Thanks to Old Pliny for the Latin tag that leads this blogpost; it’s a gift that keeps on giving.

Responding to IRS’ motion to dismiss as moot because tax in question has been paid by applying an overpayment from another year to the year at issue, and the NFTL had been withdrawn,  Western Semiconductor Corporation, 11579-20L, filed 11/3/21*, “… filed (1) an objection to motion to dismiss on ground of mootness, (2) a motion for summary judgment, and (3) a motion to rebuke.” Order, at p. 1.

Barely 75 days later, the Westerners “… filed a (1) first amended notice of objection to motion to dismiss on ground of mootness, (2) a second motion for summary judgment, and (3) a motion to compel.” Ibid.

The Westerners followed up nine (count ’em, nine) days later with “…a motion to withdraw motion to rebuke and a motion to withdraw motion to compel.” Ibid. (See, I can write like some of my high-priced colleagues if I try real hard.)

Motion to rebuke? That’s a new one on me.

“Petitioner’s opposition in this case to the notice of determination that was issued to him primarily arises from his disagreement with certain factual statements set forth in that notice of determination.” Order, at p. 1.

Well, once there’s no collection action pending because there’s no tax due, all Ch J Mighty Mo can do is toss the case.

“While petitioner may be understandably concerned about what he views as factual inaccuracies in the notice of determination, it is apparent that there is no longer any tax liability owed for the tax period at issue in this case. Accordingly, because there is no unpaid liability for the tax period [at issue], this case is moot, and the Court shall grant respondent’s motion to dismiss on ground of mootness.” Order, at p. 1.

But I’d still like to see Ch J Mighty Mo apply the Psalm 141:5 treatment to someone.

*Western Semiconductor Corporation 11579-20L 11 3 21

When I was growing up, many many years ago, there were words and there was inflection, and the greater of these was inflection. Depending on tone of voice, or rise or fall of pitch, words could convey a variety and complexity that print cannot match. I much regret that we do not have sound recordings of famous personages long ago actually saying some of the most famous words history ascribes to them; the meanings we now take from these words might differ entirely from what the speakers meant.

Hence the title of today’s post should be read as if one heard a rising inflection; more as a question than a declaration.

I was going to lament how few visitors find their way to this my blog, and those few viewed, on average over the last five-and-one- half years, only 2.7 of my posts. But when I stumbled today upon the website of an outfit called webrate.org (whoever they may be), I was much heartened.

Despite its infamous grammar, webrate.org made my day.

“Ustaxcourt.gov traffic volume is 648 unique daily visitors and their 1,945 pageviews. The web value rate of ustaxcourt.gov is 35,150 USD. Each visitor makes around 3.21 page views on average.

“By Alexa’s traffic estimates ustaxcourt.gov placed at 48,363 position over the world, while the largest amount of its visitors comes from United States, where it takes 92,396 place.”

True, I average a mere 33 visitors, and 89 views, per day. But to lag behind the Mighty DAWSON’s Creek by a minuscule 0.51 page views per visitor per day is quite an accomplishment, for one with no Genius Baristas or 18Fs to aid him.

And also true, my site is unrated as to money, although these anonymous savants at webrate.org claim “(I)n accordance with Google Safe Browsing and Symantec taishofflaw.com is pretty a safe domain.”

I forgive them their syntactical atrocities.

Misbah Idrees, Docket No. 4086-19, filed 11/2/21, meets with a less happy fate than Matthew Thomas Parmeter, the star of my blogpost “A Moving Story,” 12/21/15. Misbah moved from IL to TX on account of her health, then moved back again on account of expense, in the same year at issue. Misbah worked for the same employer in both States.

Misbah claimed moving expenses both ways. Judge Goeke nixes all but what IRS allowed in this off-the-bencher.

Misbah resided in Lewisville, TX (“The City That Spells It Right”) from January through May.

