Attorney-at-Law

DON’T BE ACCRUAL – PART DEUX

In Uncategorized on 07/11/2017 at 21:09

In the Summer of ’56, I was fourteen years old, callow beyond description, desperately in puppylove and enthralled by The King and his magnificent 197th best song of all time. Oh, those were the days (and thanks to whatever gods may be that they’re over).

But there’s a new conundrum percolating through the halls of The Glasshouse at 400 Second Street, NW, and whom else to send to the mound to pitch his way out of this one but The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Inveterate, Industrious, Illustrious, Irrefragable, Indefatigable, Ineluctable, Incontrovertible and Incomparable Foe of the Partitive Genitive, Old China Hand and Master Silt Stirrer, Judge Mark V. Holmes?

Is an S Corp a taxpayer? Well, it’s a passthrough, so it doesn’t itself pay taxes, and maybe it isn’t. IRS claims if it isn’t an accrual basis taxpayer, it isn’t a taxpayer at all, so no Section 468 goodies for Bob Gregory and Kay Gregory, 149 T. C. 2, filed 7/11/17, leading off Palindrome Week and T. C. Tuesday, as the hard-laboring clerks at the Glasshouse seem to have picked Tuesdays to unleash their T. C.s upon the world.

Bob and Kay have a Sub S that’s been cash basis from the getgo, and elected Section 468 treatment. This is one that could torpedo many an aspiring EA, as I doubt too many of my readers have a clue that Section 468 allows a landfill operator to write off closing and reclamation costs, if they so elect, many years before they must pay the same.

Don’tcha love the Code, so full of special interest giveaways? And fodder for fees to us hardworking tax pros. Well, if corporations have free speech and religious freedom, why not a few small extras? Sorry, nonpolitical blog.

Judge Holmes: “A current deduction for a future expense is a good deal for most taxpayers, and the disagreement between the parties here is simple–who counts as a ‘taxpayer’ under section 468? “ 149 T. C. 2, at pp. 2-3.

Bob and Kay have an integrated service dump. Politely, a landfill. And the TX public wasters require Bob and Kay to keep a $2 million standby L/C to cover the costs when the land will accept no more fill, Bob and Kay have to wind it up, and the clean-up costs will be substantial. Bob and Kay might scamper, leaving the people of TX to do the dirty work.

Now Bob and Kay didn’t pull their numbers from wherever, they had a professional engineer do the guesstimate. And IRS doesn’t quarrel with the numbers, or that Bob and Kay can use accrual for reporting and cash for taxpaying. And Section 448(a) doesn’t preclude Bob and Kay from using cash basis; they aren’t a partnership, large C Corp or a tax shelter. IRS only says cash basis types can’t use Section 468 at all.

Section 468(a) says “taxpayer,” tout court; and there are no Regs, surprise surprise. And 5 Cir, where Bob and Kay are Golsenized, say when a statute uses a word that everyone understands, who need legislative history?

“Even though section 468 doesn’t define “taxpayer”, we are not left without textual help. The Code has a small dictionary toward its end, and in it we find a default definition of “taxpayer”. Sec. 7701(a)(14); see, e.g., Rothkamm v. United States, 802 F.3d 699, 704 (5th Cir. 2015). It says: ‘SEC. 7701(a). When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof–

(1) Person.–The term “person” shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation.

*******

(14) Taxpayer.–The term ‘taxpayer’ means any person subject to any internal revenue tax.” 149 T. C. 2, at pp. 9-10.

Game over, right? Well, maybe for Section 468 purposes, but Judge Holmes curbs everyone’s enthusiasm.

“Our Opinion today reaches only the question of whether an S corporation is a taxpayer for the purposes of section 468. We are not deciding whether an S corporation is a taxpayer for every section of the Code.” 149 T.C. 2, at p. 10, footnote 7.

And Sub S corps like Bob and Kay’s do pay FICA/FUTA, so the S Corp is a taxpayer, just not a Title A taxpayer.

There’s much argy-bargy about noscitur a sociis, but there is no sociis, and anyway, Judge Holmes blows off IRS with “As they say at the IRS: Ab his sociis publicanus non adjuvatur.”149 T. C. 2, at p. 16. I need not, of course, translate.

There’s a case that mentions Section 468 out of USDCWDMI, but the taxpayer there was already accrual basis. And the legislative history doesn’t prove what IRS wants it to prove.

Ultimately, though, “Taxpayers like [Bob and Kay’s Sub S] must comply with numerous environmental-protection laws at the federal, state, and local levels. These costs can be large, and they continue after a landfill, mine, or nuclear-power plant stops earning income. Section 468 lessens the burden of compliance by helping to match income and expenses better in an era where businesses that are messy to run must clean up after themselves and maintain proof that they have the means to do so.” 149 T. C. 2, at p. 24.

Judge Lauber reluctantly concurs. And Ch J L Paige (“Iron Fist”), and Judges Nega, Ashford and Gale join him.

 

 

 

 

 

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