Ya gotta admit, he’s inventive. I’m talking about Michael D. Brown, flying insurance salesman. He first starred in my blogpost “Not Ready For Prime Time,” 12/3/13, which see. Mike was a dollar-splitter and high-flyer.

But Mike has apparently fallen on hard times, and owes the Feds $33.5 million (barring one year still at issue thirteen years later). That’s the tale of Michael D. Brown and Mary Brown, 2016 T. C. Memo. 82, filed 4/28/16, Judge Cohen picking up the story.

Mike claims he has no steady income, and needs an installment plan. Oh, and the Feds have a jeopardy deficiency assessment and liens out on Mike and Mary.

“Prompted by the amount of petitioners’ liability and IRS-determined factors such as petitioner’s foreign bank accounts in tax haven jurisdictions, his concealment of assets through nominees, and his having listed petitioners’ personal residence for sale at $17.7 million, the IRS decided to make a jeopardy assessment regarding the years in issue.” 2016 T. C. Memo. 82, at p. 3.

Of course, Mike was appealing everything. His counsel told Appeals all Mike has was the $5 million in equity in his home (which was held in a family trust). But he did have a proposal to pay over 15 (count ‘em, 15) years.

Judge Cohen: “The first five pages of the proposal outlined how the arrangement would work, as follows in part:

“Typically, a policy is purchased from the elderly person at a discount from the death benefit (thus, giving the elderly person the opportunity to spend or invest the cash during their lifetime) and then packaged by the purchaser into a portfolio of such policies.  The portfolio can then be sold on the open market to investors.

“A typical portfolio consists of approximately 10 policies with an aggregate death benefit of approximately $50 million.  The average age of the insured individuals is typically around 82 years, with an average life expectancy of about 8 years.  (Obviously, some of the insured individuals will die in less than 8 years and some will live longer than 8 years.)  An investor who purchases a portfolio of policies can either take a risk as to the mortality rate of the insured individuals, or the investor can purchase insurance, known as Mortality Protection Insurance Coverage (“MPIC”), which will insure that 75% of the forecasted death benefit will be paid out in each of the first 15 years of the MPIC coverage.

“The cost to acquire a $100 million portfolio is around $10 million and the cost of the MPIC coverage on such a portfolio is around $2 million.  Bank financing from a bank in Germany, North Channel Bank, is available to cover half of those costs.  In addition, the bank financing will also cover 100% of the premiums that will be due on the policies.

“The document went on to explain that insurance payment proceeds would be distributed as determined by two contracts, a Securities Account Control and Custodian Agreement (SACCA), which would retain Wells Fargo Bank to act as a custodian of the proceeds, and an Intercreditor and Security Agreement.  These agreements would cause the insurance funds to be distributed in the following priority: (1) Wells Fargo Bank fees; (2) pro rata repayment of the bank loan, including interest; (3) reimbursement to the MPIC insurer if death benefits were to exceed MPIC insurance payments already made; (4) additional payment on the bank loan if the loan-to-value ratio goes below 50%; and (5) distribution to the holder of the Net Insurance Benefit (NIB) that, under these circumstances, would most likely be a Luxembourg entity known as a “SARL” that is indirectly controlled by the underlying investor.  The example projected an expected return of $33.8 million over a 15-year period, which, at a 3% discount rate, would have a net present value of approximately $26.15 million, an amount estimated to be about the same as petitioners’ current tax liability.” 2016 T. C. Memo. 82, at pp. 7-9.

Mike would buy this metziah (please pardon an arcane technical term, but you get the idea) with two $6 million loans he would get from a bank and an unidentified source.

Although I love it (the smoke-and-mirrors are glorious), the SO kicked the proposed deal.

I’ll spare you the rest. Basically, it fails because IRS doesn’t get paid within the ten year limit.

I must add that I have been approached to arrange the sale of the insurance on my own life in a similar deal. Never happened. The buyer said I was too young and too healthy.

That’s what blogging this stuff does for you, keeps you young and healthy.

No, not the start of a Pearl Zane Grey 1940 horse opera, rather this is my tiny fist-pump for the thirty-thousandth viewer of this my blog. I know the blogs of the rich and famous, ghost-written or not, attract thirty thousand viewers in less than five seconds, while getting here took me five years. I hear an echo from the distant past: “Are we there yet?”

