Attorney-at-Law

Archive for February, 2013|Monthly archive page

STICK IT

In Uncategorized on 02/14/2013 at 20:42

The appraisal, I mean, to your Form 8832. And make sure it comports with Section 170 and the regulations thereunder. But if it doesn’t, and you reasonably relied on experts who said that it did, you’re OK.

That’s Judge Laro’s message for John Crimi, et al., 2013 T. C. Memo. 51, filed 2/14/13, a Valentine’s Day gift to the taxpayers.

This was another charitable land gift case, with dueling experts testifying concurrently about development rights, environmental legislation and appraisal methodology, featuring a “statistical model using polynomial regression to correlate a relationship between the number of lots into which an undeveloped parcel of land may be subdivided and the sale price per lot. The regression analysis shows a relationship of a diminishing rate of return.” 2013 T. C. Memo. 51, at p. 74. So does my comprehension of this stuff show a severely diminished rate of return.

A word about expert testimony is in season here. “An expert qualified to testify in a judicial proceeding owes a duty to the Court that transcends the duty to his or her client insofar as the expert must present his or her opinion, as well as the facts, data, and analysis on which he or she relied, neutrally and candidly. Experts who breach their duty to the Court in order to advance their client’s litigating position compromise their usefulness.” 2013 T. C. Memo. 51, at p. 41. (Citations omitted). So, kids, play nice.

Judge Laro laments that, notwithstanding that the experts testified concurrently (“…we cannot overstate the importance of concurrent witness testimony in these cases.” 2013 T. C. Memo. 51, at p. 34), here, alas, “(O)n brief, as with cross-examination, each party aims more to discredit the opposing party’s appraiser than to prove the reliability and accuracy of their own expert appraiser.” 2013 T. C. Memo. 51, at p. 57.

Wherefore, “we decline to accept either expert’s conclusion as to the subject property’s fair market value because, as the concurrent testimony highlighted, each suffers from critical errors in analysis and application. Accordingly, we shall reconstruct the subject property’s fair market value aided by common sense, the experts’ reports, and the benefit of their concurrent testimony.” 2013 T. C. Memo. 51, at pp. 59-60.

So we’re back to the usual mix-and-match.

But even if the appraisal you attach to your Form 8832 is flawed, all is not lost. “We need not decide whether the 2000 appraisal substantially complied with the requirements for a qualified appraisal because we agree with petitioners that their noncompliance would be in any event excused for reasonable cause because they reasonably and in good faith relied on Mr. X’s advice that the 2000 appraisal met all legal requirements to claim the deduction.” 2013 T. C. Memo. 51, at p. 98. (Name omitted).

Judge Laro analogizes to the penalty situations (how nice to see Neonatology Associates cited yet again; if Neonatology Associates got a royalty every time that case was cited, they’d be rolling in it). Crimi relied upon Mr. X, who was an accountant and an attorney, and was with the firm that for twenty years had done all Crimi’s taxes without a hitch. Mr. X blessed the outdated appraisal, and Crimi had no reason to doubt his trusted adviser (although now Crimi might be a wee bit more cautious).

So Crimi gets their deduction (or at least some of it).

LAW, LOGIC AND THE SWISS

In Uncategorized on 02/14/2013 at 14:31

Once again, I’m looking for a source for a quotation; this one was ascribed to the sixteenth-century English jurist Lord Coke. As usual, no prize for the correct answer.

The quotation: “Law, logic and the Swiss will fight for any cause if well-paid.”

Well, even if only indirectly paid, by avoiding fierce penalties on their US banking operations, the Swiss have decided to fight for the cause of ending offshore tax evasion, by signing Model 2 of the FATCA Intergovernmental Agreement propounded by Treasury. And they did it today, February 14, a Valentine’s Day present to the gang at 1111 Constitution Avenue, N.W.

So Treasury felt entitled to a wee gloat: “Today’s announcement marks a significant step forward in our efforts to work collaboratively to combat offshore tax evasion,” said Acting Secretary of the Treasury Neal S. Wolin. “We are pleased that Switzerland has signed a bilateral agreement with us, and we look forward to quickly concluding agreements based on this model with other jurisdictions.”

If Switzerland has signed, can Italy be far behind? Treasury says the Italian government and Treasury initialed an IGA on January 24.

Now let’s get the Caymans, the Cooks and Luxembourg on the roster.

THE EAGLE SLEEPS TONIGHT?