“Section 217(a) allows taxpayers to deduct moving expenses paid or incurred in connection with commencement of work as an employee at a new principal place of work. Section 217(b) generally defines the term ‘moving expenses’ as the reasonable expenses of moving household goods and personal effects and travel expenses and section 217(c) imposes conditions that the taxpayer must satisfy to be eligible to claim a deduction for moving expenses. Relevant here is section 217(c)(2)(A) which requires that during the 12-month period immediately following her arrival in her new principal place of work she must be a fulltime employee there during at least 39 weeks. Section 217(d) provides exceptions for taxpayers who are unable to satisfy the 39-week requirement by reason of death, disability, involuntary separation from employment or a transfer for the benefit of the employer. Section 217(d)(1)(B).” Transcript, at pp. 6-7.

Misbah’s relocation was none of the above. So the TX trip is out.

But there remains the return to the Land of Lincoln from The Metropolis That Spells it Right. But Misbah also has problems there, and the transcript has spelling problems.

“Section 217(b)(1) defines moving expenses as the reasonable expenses of moving household goods and personal effects from the former residence to the new residence and traveling expenses including lodging from the former residence to the new residence. Expense of moving household goods and personal effects are defined as expenses of transporting goods and affects [sic] from the taxpayer’s former residence to her new residence and packing, crating, in transit storage, and insurance. Section 1.217-1(b)(3), Income Tax Regs. Expenses that are not deductible include storage charges – other than in transit storage – the cost of acquiring new property, expenses of connecting or disconnecting utilities, penalties for breaking leases, and losses sustained from the disposal of club memberships, tuition fees, and similar items.” Transcript, at pp. 8-9.

Misbah’s testimony on her effects and affects is less than persuasive.

“At trial petitioner testified she paid cash to an individual she met at her business to move her furniture to and from Texas. We find this testimony to be vague and to lack credibility regarding her move from Texas to Illinois because in other parts of her testimony she indicated she had little, if any, in the nature of furniture or other items that she needed to move from Texas to Illinois.” Transcript, at p. 9.

*Misbah Idress Docket No 4086-19 11 2 21

It’s an occupational failing that long predates any lawyer living at this hour. Second-guessing someone else’s trial strategy is always as popular an accompaniment to cocktail hour as tapas or mezzes. For that matter, it probably predates cocktail hour.

But today I’ll forbear, though the temptation is very strong. I’ll simply note Karla Amburgey and Mary Dutey-Amburgey a.k.a. Mary Amburgey, T.C. Memo. 2021-124, filed 11/1/21*.

The case features a Constitutional challenge to the much-contemned Affordable Care Act of 2010. Coming up in the usual Section-36B-APTC-minus-Form-8962-reconciliation deficiency case, this is definitely a nonstarter.

Judge Kathleen Kerrigan: “In Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012), the Supreme Court held that the Affordable Care Act’s (ACA) penalty-backed individual shared responsibility payment is constitutional. Petitioners argue that a subsequent opinion, Texas v. United States, 945 F.3d 355 (5th Cir. 2019), rev’d and remanded sub nom. California v. Texas, 593 U.S. , 141 S. Ct. 2104 (2021), renders the individual shared responsibility payment and associated penalty invalid. We are not persuaded.

“In Texas the U.S. Court of Appeals for the Fifth Circuit dealt with 2017 amendments to the ACA that reduced the individual shared responsibility payment under section 5000A(c) to zero. These 2017 amendments were not effective until after December 31, 2018. Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, sec. 11081, 131 Stat. at 2092. The deficiency at issue here stems from an increase in tax due to excess APTC paid on petitioners’ behalves throughout 2018 before the ACA amendments discussed in Texas took effect. Therefore, the reasoning of the U.S. Court of Appeals for the Fifth Circuit in Texas does not apply.” 2021 T. C. Memo. 124, at p. 6.

Anyway, the Supremes tossed Texas.

“Petitioners have failed to meet their burden of showing that the provisions of section 36B violate the  Constitution. See Conard v. Commissioner, 154 T.C. 96, 103 (2020) (rejecting taxpayer’s constitutional challenge of a Code provision because taxpayer failed to negate ‘every conceivable basis which might support’ the legislation (quoting Estate of Kunze v. Commissioner, 233 F.3d 948, 954 (7th Cir. 2000), aff’g T.C. Memo. 1999-344)).” 2021 T. C. Memo. 124, at pp. 6-7.

