High Court Urged To Review Tax Fight Over Offshore Cos.

Law360, New York (April 03, 2015, 8:10 PM ET) — Three limited liability companies have urged the U.S. Supreme Court to review a Third Circuit decision finding that the Internal Revenue Service could require them to pay the full tax burden for a technology company transaction despite transfers of interest to offshore entities.

The companies — held by the daughters of Richard Vento, the founder of a tech company that sold itself to Agilent Technologies Inc. in 2001 — were ordered to pay taxes on the full amount of the gains even though a portion of their interests had been transferred to tax-exempt companies in the Cayman Islands.

But in their March 10 petition, the Vento LLCs argued that the high court should review questions over whether a section of the Tax Equity and Fiscal Responsibility Act allows a stand-alone three year limitations period on assessing a tax on partnership items and the admission of an attorney-client privileged document.

“The Third Circuit, misinterpreting the record, ruled that the LLCs had conceded the statute of limitations defense,” the petition said. “They had not, and … this case presents an an opportunity for this court to resolve a reoccuring issue of great importance: which provision of the tax code constitutes the applicable statute of limitations for assessing a tax on a partnership item.”

TEFRA’s Section 6229(a) was considered a stand-alone statute of limitations for assessing taxes on partnership items for many years, the petition noted, but that changed with Rhone-Poulenc Surfactants & Specialties LP v. Commissioner, which found the section was only a minimum or alternative statute of limitations.

However that ruling has created problems with no set time on when the limitations period for assessing the tax on partnership items begins, the petition said, arguing that the court should “resolve this fundamental tax question.”

“Nothing in the language or legislative history supports this result. Section 6229(a) is [titled] ‘a period of limitation,’ not an ‘alternative’ or ‘minimum’ statute of limitations,” the petition said. “Whether Rhone-Poulenc was correctly decided is a matter of utmost importance.”

Further, the Third Circuit’s decision to allow the admission of evidence protected by attorney-client privilege also warrants the high court’s attention, it said. Although the circuit court determined that the document — a legal memo that concluded that assignments to the Caymans were impermissible — was harmless, the court should clarify whether it “affects a substantial right” of a party.

The Vento LLCs dispute with the IRS goes back to the 2001 sale of Richard Vento’s Objective Systems, in which $28 million was paid out to each of the three LLCs. In late 2001, the LLCs redeemed the interests sent to the Cayman companies for about $5.3 million, according to court records.

The companies filed tax returns in October 2002, claiming the Cayman entities wouldn’t pay taxes on the stock sale income and sought to make other adjustments based on that sale. But the IRS rejected the claim in 2008, saying the money from the Caymans must be reallocated to the Vento LLCs, among other things. It issued two noncumulative monetary penalties against each Vento LLC at the partnership level for the inaccuracies, according to court records.

At a December 2011 trial, the government argued that because the Cayman entities were made in anticipation of income, the entire tax burden of the sale of Objective Systems should be placed on the Vento LLCs.

Counsel for the Vento LLCs was not immediately available for comment on Friday.

The Vento LLCs are represented by Nathan Z. Dershowitz, Amy Adelson and Daniela Elliott of Dershowitz Eiger & Adelson PC.

The U.S. is represented by Donald B. Verrilli Jr.

The case is Gail Vento LLC et al., v. United States, case number 14-1188, in the U.S. Supreme Court.