North American pipeline operators restructure after tax change

By Akshara P; Bengaluru, Arun Koyyur, Anirban Paul and Saumyadeb Chakrabarty

(Reuters) – Pipeline operators Enbridge Inc, Williams Cos and Cheniere Energy Inc said on Thursday they would restructure after a U.S. rule change removed a key tax benefit for publicly traded partnerships controlled by those companies.

Williams said it would buy all common units of its master limited partnership (MLP) Williams Partners in a deal valued at $10.5 billion.

Enbridge said it would buy its independent units including Spectra Energy Partners and Enbridge Energy Partners as well as its pipeline assets and bring then under a single listed entity for C$11.4 billion ($8.94 billion).

Cheniere said it will buy out shares it does not already hold in Cheniere Partners Holdings for about $6.54 billion.

MLPs are tax-exempt corporate structures that pay out profit to investors in dividend-style distributions.

In 2016, a U.S. Appeals Court ruled that energy regulators were allowing these companies to benefit from a “double recovery” of taxes.

In March, the U.S. Federal Energy Regulatory Commission (FERC) said the companies, largely oil and natural gas pipeline firms, will no longer be allowed to recover an income tax allowance as part of the fees they charge to shippers under a “cost of service” rate structure.

“I would expect more of them to be rolled up in a similar fashion. If the reaction to Enbridge is stronger you might see TransCanada do the same thing but it’s not nearly as material to them”, said Ryan Bushell, president and portfolio manager at Newhaven Asset Management.

The transaction will not hurt Enbridge’s three-year financial outlook, the company said.

“Under the newly changed FERC tax policy, holding certain interstate pipelines in MLP structures is highly unfavorable to unitholders and is no longer advantageous”, Enbridge said.

The Calgary-based company, which has been trying to recast itself as a pipeline utility, has been under pressure to sell non-core assets and reduce its debt of more than $60 billion as of Dec. 31.

“This is the first step of the board taking control and taking steps to put the company in good standing”, Bushell said.

The company has been saddled with debt following its $28 billion takeover of U.S.-based Spectra Energy last year. Earlier this month, it sold some assets worth $2.5 billion.

Rolling up Spectra will allow Enbridge to mitigate impact from the tax related changes by 21 percent, compared with a zero percent benefit if long-haul assets are held in a MLP structure, analysts at Tudor Pickering and Holt said.

($1 = 1.2753 Canadian dollars)

Sourced from CHECKPOINT NEWSSTAND, Reuters

TAX COURT: ADVANCES BETWEEN ENTITIES WERE LOANS; BELOW-FMV PROPERTY SALES CAUSED CONSTRUCTIVE DISTRIBUTIONS

Dynamo Holdings Limited Partnership, TC Memo 2018-61

The Tax Court, siding with the taxpayers, has held that a series of advances among two commonly-controlled real estate development entities were bona fide loans, not gifts, despite the fact that the advances failed to observe many formalities associated with a debtor-creditor relationship. However, the Court sided with IRS in holding that a number of property sales between the entities were for significantly less than the property’s fair market value (FMV) and resulted in a constructive distribution to the individual with ownership interests in both entities.

Background—debt vs. gift. In determining the existence of a bona fide debtor-creditor relationship, a court must determine that at the time the advances were made there was “an unconditional obligation on the part of the transferee to repay the money, and an unconditional intention on the part of the transferor to secure repayment”. (Haag, (1987) 88 TC 604) Special scrutiny is applied to intrafamily transfers and transactions between entities in the same corporate family or with shared ownership. (Kean, (1988) 91 TC 575)

The Tax Court has used the following 9-factor, facts-and-circumstances test to determine whether two parties entered into a valid debtor-creditor relationship, which considers whether:

  1. There was a promissory note or other evidence of indebtedness,
  2. Interest was charged,
  3. There was security or collateral,
  4. There was a fixed maturity date,
  5. A demand for repayment was made,
  6. Any actual repayment was made,
  7. The transferee had the ability to repay,
  8. Any records maintained by the transferor and/or the transferee reflected the transaction as a loan, and
  9. The manner in which the transaction was reported for Federal tax is consistent with a loan. (Jones, TC Memo 1997-400)

Background—constructive distributions. A transfer of property from one entity to another for less than adequate consideration may constitute a constructive distribution to an individual who has ownership interests in both entities. (Cox Enters., Inc., & Subs., TC Memo 2009-134)

For a court to find a constructive distribution, two tests must be satisfied: an objective test, which asks whether the transfer caused “funds or other property to leave the control of the transferor corporation” and whether it “allow[ed] the stockholder to exercise control over such funds or property either directly or indirectly through some instrumentality other than the transferor corporation”; and a subjective test, which asks whether the transfer occurred primarily for the common shareholder’s personal benefit rather than for a valid business purpose. (Wilkof, TC Memo 1978-496)

Facts. The Moog family had a real estate development business that originated in Canada then eventually expanded into the U.S.

