Archive for August, 2017|Monthly archive page


In Uncategorized on 08/24/2017 at 16:03

When You’re Drawing Up a Façade Easement

Y’all will recall poor Randy Schrimsher and his Ten Dollar misunderstanding, which torpedoed his Section 170 conservation easement write-off, but for any latecomers, check out my blogposts “Yes In Deed,” 7/16/12, and “Valuable Consideration?” 10/3/12.

Randy got nailed when his deed of gift of a conservation easement recited “TEN DOLLARS [sic] and other good and valuable consideration.” Now every dirt lawyer worth their Mephistos knows that’s boilerplate, like the one peppercorn in the will, cutting off a rapscalliony heir-at-law, which inspired generations of civilian historians to prate about how valuable spices were in medieval England.

Remember, “no goods or services were received” by donor in exchange for said gift, or else no deduction.

But today Judge Lauber gives a discount in 310 Retail, LLC, Zeller-310, LLC, Tax Matters Partner, 2017 T. C. Memo. 164, filed 8/24/17. 310 gets by on the deed of gift, which recites their benevolent objectives. Judge Lauber likes Gayle and Maggie Averyt, whose beneficence I more particularly bounded and described in my blogpost “Yes In Deed,” hereinabove cited. Gayle and Maggie never mentioned worldly pelf.

310 did, but it was only a buck. Maybe it’s the effect of inflation, but Judge Lauber gives 310 a bye on that one. The urge to merge overcomes the Almighty Dollar. The 310 deed had the usual boilerplate about all reps, warranties, negotiations, discussions, understandings, agreements, tells, cries and whispers are merged in the deed.

“By stipulating that the deed of easement constituted the parties’ ‘entire agreement,’ the merger clause negated the provision or receipt of any consideration not stated in that document.  We concluded that the merger clause, read in conjunction with other statements in the deed of easement, supplied the affirmative indication required by section 170(f)(8)(B).  We accordingly held that the deed of easement, ‘taken as a whole, provides that no goods or services were received in exchange for the contribution.’” 2017 T. C. Memo. 164, at p. 15. (Citation omitted).

Anyway, “Apart from the charitable conveyance and the covenants attending the easement, the only “consideration” mentioned in the deed of easement is the granting provision’s reference to ‘consideration of One Dollar ($1.00) * * * and other good and valuable consideration.’  Neither party contends that [donee] actually furnished [310] with any valuable goods or services in exchange for its gift.  Evaluating this clause in the context of the deed overall, we conclude that this clause constitutes ‘boilerplate language and has no legal effect for purposes of sec. 170(f)(8).’” 2017 T. C. Memo. 164, at p. 17 (Citation omitted).

310 tried a late-filed Form 990 from the qualified donee, but 15 West 17th Street put paid to that. See my blogpost “Executive Nullification,” 12/22/16.


In Uncategorized on 08/24/2017 at 15:05

If you’re of a certain age, that phrase conjures memories of a line never actually spoken in the 1948 classic movie Treasure of the Sierra Madre. But Ch J. L. Paige (“Iron Fist”) Marvel confirms IRS’ SNOD, even though IRS never gave an SFR to Kevin J. McDuffie & Anne Marie McDuffie, Docket No. 7851-17, filed 8/24/17.

This is a mutual tosser. IRS wants Kev tossed because the petition was 65 days late. Kev wants the case tossed because the SNOD, he says, was invalid.

Undisputed that Kev & Anne Marie never filed for the year at issue. Also undisputed that IRS never gave either one of them a SFR before giving them a SNOD. All they got was the Form 4549 audit changes and the Form 886-A, ‘splainin’.

Kev says the SNOD is based on MFS, and that’s wrong. Also with no SFR, so no valid SNOD.

Wrong, says Ch J Iron Fist.

