In his over 35 years of tax practice, Mr. McDonnell had been involved in several important milestones in the development of the law, including the following.
Development of Section 986
In the 1980’s, the IRS was studying the taxation of transactions and operations involving foreign currency. The IRS realized that these issues were growing, and that they had a limited set of rules in the area. As a result of advising international clients on these types of transactions, we prepared an outline of a major change that was needed with respect to dividends paid by foreign subsidiaries of U.S. companies. The arguments we presented eventually led the IRS to propose, and Congress to adopt, Section 986 of the Internal Revenue Code, which changed the tax rules that had been in place for 35 years.
The Galedrige Case and Taxation of Building Contractors
In the 1990’s the IRS began to challenge the way that construction companies and building contractors accounted for their income. Historically, these businesses could use the cash method of accounting and only report income when they were actually paid by the customer. The IRS sought to force these companies to change to the accrual method (reporting income when the work was done), which would result in a huge tax bill for companies in the year they were forced to change. By the late 1990’s the IRS had already won two major cases on this issue, but in Galedrige v. Commissioner, 73 TCM (CCH) 2838, we convinced the Tax Court that the IRS was misinterpreting the statutes, and the court ruled that the company could continue to use the cash method. Eventually, after several cases followed the Galedrige case, the IRS abandoned its attempts to force these companies to change, and announced this abandonment in Chief Counsel Announcement CC-2001-010 (Feb. 9, 2001). As a sidelight, we were also able to convince the Tax Court that the IRS had improperly imposed penalties on Galedrige, and the Tax Court ordered the IRS to pay a part of the client’s attorneys’ fees.
Modification of Offshore Transfer Rules
We have, at times, developed innovative tax saving plans for clients. When the IRS challenges such a plan on audit, the IRS sometimes realizes that the plan is solid, and the IRS can not win the case in court. At that point, the IRS often will seek to have Congress change the law. This happened with one of our methods of transferring assets to a foreign subsidiary. The IRS did not take the case to court, but instead had Congress enact Section 367(c)(2) of the Internal Revenue Code to create a “deemed exchange” when a U.S. company transfers assets to a foreign subsidiary it already owns.
Work on The Corporate Tax Treatise
As a result of the work and our involvement in the Tax Section of the American Bar Association, Mr. McDonnell was requested to review and provide comments on the drafting of the Fourth Edition of “Taxation of Corporations and Shareholders” by Boris Bittker and James Eustace, which has been recognized for decades as the preeminent treatise on taxation of corporations.