Attorney-at-Law

FOOLISH CONSISTENCY?

In Uncategorized on 05/05/2011 at 16:14

No, Intertwined and Inseparable Result

“A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.” Ralph Waldo Emerson, 1803-1882. Well, maybe so, but not for FSCs owned by IRAs, says Judge Nims in Michael S. and Pamela S. Ohsman, 2011 T.C. Mem. 98, filed 5/3/11.

Relying on Hellweg v. Commissioner, 2011 T.C. Mem. 58, filed 3/9/11, Tax Court held that, as IRS permitted the Ohsmans’ IRA to own the shares of the Foreign Sales Corporation (FSC) to which the Ohsmans directed their sales commissions, and allowed the tax treatment the Ohsmans used for their FSC, IRS was bound to accord the same treatment to the Ohsmans’ IRA. Tax Court granted the Ohsmans summary judgment.

IRS first contended they needed discovery to resolve factual issues in dispute, without stating what those factual issues were. Judge Nims gave IRS short shrift, stating: “Respondent has not contested any part of [Ohsmans expert’s] affidavit and claims only that he is unable to do so because he has not had a reasonable opportunity to conduct discovery. While respondent may require discovery to obtain the evidence necessary to resolve the factual issues that are in dispute, the absence of discovery should not prevent him from being able to identify what those disputed issues are. Respondent may not rely on generalized allegations that material issues of fact potentially exist.” 2011 T.C. Mem. 98, at p. 5.

IRS next wanted to use the good old standby substance-over-form, to argue that the FSC’s payments to the IRA were really payments to the Ohsmans, who then made excess IRA contributions, invoking the 6% Section 4973 excise tax.

No go, says Judge Nims, unless IRS recharacterizes the income tax as well as the excise tax aspects of Ohsmans dealings. Tax Court finds, citing Hellweg, that “(W)e held that the Commissioner could not do so without also making a corresponding income tax adjustment because (1) section 4973 was intertwined with and inseparable from the income tax regime and (2) the Commissioner’s approval of the transactions for income tax purposes undermined his attempted use of the substance-over-form doctrine.” 2011 T.C. Mem. 98, at p. 6.

Here no recharacterization for income tax purposes, so no recharacterization for the “intertwined and inseparable” excise tax purposes.

Takeaway? Consistency is not always foolish.

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