Archive for February, 2020|Monthly archive page


In Uncategorized on 02/20/2020 at 16:59

Rock Bordelon and Torie Bordelon, 2020 T. C. Memo. 26, filed 2/20/20, are engaged in risky business, enough to convince Judge David Gustafson to allow Rock to take passthrough losses from his wholly-owned LLC, and carry over a disallowed loss for want of basis to a year when his risky business gave him basis in his Sub S.

It’s all about personal guarantees. Rock borrowed from the Dep’t of Agriculture and from a bank to fund his business. In both cases, Rock gave personal guarantees. Though Judge Gustafson doesn’t quote the exact language, both guarantees provide that the lenders may proceed against Rock directly for payment, without the need to attempt to collect from any other person. Rock had no right to contribution from anyone, except his wholly-owned entities, and Judge Gustafson says that means Rock has the economic burden in reality.

Section 465, the at-risk rules, goes off on facts and circumstances (surprise, surprise). You can’t take losses or grow basis unless you have skin in the game. The main question is whether the guarantor of a debt is ultimately liable, with no right to recover by way of contribution, stop-loss or side agreement, from anyone else if s/he has to pay up. The test is the so-called “worst case scenario,” where obligor defaults and has nothing, and the obligee goes hunting for dollars.

But that’s different from the “realistic probability” test, that there is a realistic probability that the guarantor would suffer economic loss. Rock would win in either case.

But in a more complex case, it would get hairy.

“Among the U.S. Courts of Appeals there has been a perceived split on the appropriate framework for analyzing section 465(b)(4)–i.e., whether analyzing ‘realistic possibility’, see, e.g., Waters v. Commissioner, 978 F.2d 1310, 1316 (2d Cir. 1992), aff’g T.C. Memo. 1991-462; Young v. Commissioner, 926 F.2d 1083, 1089 (11th Cir. 1991), aff’g T.C. Memo. 1988-440 and T.C. Memo. 1988-525; Moser v. Commissioner, 914 F.2d 1040, 1048-1049 (8th Cir. 1990), aff’g T.C. Memo. 1989-142; Am. Principals Leasing Corp. v. United States, 904 F.2d 477, 483 (9th Cir. 1990), or else analyzing ‘obligor of last resort’ under a ‘worst-case scenario’, see, e.g., Emershaw v. Commissioner, 949 F.2d 841, 845 (6th Cir. 1991), aff’g T.C. Memo. 1990-246.  These cases would presumably be appealable to the Court of Appeals for the Fifth Circuit (absent a stipulation to the contrary, see sec. 7482(b)(1)(A), (2)), and we know of no opinion of that court addressing this issue.  However, the split may not really be implicated in a situation like the one in these cases.  Although we acknowledge that in factually complex cases, such as those involving multi-party sale-leaseback transactions or stop-loss agreements, choosing between the tests might lead to different results, see, e.g., Thornock v. Commissioner, 94 T.C. 439, 450 (1990), we found little distinction between the two frameworks in Wag-A-Bag, Inc. v. Commissioner, T.C. Memo. 1992-581, 64 T.C.M. (CCH) 948, 952 (1992), and held that either would lead to the same result in that case.  In these cases we follow Wag-A-Bag and find that in the circumstances before us, both approaches would lead to the same result.” 2020 T. C. Memo. 26, at pp. 23-24, footnote 10.

Taishoff says that the question is, can one devise a reasonably probable scenario wherein the guarantor would have to pony up, with no one to turn to for help? Now with enough players on the field, one might slip in a stop-loss or indemnity agreement from a minor player to bail out the guarantor. But the wise institutional lender will have none of it (not wanting the multi-bankruptcy game), and the wise guarantor will not prefer a lawsuit for contribution or indemnification from a minor player to the $1.4 million write off Rock gets from Judge David Gustafson.



In Uncategorized on 02/20/2020 at 09:27

A thought from John O’Hara (1960): “What, really, can any of us know about any of us, and why must we make such a thing of loneliness when it is the final condition of us all? And where would love be without it?”


In Uncategorized on 02/19/2020 at 17:42

It’s not cheese this time, rather it’s the Helvetian Confederation itself, ponying up all the bank records they promised for “accounts of interest” per the 2009 deal between DOJ and the descendants of William Tell.

Judge Albert G (“Scholar Al”) gives us the quick peek, via George S. Harrington, Docket No. 13531-18, filed 2/19/20, a designated hitter.

