The Tax Court in Brief January 18 – January 22, 2021

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The Tax Court in Brief January 18 – January 22, 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.

The Week of January 18 – January 22, 2021


Adams Challenge (UK) Limited v. Comm’r, 156 T.C. No. 2

January 21, 2021 | Lauber, J. | Dkt. No. 4816-15

Short SummaryThe case discusses whether under Section 882(c)(2) of the Code, a foreign corporation is entitled to the benefits of deductions or credits after the IRS has prepared returns for such corporation. The case also discusses whether the application of Section 882(c)(2) violates provisions of the tax treaty between the U.S. and the U.K., specifically those related to business profits and nondiscrimination.

During 2009 through 2011, Adams Challenge, a UK corporation (the taxpayer) owned a multipurpose support vessel. In 2009, the taxpayer entered into a contract with a U.S. company, allowing the U.S. company to use the vessel for various oil projects within the Outer Continental Shelf in the Gulf of Mexico.

In 2013, the IRS issued a Notice of Jeopardy Assessment to the taxpayer in the amount of $23,780,625 for the 2009-2011 period. At that time, the taxpayer had not filed a U.S. income tax return.

In 2014, the IRS issued a notice of deficiency where it determined that the taxpayer had effectively connected income adding that the taxpayer was not entitled to deductions or credits because it had failed to submit a tax return. The taxpayer submitted a petition with the Court. In 2017, the taxpayer filed protective returns for 2009 and 2010.

The IRS argued that under Section 882(c)(2) the taxpayer had failed to submit a true and accurate return before the IRS issued the notice of deficiency, consequently the taxpayer was not entitled to receive the benefits of the deductions and credits allowed by the Code.

The taxpayer argued that such regulation did not provide such a requirement. Additionally, it argued that Section 882(c)(2) was overridden by the provisions of the UK-U.S. tax treaty (the Treaty) specifically those related to business profits (which allow foreign corporations to the deductions and credits related to the business of a foreign corporation) and the nondiscrimination article.

After analyzing the statutory and case law development behind Section 882(c)(2), and the applicability of the UK-US tax treaty, the Court agreed with the IRS.

Key Issues: Whether Section 882(c)(2) provides a specific terminal date for a foreign corporation to submit a tax return and be entitled to the benefits of deductions and credits under the Code.  Whether Section 882(c)(2) violates the business profits article or the nondiscrimination article of the Treaty.

Primary Holdings: Based on the statutory and the applicable case law, Section 882(c)(2) establishes that a foreign corporation must file a true and accurate tax return before the IRS prepares a return on behalf of the foreign corporation. Moreover, Section 882(c)(2) does not contradict the provisions of the Treaty, specifically the business profits and nondiscrimination articles.

Key Points of Law:

Insight: This case provides great insight for foreign corporations that may be subject to ECI rules, specifically as for the filing of a tax return. Careful analysis is required to determine whether a protective tax return must be filed, to comply with Section 882(c)(2). Moreover, the case is relevant to determine the interpretation of tax treaties entered by the U.S. Multiple provisions of tax treaties are usually deemed to override he provisions of the Code, but this case clearly shows that if the provision of the Code does not directly contradict the provisions of a treaty, then the requirements of the Code may be applicable. This case clearly opens the door for the IRS to subject transactions that are “covered” by a treaty to U.S. requirements which could lead to denial of treaty benefits in a variety of cases.


Aspro, Inc. v. Comm’r, T.C. Memo. 2021-8

January 21, 2021 | Pugh, J. | Dkt. No. 17494-17

Short SummaryAspro, Inc. (Aspro) paid management fees to its three shareholders:  Milton Dakovich, Jackson Enterprises, Corp., and Manatt’s Enterprises, Ltd. for the tax years ending November 30, 2012, November 30, 2013, and November 30, 2014.  The IRS disallowed the deductions as disguised dividends.  Aspro filed a timely petition with the United States Tax Court challenging the IRS’ determinations.

Key Issues: Whether Aspro is entitled to deductions for fees it paid to Milton Dakovich, Jackson Enterprises, Corp., and Manatt’s Enterprises, Ltd.?

Primary Holdings: Aspro is not entitled to deductions for fees it paid to Milton Dakovich, Jackson Enterprises, Corp. and Manatt’s Enterprises, Ltd. because most of the evidence shows that Aspro paid the fees to its three shareholders as disguised distributions.  This evidence includes:  (1) Aspro made no distributions to its three shareholders during the years at issue or its entire corporate history but paid management fees each year; (2) the two large shareholders always got equal amounts and the percentages of management fees all three shareholders received roughly correspond to their respective ownership interests; (3) Aspro paid the management fees as lump sums at the end of each tax year to its shareholders; (4) Aspro had relatively little taxable income after deducting the management fees each year; and (5) Aspro’s process of setting management fees was unstructured and had little, if any, relation to the services being provided.  Moreover, any payments to the three shareholders were not reasonable in amount.

Key Points of Law:

Insight

The Aspro case shows the difficulties corporate taxpayers can face in attempting to prove that compensation paid to shareholders is reasonable and, in fact, true compensation.  For corporate taxpayers who pay their shareholders compensation, it may be advisable to have a tax attorney document the compensation to protect against any challenge and future IRS examination.

 

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