Attorney-at-Law

HEIR SPLITTING – PART DEUX

In Uncategorized on 05/13/2021 at 18:25

For whatever reason, IRS didn’t cross-move for summary J in Cahill; see my blogpost “Summary J – Tactics,” 6/18/18. Turns out IRS may have been wise, because there are lots of facts when split-dollar life insurance arrangements meet estate tax. And Judge Goeke digs through all of them, as we come to evaluating the tax and chops (40% style) in Estate of Clara M. Morrissette, Deceased, Kenneth Morrissette, Donald J. Morrissette, and John D. Morrissette, Personal Representatives, 2021 T. C. Memo. 60, filed 5/13/21.

I gave a tip of the battered Stetson to the late Clara’s trusty attorneys in my blogpost “Heir Splitting,” 4/13/16, which see for part of the backstory. Judge Goeke has more backstory, and it’s a family feud of the clessic (no misprint, that) species. Dad starts business with one used truck and builds a moving and storage empire covering 32 States, slave-drives his sons, two leave, one stays and gets a Prodigal Son complex when the two come back, the brothers hate each other, sue each other, the next generation wants to get into and keep the business but get shut out by the battling brothers, and Mommy wants the business to stay in the family.

Enter the split-dollar, whereby Mommy’s trust funds the life insurance policies that wind up with the sons’ dynasty trusts.

And Judge Goeke buys it all.

The desire to keep the business in the family, the need for liquidity for estate tax purposes (Mommy owned 75% of the stock, plus real estate and securities), the need to secure peace among the battling brothers, and provide the means for the next generation to buy into the business, get the split past Sections 2036, 2038, and 2703.

It takes 125 pages, but the Estate is leading at the sixteenth pole, when IRS’ valuation of the Estate’s share of the split comes up on the outside on Boss Hoss, and beats the Estate at the wire.

The Estate got $7.5 million, say the PersReps. IRS says $27 million. One of the Estate’s experts is off the mark, but the other and IRS’ expert agree on methodology. On the numbers, IRS wins, and the e-mail exchanges between the RA and his immediate supervisor satisfy Section 6751(b).

Trusty attorney warned the brothers that their valuation was too sweet, but they eschewed getting a legal opinion. No good faith defense to the chop, when they finish the Rule 155 beancount.

Is the SDLIA really dead? Maybe not.

CLAY? NO, LOESS

In Uncategorized on 05/12/2021 at 16:59

That entrepreneurial gentleman Scott A. Blum, star of my blogpost “OPIS Finis,” 11/18/12, seems to have an inexhaustible appetite for tax dodges, as he’s back today with Scott A. Blum and Audrey R. Blum, Docket No. 5313-16, filed 5/12/21. This time it’s BLIPS. I’ll let Judge Kathleen Kerrigan explain.

Scott was a partner in “… Democrat Strategic Investment fund LL (DSIF), which engaged in a tax shelter, Bond Linked Issue Premium Structure (BLIPS). DSIF was an entity taxable as a partnership pursuant to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, sec. 402(a). 96 Stat. at 648, which established unified procedures for the IRS examination of partnerships rather than a separate examination of each partner. See secs. 6221-6234.” Order, at p. 1.

“The BLIPS transaction resulted in a purported tax loess which petitioners claimed on their 1999 Federal income tax return.” Order, at p. 2. Tax loess? Judge, I thought you might be referring to Clay; see my blogpost “Indians Not Taxed – Redivivus,” 11/28/16.

Howbeit, IRS descended on the Democrats (please, this is a nonpolitical blog; any resemblance between my remarks here and any political organization or party is purely coincidental). The Democrats’ TMP elected to challenge the FPAA in USDCNDCA, at which IRS won on all counts, including without limiting in any wise the generality of the foregoing, the Section 6662(h) overvaluation chop.

So IRS hit Scott with a bunch SNODs (hi, Judge Holmes).

