Once again, that Obliging Jurist, Judge David Gustafson, the friend of the litigant both IRS and petitioner, will help both sides draft their papers, assemble their trial exhibits, and negotiate a continuance. Here’s Stephen Cary, Docket 9745-20, filed 2/9/22.

Stephen petitioned “…more than 20 months ago. We issued a notice of trial and a standing pretrial order … more than four months ago … setting this case for trial at a session beginning February 7, 2022.” Order, at p. 1.

IRS moves to toss last month for want of prosecution. Judge Gustafson sets up a phoneathon, wherein Stephen claims he’s disabled. Judge Gustafson accepts that, and moreover all sides agree that what Stephen paid in year at issue would cover the disputed IRA distribution (which Stephen says he never got, but IRS has the 1099-R). IRS wants a decision confirming the assessed tax, but Stephen claims additional deductions (unspecified) and says his disability is reasonable cause for no chops. He also refuses a next friend appointment.

So Judge Gustafson tells IRS’ counsel to move for summary J, and tells her what to put in her pleadings. He tells Stephen how to respond. He bargains Stephen down and IRS up, and gets a three-month continuance.

This is a good use of summary J, to smoke out both sides. Stephen will have to do more than simply claim “I didn’t get it,” and IRS will have to subpoena the IRS trustee’s records to show payment. And Stephen will need to come up with proofs of the additional deductions.

That’s how to move a case.

Today Judge James B (“Big Jim”) Halpern gives us the “corrected” version of TBL Licensing LLC f.k.a. The Timberland Company, and Subsidiaries (A Consolidated Group), 158 T. C. 1, filed 1/31/22 (although this “correction” appears 2/8/22).

It might possibly be of some little service to practitioners if I could set out of what the “correction” consists.

But Judge Big Jim doesn’t tell us.

Happily the attorneys for the parties (five for petitioner, four for respondent) can proofread the uncorrected version against the corrected. I cannot, as the Genius Baristas have obliterated the uncorrected version. And in the limited time I have before deadline, I cannot compare both versions even if available.

It would be nice if Judge Big Jim listed the corrections.

Failing that, please ignore my blogpost “Into the Woods – Part Deux,” 1/31/22

.

With a Side of Interest

Judge Albert G (“Scholar Al”) Lauber serves up today’s plat du jour at the Tax Court cafeteria, but Norma L. Slone, Transferee, T. C. Memo. 2022-6, filed 2/7/22, may find it unappetizing. Norma and her entourage of trusts and relatives have been here before; see my blogposts “Substance Matters,” 3/1/12, “Spring Cleaning,” 5/11/16, “Substance Matters – Part Deux,” 6/13/16, and  “Separate Checks – Redux,” 5/11/20.

Well, Tax Court, having twice been pate-whanged by 9 Cir for claiming the Slone Rangers (sorry, guys, the devil made me do it) were innocents, now must reckon up the bill for the transferor’s transgressions. That means a Rule 155 beancount.

“The IRS has calculated these numbers to include a deficiency of $13,494,884, an accuracy-related penalty of $2,698,997, and interest of $8,559,729, for a total of $24,753,610. The Ninth Circuit remanded the cases ‘for entry of judgment in favor of the Commissioner.’” T. C. Memo. 2022-6, at p. 2. The Slone Rangers claim IRS is double-dipping; they agree on the $24 million tax-plus-interest. “But they disagree as to the extent to which petitioners are liable for this debt. Petitioners contend that they are not liable for the penalty or ‘pre-notice’ interest, that the IRS has ‘double counted’ the transfers, and that they are entitled to reductions for ‘equitable recoupment.’” Idem., as my expensive colleagues say.

A transfer made for no consideration, that serves to defeat, delay and hinder creditors, gives rights to creditors, even if they aren’t yet creditors, under the AZ Uniform Fraudulent Transfers Act. A deadbeat can’t lay off all their assets in advance, incur a liability, and then claim poverty. And fraudulent intent on the part of the transferee is irrelevant; if the transferor sells all he has and gives it all to the poor, but instead of taking up as ordered, and then incurs debts he can’t pay, the poor transferees, though innocent as doves, are still on the hook.

