I just blogged today the case of Mike S. Wright (see my blogpost “No Contest,” 2/28/22), where the AO’s erroneous conclusion that Mike had a chance to contest made no difference. But now Scott Nicholas Shaddix, T. C. Memo. 2022-11, filed 2/28/22, has the same bœuf as his OIC was denied, but he had additional substantiation and never had an exam.

Two of his four (count ’em, four) years-at-issue get tossed, as IRS never gave him a SNOD or NOD. But notwithstanding that, IRS’ own records show Scott never got a SNOD or participated in any exam, despite what two SOs say.

And the bounce of the OIC sets up the right of Tax Court review, even if the year at issue is out.

The OS (offer specialist) who looked at Scott’s OIC was convinced his RCP was as Scott stated. However, the OS wanted Scott to sign Form 2261-C, Collateral Agreement—Waiver of Net Operating Losses, Capital Losses, and Unused Investment Credits, thereby demanding Scott waive a bunch NOLs (hi, Judge Holmes), which would trigger a bunch chops which he might otherwise offset by whatever NOLs were left after the amount of tax compromised plus the payment Scott was making on the OIC.

Scott says no.

Judge Albert G. (“Scholar Al”) Lauber says Scott should have had the chance to dispute liability and offer additional substantiation. So he remands Scott.

“If Appeals concludes on remand that petitioner is not entitled to dispute his underlying liabilities for [years at issue], it shall explain the factual and legal basis for that conclusion. If Appeals determines that petitioner is entitled to dispute these liabilities, it shall offer him the opportunity to submit relevant evidence and then resolve his underlying liability challenge. We do not reach at this time the question whether Appeals abused its discretion in declining to accept petitioner’s OIC. In addition to presenting, at the supplemental hearing, appropriate evidence concerning his underlying tax liabilities, petitioner is free to resume negotiations concerning the terms that should properly be included in such an offer.” T. C. Memo. 2022-11, at p. 9.

At least for now, that is, as Corning Place Ohio, LLC, Corning Place Ohio Investment, LLC, Tax Matters Partner, T. C. Memo. 2022-12, filed 2/28/22 survives summary J. The Cornings have the Garfield Building in Cleveland, built on Rockefeller land for the late Pres. Garfield’s sons. Judge Albert G (“Scholar Al”) Lauber extols the artistic-historical merits of this desirable property, which the Cornings are converting from office to condos, without touching anything anybody can see from the street.

The Cornings paid $6 million for this treasure, but took a historic exterior write-off of $22 million. They left off their appraiser’s exhibit with his c.v., but put that in on exam when told it was missing, and ponied up the $500 filing fee called for by Section 170(f)(13) as well, both of which IRS accepted. IRS graciously responded with a FPAA bouncing the entire deduction.

IRS wants summary J on perpetuity, the defective appraisal, and the late $500 (seriously).

Of course it’s all about the deed.

“Upon initial inspection the easement deed at issue seems to track the regulation precisely. It provides that ‘Grantee’s percentage interest shall be determined as the fair market value of this Easement as of the Recording Date divided by the fair market value of the Property as a whole as of the Recording Date.’ But respondent views as problematic the sentence that appears two lines later: ‘The values upon the Recording Date of this Deed shall be those values used to calculate the deduction for [F]ederal income tax purposes allowable by reason of this grant pursuant to Section 170(h) of the Code.’” 2022 T. C. Memo. 12, at p. 6.

But IRS says if the deduction is invalid, the easement FMV is zero, so the 501(c)(3) protector gets zilch.

But that assumes IRS is the one who determines the values, whereas the more plausible reading is that the Cornings decide, as the “Recording Date” occurs long before IRS is on the scene.

IRS claims the omitted c.v., plus the fact that the photos submitted didn’t show the roof, invalidates the appraisal. Judge Scholar Al says substantial compliance plus good faith could cure this, so save it for the trial.

Ditto the late $500.