The SNODs seek the chops USDCNDCA affirmed, and Scott claims he doesn’t owe them.

We all know pursuing affected items in Tax Court is a nonstarter. Happily, the next generation of partnership dodges will all be sorted out in a single proceeding. Maybe.

“Deficiency procedures apply to affected items which require partner level determinations (other than penalties, additions to tax, and additional amounts that related to adjustments to partnership items. Sec. 6230(a)(2)(A). This is a deficiency case and therefore, penalties attributable to affected items determined at the partner-level are not before the Court.” Order, at p. 2. (Citation omitted).

So anything in Scott’s petition relating to the chops is stricken.

Scott, sometimes it’s better just to pay the tax. And stay away from the tax loess.

 

COST OF GOODS NOT SOLD

In Uncategorized on 05/12/2021 at 16:08

Before drilling down into Judge Pugh’s prose, I’d like to bestow a new Taishoff award, called the Chutzpahdika Punim, upon the trusty attorneys for BRC Operating Company LLC, Bluescape Resource Company LLC, Tax Matters Partner, and Bluescape Resources Company LLC, Bluescape Resources Investors LLC, Tax Matters Partner, twinned for trial and disposition in 2021 T. C. Memo. 59, filed 5/12/21. The reason for the award will become clear, even without the need for translation.

The Bluescapes passed through to their investors $160 million in mineral lease acquisition costs over two (count ’em, two) tax years. But The Bluescapes failed to heed the well-known admonition “Drill, Baby, drill!” Not only did they not drill anything but two test wells, which they stiped were irrelevant, they earned no income whatsoever. But they characterized the passed-throughs as costs of goods sold.

The Bluescapes try to dodge IRS’ motion for summary J disallowing this novel approach by claiming that it’s not section 461 economic performance (The Bluescapes are accrual basis), but Section 451 timing of receipt of gross income. Remember, the Sixteenth Amendment permits taxation of gross income, not gross receipts, lest Congress try to tax return of capital. That’s why COGS.

But before we get to timing, Judge Pugh has a basic question.

“Can Bluescape recognize costs of goods sold before it has any gross receipts from the sale of goods? In other words do we even reach the question of whether costs of goods sold are subject to the economic performance requirement when there are no gross receipts to offset yet?” 2021 T. C. Memo. 59, at p. 7.

IRS says ya gotta have goods sold to offset income therefrom with cost of the goods ya sold.

“Petitioners, framing respondent’s position as a ‘clear reflection of income’ argument, argue that ‘matching’ of cost of goods sold and gross receipts is not required. Thus, petitioners argue, they can recognize cost of goods sold as soon as they assume the obligations to drill the wells, giving rise to a loss that flows through to their partners.” 2021 T. C. Memo. 59, at p. 8.

Judge Pugh goes back to 1918 for the history of COGS. And the cases The Bluescapes cite only shows up the illogic of their position. Taxpayers won those cases by expensing against income items disallowed by IRS as COGS. But they had to have income against which to deduct or offset.

“…petitioners take the position that Bluescape’s estimated drilling costs are not deductible expenses but costs included in cost of good [sic] sold–that is, that the expenses are part of the cost of acquiring the natural gas. This position is how they claim to avoid the economic performance requirement. But it is also what requires them to wait until there are gross receipts against which to offset cost of goods sold.” 2021 T. C. Memo. 59, at pp.16-17.

Despite all The Bluescapes’ trusty attorneys’ gyrations, there is only one essential undisputed material fact.

“In sum, we conclude that to recover cost of goods sold a taxpayer generally must have some gross receipts from the sale of goods to offset. Because Bluescape had no gross receipts from the sale of natural gas for the years in issue, the estimated drilling costs reported as ‘cost of goods sold’ are not allowable as a cost of goods sold offset to gross receipts.” 2021 T. C. Memo. 59, at pp. 20-21.

“Inventive” isn’t the word.