I want to direct a Taishoff “Good Job” to the Houston TX law firm who represented John F. Campbell, 2019 T. C. Memo. 4, filed 2/4/19. John’s trusty attorney, whom I’ll herein designate as George, has given us a few items to add to our CDP checklist, in the “abuse of discretion” pages.

First, John set up a trust on the island of Nevis (I’ve been there; don’t miss the sugar train ride through the outback). He only gave $5 million of his $25 million net worth to the trust in the year he created it, never any more. John had to report the trust activities on his personal return, but he neither anticipated any benefit therefrom himself (only his family), nor controlled trust operations or investments, keeping his hand off the dollar while his eyes were on the scale (and telling the Trust Protector to fire an overbilling trustee and substitute another). But that was six (count ‘em, six) years before the year John got to Appeals.

John ran into trouble when he got involved in a CARDS transaction. I’ve blogged a couple those (hi, Judge Holmes), and IRS raised John’s taxable income for the year at issue from $200K to $13 million, blowing off the phony mix-and-match CARDS unrecognized gain from the recognized loss. Well, if you must, see my blogpost “House of CARDS,” 3/8/11, for the skinny on this dodge.

IRS gives John a NITL and a couple NFTLs (see above) at no extra charge. John sends in Letters 12153 for the whole shootin’ match. Appeals sustains, John petitions, but get remanded.

IRS claims John’s RCP is $1.5 million, John claims $12K, and wants OIC. Appeals again bounces John. Who petitions, and gets another remand to consider State law issues.  As with Nick Saban, if you get into real estate trouble, get into it in LA. John was rooked in some LA Gulf Opportunity Zone development deals, and got the double-schneid from Chinese drywall (the stuff oozed poison) and the Black 08.

Appeals bounces John yet again, claiming RCP of $19.5 million against John’s $12K.

Judge Kerrigan: “When a taxpayer submits an OIC based on doubt as to collectibility, the Appeals officer follows IRM guidelines to determine the taxpayer’s RCP.  IRM pt.5.8.4.3 (Jan. 18, 2018).  Those guidelines consist of determining: (1) assets, including dissipated assets, (2) future income, (3) amounts collectible from third parties, and (4) assets available to the taxpayer but beyond the reach of the Government.  Id. pt. 5.8.4.3.1 (Apr. 30, 2015).” Order, at p. 14.

Dissipated assets: “Petitioner was not given the opportunity to submit an OIC until after this Court remanded the CDP proceedings to the Appeals Office.  He submitted his OIC on March 28, 2014.  Accordingly, the Appeals officer should have looked only to 2012 for any dissipated assets.  However, under the IRM guidelines, she could have looked back to the assessment date, April 19, 2010, for any dissipated assets if there was a transfer of assets within the six months before or after the assessment date.” Order, at p. 15. But the AO looked all the way back to the trust in Nevis in 2004. Too long. Anyway, the transfer didn’t render John insolvent when made, and he didn’t know about the increased deficiency when he made it.

The Gulf Opportunity Zone deals weren’t dissipation. “Petitioner did not waste his wealth in an effort to deprive the Government or to shirk his financial obligation to the public fisc.  In 2006 petitioner made a substantial investment in the Gulf Coast region under the GO Zone legislation.  After making the investment, he still had cash on hand of more than $6 million.  He was unaware of the Chinese drywall issue that affected many of the properties he purchased through the LLCs and the looming financial crisis.  Respondent provides no consideration of these issues in the second supplemental notice of determination and instead asserts that petitioner wasted his wealth in an effort to establish a loss.  There is no indication in the record, and none was demonstrated at trial, that petitioner invested in the GO Zone in an attempt to avoid paying his 2001 tax liability.  We find that it was an abuse of discretion for respondent to make this determination.” Order, at pp. 17-18.

There’s a difference between trying to earn money and trying to dodge taxation.