During the years at issue (2005 through 2007), Beekman Vista, Inc. (Beekman Vista) was a U.S. holding company formed in ’84, the principal business activity of which was real estate management and development. Beekman Vista also had a hedge fund portfolio that produced investment income.

Beekman Vista was wholly owned by a Canadian entity and was, through a complex tiered ownership structure, indirectly controlled by Delia Moog, who was also an officer and director. Ms. Moog’s nephew, Robert Julien, who was also an officer and director, handled most of the development projects.

By the early 2000s, the business of Beekman Vista and its subsidiaries had changed substantially, and its management team decided to focus its efforts on Florida real estate development and to relocate its office and management team there.

Mr. Julien was concerned about certain implications of Beekman Vista being Canadian-owned so he and Ms. Moog decided to form a U.S. partnership. Beekman Vista continued to operate profitably from 2005 to 2007.

Dynamo Holdings Limited Partnership (Dynamo) was formed in early 2005 as a Delaware limited partnership. It was owned by two dynasty trusts—the Christine Moog (Ms. Moog’s daughter) Family Delaware Dynasty Trust, with a 59.9995% limited partnership interest, and the Robert Julien Family Delaware Dynasty Trust, with a 39.9995% limited partnership interest—with the 0.001% general partnership interest held by an entity that was indirectly controlled by Ms. Moog.

Dynamo had the same management team as Beekman Vista, and it also provided management services to Beekman Vista.

The cash advances. For efficiency purposes, Dynamo centralized its operations, including cash management, so as to easily allow for intercompany advances among the related entities.

Upon formation and through the years in issue, Beekman Vista advanced funds to Dynamo to fund operating expenses and to acquire assets, and Dynamo recorded the funds on its ledgers as an account payable to Beekman Vista. The year-end balances of the advances were approximately $240 million, $501 million, and $176 million in 2005, 2006, and 2007, respectively.

Beekman Vista and Dynamo treated the recorded transfers as debt. Dynamo made repayments to reduce the outstanding balance each year via proceeds received from capital contributions, wire transfers, paying Beekman Vista’s outstanding obligations to third parties, and providing management services to Beekman Vista for which it would otherwise collect fees. In 2007 and 2008, Dynamo engaged in a series of transactions that restructured the advances, including executing promissory notes evidencing prior advances, but it didn’t abide by State laws that serve to formalize lending agreements.

Expert testimony was offered by both the taxpayers and by IRS at trial that

  1. Generally supported the year-end balances described above, the charging of interest, and that the outstanding balances were entirely repaid by 2011;
  2. Concluded that no reasonable commercial lender would have entered into loans like those in this case, i.e., without any collateral, stated interest payments, fixed maturity dates, etc.; and
  3. Determined that Dynamo was sufficiently able to repay the advances such that it would have been able to borrow from a third-party lender (albeit under more commercially acceptable terms).

The asset transfers. In addition to providing advances to Dynamo, Beekman Vista also transffered to it real property, its hedge fund portfolio, and its interest in an LLC.

At the time of the real property transfers Beekman Vista and Dynamo did not obtain independent appraisals of the property because the members of the management team believed that, as experts in property valuation and real estate development, they had accurately priced the properties.

Expert testimony at trial was offered by both sides as to the value of the properties. While the parties didn’t dispute a number of the values, in general, the taxpayers’ experts provided values that were lower than those provided by IRS experts. And, the property values were generally lower than the payment that Beekman Vista received from Dynamo—in the form of increasing the amount of the outstanding balance owed to Beekman—at the time that the property was transferred.

With respect to the LLC interest transferred to Dynamo, Dynamo increased the outstanding balance due to Beekman Vista by $14.5 million, which reflected Beekman Vista’s partnership contribution for that interest.

The hedge fund portfolio had an FMV of $228 million on Dec. 31, 2005, and the assets of the fund were transferred to Dynamo during the first half of 2006 in exchange for $198 million (again, payments recorded as increases in the outstanding balance due).

Issues before the Tax Court. The primary issues raised in the case were

  1. Whether the advances from Beekman Vista to Dynamo were gifts or loans (i.e., whether the advances were bona fide debt), and
  2. Whether there were transfers of property from Beekman Vista to Dynamo at less than FMV.

Court’s decision. The Tax Court first concluded that the advances at issue were loans. Although at the time the advances were made there was no contemporaneous promissory note identifying all the terms of the agreement, there was no collateral set aside to ensure repayment, there was no invoice or demand made by Beekman Vista, and there was no fixed maturity date or intent to force Dynamo into bankruptcy if required to ensure repayment, there nonetheless were many meaningful formal indicia of debt, including that the taxpayers maintained records that reflected advances as debt in their general ledgers, and they executed promissory notes.

