The IRS finally released its promised guidance on tax issues related to cryptocurrencies in the form of Revenue Procedure 2019-24[1] and a set of frequently asked questions on the IRS website.[2]

The Revenue Procedure looks to answer a question may have had about how to treat the hard fork of a cryptocurrency.  The best-known hard fork of a cryptocurrency was the fork that created Bitcoin Cash in August 2017.[3]  Investopedia’s article on Bitcoin Cash describes the fork and related issues as follows:

Amidst a war of words and staking out of positions by miners and other stakeholders within the cryptocurrency community, Bitcoin Cash was launched in July 2017. Each Bitcoin holder received an equivalent amount of Bitcoin Cash, thereby multiplying the number of coins in existence. Bitcoin Cash debuted on cryptocurrency exchanges at an impressive price of $900. Major cryptocurrency exchanges, such as Coinbase and Itbit, boycotted Bitcoin Cash and did not list it on their exchanges.[4]

In the case of Breland v. Commissioner, TC Memo 2019-59[1] (May 29, 2019) two different issues were decided by the Tax Court:

• Did the taxpayers properly substantiate the basis of property sold by producing only a Form 8824 from a prior return when the property was obtained as part of a like-kind exchange?

• What was the actual sales price and cancellation of debt resulting from the foreclosure sale of the taxpayer’s properties?

In the case of Simonsen v. Commissioner, 150 TC No. 8, the Tax Court reaffirmed its previously stated position regarding a short sale when a nonrecourse debt is involved.  As well, for the first time the Court also addressed the reportable gain/loss on a property converted to rental use that was sold for less than its original cost but more than its date of conversion fair market value.

The couple in question had purchased a townhouse in San Jose in 2005 for $695,000.  They lived in that home for five years, during which the real estate crisis hit.  In 2010 they relocated to Southern California and began renting the townhouse.  At the time it was converted to a rental the fair value had declined to $495,000.

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An attempt to combine the concepts of valuation discounts for family limited partnership often used in estate planning with a short-lived S corporation to create an income tax benefit was not looked upon positively by the Tax Court in the case of Smith v. Commissioner, TC Memo 2017-218.

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Rev. Rul. 2003-7 provides that variable prepaid futures contracts (VFPCs) represent “open transactions” that are not subject to tax until the contract is finally settled and do not represent constructive sales of the stock under IRC §1259.  The case of Estate of McKelvey v. Commissioner, 148 T.C. No. 13 looks at whether an extension of the VFPC represents either a taxable settlement of the contract or a constructive sale of the related shares under IRC §1259, a question not previously addressed by the Tax Court.

Under a variable prepaid forward contract, a taxpayer agrees to pledge a certain amount of stock in exchange for receiving a payment of cash.  The contract provides that, at a specified date in the future the taxpayer will deliver either a number of shares of stock (either from the original pledged group or other shares the taxpayer has) or a cash payment.  The number of shares to be delivered varies over a specified range of shares, based on the price of the stock on the date the transaction is closed.  The shares that are pledged represent the maximum number that may need to be delivered.  As well, the party pledging the shares would retain the right to close out the contract at any time before the final settlement date, either by transferring shares or cash.

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One day after the Tax Court invoked the Danielson case to reject a taxpayer’s attempt to argue substance over form to restructure an agreement for tax purposes in Makric Enterprises, Inc. v. Commissioner, TC Memo 2016-44, the Court turned down the IRS’s attempt to argue the same case should block a taxpayer from arguing a transaction represented a sale of its interests in rights to a chemical compound.

In the case of Mylan, Inc. and Subsidiaries v. Commissioner, TC Memo 2016-45 the IRS was arguing for summary judgement, based on the Danielson decision, that the taxpayer had to treat its transaction as a license agreement generating ordinary income and not a sale of its rights generating capital gains.

Details matter in tax law, especially when the taxpayer was involved in setting up the details.  In the case of Makric Enterprises, Inc. v. Commissioner, TC Memo 2016-44 a failure to make sure that the right corporation was sold as part of the agreement proved very expensive to the taxpayers—in the amount of $2,839,780.

There were two corporations involved in this matter—one of which was a holding company (Makric Enterprises, Inc.) whose only asset was the stock of a wholly owned subsidiary (Alpha Circuits, Inc.).  A third party became interested in buying the business conducted by Alpha.