In Uncategorized on 02/13/2013 at 16:20

The only opinion out of Tax Court in the last two days is a fact-specific Section 6404 abatement of interest decision, which doesn’t much enlighten the in-the-trenches practitioner, except as a reminder that Section 6404(e) applies to income taxes, not employment taxes. See my blogpost “A Case of Interest”, 8/9/12, for more about this subject than you probably want to know.

The reminder about the non-applicability of Section 6404(e) to employment taxes is to be found in Jorge Paneque and Leobigilda Paneque, 2013 T. C. Memo. 48, filed 2/13/13, Judge Gale providing the reminder at p. 21: “Mr. Paneque contends that respondent abused his discretion in disallowing his request for abatement of the interest that accrued on his unpaid employment tax liabilities during the period October 21, 2005, through August 3, 2007. Respondent contends that assessments of interest on employment tax liabilities are not eligible for abatement under section 6404(e)(1). We agree.

“Respondent lacked authority to abate interest under section 6404(e), and his failure to do so could not constitute an abuse of discretion. See Woodral v. Commissioner, 112 T.C. at 25; see also Scanlon White, Inc. v. Commissioner, 472 F.3d 1173, 1177 (10th Cir. 2006), aff’g T.C. Memo. 2005-282; Miller v. Commissioner, 310 F.3d 640, 645 (9th Cir. 2002), aff’g T.C. Memo. 2000-196.

Now that we’ve gotten that out of the way, here’s the real news from Tax Court.

Y’all will remember the Estate of Ileana Sonnabend, Docket No. 649-12. This was the $65 million misunderstanding, involving the late Bob Rauschenberg’s masterpiece “Canyon”, a 1959 masterpiece of post-modern something-or-other, starring a stuffed bald eagle, that was part of the late Ileana’s billion-dollar art collection.

Now we all know that since 1918, or maybe 1940, it’s been a one-way get-into-jail-free (do not pass “Go”) card to possess, sell, barter, import or export any part of a bald eagle, dead or alive.

So the executors valued the collage at zero, because it can’t be sold, bartered, etc., without the seller or barterer heading for the hoosegow, but IRS claimed you could sell it surreptitiously to a hypothetical collector beyond the grasp of the Federales, and didi-mao (an arcane technical term) with the boodle.

The art world gasped, the bloggers got weaving, and the New York Times, Forbes magazine, et hoc genus omne joined the fray, all excoriating IRS for their extreme position.

And of course the executors girded their loins for battle, with the whole art world watching.

Well, looks like we’re going to miss the trial, guys. Judge Wells, whether relieved or regretful he doesn’t say, has issued the following Order of Continuance, served 2/13/13:

“This case was called from the calendar for the Trial Session of the Court at New York, New York on January 28, 2013. There was no appearance by or on behalf of petitioner. Counsel for respondent appeared and was heard. A case conference call with counsel for both parties was held on January 29, 2013 in which counsel indicated that a basis of settlement had been reached between the parties and that additional time was needed to prepare the stipulated decision. The counsel agreed that a continuance of this case would be in order. After due consideration, it is

“ORDERED that this case is continued pending further direction by this Division of the Court. It is further

“ORDERED that on or before February 28, 2013, the parties shall submit to the Court a stipulated decision for this case or file with the Court written status reports as to the then present status of this case. It is further

“ORDERED that jurisdiction of this case is retained by Judge Thomas B. Wells.” Docket No. 649-12, at p. 1.

Tough luck. The opinion would have made a red-hot blogpost. And so, maybe, the eagle sleeps tonight. You could write a song….

GONE TOO FAR

In Uncategorized on 02/11/2013 at 22:26

I can’t find the source of this quotation. If some reader can supply it, I’d be grateful. “Every genius needs someone standing behind him with a hammer, to hit him over the head when he’s gone too far.”

In this case, the genius is Judge Mark V. Holmes, The Great Dissenter, a/k/a The Judge Who Writes Like A Human Being, and he goes too far in Alan R. Pinn and Toni A. Pinn, 2013 T. C. Memo. 45, filed 2/11/13.

This is a son-of-SDLIA (see my blogpost “The Split”, 8/29/12). Alan and Brother David were high school teachers who became homebuilders one summer vacation. Using sub-minimum-wage student labor, they made an outrageous profit, and turned pro, jettisoning the classroom for the great outdoors: that is, the great outdoors for their laboring types. Alan and Brother David sat at their desks and waxed stout in the bankroll.