Karla and Mary admitted they filed late, so the add-on is in. And they got picked up via the AUP, so no Boss Hoss involved. But they put in no evidence about good faith for either late filing or the five-and-ten understatement.

When APTC is on the table, I’d suggest that a good faith confusion argument to avoid Section 6662 five-and-ten or accuracy chops, if it can be made with a straight face, isn’t a bad idea. Of course, there may be tactical considerations here of which I’m unaware; those may apply to the entire case.

*Karla and Mary Amburgey 2021 T C Memo 124, 11 1 21

While I’ve often derided the CLE merchants who tout magic formulæ for winning your case at discovery, I am no foe of discovery. At its worst, it’s just another form of legalized harassment; at its best, it gets to the core of the case and renders the judge’s (and jury’s, if applicable) job easier.

Better yet, it’s how you get discovery of the judge: what does s/he think is important? Where does s/he see you as strong or weak?

I want to give a Taishoff “Good Job, First Class, Discovery Division,” to the trusty attorney for Otay Project LP, Oriole Management LLC, Tax Matters Partner, Petitioner, Docket No. 6819-20, filed 11/1/21*, whom I’ll call Geo. In his words, “I have the good fortune to lead a group of tax lawyers who not only enjoy mastering the intricacies of the tax code, but who also communicate in plain English and look for practical ways to help clients achieve their objectives.” And with only one associate with him, he ties up nine (count ’em, nine) attorneys from OCC.

The fact pattern is a dazzler, with thirty-four (count ’em, thirty-four) LLCs (Order, at p. 3), and an FPAA where Section 754 election meets Section 743(b) basis step-up, with Section 752 liabilities hovering just outside the face-off circle. Geo. wants summary J on 15 (count ’em, 15) issues. IRS has economic substance both commonlaw and codified, anti-abuse (Section 701), and the math computation of the step-up and who gets it.

And of course Boss Hossery, Clay type, is also in play.

Judge Christian N. (“Speedy”) Weiler has this trick-or-treat basket well in hand.

Geo.’s attack on the anti-abuse regs goes down before CCA learning that courts will deal with Chevron challenges only when all else fails, and Judge Speedy Weiler has plenty else. Order, at p. 10.

The real issues is where the liabilities of Otay went when the partners “turned every one to his own way.” Upon whom was laid “the iniquity of us all”?

“… we find that respondent’s alternative theories as to the Partnership’s additional liabilities and how these additional liabilities resulted in a deemed distribution… involve mixed questions of fact and law that cannot be resolved by summary judgment at this time. We agree with respondent that considerable factual development is needed to understand these partnership liabilities stemming from the land sale transactions and the validity of respondent’s position. Only after developing these facts will the Court be able to determine whether the regulations under section 752 have been properly applied. In addition, further factual development is necessary to establish whether the Partnership resulted in a deemed distribution in the amount of its liabilities as originally claimed, and whether these liabilities were assumed by petitioner or [another LLC]. As such, ruling on petitioner’s motion for summary judgment is premature as to these two alternative theories as well.” Order, at p. 11.

Get out the chart and timeline, and get ’em stiped in. Or if IRS won’t stip, get out the documents and prep the witnesses.

And although Tax Court has jurisdiction over the FPAA’s determination that the partners’ outside basis is in play, since that’s what their Section 754 election does, all Judge Speedy Weiler decides is jurisdiction. “We do not decide here whether respondent’s adjustment at issue is proper but only that the adjustment to [year at issue] gross income made in the FPAA is properly classified as a partnership item of the Partnership.” Order, at p. 15, footnote 12. (Emphasis by the Court).

Time to run the numbers and prepare a chart. And prepare to fight over getting the chart into evidence. I’m sure Geo. knows all about FRE 1006.

The Boss Hoss issues are full of factual disputes: who did what when and how. Does the codified economic substance provision in Section 7701(o), which underpins the Section 6662(b)(6) chop asserted, apply if what would be the triggering events occurred pre-3/30/2010?

