Despite this, the Chief Counsel’s office sought additional information and did not concede the issue. DelPonte moved for entry of decision based on CCISO’s determination, but the Tax Court treated this as a motion for partial summary judgment on the issue of her entitlement to § 6015(c) relief.

    Issue(s)

    Whether the IRS Chief Counsel has final authority to concede or settle innocent-spouse relief claims raised as an affirmative defense for the first time in a deficiency proceeding.

    Rule(s) of Law

    The Commissioner of Internal Revenue has broad powers to administer the internal revenue laws, including making determinations about innocent-spouse relief under I. R. C. § 6015. The Chief Counsel is authorized to represent the Commissioner in cases before the Tax Court and has the discretion to decide whether and how to defend, prosecute, settle, or abandon claims or defenses in Tax Court proceedings. See I. R. C. § 7803; General Counsel Order No. 4; IRM 30. 2. 2-. 6.

    Holding

    The Tax Court held that where innocent-spouse relief is raised as an affirmative defense for the first time in a deficiency proceeding, the IRS Chief Counsel’s attorneys have final authority to concede or settle the issue with the petitioner. DelPonte’s motion for entry of decision was denied.

    Reasoning

    The court’s reasoning was based on the statutory and regulatory framework governing the roles of the Commissioner and the Chief Counsel. The court noted that the Chief Counsel has the authority to make litigation decisions, including whether to concede or settle claims in Tax Court cases. The court reviewed the delegation of authority from the Commissioner to CCISO and from the Chief Counsel to his attorneys, concluding that the Chief Counsel’s attorneys have the discretion to accept or reject CCISO’s determinations in deficiency cases. The court also considered DelPonte’s arguments regarding fairness and horizontal equity but found them unpersuasive, as the statutory scheme did not support such an interpretation. The court emphasized that the Chief Counsel’s authority to make litigation decisions was consistent with the historical practice of handling innocent-spouse claims in deficiency proceedings.

    Disposition

    The Tax Court denied DelPonte’s motion for entry of decision, affirming the authority of the Chief Counsel’s attorneys to make final determinations regarding innocent-spouse relief claims in deficiency proceedings.

    Significance/Impact

    DelPonte v. Commissioner clarifies the authority of the IRS Chief Counsel in handling innocent-spouse relief claims in deficiency proceedings. The decision underscores the discretion of Chief Counsel’s attorneys to make final litigation decisions, which can impact the outcome of such claims. This ruling may affect how taxpayers approach innocent-spouse relief in deficiency cases, as it emphasizes the importance of engaging with the Chief Counsel’s office rather than relying solely on determinations made by other IRS units like CCISO. The case also highlights the procedural differences in seeking innocent-spouse relief across different IRS processes, potentially influencing future legislative or regulatory changes to ensure more equitable treatment of taxpayers seeking relief.

  • DelPonte v. Commissioner, 158 T.C. No. 7 (2022): Authority of IRS Counsel in Innocent Spouse Relief

    DelPonte v. Commissioner, 158 T. C. No. 7 (2022)

    In DelPonte v. Commissioner, the U. S. Tax Court ruled that IRS Chief Counsel retains the authority to concede or settle innocent-spouse relief claims raised as an affirmative defense in deficiency proceedings, not the IRS’s Cincinnati Centralized Innocent Spouse Operation (CCISO). This decision clarifies the roles within the IRS regarding innocent-spouse relief when it is first raised in Tax Court, impacting how such claims are processed and potentially resolved.

    Parties

    Michelle DelPonte, the petitioner, sought innocent-spouse relief in deficiency proceedings against the Commissioner of Internal Revenue, the respondent. DelPonte was the petitioner throughout the litigation in the Tax Court.

    Facts

    Michelle DelPonte, formerly Michelle Goddard, was married to William Goddard. During their marriage, they filed joint tax returns for the years 1999, 2000, and 2001. Goddard, a lawyer, engaged in tax-avoidance schemes with his business partner David Greenberg, leading to IRS notices of deficiency issued to the couple. DelPonte was unaware of these notices until November 2010. Goddard had filed petitions on her behalf, claiming innocent-spouse relief under I. R. C. § 6015(c), without her knowledge. Upon discovering the litigation, DelPonte hired her own legal representation and ratified the petitions. The IRS’s Cincinnati Centralized Innocent Spouse Operation (CCISO) reviewed DelPonte’s request for relief and determined she was entitled to it. However, the IRS’s Chief Counsel sought further information and did not accept CCISO’s determination, prompting DelPonte to move for entry of decision granting her relief.

