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Tax Law Roundup current law developments in U.S. taxation

Category Archives: Tax Shelters

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Tax Court Strikes Down “DAD” Loss Importation Tax Shelter

Posted in General, Partnership/LLC, Tax Shelters

In consolidated cases known as Kenna Trading LLC, the Tax Court shut down an attempt to contribute foreign currency losses into a US partnership and syndicate the losses to investors by selling partnership interests followed soon by the partnership selling the loss assets.  According to the court, the persons contributing loss assets did not qualify as… Continue Reading

Taxpayer Failed Requisite Profit Motive When Investing In Partnership Solely for Charitable Deductions

Posted in Deductions, Partnership/LLC, Real Estate, Tax Shelters

In McElroy v. Commissioner, the Tax Court concluded that the taxpayer failed the requisite profit motive to receive a tax deduction from an investment in a charitable syndication partnership.  The case involves an attempted syndication of charitable deductions by placing real estate into a partnership, soliciting investors with promised charitable deductions well in excess of… Continue Reading

Final Regulations Address Reportable Transaction Tax Advisor Penalties

Posted in Procedure, Tax Shelters

Today the IRS finalized regulations that penalize tax advisors who do not properly notify the IRS on Form 8918 with respect to so-called “listed” or “reportable” transactions.  These rules, applicable to so-called “material advisors”, are a back door way for the IRS to track transactions that have a higher probability of being tax shelters.  However,… Continue Reading

7th Circuit Joins Majority In Applying 40% Valuation Penalty in Sham Partnership

Posted in Deductions, Partnership/LLC, Tax Shelters

In Superior Trading, the 7th circuit affirmed an earlier Tax Court decision, denying a taxpayer’s losses and imposing a 40% penalty in a so-called distressed asset/debt (“DAD”) tax shelter.  In the DAD shelter, the taxpayer attempted in import built-in loss assets into a US LLC/partnership so that US investors could deduct the losses.  The court… Continue Reading

8th Circuit Affirms In Wells Fargo – No Business Purpose to Transaction Accelerating Contingent Liabilities

Posted in Deductions, Economic Substance, Litigation/Controversy, Tax Shelters

A new 8th Circuit Wells Fargo Decision held for the IRS, denying the acceleration of deductible expenses in a “contingent-liability strategy” because the transaction lacked economic substance/business purpose.  What was the strategy? Under the strategy, Wells Fargo contributed high-basis valuable assets and deductible contingent liabilities into a subsidiary corporation in a purported tax-deferred transaction.  The… Continue Reading

Tax Court Joins 2nd, 4th, and Federal Circuits in Denying Tax Benefits from SILO and LILO Leasing Transactions

Posted in General, Leasing, Real Estate, Tax Shelters

The IRS continues its winning streak in striking down lease-in-lease-out (LILO) and sale-in-lease-out (SILO) transactions with the Tax Court in John Hancock v. Comm’r joining the 2nd, 4th, and Federal Circuits in recasting the purported leases and denying the taxpayer deductions for depreciation and interest expense. Hancock participated in 19 LILO transactions and 8 SILO… Continue Reading

Court Agrees Moving to USVI Was Acceptable Tax Planning

Posted in General, Tax Shelters

In a significant taxpayer win, the Third Circuit in the Vento case overturned the lower court decision and respected a taxpayer’s move to the U.S. Virgin Islands (USVI) for purposes of taxing income under the more favorable rules applicable to the USVI.  A significant aspect of the case is that the Third Circuit distinguished between… Continue Reading

Tax Court Applies Economic Substance Doctrine in STARS Tax Credit Transaction

Posted in Economic Substance, Tax Shelters

In a case of first impression, the Tax Court ruled for the IRS in denying foreign tax credits to the Bank of New York (BNY) in an elaborate $1.5 billion financing transaction, resulting in income tax deficiencies over $200 million for the years at issue.  The transaction, marketed by KPMG and Barclays to BNY, was… Continue Reading

IRS Wins Con-Ed LILO Case On Appeal – No Substance to Lease or Debt

Posted in Debt vs. Equity, Economic Substance, Litigation/Controversy, Tax Shelters

In a reversal of the taxpayer-favorable lower court opinion, the Appeals Court for the federal Court of Claims concluded that Consolidated Edison’s Lease-In Lease-Out (LILO) transaction did not have economic substance and the purported lease was not a “true lease”.  The IRS “listed” this particular transaction in Rev. Rul. 2002-69 and Congress further stopped these… Continue Reading

Second Circuit Again Concludes Preferred Investor Was Not A Partner

Posted in Debt vs. Equity, Partnership/LLC, Tax Shelters

In the latest Castle Harbour decision, the Second Circuit Court of Appeals has again concluded that a preferred investor was not a partner for tax purposes, denying an allocation of taxable income to the tax-indifferent investor.  In 2004, the District Court originally held that the investor was a partner and the second circuit reversed under… Continue Reading

First Circuit Applies 40% Valuation Penalty On Son of BOSS Transaction

Posted in Economic Substance, General, Partnership/LLC, Tax Shelters

In Fidelity International, the First Circuit upheld a 40% valuation penalty on a so-called “Son of BOSS” transaction described in Notice 2000-44.  These transactions involved contributing offsetting long and short options into a partnership and claiming that the net effect of the options resulted in a very high tax basis in the partnership for purposes of… Continue Reading

Tax Court Slams “DAD” Loss Importation Shelter

Posted in Economic Substance, Partnership/LLC, Tax Shelters

In Superior Trading LLC v. Commissioner, the Tax Court denied losses and imposed penalties on the “Distressed Asset/Debt” tax shelter, otherwise known as the “DAD” shelter.  The IRS previously described this transaction in a 2007 Coordinated Issue Paper.  The DAD transaction involves a tax-indifferent party contributing built-in loss assets, in this case Brazilian consumer receivables,… Continue Reading

Final Regulations Address Reportable Transaction Penalties

Posted in Procedure, Tax Shelters

The IRS finalized regulations (T.D. 9550) on Section 6707A penalties for failure to disclose “Listed” and “Reportable” transactions.  These penalties were created in 2004 and later modified in 2010 to make the penalty amount proportionate to the decrease in tax shown on the return as a result of the transaction.  The new regulations conform the regulations to… Continue Reading

Regulations Address Foreign Tax Credit Generator Transactions

Posted in International, Tax Shelters

The IRS issued new final and supplementary temporary regulations addressing foreign tax credit generator transactions. The final regulations retain the basic approach and structure of the 2008 temporary regulations.  The final regulations provide that amounts paid to a foreign taxing authority that are attributable to a structured passive investment arrangement are not treated as an… Continue Reading

New IRS Guidance to Field on Applying Economic Substance Doctrine

Posted in Economic Substance, Tax Shelters

The IRS issued guidance to its field offices to instruct examiners when appropriate to seek approval to raise the economic substance doctrine.  The guidance also sets forth a series of inquiries the examiner must develop and analyze in order to seek approval for the ultimate application of the doctrine in the examination. Substantive guidance includes… Continue Reading