The Court also found economic indicia of debt, including the charging and paying of interest, which was reported and deducted by the taxpayers appropriately; that the advances were continuously repaid and that they were repaid in their entirety in 2011; and that Dynamo had the ability to repay—all of which supported the conclusion that Dynamo and Beekman Vista entered into a bona fide creditor-debtor relationship.

With respect to the property transfers, the Court found that Beekman Vista transferred property to Dynamo at less than FMV. Specifically, the first property was worth $23.5 million but sold for $12.3 million, the second property was worth $116.6 million but sold for $40.7 million; the third (a group of properties considered as a unit) was worth $12.8 million but sold for $9.9 million; and the final property was worth $140 million but sold for $49.5 million.

The Court also sided with the taxpayers that the LLC interest was transferred at FMV, but sided with IRS that the hedge fund portfolio was transferred for approximately $30.2 million less than its FMV.

The cumulative effect of the value differences described above resulted in a transfer from Beekman Vista to Dynamo of almost $211 million.

The Court then determined that this transfer constituted a constructive distribution to Ms. Moog. It easily concluded that the objective prong was met, given the control that she exercised over both Beekman Vista and Dynamo. It also found that the subjective test was met, given that the benefit of the transfer was primarily to Dynamo and, by extension, to the dynasty trusts, furthering Ms. Moog’s estate planning.

References: For constructive dividends, see FTC 2d/FIN ¶ C-2512; United States Tax Reporter ¶ 3014.08.

Sourced from CHECKPOINT NEWSSTAND, Reuters

LEGAL MARIJUANA OFFERS SMALL STATE TAX REVENUE BOOST – MOODY’S

By Robin Respaut, Laila Kearney; New York, Daniel Bases and David Gregorio

SAN FRANCISCO (Reuters) – Tax revenue from recreational marijuana makes up a small percentage of annual general fund revenues in states with the most established retail markets, such as Colorado, Washington and Oregon, Moody’s Investors Service said on Tuesday.

The boost in tax revenues is marginally credit positive in states with a nascent legalized weed industry, the rating agency said, including in larger states like California.

Cities and counties are more likely to see a bigger impact from local marijuana taxes because of their relative size, Moody’s found. Some municipalities have prohibited local retail marijuana sales, in order to avoid the potential strain on law enforcement.

Twenty-nine states nationwide have legalized some form of marijuana. Nine states permit recreational use. Canada is planning to legalize weed later this year.

Colorado and Washington, two states with the most established retail weed industries, offer examples of how tax revenues can quickly ramp up in the years after legalization. Both states now anticipate collecting hundreds of millions of weed-related tax revenues annually. But ultimately that makes up 2 percent or less of the states’ total general fund revenues.

State and local governments collect sales and excise taxes, along with licensing fees. The money has paid for marijuana-related law enforcement programs, substance abuse programs, school construction, and other capital projects.

Some experts and legislators have argued that high taxes and fees on newly legal pot businesses have actually hurt their ability to generate public dollars.

In California, where a law to legalize adult-use recreational cannabis took effect this year, lawmakers have already proposed temporarily reducing state-imposed cannabis taxes to help legitimate pot workers stay competitive.

Adding to the challenges facing the industry’s growers and sellers, there is still no legal way to access banks and other financial markets. Earlier this year, the U.S. Department of Justice withdrew guidelines that limited prosecutions of marijuana sales.

Estimates for the U.S. legal weed market reach $16 billion by 2020, up from $5.4 billion in 2015, according to Euromonitor International.

Sourced from CHECKPOINT NEWSTAND, Reuters

IRS SEEKS RECOMMENDATIONS FOR 2018-2019 GUIDANCE PRIORITY LIST

Notice 2018-43, 2018-20 IRB

IRS is requesting recommendations for items that should be included on the 2018-2019 Guidance Priority List. The deadline to submit recommendations for the initial list is June 15, 2018.

Background. IRS uses the Guidance Priority List each year to identify and prioritize the tax issues that should be addressed through regs, revenue rulings, revenue procedures, notices, and other published administrative guidance.

2018-2019 list. The 2018-2019 Guidance Priority List will establish the guidance that IRS intends to issue from July 1, 2018 through June 30, 2019. IRS stated that it recognizes the importance of public input to formulate a Guidance Priority List that focuses resources on guidance items that are most important to taxpayers and tax administration.

IRS noted that since the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017) was signed into law in December 2017, it has focused its efforts on guidance projects necessary to implement the TCJA, and expects to continue to do so. Thus, IRS does not expect to complete several of the guidance projects on the 2017-2018 Priority Guidance Plan, which may be carried over to the 2018-2019 Priority Guidance Plan.

