Froilan Nigel Villahermosa, Docket No. 6675-19S, filed 3/2/23, doubtless contributed to his employer’s Thrift Savings Plan, which he made with post-tax dollars. But the Section 219 deduction he seeks in respect of same fails.

STJ Diana L (“Sidewalks of New York”) Leyden tells us why in this off-thep-bencher.

“An IRA and a Thrift Savings Plan (TSP) are separately defined by the Internal Revenue Code. Section 7701(a)(37) provides that an IRA means an individual retirement account described in section 408(a). Section 7701(j)(1) provides that TSP is treated as a trust described in section 401(a). To prove his entitlement to claim a deduction for qualified retirement contributions, Petitioner provided a TSP statement detailing his contributions to the TSP in [Year at Issue]. However, contributions to a TSP are not considered qualified retirement contributions as discussed above and thus not eligible to [sic] the claimed IRA contribution deduction. See section 7701(j)(1)(C).” Transcript, at pp. 8-9.

Froilan also has the not-uncommon timing problem with his Section 25A American Opportunity credit. He paid in one year for qualifying expenses applicable to the next. He claimed he made other payments, but had no proof. Bursars’ receipts are sometimes hard to interpret.

Commonwealth Underwriting & Annuity Services, Inc., T.C. Memo. 2023-27, filed 3/2/23 (Happy Palindrome Day!) is sure it’s an insurance company exempt per Section 501(c)(15), but IRS is sure it isn’t.

CSTJ Lewis (“To Spell It Is To Love It”) Carluzzo likewise finds it hard to reconcile Commonwealth’s argument that the $82 million it got in Year One, and the $2 million it got in Year Two, are “arguably” premiums, but not “premium income,” for Section 501(c)(15)(A)’s cutoff of $600K of premium income per year, with Commonwealth’s other assertion that the annual “maintenance fees” it got were somehow premium income and below the $600K.

Supposedly the $82 million and the $2 million went straight into trust funds operated and controlled by an unrelated and insubordinate entity.

“Insurance premiums are includable in an insurance company’s gross income. See Avrahami v. Commissioner, 149 T.C. 144, 174–75 (2017). Petitioner acknowledges that the purchase payments ‘constituted the funds used to make annuity payments.’ This appears to fit squarely within the definition of a premium. See NationalAssociation of Insurance Commissioners, Statement of Statutory Accounting No. 51—Life Contracts, para. 5 (explaining that a premium ‘shall be recognized as income on the gross basis (amount charged to the policyholder) when due from policyholders’). Petitioner’s contention that the purchase payments were not ‘retained, controlled or utilized by’ petitioner is contradicted by its own annuity contracts, which provide that the assets held in the segregated trust accounts and subaccounts ‘remain the property of” petitioner. Moreover, petitioner has not provided any authority suggesting that the premiums were not premium income. Therefore, petitioner has not established that its gross receipts did not exceed $600,000 during either year in issue,  thereby failing to satisfy the financial test in section 501(c)(15)(A).” T. C. Memo. 2023-27, at p. 6.

For the backstory on Avrahami, see my blogpost “The Selfies – Eclipsed,” 8/21/17.

But even if Commonwealth somehow persuaded CSTJ Lew that $84 million that went to fund the annuities they sold were somehow not premiums, they have another problem.

“On the other hand, if the purchase payments are not properly treated as premiums, then petitioner would seem to have no premium income because petitioner has failed to establish that the maintenance fees it received should be considered ‘premiums.’ Viewed in that manner, petitioner fails the prong of the financial test that requires more than 50% of its gross receipts to consist of premiums. See § 501(c)(15)(A)(i)(II).” T. C. Memo. 2023-27, at p. 6.

CSTJ Lew must have had fun with this one.

Discovery geeks, rejoice! Judge Alina I (“AIM”) Marshall has a potpourri of handy hints, hacks, and hoot ‘n’ hollers for y’all. Here’s Jackson Stone South, LLC, Jackson South Investments, Docket LLC, Tax Matters Partner, Docket No. 12271-20, filed 3/1/23.