Geo. got plenty of insight into Judge Speedy Weiler’s take on the case. He’s also got a good look at IRS’ battleplan. Best of all, so far as I can tell, he hasn’t entirely tipped his own hand.

Otay Project, LP Docket No 6819-20 11 1 21

Again

I lament the passing of the designated hitter, the order singled out by the Judge or STJ as worthy of the Bar’s and the blogosphere’s attention, to say nothing of humble journos like myself. Now we have to check the number of pages, as if the Genius Baristas have taken their text from Dickens’ Mr. Weller: “Vidth and visdom, Sammy, alvays grows together.”

Vell (sorry) Well, today Judge David Gustafson expatiates on why, since a Tax Court decision is strictly numbers, he can accept IRS’ folderoo on the captive insurance issues in Paul Puglisi and Ann Marie Puglisi, et al., Docket No. 4796-20, filed 10/29/21*. Paul wants an opinion that his captivity is legit, because it isn’t chickenfeed. Paul has a 1.2 million chicken operation, providing eggs throughout the mid-Atlantic States; a bad outbreak of avian flu would slaughter Paul as well as the chickens, and no third-party insurer will cover poultry diseases.

IRS yoicked Paul around for four (count ’em, four) years, demanding forests’ worth of paper and playing enough “win your case at discovery” gambits to provide a lifetime’s CLE. Paul says he needs an opinion to protect him and the other eggers-on from IRS’ chicken…you know the rest.

Judge Gustafson has discretion, and he uses it. An opinion here is advisory. IRS is willing to stip not only to the numbers upon which everyone agrees, but to stip out the next two years, allowing the deductions Paul took.

Judge Gustafson does a huge deep-dive into the scope of Tax Court’s jurisdiction to determine a deficiency (that’s a number, not its component parts; Judges need go granular only when a question of law is involved, to give guidance), and its discretion to accept a concession, sort of like a Ch 11 or Ch 13 plan in Bankruptcy Court, or a class-action settlement or a criminal plea bargain in an Article III Court. I’ll leave it to readers who need to know to read it all; I won’t try to abstract or paraphrase, lest I get it wrong.

But I note Judge Gustafson just glances at Cigna Corp. I summed that case up as Judge Gustafson sums this one up: “You Won, Go Home,” 9/13/12.

Note that Judge Gustafson is thoroughly hip to litigation strategy and tactics, as he pointed out in my blogpost “Crafty – Akin to the Weasel,” 7/24/17. And he cites to Matthew Dean Vigon, Order, at pp. 12-13. Paul and Matty are both entitled to a decision on their liabilities. But Paul wants a legal opinion why he wins, and that he won’t get.

Why not? Well, strategy.

“If it were true that the Commissioner’s concessions in these cases are merely tactical and simply reflect that ‘Petitioners’ cases are not the litigation vehicles that he wants to use to present his theories to this Court’ (Doc. 21 at 4), then our exercising discretion to accept the concessions in these cases is, of course, without prejudice to our exercising discretion in the management of future [insurance] ‘Series A’ cases. However, if petitioners are among ‘hundreds of other companies * * * [that] purchased insurance from Series A of Oxford Insurance Company LLC’ (Doc. 21 at 2; Doc. 24 at 4-5 & n.4), then we could not criticize petitioners, the ‘other companies’, or Series A if they had coordinated their efforts and pursued the instant petitions because they were more promising than others as ‘litigation vehicles’ for the taxpayers’ position; nor can we criticize the Commissioner for conceding cases in which his position is weaker in order to devote his resources to litigating cases that are more promising for his position.” Order, at pp. 16-17.

OK, Judge, I’ll always agree that you pick your fights to win wherever you can. But to yoick your adversary around for years pre-SNOD, and then fold when he calls, after he’s spent a ton on CPAs and attorneys, is beyond tactics. And of course, with the folderoo IRS ducks Section 7430 admins and legals, although Paul admits he and Ann Marie are “over the technical limitations” that scupper the same. Order, at p. 5.

Pop goes the weasel, again.

