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John Robert focuses his practice on US and international tax. Read John Robert's full bio.

On September 21, the Internal Revenue Service (IRS) released Revenue Procedure 2017-52 which introduces an 18 month pilot program expanding the scope of the IRS’s ruling practice with respect to distributions under Internal Revenue Code (Code) Section 355. Prior to Revenue Procedure 2017-52, the IRS had determined that it would not issue letter rulings on whether a distribution qualified for tax-free treatment under Code Section 355. See Revenue Procedure 2013-32. Instead, the IRS had limited its rulings under Code Section 355 to merely addressing “significant issues.” Id. Now, with the introduction of Revenue Procedure 2017-52, a taxpayer may obtain a “transactional ruling” that specifically addresses the general federal income tax consequences of a transaction intended to qualify as tax-free under Section 355.

Practice Point: A letter ruling is an excellent way for taxpayers to gain certainty with respect to a Section 355 transaction and to head off potential controversy with the IRS.

The judicial substance-over-form doctrine provides the IRS with the ability to set aside carefully orchestrated tax planning arrangements to treat a transaction consistent with its substance.  However, the doctrine does not give the Service carte blanche to deny tax benefits. In Summa Holdings, Inc. v. Commissioner, No. 16-1712 (available here), the Sixth Circuit overturned the Tax Court and declined to apply the substance-over-form doctrine when faced with taxpayers who, “to [their] good fortune, had the time and patience (and money) to understand how a complex set of tax provisions could lower [their] taxes” and “complied in full with the printed and accessible words of the tax laws.”

Summa Holdings involved a closely held corporation (Summa Holdings, Inc.) that supercharged the tax benefits provided by paying commissions to an interest charge domestic international sales corporation (IC-DISC) by having the IC-DISC owned by two Roth IRAs. While the dividends paid by the IC-DISC were taxable upon receipt, the dividend amounts (totaling $6 million over 7 years) were vastly larger than the annual contribution limits placed on Roth IRAs. For unfathomable reasons, the IRS did not challenge the $3,000 price that the Roth IRAs paid for the IC-DISC stock. Instead, the IRS asserted that that the substance of the arrangement was that the corporation paid dividends to its shareholders and the shareholders made excess contributions to the Roth IRAs.

Continue Reading Sixth Circuit Sets Limits on the Application of the Substance-Over-Form Doctrine

In an internal memo to agency employees, Internal Revenue Service (IRS) Commissioner John A. Koskinen announced the IRS’s intention to hire between 600 and 700 enforcement personnel.  It is estimated that between 2010 and the end of 2016, the IRS will have lost more than 17,000 employees, 5,000 from the enforcement area.  The hiring, which is to occur in two waves, should fill key gaps in the IRS’s enforcement workforce created by years of attrition.  This will be the IRS’s first significant enforcement hiring in more than five years.

Whether an increase in enforcement personnel will change the trend of a lax IRS remains to be seen.  Taxpayers, however, should pay close attention to how this increase in IRS personnel affects the audit of their returns and the level of depth of an IRS examination.  Stay tuned!

More details can be found at: https://www.washingtonpost.com/news/powerpost/wp/2016/05/04/youre-more-likely-to-get-audited-as-irs-adds-700-employees-to-chase-tax-cheats/