In Uncategorized on 12/21/2018 at 17:02

My distaste of TEFRA and its ill-begotten progeny is well-known. But today Judge Mark V Holmes throws yet another monkey-wrench into the now-obsolescent 1983 machinations in Hurford Investments No. 2, Ltd., Hurford Management No. 2, LLC, Tax Matters Partner, Docket No. 23017-11, filed 12/21/18.

If the name is familiar, but the context unclear, check out my blogposts “As Clear As Anything in the Code,” 4/17/17, and “As Clear As Anything in the Code – Roger That,” 4/25/17.

You’ll remember the Hurford Managers won. So now they want Section 7430 admins and legals.

Well, Judge Holmes finds IRS was justified. ”There was little if any caselaw construing the various sections of the Code that were involved. And respondent’s position that the phantom stock kept its character as deferred compensation (and thus ordinary income) didn’t prevail in large part because of the extraordinarily strange estate planning and execution that had this deferred compensation move to a partnership that then misreported its character, and the resulting closing agreement that effectively changed it. And then there was a very close question about whether inclusion of the value of the phantom stock in Thelma’s estate changed the taxable value of that phantom stock in petitioner’s hands.” Order, at p. 6. Although the Hurford Managers won, they didn’t prevail.

So what price the Palmolives, where that Obliging Jurist Judge David Gustafson wasn’t sure that they showed good faith in relying on a 1 Cir reversal of a Tax Court decision, with no other appellate learning in sight? The Palmolives used no such jiggery-pokery as the Hurford Managers. See my blogpost “Gude Faith, He Maunna Fa’ That,” 12/14/18.

But this is just the vorspeil. The Hurford Managers made a qualified offer to pay less than what IRS wanted. See Section 7430(c)(4)(E)(i). If you make a qualified offer, that is, offer to pay less than the deficiency, and the decision comes in at or below your number and it settles all your liabilities, you win.

But wait just a minute.

“The reason we have to ask this threshold question is that section 7430(c)(4)(E)(ii)(II) excludes from the rules on qualified offers any offer in ‘any proceeding in which the amount of tax liability is not in issue….” Order, at p. 7. And there’s a laundry list of cases where Section 7430 doesn’t apply, but everyone agrees this case isn’t on the list.

Until Judge Holmes’ contrary disposition gets on board.

“The short answer is that it’s a TEFRA partnership proceeding. There’s no notice of deficiency in such proceedings; there is a notice of final partnership administrative adjustment (FPAA). I.R.C. § 6226.4 And when we enter a final decision in a TEFRA partnership proceeding, we don’t enter a decision that says a particular taxpayer has a deficiency of a particular amount for a particular tax for a particular year. We instead ‘determine all partnership items of the partnership for the partnership taxable year to which the notice of final partnership administrative adjustment relates, the proper allocation of of [sic] such items among the partners, and the applicability of any penalty, addition to tax, or additonal [sic] amount which relates to an adjustment to a partnership item.’ I.R.C. § 6226(f).

“This distinction between TEFRA cases and our ordinary deficiency cases makes us wonder if this case is even one in which a qualified offer is possible. The question is whether a TEFRA case is one ‘in which the amount of tax liability is not in issue.’ I.R.C. § 7430(c)(4)(E)(ii)(II).” Order, at p. 8.

And the Hurford Managers wanted to fight over the characterization of the gain on the phantom stock and how it flowed through to the partners.

“The offer that petitioner later made not only fails to settle the “liability” of HI-2 — which, as a partnership, doesn’t have a tax liability at all — but also is not limited only to the adjustment in the FPAA, and tries to settle the effect of this partnership-level proceeding on the liability of petitioner’s individual partners.” Order, at p. 11.

But remember BASR Partnership v. United States, 130 Fed. Cl. 286 (2017). USCFC said that a qualified offer was made, and upheld it.

Well, Judge Holmes doesn’t care about USCFC, any more than Judge David Gustafson cares about 1 Cir in a 7 Cir case.

BASR assumes that the partners’ liabilities were adjudicated; they weren’t. It still needed computational adjustments, even if affected items weren’t in play. “We agree with our sister court that partnership-level proceedings affect tax liability of taxpayer-partners, but that doesn’t mean such proceedings determine ‘the amount of the taxpayer’s liability.’ I.R.C. § 7430(g)(1)(B) (defining qualified offer).” Order, at p. 12.

And on top of this 13-pager on a rainy, foggy December Friday afternoon, Judge Holmes doesn’t even designate this order.

I wonder why I keep doing this. I guess I just love this stuff.

Happy holidays.

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