Attorney-at-Law

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BUY BASIS FROM YOUR SUB S

In Uncategorized on 08/05/2020 at 18:35

Not From Your Ex

Judge Albert G (“Scholar Al”) Lauber’s infinite variety is again at center-stage, as he shuts down Steven R. Matzin and Sarah Schroeder, 2020 T. C. Memo. 117, filed 8/.5/20. It’s Steve’s story, because it involves Steve’s property split with Sarah’s predecessor, Georgeann.

Steve’s Sub S owned 70% of a cash-cow LLC that provided dental support around this broad land. This was the couple’s largest asset, and Steve ran up $160K in legal fees in negotiating the property deal and the divorce.

After whacking up cash on hand, life insurance, real estate, and a to-be-decided-later split of furniture and art, Steve works out a payout to Georgeann for the worth of the Sub S stock which owns 70% of the cash-cow LLC. Steve pays Georgeann’s share of some debts, and pays her some interest on the promissory note he gave her for the paydown on the Sub S stock. Steve didn’t want to split the Sub S stock with Georgeann; he didn’t want to be in business with her, and the other members of the cash-cow LLC would have to consent to let her in. She knew nothing about dentistry, leaving it to the lawyers to pull as many of Steve’s teeth as they could.

Eventually the cash-cow LLC is sold. Steve gets a sweet $85.7 million capital gain, of which he owes Georgeann 50% , but IRS claims Steve’s gain is greater by $5 million, although they settle out at no more than $3 million extra. We should all have such troubles.

But Steve needs more basis, so he claims what he paid Georgeann and his attorney increased his basis in the Sub S stock. No question what he paid Georgeann wasn’t deductible alimony, or rehabilitative alimony under then-applicable local (FL) law. Obligation to pay survived her death, and was neither income to her nor deductible to Steve.

Judge Lauber lets in parol evidence, finding the divorce agreement between Steve and Georgeann ambiguous. Any lawyer who can’t find an ambiguity in any document should find another way to make a living.

“The negotiating history makes absolutely clear that the parties desired to effect an equitable distribution of marital assets, including… Steven’s indirect interest in [cash-cow]. The payments specified in the agreement are consistent with the parties’ understanding, as shown in the negotiating history, that $10.5 million of value would be placed on Georgeann’s side of the ledger on account of Steven’s indirect interest in [cash-cow]. Because it was impractical for Georgeann to receive a $10.5 million partnership interest in [cash-cow], the parties agreed that she would be paid that value in the form of cash, a promissory note, and Steven’s discharge of her share of certain liabilities.” 2020 T. C. Memo. 117, at p. 10. And though there was a payout over time, it was still a lump-sum property split.

Yes, it’s property settlement. So what?

So Section 705(a)(1) doesn’t work to increase or decrease Steve’s basis in the Sub S (taxed as a partnership), because whatever Steve paid Georgeann didn’t change his distributions from the Sub S. And Steve neither gave the Sub S money or property, nor paid off any of the Sub S’s liabilities. So Sections 722 and 752(a) are off the table. Finally, neither Steve nor Georgeann acquired any greater interest in the Sub S than the 70% Steve had to begin with, squelching Section 742.

If the marital split involved shares of publicly-traded stock, Steve’s handing over half to Georgeann wouldn’t increase Steve’s basis in the remainder.

As for the legal fees, whatever claims Georgeann had to Steve’s interests in the Sub S had nothing to do with the cash-cow LLC. What Steve paid to Georgeann and his attorneys didn’t defend or perfect title to real or personal property, so whether or not to capitalize those costs per Reg. Section 1.263(a)- 2T(e)(1) is beside the point. Anyway, the Sub S paid nothing to defend or protect its title to the 70% interest in the cash-cow; it was all Steve.

Georgeann had, under then-applicable local law, only a claim to a piece of the value of all Steve’s assets, not any specific asset, and local law made it clear that designating property as marital property was for evidentiary purposes and not to vest title. If she wanted a piece of the cash-cow action, she’d be like any other creditor. She’d have to get a court to give her a charging order, directing the Sub S to fork over some or all of Steve’s share of the Sub S’s distributions. A creditor of a partner gets no lien on partnership assets, as I once had to teach a senior associate half-an-hour before our firm got sued.

