In Uncategorized on 03/26/2020 at 17:44

IRS claims they haven’t a clue that a bunch of purported non-taxable stock purchases were really payments to settle patent infringement cases, wherefore nondisclosure triggers the 6SOL substantial omission of gross income. Naturally, Acqis Technology, Inc. and Consolidated Subsidiary, 2020 T. C. Memo. 38, filed 3/26/20, tell Judge Ruwe that IRS should have twigged to their little ballet at once, 3SOL and thus IRS is SOL.

Acquis had a bunch of ultra-tech patents. They claimed the likes of IBM, H-P, and Oracle infringed thereon. Laying a blast on these Fortune 50s, Acqis picked up about $30 million and the Fortunates got bundles of Acqis Class B stock, with which now one could relieve oneself of a shortage of an extremely necessary domestic article, and a couple license agreements (hi, Judge Holmes).

There were also cash settlements with other alleged infringers, but those were reported and play no part here.

Acquis claims contributions to its capital, no tax due. Judge Ruwe has the Schedule L to the relevant 1120 for Year One, and it shows a $30 million increase in capital stock. No mention of patent litigation, except they showed $12 million in “settlement legal fees” on Sched A, offsetting the $2 million of gross receipts on the 1120. Oh, and “…petitioner listed its business activity as ‘Sales & Development’ and listed its product or service as ‘Computer.’ 2020 T. C. Memo. 38, at p. 6.

For Year Two, business has changed to “Patents” and product as “Royalties.” The capital stock increased by $8 million.

Year Three showed $337K in royalties (no gross receipts), legal fees of another $12 million, but the capital stock was up $30 million.

A real growth industry. IRS invested a SNOD in the operation, in exchange for which IRS got a petition.

Is the SNOD time-barred? Of course the law (Section 6501) changed in between the years at issue, but Judge Ruwe isn’t going there (yet). See 2020 T. C. Memo. 38, at pp. 11-12, footnote 5, for a real head-spinner.

Howbeit, the test is whether the return and attachments gave IRS enough information to suss out the unreported income.

“In order to determine whether disclosure was adequate to apprise the Commissioner of the nature and amount of omitted income, the Court examines whether the return offered a ‘clue’ regarding the existence, nature, and amount of the omitted income. The disclosure need not detail every underlying fact but must be ‘more substantial than simply providing a clue that would intrigue the likes of Sherlock Holmes.’ Although a   misleading statement may provide a ‘clue’ to omitted gross income, it does not adequately apprise the Commissioner of the nature and amount of an item.” 2020 T. C. Memo. 38, at pp. 13-14 (Citations omitted).

And this is a question of fact.

Acqis wants a subjective test. We have to report how we characterized the transactions, not what IRS thought or might think, and that’s enough.

No, says Judge Ruwe, characterize and report whatever you want, but “…the disclosure must still provide an adequate clue as to the nature and amount of omitted income, even if the taxpayer may report the legal construction of a transaction as he sees fit. In this case the Court must know what the nature of the underlying transaction actually is, not just the taxpayer’s subjective view of how the underlying transaction should be characterized, in order to determine if an adequate clue was provided by the taxpayer’s disclosure.” 2020 T. C. Memo. 38, at p. 15 (Citations omitted).

But IRS isn’t off the hook, either. “Respondent implicitly argues in his motion that the adequacy of disclosure should be judged according to his view of the transactions. Respondent’s motion is a Trojan horse, and this Court would have to adopt his view of the transactions in order to grant it. Certain material facts remain in dispute regarding the proper characterization of the transactions, and therefore it would be premature for the Court to reach a conclusion as to which party’s view of the transactions is correct and accordingly whether disclosure was adequate.” 2020 T. C. Memo. 38, at p. 17 (Footnotes omitted).

But there are other facts (not mentioned in the opinion) concerning how these deals actually happened have to be resolved, so no summary J for either side.

  1. Not a comment on the Blogpost. Just wishing you a fine 53 years of Bar Admission!


  2. Thank you very much.


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