Our Convoluted Tax & International Business Systems

This was a win for Symantec, who sent something like 14 lawyers to the Tax Court to face off against the 7 for the IRS before Judge Foley. The Tax Court found the government's case arbitrary, capricious, and unreasonable.

If for some irrational reason you want the flavor of just how complex things can be in taxation relative to international entities and a single issue, consider reading this case, which has 71 pages and a table of contents as follows:

CONTENTS

Background

I. Storage Management Software Products

II. Product Distribution Channels

III. Intensely Competitive Market

IV. Product Lifecycles and Useful Lives

V. Geographic Expansion

VI. The Cost-Sharing Arrangement

VII. VERITAS Ireland's Operations

VIII. Procedural History

Discussion

I. Applicable Statute and Regulations

II. Respondent's Buy-in Payment Allocation Is Arbitrary, Capricious, and Unreasonable

A. Respondent's Notice Determination Is Arbitrary, Capricious, and Unreasonable

B. Respondent's Determination in Amendment to Amended Answer Is Arbitrary, Capricious, and Unreasonable

1. Respondent's "Akin" to a Sale Theory Is Specious.

2. Respondent's Allocation Took into Account Items Not Transferred or of Insignificant Value

3. Respondent's Allocation Took Into Account Subsequently Developed Intangibles

4. Respondent Employed the Wrong Useful Life, Discount Rate, and Growth Rate

III. Petitioner's CUT Analysis, With Some Adjustments, Is the Best Method

A. Comparability of OEM Agreements

B. Unbundled OEM Agreements Were Comparable to the Controlled Transaction

IV. Requisite Adjustments to Petitioner's CUT Analysis

A. The Appropriate Starting Royalty Rate

B. The Appropriate Useful Life and Royalty Degradation Rate

C. Value of Trademark Intangibles and Sales Agreements.

D. The Appropriate Discount Rate

V. Conclusion

Yikes! A Casualty Loss!

In 2005, Justin Rohrs bought this nice, new truck, a 2006 Ford F-350, for $40,210.65. (Those who know me very well will perhaps know why that fact interests me.)

Anyway, a couple of months later, he went to a gathering at a friend's house where there was drinking, but he rode to and from it with someone else to avoid driving while intoxicated. After he got home from the gathering, though, he started off to his parents' house too soon. On the way, he didn't negotiate a turn --- he said there was a severe wind --- and the truck slid off the embankment, rolled over, and sustained harsh damage. Justin's blood-alcohol level registered 0.09 percent (the legal limit was 0.08 percent), so the police cited and arrested him. Justin filed a claim with his automobile insurance, but it was denied under the terms of his policy due to the DUI.

Ouch.

The next step for Justin, then, was to ask for a grace from the government in at least reducing his income taxes because of his casualty loss. He'd still have to pay for the damages, of course, or go without a truck, but at least he'd have his taxes reduced by being able to deduct his loss. He claimed a $33,629 casualty loss deduction for the damage.

IRS said no. Not only no, but they claimed that Justin was acting inappropriately by even claiming it. IRS asserted a penalty for Justin's inaccuracy.

Justin went to the Tax Court --- on his own (aka pro se).

The Income Tax Regulations provided that a crashed automobile could be a casualty loss if the damage wasn't due to a willful act or the willful negligence of a taxpayer, that is, of Justin. Justin said, naturally, it wasn't and that he wasn't willfully negligent; IRS maintained he was. IRS also said allowing Justin the grace would frustrate public policy.

Who won?

Justin did. It seems almost the very least that could/should be done considering the severe damage to his nice, new truck and the facts and circumstances of Justin's case.

Overall, the case is about analyzing the line between mere negligence --- which Justin admitted to --- and willful negligence and also what constitutes "the frustration of public policy."

Tax Protestor Antics

ROBERT CHARLES & LISA JEAN ABELL weren't able to ring a bell in defense of their frivolous arguments against IRS when they appealed their lower-court loss to the Tenth Circuit. They appear to have acted more like Cain than Abell.

Start-up Expenses, Office-in-the-Home, and More

JOHN Y. DING faced the IRS in Tax Court relative to what they claimed were his "business expenses." He claimed a bunch of expenses relative to his employment and a prospective business he was trying to get off the ground. It results in an interesting discussion and analysis of various matters including start-up expenses versus business expenses, rules governing an office in the home, and documentation, including the application of the Cohen rule.

Education Expenses --- Are They Deductible?

This case gives a good review of applicable law:
LORI A. SINGLETON-CLARKE vs COMMISSIONER OF INTERNAL REVENUE

It involves a RN who went back to school to become more effective in her then-present duties. She realized that nursing had evolved greatly in the 24 years since she earned her bachelor’s degree, and she felt disadvantaged working with highly educated doctors.

Ronald Davenport

I had to mention this case. I just had to.

I knew a Ronnie Davenport growing up. His brother, Tommy, was one of my contemporaries and best buddies. The Davenports I knew as a boy were all the most clever and interesting people. Ronnie, as I recall, was into short-wave radio, among other things. This was back before cell phones --- even before a lot of people had land-line telephones or TVs. I was always way impressed with Ronnie talking on that radio with people all around the world. It reminds me of the opening scene of the movie Contact. Of course Ronnie was no Jodie Foster and wasn't trying to contact a deceased parent. His parents were very much alive.

Anyway, the guy in this case couldn't be Ronnie from my boyhood. No way.

Ronald Davenport (of the case) faced the following proposals for more tax and penalties:

The Judge opined:

Petitioner is no stranger to the Court. The following is petitioner's history in this Court:

Well, I won't bore you with the details --- if you want them you can just read the opinion --- other than to say Ronnie did not cooperate with IRS and lost his case. He looks like the typical tax protestor, making silly, frivolous arguments that won't fly.

Two Tuesday Memo Decisions

The Tax Court issued two memorandum opinions today. One involves the determination that Linda Bruen was an innocent spouse, even though that terminology always seems like an oxymoron to me. The other one has to do with the nature of income from a cashed-in life insurance policy that the Barr couple received and the accuracy penalty the government said was attributable to them not properly reporting the nature of such incom.