In reviewing recommendations and selecting projects for inclusion on the 2018-2019 Guidance Priority List, IRS said it will consider whether the recommended guidance:

  • Would resolve significant issues relevant to many taxpayers;
  • Would reduce controversy and lessen the burden on taxpayers or IRS;
  • Involves regs or other guidance that is outmoded, unnecessary, ineffective, insufficient, or excessively burdensome, and that should be modified, streamlined, expanded, replaced, or withdrawn;
  • Would be in accordance with Executive Order 13771, Executive Order 13777, or other executive orders;
  • Would promote sound tax administration;
  • Could be administered by IRS on a uniform basis; and
  • Could be drafted in a manner that will enable taxpayers to easily understand and apply it.

How to submit recommendations. Although taxpayers may submit recommendations throughout the year, recommendations should be submitted by June 15, 2018 for possible inclusion on the original 2018-2019 Guidance Priority List. IRS may update the Guidance Priority List periodically to reflect additional guidance that it intends to publish during the plan year. The periodic updates allow IRS to respond to the need for additional guidance that may arise during the plan year, IRS said.

Taxpayers are not required to submit recommendations for guidance in a particular format. Taxpayers should briefly describe the recommended guidance and explain the need for the guidance. In addition, taxpayers may include an analysis of how the issue should be resolved, said IRS.

Written comments should be sent to: Internal Revenue Service, Attn: CC:PA:LPD:PR (Notice 2018-43), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044; or hand delivered between 8 a.m. and 4 p.m. to: Courier’s Desk, Internal Revenue Service, Attn: CC:PA:LPD:PR (Notice 2018-43), 1111 Constitution Avenue, N.W., Washington, D.C. 20224.

Comments may also be submitted via the federal eRulemaking portal at regulations.gov (type “IRS-2018-0010” in the search field on the homepage to find the notice and submit comments). All comments will be made available for public inspection and copying in their entirety.

From Checkpoint Newsstand, Thomson Reuters

INTERNAL IRS GUIDANCE ADDRESSES LOSSES CLAIMED BY S CORP SHAREHOLDER IN EXCESS OF BASIS

International Practice Unit, “Losses Claimed in Excess of Basis”

In an International Practice Unit (IPU), IRS has provided guidance to its auditors addressing whether a shareholder has sufficient basis to claim losses and deductions passed through from the S corporation.

RIA observation: IPUs are not official IRS pronouncements of law or directives and cannot be used, cited, or relied upon as such. Nonetheless, they identify strategic areas of importance to IRS and can provide valuable insight as to how IRS examiners may audit a particular issue or transaction.

Background. An S corporation shareholder takes into account, for the shareholder’s tax year in which the corporation’s tax year ends, his or her pro rata share of the corporation’s items of income, loss, deduction, or credit, as well as the corporation’s non-separately computed income or loss. (Code Sec. 1366(a)(1)) The character of the items passed through is preserved. (Code Sec. 1366(b))

However, the aggregate amount of losses and deductions taken into account by the shareholder is limited to the sum of the adjusted basis of the shareholder’s stock in the S corporation and the shareholder’s adjusted basis of any indebtedness of the S corporation to the shareholder. (Code Sec. 1366(d)(1)) Any losses or deductions disallowed for any tax year are suspended and carried forward indefinitely until the shareholder has adequate stock or debt basis. (Code Sec. 1366(d)(2))

When stock and debt basis is insufficient, and there is more than one type of loss or deduction item that reduces basis, the amounts allowed as losses or deductions are allocated on a pro rata basis. The suspended losses retain their character and are carried forward and treated as incurred in the first succeeding year. If the stock is sold or otherwise disposed of, then the suspended losses are no longer carried forward and are lost forever. (Code Sec. 1366(d), Reg. § 1.1366-2(a))

Stock basis can never be reduced below zero, and even if a loss is claimed in excess of basis, the stock basis at the beginning of the following year is zero. (Code Sec. 1367(a)(2)) IRS’s position is that if a shareholder claims losses in excess of basis in a year closed by statute, then the shareholder must suspend all future tax-free distributions and losses from the S corporation until the excess losses claimed, but not allowed, are recaptured. (PLR 200619021) If a taxpayer claims a loss in excess of basis in a closed statue year, then a suspense account is created, pursuant to Code Sec. 1366(d)(2), to track the excess losses. The balance in the suspense account must be reduced to zero before the taxpayer is allowed to take tax-free non-dividend distributions or report pass-through losses.

IPU guidance. The IPU provides a process for auditors to follow in determining whether a shareholder has sufficient basis to claim losses and deductions passed through from an S corporation.

The process applies when the shareholder:

  1. Is allocated a loss or deduction item on Schedule K-1,
  2. Deducts all or a part of the loss or deduction items on Form 1040 or Form 1041, and
  3. Does not have sufficient basis to deduct the claimed losses or deductions.

