This one is a Midco in two parts, with a head-spinning roundy-round of cash and a platoon of characters, that ends up with “a couple other escrow accounts,” and a lot more about MN voidable transaction, tax and corporate law than you’d want to know.

And if after that you can’t guess which Judge wrote the opinion in Donald J. Buckrey, et al, 2017 T. C. Memo 138, filed 7/11/17, you haven’t been paying attention.

Buck and the als have stock in a C Corp, basis bupkis, built-in gain exponential, and a buyer who wants assets, not stock. Buck and the als sell the operating assets to buyer via a Midcoast shill. There’s some window-dressing due diligence, but a lot of that never makes it into the record.

Buck and the als distribute the remaining non-cash assets to themselves: “accounts receivable from the three owners, tax refunds, prepaid insurance refunds, and future cash from [buyer] from the earlier asset sale–to the shareholders in redemption of approximately 36% of their total shares.” 2017 T. C. Memo. 138, at p. 6.

The C Corp has only the cash from the asset sale and a yuge tax liability. Money gets wired from Midcoast (maybe; it’s a question of fact where the money came from) into an escrow account where also is kept the money from the asset sale. MidCoast gets paid, Buck and the als get a premium over the ex-tax price, and some sits against future claims but eventually mostly gets paid to Buck and the als.

Comes the usual Son-of-BOSS mix-and-match, featuring the shill.

Judge Holmes: “Son-of-BOSS deals were generally used to artificially inflate someone’s basis in a partnership interest by contributing assets with large contingent liabilities (which were ignored in computing basis) and then selling this interest at fair market value for a huge tax (but no economic) loss. See, e.g., RJT Invs. X v. Commissioner, 491 F.3d 732 (8th Cir. 2007) (involving typical Son-of-BOSS transaction); Kligfeld Holdings v. Commissioner, 128 T.C. 192 (2007). There are other variations, see, e.g., Home Concrete & Supply, LLC v. United States, 634 F.3d 249 (4th Cir. 2011). We’ve never found a Son-of-BOSS transaction that worked.” 2107 T. C. Memo. 138, at p. 11, footnote 5.

IRS wants to collapse everything, but that fails as MN Uniform Fraudulent Transfer Act (MUFTA) says each transfer stands on its own. And if the deal were to be collapsed and treated as a liquidation and distribution, MN corporate law says that creditors get no rights to fight a distribution, only the corporation, receivers and shareholders. Though strange, other States do likewise, and Judge Holmes isn’t fighting with them.

IRS claims the escrow arrangement, where money from buyer and shill was lumped together, was itself a fraudulent transfer. “We agree with the shareholders that the escrow agreement unambiguously identified which money was coming from whom and where the escrow agent should send it. The agreement required the escrow agent to transfer the exact amount of money that it received from MidCoast to three different accounts and the exact amount of money received from [shill] to MidCoast’s operating account. The escrow agent’s contractual duties trump the fact that the funds were very briefly placed in the same account.” 2017 T. C. Memo. 138, at p. 36.

In the end, though, these are motions for summary J, and since the money trail isn’t clear, transferee-of-a-transferee and for-the-benefit-of theories won’t work.

Here’s the story: “There are material facts in dispute that prevent us from ruling on whether the shareholders are liable under the transferee-of-a-transferee or for-the-benefit of theories because it’s unclear at the moment which entity actually paid for the stock and which entity actually received the stock. There are also material facts in dispute concerning the shareholders’ actual intent to enter into fraudulent transfers. To the extent that we hold that Minnesota law prevents us from collapsing the transfers and finding that the shareholders received a transfer directly from BNP, we will grant the shareholders’ motion. We also will grant the shareholders’ motion to the extent we find that the partial stock redemption wasn’t a fraudulent transfer. The rest of the shareholders’ motion will be denied, and the Commissioner’s motion will be denied.” 2017 T. C. Memo. 138, at p. 53.

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 needs 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.

Shirley M. Cotter, Docket No. 7644-15L, filed 7/11/17, is convinced that income taxes are sinful, even though she paid all but $350 of her self-reported liability for year at issue. IRS wants a Section 6702 frivolity chop.

