Fifth Circuit Rebuts IRS, Says S Corporation Satisfies Active Participation Exception – Los Angeles Income Tax Planning & Income Tax Litigation Attorney Bruce Givner

by Bruce Givner on June 17, 2014

The US Court of Appeals for the 5th Circuit affirmed a lower court’s decision that a rancher was entitled to use the cash method of accounting as she satisfied the active participation exception of tax code Section 464(c)(2), contrary to the Internal Revenue Service’s (IRS) assertion.

Previously, the IRS determined that Anne Burnett Windfohr Marion ran her company, Burnett Ranches Ltd., as a “farming syndicate” tax shelter. In his affirmation of the lower court’s decision, Judge Jacques L. Wiener Jr. pointed out the flimsiness of the IRS’s argument after the agency’s concession that “(1) Ms. Marion did indeed ‘actively participate’ in the management of Burnett Ranches’s agricultural business for not less than five years previously, and (2) her interest in Burnett Ranches is ‘attributable to’ her active participation.”

With these concessions, the IRS’s argument rested on the fact that Marion owned Burnett Ranches through her wholly owned S corporation. Judge Wiener, who called the argument an “extremely slender reed,” said the legislative history and text of Section 464 made it clear that Marion’s owning her interest through an S corporation did not prevent her from taking advantage of the exception.

Indeed, Wiener wrote that “to accept the government’s overly expansive reading of §464 by crediting its overly narrow reading of the Active Participation Exception would be to sanction ‘administrative legislation’ by an Article II executive agency.”

Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.

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