Doubtless y’all will recall we left Complex Media last month with a Rule 155 beancount, after the Complexes were let off the hook on their Section 351 tax-free incorporation, to reckon up the effects of their sale, specifically some Section 197 IP intangibles.

Refresh your recollection with my blogpost “A Challenge,” 2/10/21. And get those crutches and that large whiskey I spoke of then ready. Judge James S. (“Big Jim”) Halpern has 103 (count ’em, 103) pages of REVISION of the Complexes’ saga in Complex Media, Inc., 2021 T. C. Memo. 14 (REVISED), filed 3/31/21.

The Section 197s need to be created post-8/10/93 (check), need to be used in a trade or business (here magazine-publishing; check), and mustn’t be self-created (here created by seller; check).

But if you’re the lucky recipient of these in a Section 351, you get the transferor’s basis (here seller-created, wherefore basis is bupkis, if you’ll pardon an arcane technical term).

Judge Big Jim, no mean unscrambler of multilevel, multiparty corporate fritattas, called for help. “Identifying the issues that remain for decision has proved to be a challenge, leading to our request that the parties address in supplemental briefs a series of questions posed in an order dated April 24, 2020. Our efforts were not entirely successful.” 2021 T. C. Memo. 14 REVISED, at p. 21.

The parties seem to agree that the deal was a Section 351 tax-free incorporation. If it were a sale, the Complexes’ basis in the Section 197s would have been north of $7 million, with taxes to the seller to match.

But the deal goes out of control because of the buyout of the dissentient partner. The $3 million cash supposedly paid to acquire these Section 197s was in fact paid to the departing partner. He turned in the shares he got in the tax-free incorporation immediately and got said cash. That breaks the 80% control group required to comply with Section 351. In short, a give-and-go torpedoes the tax-free exchange.

Trying to rope in the preferred shareholders of the acquirer doesn’t help, as they didn’t get back the same stock they gave up. Anyway, they didn’t control the acquirer, as they needed one of the common shareholders to go along.

And the duty of consistency requires the Complexes to stick to their story.

But the story doesn’t end there.

“In sum, petitioner’s ineligibility to invoke grounds that would render its contracts unenforceable or call into question respondent’s interpretation of those contracts does not prevent it from disavowing the form of the transactions implemented under them.” 2021 T. C. Memo. 14 REVISED, at p. 55.

But what must the disavower prove in order to escape from the deal it created?

“…we now conclude that the additional burden the taxpayer has to meet in disavowing transactional form relates not to the quantum of evidence but instead to its content–not how much evidence but what that evidence must show by the usual preponderance. The Commissioner can succeed in disregarding the form of a transaction by showing that the form in which the taxpayer cast the transaction does not reflect its economic substance. For the taxpayer to disavow the form it chose (or at least acquiesced to), it must make that showing and more. In particular, the taxpayer must establish that the form of the transaction was not chosen for the purpose of obtaining tax benefits… that are inconsistent with those the taxpayer seeks through disregarding that form.” 2021 T. C. Memo. 14 REVISED, at p. 64. (Emphasis by the Court).

After a lengthy probe of tax consequences, Judge Big Jim finds that the Complexes aren’t trying for tax consequences other than they had sought. “Substance over form” applies to taxpayers as well as to IRS.

But there’s still the problem of valuing what the Complexes got. They got cash and a note, and tangibles as well. But the note, calling for future payment, wasn’t worth face value. And the value of the rest isn’t clear either. So our old friend Cohan is reprised, and the Section 1060 and Rev Rul. 68-55 play their parts.

And when the dust settles, we get a Rule 155 beancount again. Mark Twain got it right: “Well you’ve got to admire men that deal in ideas of that size and can tote them around without crutches.”

Today, for the first time, there are 400 (count ’em, 400) followers of this my blog.

Ward MacAllister and Mrs. Astor, thou should’st both be living at this hour.

Anna Elise Walton, 2021 T. C. Memo. 40, filed 3/30/21, “skimmed over a copy of her return after filing and thought that the totals were correct.” 2021 T. C. Memo. 40, filed 3/30/21, at p. 7.

Unhappily, AE didn’t do enough, says Judge Patrick J (“Scholar Pat”) Urda, despite the efforts of Frantic Frank Agostino and The Jersey Boys. The Jersey Boys lose a lot of cases, because they get the real tough ones; I very much doubt anyone could do better. I was once an attorney in a firm where we lost a lot of cases, because we took a lot of the toughest cases.

