Summary Opinions for 03/28/14

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This week’s report contains lots of interesting statistics from the Service, including a look into the APA program, and filing and enforcement statistics.  There is also a recap of a recent tax court case looking at material participation by a trust in real estate activities, which is going to be a very big deal this year due to Obamacare. Plus an interesting Service loss in a bankruptcy case, where the Court found the Service incorrectly determined a taxpayer’s business when reallocating income under Section 482.  Also, more West Coast administrators failing to file estate tax returns.  To the roundup:

  • The Bankruptcy Court for the Middle District of North Carolina had an interesting ruling in In Re: Decoro USA, LTD  (couldn’t find for free yet).  The Court sustained the taxpayer’s objections that additional tax allocated to it in a Section 482 adjustment were inappropriate because the transfer pricing analysis by the Service was unreasonable.  Section 482 allows the Service to reallocate tax items between related entities doing business together.  Here, the Service took the position that the taxpayer acted as a distributor for its parent in selling leather furniture, and then increased the taxpayer’s income to be more in line with a distributor.  The taxpayer argued it was more of a “facilitator” to distributors, and its income was in line with similar businesses that did the same.  The Court looked a variety of factors and found that the taxpayer’s interpretation of its business was more accurate, resulting in the IRS allocation losing the presumption of correctness.
  • Announcement 2014-14 issued by the Service this week reports on the status of the advanced pricing agreement programs.  Highlights include increased efficiency and a greater use of the program.  Part 1 of the report has a comprehensive summary of the programs, part 2 has the 2013 statistics, and part 3 discusses the types of items resolved by APAs.  Interestingly, more than 50% of the APAs executed were with Japan.
  • More stats, the Service has also issued its 2013 IRS Data Book, which generated headlines about the rich not getting audited as much (apparently, the Service didn’t care for the GAO report last year arguing the Service should audit the wealthy more often).  Table 9b shows that less than 1% of individuals were audited.  Those making over $10MM a year get a hard look the most, followed by those making over $5M.  Individuals making over $1MM, but less than $5M are audited at a 9% rate.  The next highest group to be audited are those making no money, with 6% audited.
  • Estate administration lawyers in California apparently don’t understand the filing deadline for estate tax returns.  In American Contractors Indemnity Company v. United States, the District for Northern CA denied the Service’s motion for summary judgment in a case where an administrator of an estate was claiming reliance on an attorney as reasonable cause for penalties for failure to file and failure to pay estate tax.  The named party in this case is the surety company that ended up stepping into the shoes of the administrator.  The Court found there was a genuine dispute as to whether the administrator relied on the attorney to file or relied on erroneous advice on filing or when to file.  In coming to the conclusion and looking at the distinction, the Court reviewed Boyle, Baccei, and Knappe (the last two are also Cali or West Coast cases of executors failing to file), which we covered before in great detail here and here.
  • Joe Kristan on his Roth & Co. blog has a good write up of the Frank  Aragona Trust case decided by the Tax Court this week, which allowed a trustee to “materially participate” in rental activities.  This used to be only a huge deal for passive activity gains and losses, but the Obamacare 3.8% net investment income tax follows the same rules.  The trust “materially participating” allows the net income to be exempt from tax.  There is a lot of interest in this right now.  I have two clients going through this analysis for trusts, and a call with an accountant on a third this afternoon.  If you have clients with trusts that hold majority interests in closely held companies, this is probably worth a look.
Avatar photo About Stephen Olsen

Stephen J. Olsen’s practice includes tax planning and controversy matters for individuals, businesses and exempt entities for the law firm Gawthrop Greenwood, PC.



  1. Bob Kamman says

    Earlier this week, with an order from Judge Holmes, the Tax Court entertained (or entertained with) opposing viewpoints on the partitive genitive:

    …The Court then gave Ms. Lopez one last chance to produce all her records. She produced a couple boxes, see (regarding grammatical point), to prove that she has offsetting deductions . . .

    The link goes to this discussion, apparently involving whether it should be “couple boxes” or “couple of boxes” :

    … It turns out at least one Associate Editor at MW is on our side: when asked to clear up the confusion, Neil S. Serven wrote, “Both expressions are standard, though “a couple hours” is considered to be more informal. As such, couple is entered in the dictionary as both a noun and an adjective.”…

    Here are a couple thoughts:

    1) Is this an inside joke between a judge and his clerk?

    2) The taxpayer is facing a tax bill of a million dollars if she doesn’t jump through the right hoops. Is this the proper place to be playing word games?

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