*Paul and Ann Marie Puglisi 4796-20 10 29 21

Judge David Gustafson echoes Ike Watts, as he counsels Jack Donald Supinger, Docket No. 10957-20, filed 10/29/21* on the wages of frivolity and the need for repentance in this off-the-bencher. Judge Gustafson really holds out the lamp to burn, although JD is a frivolite, zero-return variety.

True, JD “…was polite in his conduct of the trial. He timely submitted his pretrial memorandum and cooperated with the logistics of the remote trial by electronically filing his exhibits. Furthermore, as far as we know Mr. Supinger has not made frivolous contentions in court nor been penalized for doing so.” Transcript, at pp. 15-16.

Also true, his employer sent two W-2s for the same amount, so the SNOD was wrong, and IRS conceded the excess in its pretrial memo. That’s also in JD’s favor: “…we note that the amount of the deficiency was not nearly $25,000 as determined in the SNOD but rather only about $9,000. Consequently his filing of his petition did result (no thanks to his frivolous position) in a redetermination in his favor.” Transcript, at p. 15.

But JD fooled around at the trial (however politely), despite Judge Gustafson having warned him before and during trial that Section 6673 means what it says. Notwithstanding the yellow cards, he “dodged, evaded and obfuscated. He put the Commissioner to the expense and trouble of producing witnesses to prove facts for which Mr. Supinger had no rebuttal.” Transcript, at p. 16.

IRS called personnel from both JD’s employers for the year at issue to testify about JD’s employment, the numbers shown on the W-2s and the SNOD, and authenticate business records. Transcript, at p.10. I cannot think causing IRS to subpoena staff for a frivolous tax trial endears one to one’s employers.

Anyway, JD gets the five-and-ten chop (tax understated greater than lesser of ten percent or $5K).

And Judge Gustafson hits JD with a $5K Section 6673 frivolity chop.

Except.

“We point out to Mr. Supinger (as we stated at the end of the trial) that the deadline to file a motion for reconsideration is 30 days after the Court serves the transcript of this opinion, see Rule 161. If Mr. Supinger perceives any mathematical error in the computation of the $9,008 deficiency attached to the Commissioner’s pretrial memorandum (Doc. 7, Ex. A) then he could offer a correction in such a motion.

“Moreover, in a motion for reconsideration, Mr. Supinger could address the penalty issue by offering the Court his assurance that he will not hereafter repeat his frivolous arguments in future litigation, but will acknowledge that, under the law as the courts unanimously construe it, he owes Federal income tax on the compensation he receives for his work. An unequivocal commitment to that effect by Mr. Supinger could prompt a reduction in the amount of the penalty.” Transcript, at pp. 17-18.

However obliging Judge David Gustafson might be to the penitent, he warns JD that if he tries a recon to frivol again, the chop might be even heavier.

Taishoff says JD, see that lamp? There’s your chance; don’t blow it.

*Jack Donald Supinger 10957-20 10 29 21

I’d missed the civil fraud aspects of Buckelew Farm, LLC f.k.a. Big K Farms LLC, Big K LLC, Tax Matters Partner, Docket No. 14273-17, filed 10/28/21*. Apparently the 75% chop is on the table, but today’s order just has to do with an attorney’s attempt to bow out, to which both IRS and The Big K object, reasons unstated.

It’s another of the Georgia conservation easements, a growth industry. Judge Christian N. (“Speedy”) Weiler just wants IRS and The Big K to tell him why they want the attorney kept in. The case isn’t set for trial.

It seems a couple prior attorneys (hi, Judge Holmes) have heretofore bailed without objection.

Now the bailor seems to be second on the roster of a well-known Atlanta tax firm, and has been on board in this case upwards of two years.

I wonder what’s going on. When I see attorneys rotating in and out of a case, there’s usually copy in the ins and outs. Of course, privilege may apply. Nevertheless, I have reached out for comment; if I get any for publication, I will publish same.

*Buckelew Farms Docket No 14273-17 10 28 21

I post today with real regret Joseph A. Insinga, 157 T. C. 8, filed 10/27/21*, wherein Judge David Gustafson announces the death of Fighting Joe Insinga, who starred or featured in a round dozen of my blogposts.

