In Uncategorized on 06/08/2020 at 17:45

Judge Kerrigan has a rare one for us today, a taxpayer telling Appeals that the loan he told Exam he took wasn’t a loan, despite a promissory note, stated interest, an Excel spreadsheet showing loan amounts, and a loan roll-forward schedule loan.

The RA generated Form 886-A man-‘splainer as follows. Taxpayer (name to follow) borrows from his controlled C Corp to invest in various healthcare outfits via an LLC that his family trust owned; he also takes draws from the C Corp, which were converted to loans at year’s end; and provides a spreadsheet showing loan balances at end of year at issue.

But he’d also given the C Corp a 20% membership interest in the LLC. Hence Van Wyk, 113 T. C. 29, filed 12/21/99, which says that if one borrows from an entity wherein one has a prohibited interest, one is not at-risk as to the loan amounts. His controlled C Corp, from which he borrowed, has a 20% piece of the action. Das ist verboten per Section 465(b)(3)(A)(ii) and (B), hence no deduction for losses from LLC. So $8 million deficiency plus chops go to Frederick Howe and Bonita A. Macvaugh-Howe, 2020 T. C. Memo. 78, filed 6/8/20.

Are they downhearted? No!

Fred gets new counsel, Boni-Mac keeps her old counsel, and they go to Appeals. Boni-Mac claims (and gets) Section 6015(f) innocent spousery.

Fred’s new counsel claims the loans weren’t from another shareholder in the C Corp. They were straight to Fred from the C Corp. Somehow the note never gets into the Appeals’ discussion. So Appeals and Fred and Boni-Mac sign off on a Form 870-AD, cutting the deficiency to $1.5 million and dropping the chops.

The Form 870-AD repeats Fred’s new counsel’s claim that the loans never were loans, whatever the C Corp’s books and spreadsheets say. Given litigation risks, Appeals caved on the at-risk argument.

“Form 870-AD stated that the case would not be reopened by the Commissioner unless there were specific occurrences including ‘fraud, malfeasance, concealment, or misrepresentation of a material fact’.” 2020 T. C. Memo. 78, at p. 8.

Happy ending, no? No!

When the Appeals folderoo hits the Exam team, there’s a huddle with Appeals, the team “records his Minute of Dissent,” as The Man From Mumbai put it, Exam reopens audit, claiming Fred’s counsel misstated a material fact and the Appeals Director signs off.

New SNOD. Petition.

Fred claims equitable estoppel. Contract argument is a loser. “Sections 7121 and 7122 and their accompanying regulations establish procedures for closing agreements and compromises of tax liabilities, respectively. These procedures are exclusive and must be satisfied for there to be a compromise or settlement that is binding on both the taxpayer and the Government. Form 870-AD is not a binding settlement agreement under section 7121.” 2020 T. C. Memo, 78, at p. 13 (Citations omitted).

The usual equitable estoppel requirements are that party to be estopped must know the facts, the other side must not, the party to be estopped must intend the other side to act as if they believed what the party said or did, and the other side must be injured thereby.

But wait, there’s more, as the telehucksters say

“In addition to the traditional elements, the party seeking equitable estoppel against the Government must show that: ‘(1) the government engaged in affirmative misconduct going beyond mere negligence; (2) the government’s wrongful acts will cause a serious injustice; and (3) the public’s interest will not suffer undue damage by imposition of estoppel.’ These three requirements need to be met before any determination of whether the traditional elements of equitable estoppel are present.” 2020 T. C. Memo.78, at p. 15. That means the government must deliberately lie or make a series of false promises.

That the note wasn’t raised by IRS at Appeals is nothing to the point; IRS didn’t lie. And counsel should know that a Form 870-AD isn’t a contract.

Besides, Fred knew there was a note. And that Fred paid $17K of interest on the lower deficiency isn’t detrimental reliance. Paying interest on a debt you owe, partially or fully, isn’t detrimental reliance.

No estoppel.

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