In Uncategorized on 11/16/2016 at 15:41

Among the materials for tomorrow night’s meeting of the ABA/NYSBA Subcommittee on Taxation of Cooperatives and Condominiums that just hit my inbox, there comes Eighth Circuit giving IRS a heavy-duty mulligan in Estate of James Stuart, Jr., et al., 15-3319, filed 11/14/16.

While once again affirming that State voidable transfer law controls (and IRS doesn’t bother to fight this on appeal, as they’re 0-for-5 on the Circuits), Eighth Circuit gives Tax Court Judge James S. (“Big Jim”) Halpern the right-about-face.

For background, see my blogpost “State Law – With A Little Salt,” 4/1/15.

Judge Big Jim didn’t hit the Little Salties with the full tax that they would have paid if they’d played straight and not gone in with MidCoast. He only gave them the benefit they actually got, ex-MidCoast’s vigorish for putting this dodge together. He cites Nebraska law for this, while IRS argued liquidating distribution, as usual.

“Although the Tax Court concluded that the question of substantive liability under § 6901 is a question of state law, the court failed to consider the IRS argument that under Nebraska law the stock sale should be recharacterized as a liquidating distribution to the shareholders. The Tax Court instead respected the form of the transaction and concluded that the former shareholders were liable for a portion of Little Salt’s tax deficiency as beneficiaries of the transfer from Little Salt to MidCoast. On appeal the IRS argues that the Tax Court’s failure to consider whether the stock sale should be recharacterized under state law was error. We agree.”

State law is substance-over-form, equitable principles control, creditors must be protected from debtors’ chicanery, etc.

But Eighth Circuit declines to give IRS judgment for the whole nine yards.

“Although we agree with the IRS that the Tax Court should have considered whether the stock sale should be recharacterized as a liquidating distribution to the shareholders under Nebraska law, we decline its invitation to resolve this question in the first instance. A remand will allow for ‘adequate vetting through the adversarial process and avoid having the appellate court ‘try the action de novo.’’” (Citations omitted).

Sorry, no page cites, but it’s a short decision.

Anyway, back go the Little Salties to Tax Court, to play the liquidating distribution game.

Thanks to Martin Miller, Esq., for the heads-up on this. When colleagues’ children are seasoned practitioners and giving us tips, it’s time for another chorus of “Sunrise, Sunset.”


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