But Fighting Joe died fighting, as a true whistleblower would wish to do. And his passing deserves a full-dress T. C., not a measly memo. There are five (count ’em, five) attorneys named in 157 T. C. 8 for the late Fighting Joe. That’s one better than young Fortinbras allocated to Hamlet.

Judge Gustafson takes up the role of young Fortinbras. After an abstract and brief chronicle of Fighting Joe’s battles with the Ogden Sunseteers, elaboration of which is to be found in my blogposts, Fighting Joe “…filed an amended petition in September 2017, asserting only the two remaining claims. Since then the parties have filed and briefed cross-motions for summary judgment and have filed supplemental briefs on the impact on this case of Kasper v. Commissioner, 150 T.C. 8 (2018), and Van Bemmelen v. Commissioner, 155 T.C. 64 (2020).” 157 T. C. 89, at p. 3.

Fighting Joe died March 22 this year, with decision pending. The Palmetto State has duly appointed a persrep for the late fighting Joe, and she stands ready, willing, and able to take up Joe’s quarrel with the foe, and to hold high the torch she got from Joe’s failing hands.

Joe’s persrep, Ms. G, moves to step in, and IRS generously doesn’t object. Only question is, can she do it.

Judge David Gustafson, a fellow South Carolinian, obliging in the best tradition, says “sure enough.”

Like deficiency cases, here there’s a determination and a timely petition. Like the non-tax Federal False Claims Act cases, Section 7623 is intended to benefit the claimant by remedying any harm he may incur in bringing the claim. And caselaw says the non-tax Federal False Claims Act claimant’s claim survives his/her death.

But there’s more.

“Of course, one obvious intended purpose of section 7623 (analogous to the purpose of the FCA) is to promote the tax collection function (and thus to benefit the Government) by bringing information about noncompliance to the attention of the IRS. However, the means by which section 7623 does so, provided in subsection (b) (entitled ‘Awards to whistleblowers’), is to incentivize whistleblowers to risk the harms of providing such information and to compensate them for the harms they may suffer in doing so. A whistleblower’s anonymity in Tax Court proceedings is not guaranteed, see, e.g., Whistleblower 14377-16W v Commissioner, T. C. Memo 2021-113, supplementing 148 T. C. 510 (2017); and tax whistleblowers are especially vulnerable to harms such as professional stigma, retaliation, and economic duress, including current employment and future employability, especially given the absence of antiretaliatory provisions in section 7623, see Whistleblower 14106-10W v. Commissioner, 137 T.C. 183, 203 (2011).” 157 T. C. 8, at pp. 12-13, footnote 11.

Reg. 301.7623-4(d)(4) provides for survival after death, but that was enacted after Fighting Joe filed, and Judge Gustafson notes that it only  “lends some persuasive support” to letting Ms. G in. 157 T. C. 8, at p. 14.

But Rule 63(a) lets in ex’rs, adm’rs, and persreps in every tax Court case. No one doubts Ms. G is the proper successor, or that Tax Court had jurisdiction when Fighting Joe passed away.

So another case of first impression is decided; whistleblowing survives. Rest in peace, Fighting Joe.

*Joseph A. Insinga 157 T C 8 10 27 21

Further to the immediately preceding blogpost, here’s the follow-up on Tribune Company & Affiliates, 2021 T. C. Memo. 122, filed 10/26/21*.

The Newspaper of Chicagoland owned the Cubs, but wanted out. The Tribune went bankrupt because overleveraged from a buyout while negotiating the sale, but as their then-CFO said “there’s a big difference between filing for bankruptcy and being bankrupt.” 2021 T. C. Memo. 122, at p. 12.  As this is a nonpolitical blog, I’ll say no more.

Meantime, the Ricketts family wanted the Cubs. Since the Ricketts family owned a piece of TD Ameritrade, they could afford a MLB legacy team. Reminds me of J P Morgan’s remark when shown the stockbrokers’ yachts: “Where are the customers’ yachts?”