Section 6751(b) Boss Hossery is off the table, as the Slone Rangers waited until now to raise it. And the Slones’ C Corp conceded the chop while controlled by the MidCo; to reverse that would be an ambush. Moreover, the chop belongs to the Slones’ C Corp, and Section 7491(c) applies to individuals, not  corporations.

Now no one is liable as transferee for more than they got from the transferor, so Norma and spouse, and their GST, only have to pony up $13 million. But their big trust got $30 million, so that’s in the crosshairs.

“The Slone Trust received cash totaling $30,819,544, but Slone Broadcasting’s aggregate Federal tax liability was only $24,753,610. Because the Slone Trust received assets with a value that exceeded the transferor’s total tax liability (including pre-notice interest), the Slone Trust’s liability for interest is governed by Federal law, and the availability of interest under Arizona law is irrelevant. We thus hold that respondent is entitled to recover pre-notice interest as provided in sections 6601(a) and 6621.” T. C. Memo. 2022-6, at p. 11 (Citation omitted, but read it).

And Judge Scholar Al issues a winter weather advisory.

“Petitioners urge that the IRS is attempting to “double count” the transfers and “impose an aggregate transferee liability . . . that far exceeds” Slone Broadcasting’s debt. Petitioners argue that, for section 6901 purposes, the assets deemed received by the Slone Trust should be reduced to $4,794,752—viz., the assets it actually received ($30,819,544) minus the assets it transferred to Mr. and Mrs. Slone ($26,024,792). But petitioners cite no authority, and we know of none, for the proposition that a transferee may reduce its liability by distributing the transferred assets to other persons. Indeed, such a rule would incentivize transferees to make a blizzard of subsequent transfers, hoping to frustrate IRS collection efforts.” T. C. Memo. 2022-6 ,at p. 11.

Transferee liability is several, that is, one after another; each transferee is liable for the whole amount, but no more than what she/he/it/they got. No transferee can claim that IRS should first pursue someone else. And once IRS gets the $24 million, the Slone Rangers are off the hook for anything else.

The Slone Rangers seek equitable recoupment, claiming their original returns showed too great a sales price for the stock in Slone Broadcasting, if the sale to the MidCo is disregarded as a sham. But equitable recoupment only helps if there’s no adequate remedy at law. But there is. Section 1341 claim-of-right.

“Section 1341 is captioned ‘Computation of Tax Where Taxpayer Restores Substantial Amount Held Under Claim of Right.’ It applies where (1) “an item was included in gross income for a prior taxable year . . . because it appeared that the taxpayer had an unrestricted right to such item,” and (2) a deduction is allowable in a later year ‘because it was established after the close of such prior taxable year . . . that the taxpayer did not have an unrestricted right to such item or to a portion of such item.’ § 1341(a)(1) and (2). If these conditions are met, and if  the deduction exceeds $3,000, the taxpayer’s tax for the later year is reduced by taking account of this deduction. See § 1341(a)(3), (4), and (5).” T. C. Memo. 2022-6, at pp. 13-14.

Except.

“Petitioners do not now have an existing claim under section 1341. That section applies only if ‘a deduction is allowable’ for the later year. § 1341(a)(2). Petitioners are cash basis taxpayers, and no deduction will be allowable on account of their transferee liability until they have paid the tax. See Estate of Stein, 37 T.C. at 957 (stating that relief is available ‘in the year of repayment’). We accordingly conclude that neither the doctrine of equitable recoupment nor petitioners’ section 1341 claim is properly before us in these cases. After paying the tax, petitioners may pursue these forms of relief by filing claims for refund and (if their claims are denied) by commencing suit in district court, see 28 U.S.C. § 1346(a) (2018), or the U.S. Court of Federal Claims, see id. § 1491(a).” T. C. Memo. 2022-6, at pp.14-15. (Footnote omitted, but it says if the Slone Rangers lose the Section 1341, they can try equitable recoupment again.).