Judge Scholar Al puts the cap on this bottle. “In effect, petitioners argue that any debtor who honors his obligations is entitled to capitalize those payments on the theory that he is removing a cloud on his title to assets that might be subject to collection action if he defaulted. That is plainly not the law; if it were, every payment by a partner on a personal debt would increase his basis in the partnership.” 2020 T. C. Memo. 117, at p. 18. (Footnote omitted, but it says that, though local law says even a spurious request for a charging order gives rise to a cloud on title, the case cited relates to a real claim, not a hypothetical.)

I really wanted to give Steve’s trusty attorneys a Taishoff “Good Try, third class,” but they blew it with this one.

“Finally, petitioners complain that, if we do not allow a basis increase, they will have no way of recovering the costs of Steven’s divorce against his taxable income. That is correct and unsurprising. Steven agreed to a property settlement through which Georgeann received an equitable share of the marital assets.  Spousal payments made pursuant to a property settlement are not tax-deductible. Had Steven made payments that qualified as ‘alimony’ for Federal income tax purposes, those payments would have been deductible. See sec. 215. But the agreement explicitly stated the parties’ understanding that, for income tax purposes, the payments would be neither taxable to Georgeann nor deductible by him.” 2020 T. C. Memo. 117, at pp. 20-21.

Sorry, chaps, we taxpayers aren’t paying for your divorce.

 

 

 

 

 

 

A BAD ELECTION

In Uncategorized on 08/05/2020 at 17:08

No, this blog has not gone political. I express my political views, one might say vociferously, elsewhere. But Judy Yiu, 2020 T. C. Sum. Op. 23, filed 8/5/20, elected Section 6015(c)  to remove from her shoulders the burdens of her loved-once’s tax delictions. This election did not go well.

STJ Panuthos notes Judy was employed during the year at issue as a legal assistant in the Los Angeles City Attorney’s office. 2023 T. C. Sum. Op. 23, at p. 3. Though STJ Panuthos doesn’t state whether Judy had help from her colleagues, this might be another case where a little learning is a dangerous thing.

Her loved-once claimed $2500 of education credits on their joint return for year at issue, which IRS disallowed, and hit Judy with a SNOD therefor, amongst other things. Judy didn’t petition same, but filed a stand-alone, being then divorced and abiding separately from loved-once.

While stand-alone was pending, Judy paid the entire deficiency. IRS let Judy off the $2500, but hit her for the rest. Judy petitions for a refund of the $2500. She agrees that, for the year at issue, she doesn’t qualify for Section 6015(b) (innocence plus apportionment) or (f) (equity).

STJ Panuthos is blunt.

“… respondent allowed petitioner partial relief under section 6015(c). The parties agree that petitioner is not entitled to relief under section 6015(b) or (f). This should end the matter, except that petitioner paid the entire [year at issue] tax liability before filing a claim for relief under section 6015 and now seeks a credit or refund for the amount of relief granted. The problem for petitioner is the clear text of section 6015(g), which governs the allowance of credits and refunds in cases where the taxpayer is granted relief under section 6015(c).” 2020 T. C. Sum. Op. 23, at p. 6.

Section 6015(g)(3) is as clear as anything in the Code: “No credit or refund shall be allowed as a result of an election under subsection (c).”

And STJ Panuthos will tell you why.

“… Congress intentionally denied taxpayers any refund under sec. 6015(c). A House report…elaborated that an election under sec. 6015(c) ‘is limited to deficiency situations and only affects the amount of the deficiency for which the electing spouse is liable. Thus, the election cannot be used to generate a refund, [or] to direct a refund to one spouse or the other’. H.R. Rept. No. 105-817, at 63- 64 (1998), 1998-4 C.B. 253, 315-316.” 2020 T. C. Sum. Op. 23, at p. 6, footnote 4.

Practice point- Consider calculating whether to pay a SNOD in full, when Section 6015(c) is in play, or pay all but the contested amount. Underpayment and interest add-ons should tip the balance. Making a deposit to stop interest might not work, if refunds or credits are off the table.