AE concedes her return missed about 32% of her taxable income for the year in question. And even though her trusty CPAs, to whom she’d entrusted her taxes for twenty (count ’em, twenty) years, may have failed to press her for the missing 1099-MISCs, which triggered the AUR and electroSNOD that followed, size does matter. When you know you made money (and AE did), and your reported AGI swings lower than a sweet chariot, you won’t get Section 6664(a) good faithery. That’s all AE could try for this time.

The AUR and electroSNOD defeat Section 6751(b). No Boss Hoss needed when the computer does it all.

Takeaway- Read and heed…your return, if not my blogposts.

That’s Judge Emin (“Eminent”) Toro’s version of Treasury’s reply to Robert Rowen, 156 T. C. 8, filed 3/30/21. Rob (that’s Doc Rob, as he’s a travelling MD with family and friends in Singapore and China, and patients all over the world) claims Section 7345, the delinquents’-passports-grab, is unconstitutional (Fifth Amendment due process) and UN Dec of Human Rights (which the Supremes said confers no rights enforceable in US courts).

Review is record-rule. But in this case it doesn’t much matter.

Judge Eminent Toro takes a close look at the FAST Act. That’s Fixing America’s Surface Transportation Act of 2015. That enactment sets up the mechanism for the passport grab.

“To summarize the foregoing, the FAST Act authorizes different Government actors to make different decisions and carry out different actions. Pursuant to section 7345, the Commissioner is charged with determining whether a seriously delinquent tax debt exists, making a certification of that fact, and notifying the taxpayer of that certification. Also pursuant to section 7345, the Secretary of the Treasury is charged with transmitting the certification made by the Commissioner to the Secretary of State. By contrast, pursuant to FAST Act section 32101(e), the Secretary of State acts with respect to the passport of an individual who has been certified to have a seriously delinquent tax debt. The Secretary of State is permitted, in his discretion, to revoke a passport that has already been issued. And he is prohibited from issuing a new passport or renewing an expiring one, although the prohibition is not absolute. He retains discretion to issue a new passport or renew an expiring one ‘in emergency circumstances or for humanitarian reasons.’ FAST Act sec. 32101(e)(1)(B).” 156 T. C. 8, at p. 16.

And Doc Rob has serious tax debt, like $474K worth. His SOL argument is an affirmative defense, not a jurisdictional bar. Btw, at time of trial State hadn’t yet grabbed his passport.

Tax Court, like all Federal courts, tries to avoid ruling over-broadly on constitutional questions. Whether the statute as applied to State is constitutional is not before Tax Court.

Summary J for IRS.

Seems like ex-Ch J L Paige (“Iron Fist”) Marvel is revisiting US Tax Court’s worldwide reach today in Denny Chan, et al. Docket 2435-17, filed 3/30/21. It seems Denny’s ex, Tramy Van, has flown the cliché and returned to her native land.

So we have a video replay of Jon and Esther Zuhovitsky. You remember Jon and Esther? No? Then see my blogpost “Come From Away – Part Deux,” 11/17/17.

Y’all will surely remember Tramy. What, no? Then see my blogpost “A Snapshot in Time,” 10/1/19.

The question, which Jon and Esther ducked by coming to our Minor Outlying Island off the Coast of North America for trial, was Tax Court’s aforesaid reach.

Ex-Ch J Iron Fist gives IRS more time to grapple with the question.

“…respondent is given additional time until April 30, 2021, to file a status report that states his position as to whether the Court is authorized under applicable domestic law or treaty to hold a remote Zoom trial in which a party residing in Vietnam participates and to administer an oath to a party residing in Vietnam.” Order, at p. 1.

I don’t know about the Court’s power to Zoom or administer oaths in Vietnam, but I can reassure the Court and the parties, and my readers.

No worries. I hereby solemnly affirm that I myself did administer any number of oaths in Vietnam, to say nothing of colorful metaphors, undeleted expletives, objurgations and maledictions. And some half-a-million of my then-colleagues, temporarily resident therein, did likewise.

I miss my very occasional visits to the track. It’s not the thought of making money; horseplayers die broke is a truism. I like trying to dope out a race, and complaining to myself in sulphurous terms when I get it wrong, as I almost always do. Watching the paddock parade on television isn’t the same.

Howbeit, I was so taken up by the tale of Leon Max that I didn’t pick up two other opinions today. So here’s the late double.