“Pursuant to this agreement the Internal Revenue Service (IRS) submitted to the Swiss Government, under the bilateral income tax treaty between the two nations, a request for information concerning specific accounts believed to be beneficially owned by U.S. taxpayers. The Swiss Government directed UBS to initiate procedures that would lead to turning over to the IRS information in UBS files concerning bank-only accounts, custody accounts in which securities or other investment assets were held, and offshore nominee accounts beneficially owned indirectly by U.S. persons. See U.S. Department of Justice, Press Release, U.S. Discloses Terms of Agreement with Swiss Government Regarding UBS (Aug. 19, 2009), at The parties acknowledged that the Swiss Federal Office of Justice would oversee UBS’ compliance with its commitments.” Order, at p. 1.

844 (count ‘em, 844) pages of George’s account statements, correspondence, und so weiter wind up in the paws of DOJ and on to IRS. IRS wants to offer these in evidence, via a motion in limine.

George says they’re hearsay, and UBS’ legal counsel is incompetent to certify to the admissibility thereof.

Judge Scholar Al: “Respondent has submitted with the UBS documents a ‘Certification of Business Records’ executed by Britta Delmas, legal counsel for UBS. Ms. Delmas attached to her certification an index listing 844 Bates-numbered pages as UBS records associated with petitioner. Ms. Delmas avers that these records are original records or true copies of records that: (1) were made at or near the time of the occurrence of the matters set forth therein by persons with knowledge of those matters; (2) were kept in the course of UBS’ regularly conducted business activity; and (3) were ‘made by the said business activity as a regular practice.’ At the bottom of her certification Ms. Delmas ‘declares under penalty of perjury under the laws of Switzerland that the foregoing is true and correct.’

“Having considered the origin and nature of the UBS records along with the certification of Ms. Delmas, we are satisfied that the records are authentic business records of UBS and that they were used and kept in the course of UBS’ regularly conducted business activities. Respondent provided fair notice to petitioner of his intent to introduce them as such. See Fed. R. Evid. 901(11). And Ms. Delmas signed the records ‘in a manner that, if falsely made, would subject [her] to a criminal penalty in the country where the certification is signed.’ Fed. R. Evid. 902(12). Accordingly, we will admit the documents into evidence as self-authenticating foreign business records. See Fed. R. Evid. 801(d)(2), 803(6), 902(11), (12).” Order, at p.2. (Footnote omitted, but read it; Judge Scholar Al says Tax Court likes foreign documents).

Britta may not be the custodian of the records, but all that’s needed is that she’s familiar with the processes; as lead counsel for E-discovery at UBS, that’s enough, says Judge Scholar Al. And of course bank records are more than just account statements. Banks provide all kinds of services, like setting up corporations, trusts, and managing clients’ investments.

George objects to the e-mails going in, but everyone uses e-mails these days. Even maybe when they shouldn’t (but this is a non-political blog).

George says some stuff wasn’t included, but he can proffer whatever he has. For now, the Swiss stuff is the real cheese.


In Uncategorized on 02/19/2020 at 16:50

Grandma’s salty phrase translated as “don’t be a knocker.” But “knocker” here does not mean “one who disparages or denigrates.” Rather it means, “a wit, wag or wiseacre.” In my misspent youth I often heard this rebuke.

Today, Judge Colvin doesn’t use the phrase, but if Grandma were on the bench she would have so addressed Alvin E. Keels, Sr., 2020 T.C. Memo.25, filed 2/19/20.

“Petitioner’s testimony was sometimes argumentative and was sprinkled with bluster and sarcasm.  For example, when asked how he knows that his OfficeMax expenses were for items used at his State Farm office he stated: ‘The title of OfficeMax is enough to know that it’s something for an office, more than likely.’  Petitioner provided a check made payable to Cape School, but the check does not show the purpose.  When asked if the purpose was for business petitioner stated (addressing respondent’s counsel): ‘If you want to do some research, you can look up Cape School, and they’ll tell you what they do.’  Petitioner stated that he did not bring all of his credit card statements to avoid having a pile of papers at the trial.  When respondent asked why petitioner relied on a bank statement to show he had paid electric bills instead of the electrical bills themselves, petitioner said if requested he can provide the bills.  However, petitioner was unresponsive when respondent requested the underlying bills on August 25, 2017, and again when respondent file a motion on December 29, 2017, seeking the documents.” 2020 T. C. Memo. 25, at pp. 16-17.

