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Wednesday, February 26, 2014


Code §6611 provides that the IRS will pay interest on tax overpayments back to the due date if the overpayment is not refunded within 45 days of the refund claim (or within 45 days of the return due date for a timely filed return). However, as Deutsche Bank learned to its dismay, another Code requirement must be met before interest starts to run.

That requirement is under Code §6611(g), which requires that interest will not commence to run until the applicable return is filed “in processible form.” That section goes on to provide that to be processible, it must contain “sufficient required information (whether on the return or on required attachments) to permit the mathematical verification of tax liability shown on the return.”

Deutsche Bank timely filed its 1999 Form 1120-F. In filing the return it erroneously left off Form 8805 (relating to taxes withheld under Code Section 1446) and Forms 1042-S (relating to taxes withheld at the source). It later corrected the error, and after that sought a refund of over $59 million dollars with interest back to the original due date of the return. The IRS only paid interest after the error was corrected, and not back to the original due date of the return. It did this claiming that the return was not in processible form until the error was corrected and the Forms 8805 and 1042-S were submitted.

Both the Court of Federal Claims and the Court of Appeals for the Federal Circuit held that the IRS could not calculate the taxes due without those forms, and thus sided with the IRS that the return as originally files was not processible.

As part of its argument, Deutsche Bank claimed that the failure to attach forms that are not required by the statute and regulations should not disqualify a return from being processible. The courts disagreed.

Deutsche Bank also claimed that the IRS could verify the tax liability from what was filed, because the return itself showed the total credits due Deutsche Bank (the missing forms provided the breakdown of those total credits). This seems like a good argument to me – the taxes can be computed based on what was attached. However, both courts disagreed – they claimed the detail of the withheld tax was necessary to “recalculate and corroborate the mathematics and data reported.” The statute requires only “mathematical verification” – requiring “corroboration” appears to be a requirement beyond the statute. Isn’t that what audits are for?

Lastly, the courts were unpersuaded that since the IRS could obtain the required verification data either under audit or from other copies of these forms filed by payors, that Deutsche Bank should get the desired interest.

Deutsche Bank Ag v. U.S., (CA FC 02/18/2014), 113 AFTR 2d ¶ 2014-509

Saturday, February 22, 2014


Every month, we publish the monthly AFR rates. However, once a year we look back over a longer period of time to see the larger trend. Here is the 2014 version, showing a reverse of the declines of recent years. Whether the increase in the past year will continue and be the start of a major reversal in trend, or whether it is only a short-term deviation from the long-term downtrend, is anyone’s guess.


Wednesday, February 19, 2014


Code Section 482 requires that transactions between related companies be conducted based on “arms-length” pricing. The purpose of the section is to foreclose inappropriate pricing methods that attempt to shift profits to low-tax jurisdictions or companies. The rules relating to determination of an acceptable “arms-length” price are quite detailed and voluminous. IRS examinations of pricing can be a difficult ordeal for both the taxpayer and the IRS.

To assist its employees in Section 482 audits, the IRS has issued a Transfer Pricing Audit Roadmap that details the steps that the examining personnel should take, including when those steps should be undertaken. The Roadmap is useful for non-IRS professionals, both as to establishing proper arms-length pricing in advance that can withstand an audit, and guiding those professionals about what to expect and when during an audit.

The Roadmap details three phases. A summary chart of the phases is included in the Roadmap:


The Roadmap goes into detail as to each of these phases and subphases. For those that practice in this area, the Roadmap is mandatory reading. A copy of the Roadmap can be viewed here (on my computer, downloading and opening it was easier to read than reading it in my browser).

Transfer Pricing Audit Roadmap

Thursday, February 13, 2014


Asset protection trusts promise their settlors the best of many worlds. They allow a grantor to give away assets to a trust and remove them (and any future appreciation in the trust assets) from their taxable estate. However, the grantor can remain as a discretionary beneficiary, and thus can have access to the assets if needed (if the trustee cooperates). Lastly, the assets are placed beyond the reach of the grantor’s creditors, subject to fraudulent conveyance and other local law limitations.

The foregoing only works for trusts established in jurisdictions that override common law rules and exempt the reach of the grantor’s creditors from the trust assets. This can be accomplished in many offshore jurisdictions. For those that do not want to go offshore, 14 states now have some version of domestic asset protection trust (DAPT) laws that provide the requisite exemption. However, the recent case of in In re Huber, 493 BR 798 (Bkrptcy. DC Wash., 2013) has raised significant concerns about the ability of non-DAPT state residents to set up a trust in a DAPT state and enjoy the benefits of the DAPT. Since there is little other law on this question, Huber has been closely scrutinized by planners.

Huber turned on whether the state of the trust (Alaska) had a substantial relation to the trust, and looked at 3 factors: the domicile of the grantor or trustee, the location of the assets, and the domicile of the beneficiaries. Based on the minimal connections of the trust with Alaska, the court did not find such a connection and applied Washington law instead which voided the benefits of Alaska’s DAPT laws.

