Good Fortune sought to exclude its U.S.-source gross transportation income in 2007 under Internal Revenue Code Section 883, which provides an exemption for companies with more than 50 percent ownership by residents of countries whose tax laws grant U.S. companies reciprocity, according to court documents.
However, the IRS in 2003 had issued a regulation excluding companies whose stock consisted of bearer shares, an unregistered form of stock certificate that does not identify the owner. During the 2007 tax year all Good Fortune shares were in bearer form, and the company was assessed $143,500 in 2007 taxes. The company filed a petition in the U.S. Tax Court claiming the categorical exclusion of bearer shares was unreasonable. It lost and appealed.
A flat rejection of bearer shares is unreasonable, a D.C. Circuit panel ruled, calling bearer shares a legally valid form of ownership. While they make ownership is difficult to verify, it is not impossible, the panel added.
“If the IRS found that the transferable nature of bearer shares made substantiation impossible, we might conclude that the 2003 regulation reasonably implemented that finding,” the panel said. “But the IRS has never made (much less adequately supported) such an absolute claim of impossibility with regard to bearer shares.”
“The IRS cannot reasonably rely on the risk of abuse to treat bearer shares as a form of second-class ownership in some contexts but not in others, especially without any contemporaneous explanation justifying the disparate treatment.”
Read more at: Tax Times blog