I want to direct a Taishoff “Good Job” to the Houston TX law firm who represented John F. Campbell, 2019 T. C. Memo. 4, filed 2/4/19. John’s trusty attorney, whom I’ll herein designate as George, has given us a few items to add to our CDP checklist, in the “abuse of discretion” pages.

First, John set up a trust on the island of Nevis (I’ve been there; don’t miss the sugar train ride through the outback). He only gave $5 million of his $25 million net worth to the trust in the year he created it, never any more. John had to report the trust activities on his personal return, but he neither anticipated any benefit therefrom himself (only his family), nor controlled trust operations or investments, keeping his hand off the dollar while his eyes were on the scale (and telling the Trust Protector to fire an overbilling trustee and substitute another). But that was six (count ‘em, six) years before the year John got to Appeals.

John ran into trouble when he got involved in a CARDS transaction. I’ve blogged a couple those (hi, Judge Holmes), and IRS raised John’s taxable income for the year at issue from $200K to $13 million, blowing off the phony mix-and-match CARDS unrecognized gain from the recognized loss. Well, if you must, see my blogpost “House of CARDS,” 3/8/11, for the skinny on this dodge.

IRS gives John a NITL and a couple NFTLs (see above) at no extra charge. John sends in Letters 12153 for the whole shootin’ match. Appeals sustains, John petitions, but get remanded.

IRS claims John’s RCP is $1.5 million, John claims $12K, and wants OIC. Appeals again bounces John. Who petitions, and gets another remand to consider State law issues.  As with Nick Saban, if you get into real estate trouble, get into it in LA. John was rooked in some LA Gulf Opportunity Zone development deals, and got the double-schneid from Chinese drywall (the stuff oozed poison) and the Black 08.

Appeals bounces John yet again, claiming RCP of $19.5 million against John’s $12K.

Judge Kerrigan: “When a taxpayer submits an OIC based on doubt as to collectibility, the Appeals officer follows IRM guidelines to determine the taxpayer’s RCP.  IRM pt.5.8.4.3 (Jan. 18, 2018).  Those guidelines consist of determining: (1) assets, including dissipated assets, (2) future income, (3) amounts collectible from third parties, and (4) assets available to the taxpayer but beyond the reach of the Government.  Id. pt. 5.8.4.3.1 (Apr. 30, 2015).” Order, at p. 14.

Dissipated assets: “Petitioner was not given the opportunity to submit an OIC until after this Court remanded the CDP proceedings to the Appeals Office.  He submitted his OIC on March 28, 2014.  Accordingly, the Appeals officer should have looked only to 2012 for any dissipated assets.  However, under the IRM guidelines, she could have looked back to the assessment date, April 19, 2010, for any dissipated assets if there was a transfer of assets within the six months before or after the assessment date.” Order, at p. 15. But the AO looked all the way back to the trust in Nevis in 2004. Too long. Anyway, the transfer didn’t render John insolvent when made, and he didn’t know about the increased deficiency when he made it.

The Gulf Opportunity Zone deals weren’t dissipation. “Petitioner did not waste his wealth in an effort to deprive the Government or to shirk his financial obligation to the public fisc.  In 2006 petitioner made a substantial investment in the Gulf Coast region under the GO Zone legislation.  After making the investment, he still had cash on hand of more than $6 million.  He was unaware of the Chinese drywall issue that affected many of the properties he purchased through the LLCs and the looming financial crisis.  Respondent provides no consideration of these issues in the second supplemental notice of determination and instead asserts that petitioner wasted his wealth in an effort to establish a loss.  There is no indication in the record, and none was demonstrated at trial, that petitioner invested in the GO Zone in an attempt to avoid paying his 2001 tax liability.  We find that it was an abuse of discretion for respondent to make this determination.” Order, at pp. 17-18.

There’s a difference between trying to earn money and trying to dodge taxation.

But were trust funds available to John on an alter ego theory for RCP? No. The trust was an irrevocable trust, over which John had no control. “The Supreme Court has stated that the transferee, nominee, or alter ego theory requires a two-part analysis, which looks first to State law to determine what rights a taxpayer has in property and then turns to Federal law to determine whether a taxpayer’s rights in that property qualify as property or rights to property under Federal tax law. Petitioner created the Trust in 2004 as an irrevocable grantor trust.  He and his family are named beneficiaries of the Trust.  Under section 671, petitioner is required to report all tax consequences of the Trust’s activities on his personal Federal tax return.  The Trust document indicates that petitioner has no control over the trustee and cannot force the trustee to make distributions or investments.  Petitioner contends that as a beneficiary of the Trust he does not hold a property interest in the Trust assets.” Order, at p. 19.

IRS tries to claim that the trust is an alter ego per CT law. IRS admits CT hasn’t yet definitively decided anything, but claims CT would follow Federal law. This founders on a USDCDCT case that specifically refuses to graft Federal law onto CT law.

While the trust did bankroll a buyback of some of the Gulf Opportunity Zone properties post-foreclosure, using LA’s debtor-friendly “litigious rights” laws, John didn’t control the trust and the trustee independently evaluated the deal.

The AO was arbitrary and capricious.