First, a win for Frantic Frank Agostino and The Jersey Boys, John K. Crandall and Nives M. Crandall, 2021 T. C. Memo. 39, filed 3/29/21. It’s Nives’ story, as she’s a US-Italian dual citizen with some Italian-sourced income that never made it onto the 1040.

Nives saw the light, and availed herself of OVDP; that’s the come-clean for offshoreniks. There’s much back-and-forth, but at close of play Nives and IRS sign off on Form 906. I’ll let Judge Vasquez describe that.

“All closing agreements must be executed on forms prescribed by the Commissioner. Section 601.202(b), Statement of Procedural Rules, provides that the Commissioner will use one of two forms for closing agreements: (1) Form 866, Agreement as to Final Determination of Tax Liability, generally used to determine conclusively a taxpayer’s total tax liability for a taxable period; and (2) Form 906, which is the type at issue here, generally used if the agreement relates to one or more separate items affecting the tax liability of a taxpayer.” 2021 T. C. Memo. 39, at p. 17 (Citations omitted).

Of course, these settlement deals are strictly construed, and general contract law applies. The fight here is about a $6K minimum tax credit that the RA mistakenly allowed Nives and John, but which John and Nives never claimed. Now IRS wants it back, plus chop.

The form says it covers a bunch years (hi, Judge Holmes) for which John and Nives are allowed FTC (Foreign Tax Credit), but doesn’t state a sum certain for the year at issue. So IRS says that’s a free-fire zone.

No, says Judge Vasquez. The form says IRS can adjust everything but the offshore stuff. The FTC that Nives and John claimed for year at issue was never adjusted. Though IRS says that means no agreement, Judge Vasquez says the claimed FTC stands.

A Taishoff “Good Job” goes to The Jersey Boys.

Next entry, Purple Heart Patient Center, Inc., 2021 T. C. Memo. 38, filed 3/29/21. PHPC is a CA nonprofit pottery taxed as a C Corp. Keith Stephenson, sole director, shredded all proofs of COGS, fearing that same would be used to sustain Draconian mandatory minimum trafficking jail time. So he has not a shred of evidence (sorry, guys) of the cost of his COGS.

Keith tries the expert witness manœuvre, whereby the witness testifies as to industry standards. We saw that in the PMAC case; see my blogpost “Bei Mir Bist Du Schane,” 6/3/16. It didn’t work there, and it doesn’t work here.

But Keith himself takes the stand.

“Neither Mr. Stephenson’s nor Mr. [expert]’s testimony was precise enough to substantiate the amounts of COGS Purple Heart claimed on its tax returns. But Mr. Stephenson’s testimony may have been credible enough for us to estimate part of Purple Heart’s claimed COGS under Cohan. He testified that Purple Heart marked up the cannabis it sold by 100% and determined the price of its noncannabis products by doubling the wholesale price; both practices would suggest COGS of approximately 50% of its gross receipts. Mr. Stephenson also reviewed the general ledger each week to ensure that all of Purple Heart’s purchases and sales were properly recorded; and Mr. [expert] testified that, before preparing its tax returns each year, he checked the records Purple Heart provided to him to determine whether any of the sales or purchases appeared to be inaccurate. However, Mr. [expert] did not review any of the source documents for Purple Heart’s sales and purchases; and Mr. Stephenson testified that it was ‘almost impossible * * * [for Mr. Stephenson]to know everything” happening with Purple Heart’s sales and purchases because he “dealt with operations at a higher level’.” 2021 T. C. Memo. 38, at pp. 29-30.

One year’s COGS go by the board because end prior year’s inventory and opening year at issue inventory don’t match. So no basis for determining COGS. But next year’s opening inventory did match previous year’s closing inventory, so Keith’s 50% COGS number works.

There’s unreported income that Keith can’t rebut, arising out of claimed purchases of boo for cash.

Keith claims reasonable basis for escaping chops, because he filed Form 8275, the “please audit me” form. But that would help only if the issue were misallocation, not substantiation. And Keith knew that shredding his records wouldn’t help him avoid the slammer, because he had been quoted in national publications, and taught at the first pot university in America. Judge Pugh won’t even consider if Keith’s fear of prosecution is reasonable, much less a reasonable excuse for avoiding chops.

Pot university? Well, I’ll be dipped.

(Please Pardon Arcane Technical Term)

A personal digression before we engage Judge Buch’s exhaustive (not to say exhausting) dissertation about women’s clothing design and development in Leon Max, 2021 T. C. Memo. 37, filed 3/29/21. My great-grandfather owned a ladies’ dressmaking business, wherein he employed a young wannabe operatic tenor, whom he reskilled as a sewing machine operator. The tenor-operator stole the heart of his daughter, my beloved grandma. Had that not happened, I would not be writing this blogpost. So the rag trade has a warm place in my heart.