Enticed by a SDLIA run through a dubious labor union, Alan and Brother David, though as management they couldn’t join the union,  started an employee plan. And the plan provided that management could get death benefits through the plan, and get an unlimited deduction for payments made to the plan. This was a Section 419 plan (not to be confused with the Nigerian e-scams). That’s an employee welfare plan, for contributions to which employers get deductions.

This 419 buys life insurance for the beneficiaries. The beneficiaries can borrow against the cash surrender values of their policies, but must pay back the loans with interest; if they don’t, then the plan trustees can take the money out of the death benefit. But if the employee ceases to be employed while alive, or the plan is discontinued, or if the employer drops out, then the benefit goes away. And the employee can irrevocably designate the beneficiary of the life insurance.

Alan and Brother David borrow, sign promissory notes (and even amend them after the fact to correct an error) but make only a token payment.  The plan doesn’t hold them in default or try to collect.

The story gets to the IRS when the plan trustee has to disclose Alan’s and Brother David’s loans in default on Schedule G of the Form 5500, but claims the loans are secured: “The Schedule G loans are not in default because the collateral for each Schedule G loan, the participant-borrower’s death benefit provided under the terms of the plan of benefits of the Fund, will provide a payment or distribution to pay the underlying Schedule G loan obligation upon maturity. For the same reasons, the Schedule G loans are not uncollectible since, each Schedule G loan is supported by collateral which is sufficient to repay the Schedule G loan upon maturity.” 2013 T. C. Memo. 45, at p.19.

IRS claims the loans were in default and uncollectible, so Alan and Brother David had COD. But IRS doesn’t raise COD until answer stage, so IRS has burden of proof.

Alan and Brother David are conjoined for trial, briefing and decision.  And IRS stipulates the loans were bona fide loans.

The question of course, is when did the debt become uncollectible, and that’s our old friend facts and circumstances. But we need to fix a year, because taxes go by the year, and we can’t use remote possibilities.

“The Commissioner argues that the Trust had a collection policy requiring that a demand letter be mailed to a delinquent borrower and, if necessary, Forms 1099 would be issued to borrowers who failed to comply. The Commissioner correctly notes that the Trust sent no demand letter to either Pinn in 2002, from which he concludes the Trust must have intended to forgive the loans.

“Hmm. There’s something to this logic. A creditor’s decision not to try to collect a debt may be persuasive evidence of its cancellation, especially when the creditor has a policy or custom of trying to collect its debts in a particular way or at a particular time after default. But there is one problem here: The Trust didn’t have a settled policy for collecting on delinquent loans in 2002. The Trustees did discuss whether to adopt one, but never actually did. We are convinced by the credible testimony of X, and the Trust’s Board minutes which confirm that it just wasn’t the Trust’s policy in 2002 to send demand letters; therefore, we don’t think the failure to send them is as significant as the Commissioner argues.” 2013 T. C. Memo. 45, at p. 24. (Name omitted).

And while the right of Alan and Brother David to receive proceeds may be contingent, as IRS argues, these rights aren’t highly contingent in the year at issue, so no COD that year.

Here, I think, Judge Holmes has been overcome by his own cleverness. Alan and Brother David’s company could leave the plan, or one or both of them could leave their company, or the plan could cease. But to say that IRS must wait until one of those happens, or Alan or Brother David dies, to see if there’s a repayment or cancellation of debt, means Alan and Brother David have a long free ride. If I were IRS, I’d appeal.

And Judge Holmes finds the Form 5500 ambiguous as an indicium of uncollectibility in the year at issue. The loans may have been in default, but they weren’t uncollectible, as Judge Holmes finds the plan trustee could recoup the unpaid loan amounts out of the death benefit.

Judge Holmes’ conclusion: “We therefore find that the Commissioner has failed to prove that the Pinns had COD income in 2002. This may strike learned observers as unusual–there was some evidence in the record that the union associated with the Trust marketed similar plans widely, touting their benefits as including immediate deductions, tax-free loan proceeds, and a long-deferred recognition of income. When this is true, a decent respect for the opinions of informed mankind requires an explanation of why we believe our holding will not have a pernicious effect.