Here’s Shirley: “People of the Light serving The Creator God of America’s Declaration of Independence who gives life, liberty, and the pursuit ‘virtuous’ happiness, know we can only pay taxes to legitimate governments who are God’s servants (Romans13). Taxes are gifts from We The People for God’s glory and the common good. Of course, tyrants, as tools of the Devil and traitors of God, our country, and fellow citizens will try to get tribute money for Satan’s Kingdom. However, in the United States of America tax departments can only collect taxes to produce fruits of the Holy Spirit * * *.” Order, at p. 2.

If you’re interested, there’s more at p. 3, and even more at pp. 4-5.

IRS wants summary J on the NOD from the CDP, wherein IRS invoked “a moral, religious, political, constitutional, conscientious, or similar objection to the imposition or payment of federal taxes that reflects a desire to delay or impede the administration of federal tax laws.” Order, at p. 3.

What’s wrong with this picture?

Well, if you’re a reader of this my blog, you’ll doubtless recall my blopost “The Jersey Bounce – Part Deux,” 3/22/17, wherein 2 Cir. blew off the anytime Boss Hoss, and insisted that the Boss Hoss pre-imposition signoff on penalties was de rigueur.

Unhappily for IRS, here it’s de novo review, as the chop was asserted after the CDP hearing. And Shirley didn’t raise Boss Hoss in her petition.

So what, says The Taxpayer’s Friend, STJ Diana L. Leyden.

“Respondent’s motion asserts that petitioner did not allege in her petition that SO J failed to obtain the requisite verification under section 6330(c)(1) and therefore she has conceded this issue pursuant to Rule 331(b)(4). However, the settlement officer is required by statute to verify that the requirements of any applicable law or administrative procedure have been met and must do so regardless of whether the taxpayer raised it at the CDP hearing.” Order, at p. 8. (Name and citations omitted).

IRS’ summary J motion never mentions the Section 6751(b) Boss Hoss. And it’s an interesting question who is the right Boss Hoss.

“According to the Internal Revenue Manual (IRM) in effect when the section 6702(b) penalty was assessed, the ‘Appeals [Office] will not make a determination regarding assessment of the IRC section 6702(b) penalty. However, it will identify when the [CDP] request meets the criteria for penalty assessment.’ IRM pt. 5.1.9.3.16(5) (Apr.6,2010). The CDP hearing request is then returned by the Appeals Office to the collection function of the IRS, who verifies that the criteria for penalty assessment is met. See IRM pt. 5.1.9.3.16(5) and (6) (Apr. 6, 2010). The IRM further instructs the IRS collection employee to prepare a Form 3210, Document Transmittal, and states that the ‘group manager will document approval of the penalty assessment by writing [‘] Determination to assess penalty pursuant to section 6702(b) approved [‘] on Form 3210 and sign the Form 3210.’ IRM pt. 5.1.9.3.16(7) (Apr. 6, 2010); see IRM pt. 5.19.8.4.7.7(9) (Sept. 2, 2009).” Order, at pp. 8-9, footnote 7.

Collection group manager? Appeals group manager? Will the real Boss Hoss please stand up?

Now the IRM confers no rights on taxpayers, and it doesn’t necessarily have the force of law on IRS. But there’s the procedure to be followed, and it might be, could be, maybe arbitrary if it wasn’t followed. And note also that the IRM passages quoted are seven years old; YMMV.

Of course, Shirley might catch a Section 6673 frivolity chop on the trial. If the case gets that far. But I’m not betting large bucks.

Spousal abuse moved front-and-center in Rev. Proc. 2013-34, I.R.B. 2013-43, where such abuse might keep the abused from challenging the abuser’s dodging, thus enabling the abused’s plea Section 6015 innocent spousery .

But even serious abuse, when established, isn’t enough where the abused actually got free in time to participate meaningfully in the preparation of the return.

Today’s case is a Section 7430 legals and admins, that fails on IRS, like another tax collector in a much more exalted narrative, “going down justified.”

But I want to touch upon the abuse issue, as being of more general interest and application. 7430 justification is too often a case of 20-20 hindsight. And anyway, the point in today’s case on justification is that a concession, whether partial or complete, does not mean IRS wasn’t substantially justified at the time Appeals issued its NOD on the deficiency and the innocent spousery, and when IRS counsel filed the answer to the petition.

