Following on from Judge Mark V. Holmes, a/k/a The Judge Who Writes Like a Human Being, (see my blogpost “Trust, But Veriify”, 11/5/13), that obliging jurist Judge Gustafson admonishes Appeals to make sure that a SNOD was properly served (that is, mailed to taxpayer’s last known address) before concluding taxpayer had a prior opportunity to contest and blew it.

This time the putative precluded one is Albert Sofian, Docket No. 17960-12L, filed 11/8/13.

Remember Al? Not sure? Well, check out my blogpost “You Can’t Have One Without The Other”, 8/22/13, and you’ll doubtless repeat the immortal words of Jim Steinman, as sung by the Soul of French Canada, Céline Marie Claudette Dion, “It’s All Coming Back to Me Now”.

Al claims he had oodles of basis when he unloaded $114 million in stock, and never got a SNOD. But letters from Appeals told him he couldn’t contest liability at the CDP when IRS tried to collect, as he had the chance.

Of course, Al apparently has yet to lay bare his proofs of basis, so Judge Gustafson tells him to do it “immediately”, even though it was due last week.

But Judge Gustafson has some words for Appeals as well.

“…respondent [IRS], in preparing to show ‘verification’ under section 6330(c)(1) in view of Mr. Sofian’s position that he did not receive the notice of deficiency, shall note: (a) that the CDP settlement officer stated that Appeals ‘[m]ay not be able to verify SNOD as it was issued in 2004’ (Ex. V to respondent’s motion for summary judgment; underlining added); (b) that the discussion of ‘Verification’ in the attachment to the notice of determination (Ex. A) describes verification only very summarily and makes no mention of the issuance or receipt of the statutory notice; and (c) that in the absence of the taxpayer’s admission of receipt, the Settlement Officer ‘must review (or attempt to review) the underlying pre-assessment documents that show that the notice was issued and was sent to the taxpayer’s last known address. This means in addition to transcripts, you should review or attempt to review the following documents, if possible: A. a copy of the SNOD and B. the certified mailing list for the SNOD to verify whether the SNOD was properly mailed to the taxpayer’s last known address.’ IRM pt. 8.22.2.2.4.7.1(4) (emphasis added)”. Order, at p. 2.

Hmmm…is Tax Court starting to check whether IRS engages in what we used to call in New York City landlord-tenant cases “sewer service”?

Stay tuned.

While I was sad to see Ronald Isley, rock ‘n’ roll icon of my youth, star in 141 T. C. 11, filed 11/6/13, the case is too much fact-driven for me to blog here. But Buyuk LLC, Boyalik LLC, A Partner Other Than The Tax Matters Partner, and Beyazit, LLC, RP Capital Partners LLC, A Partner Other Than The Tax Matters Partner, conjoined in 2013 T. C. Memo. 253, filed 11/6/13, with its alliterative tax dodgers and reminiscences of the highly-credentialed but larcenously-inclined John E. Rogers of Superior Trading, LLC, fame, fits the bill. See my blogposts “More Shell Games”, 9/2/11, and “OPIS Finis”, 1/18/12.

As I said in “OPIS Finis”, “New verb: to ‘Bialystok’ is to guarantee that a transaction is an economic disaster on paper, generates huge tax loss for little cash, and provides the promoters thereof with a ‘get into jail free’ card.”

To begin with, two executives from a bought-out corporation, each with heavy-duty capital gains, seek to minimize their tax bite. They find the well-known accounting firm BDO with tax solutions for sale. The price? A piece of the action.

“BDO Seidman LLP (BDO) is an accounting firm which from at least 2000 through 2003 promoted and sold a number of ‘tax solutions’ products through its Tax Solutions Group (TSG). BDO’s management marketed these tax solutions within the firm by providing incentives to its employees and partners for participating in the sales of these tax solutions. These incentives included bonuses and firmwide recognition. One form of recognition was a firmwide email with the subject line ‘Tax $ell$’ announcing the sale of a tax solution, the employee who generated the sale, and the fee arising from the sale. The amount of any bonus paid to an employee was tied to the net fee BDO was able to earn from selling a tax solution.” 2013 T. C. Memo. 253, at p. 6.