The Jackson Stones have the first team defending their $19 million conservation easement write-off on some SC scrub. IRS is using its latest ploy, the salami summary J, whereby IRS seeks partial summary J on a single issue at a time. Here in The Empire State the judges can rein in such gameplaying. Judge AIM Marshall gives IRS summary J only that the FPAAs are valid, as they were served on all hands, both past TMP and present TMP. Query whether Forms 8822-B, Change of Address or Responsible Party—Business, are alone sufficient to override the TMP designation in the last-filed 1065. See Reg. Section 301.6223(a)-1(a)(1). Howbeit, IRS tagged all baserunners, and any extra FPAAs are mere surplusage. See my blogpost “The TMP Is Dead – Long Live?” 2/17/16.

Boss Hossery is in play, especially as overvaluation chops hover vulture-like. But the Jackson Stone’s trusty attorneys demand IRS pony up the Designation to Act or Notification of Personnel Action (SF-50) for MMC to serve as Supervisory Internal Revenue Agent in the Small Business/Self-Employed (SB/SE) division of the IRS for the RA who proposed the chops. IRS demurs, claiming unduly burdensome, but Judge AIM Marshall says pony up, along with other requested documents.

IRS can’t depose the ex-TMP, as they can’t show they couldn’t get the info via interrogatories. Depositions of nonparties are extraordinary.

But the ex-TMP must respond to the document subpoena, either by handing over documents or saying he hasn’t got any. His attorney stated at a hearing that ex-TMP handed everything to successors, but that’s not enough. Either move to quash or ante up.

There’s case-specific argy-bargy about IRS’ responses to interrogatories. Judge AIM Marshall says IRS’ pre-trial memo, experts’ reports,. and rebuttal reports have been filed since the Jackson Stones served their interrogatories, so they have what they need.

Discovery geeks, this is your kind of order.

Word to Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan: While you’re scrutinizing ex-Ch J Maurice B (“Mighty Mo”) Foley’s proposed revisions to the Rules from a year ago, you might want to consider our Excelsior approach to summary J. Judges can establish cutoff dates for such motions. Might prevent salami slicing.

STJ Diana L (“Sidewalks of New York”) Leyden reprises her five-year-old adherence to IRS’ computer software in Scott Edward McPherson and Michele Einspar, Docket No. 22322-21S, filed 3/1/23. This is Scott’s story. He’s a patent attorney, and says he’s good with data.

Except.

“Petitioner-Husband testified that as a patent attorney, he is very good with data. Unfortunately, with respect to his business and tax records, Petitioner-Husband completely failed to keep or maintain the data necessary to support the claimed disallowed deductions.  Accordingly, the Court sustains Respondent’s disallowance of the deductions set forth in the Notice of Deficiency….” Transcript, at p. 10. 

OK, another indocumentado.

But there’s the Section 6662(a) accuracy chop on the table, either negligence or the five-and-ten understatement variety, and not a Boss Hoss in sight.

But somehow that’s just fine.

“Based on this record, the Court concludes that the accuracy-related penalty for substantial understatement was automatically calculated through electronic means and did not require a supervisor’s approval.  IRC section 6751(b)(2)(B). Therefore, Respondent has met his burden of production.” Transcript, at p. 10.

“This record” features the following. “Petitioner-Husband is an attorney and has testified he is very adept at maintaining data. Nevertheless, Petitioners did not provide the Court with the necessary substantiation or data. Petitioner-Husband’s testimony was vague and self-serving. Petitioner-Husband conceded he did not keep good records. The record does not convince the Court that Petitioners exercised reasonable care and good faith with respect to the disallowed deduction.” Transcript, at p. 11. 

All that said, once Exam disallowed enough of Scott’s deductions, there had to be a five-and-ten penalty. But Exam’s decision to disallow enough of Scott’s deductions was the trigger, and that’s what needs supervisory approval. Otherwise, Section 6751(b)(2)(B) is easily subverted; just run a computer program to input Scott’s numbers, hit “disallow the deductions”, and press “ENTER.”

As I said five (count ’em, five) years ago, “So every time IRS wants to chop a taxpayer they can use a computer program rather than pencil-and-paper to do the arithmetic, and thereby dodge the second look Congress mandated in Section 6751(b)?” See my blogpost “I Sing the Penalty Electronic,” 5/16/18.