    Procedural History

    DelPonte’s case began with deficiency notices issued to her and Goddard for the tax years in question. Goddard filed petitions on her behalf, asserting innocent-spouse relief. DelPonte later ratified these petitions. The IRS referred her claim to CCISO, which concluded she was entitled to relief under § 6015(c). Despite this, the IRS Chief Counsel sought additional information and did not adopt CCISO’s conclusion. DelPonte then moved for entry of decision in her favor based on CCISO’s determination. The Tax Court treated this motion as one for partial summary judgment.

    Issue(s)

    Whether the IRS Chief Counsel has the authority to concede or settle an innocent-spouse relief claim raised as an affirmative defense in a deficiency proceeding, or whether such authority lies with the Cincinnati Centralized Innocent Spouse Operation (CCISO).

    Rule(s) of Law

    The Commissioner of Internal Revenue, through delegation to the Chief Counsel, has the authority to administer and enforce internal revenue laws, including making determinations about innocent-spouse relief under I. R. C. § 6015. The Chief Counsel Notice CC-2009-021 instructs attorneys to request CCISO’s determination on innocent-spouse relief claims raised for the first time in deficiency proceedings, but such determinations are advisory, not binding.

    Holding

    The Tax Court held that the IRS Chief Counsel has the authority to concede or settle innocent-spouse relief claims raised as an affirmative defense in deficiency proceedings, and that CCISO’s determinations are not binding on the Chief Counsel.

    Reasoning

    The court’s reasoning centered on the statutory and regulatory framework governing the IRS’s authority. The court noted that the Commissioner’s broad powers to administer the tax laws are delegated to the Chief Counsel in cases pending before the Tax Court. The court reviewed the history of innocent-spouse relief, noting that such claims have been raised as defenses in deficiency proceedings long before the current administrative processes were established. The court analyzed Chief Counsel Notices and the Internal Revenue Manual (IRM), concluding that while CCISO provides determinations on innocent-spouse relief, these are advisory in nature when the claim is first raised in a deficiency case. The court rejected DelPonte’s argument that principles of fairness required CCISO’s determinations to be binding, stating that the statutory scheme clearly allocates authority to the Chief Counsel in such litigation contexts. The court also considered and dismissed the possibility that Chief Counsel Notice CC-2009-021 constituted a redelegation of authority to CCISO, as CCISO is not within the Office of the Chief Counsel. The court’s decision emphasized the distinction between administrative determinations and litigation decisions, affirming the Chief Counsel’s discretion in the latter.

    Disposition

    The Tax Court denied DelPonte’s motion for entry of decision, affirming the Chief Counsel’s authority to decide whether to concede or settle her innocent-spouse relief claim.

    Significance/Impact

    This case clarifies the delineation of authority within the IRS regarding innocent-spouse relief claims raised in deficiency proceedings. It reinforces the Chief Counsel’s role in litigation decisions, potentially affecting how taxpayers approach such claims and the procedural steps they must follow. The decision may influence future cases where innocent-spouse relief is sought in deficiency proceedings, emphasizing the need for taxpayers to engage with the Chief Counsel directly when such relief is contested. The ruling also highlights the advisory nature of CCISO’s role in deficiency cases, which could impact the strategic considerations of both taxpayers and IRS attorneys in handling these claims.

  • DelPonte v. Commissioner, 158 T.C. No. 7 (2022): Authority of IRS Counsel in Innocent Spouse Relief Claims

    DelPonte v. Commissioner, 158 T. C. No. 7 (2022)

    In DelPonte v. Commissioner, the U. S. Tax Court clarified the authority of IRS counsel in handling innocent-spouse relief claims raised as affirmative defenses in deficiency proceedings. The court ruled that IRS counsel retains final authority to settle or litigate such claims, even after the Cincinnati Centralized Innocent Spouse Operation (CCISO) recommends relief. This decision underscores the procedural distinctions between different avenues for seeking innocent-spouse relief and their implications for taxpayers.

    Parties

    Michelle DelPonte, as Petitioner, sought innocent-spouse relief from joint tax liabilities with her ex-husband, William Goddard. The Commissioner of Internal Revenue, as Respondent, contested the relief through IRS counsel.

    Facts

    Michelle DelPonte and William Goddard, who were married, filed joint tax returns for the years 1999, 2000, and 2001. During their marriage, Goddard engaged in aggressive tax-avoidance strategies, leading to IRS notices of deficiency for those years. DelPonte was unaware of these deficiencies until 2010, despite Goddard filing petitions on her behalf asserting innocent-spouse relief under I. R. C. § 6015. In April 2011, DelPonte’s claim for innocent-spouse relief was referred by IRS Chief Counsel to CCISO, which concluded she was entitled to relief under § 6015(c). However, IRS counsel sought additional information before making a final determination, which DelPonte refused to provide, instead moving for entry of decision granting her relief.

