Saturday, August 31, 2013

Moline Properties and The Separate Nature of the Corporation

Moline Properties’ facts are straightforward. An individual who owned commercial real estate placed a single building into a corporation and subsequently placed the corporate shares with a voting trustee for the benefit of the mortgagee.2 When the corporation sold the property three years later, the single shareholder attempted to claim the sale as individual income rather than corporate income.3 The court ruled against the taxpayer, writing this now famous conclusion:

The doctrine of corporate entity fills a useful purpose in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity.4

The broad range of reasons given by the court to justify incorporation is striking. The incorporator can be “seeking to take advantage under the law,” the most obvious of which is the corporation’s limited liability shield. In addition, he can be seeking to comply with creditor demands as in this case or do so merely for his “convenience.” Regardless of the actual reason, it’s possible to read practically any legally cognizable justification into the above cited sentence.

But just as importantly, ample reasons existed for the court to not recognize the separate nature of the company. The taxpayer in Moline Properties was less than diligent in maintaining the required corporate formalities as the corporation kept no books or records.5 These are factors often cited as reasons for piercing the corporate veil (see discussion below), which the court could arguably have done in this case. Also note the corporation was hardly a hot bed of corporate activity:
Until 1933 the business done by the corporation consisted of the assumption of a certain obligation of Thompson to the original creditor, the defense of certain condemnation proceedings and the institution of a suit to remove restrictions imposed on the property by a prior deed. The expenses of this suit were paid by Thompson. In 1934 a portion of the property was leased for use as a parking lot for a rental of $ 1,000. Petitioner has transacted no business since the sale of its last holdings in 1936 but has not been dissolved. 6
While the corporation was a petitioner in a lawsuit, it did not pay for its own legal expenses. This factor in combination with the lack of corporate formalities would give most courts ample reason for veil piercing or, at minimum, non-recognition of the corporate form. Yet the court chose not to do so, instead ruling sufficient substance existed for the separate nature of the corporation.
To this day, Moline Properties is cited as a primary authority for the proposition that courts must accept the separate nature of a properly incorporated entity. It has been cited approvingly in all but the 10th judicial circuit. More importantly, it has been citing approvingly by the U.S. Tax Court 30 times and 26 times by various IRS materials, including Chief Counsel Memorandum,7 General Counsel Memos,8 Private

2 Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 437 (1943)
3 Id
4 Id at 438-439
5 Id at 437-438
6 Id
7 IRS CCA 201123027, 2011 IRS CCA LEXIS 119 (I.R.S. 2011)
8 Gen. Couns. Mem. 35481 (1973)
Letter Rulings,9 and Field Service Advance Memos.10 While none of the IRS materials cited are binding, they amply demonstrate the IRS’ knowledge of this well-settled legal doctrine.

Sunday, August 25, 2013

Court Denies Motion for Summary Judgement in Bancroft Case

The following is the court's ruling on the motion for summary judgement in one of the Bancroft cases.  It proves that courts indeed have a sense of humor:

The Court has amply telegraphed its belief that Bancroft’s “Premium Lite” “insurance” program is, at best, a scheme, and at worst, a scam. This Court has on multiple occasions [Dkt. Nos. 76, 94, 140] dealt with the factual underpinnings of Plaintiff’s Motion for Partial Summary Judgment [Dkt. #160]. No matter how the parties reformulate the questions, the answer is the same: “That’ll be DENIED.” The Court does not believe the parties. The Court does not believe the lawyers. This matter will be resolved once and for all in the crucibles of trial. Credibility issues alone prevent summary adjudication of core issues in this case.

Wednesday, August 7, 2013

UK Doubles the Amount of Tax Evasion Cases

The number of criminal prosecutions for tax evasion more than doubled last year, as the government stepped up its crackdown on individuals suspected of defrauding the Exchequer. 

Tax evasion prosecutions rose from 302 in 2011-12 to 617 in 2012-13, according to figures obtained by Pinsent Masons, an international law firm. The increase reflects the Treasury’s pledge in 2010 to quintuple the number of tax prosecutions in an effort to create a more robust deterrent against evasion.

Practically all tax systems are based on self-reporting -- meaning that each taxpayer reports his level of income to the appropriate governmental authority.  This of course encourages the non-reporting of income along with various practices which makes income untraceable.  

The threat of prosecution keeps most taxpayers this side of to the compliance line.  However, a dearth of prosecutions encourages taxpayers to play "audit roulette" -- not complying with the law in the hopes they won't get caught.  In a low prosecution environment, this is actually a well-reasoned strategy (although as an attorney I would advise against it). 

The US recently went through a period of heightened audits for high net worth individuals as well.  I would expect more of the same over the next few years.