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NewsNotes Lesli S. Laffie, J.D., LL.M. Responsible Person • Sale of Donated Warrants • Stock Basis after Redemption • Tax Shelters
Court Decisions In Steven Lindsey, 10th Cir., 10/7/02, the Tenth Circuit upheld a determination that an individual was a Sec. 6672 responsible person for an unpaid em-ployment tax liability, despite the fact that he had no check-signing authority for the employer corporation. The taxpayer was a founder and 50% shareholder of TFS, which leased truck drivers to Clearwater, another company with the same owners. He was president of Clearwater and vice president of TFS. TFS operated rent-free using Clearwater's facilities and had no financial obligations other than for payroll and employment taxes. The taxpayer had substantial financial control over TFS because he authorized all employee lease payments from Clearwater to TFS; he could sign Clearwater checks, but not TFS checks. Financial problems led Clearwater to stop paying TFS amounts to cover the truck drivers' wages and the employment taxes; thus, TFS failed to pay its employment taxes. The taxpayer contended that, because he lacked authority to write checks on TFS's bank account, he was not responsible for willfully failing to pay employment taxes. According to the Tenth Circuit, the issue was whether check-signing authority on a corporate account is a necessary predicate for demonstrating both personal responsibility and willfulness. The court concluded that authority to sign checks is only one of several factors in determining personal responsibility. The crux is whether the person had effective power to pay the taxes (i.e., whether he or she had actual authority or ability to pay the taxes owed, in light of his or her status within the corporation). The officer need not personally write checks, as long as he or she has significant authority and control over the corporation's finances.
The Tax Court held in Gerald A. Rauenhorst, 119 TC No. 9 (2002), that donated stock warrants that charities sold to an interested buyer known to the donors before the contributions, were not prohibited assignments of income. The court concluded that, at the time of the gifts, the charities were not legally bound and could not be compelled to sell the warrants; moreover, the facts fell squarely within Rev. Rul. 78-197, on which the taxpayers had relied in structuring the transaction. The taxpayers were the sole partners of a partnership that owned warrants in NMG, a Delaware corporation. The partnership assigned the warrants in 1993 to four charities after it learned that NMG's stock was going to be sold to World Color Press, Inc. (WCP). The donees subsequently sold their warrants to WCP. The IRS determined that the contributions were anticipatory assignments of income. The taxpayers argued that the doctrine did not apply under Rev. Rul. 78-197 (which involved similar facts, except that the stock contributions were followed by a redemption, rather than a sale). The IRS had concluded in that ruling that there was no barred assignment, because the donees were not legally obligated (and could not be compelled) to sell the contributed property. Although the IRS argued that it was not bound by Rev. Rul. 78-197, the Tax Court concluded that although that was true, the ruling has (1) been in existence for nearly a quarter-century, (2) not been revoked or modified and (3) been cited by the IRS itself in numerous letter rulings. The taxpayers argued that they had relied on the ruling in planning their charitable contributions. Revenue rulings are intended to assist taxpayers in achieving maximum voluntary compliance. The Tax Court treated the IRS's position in Rev. Rul. 78-197 as a concession that the anticipatory-assignment-of-income doctrine could not apply if the charitable donees were not legally obligated and could not be compelled to sell, which was the case here.
Regulations The Service has issued proposed regulations (REG-150313-01) on the treatment of the basis of redeemed stock when a distribution in redemption is deemed a dividend. The proposed rules would amend the regulations under Secs. 302, 304, 704, 861, 1371, 1374 and 1502 to provide guidance on the dividend issue and on stock acquisitions by related corporations treated as redemption distributions. The proposed regulations affect shareholders whose stock in a corporation is redeemed or acquired by a corporation related to the stock issuer. A public hearing is scheduled for Feb. 20, 2003; written comments and requests to speak at the public hearing must be received by Jan. 30, 2003. Send submissions to:
or electronically via www.irs.gov/regs.
The IRS has issued temporary regulations (TD 9017) revising the categories of transactions that must be disclosed on returns under Temp. Regs. Sec. 1.6011-4T. (For background, see Sawyers, "Registration, Listing and Disclosure of Potentially Abusive Corporate Tax Shelters," TTA, Aug. 2000, p. 568.) Under the current temporary regulations, taxpayers such as partnerships and S corporations must disclose their direct or indirect participation in "reportable transactions," defined in Temp. Regs. Sec. 1.6011-4T as a listed transaction or a transaction that meets two of five characteristics, satisfies a projected-tax-effect test and does not meet any of the provided exceptions. The revised temporary regulations define a reportable transaction as one that falls into one of six categories. They eliminate the projected-tax-effect test and the general exceptions. The six categories of reportable transactions are: 1. Listed transactions. 2. Confidential transactions. 3. Transactions with contractual protection. 4. Loss transactions. 5. Transactions with a significant book-tax difference. 6. Transactions involving a brief asset holding period. Definitions are provided for each category. The new rules require all direct and indirect participants to disclose all reportable transactions. Participants must attach to their returns Form 8886, "Reportable Transaction Disclosure Statement," which will become available when the regulations become effective. The temporary rules also permit taxpayers to request a ruling on whether a transaction must be disclosed. A transaction will not be a reportable transaction (or part of one) if the IRS determines–in published guidance or an administrative ruling– that it is not reportable and does not need to be disclosed. The temporary regulations will be effective on Jan. 1, 2003; the existing temporary regulations continue to be effective until then. List maintenance: Another set of temporary regulations (TD 9018) requires organizers and sellers to maintain lists of investors in potentially abusive tax shelters. Sec. 6112 requires any person who "organizes a potentially abusive tax shelter" or "sells any interest in such a shelter" to maintain a list of investors who bought an interest. Under the temporary regulations, a transaction will be treated as a potentially abusive tax shelter if it is a listed transaction or a "material adviser" knew or had reason to know that the transaction was a reportable one. A material adviser is someone who received (or expects to receive) at least $50,000 ($250,000, if the participants are corporations other than S corporations) in fees in the transaction, or provides a written or oral opinion as to the transaction's tax consequences. The temporary rules outline how to compute a minimum fee and when the list requirement starts. Lists must be maintained for 10 years. The temporary regulations will generally be effective on Jan. 1, 2003, but can have retroactive effect. Proposed regulations (REG-103735-00 and REG-103736-00) have also been issued to conform other regulations to the temporary provisions. |