To determine if the loss or deduction items exceed basis, auditors are instructed to compare the estimated beginning stock and debt basis of the S corporation with its current year Schedule K losses and deductions. Once the auditor determines that the requisite criteria have been satisfied, the auditor should determine whether to pursue the issue, with the IPU stating that the issue should be pursued if the shareholder claimed “material losses or deductions” on their Forms 1040 or 1041 in excess of the combined estimated basis. (No definition of “material” is provided for this purpose.)

To determine each shareholder’s stock and debt basis, the IPU instructs auditors to:

  1. Verify or recompute the shareholder’s basis. In completing this step, auditors are reminded that S corporation shareholders are required to both maintain adequate books and records to substantiate their basis and adjust that basis each year for the activities of the corporation, and to attach a basis computation to their return when claiming a loss or deduction, as stated in the Instructions for Schedule E (Form 1040) and the Shareholder’s Instructions for Schedule K-1 (Form 1120S). Auditors should review the shareholders’ returns for the required basis computations and request it if not attached, including basis computation for all years since the S election or since the shareholder first acquired the stock. In reviewing the shareholder’s stock and debt basis computation, auditors should:
    1. Verify the shareholder’s initial stock basis and any subsequent contributions, and consider requesting documentation to support contributions, purchases, gifts or bequests of stock;
    2. Obtain prior years Schedules K-1 information and reconcile the increases and decreases to the shareholder’s basis computation;
    3. Inquire about changes in ownership and consider the impact to basis;
    4. Verify that the proper stock and basis ordering rules are followed;
    5. Verify that any loans from a shareholder to the corporation are bona fide; and
    6. Verify that the shareholder had the necessary funds to lend or contribute to the S corporation.

The IPU provides additional steps to estimate initial stock basis for situations where historical records are not available and says that if an estimate “appears to be unreasonable based on the facts and circumstances”, consider using zero.

  1. Ascertain whether any losses were claimed in excess of basis in a closed statute year. For this step, auditors are instructed to review the basis computation schedule and identify any years for which the losses and deductions exceed the shareholder’s basis, compare the basis computation to the shareholder’s return to determine if the losses claimed in closed statute years exceed basis, and establish (or increase) the suspense account accordingly.
  2. Determine whether losses were taken in excess of basis in an open statute year. If the shareholder has a suspense account from step (2), above, then auditors should reduce the shareholder’s basis by the lesser of
    1. The absolute value of the suspense account, or
    2. The basis after the current-year increases.

Auditors are instructed to review the basis computation schedule and identify open statute years for which the losses and deductions exceed the shareholder’s basis, then compare the basis computation to the shareholder’s return to determine if the losses claimed in open statute years exceed basis. Any losses or deductions in excess of basis should be disallowed, after verifying that each loss or deduction item was properly limited on a pro rata basis.

References: For basis limitations on shareholder’s deduction of S corporation losses, see FTC 2d/FIN ¶ D-1775; United States Tax Reporter ¶ 13,664.

SOURCE: CHECKPOINT NEWSSTAND

Issue of trust fund penalty for private school’s volunteer treasurer required trial

Bibler v. U.S., (DC OH 4/23/2018) 121 AFTR 2d ¶2018-690

A district court has denied summary judgment to IRS on its imposition of the trust fund recovery penalty under Code Sec. 6672 against a volunteer treasurer of a private school. The court found that the taxpayer showed that there was a genuine issue of material fact on whether his conduct met a “reasonable cause” exception. Accordingly, the issue had to be determined at trial.

Background. Under Code Sec. 6672(a), if an employer fails to properly pay over its payroll taxes, IRS can seek to collect a trust fund penalty equal to 100% of the unpaid taxes from a person who:

  1. Is a “responsible person”, i.e., one who is responsible for collecting, accounting for, and paying over payroll taxes; and
  2. Willfully fails to perform this responsibility.

In determining who is a responsible person, the courts generally look at several factors, including:

  1. The duties of the officer as outlined by the corporate by-laws;
  2. The ability of the individual to sign checks for the corporation;
  3. The identity of the officers, directors, and shareholders;
  4. The identity of the individuals who hired and fired employees;
  5. The identity of the individuals who were in control of the financial affairs of the corporation. (Gephart v. U.S., (CA 6 1987) 59 AFTR 2d 87-1099)

Other factors include whether the person had access to the company’s books and records, and whether the individual has made personal loans to the company.

The Sixth Circuit has held that a responsible person will be found liable under Code Sec. 6672(a) if IRS can demonstrate that he had either

  1. Actual knowledge that the trust fund taxes were not paid and the ability to pay the taxes, or
  2. Recklessly disregarded known risks that the trust fund taxes were not paid.

