That is, elegy for a very interesting tax scam, that takes place in a graveyard. And the moral is that even a completely defective petition, if filed out of a FPAA, tolls the statute of limitations for both the partnership-level and partner-level determinations. And even more so if the partner files bankruptcy.
Here’s Judge Nega to tell you all about it, in Michael J. McElroy and Ruth M. McElroy, 2014 T. C. Memo. 163, filed 8/12/14.
Mike Mac succeeds inventive Glenn R. Johnston as tax matterer of several general partnerships, all bearing the title Heritage Memorial Park. Inventive Glenn is taken out of the play by the Federales, copping to “one count of conspiracy to defraud the United States by selling, claiming, and causing others to sell and claim millions of dollars in false and fraudulent tax deductions for charitable contributions and concealing from the IRS income from the sales of the fraudulent deductions.” 2014 T. C. Memo. 163, at p. 8.
Inventive Glenn gets a “get into jail free” card.
I give Inventive Glenn a Taishoff “good try in the first degree”. Inventive Glenn rounds up fewer than 100 highrollers for each of his general partnerships, and buys up cemetery plots for not heavy-duty cash (as those highrollers reckon heavy-duty cash). They then mark up the plots by a lot (we don’t hear about the appraisals from Judge Nega, but they must put the historic façadeniks in the shade), and contribute them to a 501(c)(3) cemetery, taking big charitable deductions.
The key, of course, is that there must be a one-year holding period in the gravesites, so they can be contributed at the marked-up FMV (which is beaucoup more than the highrollers paid for them).
Judge Nega explains: “The amount of the deduction for a charitable contribution of property depends in relevant part on whether the contributed property was held for over one year (in which case the deduction is the property’s fair market value) or for a lesser period (in which case the deduction is the taxpayer’s basis in the property). See sec. 170(a), (e)(1)(A); sec. 1.170A-1(a), (c)(1), Income Tax Regs.; see also sec. 1222(3) (providing that property may qualify for long-term capital gain treatment only if held for over one year).” 2014 T. C. Memo. 163, at p. 3, footnote 3.
Inventive Glenn and friends blow the one-year hold, so Mike Mac and Mrs Mac only get their minimal basis for the deductions.
However, the legal issue (“At last!” say my few readers so far still above-ground) is whether the 3-year SOL has run on Mike Mac and Mrs Mac.
Inventive Glenn as tax matterer agreed to extend the SOL before he was investigated, but not afterward. IRS then served FPAAs, and Glenn petitioned, and agreed to continuances of trial while he was being investigated and pleading guilty.
After Inventive Glenn was in the slammer, IRS moved to toss him as tax matterer, and Mike Mac stepped in, solely for the partnership-level proceeding.
Mike Mac claims his own deficiencies arising out of the scam are barred by SOL, but Judge Nega says TEFRA keeps partners’ issues open while partnership-level items are being hashed out. Mike Mac claims that there was no partnership-level proceeding, because Inventive Glenn had no right to file the petition, as he was being investigated and therefore disqualified as tax matterer.
Doesn’t matter, says Judge Nega. There was a petition. Whether or not effective, the petition was timely filed, and that opens the box.
Anyway, Mike Mac later filed bankruptcy, and that converted his items from partnership-level to partner-level, per Section 6226. And gave IRS an additional one year from discharge to go after Mike Mac and Mrs Mac.
But whatever the theory, Mike Mac loses. The proper place to challenge the petition Inventive Glenn filed was at the partnership-level proceeding. Nobody did, and Judge Nega finds nothing wrong with that. And if Inventive Glenn was right to file the petition, the mere fact he was under criminal investigation doesn’t oust him as tax matterer, and Judge Nega has Second Circuit learning to back up that statement.
Cutting to the chase: “The long and short of this issue is that the… Forms 1065 were timely filed, the FPAAs were timely mailed to the partnerships’ TMP within three years after the returns were filed, and petitions were timely filed in this Court as to the FPAAs. The assessment periods as to the partnership items therefore remained open at the commencement of and throughout the partnership-level proceedings, as stated in section 6229(d). Then, when petitioners filed their bankruptcy petition while the partnership-level proceedings were pending in this Court, petitioner’s partnership items were recharacterized as nonpartnership items by operation of law, and respondent had at least one year thereafter to mail the deficiency notice to petitioners. See secs. 6229(f)(1), 6231(b)(1)(D), (c)(1)(E); sec. 301.6231(c)-7T(a), Temporary Proced. & Admin. Regs., supra. Respondent’s mailing of the deficiency notice to petitioners met that one-year requirement. The deficiency notice was therefore timely, and the applicable limitations periods remain open.” 2014 T. C. Memo. 163, at p.18.
I note in passing that both Gregory Scott Savoy and Janice Marie Cross are on deck today, Greg in a T.C. Memo. and Janice Marie in two designated hitters, all courtesy of that Obliging Judge, Judge David Gustafson. I’ll spare you the details; they are consistent with past history.