Attorney-at-Law

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DAS KAPITAL – PART DEUX

In Uncategorized on 06/21/2017 at 21:57

It’s been almost four years, but those of my readers with long memories may recall the previous appearance of Greenteam Materials Recovery Facility PN, Greenwaste Recovery, Inc., Tax Matters Partner, et al., 2017 T. C. Memo. 122, filed 6/21/17.

If not, see my blogpost “Das Kapital,” 8/6/13.

Well, the parties seem to have done the homework to which they were set by The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Illustrious, Incontrovertible, Insuperable, Ineffable, Ineluctable and Indefatigable Foe of the Partitive Genitive, Old China Hand and Master Silt Stirrer, Judge Mark V. Holmes. And the result is anything but jolly for IRS, who argued that the sale of waste collection, recycling and landfilling agreements with various CA municipalities generated ordinary income and not capital gains.

Question presented: Are these agreements “franchises” within the meaning of Section 1253?

“The Greenteam partnerships’ argument is simple. The sales of the contracts fall under section 1253, which says that a taxpayer gets capital-gains treatment when it sells a ‘franchise’ unless it has a continuing interest in the franchise after the transfer. The Commissioner disagrees. He thinks section 1253 doesn’t apply precisely because the Greenteam partnerships didn’t keep any interests in the contracts and didn’t receive any contingent payments. The Commissioner says that since section 1253 doesn’t apply, we have to decide whether the contracts were capital assets by looking at section 1221, the six-part multiprong test of Foy v. Commissioner, 84 T.C. 50 (1985), and the substitute-for-ordinary-income doctrine. The Greenteam partnerships think they still win under Foy.” 2017 T. C. Memo. 122, at pp. 11-12.

Well, they are franchises. IRS’ argument that franchises are only private deals and not deals with municipalities goes down.

“Section 1253(b)(1) defines ‘franchise’ for the purposes of that section: Franchise.–The term ‘franchise’ includes an agreement which gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities, within a specified area.

“The definition is unambiguous, so we need only look at the plain language of the statute. Section 1253(b)(1) tells us that there’s a ‘franchise’ for the purposes of section 1253 if there is: an agreement in which one party receives the right to provide services within a defined area. If a transaction satisfies these three requirements, then it falls under section 1253.” 2017 T. C. Memo. 122, at pp. 12-13. (Citations omitted, but get them for your memo of law).

IRS already lost this one in Tele-Commc’ns, Inc. v. Commissioner, 12 F.3d 1005 (10th Cir. 1993), aff’g 95 T.C. 495 (1990).

IRS trots out a new argument, that under CA law and usage, the contracts aren’t franchises but indefinitely renewable annual contracts, known as “evergreens.” So what, says Judge Holmes; “The Commissioner’s problem is that the industry definition in California doesn’t matter for federal income-tax purposes.” 2017 T. C. Memo. 122, at p. 15.

But that isn’t the end of the search. It may be that the Greenteam sold franchises, but are the gains capital or ordinary?

“Holding that section 1253 includes the contracts here as ‘franchises’ isn’t the end of the matter. We also need to figure out whether the Greenteam partnerships kept any ‘significant power, right, or continuing interest’ in the franchises. If they did, their income from the sales is ordinary. See sec. 1253(a), (b)(2); see also Rev. Rul. 88-24, 1988-1 C.B. 306. But that’s an easy question here–none of the Greenteam partnerships kept any interest in the franchises, and they didn’t receive contingent payments–they got lump-sum payments. Even the Commissioner concedes in his briefs that the partnerships didn’t hold onto any significant interests in the franchises or receive contingent payments. Since we are dealing with franchises under section 1253, and the partnerships didn’t keep any interests in the franchises or receive contingent payments, we know the transactions aren’t ineligible for capital-gains treatment. See sec. 1253(a).” 2017 T. C. Memo. 122, at pp. 15-16.

The Greens claim that satisfying the Section 1253 franchise definition means automatic capital gains treatment. But section 1253(a) only says what isn’t a capital gain, not what is.

Judge Holmes and Section 1253(d)(2) to the rescue.

“Any amount paid or incurred on account of a transfer, sale, or other disposition of a franchise, trademark, or trade name to which paragraph (1) does not apply shall be treated as an amount chargeable to capital account. [Emphasis added.].” 2017 T. C. Memo. 122, at p. 16.

