No, not the 1935 Arthur Schwartz-Howard Dietz revue that introduced “What A Wonderful World” to the standard repertoire, nor yet the late Anthony Lewis’ Pulitzer-Prize-winning column so styled, but today it’s the story of James F. Daly and Candace H. Daly, 2013 T. C. Memo. 147, filed 6/6/13.

Or rather, it’s Jim’s story, as Sandy is safe in Utah, working full-time as a lobbyist, while Jim is off in Iraq and Afghanistan, working for L3 Communications.

Judge Kerrigan: “He was employed by L3 during the years in issue.

“During the years in issue L3 maintained its principal place of business in Salt Lake City, Utah. L3 contracted with the Department of Defense. Part of petitioner’s work for L3 involved L3’s contract with the Department of Defense.

“During the years in issue petitioner husband performed services for L3 in Afghanistan and Iraq. L3 compensated petitioner husband for those services. When petitioner husband was working overseas, he was unable to choose where he would be working or for how long he would be there. He was informed of his departure date only one month in advance. He was informed of his return date only two weeks in advance. Petitioner husband, however, was aware in advance that his assignments in Afghanistan and/or Iraq would last approximately three months. The Department of the Air Force provided L3 with an official travel authorization for petitioner husband for travel from August 10, 2007, to August 31, 2008.” 2013 T. C. Memo. 147, at p. 3.

Jim was confined to base (Kandahar or Ballard) during his hundred-day tours, was flown in and out by the US Air Force, couldn’t bring family with him nor could he leave the base. Jim worked 12-hour shifts every day, weekends included.

Jim claimed Section 911(a) foreign earned income credit. No doubt he earned the money via personal services. And he prorated his earnings based upon time in-country, and requested a waiver of the 330-day out-of-USA requirement.

But he wasn’t foreign and wasn’t waivable, said IRS, and Judge Kerrigan agrees. See Section 911(d)(4). Jim had to be a bona fide resident who would have satisfied the 330-day requirement except that Treasury, after consultation with State, decided that USA nationals had to leave because of war or civil unrest.

But Jim wasn’t a bona fide resident. Judge Kerrigan: “Petitioner husband maintained strong ties to his home in Utah. He lived on U.S. Air Force bases when he was in Iraq and Afghanistan and was not allowed to leave the bases. His family did not go with him, and he did not travel. He did not open a bank account in Iraq or Afghanistan. … petitioner husband had ties to Iraq and Afghanistan that were severely limited and transitory during the years in issue.

“Petitioners contend that even if petitioner wife had been allowed to join petitioner husband in Iraq or Afghanistan, she nevertheless would have been unable to go because of her separate career. Petitioners also contend that petitioner husband maintained a residence in Utah because of petitioner wife’s business. Even if these contentions were true, they would not outweigh petitioner husband’s limited ties to Iraq and Afghanistan.” 2013 T. C. Memo. 147, at p. 12-13.

I can understand Judge Kerrigan, except for bit about the bank account in Iraq or Afghanistan; is it possible to have a bank account there, in a bank that hasn’t been blown up?

Jim claimed his USAF travel warrant was for more than a year, but that cuts no sand (forget about ice) with Judge Kerrigan: “Petitioners contend that petitioner husband’s residence was in Iraq or Afghanistan or both during the years in issue. They claim that his primary place of business was in Afghanistan and/or Iraq because he was ‘ordered to be present in these countries for an entire 12 months’. Petitioners refer to the travel authorization that L3 received from the Department of the Air Force, which authorized petitioner husband to travel from August 2007 to August 2008. Travel authorization alone is not proof that petitioner husband’s primary place of business (and therefore tax home) was in a foreign country. Petitioner husband’s temporary location in Afghanistan and Iraq does not change the fact that petitioners’ tax home was in the United States. Petitioners have failed to show that petitioner husband established a residence in a real or substantial sense in Afghanistan and/or Iraq in the years in issue.” 2013 T.C. Memo. 147, at pp. 13-14.

