In Uncategorized on 10/30/2014 at 16:43

No, I’m not auditioning for the role of Valentin in Faust, or critiquing someone’s performance.  It’s just that before I depart for the Bayou City (or the Magnolia City, if you prefer), I was going to blog whatever was really interesting out of Tax Court today.

But there wasn’t. The two T. C. Memos today had nothing new.

One was a capitalized qualified residential mortgage interest case, of the kind I dealt with in my blogpost “Nice Try”, 2/21/13, specifically Philip C. Smoker, 2103 T. C. Memo. 56, filed 2/21/13.

Cash basis individuals can’t deduct capitalized interest until paid in cash or equivalent.

Second one is the story of a taxpayer who, confronted with a multimillion-dollar buyout, had his tax professionals (CPA and attorneys) try to negotiate a deal, and when they had, signed something else (that the buyerout prepared), which he never had his professionals review. Then when the buyerout characterized the buyout as ordinary, tried to convert it to capital gains by filing Form 4852, Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

Needless to say, this goes nowhere with Judge Cohen. Taxpayer signed documents he never showed his professionals, didn’t give them the numbers on his position in the boughtout entity, and rather than sue when they suggested it, sent a letter to the buyerout that was completely ignored. Then he made up his own documents to recharacterize the transaction. Reliance on experts? Not hardly.

No need for “somber reasoning and copious citation of precedents” today.


In Uncategorized on 10/29/2014 at 19:15

 Or Maybe They Were Right All Along

It’s our old chum Securitas Holdings Inc., and Subsidiaries, 2014 T. C. Memo.225, filed 10/29/14.

Surely you remember Securitas, with or without subsidiaries? No? Then check out my blogposts “Closing the Buch”, 7/2/13, and “Privilege Lost”, 5/29/13.

Both of the foregoing were jousts about the privileged communications between Securitas, its tax advisers PricewaterhouseCoopers, and its attorneys, who worked out the strategy. IRS got the communications, but Securitas gets the win, as Judge Buch tells us.

The issue is deductibility of insurance premiums to a captive. Two more old friends make the scene, Rent-A-Center and Acuity. For Rent-A-Center, see my blogpost “Insurance – Are You Sure?”, 1/14/14. For Acuity, see my blogpost “Say “Hello” To Judge Nega”, 9/4/13.

Securitas is a Swedish company that goes into the US security business (not stocks-and-bonds, uniformed guards with guns). They buy up Pinkerton’s and Burns Detective. This means tons of vehicles, personnel (workers’ comp and employer liability, cash galore, and all kinds of whatever other liability plaintiffs’ counsel can come up with). Insurance costs a mint in the free world, so Securitas sets up a captive in VT.

Costs cut, but Securitas has a better idea. It gets the VT regulators to allow the captive to lend all but $1 million of its capital to its parent (Securitas). Then, to make sure it’s covered (and has a great tax dodge), it sets up a captive reinsurer. Guess where? [Cue the Kerry Pipers]. The Emerald Isle, now Emerald because of all the cash stashed there. Now Securitas can take the insurance premiums for its onshore cover, wash them through VT, and deposit them at the end of the rainbow (and Ireland has great rainbows). And benefit from the Irish corporate tax rate, which is a pittance, on the millions stashed in the land of céad míle fáilte.

OK, we have shifting of risk, does it look like insurance, balance sheet, risk distribution (spreading the risk), and reasonableness of premiums and capitalization.

Now remember our old chum Centaur, the IL Section 501(c)(15)? The whole jumpball, or rather both jumpballs involving Securitas discussed in my blogposts abovecited, was about selling Centaur stock to preserve its Section 501(c)(15) status undefiled by control group attribution. Securitas picked up Centaur when it bought Burns Detective.

Well, by creating the reinsurance dodge and sterilizing the VT captive with a guaranty of performance, so that the VT captive wasn’t an insurance company for US tax purposes, Centaur wasn’t part of a US insurance control group and could keep its Section 501(c)(15) virtue intact. And Securitas could keep its Centaur stock, and save it for a rainy day.

So the whole confidentiality fight was a sideshow.

At the close of play, the Irish Re turns out to be real. Capitalized enough; Securitas’s plenteous activities furnish diversified risk; the premiums are reasonable (IRS concedes that); the policies are real on their face, and the fact that some were signed after the stated effective date doesn’t invalidate them; the risks are insurable risks; the guaranty from Securitas to the VT captive doesn’t by itself invalidate the shifting of risk; and the bookkeeping arrangements of paying by ledger entry doesn’t prevent risk-shifting, because it is unrealistic to expect members of a control group to cut checks to one another, and such payment arrangements are commonplace.

Of course, both the VT captive and the Irish Re kept separate books, had their own directors’ meetings, and had their own bank accounts.

Securitas wins, third time out. And a Taishoff “good job”, first class, to Michael Francis Kelleher, Esq., and his team.

Full disclosure: I worked for Burns Detective Agency, as it was then, one summer fifty years ago, as an unarmed guard at a Brooklyn brewery (now defunct). But that’s definitely another story.


In Uncategorized on 10/29/2014 at 17:56

Steven R. Rader is a plumber, consolidated with Vivian L. Rader, 143 T. C. 19, filed 10/29/14, but it’s Steve’s story all the way. IRS concedes that it’s all about Steve.