“The chief of these is that here the parties agreed that the loans were bona fide. Under very similar circumstances, we found… that a similar distribution did not create a loan but taxable income.  Yet even if our reading and rereading and rerereading of the arguments actually made in these cases allowed us to call the loans income to the Pinns, the Commissioner would still be stuck. Alan received his loan in 1999, and David received his in 2000. These are not the tax years at issue in these cases. And the Pinns may well have to pay taxes on the loans if they become ineligible for their death benefits, or when their death benefits are used to satisfy their debts.

“All these possibilities we leave for different records and different years.” 2013 T. C. Memo. 45, at pp. 36-37. (Citations omitted).

Very clever, but Judge, you went too far.

STARS FELL

In Uncategorized on 02/11/2013 at 17:30

No, not on Alabama, per the 1934 Frank Perkins-Mitchell Parish classic, but on Bank of New York Mellon Corporation, 140 T. C. 2, filed 2/11/13, with a cast of 21 lawyers, 15 for Mellon (of whom 6 bail after trial), and 6 for IRS.

When the footnote says the amounts are rounded to the nearest million, you know you’re in the Big Leagues with the Heavy Hitters. 140 T. C. 2, at p. 2, footnote 2.

It’s another phony transaction tax dodge. Mellon and buddies borrow in the UK, supposedly on the cheap, set up a UK trust with UK trustee, ship over income-producing assets, and claim foreign tax credits and foreign expenses for foreign-source income. They give this roundy-rounder the fetching title STARS, Structured Trust Advantaged Repackaged Securities.

IRS blows up the deal, and Mellon petitions.

STARS was a production of Barclays Bank, recently known for its prominent role in price-fixing the LIBOR, and a certain major US accounting firm. They sold their dream scheme to US banks. Barclays got an offset to the “cheap” financing they provided by sharing UK tax breaks.

So Mellon and buddies set up five (count ‘em, five) entities of various types, and use them to shovel various assets into the UK trust. Judge Kroupa, finding one picture worth thousand words (see my blogpost “OPIS Finis”, 1/18/12), draws us a diagram, 140 T. C. 2, at p. 10. And then draws another at 140 T. C. 2, at p. 15, to show how Barclays and Mellon set up a fully collateralized and oversecured loan.

Finally, Mellon’s UK subsidiary, acting as trustee, elects to front-load a ton of UK taxes, giving Mellon big foreign tax credits and interest expenses, which Mellon takes.

Second Circuit rules here, so Judge Kroupa examines subjective business purpose and objective results as Second Circuit would do it, but neither is a rigid test. “They are instead simply more precise factors to consider in the overall inquiry of whether the transaction had any practical economic effects other than the creation of tax losses. A finding of a lack of either economic substance or a non-tax business purpose can be but is not necessarily sufficient for a court to conclude that a transaction is invalid for Federal tax purposes. The ultimate determination of whether a transaction lacks economic substance is a question of fact.” 140 T. C. 2, at p. 28 (Citations omitted).

Mellon says OK, but look at the entire deal, which was designed to get Mellon low-cost capital to continue its moneylending operations. No, says IRS, look whence come the tax benefits.

Judge Kroupa says IRS got it right: “The relevant transaction to be tested is the one that produces the disputed tax benefit, even if it is part of a larger set of transactions or steps. Stated another way, the requirements of the economic substance doctrine are not avoided simply by coupling a routine transaction with a transaction lacking economic substance. “ 140 T. C. 2, at p. 30. (Footnote and Citations omitted, but Judge Kroupa cites the Kipnis case; see my blogpost “It Ain’t What You Do With What You Got – Part Deux”, 11/1/12).

You have to reckon in the foreign taxes paid in the UK as a cost of the deal. All the STARS did is recirculate the dollars earned by the assets from Mellon to Barclays and back to Mellon. And the expenses Mellon incurred in the process are just in support of the tax scheme, not to make a profit. And the assets shipped to the UK would have earned the same profit if they stayed in the US.

Coupling a tax dodge with a legitimate transaction does not legitimize the tax deal.

Instead of being a structured financing deal with a low-cost loan, Mellon incurred a high-cost loan when the transaction costs are included and didn’t acquire any assets therewith. Barclays was oversecured and had direct recourse to Mellon via a credit default swap that was part of the deal. Nobody was running any risks, or making any real profit. The UK taxes were the result of UK tax laws, whose effects are unrecognized under US law.

Mellon claimed the deal had to have substance, because if the UK didn’t give favorable treatment, they were still locked in, but this was belied by a quickout clause in the deal, giving either Barclays or Mellon an option to unwind at short notice.

