In Uncategorized on 08/31/2020 at 18:00

Blood Sweat and Tears lead vocalist David Clayton-Thomas wrote the title hereof. And the group’s name is not a bad description of what Sean L. Daichman and Linda E. Daichman, 2020 T. C. Memo. 126, filed 8/31/20, are left with after Judge Paris demolishes the structure created by their dodger attorney, who cooked up a day-trading Sub S that was collapsed a few days after it started, with its holdings of cash and marketable securities showered on an LLC and family trust, and a claimed $2.1 million short-term capital loss to Sean and Linda.

Sean has much income from his power-plant refurbishing.

So his attorney sets up the Sub S, allegedly to day-trade, but Sean testifies he has neither time nor knowledge, and the trades are minuscule. But the Sub S gets Sean’s power-planting interests plus cash. The Sub S dissolves shortly after birth, with the goodies split between LLC and family trust. Since distributed goodies are claimed to be much discounted (marketability and control), Sean claims the big loss aforesaid.

Judge Paris: “… the transactions petitioners executed to generate the claimed loss deduction failed to alter their economic position in any way that affected objective economic reality. The transfers of assets were effectively a circular flow of funds among related entities used to generate an artificial tax loss to offset petitioners’ [year at issue] income. Petitioners transferred substantial assets to…their wholly owned S corporation, which then transferred those assets to Investment LP. … S Corp owned a 98% limited partnership interest in Investment LP, while petitioners, as cotrustees of the … Trust, owned the remaining 2% as general partners. Within days of the transfers to Investment LP, Trading S Corp dissolved, distributing its 98% interest in Investment LP (including the assets petitioners had contributed to …S Corp) to petitioners. Petitioners claimed a loss deduction on their [year at issue] tax return by calculating the values of the distributed partnership interests based on substantial discounts. Petitioners had constant control over the assets and entities at all relevant times, however, and neither the contribution to … S Corp nor its dissolution affected petitioners’ position or caused ‘real dollars to meaningfully change hands’. The form of petitioners’ ownership of the assets may have changed, but the substance did not. There was no realistic risk or possibility that the funds or assets would change hands at any point.” 2020 T. C. Memo, 126, at pp. 20-21.

Moreover, the S Corp. was collapsed almost from the get-go, and its activity was subminimal. Clearly, setting up a tax loss was its only reason for existence.

And Sean’s attorney was promoting such deals. “The Court is left with the conclusion that Mr. S offered petitioners a prepackaged tax strategy, one that he offered to numerous clients in [year at issue], designed to create an artificial loss through a circular flow of assets, the application of substantial discounts, and the misreporting of the resulting loss as an ordinary loss, rather than a short-term capital loss. When the initial loss calculation failed to eliminate fully petitioners’ income, petitioners had a second return prepared for … S Corp, increasing the discounts and thereby the loss, and offsetting all of petitioners’ income.” 2020 T. C. Memo. 126, at p. 24. (Name omitted).  I dare say Mr S has gotten The Phone Call.

IRS comes up short on the chops, as only the five-and-ten substantial understatement of tax gets properly Boss Hossed.





  1. The tragedy of this TCM decision is it took 10 years to have a Tax Court opinion, albeit just a Memorandum decision. The facts appear clear and not confusing and the tax return filings results simply defy common sense and common understanding of tax law. Plus, this was one tax year and one joint income tax return. And the Sub S plus the partnership returns became irrelevant. The judge’s final sentence is: “In reaching this holding, the Court has considered all arguments made and, to the extent not discussed herein, has concluded that such arguments are moot, irrelevant, or without merit”.

    Now put this in perspective to the litigation involving Syndicated Conservation Easements. These “transactions” each involve legal terms of each easement document, appraisals and up to hundreds of taxpayer entities or individuals per “Primary Property” being “conserved. Are multiple decades required to resolve these matters in the Tax Court process ?


    William E Ellis

    William E. Ellis & Associates LLC



    1917 Fairfield Dr.

    Dalton, GA 30720


  2. Mr Ellis, Further to the foregoing, I blog orders because one can see the shape a case is taking long before an opinion issues. And one can see a result even if there never is an opinion, for example, because the parties settle and an agreed decision is entered. But since orders will not be made public under the new DAWSON régime until some time next year (maybe), like the residents of Casablanca, we must wait, and wait, and wait.


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