    Procedural History

    DelPonte’s case was part of a larger set of deficiency proceedings involving Goddard and his business partner, David Greenberg. The Tax Court bifurcated the litigation in 2010 to first address the deficiency amounts and then DelPonte’s innocent-spouse relief. In May 2018, the Tax Court upheld the deficiencies but severed DelPonte’s cases in January 2020. DelPonte moved for entry of decision based on CCISO’s recommendation, which the court treated as a motion for partial summary judgment.

    Issue(s)

    Whether IRS counsel has final authority to concede or settle innocent-spouse relief claims raised as affirmative defenses in deficiency proceedings, or whether such authority resides with CCISO.

    Rule(s) of Law

    The Internal Revenue Code § 7803(b)(2)(D) grants the Chief Counsel authority to represent the Commissioner in cases before the Tax Court, including the power to decide whether to defend, settle, or abandon claims. IRS delegation orders and the Internal Revenue Manual (IRM) outline the procedures for handling innocent-spouse relief claims in different contexts.

    Holding

    The Tax Court held that in deficiency proceedings where innocent-spouse relief is raised as an affirmative defense, IRS counsel retains final authority to concede or settle the issue with the petitioner, not CCISO.

    Reasoning

    The court reasoned that the statutory framework and delegation orders grant IRS counsel the power to make litigation decisions in Tax Court proceedings. The court analyzed the history of innocent-spouse relief and the different procedural paths available to taxpayers, noting that requests raised in deficiency cases are part of the court’s broader jurisdiction to redetermine deficiencies. The court interpreted Chief Counsel notices and the IRM, concluding that CCISO’s role in such cases is advisory, and IRS counsel retains discretion to adopt or reject CCISO’s recommendations. The court rejected DelPonte’s arguments based on fairness, stating that it could not alter the statutory scheme to ensure equal treatment across different relief paths.

    Disposition

    The Tax Court denied DelPonte’s motion for entry of decision, affirming that IRS counsel has the final authority to handle innocent-spouse relief claims in deficiency proceedings.

    Significance/Impact

    DelPonte v. Commissioner clarifies the procedural roles within the IRS concerning innocent-spouse relief in deficiency cases. The decision may impact how taxpayers approach their relief strategies, particularly those who first seek relief in deficiency proceedings. It reinforces the importance of understanding the procedural nuances of seeking relief under different IRS mechanisms and could influence future legislative or regulatory adjustments to ensure more equitable treatment across all innocent-spouse relief pathways.

  • Bats Global Markets Holdings, Inc. v. Commissioner, 158 T.C. No. 5 (2022): Domestic Production Gross Receipts under I.R.C. § 199

    Bats Global Markets Holdings, Inc. v. Commissioner, 158 T. C. No. 5 (2022)

    The U. S. Tax Court ruled that Bats Global Markets Holdings, Inc. could not claim transaction, routing, and logical port fees as domestic production gross receipts (DPGR) under I. R. C. § 199. The court determined these fees were derived from services rather than direct use of software, thus not qualifying for the deduction. This decision clarifies the scope of DPGR, impacting how software-related services are treated for tax purposes.

    Parties

    Bats Global Markets Holdings, Inc. and its subsidiaries (Petitioner) v. Commissioner of Internal Revenue (Respondent). Bats Global Markets Holdings, Inc. was the petitioner throughout the litigation in the United States Tax Court.

    Facts

    Bats Global Markets Holdings, Inc. (Bats Global), a Delaware corporation, operated national securities exchanges and developed proprietary computer software for these exchanges. Bats Global charged customers fees for transaction execution, routing to external markets, and logical port connectivity. These fees, collectively referred to as the Fees, were claimed as domestic production gross receipts (DPGR) for the purpose of calculating deductions under I. R. C. § 199 for the tax years 2011-2013. The Commissioner of Internal Revenue determined that none of these fees qualified as DPGR.

    Procedural History

    The Commissioner issued a notice of deficiency to Bats Global, determining deficiencies for the tax years 2011, 2012, and 2013. Bats Global timely sought redetermination in the U. S. Tax Court. After concessions by Bats Global regarding certain fees, the remaining issue was whether the Fees qualified as DPGR. The case proceeded to trial, and the Tax Court issued its opinion on March 31, 2022, under a de novo standard of review.

    Issue(s)

    Whether the Fees charged by Bats Global for transaction execution, routing to external markets, and logical port connectivity qualify as domestic production gross receipts (DPGR) under I. R. C. § 199 and Treasury Regulation § 1. 199-3(i)(6)(iii)?

    Rule(s) of Law

    Under I. R. C. § 199, a taxpayer may claim a deduction based on domestic production gross receipts (DPGR), which includes gross receipts derived from the disposition of qualifying production property (QPP), such as computer software, manufactured, produced, grown, or extracted by the taxpayer in the United States. Treasury Regulation § 1. 199-3(i)(6)(iii) provides that gross receipts derived from providing customers access to computer software for direct use while connected to the internet or other networks are treated as DPGR if the taxpayer or a third party derives gross receipts from the disposition of the same or substantially identical software in a tangible medium or by download.

