In Uncategorized on 05/28/2013 at 23:46

No, this is not yet another diatribe anent the Affordable Health Care Act of 2010; this is not a political blog, and even if it were, I have nothing to say on that score.

But Judge Wherry has 89 pages’ worth of things to say about Chapman Glen Limited, in 140 T. C. 15, filed 5/28/13. Chapman Glen was a foreign insurance corporation, incorporated in the British Virgin islands, that elected to be taxed as a US corporation per Section 953(d), but claimed exemption per Section 501(c)(15) (and I bet you hadn’t heard of that either).

CG’s Section 953(d) election was signed by Ms. Gilpin, who swore therein that she was the corporate secretary and duly empowered to sign same. Though CG later claimed she wasn’t, they were stuck.

CG was bought by the Enniss family, a California real estate and sand-mining clan, as part of an asset-protection plan devised by their accountants and lawyers after an injured sand miner sued the Ennisses. The family’s LLC’s interests were conveyed to CG (although one daughter claimed she hadn’t conveyed hers, Judge Wherry wasn’t buying), which treated the LLC as a disregarded entity. The LLC never filed Forms 1065 or 1120.

CG was supposedly a captive insurer of the Enniss enterprises, although CG’s Section 501(c)(15) said they weren’t a captive.

IRS examined CG, found it wasn’t a true insurer per Section 953 and wasn’t entitled to Section 501(c)(15) exemption, and the Ennisses agreed.

This triggered Section 953(d)(2)(B), deeming that CG sold everything it owned on January 1 of the next calendar year at FMV to a controlled foreign corporation and imposing US corporate income tax accordingly.

Thus, no insurance. But plenty of taxes.

Now, time to value the sand mines, so Judge Wherry, invoking the usual willing-buyer-willing-seller fiction, begins to pound sand. If the ins and outs of California sand mining, with its concomitant environmental restraints, plus a dash of real estate wheeling and dealing, enthralls you, read Judge Wherry’s 89-page exegesis. I have quoted before now the famous New Yorker cartoon, wherein the little girl gives her book review in these terms: “This book told me more about penguins than I wanted to know.” See my blogpost “More About Penguins”, 12/26/11.

After the usual giant slalom through differing appraisals with a mix-and-match to follow, Judge Wherry finds the SOL open because one of CG’s Forms 990 wasn’t signed by a corporate officer, but only by a paid preparer (even though CG claimed the preparer was an officer), and therefore everything was open, notwithstanding that IRS had processed the return minus the signature.

And when CG claims that the Ennisses really owned all the assets and that CG was only a front, Judge Wherry hits them with the alfalfa: “Thus, [CG] and the Enniss family, while they were entitled at the start to structure their affairs so that the Enniss family members owned [LLC] as of the relevant time, must now accept the consequences of instead causing [CG] to be [LLC]’s sole owner (although their actions on this point probably resulted from questionable legal advice). [LLC]’s ownership as structured by its controlling owners must ‘be given its tax effect in accord with what actually occurred and not in accord with what might have occurred.’ Commissioner v. Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. at 148.” 140 T. C. 15, at p. 46.

And see my blogpost, “You Pick It, It’s Yours”, 7/9/12.

And of course equitable considerations have nothing to do with the consequences of the unwinding of CG per Section 953. Judge Wherry: “[CG] argues from an equitable point of view that sec. 367 should not apply because, [CG] states, it will be taxed on the unrealized gain when it eventually sells the properties. We disagree that equity plays any part in our interpretation and implementation of secs. 367 and 953(d)(5) in the setting at hand.” 140 T. C. 15, at p. 44, footnote 22.

But when IRS attempts to throw in a last-minute argument that money CG got from from the Ennisses was rent and not, as the Ennisses claimed, a capital contribution, Judge Wherry invokes the anti-ambush cases. CG didn’t have a chance to put in evidence to show that the money wasn’t rent, so IRS can’t argue that it was.

Judge Wherry sends CG and IRS off to a Rule 155 sand-pound, armed with his determination of the values of the various sand boxes. Lawyers, sometimes being inventive is really not good.

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