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Tax News
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In Evans v Comm’r, the Tax Court disallows an ordinary loss from a foreclosure sale
In Evans v Comm’r,  the Tax Court disallows an ordinary loss from a foreclosure sale
The Tax Court released a few days ago Evans v Comm’r,  T.C. Memo. 2016-7.  This case offers a continued illustration of the perils of “facts and circumstances” Tax Court litigation. “Facts and circumstances” is a term of art in tax law that pops its head in almost every other page of the Internal Revenue Code. One of the few most topical for the investment industry instances of “facts and circumstances” include the “trader v. investor” issue, the “trade or business” issue, and last but not least the “dealer v....
January 13, 2016 read more
Carried Interest Loophole – Maybe not in Texas!
Carried Interest Loophole – Maybe not in Texas!
A few days ago the U.S. District Court for the Southern District of Texas issued an opinion that offers a glimpse into the 5th Circuit’s thinking on the carried interest issue. The decision is United States v. Stewart et al. and could be found here. In this case the U.S. sued two partners in an oil and gas partnership. The facts are as follows.  In year 2003, an investor named Hydrocarbon Capital, decided to acquire a portfolio of oil and gas properties from an unrelated corporation. However, the investor did not have the expertise to run and manage the properties. Therefore it...
August 24, 2015 read more
“Investor Control” doctrine shuts down investment manager’s private placement insurance planning
“Investor Control” doctrine shuts down investment manager’s private placement insurance planning
Webber v. Comm’r, 144 T.C. No. 17 (2015) is an approximately 100 page Tax Court opinion that tells the tale of a sophisticated private placement insurance planning gone wrong. It is a tale of a well-structured planning with various controls and policies foot falling on the facts. Private placement variable life insurance is a tax planning tool used by many high-net worth individuals, including hedge fund and private equity managers. Typically the manager would pay a premium upfront and fund the insurance in segregated account through which it would acquire various speculative...
July 01, 2015 read more
CCA 201525010: CODI, recourse v nonrecourse liabilities and tax uncertainties
CCA 201525010: CODI, recourse v nonrecourse liabilities and tax uncertainties
CCA 201525010 offers a useful insight and a cautionary tale regarding the unpredictability of certain recourse v. non-recourse liability issues in the partnership context. The issues which are the topic of the CCA arise primarily in the private equity fund context, and more often in the real estate context. What are the issues? When a project is held by an entity treated as a partnership and has some sort of financing, there is a substantive tax question regarding whether this financing is recourse or non-recourse for tax purposes. This determination could have various implications....
June 22, 2015 read more
Fargo and Girard Development v. Comm’r, T.C. Memo. 2015-96 – Yet Another Dealer v. Investor Travail
Fargo and Girard Development v. Comm’r, T.C. Memo. 2015-96 – Yet Another Dealer v. Investor Travail
The Tax Court just released a consolidated case (T.C. Memo. 2015-96) whereby Victor Fargo and its related entity Girard Development took an issue with the IRS’ “dealer” characterization of a sale of certain property held by Girard. This case is a classic example of the unpredictability of the quint-essential real estate tax issue: is the taxpayer a dealer or investor in real estate? Every real estate fund would be familiar with the problem and hopefully is addressing it in its PPMs, but to summarize, if the property held by the fund is found to be held for resale to...
May 27, 2015 read more
Pilgrim’s Pride is Reversed in the 5th Circuit
Pilgrim’s Pride is Reversed in the 5th Circuit
Over a year ago, Pilgrim’s Pride litigated a Section 1234A issue in the Tax Court. The issue was whether the taxpayer could claim an ordinary business loss on the abandonment of securities, and more importantly, whether  Section 1234A applies to the direct abandonment of securities as compared to the abandonment of “rights with respect of” securities. The taxpayer lost in the Tax Court but it prevailed in the 5th Circuit (Pilgrims's Pride v. Comm’r; No. 14-60295), and on top of that, quite spectacularly. The decision was published yesterday.In the private M&A and private...
February 26, 2015 read more
In Brinkley v. Comm’r, T.C. Memo. 2014-227, all Goes Wrong for the Taxpayer
In Brinkley v. Comm’r, T.C. Memo. 2014-227, all Goes Wrong for the Taxpayer
Here is a case that showcases how a routine business transaction could lead to tax grief for the parties involved. In this case we have a founder, CIO exec, who worked for a company called Zavers. The CIO was paid a salary, a bonus, and also received restricted shares, much like many founders and principals in venture capital start ups. Originally, he owned approximately 10% of the company. As it happens, the exec was diluted by later investment rounds and tried to negotiate with Zavers a minimum of 3% interest, or else, he would leave. There was no official documentation to that...
