In the case of Adkins v. US (which we argued) the Court of Federal Claims defined substantially justified in the context of the findings of the Court of Appeals for the Federal Circuit.
“The court begins by examining the “objective indicia” of the strength of defendant’s position. Pierce, 487 U.S. at 568; Nat’l Org. for Marriage, 807 F.3d at 597. Those indicia include the trial and remand decisions that this court issued in defendant’s favor, the existence of supporting precedent from other circuit courts of appeals (namely Jeppsen), the lack of contrary precedent from other appellate courts, and the Federal Circuit’s resounding rejection of defendant’s position in its most recent decision in this case. It is this final factor that tips the balance in plaintiffs’ favor.”
“Additionally, the Federal Circuit concluded, upon its review of the record, that this court’s fact findings regarding whether plaintiffs had a reasonable prospect of recovering their losses in 2004 were “clearly erroneous.” Id. at 1366.”
“The Federal Circuit considered the avenues of recovery discussed by this court—and which had been raised by defendant—and concluded that there was “overwhelming evidence” that plaintiffs lacked a reasonable prospect of recovering their losses in 2004. Adkins, 960 F.3d at 1366-68.”
“In this case, the Federal Circuit based its denunciation of the United States’ position
(adopted by this court) on its conclusion that the United States (and this court) plainly misinterpreted the relevant Treasury regulation. Misinterpretation of a regulation has been found by other courts to render the United States’ position unreasonable. See, e.g., Huckaby v. U.S. Dep’t of the Treasury, 804 F.2d 297, 299 (5th Cir. 1986) “
“This issue was the main subject of a summary judgment decision, a trial, two trial decisions, and two appeals. It therefore stands to reason that whether defendant’s position on this issue was substantially justified deserves the greatest weight in determining whether the United States’ overall position was substantially justified. Adopting this reasoning, the court concludes that because defendant’s position regarding the proper year for plaintiffs to claim a theft loss was not substantially justified, defendant’s overall position was not substantially justified. Consequently, plaintiffs are prevailing parties entitled to an award of attorney’s fees under I.R.C. § 7430. “
As one can see the Court went to great pains to show that where the Court of Appeals rules that the findings of the Trial Court were clearly erroneous and that the Court at the urging of the Government misinterpreted the Government’s own regulation, 7430 attorneys fees are allowable.
New Virginia Filing Requirement for Certain Corporations July 1, 2021
The Virginia legislature is doing a study on unitary taxes for brother/sister or parent subsidiary corporations. https://www.tax.virginia.gov/news/corporate-unitary
This study requires corporations to file a special return by July 1, 2021 based upon their 2019 tax returns.
Corporations must be “unitary businesses”.
“”Unitary business” means a single economic enterprise made up either of separate parts of a single business entity or of a commonly controlled group of business entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts. A “unitary business” includes that part of the business that meets the definition in this section and is conducted by a taxpayer through the taxpayer’s interest in a partnership, whether the interest in that partnership is held directly or indirectly through a series of partnerships or other pass-through entities. A “unitary business” shall not include persons subject to, or that would be subject to if doing business in the Commonwealth, the insurance premiums license tax under Chapter 25 (§ 58.1-2500 et seq.), Code of Virginia, or the bank franchise tax under Chapter 12 (§ 58.1-1200 et seq.)”
So, talk to your tax advisor if this applies to you.
Changing Step Up in Basis is a big deal
In its thirst to get more tax revenue to fund more give-aways, the Biden Administration has proposed a provision to get rid of the step-up in basis provision when a person dies. The current rule is that when a person dies the tax basis of that person’s assets are the fair market value on the date of death. This rule has been around for over 50 years. In the 1976 Tax Act, Congress repealed the rule and put a new rule into effect, it was so hard to carry out that it got deferred and ultimately repealed.
There are three main problems with the concept. (1) Much of the appreciation in property is due to inflation not real gain in wealth. So, if one adopts carry-over basis, then one should index that basis to inflation which creates even more complexity. (2) How does a survivor know the basis of grandpa’s assets after grandpa dies? Where did grandpa keep that information? Suppose he invested in a dividend reinvestment plan and didn’t keep records. For real estate that is probably easier to track, but if Grandpa made improvements, how do you track that? It becomes an accounting nightmare. (3) Lastly when combined with an estate tax (even if you get the tax added to the basis), it becomes confiscatory.
These are the reasons why the Administration provision is a difficult proposal.
IRS Extending Tax Filing Deadline
The IRS is extending the Tax filing deadline. Returns and payments will be due May 17, 2021 for 2020 individual returns. There is no extension for Corporation, S. Corporation or Partnership returns got similar delays. There is no indication that Fiduciary returns got extended either.
“In a statement, the IRS said the extension would be automatic, with no need to file any forms and no penalties or interest on taxes due that are paid between April 15 and May 17.”
1st Quarter Estimated Taxes however are still due on April 15.
Maryland is extending their deadline to July 15. The extension applies to individual, pass-through, fiduciary and corporate income tax returns, including first and second quarter estimated payments. It’s brought on by the recent and pending legislation at the state and federal levels impacting 2020 tax filings during the pandemic.
Virginia has not weighed in with an extension, yet.
Short Sales, Stock Manipulation, and other stuff
Under the 2017 Tax Act Theft losses are no longer deductible. In Adkins v. United States the Court implicitly agreed that a loss from a pump and dump scheme was a theft loss. This means that as a Taxpayer you are stuck with a capital loss either short or long term if you are the victim of stock manipulation.
Lately, there has been some game playing (interestingly with GameStop). The Company appeared to be on the ropes due to COVID and having stores in brick and mortar malls. Some investors sold the stock short. There is a little known fact on Wall Street, stocks go down faster than they go up most of the time. So, you can make a lot of money if you bet correctly. Gamers and others decided it would be fun to play a trick on short sellers in GameStop. So, they started buying either the stock or call options on the stock. This had the effect of making the demand higher and the stock started going up. People who sold short (meaning they borrowed the shares), had to buy the stock to stop the bloodbath. People who wrote naked call options (meaning the wrote options thinking the stock would go down) had to buy options themselves to cover or buy the stock. This cause the stock to go up further.
A few handy lessons in this. (1) If you are going to sell short, protect yourself at the beginning by purchasing a call option. A call option gives you the right to buy the stock a specified price. That way, if the stock goes up, you have upper level protection against the loss. (2). Stock manipulation occurs all the time. We don’t see it as clearly as in this case. Sometimes its for fun or an academic exercise where people don’t actually buy the stock, just take some actions which have the effect of propping it up, or knocking it down. For example, remember the urine in the beer hoax about Corona Beer, that caused a market shift downward temporarily. Another example a college class had 10 people call five different brokers to ask what’s going on with a certain penny stock (but not to buy). Brokers being salesmen figured the calls were a flurry of interest. And started touting the stock to their customers. And the stock went up slightly. (3) Beware of high pressure salesmen who attempt to get you to buy a stock. Its possible that they or their bosses own a chunk of that stock and once it goes up, they will dump it (pump and dump) leaving you to hold the bag.
So, while stocks are a great investment tool, there is some fraud out there. So, be wise in your investment strategy and use reputable brokers that you know personally.