Yes, Leon Max was here before. See my blogpost “Let It All Hang Out” – Redivivus,” 9/6/19. No worries; doesn’t look like Judge Buch was confused by anybody’s testimony.

Leon Max is a major figure in women’s clothing. He claims to do a lot of research, and wants Section 41 credits therefor.

Except it isn’t qualified research. It’s not hard science in search of a new method. What it is, is fashion. The basics, designs based on consumer research, the choices of textiles, patterns, dyeing, sizing, fitting, are all well-known processes.

The experts are given a brief mention, but Judge Buch isn’t persuaded.

Read the opinion. It’s engrossing, especially if you’re a fashionista.  

I often feel like the voice crying in the wilderness. Either everyone but myself is overjoyed with the new, improved (???), jim-handy DAWSON electronicated coruscation, or is just resigned to the current opacity.

But being in a minority of one never stopped me yet. Besides, I see today that I am not alone. Even the august Tax Court Office of Information Services, the Keepers of the Scared Flame, gets swangtangled in the new, improved et cetera.

Case in point: Kiran Rawat, Petitioner and Raghvendra Singh, Intervenor, Docket No. 11350-18, filed 3/29/21. Kiran wants to get off the electrons and onto the paper chase. True, Kirwan and Raghvendra have filed seven (count ’em, seven) petitions before, and strewn paper and e-mail addresses broadcast. Read Judge Gale’s hereinbefore-cited order for the backstory.

Seems Raghvendra is in the slammer since he filed this petition. But all the paper seems to be going to his free world address.

Here’s Judge Gale: “Although the Court’s Order served January 28, 2021, directed the Clerk of the Court to change intervenor’s mailing address of record, the Court was thereafter notified by the Deputy Clerk of the Court that due to technical limitations the Clerk could not complete the foregoing directive at that time. Consequently, intervenor’s mailing address of record has not changed during the pendency of this case.” Order, at p. 3, footnote 3.

Great system, guys. Takes more than two (count ’em, two) months to change a mailing address.

We might (or might not) get searchable opinions and orders by the end of the current millennium.

In the meantime, let the Clerk change Kiran’s service to mail-only, and get her the four documents in paper that she already got electronically.

Edited to add, 4/20/21: See order of even date herewith. “On April 5, 2021, the Court received an envelope bearing a postmark of March 31, 2021, and containing a document signed and dated by petitioner on March 30, 2021. The document, titled ‘Notice of change of address of Petitioner’s witness’, is addressed both to the Court and counsel for respondent and lists a current mailing address for intervenor Raghvendra Singh at North Kern State Prison (NKSP).” Order, at p. 1.

Judge Gale, not willing to deal with several purported addresses, susses out the correct address by contacting the North Kern State Prison, and gets assured that North Kern State will reroute mail as necessary. And tells all hands to use the correct address, lest he visit condign punishment on those who do not.

Proves the old saw: If you want something done right, do it yourself.

Fifty-four (count ’em, fifty-four, and I have) years of practicing law. Still enthusiastic.

There’s a live horse tale coming off the bench in the LA regular session today, Laurel Daphne, Docket No. 8615-19.

It’s coming from Judge Emin (“Eminent”) Toro, and it’s live as I write this (2:40 p.m., EDT, 3/26/21). I’m writing this as it’s coming through the internet, and the YouTube video is none too clear, so bear with me. Look for the whole story to hit the opinions page next week.

Diva, Sugar and Cherry (? phonetic) are the horses. Plus a healthy gelding for petitioner’s personal use, who was “healthy and didn’t eat much,” so she didn’t need to segregate his expenses.

It’s a seventeen (count ’em, seventeen) year string of losses, and a sad tale of injured foals. Only one foal sale. And no logs, separate bank account, and “(S)he should have kept better records.” Her ranch appreciated in value, but that appreciation was independent of the horsing around, and she didn’t buy the property (it was a gift).

Of course, she and her children had fun.

There’s the usual trudge through the “goofy regulation,” Reg. Section 1.183-2(b), and Judge Eminent can trudge with the best. The usual “somber reasoning and copious citation of precedent” results in a loss in Tax Court to match the horse-drawn losses. Judge Posner would reiterate his often-expressed review.

Tax Court is manifesting a deep understanding of horse breeding, horse training, and other horse-related matters.