Tax Court In Brief | Clark Raymond & Co., PLLC v. Comm'r | Partnership Intangible Assets, Economic Effect And Treas. Reg. ' 1.704-1

• Published date: 17 October 2022
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Trials & Appeals & Compensation, Income Tax, Tax Authorities
• Law Firm: Freeman Law
• Author: Freeman Law

The Tax Court in Brief - October 10th - October 14th, 2022

Freeman Law's "The Tax Court in Brief" covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation: The Week of October 10th, 2022, through October 14th, 2022

• Scheider v. Comm'r, T.C. Memo 2022-104 | October 11, 2022 | Urda, J. | Dkt. No 4048-20
• Cochran v. Comm'r, 159 T.C. No. 4 | October 12, 2022 | Greaves, J. | Dkt. No 21002-16

Clark Raymond & Company, PLLC v. Comm'r, T.C. Memo. 2022-105 | October 13, 2022 | Gustafson, J. | Dkt. No. 2265-19 (partnership intangible assets, substantial economic effect, capital accounts, distributions, tests for economic effect and Treas. Reg. ' 1.704-1)

Summary: This 56-page opinion regards a partnership-level action under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), which was repealed for returns filed for partnership tax years beginning after December 31, 2017. The case regards, basically, a partnership agreement of Clark Raymond & Company, PLLC (CRC) (an accounting firm) and tax liabilities of CRC and its partners arising from a withdrawal of various partners and fact-specific (and intensive) transactions involving CRC and its partners from the period 2006 through 2018. The tax year in issue is 2013. The partners of CRC included professional liability companies, professional services corporations, and a professional limited liability company.

In 2011 through 2013, the CRC partners negotiated a buyout of a partner (or partners) and the CRC partnership agreement was restated. Shortly thereafter, two partners withdrew and certain clients of CRC retained the withdrawn partners' new partnership. A tax quagmire arose when the tax matters partner for CRC reported, via Form 1065, U.S. Return of Partnership Income, (1) the value of the defecting clients to the partnership formed by the partners who withdrew and (2) otherwise made allocations to the withdrawn partners' capital accounts. Because the issues were ultimately narrowed by concessions, the Tax Court focused on specific defined terms used in the partnership agreement and how those terms applied to provisions for (1) determining and allocating Net Profit and Loss among the partners, (2) computing retirement payments for a retiring partner, (3) calculating contributions to the partners' capital accounts, and (4) calculating distributions for non-cash assets, such as clients.

For tax year 2013, CRC filed its 2013 Form 1065 and issued Schedules K-1 to the former partners-now-withdrawn. Those former partners filed Forms 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request with respect to CRC's 2013 issued Schedules K-1. So, the IRS issued a Tax Matters Partner (TMP) Notice of Beginning of Administrative Proceeding. In December 2018, the IRS issued the TMP a determination of adjustments to CRC's 2013 Form 1065. With regard to property distributions, the IRS determined, among other things, that reported "client distributions" (i.e., "client assets" or "book of business" assets) were not distributions and should be disregarded, or, in the alternative, CRC failed to substantiate the identities and the values of the clients distributed (and it failed to show that CRC was capable of valuing the clients distributed), and therefore the distributions should be disregarded. The Tax Court dived into these issues in great detail.

Key Issues:

• Whether CRC made distributions of client-based intangible assets to CRC...