In Uncategorized on 11/14/2019 at 16:10

Woods v Com’r and Home Concrete taught us that building basis, even with a son-of-BOSS or similar give-and-go, doesn’t trigger 6SOL, because non-omission. Well, see my blogpost “Woods, Concrete & Sham,” 3/23/15. But whatever Judge Wherry teased out to help IRS in CNT, doesn’t work for Judge Pugh in Beverly Clark Collection, LLC, Nelson Clark, Tax Matters Partner, 2019 T. C. Memo. 150, filed 11/14/19.

IRS first argued built-up basis equals understatement, thus 6SOL, but abandoned that on the appeal post-Home Concrete, and argued sham. As the appeal was from summary J in favor of Bev and Nelson, no new facts, so only theory involved. 9 Cir sent Bev and Nelson and IRS back to Tax Court to sort out.

So is a sham transaction different from a basis-builder when it comes to 6SOL substantial understatement?

Negatory, good buddy, says Judge Pugh.

In the first place, omission means saying nothing. IRS is at a disadvantage, because they don’t even know the income was there. But if what you do state is the right type of income, but too low in amount, then IRS does know it was there.

Bev and Nelson reported 19.9%, and didn’t state the remaining 80.1%. The reason they didn’t state 100% and did state 19.9%, was the sham, not the built-up basis. So, says IRS, Home Concrete shouldn’t apply.

So what, says Judge Pugh.

“The question before us is a little different, as respondent’s theory here is that a sham sale, not an overstatement of basis, gave rise to the omission. So we must decide whether that distinction makes any difference. We conclude that it does not; we are bound to the Supreme Court’s analysis. That is, even if we assume that the basis was not wrong but the sale of [Bev’s LLC] to [stooge] was a sham, the Clarks did not omit an item of gain entirely; they just reported an incorrect amount of gain….. We therefore reject respondent’s assertion that the test in section 6501(e)(1)(A) is computational. And we find no support for respondent’s claim that Colony, Inc. should not apply here because that case involved gross proceeds of a business unlike here.” 2019 T. C. Memo. 150, at p. 12.

And while more of a clue is required to avoid 6SOL than “one that would intrigue Sherlock Holmes,” 2019 T. C. Memo. 150, at p. 13, Judge Pugh says that what the Supremes said is good enough for pore l’il ole Tax Court.

No 6SOL, Bev and Nelson win.

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