Author: Peter J. Ulrich

Federal Tax Reform and the Potential Repeal of the Cash Method of Accounting

In the wake of the introduction by President Trump of his Tax Reform proposal on April 26, 2017, Congress, especially the U.S. House of Representatives Committee on Ways and Means, will be considering various methods to fund tax rate reductions. The White House formally delivered the President’s proposed budget to Congress on May 23, 2017. One proposal likely to be under consideration is the repeal of the cash method of tax accounting for service businesses, though many experts dispute whether many of the budget’s finer details will ever pass both houses of Congress. Under current law, the cash method of accounting cannot be used for income tax purposes by (i) businesses that sell goods and therefore must keep inventories, and (ii) C corporations with average annual gross receipts of $5,000,000 or more. A taxpayer-favorable exception from the C corporation rule is available for qualified personal service corporations, consisting of personal service corporations (PSCs) in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, when at least 95% of the stock of such PSCs is owned directly or indirectly by employees performing services in one of such fields. To oversimplify things, this means that law firms pay federal tax based on actual cash receipts, not based upon billings or upon what...

IRS’ Aggressive Position Challenging the Treatment of a License Agreement as a Sale of a Capital Asset Rejected on Summary Judgment

We previously reported that the Internal Revenue Service (the “IRS”) took an aggressive position in challenging the treatment of a license agreement as a sale of a capital asset in the Tax Court case Mylan Inc. & Subsidiaries v. Commissioner of Internal Revenue (Docket Nos. 16145-14 and 27086-14). Recently, Tax Court Judge Laro denied the IRS’s Motion for Summary Judgment in Mylan’s challenge of the IRS’s determination that Mylan’s 2008 amendment to the contract with Forest Labs was not a sale of its interest in rights to a certain drug product but merely an extension of the parties’ 2006 license agreement, giving rise to ordinary income to Mylan.

IRS Takes Aggressive Position in Challenging the Treatment of a License Agreement as a Sale of a Capital Asset

Recently, a Memorandum in Support of Motion for Summary Judgment was filed by the Internal Revenue Service (the “IRS”) in the Tax Court case Mylan Inc. & Subsidiaries v. Commissioner of Internal Revenue (Docket Nos. 16145-14 and 27086-14). Mylan’s opposition brief to the IRS’s motion followed shortly thereafter. This case illustrates the importance of exercising care when transferring intellectual property rights if you intend to benefit from capital gains treatment. An improperly structured sale may be recharacterized by the IRS as a license, resulting in a much larger tax liability for the transferor than what was anticipated.

Uncertainty Over Extension of Reduced Capital Gains Tax May Spur End of Year Real Estate Deals

Currently, no one knows whether Congress and the President will take action this year to retain the historically low long-term capital gains rates, which are scheduled to increase to 20% effective January 1, 2011. This uncertainty has motivated some real estate sellers to contemplate closing in 2010 in order to avoid potentially increased capital gains taxes next year.