“The statute specifies that such filing fees ‘shall be used for the enforcement of the provisions of subsection (h)’ dealing with qualified conservation contributions. § 170(f)(13)(C). Respondent contends that the deduction must be denied in its entirety because Corning Place omitted a $500 filing fee when filing its original return….

“However, Corning Place did submit the $500 filing fee as soon as this omission was brought to its attention, and the IRS accepted the filing fee. Surmising that the fee has now been dedicated to the Commissioner’s section 170(h) enforcement program, petitioner contends that it substantially complied with the statutory mandate because the statute’s purpose has been accomplished. Neither this Court nor any other court has yet considered whether section 170(f)(13) can be satisfied by substantial compliance.” T. C. Memo. 2022-12, at pp. 9-10.

And the Cornings say they filed an amended return, to which they attached the $500. But that return never made it into the record.

So save it for the trial.

or

The Great Joust

One of my nearest and dearest, and her spouse, are great fans of the local Renaissance Fair. Unfortunately, the late Marion Levine was not the owner of the one they patronize, although she did own two (count ’em, two) others. I’ll let Judge Mark V Holmes explain.

“These are a bit like state fairs, if the state were a small principality in fifteenth-century Europe populated entirely by modern people who enjoy costumed role-playing and adding extra ‘”e”s’ to words like ‘old’ and ‘fair.’” 158 T. C. 2, at p. 5.

But the late Marion owned a lot more, after she sold the family supermarket chain, and started buying real estate, trailer parks, and stocks. The late Marion also wanted to provide for her two children, who were often at odds, and her grandkids. Fortunately, she had her trusty CPA and general manager Larson, who, with the two children aforesaid, had powers of attorney. If there was any disagreement, majority ruled. Better still, she had her trusty attorney Shane Swanson, Esq., who gets a Taishoff “Good Job, First Class” as his split-dollar life insurance arrangement does a grand slalom around Sections 2036, 2037, and 2703 (with much “somber reasoning and copious citation of precedent”).

Of course, for this to work, there needs to be a client with a heavy-duty estate, with enough cash to buy a hefty insurance policy or two, children and grandkids the client wants to benefit, which children have net worths large enough, and healths good enough, to let an insurer insure their lives for heavy-duty dollars. And same cannot cramp client’s lifestyle; Marion has GRAT and QPRT and cash, so she’s in.

The case is Estate of Marion Levine, Deceased, Robert L. Larson, Personal Representative, 158 T. C. 2, filed 2/28/22.

Shane creates two trusts, a revocable for Marion and an irrevocable for children but run by Larson, organized under the beneficent SD statutes, that allow investment advisors to overrule administrators, while remaining fiduciaries. Revocable lends irrevocable $6.5 million borrowed using Marion’s assets as collateral. Irrevocable buys last-to-die life insurance policies on daughter and her spouse, because son was uninsurable, and gives revocable a note for the $6.5, payable at the greater of (i) total premiums paid or (ii) either (a) the current cash-surrender values of the policies upon the death of the last surviving insured or (b) or the cash-surrender values of the policies on the date that they were terminated, if they were terminated before both insureds died. 158 T. C. 2, at p. 17.

Irrevocable owns the policies. Revocable owns only the receivable.

Of course there’s a joust over the FMV of the receivable, because that’s in the late Marion’s estate, but that’s stiped out at $2.3 million.

IRS claims all of the $6.5 is in, because Marion and Larson could amend the deal and she’d get the policies. Except any two parties could mutually terminate any deal, and the power or right to revoke a deal doesn’t extend to power of persuasion. And Larson is fiduciary both for the children and the grand kids. If he colluded with Marion to revoke, the grandkids get nothing.

Now gift tax is another story, but we’re not going there here.

IRS loses. The stiped $2.3 is all that is subject to tax.

T&E lawyers, read the whole opinion. Trusty Shane Swanson did a real good job.

Michael S. Wright, Docket No. 7909-19L, filed 2/28/22 (the Last of the Palindromes), did in fact contest his underlying liability. The SO at the CDP concluded he hadn’t, and gave him a NOD, sustaining the NFTL.