And STJ Panuthos raps IRS’ counsel’s knuckles. Practitioners, take note. There was the usual Rule 91 stip, and therein lies the rub.

“Attached to the stipulation are two exhibits marked A and B, respectively. Exhibit A is 494 pages (identified as the ‘entire administrative record’) and exhibit B is 13 pages (identified as miscellaneous account transcripts). Rule 91(b) provides that stipulations shall be clear and concise and exhibits should be numbered serially. The parties have not directed the Court’s attention to any of the documents in the stipulation that are relevant to the very limited issue in this case. The attachment of an the entire administrative file of almost 500 pages as a single exhibit without identifying the particular documents creates a substantial burden in reviewing the record in a submitted case. We presume that this stipulation was drafted and exhibits compiled by counsel for respondent. We urge counsel to comply with the Rules.” 2020 T. C. Sum. Op. 23, at p. 3, footnote 3.

While herniating your opponent with paper might be a tactic, herniating the judge is less than a good idea.

 

 

 

JOURNALISTIC CLICHÉ

In Uncategorized on 08/05/2020 at 11:59

One of the oldest journalistic clichés is that the crime story hits page one, but when the prosecutor drops all the charges or the accused is acquitted, the story hits the back page below the ads.

One of my nearest and dearest has a blog. She remarked a few days ago that the posts she thought were most deserving of attention got almost no views, while those she thought only mildly deserving got many more.

I discussed a variant of this phenomenon five (count ’em, five) years ago, in my blogpost “Go Figure,” 10/21/16.

Today, locked-down with no work to do, I looked back at my all-time stats, and found that my blogpost “Wow,” 7/1/16, is third among individual blogposts. But the sensational story that blogpost presaged evaporated the next year, as I chronicled in my blogpost “Unwow,” 4/6/17.

“Wow” has, to date, over 800 views. “Unwow,” 16.

I remember the remark of Ray Donovan, formerly United States Secretary of Labor, indicted for larceny and fraud. When, after he had resigned his post, he was acquitted on all counts two years later, he famously asked “Which office do I go to to get my reputation back?”

I do not know what to tell the person named in my blogpost.

“BOOT UP YOUR COMPUTERS!”

In Uncategorized on 08/05/2020 at 10:18

Perhaps Judge David Gustafson is also a fan of the Houston youtube mechanic, as today he sends that message to IRS and Bryce Thompson Osoinach & Cameo Marie Wall, Docket No. 3472-19S, filed 8/5/20.

IRS is a couple days late (hi, Judge Holmes) with a status report. Ordinarily, an obliging jurist will make a COVID-19 allowance. But Judge Gustafson had told the parties three (count ’em, three) months ago to get moving. Instead, he got this: “Petitioners presented some documents to Appeals that required the Exam function to review. This has delayed the consideration of this case. Respondent will work with Appeals and Exam to make sure the documents are reviewed as quickly as possible given all the logistical challenges taking place at this time…. In order to make sure progress is made in the next few months, respondent suggests requesting an updated status of the case in October, 2020.” Order, at p. 1.

Judge Gustafson hits the brakes.

“Without meaning to overlook the logistical challenges and other difficulties that the parties are facing during the current pandemic or to be ungrateful for their work, the Court notes that the progress recently reported has been disappointing, and notes that counsel’s expectation (‘progress … in the next few months’ that might yield only an ‘updated status of the case in October, 2020’) is out of keeping with the Court’s expectation.” Order, at pp.1-2.

So we’ll have a teletrial in October.

STJ Diana L. (“The Taxpayer’s Friend”) Leyden is nowise behindhand with Donald C. Karn, Jr., Docket No. 10694-19S, filed 8/5/20.

STJ Di had ordered the parties to play nice and file a Rule 91 stip. IRS said they’d sent one to Don.

Don is peeved that IRS took a year-and-a-half to produce, not a copy of a W-2, but “a computer-generated printout of the alleged W2 form. It was not a copy of the original form, and it took respondent over a year and a half.” Order, at p.1.

Don also said he wouldn’t do a phoneathon with IRS.