IRS wants reconsideration in Buckelew Farm, LLC f.k.a. Big K Farms LLC, Big K LLC, Tax Matters Partner, Docket No. 14273-17, filed 2/4/22, but Judge Christian N. (“Speedy”) Weiler holds fast to his 11/22/21 fact-finding, more particularly bounded and described in my blogpost “Insubordination,” of even date therewith, as my expensive colleagues say.

IRS claims Federal tax law prevents curative rewritings of a deal once it’s closed, whatever State law says about correction deeds. It’s the usual improvements-out-on-judicial-extinguishment, with a gloss from Mitchell. For the story of Ramona Mitchell and Lonesome Charley Sheek, see my blogpost “Subordinate or You Lose,” 4/3/12.

Judge Speedy Weiler isn’t convinced by IRS’ argument. “…this Court and the Courts of Appeals have expressed the view that ‘not even judicial reformation can operate to change the Federal tax consequences of a completed transaction.’ Yet in other instances, this Court has held that reformation does abrogate the obligation to pay Federal tax liabilities in certain situations. ” Order, at pp. 9-10. (Citations omitted, but read the cases cited.)

Although the Order is less than crystalline, it seems that whether there was indeed a mutual mistake of law is a question of fact. Except whether there was a mutual mistake, and whether it can be corrected, there remains the Federal tax version of Charles Dickens’ Dover Mailcoach Rule. As the guard said when he shouldered his shotgun “If I should make a mistake, it could never be set right in your lifetime.” (A Tale of Two Cities, Ch. II). IRS’ version is “if you should make a mistake.”

And Judge Speedy Weiler seems to agree with the Dover Mailcoach Rule.”Although the Court is doubtful that equitable reformation can operate to change the Federal tax consequences of a completed transaction; since the Court has found there remains a genuine dispute of material fact precluding summary adjudication, it is not necessary for the Court to determine now whether the facts of this case warrant the equitable remedy of reformation under Georgia law.” Order, at p. 10.

But wait, there’s more!

Judge Speedy Weiler blows off the Buckelews’ belated attack on Reg. Section 1.170A-14(g)(6)(ii), the much-contemned Proceeds Regulation (Order, at p. 5). No mention of 11 Cir’s blow-off of Oakbrook in Hewitt (for which see my blogpost “Taking The Bookies’ Money,” 1/3/22).

Taishoff says let neither side take the Pol Roger Cuvée Winston Churchill out of the cooler just yet. The Buckelews may survive the correction deed fight, but their $47.5 million noncash charitable contribution deduction might not survive the appraisal joust at trial.

So the Dover Mailcoach Rule may not matter much, after all.

The old saw “what you don’t know can’t hurt you” may or may not be true, but the contrapositive sinks Ana Margarita Fiengo, Petitioner, and Pascual E. Fiengo, Sr., Intervenor, Docket No. 1250-20, filed 2/3/22. Judge Christian N. (“Speedy”) Weiler comes off the bench to show, once again, that knowledge of unpaid taxes is fatal to innocent spousery.

Pascual was Mr Outside, but Ana Margarita was Ms Inside, in the family business. ” Intervenor acted as the tradesman and performed the actual labor for the business, while petitioner did paperwork for the business and performed other administrative duties.” Transcript, at p. 5.

The underpayments of tax came primarily from the business. Ana Margarita “was responsible for both the personal and business finances of both petitioner and intervenor from 1984 through 2018.” Transcript, at p. 5. Ana Margarita wrote the checks and kept the books.

Ana Margarita and Pascual called it quits in 2018. The final judgment of divorce said nothing about who pays taxes.

Since only equity is available when underpayment, rather than underreporting, is in play, the Section 6015(f) laundry list gets a walkthrough.