That’s the story of Estate of Richard D. Spizzirri, Deceased, John J. McAtee, Jr., Personal Representative, T. C. Memo. 2023-25, filed 2/28/23. Rich was a lawyer and biotechie who built up a gross estate north of $81 million, while having three wives, four kids with Wife One, and two kids, each with a different Mom while estranged from Wife Four, with whom he had an expensive, extensive, and much-amended Prenup, dealing with Rich’s Manhattan penthouse, Aspen house, Miami condo (which he owned with yet another lady), and Hamptons hangout.

I can’t say Judge Patrick J (“Scholar Pat”) Urda is envious, but he carefully catalogues all the ladies to whom Rich paid heavy-duty cash, with not a 1099-MISC nor W-2 in sight, making all same gifts and thus part of estate.

Ol’ Rich was quite a lad. Until the end. Whereupon follows litigation with Wife Four in CO (Rich was a wee bit casual in complying with Prenup), his ex’r’s second request for extension to file Form 706 hits Section 6081(a), so late filing add-on; as estate isn’t individual, no Boss Hossery needed.

The various payments to Wife Four and her three (count ’em, three) kids from previous marriage fail for want of consideration. Waiving support is good consideration, but Section 2043(b) prevents turning taxable gifts into support obligations. The Prenup carefully divides all the various rights that Wife Four waives, and Judge Scholar Pat is not going to smoosh them together and redraft the Prenup. 

 “The Estate responds that the claims at issue were supported by [Wife Four]’s waivers of spousal support and equitable distribution, asserting that the value of the waivers exceeded the value of the claims at issue. The Prenup refutes the Estate’s argument, expressly specifying the property that [Wife Four] would receive in the event of a dissolution of marriage ‘in consideration of her relinquishment of any rights she has or might have at such time to maintenance or support and any claims she has or might have to equitable distribution.’ The property promised to [Wife Four] in Article V in consideration for the waiver of her spousal rights in the case of divorce is distinct from the property settled on [Wife Four] and her children in Article IV (as modified) in exchange for inheritance rights. We see no reason to redraft the parties’ agreement to reallocate the consideration that they specified for the relinquishment of certain rights.” T. C. Memo. 2023-25, at p. 15. 

Testimony for what the various ladies did for the cash they got isn’t enough for Judge Scholar Pat.

The ex’r couldn’t establish that repairing the decks at Aspen was necessary to preserve structural integrity (hence deductible), and not to fix up the house for sale (not deductible).

As for the late filing add-on, “(T)he Estate finally contends that the net amount due on the date prescribed for payment was zero because it remitted an overpayment before the filing deadline and that the penalty should be based on that amount. The penalty for the late filing of estate tax returns applies, however, even when full payment is made on time.” T. C. Memo. 2023-25, at p. 19. But IRS goofed on the deficiency number, omitting a timely payment the ex’r made, so the add-on gets reduced.

Now we tax geeks get the rap that we’re all about the numbers, recordkeeping, OCD types. But I can’t imagine even the geekiest among us handing out a 1099 after.

The reputed dying words of a Manhattan real estate dynast furnish forth the caption for Judge Tamara Ashford’s deep-dive into valuation of a closely-held family Sub S, owner of the largest residence in America still in the beneficial hands of the original owners’ family, Biltmore, in Asheville, NC, the home of the Vanderbilts, now a Gilded Age Disneyland.

This is the story of Estate of William A.V. Cecil, Sr., Donor, Deceased, William A.V. Cecil, Jr., Co-Executor, T. C. Memo. 2023-24, filed 2/28/23, conjoined with estate of Bill, Sr.’s deceased spouse Mary.

The late Bill, Sr., and the late Mary, ere they became the late Bill, Sr., and the late Mary, split-gifted (Section 2513(a)) a bunch voting and nonvoting stock (hi, Judge Holmes) in the family Sub S to trusts for the grandkids, and filed the requisite Forms 709. IRS responded with a $13 million SNOD.

Judge Ashford, clearly a connoisseur of familial lockdowns, spends five (count ’em, five) pages of her opinion describing how the Vanderbilt heirs tied up, locked up, barricaded, and otherwise fortified the family patrimony against ne’er-do-well descendants, and predatory spouses current and ex; held semi-annual meetings to inculcate even in eight-year-old infants the duty to protect, preserve, and defend, etc.; entered into voting trusts, amended certificate of incorporation and by-laws…you get the picture.  T. C. Memo. 2023-24, at pp. 5-9.