Full disclosure: some thirty years ago, a predecessor firm of BDO Seidman did income tax planning for me; needless to say, I engaged in no shenanigans.

BDO hooked up with Gramercy, a sovereign-debt hedge fund. But instead of dealing with distressed sovereign or major foreign corporate debt, where buying the debt cheap and hoping for an IMF or ECB bailout brought big returns, Gramercy found a Russian utility that got hammered when the ruble became rubble, bought its worthless receivables, and matched them up with BDO’s solution customers in a series of tiered LLCs. There were tiny actual currency gains, and massive paper losses, when the partnerships (LLCs) unwound.

Judge Laro unpacks: “The BDO distressed debt structure involved an investment in foreign consumer receivables with high cost basis and low fair market value. BDO required the consumer receivables be overdue and denominated in a foreign currency that had suffered significant devaluation relative to the U.S. dollar. Under the BDO distressed debt structure, the foreign owner of the receivables would transfer and assign the receivables to a U.S. limited liability company (LLC) under a contribution agreement in exchange for a membership interest in a ‘master’ LLC solely managed by a Gramercy entity. The master LLC would then contribute the consumer receivables to a second LLC (level A LLC) in exchange for a membership interest in the level A LLC; a Gramercy entity would also acquire and maintain a 1% interest in the same LLC. The client would then acquire approximately 90% of the master LLC’s membership interest in the level A LLC in exchange for cash. After the client’s cash purchase of the membership interest in the level A LLC, the foreign company would redeem its membership interest in the master LLC for cash. The client would become the sole manager of the level A LLC and contribute securities or additional cash to the level A LLC. The level A LLC would then contribute the consumer receivables to a second LLC (level AA LLC) in exchange for a membership interest in the level AA LLC. The level A LLC would own 99% of the level AA LLC, and a Gramercy entity would be the manager and own 1% of the level AA LLC. Following this contribution, the consumer receivables would be swapped for assets of another Gramercy LLC to achieve the desired tax effect of recognizing the inherent loss in the consumer receivables.” 2013 T. C. Memo. 253, at pp. 6-7.

Clear? Thought not.

Of course, the deals were perfect Bialystoks (noun form of verb): couldn’t possibly make more than a pittance, and throws off a huge paper loss. Needless to say, step transaction, disguised sale, no economic substance, and no real partnership activity torpedo the ship.

Much expert testimony about Russian currency and corporate restrictions later, Judge Laro surfaces: “At the end, the transactions here yielded only nominal economic gains, and thus the claimed tax losses bore no relationship to the economic reality of the transactions. There was never a legitimate or reasonable expectation of pretax profits in these cases. We thus find that the transactions lacked objective economic substance.” 2013 T. C. Memo. 253, at p. 82.

So the deals are unwound, with the 40% overvaluation chop thrown in.

 Though channeling the Great Communicator, the Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, Mark V. Holmes, shows his wonted disrespect for the partitive genitive (again) in Bryan Rowder, Docket No. 21724-12L, filed 11/5/13, today’s designated hitter, as no orders are issued today.

Rowdy Bryan twice skips a correspondence show-and-tell with Appeals, and doesn’t show for calendar call on IRS’ motion for summary judgment. Bryan’s tactic is to ask for a continuance at the last minute, or as Judge Holmes ungrammatically puts it “Mr. Rowder did not appear at the hearing but sent a letter a couple business days before asking for more time and including none of the information the settlement officer had asked for. He simply reiterated that he wanted to challenge his underlying tax liability. She sent him another letter giving him another couple weeks to send in information; he ignored that as well.” Order, at p. 1.

C’mon Judge, you’re a graduate of both Harvard University and University of Chicago (“where joy goes to die”). Do you ask for “a piece pie and a cup coffee” in the Judges’ cafeteria at 400 Second Street, NW?