Anyway, Tax Court dealt with this one too.

“Our Court has already addressed this issue too. In Jackson v. Commissioner, 86 T.C. 492, 520 (1986), aff’d, 864 F.2d 1521 (10th Cir. 1989), we held that section 1253 gives a transferor of a franchise capital-gains treatment so long as it doesn’t retain any significant interest in the franchise and the franchise was a capital asset. The Fifth Circuit agrees. It also explained that section 1253(a) says a taxpayer doesn’t get capital-gains treatment when it transfers a franchise if it retains a significant interest in the franchise. McIngvale v. Commissioner, 936 F.2d 833, 839 (5th Cir. 1991), aff’g T.C. Memo. 1990-340. McIngvale also said that section 1253 assumes the inverse too–when a taxpayer transfers a franchise and doesn’t retain a significant interest, the transaction is taxed as the sale or exchange of a capital asset. Id.” 2017 T. C. Memo. 122, at p. 17. (Footnote omitted, but read it; legislative history and more cases for your memo of law).

The Greens win.

I cannot find in Judge Holmes’ opinion any reference to IRS advancing “a good faith argument for an extension, modification or reversal of existing law.” See ABA Model Rules of Professional Conduct 3.1. Maybe the Greens should go for legals and admins. Or something else.

 

 

 

 

 

 

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CERTIFY TO BE CERTAIN

In Uncategorized on 06/20/2017 at 18:17

A rule that should be graven in stone on the walls of 1111 Constitution Ave, NW, and every outpost thereof is the source of defeat for IRS’ summary J motion in Security Management and Integration Company, Docket No. 15248-16L, filed 6/20/17.

This is a petition from a CDP NOD. IRS claims that the Decision Letter here isn’t a NOD, but CSTJ-in-waiting Lewis (“A Name Denoting Chieftainship”) Carluzzo doesn’t let technicalities deter him from proceeding as if the Decision Letter was in fact a NOD.

That said, was the petition timely?

“Because the letter was not sent by certified mail, respondent relies entirely upon the date shown on the letter, April 6, 2016, to establish the date it was sent, and therefore the date the period prescribed in section 6330(d) began to run. Using that date, it is obvious that the petition, filed July 5, 2016, would not be treated as timely. Although petitioner does not identify a specific date that he received the letter, petitioner claims that he mailed the petition to the Court within 30 days from the date he received it. Without a certified mailing list, or any other information regarding the date the letter was mailed, we are reluctant to find that it was mailed as dated. See Magazine v.Commissioner,89 T.C. 321(1987). Without being able to determine the date the letter was mailed to petitioner, we are left only with his claim that he mailed the petition within 30 days of its receipt. That being so, we find that the petition was timely.” Order, at p. 2.

IRS gets summary J, but it goes against them.

Lest the Security Managers and Integraters feel too elated, they also sought summary J, prohibiting collection during the pendency of the proceeding, and they too lose.

“The record shows that petitioner is a Federal government contractor. See sec. 6330(h)(2). Section 6330(f)(4) somewhat limits the rights otherwise provided to taxpayers by section 6320 and 6330 in the case of a taxpayer who is a Federal government contractor. See Bussell v. Commissioner, 130 T.C. 222,237(2008); Dorn v. Commissioner, 119 T.C. 356, 359 (2002). For example, the prohibition against collection during the pendency of the section 6330(d) proceeding does not apply. See sec. 6330(e)(1).” Order, at p. 2.

Takeaway- Use certified mail. Use even Priority Mail. Save receipts and screenshots from USPS website.

Takeaway 2- When representing government contractors, expect the unexpected. Come to think of it, that’s a good rule in any case.

GOING, GOING, GONE

In Uncategorized on 06/20/2017 at 00:51

Baseball season is in full swing, with the All-Star break soon to arrive. So I take my text from a phrase often heard in that context, as Judge Pugh (and I) deal with W. Zintl Construction, Inc., 2017 T. C. Memo. 119, filed 6/19/17.