But finally, get this: “Petitioners failed to meet the requirements under section 911(d)(4)(B) because they failed to show that the Secretary determined that individuals were required to leave Afghanistan and/or Iraq because of war, civil unrest, or similar adverse conditions. The Secretary publishes a list of foreign countries where war, civil unrest, or similar adverse conditions exist for purposes of section 911(d)(4)(B). Sec. 1.911-2(f), Income Tax Regs. No list was published for 2007. The list that was published for 2008 does not include Iraq or Afghanistan. See Rev. Proc. 2009-22, sec. 2.04, 2009-16 I.R.B. 862, 863.” 2013 T. C. Memo. 157, at p. 16.

Oh yeah? There was no war or civil unrest in Iraq or Afghanistan in 2007 or 2008, according to the Secretary of the Treasury?

Anyway, Jim loses.

And for more about tax homes, see my blogpost “Home Is Where The Heart Is”, 7/21/11.

That’s STJ Robert N. Armen. And even confronted with frivolity merchant Guy Decker, Docket No. 30559-12, filed 6/6/13, STJ Armen cuts Guy some slack.

It’s the typical failure-to-report-wages, with protester overlay and the obligatory quote from Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984). Apparently Guy sent in a 1040 with zeros, so IRS hits Guy for tax, interest and failure-to-pay addition.

IRS gets summary judgment, as Guy disputes no facts. But only for tax and interest.

STJ Armen: “Although petitioner did not raise the issue in either his petition or his Objection to respondent’s motion to dismiss, the record indicates that respondent erroneously determined the addition to tax under section 6651(a)(2) based on petitioner’s ‘total corrected tax liability’ of $18,451, less allowable payments of $405. (Emphasis added.) However, the addition to tax under section 6651(a)(2) is based on a taxpayer’s failure to pay the amount shown as tax by the taxpayer on the taxpayer’s return. Form 4549, which is an integral part of the September 26, 2012 notice of deficiency, indicates that the ‘total tax shown on return’ was zero. Thus, as a matter of law it cannot be said that petitioner failed to pay the amount shown as tax by him on his return.” Order, p. 2.

After all, Guy said zero and paid zero.

STJ Armen has a heart.

Those of us who loved to play Parker Bros.’ Depression-era anodyne will remember drawing that card, with the inevitable agony or ecstasy. If our younger sibling had houses and hotels, it was game-over, followed by weeping, wailing and gnashing of teeth. If Boardwalk were still no-one’s-land, and we could afford the trophy property, we jumped on it. If neutral and we could not, we knew that relief was around the corner, as on our next turn we would we pass “GO” and collect our $200.

Oh those days, “gone alas like our youth, too soon.”

But the Supremes handed that ticket to Historic Boardwalk Hall, LLC, New Jersey Sports and Exposition Authority, Tax Matters Partner, Docket No. 11273-07, telling the taxpayer to take a walk (where not specified).

So Judge Goeke gets to push the parties around (in an old-fashioned Atlantic City boardwalk rolling chair, I mean; although an alternative meaning is entirely possible). The Order in this case was filed 6/5/13.

For background, see my blogposts “Social Engineering Trumps the Code”, 1/3/11, and “Honor Your Partner?”, 9/3/12.

To summarize, HBH was a team-up by NJSEA and Pitney-Bowes, the postage meterer, to rehab an historic structure on the Boardwalk in Atlantic City and give P-B big Section 47 tax credits. But unlike the ditty made famous in the June Haver and George Montgomery 1946 classic, life wasn’t peaches and cream. IRS blew up the deal, Tax Court found for P-B in 136 T. C. 1, filed 1/3/11, but the mean ol’ Third Circuit reversed and remanded.

So now for a quick Rule 155, no?

Not so fast. When Judge Goeke asked for supplemental briefs, P-B said they filed for certiorari with the High Court. “On May 28, 2013, the Supreme Court denied certiorari to petitioner (2013 WL 249846, 81 USLW 3431 (May 28, 2013)). The parties telephonically contacted the Court stating that because the parties could not agree upon the scope of the mandate, a joint written status report would not be filed and requested a telephonic conference call. That conference call took place on June 4, 2013.” Order, p.1.

