In Uncategorized on 03/12/2012 at 17:34

Judge Holmes Deconstructs an Apartment Building

And How to be a Tax Fraud

Two for the price of one today.

Judge Holmes, the Judge who writes like a human being, has written another advanced tax accounting text in Amerisouth XXXII, Ltd., Amerisouth Texas III, LLC, Tax Matters Partner, 2012 T.C. Mem. 67, filed 3/12/12. Judge Holmes has ridden this range before (see my blogpost “Basis for Dummies,” 11/24/11), and this time he sprinkles his prose with cowboyisms (the property at issue is in Mesquite, Texas, although the parties shuffle off to Buffalo, New York, to try the case), and a few groaner puns.

Amerisouth XXXII (hereinafter “32”) is one of a string of apartment house tax shelter deals run by old-time Texas real estate operator Ruel Hamilton, who disappears after trial, so no post-trial brief is filed, and 32’s attorney are relieved (in more ways than one).

Ruel decides to use the component approach to depreciation (see my blogpost “Buying Trouble”, 1/18/12), trying to take MACRIS class lives for every single piece of 366 apartments in more than 40 buildings on 16 acres of Texas.

Ruel tries to get out of the 27.5 year residential realty life by deconstructing the entire building, via an analysis by MS Consultants, to accelerate depreciation deductions. He’s literally throwing in the kitchen sink (or sinks: there are hundreds of them).

I remember seeing this gambit played before the Tax Reform Act of 1986, and even after that by a few hardy souls. Like auto racing, it can be fun, but dangerous.

I won’t quote, much less try to paraphrase, Judge Holmes’ 61 pages of analysis, beginning with a property description that beats any broker’s set-up I ever saw, and marches resolutely through the maze of regulations, statutes both current and repealed, and a maze of decided cases. But any tax professional, who has to deal with what is a structural component and what is personal property, and the various class lives of the latter, should read and heed.

Another gem this date is Michael A. Scott, 2012 T.C. Mem. 65, filed 3/12/12. Mike is a dentist who claims he made no money for the years at issue. When IRS challenges this assertion, Mike fires off letters to banks, threatens to sue bank employees, tries to quash IRS subpoenas, and is less than credible on the witness stand, according to Judge Halpern.

I’ll digest the 50 pages of this decision thus: if you want a blueprint for how to be adjudged a tax fraud and subject to the Section 6663(a) 75% solution, just follow Mike’s example. Better yet, don’t.

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