Research Problem 3The facts of this problem are adapted from Examples 1, 2, and 4 of Reg. § 1.199-3 (i) (2).a.The gross receipts derived from the sale of the QPP to Baker are DPGR (assuming all the other requirements are met). See Example 1.b.Sammy’s proceeds derived from the sale of the QPP to Tom, from the lease to Zebra (including any financing and interest components of the lease, and from the sale of the QPP to Zebra all qualify as DPGR. See Example 2.c.The gross receipts derived by Larry are derived from the license of a qualified film produced by Larry and are DPGR. See Example 4.
Chapter 3 – Solutions to Research Problems3-13Research Problem 4TAX FILE MEMORANDUMDate:March 20, 2008From:Rob HummockRe:Owl, Inc. AMT/ESOP RequestThe IRS will argue that the § 404(k) dividend is includible in the ACE calculation. This position was taken by the IRS in a Tax Court decision [Snap-Drape, Inc., 105 T.C. 16 (1995)].The taxpayer argued that Reg. § 1.56(g)(1)(d)(3)(iii)(E), is an improper interpretation of § 56(g)(4)(C)(i), and, alternatively, that if the regulation is held valid, that the IRS abused its discretion in providing for retroactive application of the Regulation.The Tax Court upheld the IRS, noting that the Regulations in question are legislative regulations, entitled to an elevated degree of deference.The Tax Court agreed with the IRS that “section 404(k) dividends are essentially equivalent to regular dividends,” and pointed out that generally, a corporation may not claim deductions for cash dividends. The court rejected Owl’s assertion that § 404(k) dividends are a form of compensation in that the statute exists under the deferred compensation provisions, and the benefit is ultimately received by employees.The court stated that, in allowing corporations a deduction when their ESOPs use cash dividends to service debt incurred to acquire employer securities, Congress aimed at providing an incentive for corporations to establish ESOPs. However, the court asserted that Congress created the AMT regime “to ensure that each corporate taxpayer was in fact paying a fair share of tax.” The IRS’s position, the court held, furthers both congressional aims, whereas Owl’s position would further only the first. The court also rejected Owl’s contention that “the regulation nullifies the benefit provided by section 404(k),” reasoning that Owl “may be entitled to claim a credit against regular tax in a subsequent year for the amount of AMT paid in the current year.”With respect to retroactive application of Regulations, the Tax Court rejected Owl’s assertions that it justifiably relied on settled law that was altered by the Regulations and that the Regulations impose a harsh result.Research Problem 5The facts are similar to the decision in Calypso Music, Inc., [80 T.C.M. 388, T.C. Memo. 2000-293], in which the Tax Court held that the company was a personal holding company. However, no accuracy-related penalties were imposed.