Ana Margarita was in post-divorce compliance, so that helps. But she has no hardship evidence. Her abuse claim “… did, however, allege… that her relationship with intervenor was one of ‘intimidation and control, a form of abuse’. While the Court takes allegations of abuse seriously, the record does not support a finding that intervenor abused petitioner, nor did any alleged abuse prevent petitioner from complying with Federal tax laws.” Transcript, at pp. 113-14.

And while facts and circumstances (cue Sir Eddy Elgar) override a mere arithmetical tally of factors, here’s Judge Speedy’s concise bottom line.

“In evaluating the relevant factors, we conclude that the knowledge factor weighs heavily against relief for petitioner.” Transcript, at p. 14.

What you do know can hurt your innocent spousery. Fatally.

It works for estate tax (see my blogpost “Providing for the General Welfare,” 7/14/11) and for child support (see Schaschlo v. Taishoff, 2 NY2d 408 (1957); and no, it’s not me), but it doesn’t work when RCP is on the menu and OIC is off the table.

Judge Patrick J. (“Scholar Pat”) Urda tells the bad news to Edmund Gerald Flynn, T. C. Memo. 2022-5, filed 2/3/22, and he only needs nine (count ’em, nine) pages to do it.

An OIC bounce gets abuse of discretion review, as Ed’s unpaid taxes are self-reporteds. Ed wants a push on household expenses, but the SO used the Federal guidelines, and she need do no more. And Ed wants credit for his credit card bills.

Ed’s case is a wing-stall spiral.

“Mr. Flynn asserts that the allowances were insufficient because they did not support his particular lifestyle. Deviations from the national and local allowances set by the IRS, however, are permitted only upon a showing that the standard amounts are ‘inadequate to provide for a specific taxpayer’s basic living expenses.’ IRM 5.15.1.8(6) (July 24, 2019); see Ansley, T.C. Memo. 2019-46, at *18. The taxpayer bears the burden of providing sufficient information to justify a deviation from local standards. Ansley, T.C. Memo. 2019-46, at *18; Thomas v. Commissioner, T.C. Memo. 2015-182, at *27. Mr. Flynn fails to point to any specific facts indicating that the standard housing amount was inadequate to accommodate for his basic living expenses.

“Mr. Flynn fares no better regarding his credit card payments. As we have observed previously, credit cards are generally considered a method of payment, not a category of expense. See Love v. Commissioner, T.C. Memo. 2019-92, at *12 n.6; IRM 5.15.1.11(3) (Aug.29, 2018). We therefore must examine the nature of the payments to determine whether they constitute necessary living expense payments.  Mr. Flynn dooms his own argument by his admission that the credit card debt had not been incurred to pay basic living expenses.” T. C. Memo. 2022-5, at p. 8.

Judge Travis A. (“Tag”) Greaves gives us a quick tour through client-attorney privilege, as extended to preparers by Section 7525, in Estate of Mary K. Sakioka, Deceased, Jeremy T. Sakioka and Traci Kiyama, Executors and Co-Trustees, Docket No. 7132-19, filed 2/2/22.

It’s the usual post-mortem family trust/flp stash for the family’s cash, securities and income-producing realty, the good old “never sell nothing never,” of grandma/dad’s last words.  IRS wants the family’s lawyers and advisers to bukh, as good-faith reliance is clearly the plat du jour.

IRS serves up the usual waiver, with a chaser of business-advice-not-legal-advice, and sword-shield at no extra charge.

“A party impliedly waives the attorney-client privilege when it makes an argument the opposing party can refute only by reference to the privileged communications.” Order, at p. 6. OK, good-faith reliance can go off on what your lawyer told you. But the magic word is “only.” ” However, privileged communications do not become discoverable where they simply are relevant to issues raised in the litigation or where they are only one of several forms of indirect evidence about an issue.” Idem., as my expensive colleagues say. There’s more than one way to skin a cliché, and only if the Sakiokas can adduce no plausible alternative source to their good faith other than the advice of the 7525 brigade, the 7525s stand mute.

