In Uncategorized on 12/26/2012 at 18:34

Judge Vasquez has a Christmas present for Donald R. Fitch and Brenda T. Fitch in 2012 T. C. Memo. 358, filed 12/26/12. They get to depreciate Donald’s repurchase of his accounting practice, after an explanation of Donald’s sale to Mark and the repurchase thereof four-and-a-half months letter, which incidentally explains the title of this blogpost.

Donald was a single-shingle CPA in San Francisco, who spent ten years building his practice until stricken with a brain aneurysm, which put him in the hospital for a week and led to a slow recovery.

Unable to keep his practice going, he sold it to Mark, a CPA from Massachusetts, who had provided services to Donald sporadically as an IC. The agreement of sale stated Donald had had a brain aneurysm and needed to sell. Payment was to be made in a single installment of principal and interest (at AFR) one year after sale. Donald helped a little with the transition, and reported the capital gain on the sale.

Four-and-a-half months into his ownership of the practice, Mark suffered a seizure and was hospitalized.

Gotta be something about being a CPA. It’s a risky occupation.

Mark sold the practice back to Donald for the same price he paid, stating in the sales agreement he was ill and couldn’t go on running the practice.

Donald started depreciating the practice, using the 15-year Section 197 rules for intangibles, but getting the numbers wrong; he was $15K low per year.

IRS blows the deal up, of course, claiming it was a give-and-go, Donald was depreciating self-created intangibles, and also blowing up Donald’s and Brenda’s spousal meal deductions and their real estate operations. The real estate and spousal meals are too fact-driven and too much like other Section 274 and Section 469 face-offs to warrant space here.

The key is the bona fides of the sale and resale of the accounting practice, and Judge Vasquez finds for Donald.

Judge Vasquez: “Respondent contends that petitioners presented false testimony and fabricated documents in an attempt to prove that the transactions took place. We disagree. We find petitioners’ testimony to be credible and persuasive. See Diaz v. Commissioner, 58 T.C. 560, 564 (1972) (stating that the process of distilling truth from the testimony of witnesses, whose demeanor we observe and whose credibility we evaluate, is the daily grist of judicial life). Furthermore, we find the sale and repurchase agreements to be genuine and trustworthy.” 2012 T. C. Memo. 358, at p. 12.

IRS also questioned Donald’s wisdom in repurchasing the accounting practice. But Judge Vasquez doesn’t want to second-guess Donald: “However, it is beyond this Court’s purview to second-guess [Donald’s] business judgment or the manner of operations of his business.” 2012 T.C. Memo. 358, at p. 12, footnote 11.

“Respondent [IRS] attacks the agreements for their brevity, arguing that they lack ‘details that would certainly be present on an authentic sales contract of nearly one million dollars.’ However, the circumstances surrounding the sale and repurchase transactions present a different story. [Donald] was recovering from an aneurysm at the time he sold the C.P.A. practice to [Mark]. They had a working relationship dating back to 1996, and they understood the need to effect a quick sale on account of [Donald’s] medical condition. They put the basic elements of their agreement into writing and left the details to be sorted out later. Likewise, when [Mark] suffered a seizure, they signed a similar agreement to effect a quick repurchase. In these circumstances, we find it hard to believe that a lack of details somehow suggests the agreements were fabricated. Respondent does not argue that the sale and repurchase agreements are invalid or unenforceable under State law. Accordingly, we find that petitioners have proven that the sale and repurchase transactions actually took place.” 2012 T. C. Memo. 358, at p. 13 (footnote omitted, but IRS said there were no default provisions and the agreements were very short.)

And the deal was not a rescission, as Donald did not get back exactly what he had sold, as the practice had been ongoing, and Donald and Mark were not back in exactly the same position as before.

Finally, “Respondent cursorily cites section 1.197-2(d)(2)(iii)(C), Income Tax Regs. in support of the position that ‘no amortization is available under I.R.C. § 197 for self-created intangibles that are repurchased as part of a series of related transactions’. Self-created intangibles generally are not amortizable. Sec. 197(c)(2). However, an exception is provided if a taxpayer disposes of a selfcreated intangible and subsequently reacquires the intangible from a seller (in whose hands the intangible is amortizable) in an unrelated transaction. Sec. 1.197-2(d)(2)(iii)(C), Income Tax Regs.

“Almost all of the intangibles that [Donald] reacquired in the repurchase transaction were originally created by him. The issue therefore turns on whether the sale and repurchase transactions were related transactions. We find that the transactions were impelled by separate business exigencies, namely [Donald’s] anuerysm and [Mark’s] seizure. It is hard to believe these medical conditions could have been predicted or the transactions necessitated by them preplanned. We find that the sale and repurchase transactions are not related transactions, and therefore the rules generally disallowing the amortization of self-created intangibles do not apply.” 2012 T. C. Memo. 358, at p. 15 (Footnote omitted.)

And for a bonus Judge Vasquez corrects Donald’s erroneous underestimate of his allowable depreciation.


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