So Judge Goeke wants each side to set forth what they think Third Circuit wanted Tax Court to do.

But Judge Goeke skips the hundred-year-old admonition from the Supremes anent remands: “That [lower] court cannot vary it, or examine it for any other purpose than execution; or give any other or further relief; or review it, even for apparent error, upon any matter decided upon appeal; or intermeddle with it, further than to settle so much as has been remanded.” In re Sanford Fork & Tool Co., 160 U.S. 247, 255 (1895). Depending, of course, upon what actually was remanded.

So again we  take a walk on the Boardwalk.

But Judge Marvel Hangs Up

IRS tries to play telephone tag with Pamela Lynn Brooks in 2013 T. C. Memo. 141, filed 6/4/13.

Pammy is an IRS tax compliance officer, a reviewer of returns who messed up her own returns for the years at issue.

Her case is also interesting for the capital loss argument, which I’ll briefly summarize before getting to the telephone story. Pammy made some improvements at her own expense to mother-in-law Beulah’s residence, based on m-i-l Beulah’s promise to give her a cut of the profits when she sold. Though Pammy lived in the place for a short while, she vacated prior to sale. M-i-l Beulah died, the property was sold, and of course Pammy got nothing until Pammy sued, and settled for about half what she had spent to make the improvements.

That’s enough for Judge Marvel to allow the loss, even though Pammy had no ownership interest in, and no other enforceable legal right to, the house. Judge Marvel says “joint venture” and that can be an oral agreement under State law (CA, where else?). Investment was made with expectation of profit, had economic substance and an enforceable agreement.

Could also be constructive trust: family relationship, action taken in reliance.

Now for the telephone. You remember the Section 4251 telephone excise tax was trimmed by the courts and IRS offered refunds per Notice 2006-50, ultimately tacking a line onto the 2006 Form 1040 to let taxpayers take the telephone excise tax as if it were income tax paid. Well, Pammy claimed $768 in credit, and IRS said no.

Judge Marvel passes: “Although neither party contends that we lack jurisdiction to decide whether petitioner claimed an excessive telephone excise tax credit, we may question our jurisdiction sua sponte. The Tax Court is a court of limited jurisdiction, and we may exercise our jurisdiction only to the extent authorized by Congress. Section 6213(a) of subchapter B authorizes the Tax Court to redetermine a deficiency provided a timely petition is filed. Section 6211 defines a deficiency as the amount by which the tax imposed by subtitle A or B or chapter 41, 42, 43, or 44 of the Code exceeds the amount of such tax shown on the taxpayer’s return and the amount of such tax previously assessed.

“Section 4251 imposes the telephone excise tax and section 6415 allows a taxpayer to claim a telephone excise tax credit. See also Notice 2006-50, supra. Thus the excise tax and credit are not properly part of an income tax deficiency determination. See sec. 6211(a). Accordingly, we do not have jurisdiction to determine the proper amount of petitioner’s telephone excise tax credit.” 2013 T. . Memo. 143, at pp. 37-38. (Citations and footnote omitted).

This is a non-rebate refund, and therefore Tax Court can’t touch it. IRS is trying to use income tax methods for non-income tax issues, and Judge Marvel hangs up on that.

Section 469 incomprehensible? Maybe to Professor George S. Jackson, who in the October 24, 2011 edition of Tax Notes “states that section 469 contains ‘almost 4,500 words’  (we did not count) and ‘exemplifies why federal tax law is incomprehensible for most citizens.’ George S. Jackson, ‘Passive Activity Limitations: Time for a New Paradigm?’, 133 Tax Notes 447, 459 (2011).”

The quote is from Peter H. Hofinga and Margaret M. Wong, 2013 T. C. Sum. Op. 43, filed 6/3/13, at p. 5.

Nothing daunted, STJ Lew (The Right Spelling) Carluzzo sails right in: “Describing section 469 as ‘incomprehensible’ is probably an overstatement; that section, however, is hardly uncomplicated. The dispute between the parties in this case, however, allows us to avoid a discussion of many of the complexities of section 469, and a summarization of the relevant provisions of that section is sufficient.” 2013 T. C. Sum Op. 43, at p. 5. (Footnote omitted).