When I started out in the bleak midwinter of 2010, I never thought that I’d go this far. To 135 countries, territories (autonomous, semi-autonomous, whatever) and such distinct geographico-politico waypoints as my platform at wordpress.com recognizes. And 1539 (count ’em, 1539) blogposts.

Well, I can lay claim to being the most thorough blogger of the United States Tax Court, where multi-billion-dollar deficiencies from multinational behemoths, each entouraged with more white shoes than you’ll find at Burning Tree in April, meets the self-represented small-claimers fighting over less than the price of a latte macchiato. And the rounders, bless ’em, with their specious arguments, somber nonsense and copious legal gibberish.

I’ve been threatened with lawsuits, disciplinary action, and Divine intervention while I was at it. And I’m still here.

It’s been a blast. More to come, if time permits.

Until He Got Creative

Douglas G. Carroll, III and Deirdre M. Smith get a full-dress T. C., 146 T. C. 13, filed 4/27/16, as their  conservation easement on the family farm in the Green Spring Valley National Register Historic District gets blown up, notwithstanding that the donees were both qualified organizations, and the easement deed didn’t fall foul of most of the various pitfalls which such are heir to.

Judge Ruwe goes to great lengths to explain how Doug played by the rules. True, Doug didn’t reduce his claimed deduction by the interests of his minor children in the property held in their UGMA trusts, but as Judge Ruwe doesn’t need to discuss the admittedly qualified appraisal, that’s by-the-bye.

No, Doug comes unglued at Reg. 1.170A-14(g)(6)(ii), which I’m sure y’all can recite from memory. What, no? Well, that’s the perpetuity kicker I’ve blogged many a time and oft.

Here’s Doug’s problem. He didn’t use the magic language that the contribution “gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time’.”

Doug’s drafter (presumably his real estate attorney who “does not answer tax questions or give tax advice”, 146 T. C. 13, at p. 6, footnote 5) puts this in instead: “The granting of this Conservation Easement gives rise to a property right, immediately vested in Grantees, with a fair market value equal to the ratio of the value of this Conservation Easement on the effective date of this grant to the value of the Protected Property without deduction for the value of the Conservation Easement on the effective date of this grant.  The value on the effective date of this grant shall be the deduction for federal income tax purposes allowable by reason of this grant, pursuant to Section 170(h) of the Code.  The parties shall include the ratio of those values with the Baseline Determination and shall amend such values, if necessary, to reflect any final determination thereof by the Internal Revenue Service or a court of competent jurisdiction.” 146 T. C. 13, at p. 12.

So if IRS blows off the deduction, and wins in court, says Judge Ruwe, and the easement tanks, then the donees get nothing.

Doug tries to counter with our old friends the Kaufmans, but all First Circuit said was that the aim of the statute and regulations was to prevent a windfall to the donors if the easement fell through, so that if a mortgagee got in ahead of the donees , that was OK. See my blogpost “’A Joy Forever?’ – Maybe Not,” 7/20/12.

Here there is no mortgagee or supervening party.

Doug then claims Maryland law (the property was in Maryland) lets one of his donees get in ahead of him no matter what. Yes, says Judge Ruwe, if there’s an eminent domain proceeding, and then only as to one of the donees. But your easement can flop otherwise than by eminent domain, and even in eminent domain only one donee gets the boodle.

Looks like Doug is facing a substantial understatement, and maybe even a substantial overvaluation, chop.

But IRS blows it.

“Respondent [IRS] did not determine an accuracy-related penalty under section 6662(e) or (h) in the notice of deficiency or in his answer.  In his pretrial memorandum respondent asserts that petitioners are liable for substantial and/or gross valuation misstatement penalties.  Respondent also indicates in his pretrial memorandum that he anticipates making a motion that the pleadings conform to the facts to increase the accuracy-related penalty from 20% to 40%; however, respondent never filed such motion.

“Rule 41(a) provides that, when more than 30 days have passed after an answer has been served, ‘a party may amend a pleading only by leave of Court or by written consent of the adverse party, and leave shall be given freely when justice so requires.’  Whether a party may amend his pleading lies within the sound discretion of the Court.  In determining whether to allow a proposed amendment, the Court must consider, among other things, whether an excuse for the delay exists and whether the opposing party would suffer unfair surprise, substantial inconvenience, or other prejudice. The Court looks with disfavor on untimely requests for amendment that, if granted, would prejudice the other party. “ 146 T. C. 13, at pp. 47-48.  (Footnote and citations omitted).