In a recent article, Sean R. Weissbart has the following suggestions to maximize the likelihood that a court will respect and apply the law of the DAPT state even when the grantor does not reside there,based on the Huber analysis. These suggestions are:

  • Create the trust as early as possible. This minimizes the risk of the court being influenced by fraudulent intent. It also starts the 10 year period that exists under federal bankruptcy law for a creditor to overcome a domestic asset protection trust if the trust was established with bad intent.
  • Use a trustee in the DAPT state, and minimize the use, or powers of, co-trustees located outside of that state.
  • Acquire assets in the DAPT state well in advance of creating the trust.
  • Name beneficiaries that reside in the DAPT state. As a practical matter, this one may be hard to accomplish.
  • Dilute trust contacts with the grantor’s home state.

Weissbart, Sean R., Estate Planning Strategies for the Young and Wealthy, Estate Planning Journal, Feb 2014

Sunday, February 09, 2014


This is the largest valuation differential I have ever seen. It appears that Michael Jackson’s estate valued the estate at $7 million for federal estate tax purposes. The IRS is asserting a value of $1.125 billion, leaving the estate at risk for $505 million in additional estate taxes and $197 million in penalties. Areas of dispute include the estate’s rights in various Beatles songs, and the value of Jackson’s likeness.

Read the Time magazine article about it here.


A taxpayer who travels away from his tax home overnight on business can deduct 50% of meals and 100% of lodging costs. A taxpayer’s “tax home” is located at (1) his regular or principal (if more than one regular) place of business, or (2) if the taxpayer has no regular or principal place of business, his regular place of abode in a real and substantial sense.  To be deductible, the absence from home must be “temporary” and not “indefinite.” Code §162(a).

On May 26, 2009, Mr. Snellman moved away from home to work on an intereactive credit card monitoring project. The parties understood that the project would be completed by December 31, 2009, and Mr. Snellman’s employment would end at that time. Due to financial difficulties of the employer, the employment actually ended on November 18, 2009.

Mr. Snellman sought to deduct meals, lodging, and other incidental expenses.  The IRS opposed it, claiming that the employment was not temporary, but indefinite.

The Tax Court ruled that since Mr. Snellman was hired for a single project with a scheduled end date of 7 months after hiring, this was temporary and not indefinite. It described indefinite employment as temporary employment that is of substantial, indefinite, or indeterminate duration. The temporary nature of his employment was  corroborated by the fact that his apartment lease was scheduled to expire on December 31 and he negotiated an addendum to the lease agreement to allow for termination of the contract on short notice. Based on the write-up of the facts in the opinion, it is not clear why the IRS sought to challenge the employment as indefinite – perhaps there were other facts that supported the IRS’ position.

Note that the temporary employment rule will not apply for absences going over one year.

Roj C. Snellman, et ux., TC Summary Opinion 2014-10

Friday, February 07, 2014


Code §108(a)(1)(D) avoids debt discharge income to taxpayers (other than C corporations) when indebtedness is forgiven if it is qualified real property business indebtedness. This is generally indebtedness incurred in connection with real property used in a trade or business if secured by such real property.

A question has existed whether a direct mortgage on the real property is required indebtedness to be considered secured by the real property. In a useful Revenue Procedure, the IRS is providing a safe harbor as to this question in certain circumstances – if the debt is secured by a pledge of the taxpayer’s ownership interest in a disregarded entity that holds the real property, that will be treated as meeting the security requirement.

There are some miscellaneous requirements to meet the safe harbor requirements. For example, the security interest must be a first priority security interest.Also, at least 90% of the fair market value of the total assets of the disregarded LLC must be real property used in a trade or business, with the other assets being incidental to the acquisition, ownership and operation of the real property. Thus, it would appear that the LLC must be a special purpose vehicle to own just the real property to qualify under this exception.

Even if the safe harbor is not met, taxpayers can still argue that they meet the requirements of the security requirements – according to the Revenue Procedure the safe harbor is not intended as the sole method of qualifying when security arrangements are not accomplished through a mortgage. The Revenue Procedure acknowledges, and further discusses, legislative support that a mortgage is not a requirement under Code §108(a)(1)(D).

Rev.Proc. 2014-20

Sunday, February 02, 2014


Generally, amounts received by an IRA distributee are included in gross income. However, Code Sec. 408(d)(3)(A) avoids gross income if the distributee contributes the received amounts to an IRA, individual retirement annuity, or qualified retirement plan within 60 days of receipt.

There are limits, however. Code Sec. 408(d)(3)(B) provides: “This paragraph [regarding tax-free rollovers] does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.” [emphasis added]

Is this one year limit a per IRA limit, so that multiple rollovers involving different IRAs are allowed within the one year period, or if one rollover occurs with one IRA then no rollovers from any other IRAs are permitted during the one year period?

IRS Publication 590 allows for multiple IRA rollovers when it provides: "Illustration : A taxpayer we'll call Chris has two traditional IRAs (IRA-1 and IRA-2). On Date 1, Chris makes a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). Chris cannot, within one year of Date 1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. However, Chris can  make a tax-free rollover from IRA-2 into any other traditional IRA because Chris has not, within the last year, rolled over, tax free, any distribution from or made a tax-free rollover to IRA-2."

I disagree - looking at the statutory language and the use of the word "an" before "individual retirement account" in the underlined excerpt above instead of "that," I read it that once a rollover is made involving any IRAs, all further IRA rollovers from any IRA are disqualified within a year.

The Tax Court, in a 2014 Memorandum Decision, has sided with my interpretation, and rejected the more liberal provision in Publication 590. It is not often that the Tax Court adopts a more taxpayer hostile position than an IRS publication, but here you have it.

Bobrow, TC Memo 2014-21