But were trust funds available to John on an alter ego theory for RCP? No. The trust was an irrevocable trust, over which John had no control. “The Supreme Court has stated that the transferee, nominee, or alter ego theory requires a two-part analysis, which looks first to State law to determine what rights a taxpayer has in property and then turns to Federal law to determine whether a taxpayer’s rights in that property qualify as property or rights to property under Federal tax law. Petitioner created the Trust in 2004 as an irrevocable grantor trust.  He and his family are named beneficiaries of the Trust.  Under section 671, petitioner is required to report all tax consequences of the Trust’s activities on his personal Federal tax return.  The Trust document indicates that petitioner has no control over the trustee and cannot force the trustee to make distributions or investments.  Petitioner contends that as a beneficiary of the Trust he does not hold a property interest in the Trust assets.” Order, at p. 19.

IRS tries to claim that the trust is an alter ego per CT law. IRS admits CT hasn’t yet definitively decided anything, but claims CT would follow Federal law. This founders on a USDCDCT case that specifically refuses to graft Federal law onto CT law.

While the trust did bankroll a buyback of some of the Gulf Opportunity Zone properties post-foreclosure, using LA’s debtor-friendly “litigious rights” laws, John didn’t control the trust and the trustee independently evaluated the deal.

The AO was arbitrary and capricious.

Islander and SALT

Our Insolvent Islands in the Sun at least have yielded good blogfodder, if something less than economic development despite Congress’ abundant unguided largesse. But it looks like the last pareo is stripped away from Renee Vento, et al., 152 T. C. 1, filed 2/4/19, Judge Albert G (“Scholar Al”) Lauber entering IRS’ Rule 155 beancount.

Ya gotta give Renee’s and the als’ attorneys credit. They keep on going, like the advertising bunny.

I’ve blogged the Ventos’ tale, from Mom and Pop being accredited Virgins (Islanders) after 3 Cir said so, through the daughters’ abortive confab with the competent authority and their final expulsion from the VI, and I’ll leave it to my readers to go back. “My catalog is long. Through every passion ranging,” as a much finer versifier than I put it.

The Vento daughters had paid directly to VIBIR, claiming to be VI residents (which they later stiped they weren’t). Also, IRS took payments made by the Vento daughters to IRS, and “covered into,” that is, paid same to VIBIR per Section 7654. Finally, it was time for the Rule 155 beancount.

Except.

The Vento daughters claimed that the amounts paid and covered into VIBIR are State and local taxes (SALT, in contemporary jargon), and that issue was tried by consent, so that Rule 41 lets them amend their petition.

“In their briefs they had contended that both categories of payments addressed in the Court’s Opinion–the payments petitioners made to VIBIR directly and the payments ‘covered into’ VIBIR by the IRS–were payments of Virgin Islands tax eligible for credit under section 901.  In their computations for entry of decision they contended that both categories of payments constituted State or local taxes deductible under section 164.  In their motion for leave they contended that payments in the first category were deductible under section 164 and that payments in the second category should be credited dollar-for-dollar against their Federal income tax liabilities under section 31(a) (credit for tax withheld from wages) or otherwise.  Petitioners had not advanced this latter contention, which they urged ‘[a]s a protective measure,’ at any prior point in this litigation.” 152 T. C. 1, at p. 8.

As for their direct payments to VIBIR, the three-year lookback for overpayment refunds is long gone. As for the “covered into” money, there is a jurisdictional question.

“First, petitioners contended the amounts paid to VIBIR…, which our Opinion held did not constitute ‘taxes paid’ for purposes of section 901, nevertheless constituted State or local income taxes deductible under section 164(a)(3).  We based our conclusion that these amounts were not ‘taxes paid’ in part on the fact that petitioners had no legal obligation to pay Virgin Islands income tax….  In asserting that they should be allowed deductions for these payments as State or local taxes, petitioners were necessarily asserting that section 164(a)(3) allows deductions for payments that a taxpayer has no legal obligation to make.  That is unquestionably a ‘new issue’: Petitioners had not advanced this contention at any prior point in this litigation, and none of the parties addressed it, in any fashion, before the date on which petitioners filed their Rule 155 computations.

