In the immediately-preceding blogpost of even date herewith (as my Grey-Goose Gibson guzzling colleagues say), I expressed bemusement at Judge Holmes’ designation of his order concerning the Mescalero Apache Tribe’s excursus into informal-vs-formal discovery.
To remove any hint of suspense, the reason for my befuddlement was his much more interesting order, which he did not designate, Henry J. Metz & Christie M. Metz, et al., Docket No. 10346-10, filed 4/29/16.
This arises out of the Rule 155 beancount following the unhorsing of the Metzes last March, in 2015 T. C. Memo. 84, filed 3/23/15, which I didn’t blog at the time. It was another hobbyhorse case, and I’ve blogged half-a-dozen of the big-losses, no-income, big-time other income, horse-loving taxpayer cases. Section 183 trumps Section 162 every time.
So it’s just numbers, right? TurboTax should clean that up in a Silicon Valley Minute, no?
No. “By the time they submitted competing computations — perhaps 50 pages from the Commissioner and several hundred pages of a First through Eleventh Supplement to Computation from the Metzes — the Court knew it needed help.” Order, at p. 1.
And Judge Holmes is the Judge to hand out help.
Getting the battling megillah-ists on the horn, Judge Holmes finds “…the key issue keeping them from finally getting the case into the barn is the effect of the Metzes’ ownership of the real estate used by Mrs. Metz’s corporation, SMF, Inc., on her basis in that corporation. Both parties agree that with some help by the Court on this issue, they should be able to agree on the rest.” Order, at p. 1.
The Metzes had a Sub S called SMF. SMF owned some FL land. This SMF sold, and the Metzes put the proceeds in their own account, not SMF’s. They used part of the proceeds to pay down some debt (styled Metzes’ debt, but whether corporate or individual not stated). With the balance, the Metzes bought a couple parcels land (hi, Judge Holmes) in CA, which weren’t titled in SMF but in the Metzes their own selves as to one, and to Mrs. Metz as to the other. SMF used the CA parcels for its horsing around.
“There is, however, nothing in the record even remotely suggesting that SMF had to pay rent to use these properties for its operations. Nor is there anything in the record suggesting that the Metzes in any way restricted SMF’s use of the property for its operations.” Order, at p. 2.
The fight is over what basis SMF has in the CA parcels, and therefore what basis Mrs. Metz has in her Sub S stock.
IRS says none, as SMF never bought anything. The Metzes say IRS gave up on that, referring to the SMF parcels in more than one Stipulation of Agreed Facts, and never saying the Metzes parcels or any such thing. And the Metzes say even Judge Holmes referred to the couple parcels as belonging to SMF, saying “the Metzes bought two properties for SMF in the Santa Ynez Valley”, 2015 T. C. Memo. 54, at p. 22.
Judge Holmes doesn’t buy it.
“Neither works to undermine the actual stipulation as to who owned the real estate. It’s common enough in English to use the possessive to signify location or use and not ownership. The Court might say, for instance, that ‘the McNuggets were especially tasty at the Alexandria McDonald’s’ without implying in any way that the restaurant owned, leased, or squatted on the real estate it used. And referring to the Metzes’ having bought properties for SMF or referring to SMF’s California operation identifies their location or use — it isn’t a finding of fact contrary to the stipulation about the title of those properties.” Order, at p. 2.
The Alexandria McDonald’s? McNuggets, yet? C’mon Judge, even when I was starving after a long day at National Harbor a couple years ago, even I, known as I am as Cheap Lew, didn’t head for the McDonald’s near the Alexandria Days Inn where I was staying. And I know you love good food and fine wine from our dinner at The Washington Inn Duke Club a year ago.
Back to work.
“The Metzes, however, make a subtler argument. Even though they held title to the real property that SMF used, that use was of value to SMF and should increase basis in the SMF stock.” Order, at p. 3.
They want to analogize to the cases where Sub S stockholders guaranteed loans to their Sub S’s and had to make good on the guarantees, or where the shareholders borrowed the money their own selves but plowed it right into the Sub S, which wrote the checks to pay back the loans.
Putting up your own money or assets isn’t enough unless they go into the Sub S, or are foreclosed by a lender to, or creditor of, the Sub S, and personal guarantees only build basis when guarantor performs.
“The Metzes proved neither here. That’s not to say they had no basis — they certainly did, but it was in the real estate, not in Mrs. Metz’s SMF stock. In many situations this wouldn’t make a difference, but it does illustrate again the adage of tax law that taxpayers are ordinarily bound by the form of their transaction and may not argue that its substance triggers different tax consequences.” Order, at p. 3. (Citation omitted).
Judge Holmes expresses the pious hope that this enlightens the parties so they can finish their beancount without another half-ton of paper.
Note to the parties—Aren’cha glad ya asked?
Now you see my confusion, not to say annoyance: I had to plow through 7 pages and about 170 nothing orders to find this gem.
Judges, please designate the good stuff. Ya think blogging Tax Court is a giggle?