Some stuff claimed to be privileged was already turned over to IRS. Judge Tag Graves passes on that, until he can figure out whether the documents were shared with family and employees, such that they were so broadly disseminated to nonparties as to lose privilege. On that score, Judge Tag Graves will do an in camera on that issue, and the fairness doctrine issue.

Fairness says a party can’t disclose what part of privileged matter they like, and suppress that which they don’t like. This is son-of-completeness; refer to a document, and the whole thing goes in, not just the parts you like.

While Judge Tag Greaves doesn’t decide a lot here, he lays out the groundwork. So this is a good cheat-sheet for basic preparer-privilege issues.

John M. Larson, 2022-3 T. C. Memo., filed 2/2/22, was unaware that, as trustee of the ESOP of the Sub S he and his two buddies set up to stash the proceeds of their phony shelterflogging, he had to get the consent of the employees to lift the earn-out restrictions on the Sub S stock that he and they parked in the ESOP, terminate the ESOP and cash out.

Although a CPA and an attorney,”… Mr. Larson testified that he was unaware of his duties as a fiduciary of the … ESOP. We do not find his testimony credible on these points.” 2022-3 T. C. Memo., at p. 14.

Back in the day, it was OK to stash your Sub S corp’s stock in an ESOP to defer gain. But Congress killed that. An illustration of the right way to do it, quoted by Judge Courtney D (“CD”) Jones in this case, is found in my blogpost “Unvested Stock, Vested,” 4/24/17. In the end, petitioners there went a bridge too far.

John M. and his confrères self-dealt, and used the ESOP as their cookiejar. Judge CD Jones has the story, but it’s the same old. Stay at the table while the dice are hot, get up and go when they cool, hanging your employees out to dry. Btw, John M. got 121 (count ’em, 121) months hard for tax evasion. 2022-3 T. C. Memo., at p. 8.

Those of us who took Part Deux of The Great Chieftain of the Jersey Boys’ seminar on criminal tax defense last night couldn’t help.

The trusty attorney for Estate of Anthony K. Washington, Deceased, Lenda Washington, Personal Representative, T.C. Memo. 2022-4, filed 2/22/22 (eleven, count ’em, eleven, years before we get a date like this one again), is definitely in the running for a Taishoff Metallurgy Award.

Lenda is divorced spouse of the late Anthony K, but also his personal representative, and not so incidentally was supposed to be the beneficiary of the $100K life policy the Late Anthony K.’s employer maintained while the late Anthony K. was so employed. “Was supposed” because, though their divorce agreement said so, and provided it was an irrevocable designation, the named beneficiary remained their son, who glommed the proceeds when the late Anthony K. became the late Anthony K.

And their divorce agreement was explicitly not incorporated in the divorce judgment. Nonetheless, trusty attorney claims Lenda has a judgment against the estate for $100K, reducing RCP, so that the $10K OIC for the $183K the late Anthony K. owed in income tax makes the doubt-as-to-collectability cut, or maybe the Effective Tax Administration/Special Circumstances cut.

Well, Appeals didn’t have to send that OIC to the Austin OIC Special Victims Unit, because collectability had to be resolved first, and it was. The SO never reckoned the $100K into RCP, because the beneficiary change never happened, and Lenda could have taken the divorce agreement to the late Anthony K.’s employer and had them make the change. And Lenda’s claim that the divorce judgment gave her a lien on the insurance policy was thus irrelevant, as was her claimed judgment lien on the proceeds.

Trusty attorney objects to including the late Anthony K.’s 401(k) in RCP, but Lenda waived all that in the divorce agreement, even agreeing to give it to the estate if she got it by mistake.

Judge Emin (“Eminent”) Toro further justifies that sobriquet with this summation.