There was wheeling and dealing and then some, but the Rickettsians won. The deal shook out with a multi-member partnership, the Tribunals kicking in the baseball stuff, and the Rickettsians put in USD150 million. Immediately after, the Tribunals got a $704 million special distribution, as required by the formation agreement. Capital was 95% to the Riockettsians, 5% to the Tribunals; apparently MLB went along with the deal because the Tribunals were in for the stated 5%.

I told you there was wheeling and dealing. “Despite the interest percentages amounting to 95% for [Rickettsians] and 5% for Tribune, common capital shows a different ownership scheme. Of the total common capital, $150 million is attributable to [Rickettsians] and $20,986,843 is attributable to Tribune. This translates to Rickettsians]’s owning 87.726% of common capital and Tribune’s owning 12.274%. At trial, Thomas Ricketts did not know why, and he appeared surprised to learn that the common capital percentages did not match the ownership interest percentages.” 2021 T. C.Memo. 122, at p. 15. Tom should’a done deals with some of my former clients.

To satisfy MLB, the Rickettsian family trusts had to provide financial backstop to the Cubs, to safeguard players’ salaries and operating expenses if the new owning partnership cratered.

Needless to say, the $704 million required distribution came from borrowed money. This was a dealbreaker for the Tribunals, as they needed the tax deferral generated by a debt-financed distribution. The money came from the newly-created partnership-LLC, which borrowed $425 million from unrelated third parties, and enough to pay the balance of the distribution to the Tribunals from a Rickettsian. Everybody agrees the $425 million is bona fide debt, but disagrees whether it is nonrecourse to the Tribunals. The other debt ($248 million) came from Ma Ricketts, who funneled the cash through a family LLC, which got a promissory note from the partnership. Question is whether this is debt or equity.

Thoroughly confused yet? Wait a while, it gets better. The $248 million debt is subordinated to the $425 million debt by an agreement, which prevents Ma and the LLC from sneezing until the senior debt is paid in full. The agreement also provides for a cash waterfall, which directs how all the baseball revenue gets spent; needless to say Ma and the Rickettsian LLC get nada until the $425 million crew are paid in full, and can’t sue if the partnership doesn’t pay them.

But Ma and the LLC did get “…17 specified privileges…. These privileges include the right to use Wrigley Field for private functions, clubhouse access, complimentary premium seating, season ticket options, hospitality benefits, premier parking, and the right to participate in postseason award ceremonies.” 2021 T. C. Memo. 122, at p. 23. The privileges are not transferable to any person who was not Ma or the LLC. Judge Buch thinks this is a sign of equity.

And the $248 million debt has no fixed maturity, since the $425 million crew can extend or modify the terms of their debt how they want, without asking Ma or the LLC, and Ma and the LLC don’t get paid until the $425 million crew get paid in full.

The partnership’s debt-to-equity ratio was 4 to 1. Ma and the LLC tried to sell some of their interest in the note, but their private placement memo in support thereof sounded more like an equity investment than an interest-rate deal. And nobody bought it, anyway.

The Tribunals guaranteed both debts, but as they were then in bankruptcy their credit was a trifle impaired. And they only guaranteed collection, not payment. That means the creditor has to sue, win, and when the sheriff comes back with nothing, only then must the guarantor cough up.

The Rickettsians could buy out the Tribunals, and they did.

The question is whether the Tribunals are really on the hook for the $700 million in aggregate debt. A partner getting an immediate distribution after contributing property to the partnership has sold the property to the partnership. If the partnership borrowed the money to distribute to the partner, and the distributee-partner remains on the hook for the borrowed money, the sale is not taxable to the distributee-partner. But if the distributee-partner has shifted the obligation to repay to someone else, or has no obligation to repay, then the disguised sale is taxable.

So we come to the usual factors for debt vs. equity.