“Second, petitioners contended that the payments the IRS had ‘covered into’ VIBIR should be credited dollar-for-dollar against their Federal income tax liabilities.  This position contradicted the position petitioners had taken throughout this litigation, viz., that the amounts ‘covered into’ VIBIR constituted payments of Virgin Islands income tax eligible for foreign tax credits.

“Petitioners’ new position would require the Court to address at least two subsidiary legal questions, neither of which the parties addressed or even mentioned in their briefs.  The first would concern our jurisdiction to determine overpayments on the basis of the withholding and other credits petitioners now seek. The second question would be whether the payments ‘covered into’ VIBIR, once removed from petitioners’ …accounts, remained available to offset their… U.S. income tax liabilities.  In urging that petitioners’ motion for leave to amend petition was futile, respondent contended that the answer to this second question is ‘no.’  In so contending, respondent took a position resembling that which petitioners themselves had taken previously, i.e., that the payments, once ‘covered into’ VIBIR, became payments of Virgin Islands income tax.” 152 T. C. 1, at pp. 15-16. (Citations omitted).

But the Ventos aren’t finished yet. They want to introduce evidence as to “secret agreements” between IRS and VIBIR. But they originally moved under Rule 122, claiming they needed no evidence beyond what was already in the papers.

“We will accordingly deny petitioners’ motion to reopen the record and enter decisions consistent with the computations respondent has submitted.  Petitioners were free, when submitting these cases for decision under Rule 122, to urge alternative positions and alternative legal theories.  They did not do so.  This may have reflected oversight on their part, or it may have been a strategic choice prompted by fear of undercutting their primary position.  For whatever reason, they submitted only the FTC [Foreign Tax Credit] issue for decision, representing that all other issues in the case had been resolved.  The FTC issue was thus the only issue that the parties addressed and that we decided.  Petitioners cannot get a do-over by raising new issues in their Rule 155 computations.” 152 T. C. 1, at p. 18.

Judges Thornton and Halpern joust over whether the Rule 155 prohibition on raising anything but arithmetic is an absolute bar, or whether “interests of justice” might create an exception. But they agree on result. The Ventos are out.

Today we return to Hurford Investments No. 2, Ltd., Hurford Management No. 2, LLC, Tax Matters Partner, Docket No. 20317-11, filed 2/4/19, another good source of blogfodder. See my blogpost “You Just Can’t Win With TEFRA,” 12/21/18 BS (Before Shutdown), and my blogposts cited therein.

Now y’all recall that, although the Hurfords won, they didn’t prevail, and Judge Holmes disqualified their qualified offer even though the laundry list of cases prohibiting a Section 7430 qualified offer doesn’t include TEFRA FPAAs, which this case is.

Well, the Hurfords riposte that Fed Cir is fixing to deal with the BASR case, cited in my above-cited blogpost, so they want to hold off until Fed Cir has decided whether the qualified offer is allowed in a TEFRA FPAA.

IRS says that there are independent grounds for denying the Hurfords the admins and legals they’re claiming, so it’s dubious Fed Cir will deal with those, hence waiting on Fed Cir doesn’t help resolve this motion.

Judge Holmes agrees with IRS, and tells both sides to “settle order on notice.” See my blogpost thus entitled if you don’t know what that means.

But Judge Holmes has had his pate whanged by the Pelicans (appellate courts are sometimes thus described) before now, so he pays them obeisance.

“…there is much to be said for the efficiency of waiting for a higher court to rule — this division of the Court being especially aware of the definition of the law as a prediction of what an appellate court says it is….” Order, at p. 1.

Still, no go for the Hurfords.

I understand Judge Holmes wants to clear his docket, and this is a quick way to do it. Even more to the point, TEFRA has gone the way of all clichés, so any judicial ruling on “When TEFRA meets Section 7430” can only affect a limited, minuscule number of litigants. And the Hurfords likely can afford an appeal, since with no tax due they needn’t post a bond.

So while Judge Holmes has solved one problem, I must remind him of his celebrated remark in Thompson: “The silt we stir today will cloud the cases we plunge into tomorrow.” 137 T. C. 17 (2011), at p. 61. However few such cases may be.