With closely-held stock, you get valuations. Oh boy, do you get valuations! After IRS and Jr. put in two experts each, Judge Ashford swims through an alphabet soup of appraisal methods. IRS has one expert solely for the art works and collectibles. But at close of play, IRS’ lead expert has the best valuation, without the tax affect of Sub S vs C Corp (of which more hereinbelow) and without lack of control discount, although his lack of control number is taken into account. Jr’s lead appraiser furnishes the discounts for lack of marketability for each class and block of shares.

I thought Tax Court put paid to tax affect years ago. That’s discounting the worth of Sub S stock (no tax at entity level) to match with C Corp stock (entity level tax, then tax on distribution at shareholder level) for comparables. After citing all the cases that said so, Judge Ashford looks back to Judge Holmes’ blockbuster opinion in Estate of Jackson to sidestep the question, as Judge Holmes didn’t slam the door. And here, both IRS’ lead and Jr.’s lead opine that tax affect must play a role.

“As we observed in Estate of Jackson, there is not a total bar against the use of tax affecting when the circumstances call for it. Now given that each side’s experts… totally agree that tax affecting should be taken into account to value the subject stock, and experts on both sides agree on the specific method that we should employ to take that principle into account, we conclude that the circumstances of these cases require our application of tax affecting. While Messrs. [IRS] and [Jr.] do not agree on the specific rate that applies here to implement tax affecting (Mr. [IRS] determined the rate to be 24.6% while Mr. [Jr.] determined the rate to be 17.6%), we consider it appropriate on the basis of the record (and relying on Mr. [Jr.]’s opinion in this regard) to set that rate at 17.6%. We emphasize, however, that while we are applying tax affecting here, given the unique setting at hand, we are not necessarily holding that tax affecting is always, or even more often than not, a proper consideration for valuing an S corporation.” T. C. Memo. 2023-24, at p. 27. (Names omitted).

For Estate of Jackson, see my blogpost “The Opinion You’ve All Been Waiting For,” 5/3/21.

There’s a Lawsuit – Part Deux

And you can say that again! This one lasted ten (count ’em, ten) years, in Surrogate’s Nassau. This is the celebrated case of Estate of Pearl B. Kalikow, Deceased, Eugene Shalik, Executor, and Edward M. Kalikow and Laurie K. Platt, Limited Administrators, T. C. Memo. 2023-21, filed 2/27/23.

For my readers outside the two outlying islands and scrap of mainland North America that comprise Our Fair City, the late Pearl was the relict of an ultra-high real estate roller, and the life tenant of a QTIP holding interests in ten (count ’em, ten) high-class apartment buildings and some cash and stocks. The late Pearl was entitled to net income for life, with trustees having power to invade. Pearl’s QTIP was fully invested in the FLP set up to manage the properties.

Needless to say, we’re not dealing with pennies here. The battle royal involves Pearl’s estate claiming the trustees short-changed the late Pearl to the extent of $16 million in undistributed income, which was going to charity through her estate. The limited ex’rs claim the trustees overpaid $3 million. They finally settled in Nassau Surrogate’s for $9 million in income, estate administration commissions payable to ex’rs both general and limited, legals and accountings.

So what was in Pearl’s estate at DoD?

The ex’rs and the trustees file dueling Forms 706.

IRS says the $9 million settlement is included in Pearl’s estate. The limited ex’rs say the estate should be reduced by $4 million of undistributed income (stipulated in the settlement between trustees and ex’rs in Nassau Surrogate’s), and the rest as estate administration deductions.

We know Section 2044 loads the whole worth of a QTIP in second-to-die’s estate, even though s/he only had a life estate; that pays for first-to-die getting the trust corpus out of her/his estate. And the limited ex’rs and IRS stipulated that the worth of Pearl’s estate’s interest in the FLP (which was the trust’s biggest asset) was $54 million. But the limited ex’rs want to exclude the $4 million.

Ex-Ch J Michael B (“Iron Mike”) Thornton won’t wear it.