Mike took an IRA draw, of which half went to loved-once in the ongoing CA divorce proceedings. Mike said “…his assets had been frozen by the state court overseeing the divorce proceeding, and that he had a hearing scheduled to ‘work toward settlement and division of assets.” Order, at p. 2. Mike also said his ex had gotten half, so she should be liable for half. And they were CA residents, a community property state.

Despite the IRC’s solicitude for community proprietors, Section 408(g) puts paid to that argument. The distributee of the IRA draw is on the hook for the whole boat, per Section 408(d)(1). Of course, Mike can fight it out with loved-once in CA court.

That said, the SO’s erroneous conclusion that Mike couldn’t contest liability at the CDP is not a bar to summary J for IRS. Remand won’t work here, because the only arguments Mike raised to avoid liability for the whole IRA distribution were losers.

Now before my ultra-sophisticated readers yell “QDRO!”, note Mike never raised Section 408(d)(6). Order, at p. 7. Judge Emin (“Eminent”) Toro had this one; I wonder what That Obliging Jurist, Judge David Gustafson would have done.

Would Judge Gustafson have sent this back to Appeals with a nudge nudge, wink wink, to Mike to try for a QDRO?

I don’t know, and it’s futile to speculate. But Taishoff says Mike might (could be) (maybe so) want to consider a Rule 162 reconsideration.

Hewitt is the gift that keeps on giving. And Judge Albert G (“Scholar Al”) Lauber receives even more than I, as today he deals with Montgomery-Alabama River, LLC, Parkway South, LLC, Tax Matters Partner, Docket No. 9254-19, filed 2/25/22.

My readers know I eagerly awaited fresh learning in this case. See my blogposts “‘No Comment’ – Redivivus” 2/2/21, and “It’s Turkeys All the Way Down,” 6/11/21.

Today we have the update on the latter blogpost.  Therein, I chronicled how Judge Scholar Al tossed both IRS’ and the Montys’ motions for partial summary J. But now the Montys are back, wanting renewed summary J that the improvements-out clause is copasetic because Hewitt, and they’re Golsenized to 11 Cir.

IRS folds. Looks like Judge Holmes got it right, so much so that even IRS is folding. “Highly contestable readings of what it means to be perpetual” are on their way out.

But no summary J on that point to the Montys.

“We will accordingly vacate our June 11, 2021, Order insofar as it denied petitioner’s motion for partial summary judgment on the APA question. And we will hold petitioner’s Renewed Motion for Summary Judgment in abeyance pending further developments. This is the course we have followed in other cases presenting this scenario. See, e.g., Oconee Landing Prop., LLC v. Commissioner, T.C. Dkt. No. 11814-19 (Jan. 10, 2022) (order); Wisawee Partners II, LLC v. Commissioner, T.C. Dkt. No. 6105-18 (Jan. 7, 2022) (order). Because we have denied respondent’s motion for partial summary judgment on the ‘donor improvements’ issue–for reasons unrelated to the Eleventh Circuit’s opinion in Hewitt–this case (unless settled) will proceed to trial to determine the proper valuation of the easement, whether or not the regulation is valid. Given the possibility of further appellate developments on the ‘donor improvements’ issue, we think that the most prudent course is to preserve this issue for possible consideration at trial or in post-trial briefs.” Order, at p. 2.

For Oconee, see my blogpost “Price and Value,” 1/12/22; for Wisawee, see my blogpost “Another Silt-Stir,” 1/7/22.

Can Oakbrook be far behind?

CSTJ Lewis (“Master Speller”) Carluzzo doesn’t name which software led Candice L. Busch & Randall P. Busch, Docket No. 14085-20S, filed 2/25/22 astray. But their failure to heed the old saying “take care of the pennies and the dollars will take care of themselves” costs them the Section 6662 five-and-ten chop. Candice & Ron  concede the deficiency, which resulted in the refund of all their withholding.

The software Candice used to do their year-at issue taxes only recognized the whole-dollar amount of any entry. Thus, when Candice entered the Section 163 $21,201.25 deduction (which admittedly the Buschs were entitled to), the computer printed out $2,120,125.

