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FIFTH CIRCUIT REAFFIRMS DENIAL OF SIX-YEAR ASSESSMENT PERIOD FOR OVERSTATED BASIS

In an unpublished opinion, the Fifth Circuit Court of Appeals affirmed the Tax Court’s holding that the IRS was not entitled to a six-year period under IRC § 6501(e) for assessment of tax for omission from gross income where an understatement of income from gain was caused by the taxpayer’s overstatement of basis. In so holding, the Fifth Circuit followed its own precedent set earlier in 2011 in Burks v. U.S. (633 F. 3rd 347 (2/9/11)) and reiterated its departure from the reasoning adopted by a growing number of other circuits that have ruled for the IRS on the issue. The case is Equipment Holding Co. LLC v. Commissioner, docket no. 09-60866, affirming Tax Court docket no. 18737-07 (also unpublished). For previous Tax Matters discussion of the issue, including Burks, see “Circuit Split Deepens on Six-Year Period for Basis Overstatements,” May 2011, page 58.

 

 

FINAL REGULATIONS GOVERN EVIDENCE OF DELIVERY TO THE IRS

The IRS issued final regulations providing guidance on how taxpayers can prove the timely delivery of physical documents to the IRS or the Tax Court, absent direct proof of delivery (TD 9543). The regulations provide that proper use of registered or certified U.S. mail or a private delivery service, under criteria to be established by the IRS, will provide prima facie evidence of delivery.

 

IRC § 7502(c) establishes that if “any return, claim, statement, or other document” is sent to the IRS or the Tax Court by registered mail, the registration will serve as prima facie evidence of delivery. The IRS has previously extended this treatment to certified mail under authority of section 7502. The federal courts have split over whether section 7502(c) establishes the exclusive means to establish prima facie evidence of delivery so that taxpayers can raise a presumption of delivery only when they have used registered or certified mail.

 

Given the split in the courts, the final regulations are designed to clarify the rule for prima facie evidence of delivery. Under the regulations, taxpayers will be able to establish prima facie evidence of delivery if they use a private delivery service under criteria that the IRS will establish in future guidance. However, direct proof of actual delivery, proof of proper use of registered or certified mail, and proof of proper use of a private delivery service designated in the future guidance will be the only ways taxpayers will be able to establish prima facie evidence of delivery of documents that have a filing deadline prescribed by the internal revenue laws.

 

The final regulations apply to any payment or document delivered in an envelope postmarked after Sept. 21, 2004.

 

 

NINTH CIRCUIT AFFIRMS TAX COURT IN PETTER

The Ninth Circuit Court of Appeals affirmed the Tax Court’s holding in Estate of Petter (docket no. 10-71854 (9th Cir. 8/4/11), aff’g TC Memo 2009-280) allowing an increase in a taxpayer’s charitable deduction caused by the IRS’ redetermination of the value of gifted interests in a family LLC that caused additional interests in the LLC to be transferred to two charitable foundations.

 

The case involved stock that the decedent, Anne Petter, transferred to a family LLC in exchange for LLC membership interests (membership units). She gifted or sold membership units in the LLC to two trusts, one for each of her children, and made gifts of membership units to two charitable foundations. Under the transfer agreements with the trusts, the gifts to them were the number of LLC units equal to the dollar amount of Petter’s unused lifetime exclusion amount. Any number of membership units above that amount, up to a maximum number of membership units, were gifted to the charitable foundations. Under the transfer agreements, if the value of the membership units transferred to the trusts as finally determined for federal gift tax purposes was more than Petter’s remaining gift tax exclusion, the trusts were required to transfer additional membership units to the charitable foundations.

 

On audit, the IRS determined that the LLC membership units had been significantly undervalued, thus requiring the trusts to transfer additional membership units to the charitable foundations. However, the IRS denied the estate an increased charitable deduction for the additional units transferred, arguing in part that the foundations’ receipts of the additional membership units were not valid gifts under Treas. Reg. § 25.2522(c)-3(b)(1) because they were subject to a condition precedent (the occurrence of some act or event).

 

The Tax Court, rejecting the IRS’ condition precedent argument, held (see “New Life for Charitable Lids,” JofA, Sept. 2010, page 50) that the increased charitable deduction was valid.

 

The Ninth Circuit concurred, finding that the final value of the membership units (which determined the number of shares given to the foundations) was a constant, even though it was unknown at the time of the transfer, and that the value was not changed by the occurrence of the audit. The audit merely ensured that the foundations received the correct number of units. Therefore, the gift of the membership units was not subject to a condition precedent.

 

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