In other words, for a responsible person to be deemed to have acted willfully under Code Sec. 6672(a), he must have either “had knowledge of the tax delinquency and knowingly failed to rectify it when there were available funds to pay the government” (Gephart, (CA 6 1987) 59 AFTR 2d 87-1099) or “deliberately or recklessly disregarded facts and known risks that the taxes were not being paid”. (Calderone, (CA 6 1986) 58 AFTR 2d 86-5703)

In Byrne v. U.S., (CA 6 2017) 119 AFTR 2d 2017-1824, the Sixth Circuit reiterated its holding in Calderone that a responsible person is reckless and therefore willful under Code Sec. 6672(a) when he disregards obvious or known risks that trust fund taxes are not being paid to IRS and fails to investigate. However, the Court said it had to balance the government’s prerogative to recover that which is owed with limiting liability for that recovery to those who are personally at fault. While noting that Code Sec. 6672(a) did not have a reasonable cause exception, it adopted the Second Circuit’s “reasonable cause” exception to Code Sec. 6672(a) liability: “a responsible person’s failure to cause the withholding taxes to be paid is not willful if he believed that the taxes were in fact being paid, so long as that belief was, in the circumstances, a reasonable one”. (Winter, (CA 2 1999) 84 AFTR 2d 99-6892)

Code Sec. 6672(e) provides that unpaid volunteer board members of tax-exempt organizations who are solely serving in an honorary capacity, aren’t involved in day-to-day financial activities, and don’t know about the penalized failure are exempt from the penalty, unless that results in no one being liable for it. However, in Rev Rul 84–83, 1984-1 CB 264, IRS noted that a volunteer member of a board of trustees can still be deemed liable if he is found to meet the tests of responsibility and willfulness under Code Sec. 6672.

Facts. Excel Academy was an tax exempt private school that served children who were behaviorally and emotionally challenged. David Bibler was appointed to the school’s Board of Directors after the former executive director and founder of the school was indicted for violation of the State’s bingo laws. Mr. Bibler agreed to serve as a volunteer Board member, and the Board elected him Treasurer of the Board of Directors.

No member of the Board, including Mr. Bibler, was responsible for the day-to-day operations of Excel Academy. Those duties fell to the Chief Executive Officer (CEO) and her staff of administrative personnel, teachers, and staff. Neither Mr. Bibler nor any other Board member had the responsibility to determine who to pay or which bills required delayed payment. These decisions fell to the CEO. Payroll was handled by the CEO and her staff. Financial reports were prepared by the CEO and her staff and presented at meetings. However, Mr. Bibler, as Treasurer, signed or co-signed checks that were presented to him by the CEO or her assistant.

The school fell behind in its payment of employee payroll taxes for the quarterly tax period that ended on Dec. 31, 2011. The record indicates that the Board of Directors was made aware that the payroll taxes were owed for the 4th quarter of 2011 at a Board meeting of Oct. 17, 2012. This report was made by the CEO or her assistant. The President of the Board specifically instructed and directed the CEO to pay the tax. Mr. Bibler understood that the CEO was in communication with IRS and was making installments on the 4th quarter 2011 tax liability.

It was not disputed that, after receiving the information that Excel Academy’s payroll taxes were in arrears, Mr. Bibler continued to sign checks as Treasurer making payments to creditors other than IRS. Nor was it in dispute that while he was serving as Treasurer, Excel Academy failed to file its Form 941 (Employer’s Quarterly Federal Tax Return) for the fourth quarter of 2011 that was due Jan. 31, 2012.

IRS assessed Mr. Bibler liability for these taxes under Code Sec. 6672. He paid the tax for one employee for each quarter of liability and filed a refund claim, asserting that he was not a liable person required to collect, account for, and pay over payroll and/or withholding taxes for Excel Academy. Upon denial, he filed suit for a refund in the district court.

Taxpayer’s position. Mr. Bibler produced evidence to show that he signed checks and co-signed checks at the behest of the CEO, and that he had no duty or authority to sign or file tax forms for Excel Academy. He showed that he did not oversee the employees, collect payroll information, compile payroll information, or remit payroll information to the payroll service on behalf of the corporation or to IRS. Further, he did not make decisions as to what bills were to be paid and those bills for which payment might require a delay. These decisions were those of the CEO. In addition, Mr. Bibler stated that the Board directed the CEO to pay the trust fund taxes as soon as the Board learned that the taxes were behind a quarter, and he believed the CEO contacted IRS and was paying the taxes as directed.

Court’s conclusion. The district court, denying IRS summary judgment, found that the question of whether Mr. Bibler was a responsible person liable for the trust fund recovery penalty was an issue to be decided at trial.

Under the exception for voluntary board members of tax-exempt organizations under Code Sec. 6672(e), it appeared that Mr. Bibler had met the first two prongs of the test, in that he provided evidence to show:

  1. That he was serving solely in an honorary capacity, and
  2. That he did not participate in the day-to-day or financial operations of the organization.