November 03, 2014 read more
In Topsnik v. Commissioner the Tax Court Rejects Fiscal Avoidance Attempt in the Sale of Shares
In Topsnik v. Commissioner the Tax Court Rejects Fiscal Avoidance Attempt in the Sale of Shares
Here is a case that came out yesterday where the taxpayer tried to have its cake and eat it too. While the case does not address expressly an investment fund or its LPs one can draw parallels to the fund industry. What was the issue? Many treaties have various mechanisms that are in a way designed to mitigate fiscal avoidance, i.e. situations where a particular person does not pay tax in any jurisdiction. This mechanism can take various forms but most generally it would manifest itself in some requirement affording treaty benefits only if the specific person pays income tax in one of the...
September 24, 2014 read more
Real Estate Investor Argument - Continuing Travails in Allen v U.S.
Real Estate Investor Argument - Continuing Travails in Allen v U.S.
When it rains, it pours.  Just a few weeks after the Tax Court’s decision in Boree, the US District Court for the Northern District of California held against the taxpayer in Allen et al. v. United States, No. 3:13-cv-02501 (May 28, 2014). In a much familiar fact pattern the taxpayer acquired real estate, tried to develop it and sold it down the road. He claimed capital gains but the IRS and the District Court disagreed. As with many other cases that end all the way up in court, the taxpayer struggled with evidence regarding material issues. Also, as with many other small cases (in this...
May 30, 2014 read more
Boree v. Comr: Tax Planning Left on the Back Burner, Sometimes it Comes to Bite You
Boree v. Comr: Tax Planning Left on the Back Burner, Sometimes it Comes to Bite You
I see this over and over. The reality is that to business people, particularly in M&A, tax is an afterthought. This is more so true for smaller investment funds and investors. Larger entities with more extensive experience, while dreading dealing with tax, at least know what’s at stake. In ordinary income v. capital gain differential situation with penalty exposure, a mishap easily would bite over 20-30% into your profitability. That’s a large percentage! This is what Mr. Boree is learning from experience right now. I am talking about the newest real estate case of Boree v. Comr....
May 15, 2014 read more
Yet Another “Trader” Argument Doomed at the Tax Court Level
Yet Another “Trader” Argument Doomed at the Tax Court Level
As I’ve been following and discussing here on this blog, in the last few years the Tax Court has been on a roll. Everything that comes through its doors related to trader status and claiming ordinary losses from trading activities appears to be doomed from the get go if the taxpayer is an individual and does not carry on trades every single day of the year. God forbid the trader has another occupation from which it derives the majority of its income. That makes the Tax Court’s test for trader status almost impossible to meet for any non-trader professional that may be trading as...
February 26, 2014 read more
Failed Related Party Real Estate Installment Sale in Cordell D. Pool v. Com’r
Failed Related Party Real Estate Installment Sale in Cordell D. Pool v. Com’r
Real estate investors desire capital gains treatment.  Actually receiving such capital gains treatment, however, proves to be difficult particularly when development activities are afoot. The Cordell D. Pool case (T.C. Memo. 2014-3) that came out yesterday presents a cautionary tale to opportunistic private real estate funds that have their hands entrenched in development activities, whether through related, or third-party developers.  The facts of the case involve a relatively typical related party installment sale transaction whereby the putative investor purchases land and then sells...
January 09, 2014 read more
A Timely Reminder To Pay Reasonable Compensation
A Timely Reminder To Pay Reasonable Compensation
Last week, another Tax Court opinion came out slapping down an S corporation shareholder-employee for not taking out reasonable compensation.  As in all of these cases, the taxpayer’s motive in Sean McAlary Ltd, Inc. v. Commissioner, T.C. Summ. Op. 2013-62, is pretty obvious: the S corporation’s income after deducting salary expenses is passed through to the shareholder and taxed as ordinary income.  However, the amount paid out as salary is subject to payroll taxes, in addition to being taxed as ordinary income at the shareholder level.  Where there is only one shareholder, there is...