“Contrary to petitioners’ argument, the Court concludes that the…deficiency notice issued to Mr. and Mrs. McDuffie…is valid. No income tax return need be filed in order for the Commissioner to issue a valid notice of deficiency. Roat v. Commissioner, 847 F.2d 1379 1381 (9th Cir. 1988). Moreover, where a joint notice of deficiency is issued by the Commissioner and it is later decided no valid joint return was filed, this Court still retains jurisdiction to determine the individual tax liability of each spouse. Stanley v. Commissioner, 81 T.C. 634, 639 (1983).

“Where a taxpayer fails to file a return, I.R.C. section 6020(b) allows the Secretary (or the District Director or other authorized internal revenue officer or employee), sec. 301.6020-1(b)(1), Proced. & Admin. Regs.), to prepare a substitute for return ‘from his own knowledge and from such information as he can obtain from testimony or otherwise.’ Section 6020(b), however, is permissive and not mandatory. United States v. Stafford, 983 F.2d 25, 27 (5th Cir. 1993); Roat v. Commissioner, 847 F.2d at 1381. It is thus firmly established that section 6211(a) does not require the Commissioner to prepare a substitute for return before determining a deficiency and issuing a notice. Geiselman v. United States, 961 F.2d 1, 5 (1st Cir. 1992); Schiffv. United States, 919 F.2d 830, 832 (2d Cir. 1980); see also Roat v. Commissioner, 847 F.2d 1381-1382 (even when a substitute for return is prepared for a taxpayer, the Commissioner need not use that ‘return’ in determining the taxpayer’s deficiency under section 6211(a)).” Order, at p. 7.

And it’s the fact of the determination of a deficiency, not whether the deficiency actually exists, that gives Tax Court jurisdiction.

So Kev & Anne Marie could try their case. Except they filed too late and admitted they filed too late (Order, at p. 2, footnote 2), so they’re out.

But they can pay and sue in USDC or USCFC. Or try working it out with IRS out of court.


In Uncategorized on 08/23/2017 at 15:07

Today’s Tax Court orders provide me with the opportunity to take a quick peek into the Judges’ toolbox, to see what goodies the guys on the bench have waiting to encourage the dilatory and aid the uncertain, who throng the halls of justice.

Let’s start with Judge Ruwe’s means of dealing with inappropriate replies, or failures to reply, to demands for admissions. Here’s Casey A. Jones, Docket No. 11285-16, filed 8/23/17.

Casey, reply appropriately or else.

“Failure to comply with this Order may result in sanctions pursuant to Tax Court Rules 90(g) and 104(c), including:

“(1) An order that the matter regarding which the order was made or any other designated facts shall be taken to be established for the purposes of the case in accordance with the claim of the party obtaining the order.

“(2) An order refusing to allow the disobedient party to support or oppose designated claims or defenses, or prohibiting such party from introducing designated matters in evidence.

“(3) An order striking out pleadings or parts thereof, staying further proceedings until the order is obeyed, dismissing the case or any part thereof, or rendering a judgment by default against the disobedient party.

“(4) In lieu of the foregoing orders or in addition thereto, the Court may treat as a contempt of the Court the failure to obey any such order, and the Court may also require the party failing to obey the order or counsel advising such party, or both, to pay the reasonable expenses, including counsel’s fees, caused by the failure, unless the Court finds that the failure was substantially justified or that other circumstances make an award of expenses unjust.” Order, at pp. 1-2.

Now here’s Judge Halpern counseling IRS, whistleblowers and their counsel how to conform redacted (that’s edited, for you civilians) documents to unredacted (the whole story, with names and numbers) exhibits, without falling foul of the secrecy rules of Section 6103.

Case in point is Whistleblower 11099-13W, filed 8/23/17.