See my blogpost “Battlefield Commission,” 1/14/19 BS (Before Shutdown). I’d said that STJ Daniel A (“Yuda”) Guy’s order, when issued, “may not embody today’s developments as they may then be moot.”

Well, trust STJ Yuda. He makes sure that his read of Rule 24(a)(4) got into the record books today in Gerald [should be “Gerard”] J. McEnroe & Regina McEnroe, 7381-18S, filed 2/1/19.

“…his attorney, Dennis Houdek, appeared and requested that the Court specially recognize Mr. Houdek as counsel for petitioners. The Court granted that request pending Mr. Houdek’s submission of an application for admission to the Tax Court bar and his admission thereto.” Order, at p. 1.

Good job, STJ Yuda.

Judge David Gustafson is checking the old Danielian scales, and Gerard Jackson & Mary Anne Jackson, Docket No. 3661-18L, filed 2/1/19 come up short.

Gerry is a lawyer who owes beaucoup tax over five (count ‘em, five) years. He tries an IA, but misses his own estimated tax number, so Appeals tosses his IA and sustains IRS’ NFTL.

Gerry claims not exercising discretion is an abuse of discretion (Appeals just applied IRM IRM pt. 5.14.1.4.2(4) 5.14.1.4.2(3) (Sept. 19, 2014)).

That’s a nonstarter. “We have frequently held that it is not an abuse of discretion for Appeals to decline to accept a collection alternative when a taxpayer is not in compliance with current tax obligations. See, e.g., Huntress v. Commissioner, T.C. Memo. 2009161. But the Jacksons complain that, by following this rule, SO G failed even to exercise her discretion and thus abused that discretion. If this were correct, then it would be an inherent abuse of discretion for the IRS to establish any general requirements for collection alternatives. One could always argue that an SO’s decision based on any such rule would constitute an abuse of discretion because the SO simply followed the rule rather than exercising discretion in deciding whether to agree to the proposed collection alternative by reference to other considerations.” Order, at p. 6. (Name omitted).

“The IRS’s principle of declining installment agreements proposed by taxpayers who are not even currently in compliance is not arbitrary, capricious, or without sound basis in fact or law. SO G stood on firm ground when she invoked that principle to decline the installment agreement that the Jacksons proposed.” Order, at p. 6. (Name omitted).

Gerry seems to be claiming that Appeals should review his IA and balance that against the NFTL, and then balance NFTL against “least instrusive.”

Nope, says Judge Gustafson.

“..the Jacksons assume that we first review IRS Appeals’ declining of the installment agreement pursuant to section 6330(c)(2)(A)(iii) (‘offers of collection alternatives’) and then review it again pursuant to section 6330(c)(3)(C) (’balanc[ing]’). But their contention reflects a misunderstanding of the balancing that the statute requires. The statute required IRS Appeals to balance intrusiveness against the need for tax collection not in evaluating the proposed installment agreement but in evaluating the ‘proposed collection action’–i.e., the filing ofthe NFTL. Such balancing discerns whether the lien filing is unnecessarily intrusive, not whether denial of an installment agreement is intrusive.” Order, at p. 7.

But Gerry never argued that the lien was intrusive.

Judge Mark V Holmes sure gets ‘em…the off-beat conundra that delight the blogger. So here’s Emilio Torres Luque, cross-border trucker and wife Gabriela, and their C Corp (which Emilio claims is his alter ego), Emilio Express, Inc., et al., Docket No. 14949-10, filed 2/1/19.

Emilio has permits to ply his trucks between Tijuana and a certain distance into the USA. He and Gabriela have US green cards, but are also Mexican nationals and claim to have permanent homes available to them both in Mexico and the US.

Emilio and his C Corp have somewhat idiosyncratic tax filings in both countries, but IRS is nailing Emilio and C Corp for around half-a-million in total deficiencies on their US income taxes for the four (count ’em, four) years at issue.