    Holding

    The Tax Court held that Bats Global’s Fees do not qualify as DPGR under Treasury Regulation § 1. 199-3(i)(6)(iii) because they were derived from services provided to customers rather than from providing customers direct access to computer software for their use. Additionally, the court found that Bats Global did not meet the third-party comparable exception under Treasury Regulation § 1. 199-3(i)(6)(iii)(B), as the software offered by third parties was not substantially identical to Bats Global’s software.

    Reasoning

    The court analyzed the nature of the Fees and found that they were payments for services related to trade execution, routing, and connectivity rather than for the direct use of software by customers. The court emphasized that the logical port fees provided connectivity to the exchanges, the routing fees were for services performed by Bats Trading, Inc. , and the transaction fees were for trade execution services. The court rejected Bats Global’s argument that these fees were derived from the use of its trading software, as customers did not directly use this software but rather interacted with the exchanges through it.

    The court also considered whether Bats Global met the third-party comparable exception. To qualify, a third party must derive gross receipts from the disposition of substantially identical software. The court determined that the software offered by third parties (e. g. , NYSE Technologies, Cinnober, and MillenniumIT) was not substantially identical to Bats Global’s software because it was used to operate exchanges, whereas Bats Global’s customers used the software to trade on the exchanges. The court interpreted “substantially identical” to mean software that achieves the same functional result from a customer’s perspective and has a significant overlap of features or purpose.

    The court’s interpretation was guided by the plain meaning of the regulation and the specific context of the third-party comparable exception. The court also considered the regulatory examples and the safe harbor for computer software games, which did not apply to Bats Global’s situation. The court concluded that the Fees were not eligible for the DPGR deduction because they were derived from services, and Bats Global did not meet the requirements for the third-party comparable exception.

    Disposition

    The Tax Court’s decision was entered under Rule 155, meaning the court ruled against Bats Global’s claim that the Fees qualified as DPGR, and the case was closed with instructions for the parties to compute the tax liability based on the court’s findings.

    Significance/Impact

    The decision in Bats Global Markets Holdings, Inc. v. Commissioner clarifies the scope of DPGR under I. R. C. § 199 and the application of Treasury Regulation § 1. 199-3(i)(6)(iii). It emphasizes that for fees to qualify as DPGR, they must be derived from the direct use of software by customers, not merely from services facilitated by software. This ruling impacts how companies that use software to provide services, particularly in regulated industries like securities exchanges, can claim deductions under § 199. The decision also provides guidance on the interpretation of “substantially identical software” under the third-party comparable exception, which may influence future cases involving software-related deductions. Subsequent courts and taxpayers will likely refer to this case when determining the eligibility of fees for DPGR status.

  • Gina C. Lewis v. Commissioner of Internal Revenue, 158 T.C. No. 3 (2022): Qualified Offers and Innocent Spouse Relief Under I.R.C. §§ 7430 and 6015

    Gina C. Lewis v. Commissioner of Internal Revenue, 158 T. C. No. 3 (U. S. Tax Court 2022)

    In a ruling on litigation costs under I. R. C. § 7430, the U. S. Tax Court clarified that a qualified offer must fully resolve a taxpayer’s liability without reservations. Gina Lewis’s offer, which conceded tax and penalties but reserved the right to claim innocent spouse relief under I. R. C. § 6015, was deemed not a qualified offer. Consequently, the court denied her request for litigation costs, emphasizing the need for clarity in offers and the substantial justification of the IRS’s position.

    Parties

    Gina C. Lewis, the Petitioner, filed a petition against the Commissioner of Internal Revenue, the Respondent, in the U. S. Tax Court. Throughout the litigation, Lewis was represented by Steve Milgrom, and the Commissioner was represented by Vincent A. Gonzalez and Emma S. Warner.

    Facts

    Gina C. Lewis and her former spouse, Tim S. Lewis, filed joint federal income tax returns for the tax years 2008, 2009, and 2010. The IRS audited these returns and proposed adjustments and penalties. On December 28, 2016, Lewis submitted a letter to the IRS, designating it as a qualified offer under I. R. C. § 7430(g). In this offer, she conceded 100% of the tax and penalties proposed by the IRS but reserved the right to claim relief from joint and several liability under I. R. C. § 6015. The IRS did not accept Lewis’s offer and later issued a notice of deficiency. Lewis filed a petition in the Tax Court claiming relief under I. R. C. § 6015. Despite Lewis not providing the required Form 8857 or other documentation to support her claim for innocent spouse relief, the Commissioner eventually conceded that Lewis was entitled to relief under I. R. C. § 6015(c) after settling with Tim S. Lewis. Lewis objected to the Commissioner’s motion for entry of decision, arguing it was a tactic to avoid an award of litigation costs. She subsequently moved for litigation costs under I. R. C. § 7430.