And barring the neologism “summarization” (how about just “summary”, STJ Lew?), STJ Lew does just that.

It’s the usual “rental realty is always passive” meets material participation meets the $150K AGI limit meets real estate pro. And that’s the 750 hour barrier.

Pete and Maggie elect to treat all their rentals as a single activity: good move. If you want to be a pro, elect “all”, unless there’s some overriding reason for compartmentalizing. So Pete does materially participate, taking all the rentals together. But the $150K AGI ceiling prevents Pete from taking rental losses against ordinary income. If AGI exceeds the magic number, you’re still passive even if you participate.

So Pete’s only hope is the Section 469(c)(7) real estate pro, the 750-hour floor. You have to log (and the operative word here is “log”) a minimum of 750 hours of material participation per tax year, and at least half of all your personal services in all your trades or businesses must be in real estate.

But Pete, who really ran the show, is on the disabled list and, despite continuances, can’t make it to trial, so Maggie is on her own. And she admits she’s not a pro.

Pete did nothing but real estate, so he has the one-half test beat.

STJ Lew: “Ideally, a taxpayer who claims to be described in section 469(c)(7) would maintain a contemporaneous log or record showing with particularity the amount of time devoted to the rental real estate activity on an event-by-event basis. Ideally, the log would be detailed enough to allow for someone who reviewed it to make an informed judgment as to the accuracy of the information reported. The creation and availability of a detailed log is important, especially if that reviewing ‘someone’ is an Internal Revenue Service employee considering the log in connection with an examination of the taxpayer’s return on which rental real estate losses are deducted. Apparently, petitioners were not aware of the importance of keeping such a log and, as noted, neither kept a log during either year in issue.” 2013 T. C. Sum. Op. 43, at p. 8. (Citations omitted, but read them.)

But there is a saver. Reg. Section 1.469-5T(f)(4) provides for an “any reasonable method” test. There needn’t be a contemporaneous log, but appointment books, calendars and narrative summaries can be acceptable.

Unfortunately, what Maggie produces conflates her hours with Pete’s, and only Pete’s hours count. Also, Pete employed managing agents to do some of the work, so Maggie’s logs (and she did them twice) can’t really substantiate the requisite hours for Pete.

STJ Lew notes that Maggie’s testimony about what Pete did probably was hearsay, but as this is a small-claimer, he’ll let it in anyway. Especially as he’s going to find for IRS, which he does.

Takeaway- If you want to be a pro, get one of the timekeeping software programs (like lawyers use) and enter your hours every day as you do the work. Specify the properties (give each one a billing code), what you did and when you did it–every phone call, every e-mail. As Diana Ross and the Supremes, and the Temptations, put it in their 1968 hit, “Every minute, every hour, I’m gonna shower you” with data and more data, IRS. As Diana and the guys put it “I’m Gonna Make You Love Me,” IRS.

And tell ‘em STJ Lew made you do it.

No, not Wolfgang Petersen’s 1984 fantasy “Die Unendliche Geschichte”, although this is one that Grandma and Mommy might have called “a ganze geschichte”. We now come to  Act VI (or is it VII?) of Arthur I. Appleton, Jr., Petitioner and The Government of the United States Virgin Islands, Intervenor, Docket No. 7717-10.

My fellow tax masochists and the terminally insomniac will remember 2013 T. C. 14, filed 5/22/13, wherein Judge Jacobs (that’s His Honor Judge Julian Jacobs, a/k/a Big Julie, to you, hereinafter JJJBJ) gave IRS the right-about-face and marched out Artie A. and the Virgins unspotted by any deficiency or penalty.

So JJJBJ enters a Decision and Order granting summary judgment to Artie A. and the Virgins.  See my blogpost “Farewell to the Virgins”, 5/22/13. The end, right?

