And IRS Blows the SOL on Mike D’s IRA

Mike D is more properly known as Michael Deluca, the star of Michael Deluca & Elizabeth Deluca, Docket No. 548-18, filed 1/31/19. National Iron is the bank wherein Mike D stashed his Roth IRA, and from which Roth IRA he kept on borrowing from 2011 through 2016 (the dates matter), paying back the loans punctually.

Iron Mike, of course, is that eminent jurist and author of the above-cited designated hitter,  ex-Ch J Michael B (“Iron Mike”) Thornton.

Now my learned readers will exclaim as one, “Section 4975!” And they’re right. Some may even quietly remark “Prohibited Saves the Day, 4/10/18,” recalling my blogpost and the case reported therein, to which both IRS and ex-Ch J Iron Mike continually refer. And even more quietly “Section 408(e)(2)(A)” may be heard.

“On their income tax returns for all relevant years, petitioners treated [Mike’s] IRA as an existing IRA; they did not disclose the loans to Mr. Deluca. Petitioners assert that this was an innocent mistake. In a notice of deficiency dated October 19, 2017, respondent determined in part that during 2014 petitioners had a deemed distribution of $198,048 from their Roth IRA due to prohibited transactions (i.e., the loans from [Mike’s] IRA to Mr. Deluca) under section 4975(c)(1)(B).” Order, at p. 2 (Footnote omitted).

Mike D and Elizabeth want summary J. Mike’s IRA cratered in 2011 when he made the first loan, not 2014.

IRS claims duty of consistency. Mike D and Elizabeth never reported the loans and always treated Mike’s IRA as if Mike D hadn’t cratered it.

Except. The earlier case from my blogpost above referred to is Marks, and ex-Ch J Iron Mike discourses thereon.

“We agree that respondent’s concession in Marks does not necessarily preclude him from invoking the duty of consistency in this case. In making his argument, however, respondent misses the larger point. The issue that the Court raised sua sponte in Marks–the consistent application of the prohibited-transaction rules for earlier years–is the same issue that petitioners have raised to defend against respondent’s determination in the notice of deficiency. In Marks the duty of consistency had no relevance because, if for no other reason, it was the Court, rather than the taxpayers, who raised the issue. In those circumstances there was no issue as to the taxpayer’s taking inconsistent positions, and consequently there was no meaningful basis for the IRS to invoke a duty of consistency defense. In the case presently before us, such a defense takes on no greater relevance by virtue of the fact that it is petitioners, rather than the Court, who have raised the issue. In either circumstance, the question has nothing to do with any inconsistency in the taxpayer’s factual representations and everything to do with the correct application of the law.” Order, at p. 3.

We all know that the duty of consistency means a taxpayer can’t take one position in a year already closed, and a contrary one in another, open year. Pick your position and stay with it. But duty of consistency applies to facts; you can take inconsistent positions on the law. But Mike D did neither; he always maintained his IRA was legit from beginning to end, before he invokes Section 408(e)(2)(A).

And ex-Ch J Iron Mike believes in statutes, specifically the  SOL.

“Respondent’s basic problem, as he acknowledges, is that he has blown the statute of limitations for petitioners’ 2011 tax year. Be that as it may, the judicially crafted doctrine of the duty of consistency cannot displace the detailed statutory rules governing the tax treatment of IRAs. Under the plain terms of the statute [Mike’s] IRA ceased to be a valid IRA as of the first day of 2011, the year in which the prohibited transactions first occurred, and the IRA was treated as distributing all its assets on that same day. See sec. 408(e)(2)(A) and (B). To adopt respondent’s position would essentially mean rewriting the statute to postpone the consequences of prohibited transactions indefinitely into the future, depending upon when the IRS might happen to discover them. The intention and effect of respondent’s position would be to toll the statute of limitations for the collateral tax consequences of a prohibited transaction.” Order, at p. 4.

Mike D wins. Rule 155 beancount for conceded items to follow.

Even though he’s not coaching on Sunday, Nick Saban has won the big one, in 2590 Associates, LLC, 5615 Associates, LLC, as Successor in Interest to, 5615 Associates, LP, Tax Matters Partner, 2019 T. C. Memo. 3, filed 1/31/19, Judge Goeke raising his hands for the winning play.

Nick was in a real estate deal with his buddy Joseph Spinosa. Joe needed the readies to get started while negotiating with KeyBank (the firm I was then in represented them years ago), and Nick stumped up $2 million plus on a note from a couple Joe’s LLCs (hi, Judge Holmes).