And the US-UK tax treaty doesn’t help, because there was no real UK business being done.

So the STARS fell.

“NO’ DEID YET”

In Uncategorized on 02/07/2013 at 20:12

The motto of the old 92nd Gordon Highlanders was also the story of the late Virginia V.  (“VV”) Kite, daughter of the pioneers of Oklahoma, and her estate and gift machinations, especially her deft manœuvres through the Section 7520 tables and regulations.

Read all about it in Estate of Virginia V. Kite, Donor, Deceased, Bank of Oklahoma, N.A., Executor/Trustee, 2013 T.C. Memo. 43, filed 2/7/13.

Here’s VV’s story, told by Judge Paris: “Mrs. Kite was born on April 8, 1926. Her father was the chairman of a family-owned bank, Vose Bank, and its successor, First National Bank & Trust Co. of Oklahoma City (FNB). As a member of a prominent banking family, Mrs. Kite was the beneficiary of numerous trusts, which held, among other valuable assets and cash, a portfolio of founder’s shares and other securities of FNB, its affiliates, and its regional partners.

“Business acumen was also passed on from generation to generation. Mrs. Kite was a savvy businesswoman who actively participated in managing her assets. She maintained an office where two employees assisted with her family’s finances. In addition, she would meet with her trust administrator at least quarterly to discuss the financial activities of her many trusts and their investments.

“Mrs. Kite married James B. Kite (Mr. Kite), who, according to his death certificate, was a geologist in the petroleum business. They were married until Mr. Kite’s death on February 23, 1995. The couple had three children: Carolyn K. Eason (Ms. Eason), James B. Kite, Jr. (Mr. Kite, Jr.), and Virginia K. Kite (collectively, Kite children). After Mr. Kite’s death, Mrs. Kite remained a widow until she died.”  2013 T. C. Memo. 43, at pp. 3-4. (Footnotes omitted).

VV’s estate planning team was clearly Oklahoma’s best. She and they made sure she kept her hands on the income from all the multifarious trusts, so that the QTIPs (and VV had more QTIPs than RiteAid) remained pristine and free from tax.

The jewel in the estate planning crown (aside from shuttling of assets and trustees from trust to trust to LLC and back again, in Oklahoma and Texas, with bewildering speed) was the 10-year deferred annuity her kids gave her in exchange for mucho diñero from VV’s prodigious hoard. In short, the kids sold VV an annuity. See my blogpost “The Case of the Reluctant Executor”, 12/1/11, for what happens when an annuity deal goes wrong. But VV and her team got it right.

If VV lived for fewer than 10 more years (she was then 74 years old), the cash was out of her estate and the kids were off the hook. If she lived for 10 more years, the kids had to pay VV out of their own money (they weren’t poor, but the payments were hefty); and if VV made it for 13 more years, based on the kids’ current assets, they’d be broke.

But for the game to work, VV had to be at least healthy enough to have a shot at making it 10 more years. And being VV and stuffed with business acumen, she made sure that after having given the kids the loot, she still had enough to maintain her lifestyle, which included, but was in no way limited to, her home and a demi-brigade of home health aides.

She got a doctor’s note saying that she was in reasonably good health; but Judge Paris notes the doctor doesn’t testify on the trial.

IRS claims VV is at death’s door and the annuity is a sham, but nobody testifies VV was terminally ill when she made the annuity deal. VV checks out three years and a couple of months after the annuity deal.

IRS issues mammoth deficiencies, and off to Tax Court VV’s executor goes.

Question: was the annuity a disguised gift, in that VV didn’t get reasonably equivalent consideration for the transfer of the loot to the kids?

Judge Paris: “Section 7520 provides that the value of any annuity shall be determined under tables prescribed by the Secretary. Mrs. Kite and her children used IRS actuarial tables to value the annuities, and respondent [IRS] does not argue that they used the tables improperly. Rather, respondent  contends that they should not have used the actuarial tables to value a 10-year deferred annuity because Mrs. Kite’s deteriorating health in 2001 made her death within 10 years foreseeable. In addition to the high probability of Mrs. Kite’s death within 10 years, respondent argues that the lack of security for the annuity agreements, among other things, demonstrates that the parties had no real expectation of payment, and, consequently, the annuity transaction lacked substance. Respondent, as the party seeking to depart from the actuarial tables, bears the burden of proving that the circumstances justify the departure.” 2013 T. C. Memo. 43, at p. 22.

