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Economic Substance Doctrine

Court of Appeals finds FOCus transactions lacked economic substance but waives penalties

Court of Appeals finds FOCus transactions lacked economic substance but waives penalties

Kearney Partners Fund, LLC v. U.S., (CA 11, 10/13/2015) 116 AFTR 2d ¶2015-5321 The Court of Appeals for the Eleventh Circuit, affirming the district court, concluded that transactions in which partnerships engaged in under a “Family Office Customized” (FOCus) program lacked economic substance and so had to be disregarded for tax purposes. However, the Court […]

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Second Circuit: banking corporation can deduct interest paid on STARS-related loan

Second Circuit: banking corporation can deduct interest paid on STARS-related loan

The Bank of New York Mellon Corporation v. Comm., (CA 2 9/9/2015) 116 AFTR 2d ¶ 2015-5219 The Court of Appeals for the Second Circuit, affirming the Tax Court, has held that a $1.5 billion loan that a banking corporation took out in association with a structured trust advantaged repackaged securities (STARS) transaction had independent […]

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Tax Court Strikes Down Son-Of-Boss Shelter And Imposes Penalty

Tax Court Strikes Down Son-Of-Boss Shelter And Imposes Penalty

436 LTD, Heitmeier, TC Memo 2015-28 The Tax Court has determined that a partnership that engaged in a complicated series of transactions that constituted a Son-of-BOSS tax shelter designed to create artificial losses should be disregarded for U.S. tax purposes. The Court disallowed most of the losses claimed by the taxpayer on the grounds that […]

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Charitable Contribution of Partnership Units was Without Substance

Charitable Contribution of Partnership Units was Without Substance

Chief Counsel Advice 201507018 In Chief Counsel Advice (CCA), IRS has concluded that it was appropriate to recast a partner’s purported transfer of partnership units to a charitable organization under the substance-over-form doctrine. The actual substance of the transaction was the transfer of a mere promise to pay, with the charity never being a bona […]

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Court of Appeals affirms corporation’s transaction involving paired options lacked economic substance

Court of Appeals affirms corporation’s transaction involving paired options lacked economic substance

Humboldt Shelby Holding Corporation And Subsidiaries v. Comm, (CA 2 6/3/2015) 115 AFTR 2d ¶ 2015-797 The Court of Appeals for the Second Circuit, affirming the Tax Court, has concluded that a corporation and its subsidiaries improperly deducted capital losses on stock, the basis of which was artificially inflated in a transaction that lacked economic […]

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Court of Appeals denies STARS transaction foreign tax credits, allows interest deductions

Court of Appeals denies STARS transaction foreign tax credits, allows interest deductions

Salem Financial Inc., (CA FC 5/14/2015) 115 AFTR 2d ¶ 2015-743 The Court of Appeals for the Federal Circuit has ruled that the portion of a”structured trust advantaged repackaged securities” (STARS) transaction involving the use of a trust to generate foreign tax credits (FTCs) had no economic substance, but that the portion in which the […]

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U.S. manufacturer subject to multiple agency investigations over Swiss tax strategy

U.S. manufacturer subject to multiple agency investigations over Swiss tax strategy

In a form filed with the Securities and Exchange Commission (SEC), Caterpillar Inc., which last year was the subject of a Senate hearing on multinationals shifting profits out of the U.S., revealed that numerous investigations by the Justice Department, IRS, and SEC were ongoing with respect to its tax strategies and overall business structure.According to […]

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IRS uses substance-over-form doctrine to disregard leveraged forward contract transaction

IRS uses substance-over-form doctrine to disregard leveraged forward contract transaction

Chief Counsel Advice 201515020 In Chief Counsel Advice (CCA), IRS has concluded that the taxpayers’ participation in a transaction, that featured derivative contracts and an offsetting loan, could be disregarded under the common law economic substance doctrines. The taxpayers entered into the transaction to generate cash flow through expected tax benefits, rather than through the […]

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IRS Notice clarifies definitions of key terms in codified economic substance doctrine

IRS Notice clarifies definitions of key terms in codified economic substance doctrine

Notice 2014-58, 2014-44 IRB In a Notice, IRS has provided additional guidance on the codification of the economic substance doctrine in Code Sec. 7701(o), specifically with regard to: (1) the definition of “transaction” for purposes of applying Code Sec. 7701(o); and (2) the meaning of “similar rule of law” as described in Code Sec. 6662(b)(6)’s […]

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Fifth Circuit disallows $1 billion in deductions from abusive tax shelters

Fifth Circuit disallows $1 billion in deductions from abusive tax shelters

Chemtech Royalty Associates, L.P. v. U.S., (CA 5 9/10/2014) 114 AFTR 2d ¶ 2014-5234 The Court of Appeals for the Fifth Circuit, affirming the district court, has concluded that two transactions entered into by Dow Chemical Company that resulted in approximately $1 billion in deductions should be disregarded for tax purposes. The transactions lacked economic […]

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Court case: Transfer of royalties failed assignment of income and economic substance tests

Court case: Transfer of royalties failed assignment of income and economic substance tests