No, because JJJBJ vacates his order to allow IRS, the VIBIR and a demi-brigade of lawyers to view the MOU, namely, the memoranda of understand [sic] and procedural agreements between the United States Internal Revenue Service and the U.S. Virgin Islands Bureau of Internal Revenue, with a view to appealing JJJBJ’s Decision and Order, as soon as it gets re-entered after he modifies a previously-entered protective order sealing the MOU from the common view.

Just when you thought it was finally over.

“Old lawyers never die, they just lose their appeal.”

Following on my blogpost “You Didn’t Get It”, 5/31/13, here’s the story of Antonio Lepore, as told by Judge Morrison in 2013 T. C. Memo. 135, filed 5/30/13.

This was a TFRP case (Trust Fund Recovery Penalty, non-remittance of FICA/FUTA and withheld income taxes).

Antonio claimed he never got the Letter 1153, triggering the period wherein Antonio could contest his liability. IRS proves the letter and the mailing thereof by certified mail to Casa Antonio, and shows receipt signed by Antonio’s 23-year-old son.

Should be a slam dunk for IRS. After all, see FRCP 4(e)(2)(B), the so-called SAD service (person of suitable age and discretion at party’s dwelling or usual place of abode).

Antonio testified he never saw the letter. So what? Judge Morrison: “Section 6330(c)(2)(B) provides that the taxpayer ‘may also raise at the hearing challenges to the existence or amount of the underlying tax liability’ if the taxpayer did not receive any statutory notice of deficiency for such liability, or did not otherwise have an opportunity to dispute it.” 2013 T. C. Memo. 135, at p. 7.

Non-receipt trumps SAD in a TFRP. And Judge Morrison believes Antonio. And it doesn’t matter whether this is a de novo review or an abuse-of-discretion review, because Tax Court must “reject erroneous views of the law.” 2013 T. C. Memo. 135, at p. 8. Don’t ask about Judge Holmes’ side-step of this proposition in my blogpost “The Busted Stipulation”, 1/27/12.

Antonio didn’t intentionally duck receipt of the Letter 1153. And Sonny Lepore testified he threw the letter in the basement among his, his brother’s and his father’s miscellaneous business papers. And Papa, Sonny and Bro get lots of mail. And Sonny didn’t live with Papa Antonio; he only showed up a few times a week.

Finally, though FRCP 4(e)(2)(B) says what it says, Section 6330(c)(2)(B) says what it says. “The IRS contends that the merit of its theory is that ‘[r]equiring personal service of Letters 1153 would be costly, time consuming, and inefficient’ and would ‘greatly impair the Service’s ability to assess the trust fund recovery penalty against liable taxpayers.’ But to make the notification required before assessing the trust fund recovery penalty, the IRS need only mail the Letter 1153 to the last known address of the person to be assessed. Sec. 6672(b)(1), (4); Mason v. Commissioner, 132 T.C. at 322-323. The IRS can assess the penalty without making personal service on the person. Id. The receipt requirement applies only to the letter’s function to provide an opportunity to dispute the underlying liability, not its effectiveness as pre-assessment notice of the penalty. The IRS’s imputed-receipt theory (as articulated in this case) is therefore not compelled by the need to facilitate the assessment of trust fund recovery penalties.” 2013 T. C. Memo. 135, at pp. 12-13.

In short, IRS can assess just by mailing, but taxpayer can contest by not actually receiving.

So back to Appeals goes Antonio, to fight over his liability. He didn’t get it.

No, not a joke or a concept, but a SNOD or an 1153. Both are tickets to Tax Court, but the consequences of receipt or non-receipt can change what the taxpayer can do once they get there.

And 5/30 brought us two cases in point. Here’s the first; the second will get its own blogpost.

IRS claimed they mailed the SNOD in June, 2005 to Dominick Galluzzo and Angela Galluzzo, in 2013 T. C. Memo. 136, filed 5/30/13. And Dom and Angie sent in their petition.

Judge Vasquez: “Petitioners filed their petition with the Court on May 21, 2012, which was 2,545 days after the purported mailing of the notices of deficiency.” 2013 T. C. Memo. 136, at p. 3. A wee bit late, ya think?

