Sixth Circuit - Tax Court’s opinion in wireless cellular phone service case is affirmed 

August 23:  The U.S. Court of Appeals for the Sixth Circuit today affirmed a decision of the Tax Court with respect to tax issues concerning the wireless cellular service industry. Broz v. Commissioner, No. 12-1403 (6th Cir. August 23, 2013)

The Sixth Circuit found the Tax Court:


  • Correctly determined that an individual taxpayer lacked the required basis in a subchapter S corporation to permit pass-through losses
  • Correctly rejected the business expenses and amortization deductions for the license-holding entities (taxed as partnerships, and not subchapter S corporations) because those entities were not engaged in an active trade or business

The Sixth Circuit, thus, concluded that with these findings, there was no need to address the at-risk issue.


Read the Sixth Circuit’s decision [PDF 45 KB]

Background

Read TaxNewsFlash-United States (September 1, 2011) for a brief summary of the issues addressed by the Tax Court in its September 2011 opinion (also provided below).


  • Whether the taxpayers had properly allocated $2.5 million of the $7.2 million purchase price to depreciable equipment when the allocation in the purchase agreement remained unchanged despite a two-year delay in closing the transaction: The Tax Court held that the taxpayers’ allocation was improper.
  • Whether the taxpayers had sufficient debt basis under section 1366 in stock of an S corporation, to claim flow-through losses: The Tax Court held that the taxpayers had insufficient debt basis, and therefore could not claim the flowthrough losses.
  • Whether the taxpayers were at risk under section 465 and could claim flow-through losses from the S corporation and related holding companies (or whether the pledge of stock in a related S corporation is to be excluded from the at-risk amount because it was “property used in the business”?): The Tax Court found that this was a question of first impression, and held that the taxpayers were not sufficiently at risk and therefore could not claim the flow-through losses because the stock they pledged was related to the business.
  • Whether equipment holding companies was engaged in an active trade or business permitting the taxpayers to deduct business expenses: The Tax Court held that the entities were not engaged in an active trade or business, and therefore, the taxpayer could not deduct the expenses.
  • Whether the related license holding companies were entitled to amortization deductions for cellular licenses from the FCC upon the grant of the license or upon commencement of an active trade or business: The Tax Court, noting this issue presented a question of first impression, concluded that the taxpayers were not entitled to any amortization deductions upon the license grant because they were not engaged in an active trade or business during the years at issue.



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