No, not Konrad Korzeniowski’s (that’s Joseph Conrad’s) classic novel, rather it’s the claim of Michael Tseytin and Ella Tseytin, 2015 T. C. Memo. 247, filed 12/28/15. Ella is out of joint-and-several, per stip, so this is Mike’s story.
Mike was running two LLCs in Mother Russia via a NJ C Corp, spreading American values via Pizza Hut and KFC franchises. Mike’s C Corp had a 91% interest in the LLCs, and the rest were held by “unidentified key employees” of the C Corp. Please pardon an old cynic if he suggests that the “key employees” were stationed far from the Jersey Shore and might have obscure connections with the Russian government.
Howbeit, an unrelated BVI entity owns 25% of the C Corp, and Mike owns the rest. Personally. And yet another unrelated corporation “organized under the laws of the Netherlands and the shares of which were publicly traded on the Warsaw Stock Exchange, owned and operated Pizza Hut, Kentucky Fried Chicken, Burger King, and Starbucks franchises throughout Central and Eastern Europe.” Now the unrelated cast longing eyes on Mike’s Russian operation, with promises of mucho diñero.
They make a deal whereby Mike has to buy out his BVI partner, and transfer their shares and his shares in the NJ C Corp to the Dutchmen in a Section 356 tax-free merger. Mike got stock in the acquiring Dutch corp, and that everyone agrees is tax-free, but Mike picks up cash to the extent of $23 million.
Now comes the accounting. Mike claims a short-term capital loss on the BVI stock he bought, based upon an allocation of the cash he got. IRS wants the allocation based on total consideration, that is, FMV of all the Dutch corp stock Mike got plus the cash.
Mike wants to offset the short-term loss against the long-term gain he got on his own C Corp shares. Section 356(c) loss disallowance ends that. And Mike’s ingenious arguments go nowhere; he can’t offset his realized but unrecognized loss against his realized and recognized gain.
Mike first treated the transaction as sale of a single block of stock, but admits there are two blocks, his own and the BVIs.
Now comes the reason for the title of this blogpost.
Mike claims, for the first time, that he acted as agent for the BVI, and that he was a mere conduit for cash he paid the BVI, as he got reimbursed the cash by the Dutchmen. That crashes at the Nat’l Alfalfa fence: choose whatever form you want to do your business, but once you choose you’re stuck with it. The BVI never were part of the acquisition deal with the Dutchmen; they negotiated nothing and signed nothing.
And Mike gets a 20% negligence chop. Mike claims his amended return cures the defect in his original return, where he treated all the shares as single block, but repented in his 1040X.
No go, says Judge Swift. “For penalty purposes, petitioner points us to some authority that he argues supports his amended return and his alternative argument to the effect that related gains and losses in a merger transaction should be allowed to offset each other. Therefrom petitioner argues that the acknowledged error in his original tax return should be overlooked. However, respondent’s penalty is based on petitioner’s position on his original return, not on his amended return. The cited authority does not support the error petitioner acknowledges was made in his original … return.” 2015 T. C. Memo. 247, at pp. 22-23. (Footnote omitted).
Mike was not an agent for the BVI corp, secret or otherwise. And his repentance comes too late.