Dale Carnegie would face-palm.

But some of Alvin’s testimony does stand up. He gets his payments for what amounts to contract labor.

Judge Colvin has some cogent remarks about parties’ testimony. “Witness testimony could almost always be said to be ‘self-serving’, but that factor alone is not a reason to automatically reject the evidence as unreliable.  We decide whether a witness’ testimony is credible by relying on objective facts, the reasonableness of the testimony, the consistency of the witness’ statements, and the witness’ demeanor.  We may discount testimony which we find to be unworthy of belief, but we may not arbitrarily disregard testimony that is competent, relevant, and uncontradicted….” 2020 T. C. Memo. 25, at pp. 15-16 (Citations omitted, but get them for your trial briefs).

But IRS also stumbles into knockerdom, trying to drag in Section 409A deferred compensation for Alvin’s post-separation payout from State Farm, the insurer for whom he independently contracted, post-SNOD and post-answer. No 1099s from The Good Neighbor, and no copy of the deferred comp agreement, so Alvin is saved from the massive deficiencies with which IRS wanted to slug him (and for which he got no cash).

Here’s the Section 409A skinny.

“To prevail under section 409A, a taxpayer must show all three of the following:  first, that distributions from the plan may not occur before the taxpayer’s separation from service, disability, death, an unforeseen emergency, or a change in ownership of the corporation, sec. 409A(a)(2)(A)(i)-(vi); second, that the plan does not permit acceleration of benefits except to the extent provided by regulations, sec. 409A(a)(3); and third, that the election to deferred compensation must be timely made, sec. 409A(a)(4)(B)(i).  These requirements do not apply if the benefits are subject to substantial risk of forfeiture or were previously taxable. Sec. 409A(a)(1)(A)(i).

“For respondent to meet the burden of proof respondent must show that the plan fails to include any one of the three requirements above, that petitioner does not have a substantial risk of forfeiture, and that petitioner was not previously taxed on the deferred compensation.  The record does not show whether petitioner’s plan with State Farm meets the requirements of section 409A.  The   plan document probably provides these details, but it is not in the record; neither is any Form 1099-MISC sent to petitioner by State Farm.  The State Farm letter does not include those details.  Thus, respondent has not shown that the plan fails to meet at least one of the requirements of section 409A or whether there is a substantial risk of forfeiture.  Therefore, respondent did not meet the burden of proving that section 409A applies, and on this record petitioner is not taxable on the yearend balances of his termination and extended termination accounts for the years at issue.”2020 T. C. Memo. 25, at pp. 21-22.

And for wildcarding in the Section 409A issue, IRS has burden of proof.

Takeaway- Maybe IRS is going after 409As. Read and heed Judge Colvin’s checklist. But more important yet, don’t be a knocker: especially, on the stand.



In Uncategorized on 02/18/2020 at 15:41

James H. Dunlap and Eileen M. Dunlap, 2020 T. C. Sum. Op. 10, filed 2/18/20 have a problem with self-employment tax from Eileen’s deferred compensation.

Eileen was well up the pyramid at Mary Kay, a multi-level cosmetics distributorship. She retired from independent contractorship into the Family Security Program, a non-qualified Section 409A non-account balance deferred compensation plan.

Eileen wants to claim she sold her goodwill to Mary Kay.

Judge Gerber: “There was no agreement between Mary Kay and Ms. Dunlap with respect to any sale of a business or goodwill.  Other than the reference to goodwill in the preamble to some documents, there is no evidence in the record that would support a sale of a business interest.  The payments under the FSP are calculated on the basis of sales and commissions and are being paid at a rate of 60% of a high average tiered sales activity.  Lastly, Ms. Dunlap had no rights or legal relationship with the consultants and sales directors in her tiered Mary Kay activity.  Accordingly, her goodwill argument does not change the outcome of this case.” 2020 T. C. Sum. Op. 10, at p. 16.

That’s the point. If you’re paid after the fact based on the quantity and quality of the work you did as an IC, and didn’t pay income or SE tax before, you’re stuck.


In Uncategorized on 02/17/2020 at 10:01

As Presidents Washington and Lincoln are now born again, twinned, and celebrated today by Act of Congress, and as said Congress has decreed US Tax Court shall neither work nor labor on any day which is a public holiday in The City of Taxation Without Representation, I take the both title and substance of today’s non-entry from the 1861 poem by Ethel Lynn Beers.


