Blank Rome Tax Litigation Team Successfully Litigates Case of First Impression in Lipnick v. Commissioner
A Blank Rome tax litigation team successfully litigated a case of first impression in the United States Tax Court, resulting in the cancellation of over $650,000 in tax and penalties for our client, William Lipnick, in Lipnick v. Commissioner, 153 TC No. 1.
The case involved a D.C.-area real estate investor, William Lipnick, whose father had gifted to him interests in various partnerships holding rental real estate. On his 2013 and 2014 federal income tax returns, William had deducted interest expense attributable to approximately $80 million in loans held by the partnerships as “passive interest,” which offset rental income that would have otherwise been subject to tax. The loans had been used to make debt-financed distributions to William’s father. The IRS disallowed the deduction, claiming that the interest expense was properly characterized as “investment interest” based on how William’s father had treated the interest expense, and, therefore, could not be used to offset the rental real estate income, resulting in additional tax.
Blank Rome successfully argued that William had properly characterized the interest pursuant to a temporary treasury regulation, which IRS Counsel had asserted did not apply. Instead, the IRS attempted to create a new rule that would require William to treat the interest income for tax purposes in the same manner as his father had, which the tax court judge soundly rejected.
The case has far-reaching implications and has been reported nationally by the tax services, as it impacts the manner in which a taxpayer may deduct interest expense from a pass-through entity where debt-financed distributions have not been made to the taxpayer. A related matter for tax years 2011 and 2012 is currently pending before the IRS, which could bring the client’s total savings to over one million dollars.