In Uncategorized on 02/06/2013 at 20:57

Football is finished, so can baseball be far behind? Anyway, here’s Judge Kerrigan with R Ball for R Ball III by Appt, et al.,  2013 T. C. Memo. 39, filed 2/6/13, consolidated with nine other Balls, trying to build basis to offset the old story–a business worth millions with basis in pennies.

The Balls took a batch of Section 1361(e)(1)(A) small business trusts, that held the stock of a Sub S with heavy-duty appreciated assets (Sub S One), and dumped the Sub S One stock into a new corporation for which they elected Sub S treatment (Sub S Two), claimed it was a Section 351 tax-free incorporation, and then made a 1362(b)(3)(B) election, treating the election of Qsub status for Sub S One as a deemed liquidation.

They then claimed that, although the gain on the assets acquired through the deemed liquidation was deferred, they still built basis in the Sub S Two stock by claiming that deferred tax income is equivalent to tax-exempt income, which builds basis in Sub S stock per Sections 1366(a)(1)(A) and 1367(a)(1)(A).

No, says Judge Kerrigan. To begin with: “Notably, petitioners have not cited and we have not found any cases in which a Qsub election has been held to create an item of income for the parent S corporation.” 2103 T. C. Memo. 39, at p. 12.

“Petitioners overlook the role of realization and recognition in determining what constitutes gain from the sale or disposition of property. Any gain from the sale or disposition of property must first be realized. See Cottage Sav. Ass’n v. Commissioner, 499 U.S. 554, 559 (1991) (‘Rather than assessing tax liability on the basis of annual fluctuations in the value of a taxpayer’s property, the Internal Revenue Code defers the tax consequences of a gain or loss in property value until the taxpayer “realizes” the gain or loss.’).

“Once a realization event has occurred, the amount of realized gain must be calculated pursuant to section 1001.” 2013 T. C. Memo. 39, at p. 13.

In other words, the deferral must end and the income must be recognized and realized. Whether it is then taxable or not is another story, but taxable or not taxable, the income must show up on the taxpayer’s income statement.

Deferred is not exempt. Again, in other words, “some is balls and some is strikes, but they ain’t nuthin’ until somebody calls ‘em”. And we don’t call ‘em until they cross the plate. And this deferred gain ain’t crossed the plate yet.

Or more elegantly: “Notably, “[t]hese [nonrecognition] provisions do not forgive taxation of the realized gain; they merely defer its recognition and inclusion in gross income until the property is disposed of in a taxable transaction.” Boris I. Bittker et al., Federal Income Taxation of Individuals, para. 30.01[1], at 30-3 (3d ed. 2002).” 2013 T. C. Memo. 39, at p.15. (Emphasis in original).

I point out, with pardonable pride, that Herself, the Girl of My Dreams, copy-edited an earlier edition of Bittker’s classic treatise.

The Balls try a Section 331 and Section 332 shuffle, but that’s a no-go, since while there may be deemed gain on the liquidation, it is not recognized or realized and is deferred until taxable disposition.

And deferred income is not “permanently excluded” income, so Section 1366(a)(1)(A) doesn’t help the Balls.

The Balls try some obsolete Supreme Court cases to help them, but Congress repealed those decisions. “Petitioners’ position would create noneconomic basis adjustments which would reduce or eliminate tax at the shareholder level. This would not only convert the single-level taxation of S corporations into a zero-level taxation of S corporations; it would also undermine the double-level taxation of C corporations, as preserved in section 1374, and circumvent the repeal of the General Utilities doctrine. Additionally, these absurd results would open the door to a myriad of abusive transactions. Using these noneconomic basis adjustments, petitioners attempted to turn what should have been a $202 million aggregate taxable gain into a $12 million aggregate loss.” 2012 T. C. Memo. 39, at p. 27.

So there’s a heavy-duty deficiency, but IRS drops the accuracy penalties.

Still, ya gotta admire the Balls.

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