Thursday, February 28, 2013

Yet Another Bullshit Tax Shelter Bites the Dust (2/27/13)

We have yet another court rejection of a bullshit tax shelter.  Chemtech Royalty Associates LP et al. v. United States, 2013 U.S. Dist. 26329 (MD LA 2013), here  This time it is Dow Chemical who tried unsuccessfully to underpay its taxes and thus shift its share of the burden of Government to the citizens of this country.  This bullshit tax shelter was cooked up by Goldman Sachs in league with lawyers at King & Spalding.

The trial judge says:  "Both arrangements are enormously complicated in their construction and operation."  Which brings me to the features of a tax shelter.  I address this in my Federal Tax Procedure Book and this is a portion of that discussion (footnotes omitted):
Tax shelters are many and varied.  Some are outright fraudulent wrapped in what is disguised as a real deal.  The more sophisticated, however, are often without substance but do have some at least tenuous claim to legality.  Some of the characteristics that I have observed for tax shelters that the Government might perceive as abusive are that (i) the transaction is outside the mainstream activity of the taxpayer, (ii) the transaction is incredibly complex in its structure and steps so that not many (including specifically IRS auditors) will have the ability, tenacity, time and resources to trace it out to its illogical conclusion (this feature is often included to increase the taxpayer’s odds of winning the audit lottery); (iii) the transaction costs of the arrangement and risks involved, even where large relative to the deal, still have a favorable cost benefit/ratio only because of the tax benefits to be offered by the audit lottery, (iv) the promoters of the adventure make a lot more than even an hourly rate even at the high end for professionals (the so-called value added fee), which in the final analysis is simply a premium for putting the reputations and perhaps their freedom at risk to give a comfort opinion that the deal which will not work if discovered, and (v) the objective indications as to the taxpayer's purpose for entering the transaction are a tax savings motive rather than any type of purposive business or investment motive.  More succinctly, a Yale Law Professor has described an abusive tax shelter as “[a] deal done by very smart people that, absent tax considerations, would be very stupid.”  Other thoughtful observers vary the theme, e.g. a tax shelter “is a deal done by very smart people who are pretending to be rather stupid themselves for financial gain.”

Tuesday, February 26, 2013

Yet Another Bullshit Tax Shelter Bites the Dust (2/26/13)

In Crispin v. Commissioner, ___ F.3d ___, 2013 U.S. App. LEXIS 3852 (3d Cir. 2013), here, as had the Tax Court, the Third Circuit smacked down yet another Bullshit tax shelter, this one of the CARDS variety.  Also, as had the Tax Court, the Third Circuit addressed the credibility of the taxpayer's representations of profit motive.

The CARDS Shelter.  Although the patched together CARDS transactions have nuances, here is the broad overview by the Third Circuit:
      A CARDS transaction is a tax-avoidance scheme that was widely marketed to wealthy individuals during the 1990's and early 2000's. It purports to generate, through a series of pre-arranged steps, large "paper" losses deductible from ordinary income. First, a tax-indifferent party, such as a foreign entity not subject to United States taxation, borrows foreign currency from a foreign bank (a "CARDS Loan"). Then, a United States taxpayer purchases a small amount, such as 15 percent, of the borrowed foreign currency by assuming liability for a an equal amount of the CARDS Loan. The taxpayer also agrees to be jointly liable with the foreign borrower for the remainder of the CARDS Loan and so the taxpayer purports to establish a basis equal to the entire borrowed amount. n3 Finally, the taxpayer exchanges the foreign currency he purchased for United States dollars. That exchange is a taxable event, and the taxpayer claims a loss equal to the full amount of his supposed basis in the CARDS Loan, less the proceeds of the relatively small amount of currency actually exchanged. The taxpayer uses that loss to shelter unrelated income. n4
   n3 The Commissioner contends that that step in the CARDS transaction "is predicated on an invalid application of the ... basis provisions of the Internal Revenue Code." (Appellee's Br. at 4.) Specifically, I.R.C. § 1012 provides that a taxpayer's basis in property is generally equal to the purchase price paid by the taxpayer. That purchase price includes the amount of the seller's liabilities assumed by the taxpayer as part of the purchase, on the assumption that the taxpayer will eventually repay those liabilities. See Comm'r v. Tufts, 461 U.S. 300, 308-09 (1983) (noting that a loan must be recourse to the taxpayer to be included in basis). But in a CARDS transaction, the Commissioner argues, the taxpayer and the foreign borrower agree that the taxpayer will repay only the portion of the loan equal to the amount of currency the taxpayer actually purchases.
   n4 The general structure of a CARDS transaction is well and thoroughly set forth in Gustashaw v. Commissioner, 696 F.3d 1124, 1127-28, 1130-31 (11th Cir. 2012).
The following is the gravamen of the smack down on the merits -- actually lack of merits (footnote omitted):

Thursday, February 14, 2013

First Circuit Speaks on Estoppel Against the IRS (2/14/13)

