Archive for the ‘Court Rulings’ Category

Interpretation of Stock Vesting Rule

January 5, 2014

Compensation in stock and optionsThe Tax Court recently rejected an IRS attempt to treat stock as vested based on a provision in the regulations dealing with termination for cause. The court found that the employment agreement used the word “cause” with a different meaning than in the regulation.


Clergy Housing Allowance Exemption Unconstitutional

December 30, 2013

Court rulingsSection 107 of the Internal Revenue Code provides a tax exemption for a housing allowance provided to a “minister of the gospel.” In a decision virtually certain to be overturned, a federal judge has found the exemption unconstitutional.


Key Tax Question on Gay Marriage

August 5, 2013
By Kaye A. Thomas

Update: The IRS has issued a ruling that addresses the most important issues discussed in this post. We’ll have detailed guidance in the near future but for now here are the main points:

  • For federal tax purposes, the IRS will treat same-sex couples as married if the marriage occurred in a state or country where such marriages are legal, even if they live in a state that doesn’t recognize such marriages.
  • IRS will not require couples to amend prior year returns, but couples are permitted to do so if an amended return would produce a refund for a year when they were married but required to file single, provided that year is still open under the statute of limitations.
  • Civil unions, domestic partners and similar relationships will not be treated as marriages.

More to come.

The Supreme Court’s decision in Windsor to overturn the Defense of Marriage Act raises many complicated tax issues. One of the most important is whether the marital status of same-sex couples will be determined based on the state of celebration or the state of residence. What happens if a couple has been married in a state where same sex-marriage is legal but now resides in a state where such marriages are not recognized? (more…)

Self-Directed IRA Implodes

May 20, 2013
By Kaye A. Thomas

Individual retirement accounts typically hold conventional investments such as publicly traded stocks, bonds, mutual funds and certificates of deposit. If you want it to hold something unusual, such as real estate or an interest in a business that isn’t publicly traded, you have to establish a self-directed IRA at a financial institution that will accept these entities. I’m not a fan of the idea, and a recent Tax Court case illustrates one of the dangers.


Sergio Garcia Beats Retief Goosen

March 28, 2013

The Tax Court has issued a ruling favorable to Swiss golfer Sergio Garcia. (If you follow golf, you probably think of him as Spanish, but his residence in Switzerland entitles him to certain tax benefits.) At issue was how much of his TaylorMade endorsement income is subject to U.S. income tax. The payment has to be apportioned between income for personal services and royalty income. A previous decision involving golfer Retief Goosen, who has an endorsement contract with the same manufacturer, allocated the payment 50-50. In this case, the court found reasons to allocate 65% of the payment to royalty income, which escapes U.S. income tax under a tax treaty with Switzerland. More striking, though, is the value of a dynamic personality in the world of golf endorsements. Goosen, who has won the U.S. Open twice, had a contract worth $400,000. Garcia, who has never won a major, commanded a $5.5 million contract. We wonder how much of that figure is ultimately attributable to a single shot Garcia hit in 1999 — golf fans know the one — eyes closed as he struck the ball from a seemigly impossible position behind a tree, then ran out onto the fairway and leaped in the air to see over a mound as the ball sailed onto the green.

Opinion: Garcia v. Commissioner (PDF)

Value Determined in Demutualization Case

March 28, 2013

The demutualization saga continues to play out. These cases involve holders of insurance policies issued by mutual insurance companies that convert to business corporations (a transaction known as demutualization). Mutual insurance companies are owned by their policyholders, who therefore receive shares of stock in a demutualization. A number of taxpayers have challenged the IRS position that these shares have zero basis, asserting that a portion of the premiums paid on the insurance policies should be allocated to basis of the shares. We previously reported on the Dorrance case, in which the court determined that a factual determination would be required to allocate premium payments to basis. The court has now published its determination that the basis of the shares was over $1,000,000, which was roughly half the price at which the shares received in the demutualization were sold.

The IRS does not agree with the result in the Dorrance case, and litigation over this issue continues. Taxpayers who sold shares received in a demutualization in years that are still open under the statute of limitations should consider filing protective claims. Under the general rule the oldest year still open is 2009, and that year closes on April 15, 2013, the third anniversary of the due date for income tax returns for that year.

Options Backdating Dispute Ruling

March 4, 2013

A tax dispute arising from alleged backdating of stock options granted to prominent entrepreneur Sehat Sutardja continues to play out with a ruling in favor of the government. In a suit seeking a refund of taxes paid under section 409A of the Internal Revenue Code, dealing with nonqualified deferred compensation, the court granted partial summary judgment on a number of issues, including a finding that although regulations establishing that underpriced options would be treated as creating a “deferral of compensation” for this purpose did not take effect until 2008, application of this rule to stock options in earlier years was proper pursuant to IRS Notice 2005-1.


Some Other Thomas

February 9, 2013

Not one to mince words, Judge Posner of the Court of Appeals instead diced the plaintiffs in a case brought by clients of UBS against the bank for failing to protect them from the consequences of their failure to report income earned by foreign bank accounts. “The plaintiffs are tax cheats,” the opinion states, and goes on to compare this case with one that is famous in legal lore as the Highwayman’s Case, in which a criminal sued his partner over division of the profits. (In that case, the court refused to hear the dispute, and both parties were hanged.) Judge Posner seemed unimpressed with the plaintiffs’ attorneys as well, observing, “The plaintiffs advance a variety of common law claims without indicating the state or nation whose law gives rise to them.”

We’ve posted this case, Thomas v. UBS AG (PDF), for its entertainment value. Our author wants to be clear that the named plaintiff is “some other Thomas.”

Another Demutualization Case

January 23, 2013

In recent years, many mutual insurance companies, which are owned by their policy holders, have converted to corporations owned by stockholders. In the conversion process, known as demutualization, these companies issued shares of stock to their policyholders. The IRS has taken the position that these shares of stock had zero basis. According to that view, when the shares are sold, the entire proceeds must be reported as capital gain. Some taxpayers have challenged that view, arguing that they acquired these shares as a result of paying insurance premiums, so a portion of the insurance premiums should be considered basis for the shares. Last week, a United States District Court ruling in the Central District of California, Timothy D. Reuben v. United States, disagreed with other courts that have considered the question and held in favor of the IRS, finding that the shares had zero basis.

The courts have now taken three distinct approaches to this issue. The Fisher case applied the open transaction doctrine, so that no gain would be recognized on a sale of the shares. The Dorrance case refused to apply the open transaction doctrine but found that the shares have basis. The Reuben case completes the sandwich, finding that the shares have zero basis.

Court Bars Return Preparer Regs

January 22, 2013
By Kaye A. Thomas

Here’s a shocker: a district court ruling declares that the Treasury did not have authority to create a new regulatory scheme for registered tax return preparers, and says the court will permanently enjoin the Treasury from enforcing those regulations. This unexpected news comes just days before the opening of the 2013 tax season.


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