If you claim you’re going to do something, do it.

“Respondent has not explained his delay in asserting the section 6662(e) and (h) penalties.  In his pretrial memorandum respondent indicates that he anticipates filing a motion to amend the pleadings to assert the substantial and/or gross valuation misstatement penalties.  Without further explanation respondent argues in his pretrial memorandum that petitioners are liable for substantial and/or gross valuation misstatement penalties.  However, at no time did respondent file a motion with this Court requesting leave to amend his answer as required by our Rules.  Accordingly, we will not consider respondent’s assertion of substantial and/or gross valuation misstatement penalties under section 6662(e) or (h).” 146 T. C. 13, at pp. 48-49.

But Doug does get the 5-and-10 chop for understatement. He did the tax planning for the easement agreement his own self, consulted with nobody, was experienced in the area, and was a highly-educated medical doctor. And his attorney, you’ll remember, “does not answer tax-related questions or give tax advice.” 146 T. C. 13, at p. 46.

He who has himself for a lawyer….

The $3 billion showdown between IRS and Guidant LLC f.k.a. Guidant Corporation, and Subsidiaries, et al., Docket No. 5989-11, filed 4/27/16, is getting toward crunch time. IRS wants to depose non-party Fred McCoy.

Judge Laro explains: “McCoy served as president of Guidant’s Cardiac Rhythm Management (CRM) business unit, operated through Cardiac Management (CPI) business unit, operated through Cardiac Pacemakers, Inc., for part of the years at issue.” Order, at p. 1.

IRS claims, and Judge Laro agrees, that, in the immortal words of Ira Gershwin, Fred’s got Rhythm. That is, while IRS has had a crack at lesser managers at CRM, “…none of the individuals interviewed can speak to the direction of the company or the reasons behind the directions of the company. Only the president of the company can provide the necessary knowledge of the relative economic contributions of the company’s various functions.” Order, at p. 3.

Guidant gave IRS some of Fred’s testimony from a products liability deposition, and while some of that might be helpful, “…McCoy’s prior depositions had a different focus from the deposition sought by respondent [IRS]. Moreover, to the extent that respondent may ask questions regarding the events that precipitated the product liability litigation, the focus of respondent’s questions assumedly will be different, as respondent seeks to understand the business evaluations, decisions and actions resulting from the product defects and ensuing litigation.” Order, at p. 3.

Moreover, IRS played nice and tried informal discovery, but Fred’s attorney wouldn’t agree to any recording of what Fred had to say. I won’t comment on that.

Judge Laro leans heavily on the size of the litigation, namely a Section 482 unscrambling of a digested omelet, with Section 376(a) and 367(b) alternative adjustments and a load of Section 6662 chops. As the late Senator E. McKinley Dirksen remarked, “A billion here, a billion there, and pretty soon you’re talking about real money.”

Back to Judge Laro: “The information sought is reasonably calculated to lead to the discovery of admissible evidence and/or is relevant. See Tax Court Rule 70(b). The proposed deposition would further the basic purposes of discovery-to ascertain facts which have a bearing on the issues before the Court and minimize surprise by allowing the parties to obtain knowledge of all relevant facts.” Order, at p. 4.

No doubt about it, Fred is the Real McCoy.

I hadn’t started blogging when Martin Nitschke, 2016 T. C. Memo. 78, filed 4/26/16, made his Tax Court debut, got shown the Section 6673 yellow card, and later got hit with an introductory Section 6673 frivolity chop. But Judge Cary Pugh checked out (or maybe IRS helped her check out), Martin’s dubious past, and Martin now gets the $10K chop.

Here’s why.

“At trial petitioner refused to stipulate any documents, refused to testify, and stated on the record that he did not have evidence to offer regarding his income and deductions.” 2016 T. C. Memo. 78, at p. 2.

IRS had given Martin a SFR for the year at issue, because Martin hadn’t filed for that year.

IRS had an independent contractor agreement Martin signed, and a 1099-C from Chase, and put them into evidence. Martin didn’t dispute them, but refused to stipulate he signed the agreement.

So why was Martin there at all?

