The California Office of Tax Appeals recently held that a corporation failed to show that a reported transfer of stock had “economic substance” to claim a $10 million deduction on its income tax return. Economic substance is a term of art in the tax world that requires the transaction have some true economic purpose other than just to reduce income taxes. In this case, the corporation claimed the deduction for the transfer of related party stock to a qualified settlement fund. The corporation couldn’t show that the transaction was designed to facilitate a settlement or achieve another non-tax business purpose. Thus, the Office of Tax Appeals sustained the Franchise Tax Board’s disallowance of the claimed deduction and a proposed assessment of additional tax. See Gatewood Corp., California Office of Tax Appeals, 2024-OTA-414, July 2, 2024. It’s unknown if the corporation in this case consulted with tax professionals knowledgeable in this specialized area of the tax law prior to making the transfer of stock and claiming the significant deduction on its corporate income tax return.
To find out more about how Wilson Tax Law Group, could help with your tax litigation and defense needs, we invite you to set up a consultation with our firm.
Wilson Tax Law Group, APLC is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense. Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board. Wilson Tax Law Group is comprised of former IRS litigators & Special Agents, and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division, which at the time handled both civil tax lawsuits and criminal tax prosecutions on behalf of the United States of America.
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