Yes, says Judge Vasquez, and he’ll dismiss the petition for want of jurisdiction, but why he will do so matters a lot.

Dom and Angie claim there never was a SNOD. IRS claims there was.

Judge Vasquez explains in a footnote: “If respondent’s [IRS’] position is sustained, the petition is untimely, and the deficiencies and additions to tax may be assessed. Petitioners’ recourse then would be to pay the tax, file a claim for refund with the Internal Revenue Service (IRS) and, if the claim is denied, sue for a refund in the appropriate Federal District Court or the Court of Federal Claims. If petitioners’ position is sustained, the notice of deficiency is a nullity, and respondent may not assess the deficiencies or additions to tax, under normal circumstances, unless a valid notice of deficiency is issued.” 2013 T. C. Memo. 136, at p. 2, footnote 3. In the latter case, Dom and Angie get a do-over. See my blogpost “A Do-Over”, 1/11/13.

IRS proffers a USPS Form 3877 proof of mailing and nothing else, saying they lost the administrative file. Dom and Angie swear they don’t remember getting anything from IRS in June, 2005.

OK, “Section 6212(a) expressly authorizes the Commissioner, after determining a deficiency, to send a notice of deficiency to the taxpayer by certified mail or registered mail. It is sufficient for jurisdictional purposes if the Commissioner mails the notice of deficiency to the taxpayer’ ‘last known address’.” 2013 T. C. Memo. 136, at pp. 3-4. (Citations omitted).

Mailing is enough; receipt by taxpayer doesn’t matter. Mailing starts the 90-day in-country clock for filing with Tax Court.

But once Dom and Angie claim they never got the SNOD, IRS has the burden of proving both mailing (which they do) and the validity of the SNOD, which they can’t do.

Judge Vasquez cites a previous Tax Court case, affirmed by Third Circuit, where: “…the Commissioner (1) lost the administrative file, (2) had no copies of a notice of deficiency, (3) did not establish that a final notice of deficiency ever existed, (4) relied on a Form 3877, and (5) did not introduce evidence showing how the Commissioner’s personnel prepare and mail notices of deficiency.” 2013 T. C. Memo. 136, at p. 5 (Citation omitted, but look it up.).

Moreover, in the case cited, IRS “produced a draft copy of the notice of deficiency and supported the draft with affidavits from two IRS employees who stated that they worked on the notice of deficiency at issue. In our case, respondent presented no such evidence; he has not produced a draft copy of the notices of deficiency or any testimony from IRS employees who assisted in the preparation of the notice of deficiency. Thus, there is nothing in the case, apart from the Form 3877 itself, to support a presumption of regularity by the IRS.” 2013 T. C. Memo. 136, at p. 5.

I cannot here quote Mario Puzo’s immortal words to describe IRS’s situation, but fans of “The Godfather” will get it.

Dom and Angie didn’t get it. Case dismissed, but they get the do-over.

We all know Section 7525 gives tax advisers’ clients the same protection as the client of an attorney would have for confidential communications or information obtained in the course of giving the professional advice.

But that privilege can be lost by disclosure to third parties.

And today STJ Lew (Great Name!) Carluzzo shows us how. The  client is Securitas Holdings Inc., and Subsidiaries, and their outside counsel blows it for them and their tax adviser, PriceWaterhouseCoopers. The designated hitter that tells the tale is Docket No. 21206-10, filed 5/29/13.

Believe it or not, for two consecutive days I’m discoursing about Section 501(c)(15), the very existence of which I was happily unaware until last evening. See my blogpost “No Insurance? – Go Pound Sand”, 5/28/13.

As all my readers (those few, those happy few) know, Section 501(c)(15) exempts from tax insurance companies with less than $350K premium (for the years at issue).

Securitas had beneath its wings one such, Centaur, who grappled its exemption to its bosom with hoops of steel and expensive tax advice. But IRS claimed the Section 501(c)(15) aggregation rules bound Centaur to Securitas and its satellites even more firmly, torpedoing Centaur’s tax-free status.

