5th Circuit Blog

Daily Round-Up (July 31, 2014)

By Razvan Ungureanu on August 01, 2014

Published Opinions:

1) July ends with a good day for tax enthusiasts.  Salty Brine I, Ltd. v. U.S. addresses whether the transfer of certain overriding royalty interests by a partnership was an invalid attempt to assign income that should have been taxed to the partnership.  The particular scheme at issue involved the partnership carving out royalty interests from its working interests in a number of oil and gas properties and then transferring those royalty interests, through a series of intermediaries controlled by the partnership's owners, into segregated accounts associated with the owners' life insurance policies.  The Fiftch Circuit held that, under the assignment of income doctrine, the assignment of royalty interests by the partnership was taxable to the partnership.  (Under the assignment of income doctrine, a person who earns income cannot avoid income tax by assigning that income to another person.) The court also held that the royalty interest assignment scheme violated the economic substance doctrine, and that the royalty interests were properly taxed to the partnership for that additional reason.  (Under the economic substance doctrine, taxpayers cannot reap tax benefits from transactions lacking in economic reality.)


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