In Uncategorized on 02/14/2020 at 16:28

Frivolites are inventive but never successful. That is, successful at anything but providing Friday afternoon designated hitters for Tax Court judges, and blogfodder for me.

Ronnie Theodis Demmons, Docket No. 18387-18L, filed 2/14/20, gets no Valentine’s Day gift from Judge Gale, but does get a $500 Section 6673 frivolity chop.

Ronnie is confronting IRS’ motion for summary J, but Ronnie’s inventive approach started with his petition, wherein “…petitioner disputed Appeals’ determination on the ground that it violated “positive law”, citing generally the Tax Reform Act of 1976, Pub. L. No. 94-455, 90 Stat. 1520, as well as section 6065. Despite having been warned of the possibility of a section 6673 penalty, petitioner again raised section 6065 (and no other arguments) in his response to respondent’s Motion, claiming that the Motion should fail because respondent has not presented petitioner with any ‘claims’ satisfying the requirements of section 6065. It is settled law that while section 6065 requires taxpayers to sign returns and certain other documents filed with respondent under penalty of perjury, it does not require respondent to do the same with respect to documents, such as notices of deficiency, issued to taxpayers.” Order, at p. 2. (Citations omitted)

Judge Gale notes that the caselaw allows him broad discretion, and Ronnie had been offered a list of LITCs, and shown the yellow card, back in December last year.

Takeaway- Don’t try this, at home or anywhere else. But if you do, bring your wallet.


In Uncategorized on 02/13/2020 at 16:12

Oh Yes, You Do

Judge Albert G (“Scholar Al”) drives his Chevron tanker through Oakhill Woods, LLC, Effingham Managers, LLC, Tax Matters Partner, 2020 T. C. Memo. 24, filed 2/13/20, yet another syndicated conservation dodge in the GA boondocks.

With all these cases, I’m on a roll just now.

The Oakies left off the basis number on the 8283, claiming Forever Forests, enabler, told them and their CPA they didn’t have to. The Oakies claim this lets them off the hook on Section 170(f)(11)(A)(ii)(II) grounds.

Judge Scholar Al: “That subparagraph excuses failure to satisfy the reporting requirements discussed above if ‘it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect.’  This statutory ‘reasonable cause’ defense is broader than the regulatory ‘reasonable cause’ defense promulgated previously.  As noted supra p. 12-13, the latter defense is limited to situations where the taxpayer has reasonable cause ‘for being unable to provide the information required.’  Sec. 1.170A-13(c)(4)(iv)(C)(1), Income Tax Regs.” 2020 T. C. Memo. 24, at pp. 27-28.

But these are motions for summary J, and “reasonable cause” raises fact questions. “These questions include whether Forever Forests was a ‘tax professional’; whether Forever Forests was ‘a competent and independent advisor unburdened with a conflict of interest,’; whether Oakhill could reasonably rely on legal advice relayed to it indirectly; whether petitioner’s CPA was a competent tax professional who provided tax advice independent of the advice supplied by Forever Forests; and whether Oakhill actually relied in good faith on whatever advice it received.” 2020 T. C. Memo. 24, at p. 30. (Citation omitted). No summary J for IRS on failure to provide reasonable cause.

But Judge Scholar Al has no such questions about the validity of Reg. Section  1.170A-13(c)(4)(ii)(D) and (E), the reporting requirement, whether or not the Oakies had reasonable cause not to.

But DEFRA84 (the Deficit Reduction Act of 1984) told Treasury, as they say in the South, to Go Set a Watchman for dodgers trying to glide beneath the radar. And a good way is to compare what was paid for the property to what is claimed for the easement.

The Oakies claim that DEFRA84 says put it on the return, not the summary appraisal. No, says Judge Scholar Al, a return is more than the 1040, 1041, 1065, or 1120, it’s everything attached, like the 8283 and summary appraisal. IRS gets millions of returns and can’t rummage around finding buried ordnance. And even if “return” and “Summary appraisal” are somehow mutually exclusive, nothing prevents IRS from requiring inclusion on both.

