In Uncategorized on 06/28/2021 at 16:33

Sometimes the wheeler-dealer’s long-established practice of treating all his controlled entities, even those co-owned with others, as different pockets in the same suit of clothes, while possibly fraud on his creditors, isn’t fraud on the IRS. Judge Goeke thus rings down the curtain on a couple years’ worth of tax troubles (hi, Judge Holmes) for Michael R. Kelly, 2021 T. C. Memo. 76, filed 6/28/21.

It takes 45 (count ’em, 45) pages of Judge Goeke’s prose to set forth some of Mike’s wheeling-dealing, from his start as a bad-debt stripminer (buying bad secured loans to foreclose and strip the collateral), to buying and selling business as diverse as linen rental and yacht-chartering. He used a plethora of SPEs (Single Purpose Entities), each of whose integrity he safeguarded to keep from being rolled up if any one business failed (as Joe Hooker should have done at Chancellorsville). But he reported all but his one publicly-held corporation on his own 1040, as they were all disregardeds. And he flipped cash back and forth with fine abandon, until The Black ’08.

IRS claims Mike missed filing two Forms 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations (Mike’s yacht SPE was Cayman Islands-based), and that means substantial understatement 6SOL sinks him, unless Section 6501(c)(8)(B) good-faith reliance on experts saves him.

And it does. Mike’s CPAs were pros, with no adverse disciplinary history. Mike, or his staff, told them everything (and Mike cooperated with IRS during the audit). “Respondent contends that it was not enough for Mr. Kelly to inform [CPAs] that [Yacht] was a foreign entity, and he implies that Mr. Kelly should have advised Mr. S [preparer] that Form 5471 was required. The failure to file the Forms 5471 does not present an obvious tax obligation which was negligently omitted from information that a taxpayer provided to the return preparer. Mr. Kelly, through his staff, provided the necessary information to [CPAs], identified [Yacht] as a foreign corporation, and stated that he was unsure of the reporting requirements. Having done this, Mr. Kelly reasonably relied on [CPAs] to prepare his returns properly. While it could be argued that [CPAs] should have done more to ascertain Mr. Kelly’s filing obligations, it was reasonable for Mr. Kelly to rely on [CPAs] do so. A taxpayer need not question the advice provided, obtain a second opinion, or monitor the advice received from the professional.” 2021 T. C. Memo. 76, at p. 50 (Citation and name omitted).

“Respondent’s list [of badges of fraud] depends totally on the premise that Mr. Kelly’s intercompany transfers or withdrawals recorded as loans were not properly treated as loans and were concealed with intent to defraud the United States. While we do not presume the accounting by Mr. Kelly and his companies is always accurate regarding the ‘loans’, we do not believe the record establishes by clear and convincing evidence that the ‘loans’ were the basis of a fraudulent tax scheme; rather they were the products of two decades of Mr. Kelly’s business practices. As we discuss later herein, we agree with respondent that by 2008 there was no reasonable expectation the ‘loans’ would be repaid when incurred, and they should be treated as distributions. This conclusion does not in itself lead to a finding of fraud.” 2021 T. C. Memo. 76, at p. 55.

Howbeit, maybe some pre-Black ’08 transfers were loans, but after the subprime meltdown, game over.

So a major league Rule 155 bangers-and-mashed to follow.


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