August 19, 2013 read more
Sun Capital: Trade or Business Armageddon Talk
Sun Capital: Trade or Business Armageddon Talk
For various reasons, I have not posted on the blog for a while, but the recent Sun Capital decision and the related discussion in certain high profile publications, ABA meetings and such, caught my attention. I am not going to go into detail facts discussion of the Sun Capital 1st Circuit court decision (Sun Capital Partners III LP et al. v. New England Teamsters & Trucking Industry Pension Fund et al., No. 12-2312 (1st Cir. 2013)) but the gist is as follows.In Sun Capital, the 1st Circuit Court of Appeals reversed and remanded in part a decision of a lower U.S. District Court of...
August 09, 2013 read more
A Multimillion Dollar Settlement Allocation Slap on the Wrist
A Multimillion Dollar Settlement Allocation Slap on the Wrist
Investment funds litigate and settle cases like many other taxpayers. The settlement process is usually handled by litigators, in-house or otherwise. Some litigators are attuned and aware of the tax issues related to settlements and others are not. As it may be the case, settlements have significant tax consequences, and as the recent decision of Healthpoint v. Commissioner, T.C. Memo. 2011-241 (October 3, 2011) demonstrates, could lead to further tax related litigation and penalties. What’s usually at stake? The two key tax elements of a tax settlement are character of income inclusion...
October 06, 2011 read more
Henricus v. Comm’r.: a Trader v. Investor Déjà vu
Henricus v. Comm’r.: a Trader v. Investor Déjà vu
It seems like as of late the Tax Court is set on slamming every person that comes through its doors claiming a trader status.  It feels like it was yesterday when I talked about the Richard Kay case on this blog. There I alluded that a taxpayer who seemed to fall within the category of what most people in the trading community would call a swing trader ended up being treated as an investor.  On top of that the taxpayer was hammered with a Section 6662 penalty. Well, roll forward a few months and we have the same story all over again. The Tax Court just decided the following case Henricus...
September 30, 2011 read more
Santa Clara – a Warrant Causes the Termination of S Election
Santa Clara – a Warrant Causes the Termination of S Election
Sometimes funds come across a suitable portfolio company that is an S Corporation. Because of the limitations on shareholders and second class of stock, funds could not acquire equity directly in the S corporation. To mitigate this issue the fund could do a number of things such as restructure the company prior to the investment (e.g. have the S corporation contribute assets to an LLC and invest in that LLC.). Sometimes a restructuring is not feasible and the fund may either walk away from the portfolio company or contemplate acquiring debt and/or warrants in the company. The hope is that...
September 27, 2011 read more
Richard Kay, Jr v. Comm’r – Trader or Investor, Sometimes it Feels like a Coin Toss
Richard Kay, Jr v. Comm’r – Trader or Investor, Sometimes it Feels like a Coin Toss
Richard Kay, Jr v. Comm’r., T.C. Memo. 2011-159 (July 6, 2011) is yet another case that tackles the facts and circumstances query of a trader v. investor. Facts and circumstances is one of those things that you really cannot be sure what would come out of.  Many would argue that in cases that turn on the facts and circumstances inquiry there is a very high element of chance and sometimes they feel more or less like a coin toss.Why does the question of a trader v. investor matter to many people? Well, if a person buys and sells the same securities within the taxable year, in either case...
July 07, 2011 read more
Hendrix v. Commissioner – The Government Loses Another Defined Value Clause Argument
Hendrix v. Commissioner – The Government Loses Another Defined Value Clause Argument
Gift and estate planning is a major component of private equity, venture capital and hedge fund taxation. The issues come up in the context of an investment manager’s individual tax planning. Investment managers typically own a profits interest in a general partnership that in turn has a 20% profits interest in one or several funds, or alternatively a management contract with the investment funds under management.  The value of the manager’s interest in the GP is minimal at the outset. The reason is that the managed investments themselves have not appreciated in value.  If the manager...
June 30, 2011 read more
Boltar v. Commissioner: A Cautionary Tale About Appraisals
Boltar v. Commissioner: A Cautionary Tale About Appraisals
As with sausage and law, most taxpayers and their tax lawyers do not want to see how their valuation expert "made" their appraisal report.  In other words, they generally leave the methodolgy to the experts and focus only on the appraised value that will be used to support their return position.The taxpayer in Boltar LLC v. Commissioner,  136 T.C. No. 14 (April 5, 2011), however, learned the hard way that an appraisal that does not use reliable methods and relies on factual incaccuracies can be as worthless as the paper its printed on.While the appraisal at issue in Boltar was used by...