“A party submitting a redacted document shall submit a reference list, see Rule 345, that identifies each item of redacted information and specifies the ‘appropriate identifier’ that uniquely corresponds to each item listed. For this purpose, the ‘appropriate identifier’ shall not be a numeral, since numerals make the document difficult to understand and cannot be used by the Court in drafting an intelligible order or opinion. Rather, the identifiers shall instead be more descriptive terms (such as ‘Company X’, ‘Subsidiary Y’, ‘Process Z’”, ‘$n dollars’, ‘Product 1’, and the like). To the extent possible, both parties shall consistently use the same identifiers in all exhibits. If there is a substantial possibility that the choice of an identifier n ay be controversial, the parties shall before the submission, attempt to resolve that controversy and choose a mutually agreeable identifier.” Order, at p. 2.

And this one’s really hush-hush, with the public excluded from the trial and only the A List people can attend. I wonder if they’ve logged onto Amazon to get Jeff Bezos’ flaming sword.

If the last remark puzzles you, see my blogpost “The Man of Mystery – Revealed,” 10/21/14.



In Uncategorized on 08/22/2017 at 17:24

That primordial conglomerate, Mitsubishi, formed in the Meiji days, survived war, depression and occupation, to reach US Tax Court fighting about depletion allowance for calcium carbonate, and depletion of “nominating” materials, in Mitsubishi Cement Corporation & Subsidiaries, A Delaware Corporation, 2017 T. C. Memo. 160, filed 8/21/17. I’m a day late but not a dollar short, as I was closing one deal and working on a contract for another yesterday; something has to pay for my internet time.

Anyway, Mitsubishi is fighting whether depletion is 15% or 14% for CaCO3, which apparently they dig up to make the aforementioned cement. And they’re also jousting about additives that they buy from others: is all this part of mining, or something else? Miners are favored by the tax laws.

“In adjusting petitioner’s depletion deduction, respondent used a percentage depletion rate of 14% under section 613(b)(7) rather than the 15% rate that petitioner had used.  Respondent also contends that in determining its depletion deduction petitioner incorrectly computed its gross income from mining.” 2017 T. C. Memo. 160, at p. 6.

Judge Cohen digs up the battle between statute and reg. Statute wins.

“Section 613(b)(7) provides that for ‘minerals * * * including * * * calcium carbonates’ 14% shall be the percentage applied to the gross income from mining to determine the depletion deduction.  Section 1.613-2(a)(3), Income Tax Regs., provides that 15% is the applicable percentage depletion rate for ‘minerals listed in this subparagraph’, which includes calcium carbonates.  Petitioner calculated its depletion deductions for the tax years in issue using the 15% depletion rate provided in the regulations.” 2017 T. C. Memo. 160, at p. 7.

IRS conceded the point in the Reg. says Mitsubishi. No, says Judge Cohen, the Reg was superseded by the statutory enactment that brought in the 14%. Anyway, Congress’ intent was clear, so the Reg is out.

Likewise, Mitsubishi didn’t mine the additives. So their mining income must be determined by the ratio of mined costs to non-mined costs, the proportionate profits method. Even though both the CaCO3 and the other stuff go into the blend, nonmined isn’t mined, and “nominating” costs are something else.

“Petitioner argues that if we should conclude that the costs of the additive minerals may not be included in its mining costs, then we should conclude alternatively that they are ‘nominating costs’, as that term appears in section 1.613-4(d)(3)(ii), Income Tax Regs., and on that basis exclude them from the proportionate profits formula entirely.  Petitioner has not provided and we have not found any definition of ‘nominating’ within the context of the Code sections dealing with depletion.  We agree with respondent that the word ‘nominating’ as it appears in section 1.613-4(d)(3)(ii), Income Tax Regs., is a typographical error. The word “nominating” appears nowhere else in section 1.613-4, Income Tax Regs., and petitioner does not cite any other Code section or regulation where that term is used or defined.  Section 1.613-4, Income Tax Regs., addresses at length the treatment of ‘mining’ and ‘nonmining’ costs, and from the context of the relevant subparagraph we conclude that ‘nominating’ is simply a misspelling of ‘nonmining’.  The word ‘nonmining’ is, in fact, used in section 1.613-4(d)(3)(ii), Income Tax Regs., as that regulation is reproduced in T.D. 7170, 1972 1 C.B. 178, 183.” 2017 T. C. Memo. 160, at pp. 16-17.