WZ is a C Corp, owned by the eponymous W and wife Ann. WZ owes about $6.5 million in self-reported FICA-FUTA-ITW over three years. IRS hits WZ with NITLs and NFTLs, and WZ bangs in a 12153 and seeks OIC, claiming liquidation value of $1.5 million and offering $1 million to settle. The SO blows that one off, claims as a going concern WZ is worth $5 million. WZ tries to borrow this amount, but can’t.

WZ petitions, claiming the SO valued the C Corp cum tax obligations, but no one would buy the firm with those obligations unpaid. IRS claims IRM pt. 5.8.5.17 (Sept. 30, 2013) lets the SO use going concern value.

So the issue is whether to sell off the assets or sell the entire business.

This case goes up on stipulated facts (Rule 121), as no one disputes the numbers, only which set of numbers to apply.

WZ claims going concern value is never apposite where the taxpayer is the business, because IRS can never sell the business. Judge Pugh need not go there, even when IRS says “Oh, yes we can.”

“In effect petitioner asks us to decide that use of the going-concern value of a business is never appropriate when the business being valued is the taxpayer. We cannot so conclude, nor need we, because we find that SO A’s calculation of RCP was faulty for a different reason: In calculating petitioner’s RCP, SO A increased petitioner’s going-concern value by the amount of the unpaid tax liability that the appraisal took into account in its calculation of value and based his determination of RCP solely on this modified value.

“This modification to the value at first blush seems logical. Reducing petitioner’s going-concern value by its tax liability when determining how much of this tax liability petitioner can pay would seem to double count the tax liability and provide a boon to a business taxpayer whose tax debt is part of the business being valued. It is this tax liability that will be satisfied with the OIC, after all. The problem is that the going-concern value is intended to give some indication of the value of petitioner as a continuing business, that is, what a third party might pay to buy petitioner as a whole, including all of its assets and liabilities. No third party would buy petitioner without taking into account the unpaid tax liability. And the record shows that petitioner could not obtain financing for the modified amount either. This highlights the logical difficulty of using going- concern value–which presumes that a taxpayer can sell itself–to determine RCP.” 2017 T. C. Memo. 119, at pp. 11-12. (Name omitted).

Judge Pugh’s balancing act doesn’t end there. She doesn’t decide that going concern value is never relevant where the taxpayer is the business being valued. Neither does she let WZ off the hook by allowing the $1 million OIC.

SO A wasn’t reasonable in denying the OIC by leaving in most of the tax liability as part of the RCP.

So back to Appeals for WZ and SO A.

Note we see a similar argument in the Section 6901 transferee cases:  no one would buy a business at full price when a yuge tax liability is hanging over its head.

 

SEARCHIN’, SEARCHIN’

In Uncategorized on 06/19/2017 at 20:25

Judge Paris steers her footsteps into those of Jerry Lieber and Mike Stoller, as she echoes their 1957 hit, in the endless Tax Court search for jurisdiction.

Today, Judge Paris breaks new ground in Corbin A. McNeill and Dorice S. McNeill, 148 T. C. 23, filed 6/19/17.

Corb and Dori started a case in USDCDCT when engaged in a fistfight over a shelter they unwisely espoused, but after IRS hit them with a NFTL, which Corb and Dori petitioned after Appeals tells them they can’t contest the chops, Corb and Dori dismiss the USDC case with prejudice, with the FPAA which gave rise to the deficiency admitted but the Section 6662 accuracy chops never considered.

Corb and Dori already paid the deficiency to get to USDCDCT, so all that remains are chops.

Judge Paris bifurcates the case. All that’s on the table here is jurisdiction; the actual liability for the chops is for another day.

“At issue is whether, notwithstanding the specific jurisdictional provisions of TEFRA, the general jurisdictional provision of section 6330(d)(1) provides the Court with jurisdiction to review this case.” 148 T. C. 23, at p. 7 (Footnote omitted, but it says IRS concedes Corb and Dori never got a chance to fight the chops).

Prior to 2006, if there was no deficiency, chops were off the table in Tax Court after a CDP. The chopped had to go to USDC. But Congress amended Section 6330(d)(1) to provide that any petition from a NOD was fair game at 400 Second Street, NW.

Of course, if prior chance to contest, game over.

