Attorney-at-Law

NOT DISQUALIFIED, NOT PROHIBITED, NOT COMPENSATED

In Uncategorized on 12/28/2016 at 16:26

Linda Lingo slides under the IRS tag in a designated hitter, with The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a Reformed Foe of the Partitive Genitive, Old China Hand and Master Silt Stirrer, Judge Mark V. Holmes calling the play.

It’s Kristopher L. Lingo, et al., Docket No. 17356-12, filed 12/28/16. Linda’s one of the als. But Kris, Linda and son Matthew all had IRAs.

All three IRAs made loans. We call such people and entities “hard money lenders.” They don’t bother with paper, but love very low loan-to-value ratios and high interest rates. We’re concerned with Linda’s IRA here.

Former husband Kris “…owned a corporation called STDS. STDS found borrowers for would-be lenders, including the Lingos’ IRAs. Loans and interest would then pass through STDS between the Lingos’ IRAs and borrowers. The Commissioner thought all this added up to multiple prohibited transactions under IRC § 4975 and he sent the Lingos notices of deficiency for the tax years 2004-2008. This case is complicated by the Lingos’ divorce in February 2005, which affected whether Ms. Lingo was a disqualified person.” Order, at p. 1. (Contrary to my usual custom, I mention the dates because they’re crucial).

Linda claims she never did a prohibited before the divorce, even if she was a disqualified person for Section 4975 purposes, and couldn’t be afterwards, as she was no longer married to Kris.

She wants partial summary J. IRS has only the Michael Corleone gambit.

First, IRS claims her affidavits are self-serving. OK, so rebut them.

Then IRS claims that Linda had a piece of STDS. “But the Lingos point to Mr. Lingo’s affidavit that says he was the sole shareholder in 2004. There’s also a signed copy of the Lingos’ settlement agreement, where Ms. Lingo waived any interest after the divorce. Even if the affidavit and settlement agreement didn’t exist, this fact isn’t material because STDS already counted as a disqualified person for Ms. Lingo under the family attribution rules of section 4975. The Commissioner rests on his allegations and doesn’t produce evidence to dispute the affidavit or settlement agreement.” Order, at p. 2.

If STDS was a Corp, be it C or S, why didn’t IRS pull the 1120 whatever, and the K-1s if an S, and put all that in evidence? Would that evidence have sunk them?

Next, “The Commissioner also questions whether a trust fund that received payments from STDS and sent them to Ms. Lingo’s IRA existed. But there are documents showing the trust fund existed and the Commissioner doesn’t produce any documents disputing this. In fact, it seems the Commissioner knew about the trust fund since the original audit.” Order, at p. 2.

Two more tries, neither particularly successful.

“The Commissioner says the Lingos admitted STDS retained fees in Mr. Lingo’s affidavits. But that’s only partly true. Mr. Lingo acknowledges STDS retained fees, but not until two years after the Lingos’ divorce. That time line is important because the Commissioner’s argument here centers around 2004. The Commissioner hasn’t produced any conflicting evidence here either. He did produce documents suggesting STDS received compensation for some transactions, but these transactions also didn’t occur until after the divorce.

“The Commissioner’s last argument is that there’s a factual dispute about whether the Lingos received income from STDS. Again, Mr. Lingo’s affidavit says the STDS payments to the IRAs were only payments from borrowers passing through STDS. STDS acted only as a conduit. And again, the Commissioner doesn’t offer any evidence disputing the affidavit – he just says the Lingos should produce more documents to support their affidavit. That’s not enough to overcome the Lingos’ motion for partial-summary judgment.” Order, at p. 3

But the Lingos must still show they are entitled to a partial summary J.

“Section 4975(c)(1)(C) prohibits a disqualified person from furnishing ‘goods, services, or facilities’ to a plan. There’s no dispute that Ms. Lingo’s IRA counts as a plan under section 4975(e)(1)(B). The next question is who counts as a disqualified person? The answer is — at least before the divorce — a number of people. Ms. Lingo, as the IRA’s owner, is a fiduciary and disqualified person of her IRA because she controls it. Sec. 4975(e)(2)-(3); Ellis, 106 T.C.M. (CCH) 468, 2013 WL 5807593 at 5. Mr. Lingo — again, at least before the divorce — was a disqualified person for Ms. Lingo’s IRA since he was Ms. Lingo’s spouse. Sec. 4975(e)(2)(F), (6). And then there’s STDS. It’s a disqualified person because it’s owned by a disqualified person — Mr. Lingo. Sec. 4975(e)(2)(G).

“That brings us back to 4975(c)(1)(C). STDS — a disqualified person -provided services to Ms. Lingo’s IRA, which counts as a plan. STDS received money from borrowers and sent the money on to the IRA, which counts as a service as respondent argues.” Order, at p. 3.

OK, so Linda’s IRA is disqualified?

That’s a thwacking big negatory, good buddy. Even the Supremes agree that unless the service provider is compensated for said services, Section 4975 is off the table.

“The Supreme Court itself has held that a gratuitous transfer from a disqualified person to a plan is not a prohibited transaction. Commissioner v. Keystone Consolidated Indus., Inc., 508 U.S. 152, 161 n.2 (1993). And this is a solid textual basis for this commonsense result: The six types of prohibited transactions in § 4975(c)(1) are colored by the last two, which bar a fiduciary who deals with a plan’s property as his own, or who receives compensation in connection with a transaction involving a plan’s property. The seemingly more general language of§ 4975(c)(1) – (4) in no way shifts the focus of the prohibition away from a misbehaving ‘disqualified person.’ In the case of services, the more general language of ‘furnishing . . . between a plan and a disqualified person’ includes situations where such a person contracts with a plan to provide services or somehow has a plan provide services to him. In either scenario a plan’s property is at risk — is too much being charged to the plan? Is it given too little in exchange? — in a way that it isn’t with gratuitous services of the type STDS provided here.

“This becomes even more clear when one looks at § 4975(d)(2), which exempts from the prohibition services provided by a disqualified party to a plan so long as ‘no more than reasonable compensation is paid.’ The regulations then provide that a ‘disqualified person’ who provides services without consideration isn’t committing a prohibited transaction under § 4975(c)(1)(E) or (F). 26 CFR § 54.4975-6(a)(5)(ii) and (iii). We hold likewise that STDS’s minor services to Mrs. Lingo’s IRA were not prohibited transactions because zero compensation is ‘no more than reasonable compensation.’” Order, at p. 4 (Footnote omitted, but it says Section 4975(f)(4) measures damages for prohibited services transactions based on the amount of “excess compensation.”).

Now guys, says Judge Holmes, y’wanna get on the pretrial order track, or maybe so discuss settling?

And a tip of the battered Stetson to San Diego charger Mitchell Barry Dubick, Esq. A Taishoff “Good Job,” sir.

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