“When boiled down to their essence, the Estate’s arguments amount to a plea (1) that Mr. and Ms. Washington’s son be permitted to retain $100,000 in life insurance proceeds paid to him under the policy maintained by Mr. Washington’s employer, (2) that Ms. Washington (who, under the [divorce agreement], was supposed to have received the life insurance proceeds) be permitted to recover instead $100,000 from a retirement account to which she had disclaimed all rights, and  (3) that the United States be required to compromise its claim for tax due on the substantial income that Mr. Washington earned during the Relevant Tax Years. We do not see how effective tax administration could possibly support such a result. See Treas. Reg. § 301.7122-1(b)(3)(iii).” 2022-4 T. C. Memo., at p. 28.

I don’t see how either, Judge.

Technical takeaway: Ever wonder where you are Golsenized when you’re dead? See 2022-4 T. C. Memo., at p. 2, footnote 2, and be grateful it won’t be your problem.

Abe Lincoln was quite a phrasemaker. As I read the Tax Court outpouring every working day, I often find the “mystic chords of memory” plucked, strummed, and sometimes even slammed. Today, William A. Hammond & Irma Hammond, Docket No. 20860-18, filed 2/1/22, and Judge Travis A. (“Tag”) Greaves, are playing dueling dulcimers. It’s the old cash-for-stock-hedgeroo I’ve blogged so often, but this version comes with a twist.

Longtime readers of this my blog will recall the game. Petitioner has stock with ginormus FMV, basis bupkis (please excuse arcane technical term). If sells, gets 80% of gain, post-tax at capital gains rates. So petitioner borrows 90% of FMV from hedger with interest accruing, repayment due in three years with no permitted prepayment, nonrecourse. As Judge Tag Greaves says “(U)se of terms like ‘loan’, ‘collateral’, ‘lend’, ‘hedge’, ‘principal’, ‘interest’, ‘maturity’, etc., are for convenience only. We do not intend for our use of those terms to imply that [the transactions at issue] constituted loans for Federal tax purposes.” Order, at p. 1, footnote 3.

At maturity, Petitioner can elect to (a) get the stock back upon paying principal and interest, or (b) walk away and owe nothing, the hedger keeping the stock. The hedger was supposed to be hedging, but had the right to sell. Of course, the hedger sold, gave petitioner the 90%, Ponzi’d some of the rest, kept the balance, and jumped the hedge.

OK, an old story. See my blogpost “Expedite Litigation and Avoid Unnecessary Trials,” 9/25/20 (and note the Loomis case is on appeal to 9 Cir).

So where’s the aforementioned twist?

“Petitioners’ argue, however, that respondent has improperly applied this doctrine [substance-over-form] with respect to the [year at issue] transactions. Petitioners contend that this doctrine applies only if both of the following requirements are met: (1) the form adopted in a transaction differs from its economic substance; and (2) that form results in a measurable tax benefit that would not otherwise be allowed to the taxpayer if the transaction were characterized according to that substance. Petitioners further posit that this second condition was not met in that ‘they did not receive a tax benefit’ by entering into the [year at issue] transactions because if the [year at issue] transactions are respected according to their alleged form, then the master agreements would ‘give rise to the exact same tax consequences’ in that both characterizations—either a sale or loan—would result in taxable long-term capital gains.

“In an attempt to support their allegations, petitioners specifically claim that if the [year at issue] transactions are respected according to their form then they would have had to recognize capital gain income on their[maturity] return in the form of discharge of indebtedness and that respondent ‘should have assessed tax against [p]etitioner in year [maturity] (not in [year at issue]) when [p]etitioner earned capital gains by voluntarily surrendering the … [s]tock in satisfaction of the [l]oan[s].’” Order, at p. 6. (Footnote omitted, but it says that having 90% of the FMV in cash for three years tax-and-interest-free isn’t too shabby).

OK, but.

Bill & Irma didn’t allege or prove that they picked up the gain on the stock sale in the maturity year either.

And none of the prior cases followed the argument that Bill’s & Irma’s trusty attorney makes now, so Judge Tag Greaves isn’t overturning them.

But said trusty attorney gets a Taishoff “Good try.”