AutoCorrect goes underground?

Anyway, there’ll have to be a beancount to work out Mitsubishi’s correct mining and nonmining income.


In Uncategorized on 08/22/2017 at 16:55

The ongoing tussles between the nieces of the late Dr. Sheldon Sommers, art connoisseur, and his once and present spouse Bernice comes to a conclusion in Estate of Sheldon C. Sommers, Deceased, Stephan C. Chait, Temporary Administrator, Petitioner, And Wendy Sommers, Julie Sommers Neuman, and Mary Lee Sommers-Gosz, Intervenors, 149 T. C. 8, filed 8/22/17, Judge Halpern sending once and present spouse to trial, and bailing out the nieces.

Y’want backstory? Read my blogpost “Artistically Gifted,” 1/11/13. There now.

The Temp Adm’r wants a deduction for the gift tax the nieces ponied up for their gifts. IRS says Section 2035(b) claws the gift taxes paid by the nieces into the taxable estate, to prevent late-in-life gifts from undermining the estate tax.

Judge Halpern: “Although allowing decedent’s estate to deduct the gift tax owed at his death on his 2002 gifts to intervenors would frustrate the policy underlying section 2035(b), as respondent argues and petitioner concedes, disallowance of the deduction need not rest on policy considerations alone.  Longstanding precedent establishes that a claim against an estate is deductible in computing estate tax liability only to the extent that it exceeds any right to reimbursement to which its payment would give rise.” 149 T. C. 8, at pp. 16-17. (Citations omitted).

Besides, “Because intervenors agreed to pay any gift tax arising from those gifts, the estate’s payment of that tax would have given rise to a right of reimbursement from intervenors that must be taken into account in determining decedent’s taxable estate–either as a separate asset or as a reduction in the amount that would otherwise have been deductible under section 2053(a)(3) as a claim against the estate.  Because the estate would have been entitled to reimbursement of the full amount of the gift tax paid, no deduction can be allowed.” 149 T. C. 8, at pp. 18-19. And mox nix whether the right to recover the gift tax arose via subrogation or contractual obligation to contribute.

Besides, under the “net gift” regime established by the 1976 Tax Reform Act, when the donee pays the donor’s tax, the donee is a mere conduit. It’s another case of one party’s paying another’s liability, therefore as if the other paid it their own self. And same-same whether donee paid before or after donor died.

The ultimate allegiance is to the rule that net gifting can’t diminish the decedent’s estate by end-of-life gifts.

To what extent marital assets were used to pay debts and administrative expenses, thereby reducing the marital exemption, is a fact question. As for who paid what, how much and when, that needs a trial, not partial summary J.

Finally, the Temp Adm’r wants to nail the nieces for contribution to the estate tax. But, after an exhaustive and exhausting gallop through half a dozen State apportionment statutes, Judge Halpern concludes that the nieces got no property includible in the gross estate, so they don’t owe any of the estate tax.

As for Bernice’s marital share being subject to tax, there’s another long story.