The case is Nina H. Kazazian, 2017 T. C. Memo. 135, filed 7/10/17 (Happy Palindrome Day, again).

Judge Lauber notes the spousal abuse, both in the statement of facts and in the opinion.

“Mr. Stackpool and petitioner both alleged spousal abuse in support of their requests for innocent spouse relief.  The AO noted that their short-lived marriage was tumultuous, with the police having been called to their residence on several occasions.  Indeed, Mr. Stackpool ultimately secured a judicial restraining order against petitioner, which she violated on at least one occasion, leading to her arrest and jailing.” 2017 T. C. Memo. at p. 5.

But this avails neither Mr Stackpool nor petitioner.

“In challenging the reasonableness of the AO’s determination petitioner relies heavily on her charge of spousal abuse.  Generally, abuse is a relevant factor where it ‘undermines the requesting spouse’s ability to reason independently and be able to do what is required under the tax laws.’   This may be true where the requesting spouse ‘was not able to challenge the treatment of any items on the return, or was not able to question the payment of any balance due reported on the return, for fear of the nonrequesting spouse’s retaliation.’

“The AO reasonably concluded that petitioner could not make this kind of showing.  Petitioner and Mr. Stackpool had permanently separated in August 2010, three months before the 2009 joint return was filed in November of that year.  She was directly and actively involved in the preparation of that return, as evidenced by her extensive communications with the [CPA preparer] firm.” 2017 T. C. Memo. 135, at pp. 12-13. (Citations omitted).

IRS did concede both the portion of the deficiency relating to Mr Stackpool’s taxes, and a big chunk of petitioner’s NOL and real estate pro portion of the deficiency. But the record is inconclusive as to the reason for the first, and the litigation risk reason for the second, which petitioner initially claims she had nothing to do with, turns out to be something she argued heavily at Appeals. And won in part.

As for the dollar amount of the claim, petitioner was pro se, even though a lawyer herself. No award without client-attorney relationship.

Thus did the late G. M. Fraser entitle one chapter in his history of the scruffiest soldier in the world, Private John MacAuslan, Gordon Highlanders, a favorite of my little ones when they were still little.

Today we have another case where general knowledge of private information was already out of the bag, in Loys Vallee, Docket No. 13513-16W, filed 7/7/17.

Loys, a blower fighting an Ogden Sunseteers shootdown, wants his info sealed after IRS messed up a couple of Branerton mailings, sending them to the wrong address. The parties who got them must have opened them, because Loys got them forwarded, resealed with tape.

So eleven (count ‘em, eleven) months post-petition, Loys wants Rule 345(a) treatment, the blower’s Rule 27 equivalent duckdive.

Unfortunately, even that Obliging Jurist, Judge David Gustafson, can’t help Loys now.

“Petitioner’s motion does not present potential harm in any concrete, ‘fact-specific’ way. The motion points to two categories of concern-letters sent to a nearby wrong address, and nebulous, theoretical concerns of economic or physical harm. Even if we were to grant the motion, our action could not un-send the two letters respondent already incorrectly mailed. And in his motion, ‘Petitioner has not identified a taxpayer who, upon learning petitioner’s identity, would have the power to, and might be expected to, act against him.’ Whistleblower 14377-16W v. Commissioner, 148 T.C. No. 25, slip op. at 37 (June 28, 2017).” Order, at p. 3.

As for Whistleblower 14377-16, a/k/a 716 Whiskey, see my blogpost “A. Nonymous, Serial Blower,” 6/28/17.

Since Loys his own self originally unbagged the cliché almost a year ago, all Judge Gustafson can do is promise a future sealing, should events and the course of the proceedings warrant the same.

In the meantime, Judge Gustafson will seal Loys’ motion, and tell IRS to be careful when sending out correspondence in blower cases.

Takeaway- Whether it’s a petition from a SNOD, NOD, worker classification or 501(c)(3)  or blower shootdown, put that motion to seal in with your petition and your sixty bucks. Get there first.