Emilio and C Corp claim they’re really Mexican all the way, and thus can be taxed only by Mexico. Their basis for their claim is the Convention Between the Government of the United States of America and the Government of the United Mexican States for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, Mex.-U.S., Sept. 18, 1992, S. Treaty Doc. No. 103-7 (amended by Protocols, Sept. 8, 1994; Nov. 26, 2002).

Emilio and C Corp petition the SNOD, but since they claim treaty benefits, Judge Holmes holds everything up while the competent authorities hash it out. “(This term might sound odd to those outside the international-tax cloister, but is simply an office within the Treasury Department that is enabled by the Treaty to communicate informally with its counterpart in the Mexican government to try to resolve disputes about taxes owed by the same taxpayer of these two sovereigns.).” Order, at p. 4.

Emilio and C Corp first filed with Mexico showing tax due, but then amended to show they had a Mexican $28K refund coming.

“An agent of the IRS’s competent authority wanted to know what the effect of these amended returns would be, and she wrote her Mexican counterpart to ask. He replied that ‘I can tell you that in terms of article 32, paragraph 4 of our Federal Fiscal Code, an amended income tax retum has the effect to replace the normal income tax return, prevailing over the normal income tax return.’ Other correspondence confirmed that this meant the original payment of more than Mex$28,000 was now an asset to [Emilio], available as an offset or refund.” Order, at p. 4.

So the US competent authority concluded Emilio wasn’t taxed on anything in Mexico.

Emilio claims he’s a Mexican resident, and when Mexico accepted his amended returns he doesn’t owe the US anything.

Except.

“Let us turn first to the language of the Treaty. What is its purpose — is it to determine residence in ambiguous situations like this, or is it something else? The submittal letter from the Secretary of State to the President that accompanied the Treaty says that the Treaty’s purpose is to ‘cooperate to resolve issues of potential double taxation and to exchange information relevant to implementing the Convention and the domestic laws imposing the taxes covered by the Convention.’ Article 26 sets up the mutual agreement procedure that the parties in these cases used. See Treaty, supra note 1, art. 26. That Article states that the procedure is to be used when there is ‘taxation not in accordance with the provisions of this Convention.’ Id. at art. 26, para. 1.

“There is nothing in the Treaty that creates exemptions from taxation for income based on residence as the Treaty defines it. What the Treaty does is embody an agreement between the two countries that each shall relieve residents of the other from double taxation on the same income through a system of tax credits. This is set out in Article 24, where both countries agree that “a Contracting State shall allow to a resident of that State . . . as a credit against the income tax of that State: a) the income tax paid to the other Contracting State by or on behalf of such resident or citizen . . .” Id. at art. 24, para 1, subpara. a.” Order, at p. 9. (Citation omitted).

And here’s as clear an explanation of the rationale of double taxation treaties as anything I’ve yet read.

“[Emilio’s] argument is based on an [sic] that, if they qualify as residents of Mexico under the Treaty, all of their income can be taxed only by Mexico and not by the United States, even though they are green-card holders. The Court can sympathize with them a bit — it certainly might seem that relief from double taxation could be more easily done by a treaty allocating to either Mexico or the United States the right to tax particular taxpayers on particular sorts of income. But that is not how the Treaty is set up — it is set up instead to allow both countries to subject to their tax law the entire income of the same taxpayer as long as a system of credits is in place to prevent double taxation.

“And, if the purpose of a tax treaty exercised any pull over the interpretation of its language, one must consider the advantages of such a credit system over an exemption system. Under an exemption system, two residents of the same country with the same amount of income could be subject to different effective rates of taxation — a resident with low-taxed foreign income would be subject to less total tax than would a resident with purely domestic income. (And that would be the situation with [Emilio] and their San Diego neighbors.) With a system of credits in place based on tax paid, there is no such advantage.” Order, at pp. 9-10.

All the treaty does is give Emilio credit for any tax he paid Mexico. As he paid none, all his US income is taxable by US law.

So the treaty only provides that two single tax returns don’t equal double taxation.

