In Uncategorized on 06/02/2020 at 16:31

Jason B. Sage, 154 T. C. 12, filed 6/2/20, was a real estate type caught in the Black ’08. He had three deals in hock to two banks, so he put them, via the standard S Corp – LLC daisychain, into liquidating trusts, with one of his management outfits as trustee and the lenders as beneficiaries. The initial draft of the trust instruments had the usual wordprocessing hangovers and technical delicts, showing the drafter took the last deal they did and doctored same, without “search and replace.” 154 T. C. 12, at p. 8. No, I’m not gloating; I’ve done that too, but the errors got caught before they got to court.

The trust instruments did track the language of Reg. Section 301.7701-4(d). JB structured the paperwork so that he assigned the membership interests in the LLCs that had the parcels to the lenders, and they in turn simultaneously transferred the interests to the respective trusts in exchange for beneficial interests therein. And JB would take a Section 165 loss for the difference between debts and FMV of his subaqueous realty, using carryback and carryforwards thereof.

He only told the lenders after the fact.

And he told the county transfer tax authorities that the property was “not being sold, but simply transferred to another wholly owned entity” with “no transfer of debt”, in order to “create a liability protection entity.” 154 T. C. 12, at p. 10. I’ve seen people play fast-and-loose with local transfer taxes, playing for pennies when telling the truth and paying up would help secure the deal. Head-shake.

IRS changed their trial theory from those of the SNODs they gave JB, so they do have BoP. But I’m sure my hip readers, whether or not under curfew, have already shouted “closed and completed!”

So did Judge Patrick J (“Scholar Pat”) Urda. The key is whether or not JB was no longer owner of the trust in year at issue; see Reg. Section 1.677(a)-1(d). Since each trust’s sole function was to pay off JB’s debts, the trusts weren’t separate from JB’s passthough. So no “closed and completed” transaction in year for which loss was asserted. No loss in year at issue, no carryback, no carryforwards.

Judge Scholar Pat puts it simply. “The [year at issue] transfers accordingly did not accomplish bona fide dispositions of the property evidenced by closed and completed transactions as necessary to support the losses ultimately reported by [passthrough] and passed on to Mr. Sage.” 154 T. C. 12, at pp. 24-25. (Footnote omitted, but I’ll summarize in the next succeeding paragraph hereinbelow, as my high-priced colleagues would say.)

The footnote says JB’s argument that lenders weren’t legally obligated to take whatever cash the trusts threw off to pay down the debt doesn’t matter. Even though Reg. Section 1.677(a)-1(d) speaks of nonadverse parties: says money may (emphasis by the Court) be applied to debts of the grantor-owner; and trust beneficiaries are usually adverse parties, no one is an adverse party if you give them money. Anyway, legally obligated or not, the lenders took the money.


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