If you want to read an extensive description of how real estate development deals died during the Black ’08, you can read Judge Goeke’s exhaustive account. Joe was an optimist, like all developers. As with all my developer clients, his motto was that of Tug McGraw: “Ya Gotta Believe.”

Nick’s note got renegotiated a couple times (see above) between 2006 and 2008, but as Joe’s negotiations and renegotiations with lenders spiraled downward, Nick wasn’t getting paid.

But his note, at each iteration, was not a novation under LA State law (no new parties, no extinguishment of debt), provided for stated above-market interest, stated maturity, attorneys’ fees in case of default, and identifiable event of default.

Nick couldn’t manage Joe’s operations, although they were both in some of Joe’s deals.

Well, Joe’s development deal craters. Nick put his note in an LLC he got from Joe, because he didn’t want anyone in LA to know he was around after he turned to the Crimson side.

Nick took a bad debt deduction through the LLC, claiming the loan went south in 2011. IRS only disputed this in pretrial brief, so IRS has burden of proof, and doesn’t sustain it.

Nick proves the debt was real, not a contribution to capital in Joe’s deal. The thirteen (count ‘em, thirteen) factors 5 Cir. uses to unpack real indebtedness doesn’t long detain Judge Goeke.

“Respondent has conceded that the Saban loan was bona fide; i.e., the cash transfer from Mr. Saban to [Joe’s outfit] created a bona fide debt between Mr. Saban and [Joe’s outfit].  The debt was evidenced by three promissory notes with fixed maturity dates.  Each note provided for an interest charge, increased the interest rate upon default, and provided for the payment of attorney’s fees for any collection actions.  Upon default, Mr. Saban negotiated with [Joe’s outfit] to ensure repayment, first by extending the maturity date for one year (the 2007 note) and a second time by again extending the maturity date (the 2008 note) after which he transferred the note to [his LLC] as a capital contribution, placing the risk of the debt with the company.” 2019 T. C. Memo. 3, at pp. 23-24.

IRS claims the transfer to Saban’s LLC extinguished the debt, but Judge Goeke says no.

Repayment wasn’t limited to the success of this deal, the cash Nick advanced wasn’t used to buy capital assets, and Joe’s outfit wasn’t thinly capitalized. And Joe testifies how experienced he is, and how he was sure the deal would work.

Nick is ahead as the game ends.

IRS has Vivian Ruesch, Docket No. 2177-18L, filed 1/30/19, on a schneid, as the cardplayers say, and ex-Ch J Michael B (“Iron Mike”) Thornton doesn’t even need to take a nibble from the dictionary to see Viv off in this designated hitter.

Viv had her $63 State tax refund grabbed to satisfy a $300 shortfall, which, together with a grab of overpayments still in play, extinguished her 1040A liability for the year at issue. Thus, no SNOD. Nevertheless, Viv sent in Letter 12153 concerning the NFTL IRS had filed, but IRS withdrew the NFTL after Viv’s equivalent hearing ended with a zero balance NOD.

Meanwhile, IRS claims the 10K penalty for nonfiling foreign partnership (Form 8865) or foreign corporation (Form 5471) returns for that same year, and gives Viv a NFTL for six (count ‘em, six) years’ worth of Section 6038(b) $10K annual chops. Viv files Form 9423 (Collection Appeal Request) and Letter 12153, which IRS first claims was untimely, but as it was faxed to the RA who was handling the 1040A matter, IRS concedes it was timely, but the matter is moot.

Ex-Ch J Iron Mike wants to toss Viv’s original petition, as there’s no 1040A left.

Viv’s counsel claims the 12153 covers the NFTL for the six years’ chops.

“Petitioner contends that the case is not moot because ‘there is currently outstanding liability for the [year at issue]’ as relates to the section 6038(b) penalty. Petitioner further contends that ‘res judicata precludes respondent’s determination and assessment of a section 6038(b) penalty’ because, petitioner says, respondent’s decision letter constitutes a final determination that petitioner owe [sic] no tax, interest, or penalties for [year at issue].” Order, at p. 5.

I give Viv’s counsel a Taishoff “Good Try, Second Class.”

Administrative proceedings give no rise to res judicata, as that applies only to judicial proceedings. In any case, Viv has her shot with Appeals, and can petition any NOD, whether for year at issue or the other five, once Appeals decides them.

IRS can claim more types of tax or chops tax due for the same year, and if any of them is unripe when the other is determined, Tax Court is open as soon as it ripens.