Steve and Viv didn’t bother to file tax returns for a bunch of years, in one of which they unloaded some real estate (character of which not stated, but it matters) they both owned. For that year they got withheld the FIRPTA 10%.

For those who don’t deal with income taxation of real estate, every transferor of US real property (except certain low-budget principal residences) must either provide a TIN to the transferee, or the transferee must withhold 10% of the gross proceeds and remit same to IRS, along with Form 8288-A.

Now FIRPTA means Foreign Investment in Real Property Tax Act (of 1980); but Steve and Viv are both US citizens, so why the 8288-A? Neither one provided a TIN. The real estate was all in CO, so it was the usual Western escrow closing, run by a title company. I’ve done CO deals; to my New Yorker eyes they’re weird, but I’m sure the CO title company would say the same about my hometown.

And the title company didn’t bother with the back-and-forth that would take place at a New York closing, where all (or almost all) of our form contracts require either a Section 1445 certificate (US personhood) or withholding, and failure to provide one from what seem to be US people would raise eyebrows, at a minimum. No, the title company just withheld.

Since the deficiencies at issue are all to do with Steve’s plumbing operation, but since the 10% withholding impacted Viv’s share of the proceeds from the jointly-held realty (presumably community property in CO, no? Help me out here, Colorado colleagues), shouldn’t Viv get credit for her share of the 10% withheld, as IRS isn’t hitting her up for any tax?

Yes, if she had timely filed. But she never filed, and the payment date (of the 10% withheld), which is deemed to be April 15 of the year following the year of closing, is more than two years before IRS issued Viv the SFR that covered that year.

See my blogpost “Lookback in Anger”, 12/12/11. If you don’t file, you get a two-year-from-payment lookback, not the three-years-from-filing lookback. Nonfilers cannot be as well off as filers.

Now Steve doesn’t get a break on the 10% either, because in computing a deficiency, the credit for the 10% withheld (Section 33) is expressly excluded from the deficiency computation (Section 6211(b)). And all the deficiencies are Steve’s alone.

Tax Court can’t consider any entitlement Steve might have to a Section 33 credit, even assuming that he can get past the two-year lookback.

Incidentally, although one of Steve’s arguments has merit, that doesn’t save him from a Section 6673 frivolity chop, because Judge James S. (“Big Jim”) Halpern decides Steve was stalling by interposing protester arguments to excuse his nonfiling.

Steve’s winner was based on IRS’s amended deficiencies, which IRS increased by changing Steve from single status to MFS. But the amended deficiencies also increased the Section 6651(a) (2) failure-to-pay-timely chop that IRS claims.

“All of those increased amounts are computed on attachments to the amendments to answer, which attachments consist of a new Form 4549-A, a Form 5278, and computations of the various penalty amounts and of petitioner’s self-employment tax for 2003-06. Respondent has failed to attach to his amendments to answer a Form 13496 for any of the years covered by the amendments to answer. The Form 13496, in pertinent part, states: ‘The officer of the IRS identified below, authorized by Delegation Order 182, certifies the attached pages constitute a valid return under section 6020(b).’”. 143 T. C. 19, at p. 26.

So what’s up with that? Judge Big Jim will tell you: “However, without their having been subscribed to or certified by an authorized Internal Revenue Officer or employee, under those same authorities, the attachments do not ‘purport[] to be’, and do not constitute, a section 6020(b) return [SFR] for any of the… tax years. Therefore, we sustain the section 6651(a) (2) additions to tax set forth in the notice … and reject the increases to those amounts set forth in respondent’s amendments to answer.” 143 T. C. 19, at p. 27.

See my blogpost “Doesn’t Anybody Read Their Papers?”, 10/27/14.

Before I say goodbye to Steve and Viv, I want to take up the cudgels for the CO title company that closed Steve’s and Viv’s deals. Judge Big Jim thinks they didn’t know the law, specifically Section 1445.

“Also exempt from the requirement to withhold under sec. 1445(a) are sales of U.S. real property interests for $300,000 or less if ‘the property is acquired by the transferee for use by him as a residence’. See sec. 1445(b) (5); sec. 1.1445-2 (d) (1), Income Tax Regs. Petitioners’ … real property sales were for $250,000 and $25,000, respectively. The record is silent regarding the buyers’ intended use of the properties, and we can only assume that the title company payor did not avail itself of the sec. 1445(b) (5) exemption either because (1) the buyers did not intend to use the properties as a residence or (2) it was not aware of the exemption.” 143 T. C. 19, at pp. 19-20 (footnote 9).

Don’t assume too much, Judge. I think the title company knew the exemption “richt weel”, as they say in Gleesca.

More to the point, they were dealing with Steve and Viv and their shenanigans, which aforesaid shenanigans were enough for Judge Big Jim to hit them with a $10K frivolity chop. If I were title company’s counsel, and a transferor didn’t give me a Section 1445 FIRPTA cert, even if s/he were Uncle Sam his own self, and the realty were the original Little House on the Prairie, I would have told the title company to take the 10%, slap up a Form 8288-A, and ship them both to the Ogden Service Center, by registered mail the same day.

My client should take a chance of getting involved with some tax dodge? They should trust Steve and Viv, and whatever tale the transferee/buyer tells them? As they say on the roads in the Great West, that’s a thwacking great negatory, good buddy.


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