“Petitioner’s arguments regarding the validity of the notice of deficiency center on his failure to obtain copies of certain documents from respondent that he claims will show there was no deficiency.  He claims, for example, that there was no determination of worker status (an ‘SS-8 determination’).  We find the documents petitioner requested and his explanation as to their relevance difficult to comprehend.  Regardless of what petitioner seeks from respondent’s computerized records, they do not relate to petitioner’s income and deductions and would not establish that the notice of deficiency is invalid under section 6212(a).” 2016 T. C. Memo. 78, at pp. 5-6.

Anyway, there’s no required form for a SNOD. All a SNOD needs to do is specify the year and amount claimed (or provide the means of computing the amount due). IRS connected Martin to the income reflected in the SFR, and Martin connected nothing. And Tax Court does not look behind the SNOD; if it’s wrong, the taxpayer should prove it’s wrong.

And eight years ago, Martin tried the same moves, with the same result.

Chops rain down on Martin, culminating in the $10K frivolity chop.

Worldly-wise Judge Pugh knows that never stops a true rounder. “While a penalty here may dissuade him no more than ones we have imposed in the past, imposing the penalty on him again for his persistence in trying to deny or delay his obligation to pay tax by making frivolous arguments serves as a warning to other taxpayers considering these or similar arguments.” 2016 T. C. Memo. 78, at p. 12.

No, not the 1967 hit from the New Jersey-based Parliaments, but rather the responses of would-be expert witnesses Stanley Feldman and James Rech (batting rebuttal) to IRS’ motions in limine (that means to lock out, for you civilians) in the ongoing saga of Caylor Land & Development, Inc., et al., Docket No. 17204-13, filed 4/26/16.

Trial is set for Monday, May 2. Finally; I’ve blogged the Caylor story extensively. See my blogposts “Don’t Suppose You Can Depose – Part Deux,” 9/2/14, “Is You Is Or Is You Ain’t,” 3/27/15, “Seasonable Greetings,” 11/24/15, and “Discovered Check,” 11/30/15. In the last of these, I hoped for more blogfodder from the Caylor evidentiary chicane, and my wish has been granted.

IRS claims Stan is testifying about what my Texan daughters call insurance, but he is not a licensed insurance broker. Stan “…is a specialist in valuation but he’ll be testifying about whether petitioners’ captive-insurance arrangement is ‘insurance’ as that term is commonly understood.” Order, at p. 1.

So what, says The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Indefatigable, Illustrious, Industrious, Irrefrangible, Incontestable, Ineffable and Incontrovertible Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes.

“…Feldman’s valuation experience includes a focus on the analysis of risk on business. Risk — its identification and management — is relevant to the Court’s analysis of whether what petitioners were buying was insurance. The standard is whether Feldman’s knowledge and testimony ‘will help the trier of fact.’ Fed. R. Evid. 702(a). At least at the threshold of trial, the Court concludes it will. (Or may — cross-examination hasn’t yet occurred, of course.) Daubert‘s  ‘“gatekeeper” function in excluding evidence that is not reliable’ certainly applies in Tax Court proceedings; but it is less urgent in a bench trial.” Order, at pp. 2-3 (Citations omitted).

Daubert is the Federal touchstone for admission of expert testimony, Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993).

Stan is in.

The Caylors aren’t exercised over excluding Jim Rech. They were using him as a consultant. But they were afraid that IRS was playing games with excluding rebuttal testimony. To prevent further motion practice, Judge Holmes got the parties on the horn and said that excluding Jim doesn’t mean the Caylors can’t put on rebuttal witnesses.

IRS isn’t finished; IRS wants to strike part of Stan’s expert report, as it relies on stuff not presented in discovery, and thus the Caylors can smuggle that stuff into evidence, leaving IRS with no chance to review or rebut.

“Our analysis has to begin by noting that not all information on which an expert relies has to be produced in discovery: ‘If experts in the particular field would reasonably rely on those kinds of fact and data in forming an opinion on the subject, they need not be admissible for the opinion to be admitted.’ Fed. R. Evid. 703. And this becomes more obviously true if one thinks of all the course-work, reading, and life experience that go into making a good expert.