And IRS Blows the SOL on Mike D’s IRA

Mike D is more properly known as Michael Deluca, the star of Michael Deluca & Elizabeth Deluca, Docket No. 548-18, filed 1/31/19. National Iron is the bank wherein Mike D stashed his Roth IRA, and from which Roth IRA he kept on borrowing from 2011 through 2016 (the dates matter), paying back the loans punctually.

Iron Mike, of course, is that eminent jurist and author of the above-cited designated hitter,  ex-Ch J Michael B (“Iron Mike”) Thornton.

Now my learned readers will exclaim as one, “Section 4975!” And they’re right. Some may even quietly remark “Prohibited Saves the Day, 4/10/18,” recalling my blogpost and the case reported therein, to which both IRS and ex-Ch J Iron Mike continually refer. And even more quietly “Section 408(e)(2)(A)” may be heard.

“On their income tax returns for all relevant years, petitioners treated [Mike’s] IRA as an existing IRA; they did not disclose the loans to Mr. Deluca. Petitioners assert that this was an innocent mistake. In a notice of deficiency dated October 19, 2017, respondent determined in part that during 2014 petitioners had a deemed distribution of $198,048 from their Roth IRA due to prohibited transactions (i.e., the loans from [Mike’s] IRA to Mr. Deluca) under section 4975(c)(1)(B).” Order, at p. 2 (Footnote omitted).

Mike D and Elizabeth want summary J. Mike’s IRA cratered in 2011 when he made the first loan, not 2014.

IRS claims duty of consistency. Mike D and Elizabeth never reported the loans and always treated Mike’s IRA as if Mike D hadn’t cratered it.

Except. The earlier case from my blogpost above referred to is Marks, and ex-Ch J Iron Mike discourses thereon.

“We agree that respondent’s concession in Marks does not necessarily preclude him from invoking the duty of consistency in this case. In making his argument, however, respondent misses the larger point. The issue that the Court raised sua sponte in Marks–the consistent application of the prohibited-transaction rules for earlier years–is the same issue that petitioners have raised to defend against respondent’s determination in the notice of deficiency. In Marks the duty of consistency had no relevance because, if for no other reason, it was the Court, rather than the taxpayers, who raised the issue. In those circumstances there was no issue as to the taxpayer’s taking inconsistent positions, and consequently there was no meaningful basis for the IRS to invoke a duty of consistency defense. In the case presently before us, such a defense takes on no greater relevance by virtue of the fact that it is petitioners, rather than the Court, who have raised the issue. In either circumstance, the question has nothing to do with any inconsistency in the taxpayer’s factual representations and everything to do with the correct application of the law.” Order, at p. 3.

We all know that the duty of consistency means a taxpayer can’t take one position in a year already closed, and a contrary one in another, open year. Pick your position and stay with it. But duty of consistency applies to facts; you can take inconsistent positions on the law. But Mike D did neither; he always maintained his IRA was legit from beginning to end, before he invokes Section 408(e)(2)(A).

And ex-Ch J Iron Mike believes in statutes, specifically the  SOL.

“Respondent’s basic problem, as he acknowledges, is that he has blown the statute of limitations for petitioners’ 2011 tax year. Be that as it may, the judicially crafted doctrine of the duty of consistency cannot displace the detailed statutory rules governing the tax treatment of IRAs. Under the plain terms of the statute [Mike’s] IRA ceased to be a valid IRA as of the first day of 2011, the year in which the prohibited transactions first occurred, and the IRA was treated as distributing all its assets on that same day. See sec. 408(e)(2)(A) and (B). To adopt respondent’s position would essentially mean rewriting the statute to postpone the consequences of prohibited transactions indefinitely into the future, depending upon when the IRS might happen to discover them. The intention and effect of respondent’s position would be to toll the statute of limitations for the collateral tax consequences of a prohibited transaction.” Order, at p. 4.

Mike D wins. Rule 155 beancount for conceded items to follow.