“On the record before us, we are unable to determine the extent to which the estate tax will reduce the value of the marital share of decedent’s estate.  As noted above, to the extent that Bernice used property that would otherwise have been exempt from claims against the estate to pay debts or  expenses, she may have been a ‘transferee’ subject to apportionment of estate tax.  If neither Bernice nor intervenors are transferees subject to apportionment under the New Jersey statute, the Federal estate tax liability would be apportioned entirely to the fiduciary under N.J. Stat. Ann. sec. 3B:24-4(a).  To the extent that any tax apportioned to the fiduciary reduces the residuary distributions ultimately made to Bernice’s successors, the tax will be paid out of the marital share of the estate.  Petitioner’s claim to a marital deduction that includes only the value of nonprobate property, however, may indicate that, even without regard to the estate tax deficiency, decedent’s probate estate would have been entirely consumed by debts and expenses.  To the extent that petitioner pays estate tax out of assets that would otherwise have been used to pays debts or expenses, the tax would not reduce the value of the property ultimately received by Bernice and her successors.  (To that extent, the burden of the estate tax would be borne by the estate’s creditors.)  Moreover, the allocation to petitioner under N.J. Stat. Ann. sec. 3B:24-4(a) of an amount of estate tax in excess of the value of the assets remaining under his control may have no economic consequence.  Instead, the ultimate incidence of that portion of tax might depend on the vagaries of the Service’s exercise of discretion in choosing among alternative sources for the tax’s collection.  Whoever pays that portion of the estate tax would presumably have a right to reimbursement from a fiduciary with no assets remaining under his control from which to make the required reimbursement.  We need not address those potential conundrums at this juncture.  At this stage of the proceedings, and on the limited record before us, we conclude only that N.J. Stat. Ann. sec. 3B:24-4(b), which requires that Federal estate tax be apportioned in a manner that preserves for the benefit of a decedent’s spouse, to the extent possible, the benefit of any marital deduction allowed by section 2056(a), provides us insufficient grounds to rule as a matter of law that any estate tax due in this case cannot affect the allowable marital deduction.” 149 T. C. 8, at pp. 73-74.

See above; what did Bernice pay, if anything, to whom and when? Questions of fact.

So Bernice battles on, while the nieces walk.

How artistic.


In Uncategorized on 08/22/2017 at 15:38

No, not the still-controversial 1964 Arthur Miller drama. Rather this is the final unwinding, in ten (count ‘em, ten) pages of Tax Court orders from the wordprocessor of Judge Chiechi, leading those stipulated to be bound by Alphonso v. Com’r, to surrender and accept bondage.

See my blogpost “Rainy Day Woman,” 7/14/16, for the whole shebang.

For a specimen order, see Robin A. Morse & David A. Rogerson, Docket No. 22039-09, filed 8/22/17.

Scrolling through the list of petitioners, I saw the names of two old friends. Tough break, guys.


In Uncategorized on 08/21/2017 at 16:42

As darkness overspread our land, The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Indefatigable, Ineluctable, Ineffable, Incontrovertible, Irrepressible, Illustrious and Irrefragable Foe of the Partitive Genitive (although perhaps in recovery), Old China Hand and Master Silt Stirrer, Judge Mark V. Holmes enlightens us and the Self-Insurance Institute of America, Inc., in Benyamin Avrahami and Orna Avrahami, 149 T. C. 7, filed 8/21/17.

You remember Ben and Orna? No? Then see my blogposts “The Front – Part Deux,” 12/18/15, and “The Fighting Lawyer,” 3/29/16.

Well, now the whole captive insurance business is up for grabs, and Judge Holmes is the man.

The Avrahamis had three jewelry stores and three shopping centers. They also had what they called an insurance company called Feedback, owned by Orna, which paid no claims, but lived up to its name by feeding back to the Avrahamis a lot of the deducted premiums the Avrahamis sent them.

Their CPA turned the Avrahamis on to the Fighting Lawyer, who set up their captive in St. Kitts. I’ve been there. It ain’t much. But the captive filed a 953(d) election to be taxed as a US C Corp, and a Section 831(b) small insurance company election.

Notwithstanding the captive, the Avrahamis insured their multiplex business with US commercial insurers, and IRS has no beef with that. The captive did tax risk, litigation risk, and other exotics.

They also dealt with a St. Kitts outfit that insured against terrorism risks. They also joined a quota share (reinsurance) deal, a favorite of Lloyds of London brokers who were stealing from their Names. Only here it was a roundy-round to move premium money back to the cedant.

The Avrahamis, ever inventive, created an entity named Belly Button, Inc., to make loans to themselves with money from Feedback. Judge Holmes says the “omphaloskeptical” St. Kitts insurance regulators gazed askance at these.