However, the court noted that the exception requires a third prong, that the person (3) did not have actual knowledge of the failure on which such penalty was imposed. The Board was told that the tax was not paid, confirming that at that point Mr. Bibler had actual knowledge. For argument’s sake, the court assumed that Mr. Bibler was a responsible person. However, this factor alone was not dispositive: to be penalized for a company’s tax delinquency a responsible person’s failure to pay trust fund taxes must be willful.

The district court concluded that, in view of the Sixth Circuit’s adoption of the “reasonable cause” exception in Byrnes, it had to consider whether Mr. Bibler had produced sufficient evidence to raise a genuine issue of material fact to support a reasonable belief that the taxes were in fact being paid. Mr. Bibler attested that he understood that the CEO, who had been specifically instructed by the President and all of the members of the Board to pay the tax, was in communication with IRS and was making installments on the 4th quarter tax liability in November and December of 2012, within two months of assessment and in 2013.

The evidence in the record did not contradict Mr. Bibler’s stated belief. Considering all of the evidence in the light most favorable to Mr. Bibler, the district court concluded that he had provided evidence sufficient to raise a genuine issue of material fact concerning whether his conduct met the Sixth Circuit’s “reasonable cause” exception. Accordingly, this issue was to be decided by a jury at trial and not by the summary judgment motion.

References: For the willful failure to collect and pay over tax for purposes of the trust fund recovery penalty, see FTC 2d/FIN ¶V-1717; United States Tax Reporter ¶66,724.

CHECKPOINT NEWSTAND

EU moves to tackle letter box firms’ tax avoidance, social dumping

By Francesco Guarascio and Elaine Hardcastle

BRUSSELS (Reuters) – The European Commission proposed new rules to clamp down on firms that relocate within the bloc for the purpose of cutting their tax bills or reducing rights of employees, creditors and minority shareholders, setting up mere letter box companies.

Smaller countries in the 28-country single market, like Luxembourg, Ireland, Malta and the Netherlands, have traditionally attracted companies from other member states thanks to lower corporate tax and rights for workers and smaller shareholders.

Under the proposed rules, which need approval from EU states and parliamentarians, countries where companies are originally headquartered would be able to block their relocation to another member state if “the operation constitutes an artificial arrangement” meant exclusively to circumvent tax or workers’ rights.

“In our thriving EU Single Market, companies have the freedom to move and grow. But this needs to happen in a fair way”, The Commission’s Vice President Frans Timmermans said.

In some cases corporate relocation has resulted in the setting up of mere letter box companies which are not engaging in any economic activity but simply avoiding their obligations.

“Companies should relocate only when there is a genuine reason to do so, not simply as a way of shopping for the lowest tax rate or as a way of circumventing workers’ rights”, Socialist lawmaker Sylvia-Yvonne Kaufmann said, welcoming the commission’s proposal as a “step in the right direction”.

“Employees will in the future have a say on their companies’ cross border operations”, EU justice commissioner Vera Jourova said, stressing that the proposal is also aimed at countering social dumping – where production is moved to countries with lower wages or workers’ rights.

While tackling abuses, the Commission expects at the same time to facilitate firms’ legitimate relocation or division by introducing a new common transfer procedure that would replace the existing patchwork of national rules.

States will be required to offer online procedures for corporate registration which in the 17 EU countries where they are already operational have significantly cut costs for firms, the Commission said.

BusinessEurope, a trade association for EU enterprises, welcomed the plan to simplify cross-border operations but warned against risks of “overburdening check-ups” on firms.

Sven Giegold, an EU lawmaker for the Greens, said the proposal was a “promotional programme for tax and social dumping in Europe”.

“As long as we have very different tax and social systems within the EU, it is harmful to facilitate company relocations in the internal market”, he said.

WASHINGTON ALERT

Is it possible we are following the lead of Soviet Russia? I expect the states to win this case at the Supreme Court. I see two problems with that outcome. (1) States do need to replace the revenue lost as local shopping vanishes. That is a problem. But there are other solutions that are simply not attractive to bureaucrats, I’m not certain this is the best answer, or whether this is just the lowest hanging fruit states can find. (2) This looks like a push towards enforced conformity across all domains.

» Reuters Featured Article of the Day

South Dakota e-commerce sale tax fight reaches U.S. Supreme Court

By Lawrence Hurley and Will Dunham

WASHINGTON (Reuters) – A high-stakes showdown at the U.S. Supreme Court on Tuesday will determine whether states can force out-of-state online retailers to collect sales taxes in a fight between South Dakota and e-commerce businesses.

South Dakota is asking the nine justices to overturn a 1992 Supreme Court precedent that states cannot require retailers to collect state sales taxes on purchases unless the businesses have a “physical presence” in the state.

The state, appealing a lower court decision that favored Wayfair Inc, Overstock.com Inc and Newegg Inc, is being supported by President Donald Trump’s administration.