In Shafmaster v. United States, 707 F.3d 130 (1st Cir. 2013), here, the taxpayers urged, inter alia, that the the IRS was estopped from collecting the failure to pay penalty the IRS asserted under § 6651(a)(3).  The Shafmasters claimed that the IRS, in its various dealings with them and various documents, had agreed not to assert the penalty.  The problem was that there was certainly not a closing agreement that said that.  Nor was there even a Form 870-AD that said that.  Nor did the other dealings really establish the claim.  The Court disposed of the argument as follows and expressed skepticism, but declined to hold, that estoppel could apply against the IRS.  The key part of the holding is as follows (footnote omitted):
The Shafmasters argue that the IRS was equitably estopped from assessing the failure-to-pay penalty because the agency had, through Hamilton and through the various documents that the Shafmasters signed, agreed not to assess such a penalty, and the Shafmasters had relied on that promise. The argument fails, for a number of reasons. We need not reach the question of whether equitable estoppel can ever bind the IRS in informal settlements reached apart from the §§ 7121-7122 procedures. 
In Botany Worsted Mills v. United States, 278 U.S. 282 (1929), the Supreme Court interpreted the predecessor of 26 U.S.C. §§ 7121-7122 as providing the "exclusive method" for compromising tax liability, holding that Congress "did not intend to in trust the final settlement of such matters to the informal action of subordinate officials in the [IRS]." Id. at 288-89. As a result, the Court concluded, informal settlements are not binding on either the taxpayer or the government. Id. at 288. However, the Court went on to note that it was not "determining whether such an agreement, though not binding in itself, may when executed become, under some circumstances, binding on the parties by estoppel." Id. at 289. The Court thus left the door open for the argument that some informal agreements between taxpayers and the IRS might give rise to claims of estoppel -- at least when, as in Botany Worsted, the government asserts estoppel against a taxpayer.

Tuesday, February 12, 2013

Another Bullshit Tax Shelter Bites the Dust (2/12/13)

Note to readers, this is a cut and paste from a blog entry on my Federal Tax Crimes Blog, here.  The subject overlaps, so I have put it here as well.

In Bank of New York Mellon Corp. v. Commissioner, 140 T.C. No. 2 (2013), here, the Tax Court knocked down yet another another bullshit tax shelter.  It is a complex case, and for purposes of this blog, I will not get into the weeds (this genre of tax shelter usually has many weeds designed to obscure the big picture what is really going on -- i.e., pretty much nothing except paper and money shuffling and re-shuffling, with net effect mostly to the promoters).  I will just summarize the gravamen of the opinion:

The Court opens the opinion (after finding the bullshit facts) as follows (emphasis supplied):
This complex transaction presents a case of first impression in this Court. We are asked to decide whether petitioner is entitled to foreign tax credits and certain expense deductions from the STARS transaction and also whether petitioner is entitled to report income generated from the STARS assets as foreign source income. Respondent argues that the STARS transaction lacked economic substance. Respondent asserts consequently that the foreign tax credits and expenses attributable to STARS should be disallowed and the income from the STARS assets should be characterized as U.S. source. n7 Petitioner, in contrast, contends the STARS transaction had economic substance. In this regard, petitioner asserts that BNY entered into STARS to obtain low-cost funding for its banking business and that it reasonably expected to earn a pre-tax profit from STARS. Additionally, petitioner contends that the U.S. foreign tax credit was intended for transactions like STARS.
   n7 Respondent also argues that the foreign tax credits BNY claimed are disallowed under substance over form doctrines (including the step transaction doctrine) and under the statutory anti-abuse rule in sec. 269(a). We need not decide these arguments because of our other holdings.
The Court  then concludes that, on the facts, there was no economic substance.  That holding seems solid.

Saturday, February 9, 2013

God Made a Law Prof (2/9/13)

A colleague sent this to me -- titled God Made a Law Prof, here.

According to the video, God made a law prof for many reasons, including to put the "sexy back in law."  Imagine that?

The video apparently was by a student or students at Schulich School of Law in Canada, here.

Thursday, February 7, 2013

Watch the Details in Relying on the Timely Mailing, Timely Filing Rule (2/7/13)

I write today to provide a reminder to students, practitioners and even law professors as to not thinking through and accomplishing simple tasks in a tax controversy practice.  This object lesson is based on Glenn v. Commissioner, T.C. Memo. 2013-33, here.

In Glenn, the lawyer did, as most practitioners do, intended to rely upon the timely mailing, timely filing rule in Section 7502, here, to meet Section 6213(a)'s jurisdictional requirement for timely filing a Tax Court petition.    See Section 6213(a), here.  Section 7502 requires a timely USPS mailing to the Tax Court in a properly addressed envelope with proper postage prepaid.  (A similar rule applies for qualified overnight delivery services.)  When the USPS mailing is by registered or certified mail, it is prima facie proof of timely filing even if  the petition arrives at the Tax Court late or even never arrives.

In this case, the lawyer wanted to receive a return stamped petition copy which requires that the envelope with the petition include the copy for stamping and a self-addressed, postage prepaid envelope to return the  stamped copy to whomever is designated to receive it (in this case the attorney).  The attorney took both envelopes, with appropriate certified mail form, to the USPS to obtain the proper postage.  She handed it to the USPS person, presumably at the window with instructions to determine and apply the proper postage (for which she paid) and then to insert the return envelope with the other documents into the envelope for delivery to the Tax Court.  The USPS person made a mistake.  He put the Tax Court delivery postage on the return delivery envelope and apparently put no postage on the Tax Court delivery envelope; he then placed everything into the envelope that was to be the return envelope.  Hence, that return delivery envelope went through the mail back to the attorney along with the petition and the petition envelope and did not go to the Tax Court as intended.  Ms. Walker then promptly sent the package to the Tax Court with an  explanation of why the petition was late.

The IRS moved to dismiss the petition as untimely filed.

The Tax Court held that the error was the USPS person's error.  The Court relied upon its cases holding that USPS error does not vitiate timely mailing timely filing if the mailing were otherwise proper (proper address, proper postage).

The opinion saves the attorney's bacon.  The message though is that this case could have gone the other way.  Cross your t's and dot your i's.

I recommend that practitioners periodically review Section 7520 and the regulations, 301.7502-1, here.