“We are unpersuaded. Having stipulated that the relevant value of the [QTIP] Trust’s [FLP] partnership interest was $54,492,712, the limited administrators cannot successfully argue for some lesser value of this asset on account of the undistributed income payment liability. In any event, the settlement agreement imposes the liability for the settlement payment jointly and severally upon the [QTIP] Trust, the Article Fourth Trust, and the Article Fifth Trust (the latter two trusts having been created by decedent’s husband’s will for the benefit of [son and daughter] to receive the residue of the [QTIP] Trust after decedent’s death). The liability for the settlement payment does not run to [FLP]. Consequently, there is no basis to conclude that this liability would affect the date-of-death fair market value of the [QTIP] Trust’s [FLP] partnership interest, i.e., the liability would not affect the price of this partnership interest as determined between a hypothetical willing buyer and seller as of the date of decedent’s death.” T. C. Memo. 2023-21, at pp.10-11. (Footnotes omitted).

As for the claimed administration deductions, those apply only when the estate is defending claims, not bringing them.

“The parties devote much of their arguments to the question of whether the various components of the agreed-upon settlement payment meet the limitations on deductibility as set forth in Treasury Regulation § 20.2053-8(b). These arguments are misdirected. The limitations on deductibility set forth in these regulations do not apply with respect to claims in favor of the estate that are includible in the decedent’s gross estate under section 2031. The obligation of the [QTIP] Trust to make the agreed-upon settlement payment to the estate does not give rise to any deduction by the estate. Rather,  the estate’s claim against the [QTIP] Trust is itself property to be included in the gross estate. Even if we were to assume, for the sake of argument and in the absence of any evidence in this regard, that the estate actually incurred the fees and commissions specified as components of the agreed-upon settlement payment, reimbursement of these expenses under the settlement agreement would preclude any deduction by the estate. See Treas. Reg. § 20.2053-4(d)(3).” T. C. Memo. 2023-21, at p. 13.

But IRS did concede a deduction of  $800K in paying out commissions, which gives ex-Ch J Iron Mike a SMH footnote.  “Without expressing any view about the legal correctness of respondent’s concession, we accept it in the interests of judicial economy. See Liljeberg v. Commissioner, 148 T.C. 83, 97 (2017) (“In practice, the Court will accept concessions of law in the interest of judicial economy unless justice requires otherwise.”), aff’d, 907 F.3d 623 (D.C. Cir. 2018). T. C. Memo. 2023-21, at p. 14, footnote 19.

For Liljeberg, see my blogpost “At Home Abroad – Part Deux,” 3/16/17.

Judge Ronald L (“Ingenuity”) Buch uses some ingenuity when applying the most-quoted approximation case of them all.

Kevin B. Cheam and Julie Lim, T. C. Memo. 2023-23, filed 2/27/23, ran a supermarket, but their records were almost nonexistent, even though they had five (count ’em, five) years to come up with them, T. C. Memo. 2023-23, at p. 4. IRS finally allows them their MoneyGram payouts and their Sched Cs on the trial, but for two (count ’em, two) of the years at issue, they have nothing to substantiate cost of goods sold. Their trusty preparer for those years is AWOL.

But to the rescue comes social worker and part-time tax preparer, whom I’ll call Taz. Taz prepared the Year Three return, and did keep records of items that could be included in COGS Although his spreadsheet showing same had some sketchy elements, which Judge Ingenuity Buch discards, the rest is reliable enough to be going on with.

“The [Year Three] spreadsheet is reliable. [Taz] assisted with …Supermarket’s bookkeeping and accounting for 2016 and prepared the [Year Three] return. Using the Year Three] spreadsheet, he kept track of monthly amounts paid to various vendors, which he determined from invoices and check registers. The total amount paid to vendors in the [Year Three] spreadsheet equals the cost of goods sold reported on the [Year Three] return.” T. C. Memo. 2023-23, at p. 5.

Spreadsheets prepared by Taz for Years One and Two are unreliable because he wasn’t on the job for those years and Kev and Julie have no back- ups.

Not to worry, Judge Ingenuity Buch is on the case.

“…given the nature of their business, it is clear that Mr. Cheam and Ms. Lim incurred costs of goods sold greater than zero, as determined by the Commissioner. Because the evidence for [Year Three] is reliable, we will supply an estimate for [Years One and Two] based on a ratio calculated from [Year Three] data. We have used percentages to estimate a taxpayer’s cost of goods sold, and will do so here. For [Year Three], the cost of goods sold was 31.4% of … Supermarket’s adjusted gross receipts. Thus, the allowable amount for costs of goods sold for [Years Two and Three] is 31.4% of adjusted gross receipts for each respective year.” T. C. Memo. 2023-23, at pp. 7-78 (Citation omitted).

