Mendes Weed, LLP successfully argues a case in front of the Office of Tax Appeals

Mendes Weed, LLP successfully argues a case in front of the Office of Tax Appeals

The tax litigation and family law firm Mendes Weed, LLP successfully argued a case in front of California’s Office of Tax Appeals, one of the 1st 12 cases heard by the court. There is a complete write up about it on JDSupra titled “California’s Changing Approach to Like-Kind Exchanges” 

An excerpt: Internal Revenue Code (IRC) Section 1031 allows nonrecognition of gain or loss where property held for investment or for productive use in a trade or business is exchanged for like-kind property held for the same purpose. 

An issue arising under Section 1031 involves multiple owners of a real estate business entity holding one or more investment properties, where some owners want to maintain their investment while others want to cash out their investment. 

One common technique when the owners want to go their separate ways with investments is for the entity to redeem the interest of the member in exchange for an undivided interest in the property (a so-called “drop-and-swap”).  Thereafter, the entity and the former owner join in the sale of the property to a buyer.  Following the sale, the former owner can direct its share of the sale proceeds to a qualified intermediary to be reinvested in like-kind property without recognizing gain. 

The full transcript of our case before the Office of Tax Appeals (OTA) is available at https://ota.ca.gov/wp-content/uploads/sites/54/2018/06/Mitchell_Sharon_April-24-2018_Transcript.pdf 

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Read the full article on JD Supra

Christina Weed, Walnut Creek Attorney

California Tax Law Specialist

Partner Christina Weed has years of experience helping businesses and individuals with their complex California tax litigation issues. She is a licensed attorney with an LL.M. in Taxation from the University of San Diego and a Bachelor’s Degree in Accountancy. She serves as Chair of the Tax Section of the Contra Costa County Bar Association and is also a member of the Estate Planning Council Diablo Valley and the Tri-Valley Estate Planning Council.

In 2018, Christina became one of the first lawyers to argue a case in front of California’s Office of Tax Appeals.

Christina has been designated a Certified Specialist in Taxation by the State Bar of California.

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Office of Tax Appeals Hearing – 1031 Exchange

Office of Tax Appeals Hearing – 1031 Exchange

On April 27, 2018, the partners from Mendes Weed, LLP represented a taxpayer before the Office of Tax Appeals (OTA).

As of the date of this blog posting, Mendes Weed, LLP is one of only a handful of firms to have gone before the OTA because the OTA has only been hearing cases since January of 2018.

Last week, we discussed some of the procedural issues that came up during the hearing.  This week, we wanted to address some of the issues before the OTA during our hearing.

The primary issue at the hearing was whether the Franchise Tax Board’s (FTB) disallowance of a taxpayer’s like-kind exchange pursuant to Internal Revenue Code (IRC) Section 1031 should be sustained.

The FTB stated the primary issue was who was the true seller of the real property in issue.  The FTB’s secondary argument was that an assignment of income had occurred.

The Taxpayer argued that intent should control.  The Taxpayer in this case had completed numerous like-kind exchanges in the past, and she clearly had the intent required to complete a like-kind exchange.

Furthermore, there was no assignment of income, which implies some intent to evade tax.  A like-kind exchange is a mere deferral of the recognition of gain, not an evasion of tax.  The taxpayer’s counsel was quoted as saying the FTB was “grasping at straws” with this argument.

Of course, what the FTB is really getting at is that it arbitrarily applies a rule that the property exchanged must be held for a certain period of time.  There is no period of time delineated in the statute or the case law.  This is bad tax policy to apply this arbitrary rule, and it is not the law.

The elephant in the room during the entire hearing was that of the four like-kind exchanges completed by the taxpayer in 2007, the exchange before the OTA was the only property that was transferred out of California and into another state.  The other exchanges all took place outside of California, and none of them were challenged.  The FTB does not like the fact the property was exchanged out of California, but that is not adequate grounds for denying a like-kind exchange to a taxpayer who is entitled to it.

The decision, in this case, could take up to 100 days.  We will keep you posted on the outcome.

You have a right to pay only the correct amount of tax, not a penny more.  If you find that you need assistance, please contact us today.

If you have questions about which business entity might be right for you, you should reach out to a tax lawyer who can assist you with your questions and concerns.

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[Video] Federal Tax Litigation

Please find valuable information regarding Federal Tax Litigation in our video blog.

As one of the principal attorneys for Mendes Weed, LLP, I have previously discussed how to initiate a tax court case in U.S. Tax Court if you have not received a desirable result during the course of your audit with IRS Appeals. But, did you know that not all tax cases need to be brought in a U.S. Tax Court?

The majority of cases are brought before the U.S. Tax Court, which is a court that only hears tax cases.  The reason many taxpayers bring their cases before the U.S. Tax Court is that they do not have to pay the tax asserted against them prior to filing their petition in U.S. Tax Court. Even if the case is decided against the taxpayer, the taxpayer will not need to pay until all appeals are exhausted. Appeals of tax court decisions go to the appropriate U.S. Court of Appeals. There may also some benefit to having a judge that is more experienced in tax law.  However, what if a taxpayer would like to have their case heard by a jury?

In this case, a taxpayer may choose to prepare any asserted tax and, after exhausting all administrative remedies, file a claim for refund in U.S. District Court.  This is the only court in which a taxpayer may have a trial by jury.  Any appeals of an unfavorable decision would go to the U.S. Court of Appeals for the particular district court where the case was heard.

Alternatively, a case for refund could be brought in the U.S. Court of Federal Claims.  No jury trial is available, but what if there is a similar case that was previously brought before the U.S. Court of Federal Claims that a taxpayer believes is favorable to her case?  Perhaps, you would want to bring your tax case before this court in that situation.

It is important to meet with a tax lawyer who can discuss your case with you and advise you on which court may be best for your specific case.

Mendes Weed, LLP has experience in matters related to Federal tax litigation, and we may be able to help you. Please contact us to discuss your situation.

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