I remember with gratitude the enthralling lectures in trial tactics and evidence from James Wilson (“Hey, Bald Guy!”) McElhany, Esq., wherein the Bald Guy (and brilliant trial tactician) dissected the famous response “(T)he document speaks for itself” when counsel tried to read into the record a portion of a document already in evidence.

Sometimes that would shut counsel up. But not the Bald Guy.

No, said Prof McElhaney, the correct riposte is: ”Rule of Completeness; you read what you want into the record, and then I’ll read enough of the rest to put in context what y’all have cherrypicked.”

So here is the finale of Karen Spenningsby, Docket No. 13699-19, filed 7/6/17. For completeness.

Or, “Toto, I’ve a Feeling We’re Not in Kansas Anymore”

Perhaps someone at The Glasshouse at 400 Second Street, NW, in the Town L’Enfant Built, reads this blog. Peut être, as the late great Pierre Charles might have said.

Here’s Karen Spenningsby, Docket No. 13699-17, filed 7/6/17.

Karen and her trusty attorney Chris the K are back without even one day’s rest, as it would seem that my blogpost from yesterday, “Everything West of the Hudson is Kansas,” 7/5/17, awakened somebody.

Read for yourself.

We’ve all been there, when the facts are bad enough to bury your case right from the start. And today I’ve got sympathy for that hardworking lawyer who furnishes “honest tax representation at reasonable rates,” Eric William Johnson. He’s up against, among others John (“Scholar John”) Schmittdiel, Esq., star of my blogpost “Go To the Head of the Class,” 3/26/14.

Eric William’s client, Xibitmax, LLC, 2017 T. C. Memo. 133, filed 7/5/17, was a wee bit casual about filing Forms 941 for 10 quarters, and ponying up the money withheld from employees for FICA-FUTA-ITW.  These are non-assessables, so de novo review by Judge Nega. But that doesn’t help.

JP is Xibitmax’s sole shareholder and officer. Xibitmax makes trade show displays. JP spends much time on the road, so he hires an employee with no background in payroll taxes to do the Forms 941, and doesn’t look too closely when these don’t get filed or the withholding paid.

True, the economy tanks while this is going on, but Judge Nega isn’t interested. “[JP] testified that, on at least one occasion, he directed his employee not to remit–to ‘defer’–payment of petitioner’s employment and trust fund taxes.  This was done in early 2009 while petitioner was facing cashflow problems during a national economic recession.  Later that year, however, he instructed his employee to resume making timely payments on petitioner’s tax obligations, but the payments never resumed.

“During all periods at issue petitioner continued to withhold employment taxes from the paychecks of its employees and continued to pay its vendors and creditors.  Although he had access to, and would frequently review, petitioner’s only bank account, Mr. Powell never noticed, or chose to overlook, the fact that petitioner’s employment and trust fund tax payments were not being drawn from its account.” 2017 T. C. Memo. 133, at pp. 11-12.

It’s a tough case. Late filing and nonpaying chops sustained.

Older readers of the New Yorker magazine will remember Saul Steinberg’s immortal drawing of the New Yorker’s vision of America, where there was nothing between NYC and SF, except maybe Chicago and Kansas.

Well, even though she’s a native of the Old Line State, she’s still a Right Coaster, so Ch J L Paige (“Iron Fist”) Marvel can’t be bothered with those flyovers.

Here’s Karen Spenningsby, Docket No. 13699-17, filed 7/5/17, and her trusty attorney, whom I’ll hereinafter designate as “Chris the K.”

Chris the K hangs out in Fargo. Chris the K files a petition for Karen and asks for place of trial down the road in Bismarck.

But apparently Karen’s case is a nonstarter for small-claimer status, so Ch J Iron Fist suggests trial elsewhere.

Only she does it thus: “…the Court lodged a Request for Place of Trial which improperly seeks to Bismarck, North Dakota, as the requested place of trial in this case. The Court’s records reflect that this case is being conducted under the Court’s regular tax case procedures, and not the small tax case procedures. Only cases conducted under the Court’s small tax case procedures may be tried in Wichita, Kansas.” Order, at p. 1.

Wichita, Bismarck, who cares? Everything west of the Hudson is Kansas.

And so am I.