Attorney-at-Law

ALL IN THE FAMILY

In Uncategorized on 11/07/2017 at 16:19

Don’t run your family business this way. As a cautionary lesson,, take a gander at VHC, Inc., 2017 T. C. Memo. 220, filed 11/7/17.

Favorite son Ron was running a number of his own companies, some of them in direct competition with the family business. He had built the family company from a local into a national, but then his companies went sour and his promissory notes (some signed, some rubberstamped, some none thereof) went even sourer.

The family C Corp kept advancing money to Ron, even when their own capital was eroded and their lenders walked away. Then they couldn’t get performance and completion bonds to bid some projects.

It takes Judge Kerrigan fifty (count ‘em, fifty) pages to go through the non-loans to Ron and Ron’s wheeling and dealing, but the bottom line is, no bad debt write-off. No arms’-length lender would lend on the terms that VHC did to the favorite son.

And the advances weren’t ordinary and necessary business expenses. A business might advance money to another to shore up goodwill or seek a profit therefrom, but there has to be some hope of an economic return. Ron was under water, and what put the finishing touches on it was this gem.

“By 1999 [Ron’s company] and its affiliates were operationally in trouble.  Advances made by VHC did not remedy Ronald H.’s problems, as [Ron’s company] continued to struggle and in 2001 could not pay its bills.  [Bro] Timothy testified that if VHC had not guaranteed Ronald H.’s and his related companies’ debts in 2002, the companies would have gone into bankruptcy.  VHC continued to make advances to Ronald H. and his related companies throughout the years at issue knowing that they would not be repaid.” 2017 T. C. Memo. 220, at pp. 62-63.

Thanks, Bro, good job. Your eight (count ‘em, eight) male lawyers must have smiled their sweetest smiles as your case went down the drain, while the three (count ‘em, three) women lawyers from IRS must have exchanged behind-the-back fist-bumps.

Equitable recoupment doesn’t help with the interest VHC accrued on Ron’s notes that weren’t paid. Equitable recoupment applies only when two taxes have been applied to the same item inconsistently, and refund of one of the two taxes is barred by SOL.

“Our determination regarding whether VHC’s advances represented bona fide debt does not automatically establish that taxes it paid for closed tax years were erroneously applied.  Application of the equitable recoupment doctrine would require the Court to make further determinations regarding the amount and character of VHC’s purported accrued interest payments from 1997 through 2003.  It is outside the scope of the equitable recoupment doctrine for this Court to make such determinations for taxes collected 20 years ago.” 2017 T. C. Memo. 220, at p. 77.

If you’re confused, so am I. I think what Judge Kerrigan is really saying is, you made your bed, now pleasant dreams.

But VHC does get some giveback on a litigation with a subcontractor that settles years later, requiring a payment by VHC and relinquishment of a claim for which VHC had accrued income years before.

The rest is gone.

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