Taxpayers 3, IRS 1

Two transferee liability cases yield wins for the transferees. The facts of both do not differ widely.

We once again have the successful businesspeople selling the corporations that carried them to exalted financial heights, with a basis in pennies. In both cases, sale of the corporation, whether by way of a stock sale or an asset sale, was followed by vendee shenanigans, of which the vendors were unaware, triggering astronomical tax liability in the sold corporation, and setting up the transferees of the sales proceeds for Section 6901 transferee liability.

The cases are Griffin, T.C. Mem. 2011-61, and Starnes, T.C.Mem.  2011-63, both released 3/15/11. In both cases, the guileless selling stockholders sold their profitable businesses to a subsidiary of Mid-Coast Financial, a strip-miner of worthless debt.  Mid-Coast, by reason of acquiring stock in a corporation with almost no basis in valuable assets, landed the corporation with an enormous tax liability by selling off the corporation’s assets.

Mid-Coast played the variation on the interest rate swap, foreign currency game, as in Stobie Creek (see my 1/2/11 post). They bought a Producers type “collar”, that either produced a lottery-size win (on lottery-sized odds) or a dead loss (that was worth an enormous tax savings), and married the loss on the swap to the gain on the assets. And of course there was no substantial business purpose for a corporation that operated warehouses (as in Starnes), or made swimming-pool heat pumps (as in Griffin), to play Las Vegas style options trades. Huge tax assessed on corporation, and selling shareholders as insider-transferees.

Tax Court went off the uniform fraudulent conveyance statutes. The transferees of the purchase price had no idea that Mid-Coast was playing games (in fact Griffin sued Mid-Coast, spent $125,000 in legal fees to get a judgment directing Mid-Coast to pay the taxes as they had agreed, and of course didn’t collect Dime One).

The taxpayers are injured innocents, said Tax Court. IRS should pursue Mid-Coast.

Winner number three is the Estate of Sylvia Riese T.C. Mem 2011-60, released 3/15/11.  The late Sylvia was the  widow of a co-owner of the largest franchisee of chain restaurants in New York City. The late Sylvia sets up a QPRT for her mansion (IRS says it’s worth $11 million). QPRT ends, but Sylvia never gets around to signing a lease or paying rent before she dies suddenly and unprepared, but before the end of her current tax year. Even the fair market rent had not then been determined, although her daughter and co-executor said she intended to get it done. And of course the trustees never deed the property to the trust beneficiaries.

What should have been a slam-dunk for IRS hit the rim and bounced out (sorry, it’s March), because the decedent died before tax year-end, and the Regulations don’t say when rent must commence or lease be signed. As decedent died before either act had to take place, the mansion is out of the taxable estate.

The fourth case was a run-of-the-mill unamended retirement plan case, Christy & Swan, Profit Sharing Plan, T.C. Mem. 2011-62, released 3/15/11. No amendment means disqualification, even if the plan never involved any of the matters required to be amended by the statutory enactments. Taxpayer loses, even though the result flies in the face of reason. So what else is new?