I’ve taken the 1963 Brian Wilson/Roger Christian iconic evocation of California cardom for my title, and its first line for an introduction: “Well I’m not braggin’, babe/So don’t put me down”.
No, I claim no Olympian or Sinaiatical omniscience, as too often writers in the tax blogosphere seem to do. Not only don’t I claim to know everything, but every day and every blogpost bring a chance to learn.
And if my blogposts do not equip the in-the-trenches practitioners with all they need to know, at least I hope I haven’t led any too far wrong.
That said, let’s look again at a topic I don’t really understand, or didn’t, until Judge Goeke laid it out today in Frank Sawyer Trust of May 1992, Transferee, Carol S. Parks, Trustee, 2014 T. C. Memo. 128, filed 6/25/14.
This is a Rule 161 rewrite of 2014 T. C. 59, filed 4/3/14, and no, I didn’t blog that case, because it involved that topic I didn’t understand, equitable recoupment.
Oh, I knew in general terms that equitable recoupment involved someone who overpaid a tax, refund of which is barred by SOL, and is now hit with another tax somehow cabalistically related to the acts or transactions or something wherefrom arose Tax No. 1, and is permitted to offset the aforesaid overpayment against Tax No. 2, with interest and penalties only on any overage post-ER.
But how the taxes were related, and what qualifies for ER and what doesn’t, was a mystery.
Judge Goeke finally lifts the fog: “To apply equitable recoupment, the taxpayer must prove the following elements: (1) the overpayment or deficiency for which recoupment is sought by way of offset is barred by an expired period of limitation, (2) the time-barred overpayment or deficiency arose out of the same transaction, item, or taxable event as the overpayment or deficiency before the Court, (3) the transaction, item, or taxable event has been inconsistently subjected to two taxes, and (4) if the transaction, item, or taxable event involves two or more taxpayers, there is sufficient identity of interest between the taxpayers subject to the two taxes that the taxpayers should be treated as one.” 2014 T. C. Memo. 128, at pp. 6-7.
This was another MidCoast fiasco, where the trust sold off the stock of four C Corps with monumental assets and almost zero basis, to a MidCoast stooge, who pulled the usually phony shelter, looted the C Corps and skipped.
There’s transferee liability, of course, but IRS couldn’t establish fraudulent conveyance, so the fight is now over whether the trust beneficiary can offset any overpaid estate tax by the trust against income tax transferee liability.
Here, IRS folds on items (1) and (4), fighting about (2) and (3).
As to item (2), this involves the sale of the C Corp stock on both ends: the estate tax was based on an incorrect valuation of the stock, which it’s now too late to correct, and the income tax is based on the same stock.
As to item (3), IRS treated the stock price as if the C Corps had no income tax liability, but now is trying to collect income tax as if they had. That’s inconsistent enough for Judge Goeke.
“The equitable recoupment doctrine seeks to prevent an inequitable windfall to the taxpayer or the Government for inconsistent tax treatment. The estate valued the corporations’ shares of stock at their sale prices, and it calculated its estate tax using those values. For purposes of demonstrating petitioner’s transferee liability, respondent has proved that the sale prices exceeded the fair market values of the corporations’ shares of stock. However, respondent seeks to retain the estate tax petitioner paid, even though it was calculated on the basis of the sale prices. Denying petitioner a credit for the estate’s overpayment of estate tax would give respondent an inequitable windfall. To prevent this result, we will modify our opinion in Frank Sawyer IV to further reduce petitioner’s liability by the amount of the estate’s estate tax overpayment resulting from its misvaluation of the taxi corporations’ stock.” 2014 T. C. Memo. 128, at p. 10.
And, again because IRS couldn’t establish that the deal with the MidCoast stooge was a fraudulent conveyance, no accuracy penalty.
A Taishoff “good job, guys” to David R. Andelman, Esq., and Juliette M. Galicia, Esq., of Lourie & Cutler, counsel for taxpayer.