June 10, 2011 read more
District Court Rejects Fund Managers' Attempt to Recharacterize Service Contract as Partnership Relationship
District Court Rejects Fund Managers' Attempt to Recharacterize Service Contract as Partnership Relationship
As may be divined from the site's name, our main goal here is to keep the reader apprised of new developments in the world of taxation that are relevant to the taxation of investment funds and the various fund participants.  Sometimes, the developments take the form of truly new law in the form of IRS regulations or precedential case law; other times, it may be a new case or ruling that simply adds to a larger body of law in an important area.  The opinion of the U.S. District Court for the Southern District of Texas in Rigas v. United States, 107 AFTR 2d 2011-788 (C. D. Tx. 5/2/2011),...
May 13, 2011 read more
Sollberger v. Commissioner: The Tax Court Continues to Slam Monetization Strategies
Sollberger v. Commissioner: The Tax Court Continues to Slam Monetization Strategies
In a recent decision the Tax Court rejected yet another monetization attempt in the case of Kurt Sollberger v. Commissioner, T.C. Memo. 2011-78 (April 4, 2011).  This seems to shape a Tax Court trend considering that the court held against the taxpayer in the other two monetization cases that were decided last year, Calloway, 135 T.C. No. 3 (July 8, 2010) and Anschutz, 135 T.C. No. 5 (July 22, 2010). I previously reasoned on this blog that the negative result in the Anschutz case seemed to stem from poor execution than anything else.  So what went wrong in the Sollberger case? In this...
April 21, 2011 read more
Tax Court: Fund Manager Gets Business Bad Debt Treatment for Loan to Advisor
Tax Court: Fund Manager Gets Business Bad Debt Treatment for Loan to Advisor
Fund managers' compensation typically consists of two elements: a management fee--generally 1-2% of NAV (which in addition to paying the managers, is applied toward other operating expenses), and a performance fee--generally 20% of gains.  In addition, fund managers may receive an investment return from any capital they invest into the fund (typically, around 1% of the fund's capital).  The Tax Court's holding in Todd A. Dagres et ux. v. Commissioner; 136 T.C. No. 12 (March 28, 2011), indicates that the relative amouints of these components can be determinative of the issue of whether a...
April 04, 2011 read more
Tax Court: LLP Partners Did Not Qualify for Limited Partner Exception to Self-Employment Tax
Tax Court: LLP Partners Did Not Qualify for Limited Partner Exception to Self-Employment Tax
A recent Tax Court opinion held that the "limited partner" exception to liability for self-employment tax ("SET") found in IRC Section 1402(a)(13) did not apply to the partners of a Kansas limited liability partnership, which was operated as a law firm specializing in, you guessed it, Federal income tax law.  The opinion--Renkenmeyer, Cambell & Weaver, LLP v. Commissioner, 136 T.C. No. 7 (February 9, 2011)-- is noteworthy both to interest holders in "newer" entities such as LLPs, LLLPs, and LLCs, and also to old-fashioned limited partners.The prevailing view among practitioners...
March 15, 2011 read more
Robucci v. Commissioner - Tax Planning No Good, the Tax Court Says
Robucci v. Commissioner - Tax Planning No Good, the Tax Court Says
Here is a case that the Tax Court published yesterday that applies equally to investment fund related tax planning and any other tax motivated planning taxpayers may engage in. I personally have always viewed the disregarding of corporate entities by the IRS as a tough nut to crack, but in this case they did it quite successfully, and not only that, but they managed a double whammy by hitting the taxpayer with a Section 6662(a) penalty. So what happened in this case? In Robucci v. Commissioner, T.C. Memo. 2011-19, a psychiatrist sought the tax planning advice of an attorney/CPA on how to...
January 25, 2011 read more
Personal Goodwill Developments
Personal Goodwill Developments
Ever since the Martin Ice Cream case, personal goodwill has been the sweet spot of disposing a business.  The disposition of personal goodwill is generally taxed at capital gains rates of 15% and as long as there continues to be an arbitrage between capital and ordinary rates, taxpayers will likely persist in attempting to fall within the personal goodwill cubby hole.  In the fund context the issue usually arises for fund managers in the estate planning and divorce context, or at the fund level if the fund is on the buy side and a founder is trying to sell all or a portion of its business...
October 19, 2010 read more
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