I’m taking Jerry Stoller and Mike Lieber’s words to Carlo Donida’s 1963 torcher to intro another Judge Mark V Holmes designated hitter, as he goes back to 1963 to conclude that, indeed, H R B-Delaware, Inc. & Subsidiaries, Docket No. 28129-12, filed 1/29/19, has nothing.

At least, nothing by way of franchisee rights in the multifarious successors to the two young men who formed the Best Little H&R Block Tax Prep Franchise in Texas. Way back when in 1963, before the FTC and the several States got into regulating franchises, they were simply defined by the written agreement. And that provided for cancellation by the franchisor, noncompetition from the franchisor, and that the franchise was a personal, nonassignable license.

Fast forward. The original C Corp the two young men formed became a Sub S in 2000, with heavy-duty BIG (Built-In Gain tax) if (a) the franchise rights were worth anything at that point, and (b) they subsequently unloaded the franchise rights.

As a result of a franchisee class action when franchisor tried to market its software to individuals, cutting out the franchisees, the Sub S settled out. The settlement modified the 1963 agreement in 2000 to provide that all goodwill belonged to franchisor, franchisor could buy out franchisee for a formula, allowed assignment on consent not to be unreasonably withheld, and took away any right of franchisee to retain franchisor’s name, even if franchisor breached.

H&R buys out H-R-B Delaware & Subs in 2008 for $100 million. Part of that might be capital, but the BIG gets taxed as ordinary (35% for year at issue). H-R-B Delaware claims BIG $11.9 million, IRS says $28.4 million.

But H-R-B Delaware shifts ground, says franchise rights worth zero. And wants summary J.

I’m sure by now that those of my readers who haven’t nodded out are saying “Summary J for valuing intangible intellectual property? No way.”

“Way,” says Judge Holmes.

Though IRS claims other rights besides franchise rights are involved in the sale, the SNOD gives the $28.4 million valuation and the Form 886-A says only “franchise rights.”

But here’s a hint for IRS. “This is sufficient to let us conclude that the dispute between the parties is limited to the value of those ‘franchise rights.’ (If the Commissioner does dispute the value of other intangible assets that petitioner might owe BIG tax on, we note our Rules treat motions to amend pleadings at this stage of the litigation liberally.).” Order, at p. 5 (misdesignated as number 2 in original).

The old caselaw says that where the franchisor can terminate the franchise at a date certain without breach by franchisee, and where the franchise is personal and nonassignable, the franchisee has nothing to sell.

IRS argues that providing services is different than selling goods, but that’s a nonstarter. “We don’t see how that makes a difference in the value of franchise rights, or closely associated concepts like good will and going concern. The cases don’t make this distinction and the common element in all of them is that a franchisee under these old contracts had no intangible asset of value apart from the right to do business under the franchisor’s name.” Order, at p. 7 (misdesignated as number 4 in original).

The test date for BIG is the first day of the year wherein the C Corp elected S Corp. That was before the settlement and modification of the 1963 agreement. On that date, H-R-B Delaware had nothing.

I give H-R-B Delaware’s counsel and tax planners a Taishoff “Good Job, First Class.”

Sing it, Ben E. King!

I place the question mark because the old maxim is so ingrained that no excuse seems possible. The old maxim is that misinformation, disinformation, misconstruction of law and regulation, and misdirection of taxpayers, by IRS servants, agents and employees does not excuse the taxpayer if s/he follows any thereof. The statute and regulations are paramount; all else is irrelevant. Believe IRS personnel at your peril.

Or maybe not.

Here’s Judge James S (“Big Jim”) Halpern, revisiting James L. McCarthy, Docket No. 21940-15L, filed 1/29/19 (hereinafter referred to as “Poor Jim”), and Poor Jim’s trusty attorney (hereinafter referred to as “Mr A”)..

All y’all will remember Poor Jim and his trust, but just in case the shutdown wiped your memorybank, see my blogposts “Futility,” 12/10/18, “When – Reprise,” 10/31/18, “Big Jim, Poor Jim,” 3/31/17, and “The Twelfth of Never,” 1/18/17. You see that Poor Jim has frequent litigator points here.

Appeals bounced Poor Jim’s OIC and PPIA after Mr A concluded there was no use sending in fresh financials, because the SO first told him to hold while Area Counsel pondered the matter, and after Area Counsel confirmed the SO’s view, the SO said Appeals was sticking to the trust-as-nominee.