Salty Brine I, Limited, (CA 5, 7/31/2014) 114 AFTR 2d ¶ 2014-5109 The Court of Appeals for the Fifth Circuit has affirmed a district court’s holding that transfers of royalty interests owned by a partnership, to segregated accounts at an insurance company that were the investment vehicle of life insurance policies owned by companies related […]

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Tax Court disallows losses from CARDS transaction and related forward contracts

Tax Court disallows losses from CARDS transaction and related forward contracts

Hunter, TC Memo 2014-132 The Tax Court has upheld IRS’s disallowance of a taxpayer’s claimed losses from a Custom Applicable Rate Debt Structure (CARDS) transaction that he entered into to shelter over $16 million in capital gains, finding that the transaction lacked economic substance and had no effect beyond the creation of tax benefits. In […]

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Court of Appeals for the Ninth Circuit affirms that OPIS tax shelter lacked economic substance

Court of Appeals for the Ninth Circuit affirms that OPIS tax shelter lacked economic substance

Reddam v. Comm., (CA 9, 6/13/2014) 113 AFTR 2d ¶ 2014-936 The Court of Appeals for the Ninth Circuit, affirming the Tax Court, has denied a taxpayer’s capital loss deduction from a tax and investment program, i.e., the Offshore Portfolio Investment Strategy (OPIS), concluding that the transaction had no practical economic effects other than the […]

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Supreme Court won’t review decision that lease conversion deal lacked economic substance

Supreme Court won’t review decision that lease conversion deal lacked economic substance

WFC Holdings Corp. (CA-8, 8/22/2013) 112 AFTR 2d 2013-5815, cert denied 6/09/2014. The Supreme Court has declined to review the Eighth Circuit’s holding that there was no deductible loss from Wells Fargo’s multi-part transaction in which it attempted to create a deductible loss from several unfavorable lease obligations. The loss was denied because Wells Fargo […]

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Tax Court strikes down Son-of-BOSS structure with corporate partner

Tax Court strikes down Son-of-BOSS structure with corporate partner

The Markell Company, Inc., TC Memo 2014-86. The Tax Court has determined that a complicated series of transactions entered into by a family-owned corporation were essentially a Son-of-BOSS tax shelter designed to create artificial losses. The Court first found that the entity formed to facilitate the transactions didn’t warrant treatment as a partnership and should […]

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Corporation’s transaction involving paired options lacked economic substance

Corporation’s transaction involving paired options lacked economic substance

In Humboldt Shelby Holding Corporation And Subsidiaries, TC Memo 2014-47, the Tax Court has concluded that a corporation and its subsidiaries improperly deducted capital losses on stock, the basis of which was artificially inflated in a transaction that lacked economic substance. Under the scheme, the taxpayers contributed paired options to a partnership to generate an […]

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No Supreme Court review of case finding CARDS transaction lacked economic substance

No Supreme Court review of case finding CARDS transaction lacked economic substance

In Kerman, (CA 6 4/08/2013) 111 AFTR 2d 2013-1554, cert denied 1/13/14, the Supreme Court has declined to review a Sixth Circuit case affirming a Tax Court decision that a taxpayer who entered into a Custom Adjustable Rate Debt Structure (CARDS) transaction in 2000 wasn’t entitled to a $4.25 million loss deduction because the transaction […]

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Court of Appeals Case, Tenth Circuit: Tax Shelter Lacked Economic Substance and Penalties Applied

Court of Appeals Case, Tenth Circuit: Tax Shelter Lacked Economic Substance and Penalties Applied

In Blum v. Commissioner, (CA 10th Cir., 12/18/2013), 112 AFTR 2d ¶ 2013-5690, where a taxpayer chose to litigate a tax shelter scheme, i.e., the Offshore Portfolio Investment Strategy (OPIS), that IRS had formally disallowed as a general scheme many years before, the Court of Appeals for the Tenth Circuit has affirmed the Tax Court’s […]

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Payment in STARS transaction demonstrated reasonable prospect of profit

Payment in STARS transaction demonstrated reasonable prospect of profit

In Santander Holdings USA, Inc., v. United States (DC MA 10/17/2013) 112 AFTR 2d ¶ 2013-5403, a district court has concluded that payments which a taxpayer received in a Structured Trust Advantaged Repackaged Securities (STARS) transaction were to be taken into account as pre-tax income to the taxpayer, rather than as a tax rebate, in […]

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Another “STARS” transaction treated as lacking economic substance

Another “STARS” transaction treated as lacking economic substance

The Court of Federal Claims has held in Salem Financial Inc., (Ct Fed Cl, 9/20/2013) 112 AFTR 2d ¶2013-5318, that the Structured Trust Advantaged Repackaged Securities (STARS) transaction that a taxpayer entered into lacked economic substance and was to be disregarded for Federal tax purposes. As a result, the taxpayer wasn’t entitled to its claimed […]

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Meet Paul Raymond

Meet Paul Raymond

Mr. Raymond is a sought after speaker in tax controversy law by many attorney, accountant, and business groups and at the request of the Internal Revenue Service, has presented programs at the IRS Nationwide Tax Forum, attended by tax professionals throughout the United States.

Additionally, he continues to be an active member in the Section of Taxation, American Bar Association, where he was the Past Chair of the Employment Taxes Committee.

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Member CA Bar Member Orange County Bar US Tax Court Attorney