Nonetheless, “Congress created the CDP process to provide taxpayers who are confronted with a lien filing or a proposed levy the opportunity to contest that collection action before the Internal Revenue Service proceeds to collect the outstanding tax liability. It follows that when Congress amended section 6330 in 2006–making the Tax Court the exclusive venue for review of CDP cases–its intent was not to preclude from review certain issues not subject to the Tax Court’s deficiency jurisdiction. With respect to petitioners’ section 6662(a) accuracy-related penalty, this penalty is another example of an item not subject to the Court’s deficiency jurisdiction under section 6221 but nonetheless reviewable by the Court in the context of its section 6330 jurisdiction.” 148 T. C. 23, at pp. 13-14. (Citations omitted).

Corb and Dori, stand by. There’s another opinion coming, that will determine your penalty.

 

IRS VS. THE ORC PARTNERS

In Uncategorized on 06/16/2017 at 22:59

No, this is not a newly-discovered manuscript by John Ronald Ruel Tolkien, coming soon to a theatre near you. No elves, dwarves or hobbits today, only another scenic easement case with some very sketchy arguments from IRS in pursuit of summary J.

Judge Morrison isn’t having it.

Here’s ORC Partners, LLC, Five Rivers Conservation Group, LLC, Tax Matters Partner, Docket No. 1041-16, filed 6/16/17, a designated hitter.

We’re dealing with GA law, as State law determines property rights, while Federal law governs the taxation thereof.

IRS wants summary J knocking out the ORCs’ $5,570,000 claimed Section 170(h) deduction.

First, IRS claims that, although the donee of the easement is a genuine 501(c)(3), the easement merges with the fee if both the dominant tenant and the fee owner are one and the same under GA law. Although the easement instrument provides for no such merger unless waiver of that provision is expressly stated, IRS claims the mere fact that such statement is necessary proves that the chance of such a merger of interests is not so remote as to be negligible.

Back to the Graev yet again. It’s the same idea getting a workout.

And the ORCs could buy out the 501(c)(3), or vice versa.

“Second, the IRS contends that the easement can be amended in such a way that one of the conservation purposes that the easement purports to serve could be harmed. Paragraph 20 of the easement allows the easement to be amended upon the consent of both parties if the amendment ‘would be appropriate to promote the Purposes of the Easement’, the amendment is ‘in accordance with the Policies’ of the [501(c)(3)], the amendment is approved by the Georgia Department of Natural Resources, and the amendment is ‘consistent with the Purposes of the Easement and the aggregate Conservation Values.’ Under section 1.170A-14(e)(2), Income Tax Regs., a conservation easement that would accomplish one of its enumerated conservation purposes but that would permit the destruction of other significant conservation interests is not exclusively for conservation purposes.” Order, at pp. 3-4.

First, it is a question of fact whether the possibility of merger of the easement and the fee is so remote as to be negligible.

Second, it is a question of fact whether the policies of the 501(c)(3) “… would cause it not to agree to an amendment that would harm one of the purported conservation purposes of the easement. The IRS does not deny that the [501(c)(3)]’s policies are relevant to the question of whether it would approve a harmful amendment. The question therefore is whether ORCs has shown that there is a genuine dispute about the [501(c)(3)]’s policies. We conclude it has raised a genuine dispute.” Order, at p. 5.

Given the brusque dismissal of IRS’ summary J claims, it might be a good idea for IRS not to try this move again.

 

 

 

THE RACE TO THE COURTHOUSE DOOR

In Uncategorized on 06/15/2017 at 16:51

It’s been fifty years and more since I first heard that phrase, on The Hill Far Above, when I first encountered the recording statutes of Our Fair State, from the now-long-departed Chief Whistler William Hirsch Farnham. No, Willie was a different kind of whistler than is found gazing at the Ogden sunset.

Enough nostalgia.

Briefly, if you want to protect your grantee’s interest in a conveyance or encumbrance, you must record the conveyance or encumbrance with the proper official before the grantor-encumbrancer unloads the property to that innocent purchaser for value without notice.

Merely taking possession of a written conveyance (deed, declaration) or encumbrance (mortgage, judgment, lien) means nothing unless you take it down, pay the fees, and get it recorded.