“DEFRA section 155(a)(3), which petitioner fails to cite, wholly undermines its argument.  That paragraph, captioned ‘Appraisal summary,’ provides that, ‘[f]or purposes of this subsection, the appraisal summary shall be in such form and include such information as the Secretary prescribes by regulations.” (Emphasis added.)  Congress thus left the Secretary with discretion to require inclusion on Form 8283 of whatever information the Secretary reasonably deemed relevant…. The Code provision governing appraisals makes the depth of the Secretary’s discretion plain.  See sec. 170(f)(11)(C) (requiring that taxpayers obtain a qualified appraisal and ‘attach[] to the return* * * such information regarding such property and such appraisal as the Secretary may require’).  For these reasons we reject petitioner’s contention that the regulation violates Chevron step one on the theory that it contravenes ‘the unambiguous language of the statute.’” 2020 T. C. Memo. 24, at p. 25-26. (Citation omitted)

And of course the Reg. satisfies Chevron as a permissible reading of the statute, as a comparison of basis to claimed worth of easement shows up an inflated appraisal like luminol shows blood.

Reg. sustained. Dodgers, look out.



In Uncategorized on 02/13/2020 at 12:35

See my blogposts “This Is A Memo?” 6/10/16, and “Cut Uncut,” 8/17/18. One issue Medtronic and its various appendages had was litigation risk.

It sure is real.



In Uncategorized on 02/12/2020 at 16:15

Ex-Ch J L Paige (“Iron Fist”) Marvel might have thought that the unreported distributions that Richard Essner, 2020 T.C. Memo. 23, filed 2/12/20, took from the IRAs he inherited from his late father via his late mother presented “a straightforward case”, when AUP (Automated Underreporting Program) electronically handed Richard a SNOD (2020 T. C. Memo. 23, at p. 4).


While Richard’s petition was pending from the AUP SNOD, Compliance Officer J (name omitted) started an audit of the same year (among others), but Richard petitioned only the one AUP year for Section 7605(b) duplicative audit violation. Initially, Officer J only looked at legals, travel and meals, and eventually gave Richard a SNOD only for one of the two years wherein Richard took said IRS draws, never mentioning the IRA draw for either year. Richard subsequently petitioned that year too.

Clear? Thought not.

Ex-Ch J Iron Fist: “At the outset, we note that petitioner’s interactions with the IRS–both through the AUR program and his correspondence with Officer J–would be confusing to an ordinary taxpayer. Various offices of the IRS contacted petitioner without coordination, without clarity as to what the other parts were doing, and without providing petitioner a clear explanation as to why the IRS was speaking out of many mouths. A taxpayer ought not to have been subjected to such a byzantine examination. However, we are not empowered to police what ought to have occurred in an examination; we are limited to considering whether section 7605(b), as written, was violated. See Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974).” 2020 T. C. Memo. 23, at pp. 10-11.

But the AUP isn’t an examination of taxpayer’s “books and records,” because it only looks at the taxpayer’s return and the third-party reporting. Besides, Richard conceded all or part of what Officer J proposed as adjustments on audit, so Officer J’s examination wasn’t unnecessary.

Richard argued that there was unrecaptured basis (original investment in the account) in his late father’s IRAs. “At trial petitioner stated that he had contacted the financial institutions that had held the IRA–TD Ameritrade and Fidelity– seeking documentation to determine the portion that represented his late father’s original investment. Unfortunately, neither institution had the records he sought. At trial he conceded that he could not substantiate that any portion of the distributions represented a return of his late father’s original investment.

“We find credible petitioner’s statement at trial that he attempted to find records that could substantiate his position, and we sympathize with him for the dilemma in which he found himself when he inherited his late father’s IRA. But petitioner bears the burden of proving respondent’s determinations to be incorrect, and he has not. Therefore, we must sustain respondent’s determinations.” 2020 T. C. Memo. 23, at p. 7. (Footnote omitted, but it says if Richard could have proved original investment of after-tax dollars, he could have done better).

But Richard stiped in the Boss Hoss sign-off, and never told his paid preparer about the IRA draws. Sympathetic or not, Richard gets the Section 6662(b) five-and-ten; he’s a cancer surgeon who only checked the IRS website when he took a bundle of cash from late father’s IRA. “Given petitioner’s background and the substantial size of the distribution, this is not reasonable. We therefore conclude that petitioner did not have reasonable cause for his underpayment and that he is liable for the accuracy-related penalty under section 6662(a) and (b)(2)….” 2020 T. C. Memo. 23, at p. 14.