“What a court must be sensitive to is the introduction through an expert’s testimony of discoverable evidence that a party has asked for and which his adversary has concealed. But we don’t think that’s a problem here: All the cases tried in our Court are bench trials, and our judges take care to decide them on the basis of evidence in the record, which includes expert’s opinions but not all the possible hearsay and inadmissible evidence which may go into the formation of those opinions. We also note that there seem to be very few discoverable yet unproduced documents — petitioners say that there were a grand total of eight, out of the hundreds and hundreds of documents that they did turn over. We are prepared to think this non-disclosure was inadvertent and cured in reasonably short order; we see little evidence of prejudice to respondent.” Order, at pp. 2-3.

Tax Court trials are all bench trials. There’s no jury to be confused or misled. And it’s the judges’ job to sift the truth from the mass of testimony and piles of paper.

IRS is still worried about rebuttal witnesses, and wants to bar the lot of them.

No, says Judge Holmes. IRS “…naturally wishes to avoid surprise, but our Rules do contemplate the use of rebuttal testimony. Such testimony is by its nature dependent on what respondent’s case in chief looks like, which can’t be predicted with precision before trial. Respondent is substantially protected from surprise by the nature of rebuttal testimony (i.e., it’s limited to attacking the opinions of respondent’s experts, not introducing new opinions in support of petitioners’ own case in chief). That’s a major reason that Rule 143(g)(3) doesn’t require a written rebuttal expert-witness report. The Court’s pretrial order in this case, however, did require the identification of all witnesses, and the Court will require petitioners to supplement their previous identification of witnesses to enable respondent to prepare for cross-examination if petitioners put on a rebuttal expert.” Order, at p. 3.

So the Caylors had to give IRS their list of rebutters last Friday.

I’m glad there’s going to be a trial, so I get more blogfodder. But once it’s over, I’ll have to go back to digging.

Means No Exclusion

International waters, that is, waters not subject to the dominion of any nation, aren’t foreign enough. That’s Judge Gerber’s message to Wendell Wilson and Angelica M. Wilson, 2016 T. C. Sum. Op. 19, filed 4./25/16.

Wendell is a “…ship’s engineer in the merchant marine, and his only employment during [the years at issue] was as an engineer on board oceangoing container ships. As an engineer, he was in charge of the ship’s engine room, including its electrical, mechanical, and electronic systems.” 2016 T.C. Sum. Op. 19, at pp. 2-3. Wendell is a US citizen, and serves on US flag ships. Angelica has dual US-Mexican citizenship; the Wilsons are bona fide residents of Mexico.

Here I would drop a kindly hint to Judge Gerber. Wendell is not a “merchant marine.” He is definitely not a “licensed merchant marine,” 2016 T. C. Sum. Op. 19, at p. 3.

The merchant marine comprises all the ships of a nation that, in the words of a classic 1939 documentary, “keep our larders full, increase foreign trade, bring out supplies to naval bases and navy ships,” and carry passengers. The ships of the merchant marine are crewed by merchant mariners. And please, Judge, never confuse a merchant mariner with a Marine (I use the capital letter advisedly). If you do so to a United States Marine, I will not be answerable for the consequences.

Anyway, the point of this little essay (and again my readers will doubtless say, “He has a point? How quaint.”) is that international waters, belonging to no nation, are not considered “foreign” for Section 911(a) exclusion, which Wendell seeks. “Foreign” means belonging to some government not the United States.

Wendell does get partial credit for time he sailed through truly foreign waters, which no doubt can be substantiated by logbooks.

And Wendell escapes the accuracy/negligence chops, because he used the same CPA to do his taxes for upwards of 20 years, with no previous ill effects.

Owing to my brother’s and sister-in-law’s overwhelming hospitality, there’s a one-day delay in bringing you John A. Atkinson & Judy B. Atkinson, et al., Docket No. 2683-11, filed 4/22/16.

Harking back to the Part Un version of this post, it’s another conservation easement blown up, but the blowing up took place back in December last year. The issues were much the same as my blogpost “It Ain’t Over,” 7/14/15, so I didn’t blog it.

So Judge Wells sent off the parties to the usual Rule 155 beancount. The parties stipped to $200K of expenses claimed deductible. But their submitted Computations for Entry of Decision (CED) differed, and thereby hangs the cliché.

Though they stipped to the number in gross, they didn’t stip to who got what and for what, and therefore, says IRS, there’s no way to know what, if any, of that $200K was properly deductible.