In the last-named of my above blogposts, Judge Big Jim wanted to know if IRS was claiming that failure to update financials was a separate basis for bouncing the OIC and PPIA, regardless of the trust angle. And if IRS did so assert, let Mr A show that he was right to refuse to do so.

“In support of his claim, Mr. A refers us to SO M’s case activity report (Report). According to the Report, after our remand of the case, SO M requested an updated analysis from respondent’s Area Counsel on the issue of whether a trust created by petitioner’s accountant held specified properties on petitioner’s behalf as his nominee. In her initial communication with Mr. A after remand, SO M advised him that it ‘would be best to wait for * * * [the updated Area Counsel opinion] before potentially requesting any additional financial information or further discussing the issues.’ SO M had another call with Mr. A after Area Counsel advised her that it was adhering to its position that the trust was petitioner’s nominee. In that call, according to SO M: ‘I explained that upon my review of the trial transcript, I did not change my determination * * * [regarding the nominee issue]. I said that I followed up with a request for a second opinion and that the Counsel attorney said the same thing.’ She continued: ‘I stated that * * * [petitioner] could provide updated financial information and requested the information within 45 days. Mr. A pointed out that as long as Appeals is going to maintain its position with regard to the nominee situation, there is no point in providing updated financial information.’” Order, at pp. 1-2. (Names omitted).

Mr A gets a Taishoff “Good Job.” And Judge Big Jim seems to agree.

“Thus, the Report tends to confirm Mr. A’s claim. It shows that SO M discouraged Mr. A from providing updated financial information before she had received an updated analysis from Area Counsel and that, after she had received that analysis, she advised Mr. A of her intention to adhere to her determination that the trust was petitioner’s nominee. Although she went on to invite Mr. A to submit updated financial information, she did not tell him that the failure to do so would provide independent grounds for rejecting petitioner’s proposed collection alternatives.” Order, at p. 2.

It may be one thing to mislead, misdirect, misconstrue or misinform, but quite another to ambush.

So let IRS now explain if they want to assert nonproduction of current financials as a separate ground, and why, based on the futility of production thereof, Poor Jim shouldn’t be let off the hook.

Judge Holmes is back with a designated hitter in a shifty case, and a hard result for Drill Right Consultants, LLC, Docket No. 16986-14, filed 1/28/19, and its skilled lawyer, who gets a Taishoff “Good Try.”

Drill Right mimics an ancient Roman centurion. “Drill Right acts as a labor-market middleman. It finds qualified workers for oil-field operators in the Permian Basin — welders, drivers, and the like — tells them where to go if they want the work, and to take their tools with them. The workers get hourly wages and Drill Right collects a small margin on what they are paid. At the end of the year, the company sent out 1099s and not W2s, because it takes the position that the workers are independent contractors and not its employees. If Drill Right is right, it is a facilitator for the oil field’s equivalent of a Hollywood production team of the sort we analyzed in Quintanilla v. Commissioner, 111 T.C.M. 1017 (2016).” Order, at p. 2.

Indubitably all y’all will recollect Jorge Quintanilla, the sets-and-props whiz of TV commercials. What, the shutdown has befogged your memory? Then dig my blogpost “Gigged,” 1/7/16.

There now.

Drill Right got hit by the TX Workforce Commission (no, not chain-gang operators; they’re the TX equivalent of Our Fair State’s Labor Department) for unemployment compensation tax.

“That tax is not large — at least in comparison to the cost of lawyers skilled in the field — and Drill Right made the business decision to just pay it and move on.” Order, at p. 2.

But alas, the TX Workforcers tipped off IRS, who whanged the Drill Right pate with heavy-duty FICA-FUTA. And these being assessable without SNOD, collection jumped in to the tune of $2.5 million-plus. And that’s enough to hire a skilled lawyer.

Skilled lawyer invokes Section 7436(a) to petition, and Section 7436(d) to abate said assessment. And skilled lawyer raises Section 7491 to shift the burden of proof to IRS that the Drill Right workers are ICs and not EEs, hence no FICA-FUTA, rather Sched Cs.

But here’s the rub: Section 7491 allows the shift if petitioner introduces credible evidence with respect to any factual issue about liability for any tax imposed by subtitle A or B.

And we all know that FICA-FUTA is subtitle C.