Ex-Ch J Michael B (“Iron Mike”) Thornton plows through our Real Property Law and a bunch of New York cases to prove this point. Ten Twenty Six Investors, Douglas Oliver, Tax Matters Partner, 2017 T. C. Memo. 115, filed 6/15/17, gets all kinds of technical, claiming that New York’s Environmental Conservation Law, which addresses architectural easements (yes, it’s another Section 170 “joy forever”), doesn’t apply, and, dragging arguments from the Graev, claim “so remote as to be negligible” that they would sell their historic warehouse before the National Architectural Trust got down to the thirteenth floor of 66 John Street, around the corner from where I sit typing this, with documents and fees in hand.

I’ve blogged the Graev case extensively. But see my blogpost “Back from the Graev,” 2/19/15, for this specific gambit.

Doesn’t fly.

An architectural easement is what we dirt lawyers call an “easement in gross.” That is, one not connected to adjoining property. For example, my right to drive over your driveway if we live next door to each other is an “easement appurtenant,” that is, part of my right in my land, which I can pass on to anyone else who gets title to my land. An easement in favor of a 501(c)(3), which doesn’t own any land anywhere, over your building is an easement in gross, and not enforceable at common law in Our Fair State.

Of course there are exceptions, and the recording statute, among others, bails out the grossers. Our Environmental Conservation Law does, but Ten Twenty Six is loudly protesting their easement wasn’t created under that law, because then their easement would require recording to be effective.

It was recorded. Only in the wrong year; not the year Ten Twenty Six claimed the $11 million tax writeoff.

So? says Ten Twenty Six. We wouldn’t sell or encumber until National Architectural Trust got around to recording the easement.

Mox nix, says Judge Iron Mike.

“Under N.Y. Real Prop. Law sec. 291 (McKinney 2006), a purchaser of real property who pays value for the property and does not have notice of an unrecorded interest in the property when the property is purchased will take the property free of that unrecorded interest, provided that the purchaser’s interest is recorded before the unrecorded interest is recorded.   Therefore, the relevant question is whether–as of the date of donation-there was a nonnegligible possibility that a recorded sale might have occurred without notice of the easement deed and before it was recorded.  If so, then the perpetuity requirements are not met.

“Petitioner has not argued or set forth facts to show that (1) the partnership was under any obligation not to sell the warehouse or that (2) NAT was under any obligation to record the easement deed.  Therefore, it was quite possible that a sale could have occurred at some point after donation of the easement but before the easement deed was recorded.  And given that property sales are almost always recorded, the possibility of a recorded sale before the easement deed was recorded was not so remote as to be negligible.” 2017 T. C. Memo. 115, at pp. 28-29. (Footnote omitted).

We wouldn’t have gone behind NAT’s back, says Ten Twenty Six. OK, says Judge Iron Mike, you could have disremembered to tell either NAT or your buyer about the easement, and that’s not so remote as to be negligible.

I shall not, in a blogpost meant for family reading, repeat the old joke about the translation of the words “trust me, trust me.”

No recording in the right year, no perpetuity, no deduction, 40% chop. Gross.

RTFC – PART DEUX

In Uncategorized on 06/14/2017 at 16:56

Read the Contract – The “F” is For Emphasis

I said this in this blog a long time ago; see my blogpost “RTFC,” 3/9/16. I say it quite often on the NYSBA Real Property Section listserve.

Clients seem to think contracts are rather like The Pirate’s Code: “Guidelines – Aspirational goals.” Well, maybe so, for those of them that are pirates…but that’s another story.

Judge Nega, a rather old-fashioned sort, seems to think that contracts are made to be read and followed. Here’s Thomas E. Watts and Mary E. Watts, 2017 T. C. Memo. 114, filed 6/14/17.

Except it’s really the story of RW, the partnership between la famille Watts and Wellspring, hedgefundamentalists.

The Watts gang were big-time pro-shop operators, employing hundreds, having locations all along the sunbelt, making big bucks. Wellspring offers a buyout, and to keep the Watts gang managing (and collecting rent on the pro shops they owned themselves but leased to their golfing selves), they set up a preferred-common duality in their LLC.

It’s got the usual preferred payout at dissolution or sale of all assets, guaranteed payments for interest on the cash they gave the Watts gang, various kickers, all subordinate only to creditors. The excerpts quoted by Judge Nega show a professional job of the usual sort where big buck investors bankroll canny but low budget operators.