IRS elevated this scam to the “dirty dozen” list in 2015 and made them transactions of interest in 2016. See Notice 2016-66, 2016-47 I.R.B. 745; I.R.S. News Release IR-2015-19 (Feb. 3, 2015). But this is the first such case that went to trial.

The bottom line, despite the overlay of tax breaks for small mutual insurance companies, is whether risk has truly shifted, been diversified (so that “no man is undone, but rather the losse falleth lightlie upon many, and not heavilie on fewe” as the English said in 1601), and has been run like a for-profit insurance company.

Remember Rent-A-Center? See my blogpost “Leading Captivity Captive,” 11/4/16. That captive was OK.

Just not the Avrahamis’.

“But it [the captive] might also be run so that related parties pay the captive deductible insurance premiums of just under $1.2 million a year.  In turn the captive might pay out few if any claims, might make a section 831(b) election so it pays tax only on its investment income, and might quickly build up a large surplus.  Then, if the captive were to be licensed and regulated in a jurisdiction with extremely low reserve requirements and loose rules on related-party transactions, it might lend its surplus back to its affiliates.  This might generate nearly $1.2 million in tax deductions while arguably only moving money from one pocket to another.  Or perhaps the captive could be owned by a Roth IRA, which might mean it could make large dividend payments to its stockholder, creating a form of deductible, yet tax-free, retirement savings.  Or perhaps the captive could be owned by its business owner’s children or an irrevocable family trust, which might enable the avoidance of future gift and estate taxes.” 149 T. C. 7, at pp. 58-59.

There was an insufficient spread of risk on the facts, the terrorism quota share was a true roundy-round, the captive didn’t pay claims until the IRS was all over the Avrahamis, and at the end of the day, Judge Holmes finds it wasn’t a true insurance company.

“We have to find that Feedback’s operations left something to be desired.  It dealt with claims ‘on an ad hoc basis.’  It invested only in illiquid, long-term loans to related parties and failed to get regulatory approval before transferring funds to them.  And we will not overlook the fact that the Avrahami entities made no claims whatsoever against Feedback from its inception in 2007 until March 2013–two months after the IRS sent the Avrahamis documents about the audits of the returns of [Avrahamis’ entities] that suggested Feedback was a sham.  And even the claims Feedback did receive it dealt with in questionable ways.  Most of the claims were approved despite being filed late–the policies required that Feedback be notified within 30 days of the loss ‘as a condition precedent to payment of any benefit hereunder.’” 149 T. C. 7, at pp. 78-79.

And Feedback only had cash and loans to the Avrahamis’ entities. But the caselaw says that adequate capitalization in the state or country of organization is sufficient. And even though in St. Kitts to be an insurance company you only need what you need for a MegaMillions ticket (“all you need is a dollar and a dream”), that’s enough.

The policy language was not of the best (claims-made vs when-occurred), but the Avrahamis produced the Incomprehensible Actuary. Judge Holmes couldn’t figure him out, and I didn’t even try.

Finally, a loan between Feedback and Belly Button was a real loan, although barely, so no income to Orna except interest.

The Avrahamis have a partial escape from the accuracy chops, as one person they relied upon had credentials, full information, and wasn’t a promoter.

The rest of you captors, beware.


In Uncategorized on 08/19/2017 at 00:04

It is well, if you are an attorney drafting a motion for summary J, to make it easy for the judge to decide in your favor. And not only in a motion for summary J.

IRS’ counsel in Talib I. Karim, Docket No. 17407-15L, filed 8/18/17, needs reminding.

And who better to remind IRS’ counsel gently but that Obliging Jurist, Judge David Gustafson? And in a designated hitter, making easy the late night work of the blogger surfeited with family’s overwhelming hospitality.

Of course the motion is accompanied by the usual declaration, in this case of the SO who handled the CDP at issue here, plus a bunch of exhibits thereto.

Unhappily, IRS’ counsel didn’t marshal evidence and lay bare the proofs.