STJ Di sets teletrial for October. If anyone wants a phoneathon, give STJ Di’s chambers a ring. But do as set forth in the title first set forth at the head hereof (as my high-priced colleagues would say).

I objected to teletrials because the public couldn’t watch them. But I’m coming around to the idea that they are the tsunami of the future. They stop the waltzing, and concentrate the litigants’ minds wonderfully. Now if the videos could be posted online for the public to view, that would be perfect. The whole “pick a venue” issue would vanish. All trials would be held at The Glasshouse server, wherever that is. Teletrials would do away with the need for judges, IRS’ counsel, parties’ counsel, litigants and witnesses to go on the road, saving a bundle of money and a bushel of time.  There are no juries in Tax Court trials, so that’s not an issue.

If we get permanent teletrials out of this pandemic, it’s truly an ill wind that blows no one some good.

Edited to add: And I’m certainly not suggesting that calendar call pro bono volunteers be shut out, and helpless self-representeds be left to a cruel fate. Break-out rooms are a standard feature in most teletubby software, and online trials give pro ses and the vols a chance to get together well in advance of trial with Zoomies, Facetimes, and like software. Instead of the “justice in the hallways” that I see at in-person trials, the LITCs and pro bonos can be on-call, and space-and-time concerns eliminated. It’s a total win-win.

 

 

 

 

LAGNIAPPE

In Uncategorized on 08/04/2020 at 17:19

I am told that the title of this blogpost entered English from the Louisiana French adapting a Quechua word brought in to New Orleans by the Spanish Creoles. Therefore, it is a typical American word. I’ve used it in my blogposts before now, but I really like how Mark Twain defined it.

He said it was “a word worth traveling to New Orleans to get; a nice limber, expressive, handy word… They pronounce it lanny-yap. It is Spanish—so they said. It has a restricted meaning, but I think the people spread it out a little when they choose. It is the equivalent of the thirteenth roll in a ‘baker’s dozen.’ It is something thrown in, gratis, for good measure. The custom originated in the Spanish quarter of the city. When a child or a servant buys something in a shop—or even the mayor or the governor, for aught I know—he finishes the operation by saying—’Give me something for lagniappe.’ The shopman always responds; gives the child a bit of licorice-root, gives the servant a cheap cigar or a spool of thread, gives the governor—I don’t know what he gives the governor; support, likely.”

Today, SO D (name omitted) considered a request for “120 day stay of collection” as a collection alternative. All my super-sophisticated readers know that is not one of the options in Form 12153, but Craig A. Sopin & Ruth Sopin, Docket No. 10242-19L, filed 8/4/20 did request withdrawal of the NFTL, and added “…that their ‘[r]equest for 120 day stay of collection was denied’ and the ‘collection activity is overly aggressive under [the] circumstances.” Order, at p. 2 (Footnote omitted, but it says Judge Courtney D. (“CD”) Jones had some difficulty making out Craig’s & Ruth’s handwriting).

Judge CD Jones deals with Craig’s & Ruth’s sundry instances of noncompliance, but what interests me here is Craig’s & Ruth’s objection that the Appeals Office erred in considering a collection alternative “because they did not request one.” Order, at p. 4.

Well, even though it seems Craig’s & Ruth’s case took place far from New Orleans, Judge CD Jones is willing to allow Appeals to give something for lagniappe.

“We conclude it was not an abuse of discretion for the Appeals Office to construe petitioners’ request for a’120 day stay of collection’ as a collection alternative.” Order, at p. 4.

But Craig’s & Ruth’s noncompliance sinks that.

 

 

 

 

 

MARCHING THROUGH GEORGIA

In Uncategorized on 08/04/2020 at 16:41

It was said that Billy T. Sherman came to hate that song, because he could not walk out his front door without some brass band playing it; legend has it that it was played at his funeral.

I don’t know Judge Kerrigan’s musical tastes, but today she has a duo of Effingham County conservation easements, sired by HRH, the progenitor of a large number of these dodges, and she gives both the Billy Sherman treatment.