    Procedural History

    After the IRS audit and issuance of a notice of deficiency for the tax years 2008, 2009, and 2010, Gina C. Lewis filed a timely petition in the U. S. Tax Court. In her amended petition, she elected benefits under I. R. C. § 6015(b) and (c). The Commissioner responded by indicating that he would review her request for innocent spouse relief. Despite requests from the Commissioner, Lewis did not provide Form 8857 or supporting documentation. After settling with Tim S. Lewis, the Commissioner conceded that Gina C. Lewis was entitled to relief under I. R. C. § 6015(c) and moved for entry of decision reflecting no liabilities for the years in issue. Lewis objected to this motion and moved for litigation costs under I. R. C. § 7430. The Tax Court denied her motion for litigation costs.

    Issue(s)

    Whether an offer that reserves the right to claim relief from joint and several liability under I. R. C. § 6015 qualifies as a “qualified offer” under I. R. C. § 7430(g)(1)(B)?

    Whether the Commissioner’s position in the proceeding was substantially justified under I. R. C. § 7430(c)(4)(B)(i)?

    Rule(s) of Law

    Under I. R. C. § 7430(g)(1), a qualified offer must be a written offer made during the qualified offer period, specify the offered amount of the taxpayer’s liability (determined without regard to interest), be designated as a qualified offer, and remain open for a specified period. Treasury Regulation § 301. 7430-7(c)(3) further requires that the specified amount must be an amount that, if accepted, would fully resolve the taxpayer’s liability for the type and years at issue. I. R. C. § 6015 provides relief from joint and several liability for spouses filing joint returns, allowing relief from the underlying tax liability, not just collection.

    Holding

    The U. S. Tax Court held that Gina C. Lewis’s offer was not a qualified offer under I. R. C. § 7430(g)(1)(B) because it reserved the right to claim relief under I. R. C. § 6015, failing to specify an amount that would fully resolve her liability. Additionally, the court held that the Commissioner’s position was substantially justified under I. R. C. § 7430(c)(4)(B)(i) due to Lewis’s failure to provide the required documentation for innocent spouse relief.

    Reasoning

    The court reasoned that Lewis’s offer did not meet the requirements of a qualified offer because it did not specify the offered amount of her liability as required by I. R. C. § 7430(g)(1)(B) and Treasury Regulation § 301. 7430-7(c)(3). The court emphasized that I. R. C. § 6015 provides relief from liability, not just collection, and thus Lewis’s reservation of the right to claim such relief affected her liability. The court rejected Lewis’s argument that her offer should be considered without regard to the potential application of I. R. C. § 6015, noting that her offer explicitly reserved the right to claim relief under this section. The court also found that the Commissioner’s position was substantially justified because Lewis did not provide the required Form 8857 or other documentation to support her claim for innocent spouse relief, and the Commissioner’s ultimate concession was based on a settlement with Lewis’s former spouse, not on documentation provided by Lewis.

    Disposition

    The U. S. Tax Court denied Gina C. Lewis’s motion for litigation costs under I. R. C. § 7430.

    Significance/Impact

    This decision clarifies the requirements for a qualified offer under I. R. C. § 7430(g), emphasizing that such an offer must fully resolve the taxpayer’s liability without reservations. It also underscores the importance of providing necessary documentation when seeking innocent spouse relief under I. R. C. § 6015. The ruling impacts how taxpayers structure their offers to the IRS and highlights the Commissioner’s discretion to require documentation before making a determination on innocent spouse relief. The decision may influence future litigation involving qualified offers and innocent spouse relief, reinforcing the need for clear and comprehensive offers in tax disputes.

  • Estate of Marion Levine v. Commissioner, 158 T.C. No. 2 (2022): Split-Dollar Life Insurance and Estate Tax Valuation

    Estate of Marion Levine v. Commissioner, 158 T. C. No. 2 (2022)

    The U. S. Tax Court ruled that the cash surrender values of life insurance policies funded through a split-dollar arrangement were not includible in the decedent’s estate. The court held that the estate’s valuation of the split-dollar receivable, rather than the policies’ cash values, was correct under sections 2036, 2038, and 2703 of the Internal Revenue Code, due to the fiduciary duties of the investment committee member and the absence of restrictions on the receivable itself.

    Parties

    The petitioner was the Estate of Marion Levine, with Robert L. Larson serving as the personal representative. The respondent was the Commissioner of Internal Revenue.

