The Tax Court in Brief October 25 – October 29, 2021

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The Tax Court in Brief October 25 – October 29, 2021

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

For a link to our podcast covering the Tax Court in Brief, download here or check out other episodes of The Freeman Law Project.

Tax Litigation: The Week of October 25 – October 29, 2021


Tribune Media et al. v. Comm’r, Nos. 20940-16 & 20941-16, T.C. Memo 2021-122

October 26, 2021 | Buch, J.  

Opinion

Short Summary:  In 2009, Tribune Media Co. (“Tribune”) formed Chicago Baseball Holdings, LLC (CBH) with the Ricketts family.  Tribune contributed the Chicago Cubs Major League Baseball team and related assets (“Chicago Cubs”) (with a fair market value of approximately $770 million minus liabilities of approximately $35 million) and the Ricketts family contributed $150 million of cash.  CBH then distributed approximately $700 million of cash to Tribune.  After the transaction, the Rickett family became majority owners of CBH with Tribune holding a minority share.

To finance the large cash distribution to Tribune, CBH was funded with $425 million of senior debt from unrelated parties and approximately $250 million of debt from RAC Finance, an entity closely related to the Rickett family (“RAC”).  Tribune executed two guarantees on the closing date:  a senior guaranty and a sub-debt guaranty.

Tribune timely filed a 2009 Form 1120S.  On its Form 1120S, Tribune reported the Chicago Cubs transaction as a disguised sale.  It reported a loss of approximately $190 million and a net long-term capital gain of approximately $33 million.  It also reported a net built-in gain of approximately $33 million.

CBH also timely filed a Form 1065.  On its Form 1065, it reported that its partners contributed $150 million of cash and approximately $730 million of property.  It also reported that it made an approximately $700 million distribution.

The IRS examined Tribune’s and CBH’s 2009 tax returns.  Later, the IRS issued a notice of deficiency to Tribune, which determined an increased tax liability of approximately $180 million attributable to built-in gains under section 1374.  The notice also made adjustments to items reported by CBH to Tribune—that is, it reduced Tribune’s reported capital contributions from $715 million to $20 million.  It also reduced Tribune’s reported allocable share of recourse liabilities from $673,750,000 to zero and increased Tribune’s share of nonrecourse liabilities from approximately $6 million to approximately $27 million.

The IRS further issued an FPAA to Northside Entertainment Holdings, LLC (formerly RAC).  Through the FPAA, the IRS determined partnership items of CBH, namely, adjustments to income, capital contributions, and disguised sale proceeds.  The FPAA also set forth the IRS’ determinations regarding the nature of CBH’s liabilities.   Both parties, through their authorized representatives, timely filed petitions with the Tax Court and the cases were consolidated for purposes of trial and briefing.

Key Issues:

Primary Holdings: 

Key Points of Law:

Insight: Tribune shows that the IRS will, in certain cases, attempt to attack taxpayer transactions with anti-abuse regulations and substance-over-form arguments.  Taxpayers who enter into transactions should involve tax counsel early on to ensure that the desired tax effects of a given transaction are respected for federal income tax purposes.


Cashaw v. Comm’r, No. 9352-16L, T.C. Memo 2021-123 

October 27, 2021 | Greaves  

Short Summary:  This case involves the application of trust fund recover penalties (“TFRP”) pursuant to I.R.C. § 6672.  The primary issue is whether such penalties were properly assessed against the Petitioner.

Key Issues:

Facts and Primary Holdings

Key Points of Law:

(1) the individual’s status as an officer or member of the business’ board of directors; (2) the individual’s role in managing the day-to-day operations of the business;

(3) whether the individual made decisions as to the disbursement of funds and payment of creditors; and

(4) the individual’s authority to sign checks on behalf of the business. Barnett, 988 F.2d at 1454-1455 .

InsightThis decision makes clear that Trust Fund Recovery Penalties can and will be assessed against those responsible for their collection and remittance.  In a rare expression of compassion, the Court even appeared to sympathize with the Petitioner, stating that “[t]he Court appreciates the difficult situation in which petitioner found herself during the periods at issue.”  However, the Court when on to make clear that “[w]hile we may sympathize with petitioner’s dilemma, we are a court of law, not equity. Stovall v. Commissioner, 101 T.C. 140 , 149-150 (1993).  Petitioner was required to collect and remit withheld funds, and she did not. Her stated justification, no matter how noble, does not make her failure to pay any less willful.”  Readers should therefore be mindful that, when presented with difficult choices regarding payments, trust fund taxes must generally prevail.

 


Albert G. Hill, III v. Comm’r; T.C. Memo. 2021-121

October 25, 2021 Lauber, J. | Dkt. No. 794-18

Summary: Petitioner was party to a settlement agreement that he understood could generate a gift tax liability. In February 2012, the district court where that litigation was pending issued a check from its registry payable to the U.S. Treasury for $10,263,750. Also in February, petitioner wrote to the IRS, providing the litigation background and explaining that the check was remitted with respect to the potential gift tax liability, as yet undetermined. In this letter and repeatedly for most of his gift tax dispute, petitioner referred to the check as a deposit. Acknowledging the receipt, the IRS noted that there was no corresponding tax return and urged petitioner to submit a gift tax return as soon as possible. During 2014, petitioner sought return of his “deposit.” Because the check was from the district court registry, the IRS requested additional information. In 2015, the IRS commenced a gift tax examination, which was resolved by settlement in 2019. Throughout this time, petitioner repeatedly referred to the district court’s check as a “deposit.”