The pair are Red Oak Estates, LLC, Amanda Farahany, Tax Matters Partner, 2020 T. C. Memo. 116, and  Cottonwood Place, LLC, Hugh F. Smisson, III, Tax Matters Partner, 2020 T. C. Memo. 115, both filed 8/4/20.

The issues are the usual, the split on extinguishment and the Chevron-Oakbrook joust over Reg. Section 1.170A-14(g)(6)(ii). Coal Holdings and PBBM each get a cameo appearance. And Belair comes up to tackle GA state law.

All the foregoing have furnished me with enough blogfodder, so that I need not unduly wear the reader’s patience by retelling an already-many-times-told tale. Just Google the case names.

In the end, Oakbrook carries the day. And now join in the chorus.

 

 

 

PAPER TIGER?

In Uncategorized on 08/03/2020 at 19:09

It’s been my experience over the last 53 (count ’em, 53) years of practicing law that answering one question only raises others. It resembles a whack-a-mole, or, for the classically-educated, Hercules and Hydra. Today we have a designated hitter from Judge Buch.

James Matthew Enright, Docket No. 6600-19, filed 8/3/20, is on his third trip to Tax Court. His previous ventures got tossed.

” Mr. Enright filed a petition purporting to place at issue the years 2000 through 2019. In the sections 2, 5, and 6 of the petition, Mr. Enright wrote: ‘Never received the notice of Deficiency; [n]ever received the notice of Determination.’

“… the Commissioner filed a thorough motion to dismiss in which he detailed what notices had (and had not) been issued to Mr. Enright for each of the twenty years he attempted to place at issue. The Commissioner also asked that the Court impose a sanction on Mr. Enright. The Commissioner notes, and the Court’s own research confirms, that this is the third such frivolous petition filed by Mr. Enright. See docket nos. 2444-17 and 10557-18, in which Mr. Enright attempted to place at issue years ranging from 1958 through 2017.” Order, at p. 1.

I never blogged Mr. Enright, but the sort of game he played featured in my blogpost “I’m Beginning to See the Light,”4/9/18. At that time, I suggested that a Section 6673 chop would cool the ardor of those inclined thereto. Judge Buch, apparently a frustrated baseball fan, decides “three strikes and you’re out,” and gives Mr. Enright a $2000 chop.

OK, but the question. Section 6673(a)(1)(B) clearly sets up the chop. So how does Tax Court collect? The German philosopher Hans Vaihinger, author of Die Philosophie des ‘Als Ob’, cannot help, because only in Federal courts other than Tax Court can Section 6673 chops be collected, after notice and demand, “in the same manner as a tax.” Section 6673(b)(2).

So “as if” doesn’t work. Mr. Enright seems to reside in FL; can Tax Court docket the order with the County Clerk in whatever county Mr. Enright is domiciled? Will the sheriff collect the judgment? Is the order docketed in USDC in and for the relevant district? Does the US Marshal’s Office collect?

I wonder what the collection rate might be for Section 6673 chops.

 

 

MUCH WIND-UP, NO BASEBALL

In Uncategorized on 08/03/2020 at 18:32

Judge David Gustafson is obliging to a fault. Today, however, instead of taking on the real big issue (are the travel reimbursements to the employees of Reflectxion Resources, Inc., 2020 T. C. Memo, 114, filed 8/3/20, taxable as wages?), Judge Gustafson spends 35 (count ’em, 35) pages of opinion to conclude that a justiciable controversy does not exist when both petitioner and IRS agree that Section 530 (the Social Security Act fix from 1978 when an employer misclassifies an employee consistently for years) does not apply to certain quarters of withholding. Withholding goes quarter by quarter.

Reflectxion wants to raise other issues, but those are for another day and another petition. This one affects only those quarters where Reflectxion used a payroll servicer under a professional services arrangement. And for those there is a dispute, and thus a justiciable controversy.

So there’s jurisdiction only for the quarters the servicer was doing the payroll.

The Reflectxions were here before, fighting stealth subpoenas. See my blogpost “Stealth Shot Down,” 11/21/19.

RTFM

In Uncategorized on 08/03/2020 at 16:12

Read the Manual

The “F”is for emphasis. So Judge Colvin admonishes IRS. The manual in question is the Marine Corps Manual, which is the nearest thing to Holy Writ for the eagle, globe and anchor folks, who guard us while we sleep.