Even though he’s not coaching on Sunday, Nick Saban has won the big one, in 2590 Associates, LLC, 5615 Associates, LLC, as Successor in Interest to, 5615 Associates, LP, Tax Matters Partner, 2019 T. C. Memo. 3, filed 1/31/19, Judge Goeke raising his hands for the winning play.

Nick was in a real estate deal with his buddy Joseph Spinosa. Joe needed the readies to get started while negotiating with KeyBank (the firm I was then in represented them years ago), and Nick stumped up $2 million plus on a note from a couple Joe’s LLCs (hi, Judge Holmes).

If you want to read an extensive description of how real estate development deals died during the Black ’08, you can read Judge Goeke’s exhaustive account. Joe was an optimist, like all developers. As with all my developer clients, his motto was that of Tug McGraw: “Ya Gotta Believe.”

Nick’s note got renegotiated a couple times (see above) between 2006 and 2008, but as Joe’s negotiations and renegotiations with lenders spiraled downward, Nick wasn’t getting paid.

But his note, at each iteration, was not a novation under LA State law (no new parties, no extinguishment of debt), provided for stated above-market interest, stated maturity, attorneys’ fees in case of default, and identifiable event of default.

Nick couldn’t manage Joe’s operations, although they were both in some of Joe’s deals.

Well, Joe’s development deal craters. Nick put his note in an LLC he got from Joe, because he didn’t want anyone in LA to know he was around after he turned to the Crimson side.

Nick took a bad debt deduction through the LLC, claiming the loan went south in 2011. IRS only disputed this in pretrial brief, so IRS has burden of proof, and doesn’t sustain it.

Nick proves the debt was real, not a contribution to capital in Joe’s deal. The thirteen (count ‘em, thirteen) factors 5 Cir. uses to unpack real indebtedness doesn’t long detain Judge Goeke.

“Respondent has conceded that the Saban loan was bona fide; i.e., the cash transfer from Mr. Saban to [Joe’s outfit] created a bona fide debt between Mr. Saban and [Joe’s outfit].  The debt was evidenced by three promissory notes with fixed maturity dates.  Each note provided for an interest charge, increased the interest rate upon default, and provided for the payment of attorney’s fees for any collection actions.  Upon default, Mr. Saban negotiated with [Joe’s outfit] to ensure repayment, first by extending the maturity date for one year (the 2007 note) and a second time by again extending the maturity date (the 2008 note) after which he transferred the note to [his LLC] as a capital contribution, placing the risk of the debt with the company.” 2019 T. C. Memo. 3, at pp. 23-24.

IRS claims the transfer to Saban’s LLC extinguished the debt, but Judge Goeke says no.

Repayment wasn’t limited to the success of this deal, the cash Nick advanced wasn’t used to buy capital assets, and Joe’s outfit wasn’t thinly capitalized. And Joe testifies how experienced he is, and how he was sure the deal would work.

Nick is ahead as the game ends.

IRS has Vivian Ruesch, Docket No. 2177-18L, filed 1/30/19, on a schneid, as the cardplayers say, and ex-Ch J Michael B (“Iron Mike”) Thornton doesn’t even need to take a nibble from the dictionary to see Viv off in this designated hitter.

Viv had her $63 State tax refund grabbed to satisfy a $300 shortfall, which, together with a grab of overpayments still in play, extinguished her 1040A liability for the year at issue. Thus, no SNOD. Nevertheless, Viv sent in Letter 12153 concerning the NFTL IRS had filed, but IRS withdrew the NFTL after Viv’s equivalent hearing ended with a zero balance NOD.

Meanwhile, IRS claims the 10K penalty for nonfiling foreign partnership (Form 8865) or foreign corporation (Form 5471) returns for that same year, and gives Viv a NFTL for six (count ‘em, six) years’ worth of Section 6038(b) $10K annual chops. Viv files Form 9423 (Collection Appeal Request) and Letter 12153, which IRS first claims was untimely, but as it was faxed to the RA who was handling the 1040A matter, IRS concedes it was timely, but the matter is moot.

Ex-Ch J Iron Mike wants to toss Viv’s original petition, as there’s no 1040A left.

