Attorney-at-Law

A TOUGH DAY FOR IRS

In Uncategorized on 05/07/2018 at 17:44

IRS did win the Boss Hoss TEFRA throwdown.  But when the remainder of Dynamo Holdings Limited Partnership, Dynamo, GP, Inc., Tax Matters Partner, 2018 T. C. Memo. 61, filed 5/7/18, came around, IRS was only able to win the undervalued transfers among related parties.

True, there were big bucks involved, heavy-duty chops and withholding penalties (FIRPTA style), and IRS’ experts prevailed on the low-ball numbers.

But Dynamo, and its buddy Beekman, proved their somewhat unorthodox loan system did create real indebtedness, which was accounted for and paid off. Of course, IRS had no one to challenge Dynamo’s ace CPA, who spent “…thousands of hours analyzing the financial records of Dynamo and Beekman and selected records of Canada Square, each of which maintained separate books.  He prepared schedules of all the transactions recorded by Dynamo and Beekman from 2005 to 2011.” 2018 T. C. Memo. 61, at pp. 14-15.

And when it came to whether a commercial lender would have lent to Dynamo, once again Israel (“Bring Home the Bacon”) Shaked, the hero of my blogpost “The Scottish Play,” 6/19/12, works his magic. Of course, IRS’ expert would better have stayed home. He employed some method known as the KMV-Merton model.

“The KMV-Merton model increases the probability of default over time.  The Court questioned Mr. L on the nature of this assumption in his report.  The Court asked Mr. L whether over a 10-year period, where each year the company had a 2% chance of default, the company would have a 20% chance of default.  Mr. Lucas said that it would.  Yet when the Court asked Mr. L:  ‘If I were to flip a coin twice, do I have a 100 percent chance of getting heads in one of those two flips?’, Mr. L replied ‘No’ and then added that “I may have misresponded to the additive nature of the probability of default’.  Mr. L’s original report was riddled with errors, and his testimony indicated a lack of familiarity with  probabilities, the very subject about which he testified.  After corrections for errors, Mr. Lucas’ report largely supported  petitioners’ position that Dynamo would have been able to borrow from a third party lender.” 2018 T. C. Memo. 61, at pp. 21-22 (Name omitted).

I suppose we taxpayers paid for this dude’s opinion.

Gwen Kestin is back. You remember Gwen from my blogpost “Gustafson on Evidence,” 2/1/18.

Well, IRS gets summary J that Gwen’s amended return was frivolous. But IRS seemed to think when Gwen sent them a photocopy of her frivolous 1040X in response to the Letter 3176 that IRS sent her, that was frivolous return number 2, so IRS zonked Gwen with a second $5K chop. And the chops kept on coming as Gwen and IRS ping-ponged her forms, until Gwen is up to $35K and counting.

So how many chops are on the table?

Ex-PFC Wintergreen, where are you now that we need you?

By the way, the Boss Hoss sign-offs aren’t clear on the Form 8278. But maybe the “presumption of regularity” would solve the problem. So let the parties brief that one.

 

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: