All y’all will recall that the Elevenses bucked back Thomas E. Watts and Mary E. Watts, 2020 T. C. Memo. 144, filed 10/15/20 to Judge Nega back in March B. C. (Before COVID-19). What, you were distracted by politics and pandemic? OK, you’re not alone, so see my blogpost “RFTC Revisited,” 3/12/20.

But the result is the same. Danielson prevails, whether or not Wellspring, the VC (that’s venture capitalists, not foes from battles long ago) made certain contractually-permitted elections that would have torpedoed the Watts’ ordinary loss argument, leaving them with the $3K annual write-off. Both the Watts’ trusty attorneys and IRS (then represented by no less than Patrick J. (“Scholar Pat”) Urda) agreed that no such election was made.

But Danielson. That’s Danielson v. C. I. R., 378 F.2d 771 (3 Cir., 1967).

Judge Nega cites Danielson: “'[A] party can challenge the tax consequences of his agreement as construed by the Commissioner only by adducing proof which in an action between the parties to the agreement would be admissible to alter that construction or to show its unenforceability because of mistake, undue influence, fraud, duress, etc.’ The Court of Appeals further held that if the shareholders had attempted, in an action against the buyer, “to avoid or alter the [sale] agreement * * * [they] would have a heavy burden of showing fraud, duress, undue influence and the like under what may loosely be called common-law principles”, id. at 778-779, and that ‘examination of all the evidence adduced in this case reveals nothing to demonstrate that the contract as written was not the taxpayers’ [i.e., the shareholders’] conscious agreement’, Commissioner v. Danielson. 378 F.2 at 779.” 2020 T. C. Memo. 144, at pp. 4-5.

“The Danielson rule applies to a taxpayer’s argument only if the agreement in question is unambiguous. (‘If the contract is ambiguous, however, the Danielson rule does not apply.’) The Court of Appeals for the Eleventh Circuit has expressly adopted the Danielson rule.” 2020 T. C. Memo. 144, at p. 5. (Citations omitted, but get them for your briefs file).

The Watts claim that, notwithstanding the explicit terms of the purchase agreement, they got part of the proceeds and then gave them to Wellspring. They claim they’re “explaining” the agreement, not modifying it.

Judge Nega man-‘splains: “The Danielson rule applies to preclude petitioners from reaping favorable tax benefits by recharacterizing their transaction from one in which, as the agreement provided, 100% of the net proceeds were paid to Wellspring as consideration for the sale. The Danielson rule is applicable in situations, as here, where parties to a transaction expressly agree to a characterization of a transaction in a particular form or intentionally structure a transaction in a particular form for tax purposes, and it is intended to prevent any party from unduly enriching itself by claiming a unilateral alteration of the agreed-upon consequences after the consummation of the transaction. Here, the purchase agreement, at section 11.10 states: ‘This Agreement * * * constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes any prior and contemporaneous understandings, agreements, negotiations, discussions or representations by or between the parties hereto, written or oral, with respect to such subject matter’.” 2020 T. C. Memo. 144, at pp. 6-7.

The Watts’ claim of an oral agreement modifying the purchase agreement founders for want of evidence. Neither Wellspring nor the fundie who bought them out testifies on the trial. The story about taking a cheaper deal to save the employees’ jobs likewise craters for want of evidence.

The Wattses are stuck.