“The motion itself consist [sic] of 21 numbered paragraphs. However, the factual assertions in the motion are not in a section distinct from the motion’s legal argument. Paragraphs 4-9, and 12-13 appear to consist of statements of fact on which the motion is based (interspersed among paragraphs making legal argument). The SO’s declaration authenticates documents that are attached thereto as exhibits, but the declaration does not otherwise state the facts underlying the motion. It may be that support for the motion’s factual assertions could be found in exhibits, but we decline to take on that project.” Order, at p. 1.

Maybe I’m just an old fogey, but legal arguments get made in a memorandum of law or in a brief, not in the motion itself. Just the facts, ma’am, as the late Jack Webb used to say.

Tal is flying solo in this one, and judges tend to make life a wee bit easier for the hapless pro se.

Howbeit, “Ideally, whether or not the petitioner is self-represented, a motion for summary judgment will include (either in the motion itself or in an accompanying memorandum) a separate section of numbered paragraphs stating the proposed undisputed facts, and each factual assertion will be supported by a citation to a declaration or an exhibit. The Court can therefore more efficiency evaluate the motion, and the non-movant can more fairly be required to respond to the factual assertions.” Order, at pp. 1-2.

So, IRS counsel, your motion is denied without prejudice. If you decide to do it right, you need not resubmit the declaration and exhibits.

I do not recommend asking the judge to do your work. It is an out-of-title assignment.


In Uncategorized on 08/17/2017 at 18:15

I must again apologize for loquacity and lame attempts at humor today. I throw myself on the mercy of the Court, and hope Judge Posner will forgive me.

As promised, here’s Kurt Hickam and Michelle Hickam, 2017 T. C. Sum. Op. 66, filed 8/17/17, a small-claimer from STJ Diana L. (“Sidewalks of New York”) Leyden. It’s another real estate pro with dodgy substantiation, so nothing novel about that. And Kurt is the only one playing this hand.

The interesting part is that Kurt wants to add in his mortgage brokering hours on top of his running three (count ‘em, three) rental properties for self and family, for which he did everything but keep good time records.

Kurt claims his mortgage brokering is enough of  a real estate activity to qualify within Section 469(c)(7)(C).

“Real property trade or business.–For purposes of this paragraph, the term ‘real property trade or business’ means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.” 2017 T. C. Sum. Op. 676, at p. 13.  (Emphasis by the Court.)

“Mr. Hickam focuses on the word ‘operation’ and argues that his mortgage brokerage services and his loan origination services are performed in trades or businesses in real property operation because the underlying assets in both services are real property.” 2017 T. C. Sum. Op. 66, at p. 13.

Kurt also gripes that IRS retroactively applied CCA 201504010 (Dec. 17, 2014), which said mortgage brokerage wasn’t real estate activity. But that’s nothing new, says STJ Di.

“The legislative history of the statute supports the consequence of this distinction.  Congress considered including ‘finance operations’ in the activities listed in section 469(c)(7)(C) but specifically did not do so.  See H.R. 2264, 103d Cong., sec. 13143 (1993); H.R. 1414, 102d Cong. (1991); S. 1257, 102d Cong. (1991); H.R. 3732, 101st Cong. (1989); S. 2384, 101st Cong. (1989).” 2017 T. C. Memo. 66, at p. 16.

Mortgage brokering, however much time Kurt put in, doesn’t get into the equation.

Kurt relies on a case where a real estate and mortgage broker got treated as a real estate pro, but IRS and broker stipulated she was a pro as to three rental properties she owned, without taking any brokerage time into account. Apparently her timesheets were better than Kurt’s.

But STJ Di gives Kurt a bye from the 20% chop IRS is holding over him.