And IRS fails to shoulder the burden. VV had 12.5 years to go per the tables, and her non-testifying doctor wrote that she had better than a 50% chance of making it for another 18 months. You can’t use the tables if you’re terminally ill, but that means “…an ‘incurable illness or other deteriorating physical condition’ with at least a 50% chance of death within a year. Sec. 1.7520-3(b)(3), Income Tax Regs. In Estate of McLendon v. Commissioner, 135 F.3d 1017, a taxpayer who had terminal cancer, received 24-hour home health care, and, according to his physician, had a 10% chance of surviving for more than one year was not terminally ill for purposes of using IRS actuarial tables to value a private annuity transaction.” 2013 T. C. Memo. 43, at p. 23.

What about the battalions of home health care aides? Judge Paris: “Respondent did not challenge the physician’s letter or present evidence contradicting the physician. Instead, respondent relied on Mrs. Kite’s 24-hour medical care at home, which began in 2001, and her increased medical costs from 2001 through 2003 to conclude that her death within the next 10 years was foreseeable. Mrs. Kite’s increased medical costs, however, were due primarily to the cost of home health care. Mrs. Kite’s Federal income tax returns filed for 2001 through 2003 claimed medical expense deductions of $131,100, $142,136, and $176,982, respectively, of which $115,780, $114,587, and $170,845, respectively, were attributed to home health care. Although the increased medical costs and home health care indicate that Mrs. Kite’s health was in decline, they alone do not suggest, let alone prove, that Mrs. Kite had a terminal illness or an incurable disease. Rather, Mrs. Kite’s increased medical costs merely demonstrate that Mrs. Kite was a wealthy, 75-year-old woman who, when faced with certain health problems, decided to employ health care aids [sic] at her home. Her decision to hire home health care was not unusual for a woman who was accustomed to hiring personal assistants. Moreover, as exemplified in Estate of McLendon, increased medical costs and home health care do not prove a terminal illness or other incurable disease for purposes of section 7520. Accordingly, Mrs. Kite was not precluded from relying on IRS actuarial tables to value the annuity transaction.” 2013 T. C. Memo. 43, at pp. 23-24. (Footnote omitted).

So the annuity deal stands, and, as we saw, VV, acting true to form, departs this life three years and a few months thereafter, and the kids get the Bennys.

The Estate does owe some tax on whatever wasn’t an income interest, but that’s for the technicians and a Rule 155 beancount.

Nicely done, VV.

FOUL BALLS

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.

A NEW YORK COOPERATIVE CONUNDRUM – PART DEUX

In Uncategorized on 02/06/2013 at 17:03

Second Circuit weighed in on an oldie-but-goodie, Alphonso v. Com’r., 137 T.C. 247, reversing Judge Chiechi in Alphonso v. Com’r, Docket No. 11-2364-ag, dated 2/6/13. For background, see my blogpost “A New York Cooperative Conundrum”, 3/18/11.

Thanks and praise to Eric Levine and that generous purveyor of pizza and pasta to hungry attorneys and accountants at the joint ABA-NYSBA Committee on Taxation of Cooperatives and Condominiums, Charlie Baller, for winning this one.

Essentially, New York’s crazy-quilt of rights embodied in cooperative apartment corporations’s certificates of incorporation, by-laws, shares, proprietary leases and house rules, which concatenation our State’s highest court has called sui generis, and as a result of our State’s lower courts wrestling with same, equals a property right sufficient to pass the Section 165(c)(3) test for casualty loss deductibility.

While of great interest to New York practitioners, the case is of limited use elsewhere, as State law dictates property rights.

And as for the victorious Ms Alphonso and her 200 fellow tenant-shareholders, IRS may have lost the battle, but there remains the war over whether the property damage was indeed a casualty loss; and that Second Circuit expressly said they did not decide.

Stay tuned.

ACCEUILLONS, LET’S WELCOME, JUDGE ALBERT G. LAUBER

In Uncategorized on 02/05/2013 at 16:42

Taking my cue from the greeting in the old Montreal Forum, here’s the Tax Court’s latest bright light, Judge Albert G. Lauber, summa cum laude from Yale, with a M.A. from Clare College Cambridge, etc. etc., appointed to Tax Court January 31, 2013, the newest star in the Tax Court line-up.  Most impressive resume, and should be a fine addition to the Tax Court Bench.

