In Uncategorized on 01/10/2017 at 19:07

You Know the Rest

New Millennium Trading, LLC, AJF-1, LLC, Tax Matters Partner, 2017 T. C. Memo. 9, filed 1/10/17, is another blown-up Bialystok, Son-of-Boss variation.

We have BDO Seidman’s Tax Solutions dodgefloggers, a cameo appearance by Jenkens & Gilchrest, and an inventive CPA-turned-hedge fund manager whom I’ll call Bergie.

It’s the old Section 752 unrecognized liability (gain) meets recognized loss. Bergie is the guiding light of the enterprise, with total hands-on control over the deal.

If you’re interested in the details of a blown-up Bialystok that’s been on IRS’ Ten Worst for many years, read Judge Goeke’s surgical dissection.

New Millennium Trading was a sham.

I’m going to focus on the 40% substantial undervaluation chop.

But first, “When a partnership is disregarded for tax purposes, the rules of subchapter K of chapter 1 of the Code no longer apply, and the partnership’s activities will be deemed to have been engaged by one or more of its purported partners. A disregarded partnership has no identity separate from its owners, and we treat is as an agent or nominee. Pursuant to section 6233(a) and (b), TEFRA procedures still apply to the entity, its items, and persons holding an interest in the entity as long as the purported partnership filed a return, which NMT did for tax year 1999. See sec. 6233(b); sec. 301.6233- 1T(a), (c)(1), Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6795 (Mar. 5, 1987). Thus, we have jurisdiction to determine any items that would have been ‘partnership items’, as defined in section 6231(a)(3), and section 301.6231(a)(3)- 1, Proced. & Admin. Regs., had NMT been a valid partnership for tax purposes.” 2017 T. C. Memo. 9, at pp. 34-35. Citations omitted).

So Judge Goeke has jurisdiction to deal with the chops, even though partner-level items are involved. But when the partners go under the chopper, what Tax Court did here may be provisional.

Since the taxpayer, whom I’ll call Fili (founder of a $5 billion software outfit he unloaded for Social Security numbers, basis of bortscht) reported an inflated basis in the “partnership” when he should have reported zero, a fortiori Fili is up for the 40% chop.

Fili can’t yell he was an injured innocent who relied upon an oceanful of sharks; at least not in Tax Court. As the Supremes pointed out in Woods, Fili can fight in USDC or USCFC after he has paid up in full.

The real issue is the good faith reliance of the “managing partner” of the non-partnership, which brings us back to Bergie.

Bergie “…was the only individual with the authority to act on behalf of NMT, and it is his conduct that is relevant for determining whether we should sustain the accuracy-related penalty.” 2017 T. C. Memo. 9, at p. 35.

Of course, Bergie, a sophisticated CPA, should have known this deal was too good to be true.





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