The Buschs claim honest mistake. And any of us could make one. I remember one year when I put the right number on the wrong line of our 1040, wrong by one line; it took a year’s worth of phonecalling to put it right.

CSTJ Lew: “As they see, they had reasonable cause and acted in good faith with respect to the entire amount of the underpayment of tax that resulted from the mistaken entry. They ask the Court to recognize, as they point out that honest mistakes are sometimes made. As a general proposition of life, we agree with petitioners on the point, and we further agree with petitioners’ suggestion that not every mistake made on a Federal income tax return should result in the imposition of an accuracy-related penalty. A person preparing a return might understandably get distracted while doing so and enter the wrong amount for an item, or if not distracted, when transferring numbers from one document to another, transpositions often occur. If a computer-based software program is being used in the process, the limitations and requirements of a software program might not be fully appreciated by the user. Any number of situations could cause an ‘honest’ mistake to be made when amounts are incorrectly reported on a Federal income tax return.” Transcript, at p. 7.

But.

“The mistaken entry is not the real problem. Their mistake was failing to review the return carefully enough to have recognized the erroneous entry before the return was filed. After all, it should go without saying, that a taxpayer’s obligation to prepare and file a Federal income tax return includes the duty to review that return to ensure that the information reported or shown on the return is accurate before the return is filed.” Transcript, at pp. 7-8.

The mortgage interest page of the return has a couple columns (hi, Judge Holmes) to the left of all the other numbers, showing the mistake. CSTJ Lew says it sticks out like a sore thumb.

And besides stiping out the Boss Hoss sign-off (they’re pro se, of course), Candice & Ron give it away on the trial. “At trial petitioners more or less acknowledge that they failed to carefully review the return before it was forwarded to the Internal Revenue Service. It was a mistake for petitioners not to review the return carefully, or as recollected by one of them, not to review it at all after it was prepared. Their failure to review the return carefully was a careless mistake that completely undermines their claim that they acted with reasonable cause and in good faith with respect to the underpayment of tax that, as it turned out, resulted from that failure.” Transcript, at pp. 8-9.

The most dangerous part of any software program is found in front of the keyboard.

I take the immortal words of Surgeon Lt.-Col. John McCrae to welcome the newest Ch J of United States Tax Court, Judge Kathleen Kerrigan. Her term of office commences 6/1/22. I am sure Judge Kerrigan will hold the torch high during her tenure.

Never before having a Taishoff cognomen, I open the field for suggestions. As usual,. no prize for the winning answer, and I reserve to myself the ultimate choice.

Here’s the official word:https://ustaxcourt.gov/resources/press/02252022.pdf

My caption derives from the Federally-Authorized Tax Preparer privilege, enshrined in Section 7525(a)(1). This enactment spreads the invisible shield over advice and communications exchanged with the Circular 230 crowd, EAs, CPAs, ERPAs, and EActs, as well as attorneys at law admitted to practice in any State, Commonwealth or Territory.

IRS is trying to pry loose the shield in Picayune Pearl Aggregates, LLC, Picayune Pearl Aggregates Investors, LLC, Tax Matters Partner, Docket No. 7045-19, filed 2/24/22. The shield has two (count ’em, two) components, work-product and advice.

The Picayune Pearls ain’t so picayune, as they’ve taken a $170 million Section 170 deduction.

But the work product they’re trying to hide was prepared years before the NBAP that kicked off the FPAA that’s at issue here.

Judge Courtney D (“CD”) Jones has this one.

First, the work product doctrine. Work product shields from discovery documents, interviews, statements, memoranda, correspondence, briefs, mental impressions, and tangible things prepared by an attorney in anticipation of litigation or trial. The magic words are “in anticipation of litigation or trial.” There’s got to be a specific claim supported by concrete facts that would likely result in litigation.

Here, “…the documents at issue were prepared well before the Internal Revenue Service (IRS) even issued a Notice of Beginning of Administrative Proceedings (NBAP) on May 24, 2018. Consequently, it is difficult to conceive of a factual predicate that would have made it reasonable for Picayune Investors to anticipate litigation concerning the section 170 deduction at issue when these documents were created in 2015 and 2016.” Order, at p. 3, footnote 5.