Hopefully, he will not be wasting his sweetness on the desert air, as Tommy Gray lamented in 1751, writing the ten-thousandth “you didn’t attach a Form 8332, so no child credit” case, such as poor Judge Kerrigan had to deal with today, in Paul Edward Vokovan, 2013 T. C. Memo. 37, filed 2/5/13.

I’ll spare you most of the details, dear reader, the story is one often told. Paul Edward claims he attached a signed original Form 8332 to a return from twelve years ago, produces an unsigned copy on the trial, but has neither return nor copy of the signed Form 8332, and IRS can’t find it either. So he’s fighting about a $1500 deficiency.

No dice, Paul Edward; you must have a signed original Form 8332, or an original signed equivalent so near to the Form 8332 in substance that you might as well just use the Form 8332, attached to each and every return for each and every year until each and every would-be qualifying child reaches adulthood, or death relieves you of this burden.

Judge Kerrigan: “Petitioner stipulated that he did not attach a signed Form 8332 to his 2008 Federal income tax return. If petitioner did not attach a signed Form 8332 or a statement conforming to the substance of Form 8332, he did not satisfy section 152(e)(2) and the prior existence of a Form 8332 is immaterial; petitioner needed to attach a copy of a signed Form 8332, or a statement conforming to the substance of Form 8332, every year to his tax return or he is not entitled to the exemption deduction. See Chamberlain v. Commissioner, T.C. Memo. 2007-178, slip op. at 7.” 2013 T. C. Memo. 37, at pp. 7-8.

So Judge Lauber, a man of distinguished academic and professional stature, a scholar and a seasoned practitioner, must now apply his formidable intelligence and magisterial experience to such as this.

Welcome to Tax Court, Judge Lauber.

GOING POSTAL

In Uncategorized on 02/04/2013 at 18:19

Once again the Section 7502 saga is played out, this time by a lawyer who should know better than to entrust to a post office employee the mailing of a petition on the last day for file-by-mail. The lawyer escapes, but this is a cautionary tale (and I doubt the lawyer’s client was paying for this Tax Court trial).

The case is Earl D. Glenn and Carolyn J. Glenn, 2013 T. C. Memo. 33, filed 1/4/13, as told to Judge Marvel.

Here’s the background. “Petitioners retained Attorney Julie M.T. Walker to file their petition. Ms. Walker received her bachelor of arts degree from Hampshire College in 1977, her juris doctor degree from Howard University School of Law in 1980, and her master of laws degree in taxation from Emory University School of Law in 1984. From October 6, 1980, through May 4, 1998, Ms. Walker was employed as an attorney by respondent’s Office of District Counsel in Atlanta, Georgia. From May 5, 1998, through December 31, 2005, Ms. Walker served as a full-time judge on the City Court of Atlanta. In April 2006 Ms. Walker started a solo law practice.” 2013 T. C. Memo. 33, at p. 2.

Maybe the bio is there to show Julie M.T. is a member of the judges’ club in good standing, so she gets cut some slack.

Howbeit, Julie M. T.’s clients got a SNOD, so Julie M. T. prepared a petition, got it signed, assembled her supporting documents, made copies and headed to the post office. She filled out her certified mail slips, prepared a return receipt, prepared a return envelope to her office for the “stamped filed” copy she wanted to get back, and asked the postal employee to figure out the postage and put the petition and copies in the right envelopes, and send them.

Of course, the postal employee put the wrong labels on the wrong envelopes, got the postage wrong, and Julie M. T. never checked that the postal employee had got it right. So Tax Court never got the petition until Julie M.T. discovered the mistake, eleven days too late, whereupon she fired off the petition to Tax Court. Of course, IRS moved to dismiss for late filing want of jurisdiction.

But Judge Marvel sustains Tax Court jurisdiction. Julie M.T. has certified mail receipts showing the mailing on the magic day to the right address, and the postal employee testifies on the trial that he didn’t remember whether he messed up the envelopes (I wonder how much that trial cost). And Tax Court did ultimately get the petition, albeit late.

So Julie M.T. gets a bye.

Takeaway–Remember the unlucky Portney; see my blogpost “Wait Just A Minute, Mr. Postman – Part Deux”, 9/11/12. Prepare the envelopes and receipts yourself. Buy a postage scale if you don’t have one, if there isn’t one at the local PO, or better still, use the self-service machine if your PO has such a thing (mine has two). Don‘t trust anyone else; unlike Julie M.T., with her high-priced resume, you might not be so lucky.

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