Viv’s counsel claims the 12153 covers the NFTL for the six years’ chops.

“Petitioner contends that the case is not moot because ‘there is currently outstanding liability for the [year at issue]’ as relates to the section 6038(b) penalty. Petitioner further contends that ‘res judicata precludes respondent’s determination and assessment of a section 6038(b) penalty’ because, petitioner says, respondent’s decision letter constitutes a final determination that petitioner owe [sic] no tax, interest, or penalties for [year at issue].” Order, at p. 5.

I give Viv’s counsel a Taishoff “Good Try, Second Class.”

Administrative proceedings give no rise to res judicata, as that applies only to judicial proceedings. In any case, Viv has her shot with Appeals, and can petition any NOD, whether for year at issue or the other five, once Appeals decides them.

IRS can claim more types of tax or chops tax due for the same year, and if any of them is unripe when the other is determined, Tax Court is open as soon as it ripens.

I’m taking Jerry Stoller and Mike Lieber’s words to Carlo Donida’s 1963 torcher to intro another Judge Mark V Holmes designated hitter, as he goes back to 1963 to conclude that, indeed, H R B-Delaware, Inc. & Subsidiaries, Docket No. 28129-12, filed 1/29/19, has nothing.

At least, nothing by way of franchisee rights in the multifarious successors to the two young men who formed the Best Little H&R Block Tax Prep Franchise in Texas. Way back when in 1963, before the FTC and the several States got into regulating franchises, they were simply defined by the written agreement. And that provided for cancellation by the franchisor, noncompetition from the franchisor, and that the franchise was a personal, nonassignable license.

Fast forward. The original C Corp the two young men formed became a Sub S in 2000, with heavy-duty BIG (Built-In Gain tax) if (a) the franchise rights were worth anything at that point, and (b) they subsequently unloaded the franchise rights.

As a result of a franchisee class action when franchisor tried to market its software to individuals, cutting out the franchisees, the Sub S settled out. The settlement modified the 1963 agreement in 2000 to provide that all goodwill belonged to franchisor, franchisor could buy out franchisee for a formula, allowed assignment on consent not to be unreasonably withheld, and took away any right of franchisee to retain franchisor’s name, even if franchisor breached.

H&R buys out H-R-B Delaware & Subs in 2008 for $100 million. Part of that might be capital, but the BIG gets taxed as ordinary (35% for year at issue). H-R-B Delaware claims BIG $11.9 million, IRS says $28.4 million.

But H-R-B Delaware shifts ground, says franchise rights worth zero. And wants summary J.

I’m sure by now that those of my readers who haven’t nodded out are saying “Summary J for valuing intangible intellectual property? No way.”

“Way,” says Judge Holmes.

Though IRS claims other rights besides franchise rights are involved in the sale, the SNOD gives the $28.4 million valuation and the Form 886-A says only “franchise rights.”

But here’s a hint for IRS. “This is sufficient to let us conclude that the dispute between the parties is limited to the value of those ‘franchise rights.’ (If the Commissioner does dispute the value of other intangible assets that petitioner might owe BIG tax on, we note our Rules treat motions to amend pleadings at this stage of the litigation liberally.).” Order, at p. 5 (misdesignated as number 2 in original).

The old caselaw says that where the franchisor can terminate the franchise at a date certain without breach by franchisee, and where the franchise is personal and nonassignable, the franchisee has nothing to sell.

IRS argues that providing services is different than selling goods, but that’s a nonstarter. “We don’t see how that makes a difference in the value of franchise rights, or closely associated concepts like good will and going concern. The cases don’t make this distinction and the common element in all of them is that a franchisee under these old contracts had no intangible asset of value apart from the right to do business under the franchisor’s name.” Order, at p. 7 (misdesignated as number 4 in original).

The test date for BIG is the first day of the year wherein the C Corp elected S Corp. That was before the settlement and modification of the 1963 agreement. On that date, H-R-B Delaware had nothing.

I give H-R-B Delaware’s counsel and tax planners a Taishoff “Good Job, First Class.”

Sing it, Ben E. King!