The tax court’s stipulated decision resolving the gift tax examination did not find an overpayment of tax for any year. IRS issued petitioner a check for $3,473,750 – the difference between petitioner’s remittance ($10,263,750) and the deficiency it determined ($6,790,000). The check included no interest.

In August 2020, petitioner filed a motion to redetermine interest pursuant to Rule 261, alleging that the $10,263,750 check was intended as a deposit pursuant to § 6603(a) and that the deposit was to be directed to potential gift tax imposed for tax year 2011. Petitioner contended that the IRS erred in failing to refund the interest that accrued pursuant to § 6603(d)(1) for the time the funds were deposited with the Treasury. Petitioner argued that the interest due on his excess deposit is $1,267,323, calculated using the interest rate payable on overpayments of tax. Under section 6621(a)(1), the “overpayment rate” for non-corporate taxpayers is the Federal short-term rate plus three percentage points.

The Court did not have jurisdiction over petitioner’s motion to redetermine interest. Section 7481(c)(2)(B) permits the tax court to reopen case if it finds the taxpayer made an overpayment. Petitioner made a deposit, rather than a payment. If petitioner had made an overpayment, the court would have had jurisdiction and petitioner may have been entitled to more than an additional $1,000,000 in interest.

Key Issues:

Taxpayers have long made deposits with the IRS to prevent interest from accruing. IRS procedures distinguish between payments made in satisfaction of a tax liability and deposits. Initially, the IRS treated deposits as similar to a cash bond (as opposed to a tax payment) and did not pay interest on deposits subsequently returned. Congress changed this in 2004, adding section 6603 (“Deposits Made to Suspend Running of Interest on Potential Underpayments, etc.”). Section 6603(a) (“Authority to Make Deposits Other Than as Payment of Tax”) provides that a taxpayer may make a cash deposit which may be used to pay any tax which has not been assessed at the time of the deposit. Unless the Secretary determines that collection of tax is in jeopardy, he is required to return to the taxpayer any amount of the deposit (to the extent not used for a payment of tax) which the taxpayer requests in writing. Sec. 6603(c).

Section 6603(d) (“Payment of Interest”) provides that, “for purposes of section 6611 (relating to interest on overpayments), except as provided in paragraph (4), a deposit which is returned to a taxpayer shall be treated as a payment of tax for any period to the extent (and only to the extent) attributable to a disputable tax for such period.” A “disputable tax” means “the amount of tax specified at the time of the deposit as the taxpayer’s reasonable estimate of the maximum amount of any tax attributable to disputable items.”

Of central importance to this case, section 6603(d)(4) specifies that “[t]he rate of interest under this subsection shall be the Federal short-term rate determined under section 6621(b), compounded daily.” In this case, the IRS conceded that petitioner was owed interest on his deposit in the amount of $218,122, calculated using the Federal short-term rate. Petitioner claimed he was owed $1,267,323 in interest, using the short-term rate plus 3 percentage points (the rate specified for overpayments).

Primary Holdings:

“A proceeding to redetermine interest … on an overpayment determined under Code section 6512(b) shall be commenced by filing a motion with the Court.” Rule 261(a)(1). The motion papers must include a statement that “the Court has determined under Code section 6512(b) that the petitioner has made an overpayment,” a “copy of the Court’s decision which determined the overpayment,” and a schedule setting forth “each payment made by the petitioner in respect of which the overpayment was determined.” Rule 261(b)(3). In order for section 7481(c)(2) to apply in a case such as this, “this Court must have determined that there is … an overpayment pursuant to section 6512(b).” Because there was no overpayment, section 7481(c)(2) and the court did not have jurisdiction.

Key Points of Law: As explained above, the Code’s distinction between deposits and overpayments carries multiple consequences, substantive and jurisdictional.

Insight: As with any litigation, it is important to consider all the ramifications of strategic decisions. In 2012, when the district court issued the $10,263,750 check from its registry to the IRS, petitioner had a choice. He could have designated that check as a payment or a deposit. He understood that the district court settlement would create a gift tax liability, but he did not know the amount or for what year, at that point. Petitioner chose to characterize that check as a deposit. As the tax court observed: “Designating this remittance as a ‘deposit’ provided petitioner with an important benefit, as his advisers surely knew: He could demand the immediate return of his deposit at any time. Had petitioner made an ‘advance payment,’ he could have secured return of the funds only by pursuing the IRS’ formal refund process, which could be lengthy.” Opinion at 9 (citations omitted). Perhaps, the petitioner could have attempted to change the designation earlier, at some point before he resolved the gift tax dispute. The Court referred to petitioner’s efforts to re-characterize that remittance as an “eleventh-hour change of strategy.” Id. Having repeatedly characterized the remittance as a deposit for years (before and throughout the gift tax dispute), petitioner’s late efforts to recharacterize it as a payment were unavailing.

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