Securitas and its experts engaged in lengthy e-correspondence over the plight of Centaur. IRS hit them with a massive document demand, but was met with the privilege claim.

STJ Lew gives with his right hand but takes with his left.

“According to petitioners, the tax advice included in the protected documents cannot be disclosed without revealing, if only by implication, the confidential communication(s) made to the tax advisors/attorneys for the purpose of receiving such advice. That being so, petitioners resist disclosure of the documents even though with few exceptions the particular document contains no specific or express disclosure of any facts provided in confidence to the tax advisors/attorneys by any one of petitioners’ officers. After an in camera review of the documents, and with one or two exceptions as noted in the transcript of the proceedings, we tend to agree with petitioners. For the following reasons, however, we need not address petitioners’ privilege claims on a document-by-document basis. We proceed as though the documents, or portions of documents, identified on petitioners’ privilege log are protected from disclosure as claimed and turn our attention to respondent’s argument that petitioners have waived any applicable privileges.” Order, p. 1.

OK, so deemed privileged, right?

Well, they were…but… Securitas’ outside counsel wrote to the Illinois Insurance Department seeking exemption from certain rules for all of Securitas’ subs, including but without in any way limiting the generality of the foregoing, as the high-priced lawyers so elegantly put it, Centaur.

Here’s what Securitas’ outside counsel wrote to the Illinois insurance people that sets off STJ Lew and blows up Securitas: “The reason for the transfer of the Centaur stock from BI-Insurance Holding to Securitas Group Re is tax related. At present, the rehabilitation estate of Centaur is exempt from federal income tax (including tax on its investment income) because it has no premium income. (See 26 U.S.C. §501(c)(15), exempting certain insurance companies with annual premium less than $350,000.) However, the U.S. corporate group of which Pinkerton’s is a member is implementing a captive insurance program, which could jeopardize Centaur’s federal tax exemption if Centaur and the new captive insurer are in the same U.S. ‘controlled group’ for tax purposes. (See 26 U.S.C. §501(c)(15)(all insurers and premiums in the same ‘controlled group’ treated in the aggregate for purposes of the $350,000 limitation.) If there were no sale of Centaur stock, and if Centaur were to lose federal tax exemption as a result, a federal income tax liability could arise on Centaur’s investment income. The rehabilitation estate of Centaur, and the common parent of Pinkerton’s U.S. corporate group, would be jointly liable to the federal government for such tax. The proposed sale is intended to prevent this from happening, preserving Centaur’s federal tax exempt status by removing Centaur from the U.S. ‘controlled group’ for federal income tax purposes.” Order, p. 2.

STJ Lew is unimpressed with Securitas’ riposte: “According to respondent [IRS], the letter operates as a waiver of the attorney-client and/or section 7525 privileges asserted by petitioners. Petitioners characterize this letter as nothing more than a routine public filing that reveals neither a confidential communication made to petitioners’ tax advisors by petitioners nor any tax advice given in return. According to petitioners, like any public filing the letter does not result in the waiver of any privilege. For the most part, we agree with petitioners with respect to the consequences of a public filing, but only in principle; we disagree with their characterization of the letter and its consequences. The letter reveals, at least in part, the Federal income tax planning and advice given to petitioners by their tax advisors in ‘implementing a captive insurance program’, which program (1) is the topic of all of the documents identified in petitioners’ privilege log; and (2) presumably gave rise to the disputed deduction. That being so, by revealing the tax advice and, if only by implication, the facts on which the advice is based, the attorney-client privilege as well as the section 7525 privilege are waived. Although the letter reveals only a part of the tax advice given to petitioners in connection with its ‘captive insurance program’ tax planning, the waiver applies to the entire topic and therefore to each document identified on petitioners’ privilege log.” Order, p. 2. (Citation and footnote omitted).

And even though IRS didn’t ask for everything, expansive STJ Lew tells Securitas to cough up, as IRS didn’t know all the documents, but STJ Lew says Securitas waived as to everything.

Moral of the story- Least said, soonest mended.

Full disclosure – A member of my immediate family works for PriceWaterhouseCoopers, but played no part in this matter.