Social worker and tax preparer: just the skills you want to prepare your taxes.

Judge Ronald L. (“Ingenuity”) Buch need not exercise a great deal of his ingenuity in crafting a Rule 103(a) protective order for IRS, but in so doing he provides a useful checklist for objecting to inadmissible requests for admissions.

Now I’m a fan of requests for admissions. Rule 90 has no numerical limitation on the number of items as to which one may request admissions, unlike Rule 70(a) for interrogatories. So the crafty practitioner (or even craftier dodgeflogger) can duck the Rule 70(a) 25 item limit on interrogatories by framing her/his requests as requests for admissions.

Cf. Noel M. Parducci & Kenneth L. Parducci, et al., Docket No.: 20894-19, filed 2/27/23, but the real wag involved is Dennis Simpson, he of Docket No. 17771-21, of even date therewith, as my expensive colleagues say

Denny is on his Third (count ’em, third) request for admissions to IRS. This barrage causes IRS to bleat that Denny’s request consists of “171 apparently repetitive requests, is oppressive, appears designed to provoke annoyance, and subjects [the Commissioner] to undue burden.” Order, at p. 1.

Judge Ingenuity Buch is then forced to scrutinize Denny’s latest, and can salvage only two (count ’em, two) of Denny’s unguided missiles.

“Indeed, Mr. Simpson’s request is repetitive. It contains many requests that are duplicative within the Third Request for Admissions. It also contains many requests that overlap with, or are nearly identical to, requests in Mr. Simpson’s First and Second Requests for Admissions. The Commissioner responded to the first and second requests, and many of Mr. Simpson’s requests have been asked and answered. Additionally, the request repeatedly asks the Commissioner to admit to the contents of documents. Documents speak for themselves, and it is unduly burdensome to ask a party merely to verify that Mr. Simpson has properly restated the contents of a document. Another category of improper requests are several that are indecipherable because they are not complete sentences. Altogether, the Third Request for Admissions contains only two requests (nos. 131 and 132) that are understandable and neither ask the Commissioner to admit to the contents of a document nor to answer a request that he has already answered.” Order, at p. 1.

I’m thinking of adding this maneuver to my “Bamboozle Your Way to Victory At Discovery” archive. Thanks again to Judge Ruwe for a great idea. See my blogpost “Bamboozle Your Way to Victory,”4/27/20.

Except.

Word to Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan: While you’re considering ex-Ch J Maurice B (“Mighty Mo”) Foley’s proposed amendments to the Rules from a year ago this March, y’all might wish to consider amending Rule 90(a) to limit the permissible number of requests for admissions.

If you take what you shouldn’t, but put it back, how much of it is taxable income? Ana M. Franklin, Docket No. 15054-21, filed 2/24/23, says none, IRS says all; in a companion case involving Ana’s deductions for legals and accountings, same story in reverse; Ana says all, IRS says none. In both, Judge Elizabeth Crewson Paris says we need a trial.

Ana claims “a misunderstanding of the facts,” Order, at p. 2, and wants summary J.

Judge Paris draws “reasonable factual inferences” from what Ana submits, and what IRS ripostes.

“If only by inference, the submissions of the parties show an obvious factual dispute that far exceeds a simple ‘misunderstanding’ and that is most certainly material. At this stage of the proceedings, we view inferences in favor of the nonmoving party, here the respondent. That being so, petitioner has failed to show that the material facts are undisputed and that a decision in these consolidated cases can be rendered in her favor as a matter of law. See Rule 121(b), Tax Court Rules of Practice and Procedure.” Order, at p. 3. (Citation omitted).

Seems like a run-of-the-mill order, unworthy of a blogpost. But what Ana took and put back, and the legals and accountings she paid or incurred, are an interesting story.

I offer the following for the fact that it appeared, and not for the truth or otherwise therein set forth.

https://www.al.com/news/2019/10/former-alabama-sheriff-sentenced-to-probation-in-federal-tax-case.html