In Uncategorized on 07/12/2018 at 18:19

Martin W. Washburn, Jr., 2018 T. C. Memo. 110, filed 7/12/18, owned a C Corp which was majority member of an LLC. Martin was “corporate secretary” of the LLC, although STJ Diana L. (“Sidewalks of New York”) Leyden doesn’t know how the LLC was taxed (2018 T. C. Memo. 110, at p. 3, footnote 3).

Howbeit, Martin “…and four other individuals (hereinafter sometimes collectively referred to as codefendants) participated in a scheme to defraud the Overseas Private Investment Corporation (OPIC) to obtain a loan of about $9.4 million for [LLC].” 2018 T. C. Memo. 110, at p. 3. OPIC was a US government agency whose aim was to encourage foreign investment by US small business companies.

Martin made the application as sec’y of the LLC, claiming his C Corp was the “sponsor” that is, the US investor, and was putting up a big chunk of cash, with OPIC throwing in the rest of our money (that is, our tax dollars at work).

Martin and the co’s worked a put-and-take with the cash that the C Corp supposedly ponied up. Their offshore enterprise first built a grain-drying facility in Vahenurme, Estonia, bought a bakery in Valga, Estonia (thus the title of this little tale), and later built a mill in Viljandi, Estonia.

Well, the Estonia deal turned out to be half-baked (sorry, guys).

“…disputes arose over the management and control of the milling and bakery operation.  It was during the course of these disputes that OPIC discovered that GSP had misrepresented certain facts in its loan application.  Contrary to the statements in the loan application, the investment contributions to [LLC] by [C Corp] and one other [LLC] owner [member?] were in substance a disguised loan from one of the codefendants.  Petitioner and his codefendants withheld bank statements from OPIC that showed that the investment contributions by [C Corp] and one other [LLC] owner [member?] were immediately distributed to the codefendant who made the loan.” 2018 T. C. Memo. 110, at p. 4.

In other words, the LLC members cashed out and left us (the US taxpayers) holding the cliché. They also engaged in buying equipment from themselves at inflated prices, and lied to OPIC.

Martin and the cos went down in some unstated-USDC, with $400K in restitution being ordered, as well as jail time.

The fight is about whether Martin gets a tax deduction for the $400K. Martin never got a SNOD, because he first claimed the $400K as withholding, and the CP23 IRS issued Martin taking that away doesn’t rate a SNOD; see Section 6213(b)(1).

Martin changed course, abandoning his claims that the $400K was estimated tax payments or a claim-of-right credit per Section 1341. Now he claims Section 162 business expense or Section 165(c)(2) transaction entered into for profit.

STJ Di looks at the stip the parties entered into. Remember, Tax Court judges love stips; who wants to sit through a lot of blathering witnesses and bombastic lawyers, when the facts are cut and dried?

The sacred Branerton case is exhumed, and veneration paid to it and its kindred.

“The stipulation process is considered ‘the bedrock of Tax Court practice’ and acts ‘as an aid to the more expeditious trial of cases’.  Branerton Corp. v. Commissioner, 61 T.C. 691, 692 (1974).  Stipulations narrow controversies to their essential issues in dispute. Generally, a stipulation is binding on the parties, and the Court is bound to enforce it.  Rule 91(e) provides an exception by permitting relief from the binding effect of a stipulation where justice so requires.  The Court generally enforces stipulations unless ‘manifest injustice’ would result. Absent manifest injustice, the Court ‘will not permit a party to a stipulation to qualify, change, or contradict a stipulation in whole or in part’.  Rule 91(e).” 2018 T. C. Memo. 110, at pp. 13-14. (Citations omitted, but they’re the usual “canned brief” types).

Remember, the Section 162 and the Section 165(c)(2) deductions are above-the-line, that is Schedule C type reductions in gross profit that reduce AGI before the Schedule A below-the-line deductions figure in. They’re not subject to the phase-outs for Schedule A deductions, like miscellaneous.

But Martin stiped to miscellaneous characterization.

“However, petitioner’s arguments on brief that he is entitled to an above-the-line-deduction for the restitution payments under section 162(a) or section 165(c)(1) are contrary to the parties’ stipulations.” 2018 T. C. Memo. 110, at p. 15. And Martin doesn’t yell “foul!” so he’s stuck.

So Martin is relegated to unreimbursed employee expense deduction, the now-extinct reef upon which so many petitioners have foundered. So does Martin. While the C Corp treated him as an employee (W-2 type), and the LLC always called him “corporate secretary,” the record is too scanty to establish him as an employee of the LLC. And the LLC is where the trouble arose, hence the restitution. And the restitution was partial repayment of the fraudulent loan, and repayment of loan proceeds (receipt of which wasn’t taxed) isn’t a deduction.

As for promoting Martin’s business, he hasn’t shown how paying back what he and the cos stole via the LLC helped his C Corp’s business.

Finally, although IRS and Martin’s counsel argued about whether restitution is punitive or compensatory, STJ Di doesn’t go there.

“Before a taxpayer is entitled to deduct a loss under section 165(c)(2), he must demonstrate that he has entered into a transaction the primary purpose of which was to make a profit. The business that an officer conducts for a corporation is not his own business.” 110 T. C. Memo. at p. 23.

If anyone made a profit, it was the LLC. The LLC was faking and baking in Estonia. So Martin is out. No deduction.

Takeaway- Must I say it again? Stipulations are the IEDs of litigation; they look so innocent, until they go off, taking your case with them.


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