And it certainly serves as a divorce or separation agreement, when confirmed by 58 (count ’em, 58) words of e-mails between Adam Jordan Winslow, 2020 T. C. Sum. Op. 22, filed 8/3/20, now or formerly USMC, and his loved-once. Especially so since his loved-once confirmed that what she was getting before the divorce came through was based on the MCM.

The only question was whether or not there was a separation agreement. Even though Judge Colvin’s c.v. only refers to his service as counsel to the US Coast Guard, he follows the MCM.

“A valid written separation agreement exists where one spouse assents in writing to a letter proposal of support by the other spouse. A written separation agreement need not state a specific amount of required support so long as there is an ascertainable standard with which to calculate support amounts. The emails show that petitioner and his former spouse both adopted the Marine Corps Manual family support policy as the basis for fixing the amount of the monthly payments. In her email to petitioner his former spouse directly refers to the family support policy. Respondent points out that in his email petitioner did not refer to the Marine Corps Manual. However, the amounts stated in his email, when considered in the context of petitioner’s familiarity with the Marine Corps Manual and its mandatory nature (i.e., ‘violations of this order are punishable under the UCMJ, and may subject violators to adverse administrative action’, MCO 5800.16A, para. 15000), clearly show petitioner’s intention to comply with the Marine Corps Manual.” 2020 T. C. Sum. Op. 22, at pp. 8-9. (Citations omitted). And if you don’t know what UCMJ stands for, consider yourself lucky. You are well advised not to find out too much about it, especially if you wear a uniform.

And to figure out what part of the payment was alimony (deductible for years at issue) and child support (not deductible), Judge Colvin deducts the difference between single spouse payment and spouse with one child payment per the MCM from what AJ paid.

 

 

 

 

 

THEY DIDN’T READ TAISHOFF’S BLOG

In Uncategorized on 08/03/2020 at 13:43

When I came upon Bradley Rice & Laura Rice, Docket No. 7890-19, filed 8/3/20, there flashed through my mind my “lookback” series of blogposts, starting with “Lookback in Anger,” 12/12/11, and ending with “Lookback and Get a Refund,” 10/24/19. It seems neither IRS nor Bradley & Laura had read any thereof.

My somewhat carrier-witted mind recurred to the story of the retired hardware dealer (to my offshore readers an ironmonger) and his feckless son and successor, giving rise to the title set forth at hereof, as my high-priced colleagues would say. But that is not for a blog meant for ecumenical reading. Back to work!

Bradley & Laura and IRS lay upon the cyberdesk of ex-Ch J Michael B (“Iron Mike”) Thornton a joint settlement stip and a joint proposed stipulated decision. Said documents seek entry of decision that Bradley & Laura are entitled to credit for overpayments in each of two (count ’em, two) successive years.

Ex-Ch J Iron Mike bounces them both.

“Section 6512(b)(1) confers jurisdiction on the Tax Court to determine the amount of an overpayment which is to be credited or refunded to the taxpayer for a year that is properly before us for the redetermination of a deficiency. An overpayment of tax under section 6512(b)(1) requires, among other things, payment in excess of the deficiency plus any penalties and additions to tax. In addition, section 6512(b)(3) limits the amount of the allowable credit or refund based on the time of payment of tax and provides that ‘[n]o such credit or refund shall be allowed or made of any portion of the tax unless the Tax Court determines as part of its decision that such portion was paid’ within one of three specified time periods. The parties’ filings lack appropriate language to establish petitioners’ entitlement to any overpayment.” Order, at p. 1. (Footnote and citation omitted).

Besides, the stip only refers to attached statements of account, rather than reciting specific amounts and dates. Worse, the contemned documents “…incorrectly refer to ‘additions to tax’ due from petitioners under the provisions of section 6662(a). Section 6662(a) imposes a ‘penalty’ rather than an ‘addition to tax’, in contrast to provisions such as section 6651(a), which imposes an ‘addition to the tax’. Order, at p. 2.

Takeaway- When credits or refunds are on the Tax Court table, don’t forget to look back.