    Facts

    Marion Levine, before her death in 2009, entered into a split-dollar life insurance arrangement. Her revocable trust paid premiums for life insurance policies on the lives of her daughter Nancy and son-in-law Larry, held by an irrevocable trust (the Insurance Trust). The Insurance Trust’s beneficiaries were Levine’s children and grandchildren. The arrangement stipulated that Levine’s revocable trust had the right to receive the greater of the total premiums paid or the cash surrender value of the policies upon termination or the death of the insureds. Bob Larson, a family friend and business associate, was the sole member of the investment committee managing the irrevocable trust. Levine’s children, Nancy and Robert, and Larson also served as attorneys-in-fact under her power of attorney.

    Procedural History

    The IRS audited Levine’s estate and issued a notice of deficiency, asserting that the estate’s reported value of the split-dollar receivable was too low. The Commissioner argued that the cash surrender value of the insurance policies should be included in the estate’s valuation. The case was heard by the U. S. Tax Court, with the parties stipulating that the fair market value of the split-dollar receivable was $2,282,195 if the estate prevailed. The court focused on the applicability of sections 2036, 2038, and 2703 of the Internal Revenue Code.

    Issue(s)

    Whether the cash surrender value of the life insurance policies held by the Insurance Trust should be included in Levine’s gross estate under sections 2036(a), 2038(a)(1), or 2703 of the Internal Revenue Code?

    Rule(s) of Law

    Sections 2036(a) and 2038(a)(1) of the Internal Revenue Code include in a decedent’s gross estate the value of any transferred property if the decedent retained certain rights or powers over it. Section 2036(a)(1) applies if the decedent retained possession or enjoyment of, or the right to income from, the property. Section 2036(a)(2) applies if the decedent retained the right, alone or with others, to designate who shall possess or enjoy the property or its income. Section 2038(a)(1) applies if the decedent retained the power, alone or with others, to alter, amend, revoke, or terminate the enjoyment of the property. Section 2703 requires property to be valued without regard to certain options, agreements, or restrictions. The regulations under section 1. 61-22 govern the tax consequences of split-dollar life insurance arrangements.

    Holding

    The Tax Court held that the cash surrender values of the life insurance policies were not includible in Levine’s gross estate under sections 2036(a), 2038(a)(1), or 2703. The court found that Levine did not retain any rights to the policies themselves and that the split-dollar receivable, valued at $2,282,195, was the only asset to be included in her estate.

    Reasoning

    The court’s reasoning focused on the specific terms of the split-dollar arrangement and the fiduciary duties of Larson as the sole member of the investment committee. The court rejected the Commissioner’s argument that Levine retained rights to the cash surrender value of the policies under sections 2036(a) and 2038(a)(1), as only the Insurance Trust had the unilateral right to terminate the arrangement. The court distinguished this case from others like Estate of Strangi and Estate of Powell, where fiduciary duties were owed essentially to the decedent. Here, Larson owed enforceable fiduciary duties to all beneficiaries of the Insurance Trust, including Levine’s grandchildren, which would be breached if the policies were surrendered prematurely. The court also held that section 2703 did not apply, as it only pertains to property owned by the decedent at death, and there were no restrictions on the split-dollar receivable held by Levine’s estate. The court emphasized that general contract law principles allowing for modification do not constitute a retained power under sections 2036 or 2038, citing Helvering v. Helmholz and Estate of Tully.

    Disposition

    The Tax Court ruled in favor of the Estate, holding that the value of the split-dollar receivable, not the cash surrender values of the insurance policies, should be included in Levine’s gross estate. The court ordered a decision to be entered under Rule 155.

    Significance/Impact

    This case clarifies the treatment of split-dollar life insurance arrangements under the estate tax provisions of the Internal Revenue Code. It highlights the importance of the specific terms of the arrangement and the fiduciary duties of those managing the trust in determining whether a decedent retains rights to the property transferred. The decision reinforces the principle that only property owned by the decedent at death is subject to valuation under section 2703, and that general contract law principles do not automatically constitute retained powers for estate tax purposes. This ruling may influence future estate planning involving split-dollar life insurance, particularly in ensuring that the terms of the arrangement and the fiduciary duties of trust managers are clearly defined to avoid unintended estate tax consequences.

  • TBL Licensing LLC v. Commissioner, 158 T.C. No. 1 (2022): Application of Section 367(d) in Outbound F Reorganizations

    TBL Licensing LLC f. k. a. The Timberland Company, and Subsidiaries (A Consolidated Group) v. Commissioner of Internal Revenue, 158 T. C. No. 1 (U. S. Tax Court 2022)

    In a significant ruling, the U. S. Tax Court determined that a U. S. corporation must recognize immediate gain upon transferring intangible assets in an outbound F reorganization to a foreign subsidiary, even if the U. S. entity becomes disregarded for tax purposes. This decision underscores the complexities of tax treatment in corporate reorganizations involving intangible property transfers abroad, affirming the IRS’s position on the application of Section 367(d).

