In Uncategorized on 09/11/2018 at 18:07

He’s already given me the stuffing for  “Basis for Dummies,” 11/24/11, and “The Sum of Its Parts,” 3/12/12, so who better to deal with basis in all its permutations, variations, combinations and tergiversations, than The Great Dissenter/Concurrer, a/k/a The Judge Who Writes like a Human Being, Master Silt Stirrer and Old China Hand? Of course I mean Judge Mark V Holmes.

Today he has a designated hitter, Donald Bailey & Sandra M. Bailey, et al., Docket No, 5477-14, filed 9/11/12. And the subject is basis. Carryover type.

Don & Sandra bought 10% of the stock of a Sub S formed by two dudes with a software program. The dudes had the software in an LLC, and swapped the software for the Sub S stock. Everyone agrees that the software, being self-created, had a basis of zero in the hands of the dudes when they transferred same to Sub S, and they only got Sub S stock in exchange.

Sounds like the plainest vanilla Section 351 tax-free incorporation. We did a lot of those years ago.

“The Baileys, as shareholders of the S corporation, argue that it got a stepped-up basis in the software. The Baileys have filed two motions for partial summary judgment and ask for oral arguments on their first motion.

“Both parties have fully briefed their arguments, so oral arguments aren’t necessary to decide the Baileys’ partial summary-judgment motions.” Order, at p. 2.

Now here’s where it gets cute.

“After the transaction, the corporation increased its basis in the software from zero to around $9.7 million and began to depreciate it. This enabled the company to offset its cash income and therefore the amount of passthrough income taxable to its shareholders, including the Baileys. The Commissioner says the basis of the software should have stayed at zero. This disagreement is important — it’s the difference between the Baileys’ having taxable income or not.” Order, at p. 2.

Don & Sandra get a brief lesson in basis from Judge Holmes.

“The Code tells us that when there is no boot in a section 351 transfer, the basis of the stock the shareholders get must be the same as the property exchanged. I.R.C. § 358(a). The corporation gets a carryover basis in the property it receives too. I.R.C. § 362. So the corporation’s basis in the software should have been the same as it was before the transaction — zero. The Baileys point to Revenue Ruling 85-164, but this ruling doesn’t help them. This ruling tells taxpayers how to allocate basis among different stocks and securities received in exchange for property contributed to a corporation, not how to increase the basis of that property to its fair market value. That means the Baileys haven’t shown they are entitled to judgment as a matter of law here.” Order, at p. 2.

But Don & Sandra aren’t done yet. They attach new Forms 1040 to their motion, but all a 1040 is, is a taxpayer’s assertion (and maybe an admission). They’re not proofs of their correct tax.

Don & Sandra lose both motions.

But ya gotta like their never-give-up attitude. They ask for Section 7430 admins and legals. No, says Judge Holmes, you haven’t prevailed, “at least not at this stage.” Order, at p. 2.

Judge, on this record, I wouldn’t bet the ranch that they prevail at any stage.

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