Comes along another hedgefundamentalist, which I’ll call “fundie,” who sees the boodle raked in by the golfers and makes them an offer, and a national sporting goods chain who offers even bigger bucks.

Per the contract, Wellspring has the call, and can drag the Watts gang (kicking and screaming as they will) whithersoever the Wellspringers want to go. But the Watts gang claim the chain gang will wreck the brand, steal the locations, and fire the loyal brigade of workers who made Watts what they are.

So Wellspring sells to fundie, for $35 million less than they would have gotten from the national chain. There follows an extraordinary footnote from Judge Nega.

“Other than petitioners’ uncorroborated testimony, the record does not indicate what motivated Wellspring’s decision to sell to [fundie].  No representative of Wellspring was called to testify, and no documentation reflecting bids, proposals, negotiated terms, or agreements were entered into evidence.

“Petitioners’ theory of the case does not reconcile the $35 million difference between the purported [chain]’s and [fundie] bids.  Wellspring held exclusive power to sell all of Partnership, to drag along the common partners.  Petitioners avoided discussion of Wellspring’s drag-along rights and did not address any potential damage the Watts brothers’ protests and holdout threats may have inflicted on any potential sale to [chain], and whether this may have resulted in [fundie]’s effectively being the buyer of last resort.” 2017 T. C. Memo. 114, at p. 13, footnote 10 (names omitted).

Must’a been a helluva lotta howling from Watts gang, to say nothing of their selfless love of the working stiffs peddling their nine irons, to get a preferred, front-seat, last-dollar-in and first- dollar-out hedge fund partner to walk from $35 million. I’d love to know how they did it, given that they weren’t able to prove how they were getting any part of that money in any event. Well, maybe so a couple hundred K (hi, Judge Holmes).

Howbeit, relying on trusty accountant HG, the Watts gang claims they abandoned their partnership interests and got an ordinary loss.

Watts wants Judge Nega to buy the idea that Watts had a right to money, which they gave to Wellspring to get Wellspring to do the fundie deal and not the chain. You can do that, maybe, with the substance-over-form argument that Watts is trying, but you need strong proof. Judge Nega is “unmoved.” 2014 T. C. Memo. 114, at p. 17.

Watts has nothing but the Michael Corleone ploy.

Judge Nega walks the walk of ex-Ch J Michael B (“Iron Mike”) Thornton, but instead of “chewin’ de stuffin’ out’n de dictionary,” in O. Henry’s felicitous phrase, he chows down on the contract between Watts and Wellspring. At great length.

Watts claims no preferential treatment for Wellspring. Judge Nega has had it with that argument.

“In fact petitioners–at trial and on brief–entirely avoid discussing section 10 of the agreement.  Petitioners similarly avoid discussing section 3.4, the liquidation priority provisions, or the impact of any relevant defined terms or Wellspring’s $85.5 million initial capital account.  They made no effort to address, examine, construe or even allege any ambiguity within the terms of the agreement.  Petitioners did not even offer testimony as to their own personal knowledge and understanding of these provisions.  They offered no Partnership balance sheets, books, audit statements, or other accounting records as evidence or exhibit.  Petitioners called no members of Wellspring or [fundie] to testify and corroborate their theory at trial.

“Petitioners’ argument begins with a conclusion:  They were entitled to a pro rata share of the cash proceeds from the [fundie] sale.  It ends there, too.  Petitioners’ conclusory presumption runs contrary to the unambiguous wording of the agreement.” 2014 T. C. Memo. 114, at pp. 24-25.

Trusty accountant HG saves the Watts gang the negligence chops.

Takeaway- Read the contract, even without the “F” for emphasis.

DON’T BE ACCRUAL

In Uncategorized on 06/13/2017 at 18:25

Judge Lauber has a new take on the 197th item on the Rolling Stone all-time best song list, a classic from my fourteenth summer so long ago. Here’s Steven M. Petersen and Pauline Petersen, 148 T. C. 22, filed 6/13/17. But the story is really about their Sub S and ESOP.

Steve and Pauline and their Sub S’s trusty employee John (Larue being on board only because she filed jointly with John) were all participants in the Sub S’s ESOP, which everyone agrees was qualified. The Sub S accrued salary, payroll taxes and ESOP contributions for Steve, Pauline and John, but didn’t pay until the following January, the year when Steve and Pauline and John paid taxes thereon. Sub S was of course a calendar year, accrual basis taxpayer.

