In Uncategorized on 01/04/2016 at 17:06

Smooth or not, the course of true love doesn’t bind IRS in Diane Blagaich, 2016 T. C. Memo. 2, filed 1/4/16, with Judge Halpern firing the opening salvo in the 2016 Tax Year bombardment.

Di wants IRS estopped from denying that the $700K she got in the year at issue was partly an outright gift, and partly a rescinded gift to the extent of $400K.

She got the $700K from the late Lew Burns before he became the late Lew Burns. Lew could spell all right but his big heart led him astray. Diane was his live-in source of comfort, and received $700K from Lew during their two-year relationship, part in cash and part in the form of a $79K Corvette Lew bought her because he wanted to end her biker-babe Harley Davidson gig. But their relationship turned sour, Lew ejected her from his home, and, when he claimed she was two-timing him, sued her for the loot.

As a parting gift, Lew hit Di with a Form 1099-MISC for the $700K. Di of course reported nothing.

IRS hit Di with a SNOD for the whole $700K, Di timely petitioned, and IRS got wind of the judicial goings-on. So IRS asked for, and got, copies of pleadings, depositions, documents and decisions from State court. And Di asked for, and got, an unopposed continuance of her Tax Court case while she fought it out with Lew’s estate.

Finally, two years after the year at issue, State court decides Di owes the Late Lew’s estate $400K, and the next year the ex’rs send a revised 1099-MISC showing Di paid the $400K. The $300K remaining, including but  without in any way limiting the generality of the foregoing the ‘Vette aforesaid,  was a gift, said State court.

Di wants summary J that the most she owes is zero, as the $400K was the result of the partial rescission of the $700K, and the rest of the loot was a gift, as State court decided.

No on both counts, says Judge Halpern.

First, Di argues issue preclusion. IRS was fully aware of the State court case from overture to the Fat Lady’s cavatina. Not enough, says Judge Halpern. For summary J, parties’ interest must be aligned, so that the party can virtually represent the nonparty. Alternatively, the nonparty must participate in the litigation, although short of formal intervention, so as to be an active player.

Just sitting in the stands is not enough, however hard you root for one side or the other and look at the game with binoculars. To be bound, you have to be on the bench or on the field. IRS wasn’t.

So IRS can retry what part of the $700K was a gift in Tax Court, regardless of State court’s conclusions.

As for rescission, that has to happen in the same year that the money or money’s worth was transferred. Each year stands on its own. “Petitioner relies on Hope v. Commissioner, 55 T.C. 1020, 1030 (1971), aff’d, 471 F.2d 738 (3d Cir. 1973), which suggests that the rescission doctrine may apply even when repayment of a gain does not formally occur in the year of receipt, but only if, before the end of the year, ‘[the] taxpayer recognizes his liability under an existing and fixed obligation to repay the amount received and makes provisions for repayment.’ Nothing in the facts presented indicates petitioner recognized such a liability, much less made provision for repayment, in…the year she received the $400,000. Indeed, the record shows petitioner maintained… that she was under no obligation whatsoever to return the money paid to her under the agreement. Putting aside petitioner’s questionable analogy regarding ‘a lack of control over the rescission’, the suggestion in Hope is inapplicable to the facts of this case.” 2016 T. C. 2, at p. 14.

And Di’s equitable argument founders on the “we ain’t got no equitable jurisdiction” mantra.

Di, go try the case.


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