    Parties

    TBL Licensing LLC f. k. a. The Timberland Company, and Subsidiaries (A Consolidated Group) (Petitioner) v. Commissioner of Internal Revenue (Respondent).

    Facts

    TBL Licensing LLC (TBL), a Delaware limited liability company treated as a corporation for U. S. federal income tax purposes, was involved in a post-acquisition restructuring following VF Corp. ‘s acquisition of Timberland. TBL came to own Timberland’s intangible property, which it then constructively transferred to TBL Investment Holdings GmbH (TBL GmbH), a Swiss corporation, as part of an outbound F reorganization under Section 368(a)(1)(F). TBL subsequently elected to be disregarded as an entity separate from its owner, International Properties, which was owned by VF Enterprises S. à. r. l. , a foreign subsidiary of VF Corp. The parties agreed that this transaction constituted a reorganization described in Section 368(a)(1)(F) and that TBL’s transfer of intangible property to TBL GmbH was subject to Section 367(d).

    Procedural History

    The Commissioner issued a notice of deficiency to TBL on May 11, 2015, asserting a deficiency of $504,691,690 in income tax for the taxable year ended September 23, 2011. TBL filed a petition in the U. S. Tax Court challenging the deficiency. Both parties moved for summary judgment. The Commissioner also filed a motion in limine to exclude certain stipulations and exhibits offered by TBL and a motion to strike material from TBL’s memorandum in support of its motion for summary judgment.

    Issue(s)

    Whether TBL must recognize immediate gain under Section 367(d)(2)(A)(ii)(II) due to its constructive transfer of intangible property to TBL GmbH as part of an outbound F reorganization, given that TBL became a disregarded entity following the transaction?

    Whether the fair market value of the transferred intangible property for gain recognition purposes under Section 367(d)(2)(A)(ii)(II) should be determined using the property’s entire expected useful life, or limited to 20 years as per Temp. Treas. Reg. § 1. 367(d)-1T(c)(3)?

    Rule(s) of Law

    Section 367(d) of the Internal Revenue Code generally requires a U. S. transferor of intangible property to a foreign corporation to recognize gain in the form of ordinary income. The timing of income recognition varies depending on the circumstances, with Section 367(d)(2)(A)(ii)(II) mandating immediate gain recognition upon a “disposition” following the transfer, defined as including a distribution of the stock of the transferee foreign corporation.

    Holding

    The U. S. Tax Court held that TBL must recognize immediate gain under Section 367(d)(2)(A)(ii)(II) due to its constructive transfer of intangible property to TBL GmbH, as TBL’s distribution of TBL GmbH stock to VF Enterprises constituted a “disposition” within the meaning of the statute. The Court further held that the fair market value of the transferred intangible property for gain recognition purposes should be determined based on the property’s entire expected useful life, without applying the 20-year limitation imposed by Temp. Treas. Reg. § 1. 367(d)-1T(c)(3).

    Reasoning

    The Court reasoned that TBL’s distribution of TBL GmbH stock to VF Enterprises was a “disposition” under Section 367(d)(2)(A)(ii)(II), as it was a constructive distribution of the stock received in exchange for the transferred intangible property. The Court rejected TBL’s argument that the disposition did not occur within the transferred property’s useful life, as the distribution necessarily followed the transfer of intangible property. The Court also found no provision in the regulations that allowed TBL to avoid immediate gain recognition by having another entity report deemed annual payments under Section 367(d)(2)(A)(ii)(I), especially since TBL ceased to exist as a separate entity for tax purposes after the reorganization. Regarding the fair market value of the transferred intangible property, the Court held that Temp. Treas. Reg. § 1. 367(d)-1T(c)(3)’s 20-year useful life limitation was not applicable for determining gain under Section 367(d)(2)(A)(ii)(II), as it was intended for the annual inclusion regime and not for immediate gain recognition. The Court emphasized that the fair market value should reflect the amount an unrelated purchaser would pay, considering the entire period during which the property would have value.

    Disposition

    The U. S. Tax Court granted the Commissioner’s motion for summary judgment and denied TBL’s motion for summary judgment. The Court also denied as moot the Commissioner’s motion in limine and motion to strike.

    Significance/Impact

    This case clarifies the application of Section 367(d) in outbound F reorganizations involving intangible property transfers, emphasizing that immediate gain recognition is required upon a disposition, such as a distribution of stock of the transferee foreign corporation. The decision reinforces the IRS’s position on the treatment of such transactions and highlights the importance of considering the entire useful life of transferred intangible property for gain recognition purposes. It may impact future corporate restructuring strategies involving foreign entities and intangible assets, prompting taxpayers to carefully consider the tax implications of electing disregarded entity status in such transactions.

