Research Problem 3
The 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 Problems
3-13
Research Problem 4
TAX FILE MEMORANDUM
Date:
March 20, 2008
From:
Rob Hummock
Re:
Owl, Inc. AMT/ESOP Request
The 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 5
The 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.