Now lest the sins of Rand Paul (Republican Senator from Kentucky, for anyone from Mars reading this) descend upon my balding head, I quote from the about.com article on the partitive genitive: “The Partitive Genitive in Latin is a type of Genitive that is used to show the relationship of part to whole. (Reminder: The Genitive is a case used for nouns, pronouns, and adjectives. It frequently shows possession between two things.) If you have a part of something, the substance that is the whole is in the Genitive Case.” http://ancienthistory.about.com/od/genitives/qt/032909partitivegen.htm

A couple of all the weeks that are, Judge Holmes, is how you’re supposed to write it; and a cup of all the coffee in the cafeteria.

Back to Rowdy Bryan.

The facts so far look like a slam dunk for IRS. Bryan was given a chance to contest his underlying liability for tax, stalled, provided no evidence…should be game over, right?

Yes, says Judge Holmes. But not quite. He admonishes IRS counsel at the calendar call that, in the words of my blogpost 8/20/13, “You Have To Fulfill The Requirements”.

“However, as the Court explained to respondent’s [IRS’] counsel, Code section 6330(c)(1) requires the IRS officer conducting the hearing to ‘obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met.’ One of these requirements is that any notice of deficiency be mailed to the taxpayer’s last known address. Sec. 6212(b). If that didn’t happen here, the consequence would not be that Mr. Rowder gets to contest his underlying liability, it would be an abatement of the assessment of the deficiency.” Order, at p. 2. (Citation omitted).

Bryan had his chance to contest his liability, and blew it, so that’s done. But the SNOD’s the thing. If it wasn’t mailed to Bryan at his last known address, or if he otherwise didn’t get wind of it in time to petition, then there’s no deficiency and no case.

Apparently Appeals never made sure the SNOD and proof of mailing thereof got into the SO’s hands, and the SO said nothing about the SNOD in the NOD.

And Bryan didn’t have to raise this issue before the CDP or at the CDP.

Judge Holmes: “Mr. Rowder asked for a remand; we have to conclude that he’s entitled to one. On remand, he cannot challenge the amount of his underlying tax liability — he’s had his chance to do that. But the settlement officer must make a reasoned determination on the issue of whether the IRS followed its administrative procedures in assessing the deficiency — Did it send a notice of deficiency to Mr. Rowder’s last known address? Did he otherwise receive it with enough time to petition in Tax Court? But — we stress again — if that notice was sent to his last known address and he did not receive it, he has missed his opportunity to contest the ‘existence and amount of his underlying tax liability’.” Order, at p. 2.

So, IRS, give Judge Holmes a supplemental NOD that fulfills the requirements, and then let him have a status report responding to the supplemented NOD.

Should your immigration status (or lack thereof) cause you angst in Tax Court? That’s Judge Laro’s question to IRS and Lee Ang, Docket No. 13309-12L, filed 11/4/13.

I blog this Order (which of course has no precedential value; see Rule 50(f)), because it  at least raises a novel legal question of general application, rather than the three fact-intensive, substantiation-burdened small claimers, and the similarly burdened designated hitter, out of Tax Court today.

Lee petitions a NOD from a CDP, and IRS moves for summary judgment. One can hardly concoct a noteworthy cocktail from the usual run of such motions.

But IRS takes a novel tack, apparently as a make-weight argument, because it shows up late in the game.

I’ll let Judge Laro tell the story: “Respondent’s motion includes a statement on pages 41 and 42 that respondent has determined that ‘petitioner is living in the United States illegally’.”  Order, at p. 1.

OK, but does IRS have jurisdiction to make such a determination? In the absence of an averment that Department of Homeland Security or a Court of competent jurisdiction has done so, Judge Laro says “So what? And mind your own business, IRS.”

Only he does it more elegantly, in the form of a homework assignment.

“…each party shall by November 15, 2013, file with the Court a Memorandum of Law that sets forth his position as to the following matter: Assuming that the Court were to eventually find that petitioner is in the United States illegally, what (if any) is the relevance to this proceeding of such a finding? What is the Petitioner’s current status with the Immigration and Naturalization Service? Is Petitioner a ‘fugitive’? Has an arrest warrant been issued for Petitioner? Among other things, each party shall specifically address whether an individual who is illegally in the United States is precluded from prosecuting a case in this Court and, if so, whether the Court, if we were to make the referenced finding, should dismiss this case on those grounds.” Order, at p. 1.

Can’t wait to see the answers.