  • TBL Licensing LLC v. Commissioner, 158 T.C. No. 1 (2022): Application of Section 367(d) in Outbound F Reorganizations

    TBL Licensing LLC v. Commissioner, 158 T. C. No. 1 (U. S. Tax Court 2022)

    In TBL Licensing LLC v. Commissioner, the U. S. Tax Court ruled that a U. S. corporation must recognize immediate gain under Section 367(d) when it transfers intangible property to a foreign corporation in an outbound F reorganization and then distributes the foreign corporation’s stock to its foreign parent, ceasing to exist as a separate entity. This decision underscores the complexities of tax treatment for outbound reorganizations involving intangible assets.

    Parties

    Petitioner: TBL Licensing LLC f. k. a. The Timberland Company, and Subsidiaries (a consolidated group), at the trial and appellate levels. Respondent: Commissioner of Internal Revenue, at the trial and appellate levels.

    Facts

    TBL Licensing LLC (TBL), a domestic corporation, was involved in a post-acquisition restructuring following the business combination of VF Corp. and Timberland Co. VF transferred its membership interest in TBL International Properties LLC (International Properties) to VF Enterprises S. à. r. l. (VF Enterprises), a foreign subsidiary. Subsequently, VF Enterprises contributed the sole member interest in International Properties to TBL Investment Holdings GmbH (TBL GmbH), a Swiss corporation. TBL, which owned Timberland’s intangible property, elected to be disregarded as a separate entity for federal tax purposes, effectively transferring the intangible property to TBL GmbH. This series of transactions was treated as an F reorganization under Section 368(a)(1)(F).

    Procedural History

    The Commissioner issued a notice of deficiency determining a deficiency of $504,691,690 in TBL’s income tax for the taxable year ended September 23, 2011. TBL challenged this determination in the U. S. Tax Court, seeking a summary judgment. The Commissioner also moved for summary judgment, arguing that TBL must recognize immediate gain under Section 367(d)(2)(A)(ii)(II) due to the constructive transfer of intangible property to TBL GmbH and the subsequent constructive distribution of TBL GmbH stock to VF Enterprises.

    Issue(s)

    Whether a U. S. corporation that transfers intangible property to a foreign corporation in an outbound F reorganization and then distributes the foreign corporation’s stock to its foreign parent must recognize immediate gain under Section 367(d)(2)(A)(ii)(II)?

    Rule(s) of Law

    Section 367(d) of the Internal Revenue Code requires a U. S. person to recognize gain upon the transfer of intangible property to a foreign corporation in an exchange described in Section 351 or 361. The gain is treated as ordinary income and must be recognized either annually over the useful life of the property or immediately upon a disposition of the property or the stock of the transferee foreign corporation. Temporary Treasury Regulation § 1. 367(d)-1T provides guidance on the application of Section 367(d).

    Holding

    The Tax Court held that TBL must recognize immediate gain under Section 367(d)(2)(A)(ii)(II) as a result of the constructive transfer of intangible property to TBL GmbH and the subsequent constructive distribution of TBL GmbH stock to VF Enterprises. The court determined that TBL’s constructive distribution of TBL GmbH stock was a “disposition” within the meaning of the statute, necessitating immediate gain recognition.

    Reasoning

    The court’s reasoning focused on the statutory interpretation of Section 367(d) and the applicable regulations. The court found that the constructive distribution of TBL GmbH stock by TBL to VF Enterprises constituted a “disposition” within the meaning of Section 367(d)(2)(A)(ii)(II). This disposition followed the transfer of intangible property to TBL GmbH, triggering immediate gain recognition. The court rejected TBL’s argument that the transaction should be treated as a single event under the step transaction doctrine, emphasizing that the distribution of stock logically followed the transfer of intangible property. Furthermore, the court found no regulatory provision allowing TBL to avoid immediate gain recognition by having another entity report deemed annual payments. The court also determined that the fair market value of the transferred trademarks should be calculated based on their entire expected useful life, not limited by the 20-year cap in Temporary Treasury Regulation § 1. 367(d)-1T(c)(3).

    Disposition

    The court granted the Commissioner’s motion for summary judgment, denied TBL’s motion for summary judgment, and denied as moot the Commissioner’s motion in limine and motion to strike. The court entered a decision for the Commissioner, affirming the deficiency in TBL’s income tax for the taxable year in question.

    Significance/Impact

    This case clarifies the application of Section 367(d) to outbound F reorganizations involving intangible property. It establishes that immediate gain recognition is required when a U. S. corporation transfers intangible property to a foreign corporation and then distributes the foreign corporation’s stock to a foreign parent, resulting in the U. S. corporation’s dissolution. The decision underscores the importance of considering the timing and nature of transactions in reorganizations and the potential tax consequences of such actions. It also highlights the limitations of the regulatory framework in addressing complex transactions, emphasizing the need for careful planning and compliance with statutory requirements.