IRS swoops in and, citing Section 267(a)(2) deferral for any payment to a related person until said related person pays tax thereon, hits Steve and Pauline and John and Larue with SNODs for their flow-through deductions in the accrued year.

IRS claims that the ESOP stock held in their respective names makes Steve and Pauline and John related persons to the S Corp, by virtue of being beneficiaries of a trust which is a stockholder in the Sub S.

Apparently, this is a case of first impression, so trusty counsel for Steve and Pauline and John tries everything from Section 318 attribution rules (but 318 attribution is Subchapter C, and 267 is Subchapter B, so Section 318(a) limits 318 attribution to “this subchapter”) to “The ESOP is not a trust under UT law” (so what, says Judge Lauber, federal law controls). Besides, the ESOP is qualified and to comply with ERISA and the whole statutory scheme (and its own organic documents), the ESOP must be a trust.

Judge Lauber, more patient than I, wades through the whole mass of arguments, but at the end of the day, his message to Steve and Pauline and John and Larue is that of The King: Don’t Be Accrual.

“ABSOLUTELY”

In Uncategorized on 06/12/2017 at 16:05

Certain words and phrases should be weighed very carefully before use, especially in litigation. While instances arise where one side swears “black,” and the other “white,” but the answer is not “grey,” or even fifty shades thereof, far too often the answer is one or the other, and not “grey, or even fifty shades thereof.”

Today’s illustrative offering from Judge Nega is Larry Geneser, 2017 T. C. Memo. 110, filed 6/12/17. The date is a milestone for me, but bears not at all on the matter at hand.

Larry is fighting over SE. He spent about 26 years as an IC for an insurance company, and carried a debit. This was a balance of advanced commissions, to be repaid as the commissions were earned. The insurance company gave Larry a 1099-MISC (nonemployee comp) when he stopped selling for them.

Larry didn’t file for that year, claiming he was sick, but hadn’t enough evidence thereof to convince Judge Nega.

The SE issue is based upon Section 1402(k). Payments to life insurance salespeople are not subject to SE, provided same “’do[] not depend to any extent on length of service * * * performed for such company (without regard to whether eligibility for payment depends on length of service)’.” 2017 T. C. Memo. 110, at p. 7.

However, Larry’s contracts with the insurer (AIL) are in evidence.

“Petitioner and AIL entered into several State general agent contracts.  One contract (effective October 20, 2003) set forth a vesting schedule for commissions that was dependent on an agent’s length of service at AIL and stated that ‘all (100%) of the commissions earned following the General Agent’s termination date shall be vested’ if the agent has ‘completed ten years of continuous service’.  The last contract between petitioner and AIL (effective August 1, 2004) stated that petitioner, for the one year period beginning on the date of termination, ‘will not engage in the life or health insurance business in any territory possessed by the State General Agent during the year proceeding termination, utilizing the union, credit union, or association sales procedures of the company.’  That contract also stated that ‘[c]ommissions are determined by the schedule in effect at the time the insurance is issued’.” 2017 T. C. Memo. at p. 3.

Larry is represented by counsel. There follows an example of the sort of thing that ages counsel.

“Petitioner’s commission payments credited toward his account in 2010 were dependent on his length of service at AIL.  Accordingly, petitioner does not meet the requirements of section 1402(k).  Petitioner’s testimony that he ‘absolutely’ meets all the requirements of section 1402(k) exemplifies self-serving testimony and, apart from being neither convincing nor persuasive, is inherently incredible. Petitioner may not exclude the $903,707 in commission payments from his net earnings from self-employment under section 1402(a), and those earnings are therefore subject to self-employment tax under section 1401.  See Rule 142(a).” 2017 T. C. Memo. 110, at p. 7.

As a well-known on-line chess lecturer says “And we can stop here.”

Absolutely.

SCORECARD

In Uncategorized on 06/11/2017 at 23:12

As at blogpost 2,000: 244 followers, 103,548 views, 42,560 viewers from 144 countries, territories (both autonomous, semi-autonomous and whatever), and still enthusiastic.