Yes, the $248 million note is called a note, but that matters little. The lack of a fixed maturity date hurts, because of the $425 million crew’s ability to shift repayment of their note, thus extending Ma’s and the LLC’s maturity date. But repayment of principal is not conditioned upon the revenue stream from baseball; the waterfall only talks about interest, so more like debt. True, not all subordinated debt is equity, but here the subordination is so extensive that it ties Ma’s and the LLC’s hands to such an extent that Judge Buch finds it’s equity. Participation in management is neutral. Judge Buch is as confused as I am when it comes to preference over trade creditors, so leaves that as neutral. As for intent of the parties, that private placement memo sinks the Rickettsians; too much discussion of investment risk. But I can’t fault Ma’s lawyers; the deal is sufficiently dodgy to warrant top-class disclaimers. And the Tribunals insisted upon the debt, but when you fold the $248 million “debt” back into capital, the mismatch that surprised Tom Ricketts is no mismatch at all; both capital and percentage interests line up. Moreover, the buyout of the Tribunals was based on capital of 5%; if the Tribunals’ capital had truly been the 12%, why did they take less for their interest?

Because the Rickettsians own the partnership (the Tribunals had only 5%), and Ma and the LLC are family also, this is equity. That doesn’t mean that family members cannot have debt among themselves, and enforce the debt; but this is too close. The note wasn’t sold and no institutional lender would purchase the note. The proceeds were used to acquire capital, not to pay operating expenses. The $248 million is equity, not debt.

OK, so the $425 million is debt, so that part of the $700 million the Tribunals got counts toward a debt-financed distribution. But was it really the Tribunals debt? Are the Tribunals truly on the hook?

First, the Section 752 constructive liquidation test, which presumes that the obligor will pay. And the obligor is assumed to pay in the worst-case scenario: the partnership is bust, its assets are worthless (cash included), the creditors have sued all and sundry to no effect, and guarantor is last man standing.  And that the Tribunals are the last man standing doesn’t make their obligation contingent; if it did, no collection guarantee would survive Section 752, and they do.

The Rickettsians were not the real guarantors under the constructive liquidation test of Section 752. They weren’t partners, their LLC was. The cash reserve required by MLB couldn’t be used to pay the $425 million crew. And IRS’ unlikelihood arguments are irrelevant under the worst-case scenario, which is Murphy’s Law codified: if it can go wrong, it will.

The only analogy is our old friend Canal Corp., 135 T. C. 9. The supposed obligor there was undercapitalized, and couldn’t pay, so the true obligor had to pick up the tab. And in Canal, the undercapitalized “obligor” got a piece of the deal if it paid, whereas the Tribunals get nothing.

The anti-abuse regs (Section 701) do not require that each element thereof have a substantial business purpose, only that the whole deal does.

“The Cubs transaction was a disguised sale in both form and substance. The economic reality of this transaction lies squarely within the intent of the disguised sale statute. The parties to the transaction formed a bona fide partnership that operates the Cubs franchise with assets contributed by Tribune. And the partnership in fact distributed cash to Tribune. This transaction also substantively fits into the debt-financed distribution exception for a disguised sale, receiving the distribution tax free up to the amount of the senior debt guaranteed by Tribune. [Partnership] borrowed the senior debt, and Tribune guaranteed the senior debt. When such a transaction is explicitly provided for by Congress and followed by a taxpayer in both substance and form, we will not recharacterize it. The doctrine of substance over form is applied to prevent taxpayers from mislabeling transactions to achieve a desired tax consequence. Petitioners did not mislabel the transaction here; the economic substance of the Cubs transaction is a disguised sale with a debt-financed distribution, a structure contemplated by both the statute and the regulations.” 2021 T. C. Memo. 122, at pp. 118-119. (Footnotes omitted).

The Tribunals tried to deduct the break-up fee they paid to a proposed successor suitor when it looked like the Rickettsians might bail. The Tribunals claimed this as an abandonment fee, but the deal wasn’t abandoned, it closed.  Had the Tribunals closed with the successor suitor, they would have had to capitalize those expenses.

And just as I was about to close out my file on the Tribunals, who were good for five (count ’em, five) previous blogposts, where I conflated the Cubs with the White Sox, Judge Buch tells us, after 127 pages of text and 214 (count ’em, 214) footnotes, that he still has the chops to work on.

I guess I’ve got another all-nighter coming up.

*Chicago Tribune Media 2021 T C Memo 122 10 26 21