Highlighted Corporate Tax Disputes of 2024 - Third Installment
Writing a Fresh Version:
In this installment of our three-part series, Damien Martin and Tony Nitti share their top tax cases from 2024, focusing on two C corp cases: Ju et al v. United States and Stead v. Commissioner.
Host David D. Stewart welcomes listeners to the podcast, emphasizing that the episode will be available to watch on YouTube. Damien Martin begins the discussion by mentioning that they are moving away from S corps and venturing into the world of Section 1202 Qualified Small Business Stock (QSBS). Tony Nitti, a self-proclaimed S corp and QSBS specialist, can't help but laugh at Damien's pun.
The conversation turns to the Ju et al v. United States case, winner of the esteemed spot as the second case in 32 years under Section 1202. The case revolves around section 1202, which provides taxpayers with the opportunity to exclude up to 100% of the gain from the sale of QSBS held for more than five years. Tony Nitti highlights the case's significance, as it came during a period when more and more companies are turning to C corps in order to benefit from the lower corporate tax rate and the exclusion provision.
The case centers around Ju, a professor who participated in an agreement with his university, agreeing to surrender the rights to any patented concepts developed during his tenure. The university later licensed these patents to a third party in exchange for both cash and stock, with the intention of issuing the stock to Ju after he left their employ. The case becomes complex when the university issues additional shares to Ju in 2015, leading to questions about the hold period, stock acquisition, and meeting the requirements to be considered QSBS.
Tony explains that the burden of proof is now on the taxpayer, who must establish that the original 18,000 shares were issued to them in 2003 directly and that the assets of the company were less than $50 million before the shares were acquired and when they were acquired. The court was not convinced by Ju's arguments and stated that the shares did not qualify as QSBS.
The discussion then shifts to the second case, Stead v. Commissioner, a bench opinion involving the doctrine of constructive receipt. Damien Martin highlights that the case is unique due to the fact that Judge Holmes wrote it while presiding over the trial. The case revolves around Dr. Stead, a sole shareholder of a C corporation who found himself in financial hardship. Dr. Stead took steps to ensure his creditors and employees were paid before himself, leading him to have the corporation cut checks to himself and his wife for services. Despite taking out federal tax withholding as if he were cashing the checks, he did not sign most of them and did not cash any of them.
The question becomes whether Dr. Stead had constructively received income that he did not actually receive. To determine this, the court looks at Section 451, which states that income is taxable when cash is received, but also discusses constructive receipt. To qualify as constructively received, income must be reduced to a taxpayer's undisputed possession, set apart for them, and available to them at any time (except for substantial limitations or restrictions).
The court examines case law, ultimately determining that Dr. Stead did not constructively receive the income represented by the checks, as he was not subject to enough restrictions to prevent him from calling for the money if he so desired. The court also highlights that the corporation did not have an obligation to pay wages to Dr. Stead, thus making it more difficult to establish constructive receipt in this case.
Tony Nitti concludes the episode by summarizing the takeaways from this year's top tax cases. The episodes serve as a reminder that taxpayers must mind the details and plan proactively to avoid ending up in court. The cases also demonstrate that the tax law provides valuable lessons on how to avoid problems in the first place.
In closing, David D. Stewart thanks listeners for tuning in and extends appreciation to Tax Notes for hosting the discussion. The podcast wraps up with Damien Martin and Tony Nitti expressing their excitement about continuing the series in the future.
- Damien Martin and Tony Nitti, while discussing top tax cases from 2024, acknowledge their move towards Section 1202 Qualified Small Business Stock (QSBS) for C corps, highlighting the complexity of the case Ju et al v. United States under QSBS.
- During the discussion, Tony Nitti points out the significance of Stead v. Commissioner, a case that involves the doctrine of constructive receipt, and emphasizes its uniqueness due to it being a bench opinion written by Judge Holmes during the trial.
- The conversation culminates with Tony Nitti and Damien Martin advising taxpayers to be meticulous in their planning to avoid problems associated with tax cases, drawing lessons from the events presented in Ju et al v. United States and Stead v. Commissioner.