SCOTUS Reports

Tag: Revenue Procedure 65-17

  • Long v. Commissioner, 93 T.C. 352 (1989): Constructive Payment Doctrine Inapplicable to Revenue Procedure 65-17

    Long v. Commissioner, 93 T. C. 352 (1989)

    The doctrine of constructive payment does not apply to satisfy an account receivable established under Revenue Procedure 65-17.

    Summary

    In Long v. Commissioner, the U. S. Tax Court ruled that the doctrine of constructive payment does not apply to an account receivable established between related corporations under Revenue Procedure 65-17. The case involved William R. Long, who sought to apply the doctrine to avoid constructive dividend treatment. The court denied Long’s motion for reconsideration, emphasizing that Rev. Proc. 65-17 requires actual payment in money, not constructive payment, to satisfy the account receivable. The decision clarified that the terms of the closing agreement and the revenue procedure mandate an actual transfer of funds to avoid constructive dividend treatment.

    Facts

    William R. Long, the controlling shareholder, moved for reconsideration of the Tax Court’s opinion in Long v. Commissioner, 93 T. C. 5 (1989). The initial opinion held that an account receivable established between related corporations under Rev. Proc. 65-17, which was not offset by a preexisting account payable or otherwise satisfied within the allowed methods, constituted a constructive dividend to Long and a contribution to the capital of the transferee corporation. Long argued that the doctrine of constructive payment should apply to the transfer of assets required by the revenue procedure.

    Procedural History

    The Tax Court initially ruled in Long v. Commissioner, 93 T. C. 5 (1989), that the unsatisfied portion of the account receivable was a constructive dividend. Long filed a motion for reconsideration under Rule 161 of the Tax Court Rules of Practice and Procedure, which was denied by the court in the supplemental opinion at 93 T. C. 352 (1989).

    Issue(s)

    1. Whether the doctrine of constructive payment applies to the satisfaction of an account receivable established pursuant to Rev. Proc. 65-17.

    Holding

    1. No, because Rev. Proc. 65-17 requires payment “in the form of money,” and the closing agreement required payment in “United States dollars,” which precludes the application of the constructive payment doctrine.

    Court’s Reasoning

    The court’s reasoning focused on the interpretation of Rev. Proc. 65-17 and the closing agreement. The court emphasized that the revenue procedure explicitly required payment in money, and the closing agreement similarly required payment in U. S. dollars. The court rejected Long’s argument that constructive payment could satisfy these requirements, noting that accepting such an interpretation would render the closing agreement futile. The court distinguished this case from prior cases like White v. Commissioner and F. D. Bissette & Son, Inc. v. Commissioner, where the constructive receipt doctrine was applied in different contexts. The court found that the language of Rev. Proc. 65-17 and the closing agreement was unambiguous in requiring actual payment, and thus, the doctrine of constructive payment did not apply.

    Practical Implications

    This decision clarifies that taxpayers cannot use the doctrine of constructive payment to satisfy obligations under Rev. Proc. 65-17. Practitioners should ensure that actual payments are made in accordance with the terms of such agreements to avoid unintended tax consequences like constructive dividends. This ruling impacts how related corporations structure their financial transactions and emphasizes the importance of adhering to the specific payment requirements in revenue procedures. Subsequent cases involving similar revenue procedures will likely cite this decision to support the necessity of actual payment in money.

  • Long v. Commissioner, 93 T.C. 5 (1989): Requirements for Actual Payment Under IRS Revenue Procedure 65-17

    Long v. Commissioner, 93 T. C. 5 (1989)

    Under Rev. Proc. 65-17, actual payment in cash or a written obligation is required to avoid tax consequences of section 482 allocations.

    Summary

    In Long v. Commissioner, the U. S. Tax Court held that the taxpayer, William R. Long, and his controlled corporations did not comply with the terms of a closing agreement under IRS Revenue Procedure 65-17. The agreement required Long Specialty Co. , Inc. to pay Long Mfg. N. C. , Inc. within 90 days following a section 482 allocation. Despite having the financial ability, no actual payment was made within the stipulated time. The court ruled that an actual transfer of funds was necessary to avoid tax consequences, and the failure to pay resulted in a constructive dividend to Long, leading to a tax deficiency.

    Facts

    William R. Long was the chief executive officer and controlling shareholder of Long Mfg. N. C. , Inc. (Manufacturing) and the sole shareholder of Long Specialty Co. , Inc. (Specialty). Both companies used the accrual method of accounting. Following an IRS examination for 1981, income was allocated from Specialty to Manufacturing under section 482. A closing agreement was executed, allowing the companies to elect relief under Rev. Proc. 65-17. This required Specialty to pay Manufacturing $717,084. 93 within 90 days after the agreement’s execution. Manufacturing offset part of this amount against an existing account payable to Specialty, but the remaining balance was not paid in cash or by note within the required period.

    Procedural History

    The IRS determined a tax deficiency against Long for 1981 and issued a statutory notice. Long petitioned the U. S. Tax Court, which upheld the IRS’s position that the terms of the closing agreement were not met, resulting in a constructive dividend to Long.

    Issue(s)

    1. Whether the terms of the closing agreement requiring payment within 90 days were complied with by Specialty.
    2. Whether the failure to pay the remaining balance within the 90-day period resulted in a constructive dividend to Long.

    Holding

    1. No, because Specialty did not make an actual payment in cash or issue a written obligation within 90 days as required by the closing agreement and Rev. Proc. 65-17.
    2. Yes, because the failure to pay resulted in the unpaid balance being treated as a constructive dividend to Long, as stipulated in the closing agreement.

    Court’s Reasoning

    The court emphasized that closing agreements are contracts governed by general contract principles and are final and conclusive as to all matters contained within them. The agreement clearly required payment in “United States dollars” within 90 days, which was not met by Specialty. Rev. Proc. 65-17, which the agreement was subject to, similarly required payment in the form of money or a written obligation. The court rejected the argument that a constructive payment was sufficient, noting that Rev. Proc. 65-17 must be narrowly construed as a relief provision. The court also dismissed the argument of inconsistency in allowing an offset against a pre-existing debt while requiring actual payment for the remaining balance, as the procedure itself allowed such offsets. The court concluded that substance must follow form, and actual payment was required to avoid tax consequences.

    Practical Implications

    This decision underscores the importance of strict compliance with the terms of closing agreements and IRS revenue procedures. Taxpayers relying on Rev. Proc. 65-17 must ensure actual payment within the specified time to avoid tax consequences of section 482 allocations. The ruling affects how taxpayers and their advisors handle such allocations, emphasizing the need for careful planning and timely execution of payments. Businesses with related entities must be aware of the necessity for actual transfers of funds to reflect income adjustments without triggering further tax liabilities. Subsequent cases have cited Long v. Commissioner to support the requirement for actual payment in similar situations involving section 482 and Rev. Proc. 65-17.