Judge Holmes looks at the pre-amended Section 7491 cases, but none fits here. And Scar (the patently defective SNOD case) involved a SNOD, which is not required for subtitle C taxes like these. For the Scar story, see my blogpost “Scar Tissue,” 4/14/17. And unlike Scar, here there’s no asserted deficiency (none needed for FICA-FUTA) and no assessment (because abated by Section 7491(d) pending trial and decision).

Drill Right’s skilled lawyer is out of luck. Congress excluded Title C cases from the Section 7491 shift.

Time for a Section 7482 interlocutory?

The information sought by IRS may be protected by State laws, but that doesn’t help Verde Wellness Center, Inc., Docket No. 23785-17, filed 1/28/19*, an AZ pottery. The AZ Dep’t of Health Services tries to quash an IRS trial subpoena, but Judge Buch quashes the AZ Health types, using Art. VI, cl. 2, known to the cognoscenti as the Supremacy Clause. Any State law that hinders or conflicts with Federal law is inoperative. Constitutionally.

“In the tax area, courts have often addressed the question of whether a privilege created by state statute is to be recognized, specifically with regard to the accountant-client privilege often created under state law. The Supreme Court addressed this in Couch v. United States, 409 U.S. 322, 335 (1973), holding that ‘no confidential accountant-client privilege exists under federal law, and no state created privilege had been recognized in federal cases.’ See also, United States v. Arthur Young & Co, 465 U.S. 805 (1984). Except where the Federally authorized tax practitioner privilege of section 7525 applies, this remains the law today. This remains true even when (like here) the records are in the possession of the State and disclosure of the State’s records is a crime under State law.” Order, at p. 3.

Since the AZ Health types could face jail time for disclosing what IRS wants, they ask Judge Buch, if he rules for IRS (spoiler alert: he does), to let them off the hook.

“…Federal supremacy renders the confidentiality provision of the Arizona Medical Marijuana Act (and its corresponding criminal sanction) inapplicable insofar as responding to the Commissioner’s subpoena is concerned.” Order, at p. 5.

Thanks Judge. Isn’t it great to be back?

*Verde Wellness Ctr 23785-17 1 28 19

It gives me great pleasure to post the first post-shutdown order. Judge Gerber is first off the starting line at Second Street, NW, with Thu-Huong Tran, Docket No. 485-18S, filed 1/28/19.

It’s a simple uncontested no-tax-due order & decision, but for those of us who suffered through the long dark of Tax Court withdrawal, it’s a cause for celebration.

The Long Night is over. Starting by dawn’s early light tomorrow, January 28, 2019, the Glasshouse doors will be flung wide, the formerly furloughed flailing datestampers and hard-laboring intake clerks will stand to their action stations, Judges and STJs will once more pour forth “somber reasoning and copious citation of precedent,” and I shall again take up keyboard and electron to chronicle the sixty-buck ticket to justice.

Cain’t hardly wait.

It’s been a long time since I looked at an AR (not a rifle, an Army Regulation), but one of the cases at this morning’s calendar call in New York City sent me off to AR 601-50, Part VI, Par. 19 (15 Dec 86), whence comes the title of this blogpost.

The case is Gerard J. McEnroe and Regina McEnroe, Docket No. 7381-18S, 1/14/19, but the formal order won’t be around for some time, what with the shutdown and all. And if and when the order does come, it may not embody today’s developments as they may then be moot.

It’s another of those Section 72 pension loan cases. This variation has to do with whether the loan was in fact in default, and the balance paid from Gerard’s account as a taxable distribution. There was to be a trial on that point. Remember that cancellation of debt goes off on facts and circumstances.

So up steps Gerard and his counsel, whom I’ll call Denny. Denny tenders a massive pre-trial brief, but IRS’ counsel has a wee problem.

Though admitted in Our Fair State, and otherwise apparently eligible, Denny never got admitted to Tax Court. When he tried to get the application form from the Glasshouse Gang, Tax Court was shut down.

Although STJ Daniel A (“Yuda”) Guy rightly pointed out that Form 30 and instructions are available on the still-operating Tax Court website in down-loadable and form-fillable PDF, filling in and sending in the form, check and certificate of good standing today would do no good, as there is no one at the Glasshouse to process same.

What to do?

STJ Yuda checks in with the Glasshouse High Command, and obtains from Denny an undertaking to apply as soon as the shutdown ends, but in the meantime, he invokes Rule 24(a)(4) top-of-the-stretch provision.

“…counsel may be recognized as counsel in a pending case to the extent permitted by the Court and then only where it appears that counsel can and will be promptly admitted.”

I’d never seen this before, but I expect we will see it again if this shutdown continues.