Judge, if a client of mine even casually mentioned that they were considering taking a nine-figure charitable deduction for anything, and selling the same to high-rollers with big taxable gains, I’d be eo instante anticipating IRS would be doing the Matthew 24:28 number on them. But the Picayune Pearls lose that one. Note that Judge CD Jones cites a case where even a note from the IRS Art Advisory Panel questioning a deduction is enough to invoke work product for everything thereafter. So keep a lookout for casual billets doux from IRS.

Judge CD Jones defers opining whether the client-attorney variant of FATP covers the documents the Picayune Pearls seek to suppress. The privilege log submitted in support is too vague. The Picayune Pearls did ask for a mulligan via a status report in the first week in April, so Judge CD Jones gives them that.

Of course, if the Picayune Pearls are going to claim good-faith reliance on any thereof, privilege is impliedly waived. Here’s one version of implied waiver: “1) assertion of the privilege was a result of some affirmative act, such as filing suit, by the asserting party; (2) through this affirmative act, the asserting party put the protected information at issue by making it relevant to the case; and (3) application of the privilege would have denied the opposing party access to information vital to his defense.” Order, at p. 4. 5 Cir, to which the Picayune Pearls are Golsenized, has a simpler version, but it’s the same story.

Of course, at least in 5 Cir, if their petition was artfully drafted, the Picayune Pearls could claim reliance on statutes, regs, decided cases, administrative practices, policies, and procedures, and never mention what their lawyers and CPAs told them. Practice tip: Take a look at the Schlumberger case, discussed in Order, at p. 5.

It’s been a couple years (hi, Judge Holmes) since I last visited the anecdote told by the late essayist and raconteur Harry Golden. It was the story of an immigrant who, after many years, finally attained US citizenship. Triumphantly forsaking his native tongue, he spoke only broken English thereafter, affecting to understand no other. Even when his wife would address him in their native tongue, he would turn to his US-born children and ask them “Vot did she set?” Thereupon his wife would bombard him with choice language.

I’m sure Judge Courtney D (“CD”) Jones is far too well-bred to use any such language. But she has the same question as Harry Golden’s new-fledged citizen when it comes to 11 Cir’s celebrated decapitation of IRS’ reading of the Proceeds Regulation, s/a/k/a Reg Section 1.170A-14(g)(6)(ii), improvements-out, prior-claims-in.

Both IRS and Cub Creek Preserve, LLC,  Southern Land Protectors, LLC, Tax Matters Partner, Docket No. 12401-20, filed 2/23/22, want partial summary J. But with chops still on the table, any form of summary J won’t obviate the need for a trial.

Howbeit, Judge CD Jones has the latest silt-stir, the post-Hewitt fallout.

Y’all remember the Coalholders lost on both improvements-out, prior-claims-in. IRS wants a “dission” to like effect for the Cubcreekers. But, while IRS quibbles about the Cubcreekers principal place of business, everyone is betting this case goes to 11 Cir. There’s no stip taking the case out of Golsen. And the Cubcreekers weren’t dealing with improvements, only prior claims.

For those who tuned in late, “prior claims” means that, if the easement is judicially extinguished, prior claims against the servient tenement must come out of any proceeds (like a condemnation or eminent domain award) before the 501(c)(3) protector gets anything.

So vot (sorry, what) did 11 Cir mean when they shot down IRS’ reading of the Reg?

“Though the motions before us address the prior claims provision, not a donor improvements provision (as the deed does not appear to contain a donor improvements provision), respondent’s position is based primarily on his assertion that the prior claims provision fails to satisfy the requirements of Treas. Reg. §1.170A-14(g)(6)(ii). It is not entirely clear at this time whether the Eleventh Circuit invalidated Treas. Reg. §1.170A-14(g)(6)(ii) in its entirety, or whether the court invalidated that regulation only insofar as it is interpreted to disallow deductions based on carve-outs for improvements. We also note that the validity of Treas. Reg. §1.170A-14(g)(6)(ii) remains pending before the Sixth Circuit. See Oakbrook Land Holdings, LLC v. Commissioner, No. 20-2117 (6th Cir. Oct. 16, 2020). Under these circumstances, we conclude that summary judgment based upon an application of Treas. Reg. §1.170A-14(g)(6)(ii) to the prior claims provision would be inappropriate.” Order, at p. 4.