No, this is not yet another diatribe anent the Affordable Health Care Act of 2010; this is not a political blog, and even if it were, I have nothing to say on that score.

But Judge Wherry has 89 pages’ worth of things to say about Chapman Glen Limited, in 140 T. C. 15, filed 5/28/13. Chapman Glen was a foreign insurance corporation, incorporated in the British Virgin islands, that elected to be taxed as a US corporation per Section 953(d), but claimed exemption per Section 501(c)(15) (and I bet you hadn’t heard of that either).

CG’s Section 953(d) election was signed by Ms. Gilpin, who swore therein that she was the corporate secretary and duly empowered to sign same. Though CG later claimed she wasn’t, they were stuck.

CG was bought by the Enniss family, a California real estate and sand-mining clan, as part of an asset-protection plan devised by their accountants and lawyers after an injured sand miner sued the Ennisses. The family’s LLC’s interests were conveyed to CG (although one daughter claimed she hadn’t conveyed hers, Judge Wherry wasn’t buying), which treated the LLC as a disregarded entity. The LLC never filed Forms 1065 or 1120.

CG was supposedly a captive insurer of the Enniss enterprises, although CG’s Section 501(c)(15) said they weren’t a captive.

IRS examined CG, found it wasn’t a true insurer per Section 953 and wasn’t entitled to Section 501(c)(15) exemption, and the Ennisses agreed.

This triggered Section 953(d)(2)(B), deeming that CG sold everything it owned on January 1 of the next calendar year at FMV to a controlled foreign corporation and imposing US corporate income tax accordingly.

Thus, no insurance. But plenty of taxes.

Now, time to value the sand mines, so Judge Wherry, invoking the usual willing-buyer-willing-seller fiction, begins to pound sand. If the ins and outs of California sand mining, with its concomitant environmental restraints, plus a dash of real estate wheeling and dealing, enthralls you, read Judge Wherry’s 89-page exegesis. I have quoted before now the famous New Yorker cartoon, wherein the little girl gives her book review in these terms: “This book told me more about penguins than I wanted to know.” See my blogpost “More About Penguins”, 12/26/11.

After the usual giant slalom through differing appraisals with a mix-and-match to follow, Judge Wherry finds the SOL open because one of CG’s Forms 990 wasn’t signed by a corporate officer, but only by a paid preparer (even though CG claimed the preparer was an officer), and therefore everything was open, notwithstanding that IRS had processed the return minus the signature.

And when CG claims that the Ennisses really owned all the assets and that CG was only a front, Judge Wherry hits them with the alfalfa: “Thus, [CG] and the Enniss family, while they were entitled at the start to structure their affairs so that the Enniss family members owned [LLC] as of the relevant time, must now accept the consequences of instead causing [CG] to be [LLC]’s sole owner (although their actions on this point probably resulted from questionable legal advice). [LLC]’s ownership as structured by its controlling owners must ‘be given its tax effect in accord with what actually occurred and not in accord with what might have occurred.’ Commissioner v. Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. at 148.” 140 T. C. 15, at p. 46.

And see my blogpost, “You Pick It, It’s Yours”, 7/9/12.

And of course equitable considerations have nothing to do with the consequences of the unwinding of CG per Section 953. Judge Wherry: “[CG] argues from an equitable point of view that sec. 367 should not apply because, [CG] states, it will be taxed on the unrealized gain when it eventually sells the properties. We disagree that equity plays any part in our interpretation and implementation of secs. 367 and 953(d)(5) in the setting at hand.” 140 T. C. 15, at p. 44, footnote 22.

But when IRS attempts to throw in a last-minute argument that money CG got from from the Ennisses was rent and not, as the Ennisses claimed, a capital contribution, Judge Wherry invokes the anti-ambush cases. CG didn’t have a chance to put in evidence to show that the money wasn’t rent, so IRS can’t argue that it was.

Judge Wherry sends CG and IRS off to a Rule 155 sand-pound, armed with his determination of the values of the various sand boxes. Lawyers, sometimes being inventive is really not good.