“The question of whether Mr. Hickam was a real estate professional was partially resolved on technical grounds—whether his mortgage brokerage services and loan origination services constituted real property trades or businesses under section 469(c)(7)(C).  Although the Court found that neither service constituted a real property trade or business and notwithstanding his failure to maintain adequate records, the Court finds that Mr. Hickam acted reasonably and in good faith in taking that position for the years at issue.  Petitioners are therefore not liable for a section 6662(a) accuracy-related penalty….” 2017 T. C. Memo. 66, at pp. 25-26.

The taxpayer’s friend – that’s STJ Di.




In Uncategorized on 08/17/2017 at 17:40

Sorry, guys, it’s been a tough day. And today’s Sum. Op.s  were uninteresting, although I will blog Kurt Hickam, under separate cover.

And I’m subject to promissory estoppel until tomorrow to take up a new rant.

But to the rescue comes The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Incontrovertible, Indefatigable, ineluctable, Ineffable, Imperturbable and Incomparable Foe of the Partitive Genitive (although he is getting better, I must admit), Old China Hand and Master Silt Stirrer, Judge Mark V. Holmes.

He sends out a designated hitter, Paza Staffing Services, Inc, Docket 6881-12R, filed 8/17/17. Yes, 2012; the case is aged five years, while VSOP Cognac needs to be only four-and-a-half years old, I’m told. And the Docket suffix “R” is apparently a marker for retrofitting retirement plan cases.

This deal is the device of a certain Doctor Z (name omitted), who puts all the shares of Paza in an ESOP, of which he is sole trustee and beneficiary. The value of said stock grows from about $12K at inception to $333K in a year, which is the year at issue.

During the year at issue, Paza leases five employees from Golden Gate, another company of which Dr Z is sole owner, shareholder, officer and director. He pays himself an $83K annual salary from Paza during the year at issue. None of the leased employees from Golden Gate participate in the Paza ESOP.

Dr Z disputes IRS’ top-heavy disqualification of the Paza ESOP. He’s the sole participant, and anyway he doesn’t own the Paza stock, the ESOP does.

OK, but is it only Paza with which we’re concerned?

“The primary issue in this case stems from I.R.C. § 410(b)(1)(B), which requires qualified plans to benefit ‘a percentage of employees who are not highly compensated employees which is at least 70 percent of the percentage of highly compensated employees benefitting under the plan.’ But what group of people do we consider in our math? If we only need to include Paza employees in the group, then we need only confirm that [Doctor Z] is covered because he is Paza’s only employee. But Paza loses its case if we must include Golden Gate’s employees in the group. See I.R.C. § 410(b)(1)(B).” Order, at p. 3. (Footnote omitted; like the Ancient Mariner, Judge Holmes considers only one of three possible employee groups, but everyone agrees the other two are irrelevant).

So how does the IRC marry corporations for ESOP purposes? Why, Sections 1563(a)(2) and (f)(5) perform the ceremony. Where fewer than five (count ‘em, five) individuals own at least 80 percent of the total value of shares of all classes of stock of each corporation, and more than 50 percent of the total combined voting power, with this clause I thee wed.

So what, says Dr. Z? I don’t own any Paza stock, the ESOP does.

This is what, says Judge Holmes. “But [Dr Z] is the ESOP’s sole beneficiary, and he therefore has constructive ownership of the stock. I.R.C. § 1563(e)(3)(A). That means, that for our purposes, [Dr. Z] owns 100 percent of the value of the shares, and 100 percent of the voting power of Paza and Golden Gate. See I.R.C. §§ 1563(a)(2) and (f)(5). Therefore, Paza is a controlled group — consisting of Paza and Golden Gate. Id.” Order, at p. 4 (Footnotes omitted).

To end the suspense, the omitted footnotes say that Dr Z claimed his rights in the ESOP hadn’t yet vested for the year at issue. Now it was Judge Holmes’ turn to say “So what?” Vesting is not mentioned in the statute. Besides, Section 1563(a)(3) talks about an actuarial interest, and you got that.  Order, at p. 4, Footnotes 4 and 5.

So the five Golden Gaters are in, Dr Z and his ESOP are out, retroactive to year-at-issue and all subsequent years.