Ellis George partner Nathan J. Hochman scored another victory on behalf of his clients before the U.S. Tax Court on May 13, 2020, following a September 2019 trial before Judge Ronald Buch. Hochman represents Newport Capital Advisors and its related entities (“NCA”), who had been embroiled in a dispute with the Internal Revenue Service over the characterization of a $23 million settlement payment. The $23 million settlement payment followed a state court trial where NCA prevailed against Commonfund Realty, Inc. regarding joint real estate ventures that the parties had entered into and Commonfund had disavowed, resulting in compensatory damages to NCA of $16,375,968 and punitive damages of the same amount. The IRS sought to treat the post-trial $23 million settlement agreement as an approximation of future income and therefore ordinary income; in addition, the IRS assessed 20% accuracy-related penalties. On that basis, the IRS sought to hold NCA liable for over $10 million in unpaid taxes, penalties, and interest. NCA countered that the entire amount should be characterized as long-term capital gains, and its reliance on three different accountants established reasonable cause for its tax position.
Hochman represented NCA during the Tax Court trial. After the trial, Judge Buch issued his opinion fully adopting our client’s position that the express language of the settlement agreement’s damage allocation controlled since the parties were adversarial, negotiated at arm’s length in good faith, and specifically structured the agreement to constitute a buy-out of NCA’s joint venture interests. As such, the $23 million settlement payment should be taxed as long-term capital gains. Siding with our clients, Judge Buch wrote that the Court would “respect the parties’ allocation of all of the payment to the exchange of the capital assets” and that the “NCA entities properly treated the proceeds as gain on the sale of a capital asset.” Since no additional tax was found, no penalties applied.
Hochman commented: “Judge Buch’s thorough and well-reasoned opinion vindicates our clients’ multi-year odyssey to reach this result.”
Hochman previously served as the Assistant Attorney General for the Tax Division, as an Assistant U.S. Attorney for the Central District of California, and has tried numerous cases before the U.S. Tax Court and district courts on behalf of clients with complex tax issues.