Oh, what a lovely silt-stir.

I haven’t followed pro basketball since Clyde Frazier and Dave DeBusschere, but today Judge Nega follows the careers of Zach Randolph and Michael Conley, two millionaires whose untaxed millions are cause for the jumpball between IRS and Hoops, LP, Heisley Member, Inc., Tax Matters Partner, T. C. Memo. 2022-9, filed 2/23/22.

Hoops formerly owned the Memphis (ex-Vancouver) Grizzlies of the National Basketball Association, whose principal activity was once described as “every twenty-four seconds ten millionaires jump in the air.” Messrs. Randolph and Conley were, prior to and in the year at issue, employed by Hoops under the terms of the NBA Uniform Player Contract.

In that same year, Hoops sold out, owing Messrs. Randolph and Conley deferred compensation (all fully-earned and not subject to substantial forfeiture, but unpaid) of some $12.6 million, but discounted to present value at year of sale of $10.673 million. The buyer assumed all the obligations of Hoops, including, but in no way diminishing, limiting, or abridging the generality of the foregoing, the aforesaid $12.6 due the gentlemen aforesaid.

Hoops filed its Form 1065 for year at issue without deducting the $10.673 as wages. They amended to do so, whereupon IRS whanged them with a FPAA. Hoops claims asymmetry: they have to pay tax on the COD for the $10.673 (Hoops is off the hook for the $12.6 ultimate payoff), but that was wages to Messrs. Randolph and Conley.

Despite some really ingenious argy-bargy by their trusty attorneys, whose shoes pass the Mark 9:3 test, Judge Nega and Section 404(a)(5) are too much.

Section 404(a) says if deferred compensation would be deductible (like wages), same can only be deductible subject to the limitations of Section 404(a).

“Section 404(a)(5) provides that, in a case of a nonqualified plan, a deduction for deferred compensation paid or accrued is allowable for the taxable year for which an amount attributable to the contribution is includible in the gross income of the employees participating in the plan.” T. C. Memo. 2022-9, at p. 8. Everyone agrees that the NBA plan is nonqualified.

Of course Hoops is an accrual-basis taxpayer, thus bringing in Section 461.

Ascertainable amount (check), there is in fact a liability (check), and economic performance has taken place (all-events: check). So there would be a recognizable tax event.

Except.

“The regulations under section 461, however, further instruct that if, as here, the taxpayer uses an accrual method of accounting, ‘[a]pplicable provisions of the Code, the Income Tax Regulations, and other guidance published by the Secretary prescribe the manner in which a liability that has been incurred is taken into account.’ Treas. Reg. §§ 1.461-1(a)(2)(i), 1.446-1(c)(1)(ii)(A). Thus, under the regulations,  the initial question is whether another provision of the Code or the Regulations prescribes the manner in which the deferred compensation liability is taken into account.” T. C. Memo. 2022-9, at p.10. (Citations omitted).

Enter Section 404(a(5).

“… section 404(a)(5) is the applicable Code provision that governs the deductibility of and prescribes the manner in which a deferred compensation liability is taken into account. Under the plain text of section 404(a)(5), a deduction for deferred compensation is taken into account only for the taxable year in which an amount attributable to the contribution is includible in the gross income of the employee and then only to the extent allowable under section 404(a). See Treas. Reg. § 1.404(a)-12(b)(1). T. C. Memo. 2022-9, at p. 10.

The statute aims to match payment (and deduction thereof) by the employer with receipt by (and payment of tax by) the employee.

Hoops was let off the obligation to pay Messrs. Randolph and Conley, so that’s part of the gain on the sale.