A ruling favoring South Dakota could help small brick-and-mortar retailers compete with online rivals while funneling up to $18 billion into the coffers of the affected states, according to a 2017 federal report.

The justices will hear arguments in the case on Tuesday against a backdrop of Trump’s harsh criticism of Amazon.com Inc, the dominant player in online retail, on the issue of taxes and other matters. Trump has assailed Amazon CEO Jeff Bezos, who owns the Washington Post, a newspaper that the Republican president also has disparaged. [nL1N1RB0L9]

Amazon, which is not involved in the Supreme Court case, collects sales taxes on direct purchases on its site but does not collect taxes for items sold on its platform by third-party venders, constituting around half of total sales.

South Dakota depends more than most states on sales taxes because it is one of nine that do not have a state income tax. South Dakota projects its revenue losses because of online sales that do not collect state taxes at around $50 million annually, while its opponents in the case estimate it as less than half that figure.

Major retailers that have brick-and-mortar stores, and therefore already collect taxes, are represented by industry groups that back South Dakota. The National Retail Federation, which supports the state, has a membership list that includes Walmart Inc and Target Corp, as well as Amazon.

Stephanie Martz, the federation’s general counsel, said in an interview the case gives the Supreme Court a chance to adapt the law to new circumstances prompted by the rise of internet shopping.

“Things have changed a lot since 1992. The entire nature of interstate commerce has changed”, Martz said.

E-commerce companies supporting Wayfair, Overstock and Newegg include two that provide online platforms for individuals to sell online: eBay Inc and Etsy Inc.

“Win or lose at the Supreme Court, we will continue to advocate for a legislative solution and a level playing field where all retailers collect and remit sales tax on the same basis”, Wayfair spokeswoman Jane Carpenter said in a statement.

Brian Bieron, eBay’s senior director of government relations, said in an interview the 1992 precedent “provides the many small businesses that use the internet with a very clear and simple and stable legal environment in which to grow their business”.

Overturning the ruling while not replacing it with a new national framework “is really going to be a negative move in terms of e-commerce”, Bieron added.

A 2016 South Dakota law requires out-of-state online retailers to collect sales tax if they clear $100,000 in sales or 200 separate transactions. State legislators knew the measure was unlawful under the 1992 precedent.

The state sued a group of online retailers after the law was enacted to force them to collect the state sale taxes, with the aim of overturning the precedent. 

 

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Penalties increase for failure to file FBAR for foreign financial account

Inflation Adjustment of Civil Monetary Penalties (Mar. 19, 2018)

The Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department, has announced the inflation-adjusted increase in the penalty amounts for a failure to file a Report of Foreign Bank and Financial Accounts (FBAR) reporting an interest in a foreign financial account.

Background on FBAR. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, must file an FBAR (Report of Foreign Bank and Financial Accounts, i.e., FinCEN Form 114) if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.

A U.S. person means a U.S. citizen (including a child), a individual who is a resident alien under Code Sec. 7701(b) of the U.S., the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the U.S., and an entity, including a corporation, partnership, trust or limited liability company organized or formed under U.S. laws or the law of any State, the District of Columbia, the U.S. Territories and Insular Possessions or Indian Tribes.

A “foreign financial account” is a financial account located outside the U.S. The U.S. includes the states, the District of Columbia, territories and possessions of the U.S., and certain Indian lands. An account maintained with a branch of a U.S. bank that is physically located outside of the U.S. is a foreign financial account. An account maintained with a branch of a foreign bank that is physically located in the U.S. is not a foreign financial account.

A U.S. person has a financial interest in a foreign financial account for which:

  1. The U.S. person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the U.S. person or for the benefit of another person; or
  2. The owner of record or holder of legal title is one of certain listed entities, which include
    1. An agent, a nominee, attorney, or a person acting in some other capacity on behalf of the U.S. person with respect to the account, or
    2. Any of certain entities controlled by the U.S. person.

The civil and criminal penalties for noncompliance with the FBAR filing requirements are significant. Civil penalties for a non-willful violation can range up to $10,000 per violation (31 U.S.C. 5321(a)(5)(B)(i)), as adjusted for inflation, and civil penalties for a willful violation can range up to the greater of $100,000 (31 U.S.C. 5321(a)(5)(C)), as adjusted for inflation, or 50% of the amount in the account at the time of the violation. As adjusted for inflation, these amounts are, for penalties assessed after 8/1/2016 but before 1/16/2017, $12,663 and $126,626, respectively. A “reasonable cause” exception exists for non-willful violations, but not for willful ones.

Inflation adjustment. For penalties assessed after 1/15/2017, the FBAR penalty for a non-willful failure to report penalty increases from $12,663 to $12,921, and the penalty for a willful failure to report increases from $126,626 to $129,210.

References: For foreign financial accounts reporting requirements, see FTC 2d/FIN S-3650; United States Tax Reporter 60,114.06.