More elegantly, Judge Wells: “The parties did not, however, stipulate as to details of the services provided or…the amounts paid to each of the payees. Neither did the parties stipulate that the amounts paid to the…payees totaled the amounts deducted by petitioners. Respondent contends that without these stipulations, respondent’s determination of a zero value for the expenses is presumed correct, and that petitioners have failed to produce the necessary evidence to overcome the presumption and support a different determination.” Order, at pp. 1-2.

I can testify from my own knowledge that, at the end of a knock-down, drag-out negotiation, with the empty cardboard coffee cups littering the conference table and the floor, and the ill-digested tuna-salad-on-toast from lunch nine hours ago still wallowing around my innards, a couple the finer points (hi, Judge Holmes) of the hammered-out (and I do mean hammered) deal might get lost when banging out the final, final stip in someone else’s office with someone else’s wordprocessing software. Of course, the support staff have long since gone home at that point.

Judge Wells isn’t buying that finesse, although I do give IRS’ counsel a Taishoff “good try, Third Class.”

Section 212(3) is broad enough to cover payment of fees for obtaining tax advice. And IRS stipped that the fees and payees were “related to the Easements.” That is, the shot-down Easements.

“Respondent [IRS] stipulated that petitioners deducted appraisal, consulting, legal, and accounting fees that were ‘related to the Easements’. The fact that the accountants also provided business services and that the returns were self-prepared are not inconsistent with the stipulations; petitioners stipulated that they deducted only those fees paid in relation to the Easements, and there are plenty of accounting services to be provided apart from return preparation. In the instant cases, respondent provides no reason to set aside the stipulations and find that petitioners incurred expenses to ‘implement’ the Easements but not to ‘determine’ the tax liability related to the Easements.” Order, at p. 2.

Facilitators’ fees aren’t deductible, of course, but fees paid for tax advice, even if wrong but not fraudulent, are. (Clients please copy).

And Judge Wells does a Cohan without citing the composer of my Alma Mater’s fight song.

“…in the event that a taxpayer establishes that a deductible expense has been paid, as in this case through stipulations, but is unable to substantiate the precise amount, we generally may estimate the amount of the deductible expense. The taxpayer must present sufficient evidence to provide some basis upon which an estimate may be made. Through the stipulations and testimony as discussed in our Opinion, petitioners have provided sufficient evidence to support an estimate of between $20,000 and $25,000 in fees paid… to the four remaining payees: attorneys, accountants, NALT, and appraisers.” Order, at p. 2.

NALT is North American Land Trust, hawker of dubious easements and furnisher of incoherent testimony, in which context see my blogpost abovecited.

Judge Wells puts John’s and Judy’s beef about interest on hold pending the final numbers.

So guys, come up with fresh CEDs. Today.

Takeaway– The Devil hasn’t relocated. The Old Boy is still there, in the details. Remember, stipulate, don’t capitulate.

Whom MFJ hath joined together, AMT credit puts asunder in a saga of first impression, Nadine L. Vichich, 146 T. C. 12, filed 4/21/16.

Years before Nadine’s late husband William became her husband, and while he had another wife, he exercised an ISO that led to AMT. If you don’t know what that means, consider yourself lucky.

Incentive stock options are generally (love that word) taxed, not when exercised, but rather on the difference between option price and gain at disposition. But they’re preference items for alternative minimum tax, and are taxed at FMV of the stock acquired at time of exercise, even when the exerciser gets nothing but the stock.

This is OK if the stock appreciates; the lucky exerciser gets two sets of bases: the basis at exercise (option price), or the FMV on which s/he paid AMT.

What if the stock tanks? “Section 53 allows a taxpayer to claim a credit for AMT paid in prior years, adjusted for specific items.  The credit is limited to the amount by which a taxpayer’s regular tax liability, reduced by certain other credits, exceeds the taxpayer’s tentative minimum tax.  Sec. 53(c).” 146 T. C. 12, at p. 6.

But the unlucky exerciser may not have enough regular tax liability in the year wherein s/he disposes of the now-tanked stock to use the credit. So back in 2006, with amendments in 2007 and 2008, Congress remedied the problem with carryforwards of the credit.

Remember when Congress actually did something? Oh, sorry, I forgot this is a non-political blog.

Well, Nadine’s late husband William didn’t use all his credit while married to his previous wife (with whom he filed MFJ); then he divorced her, married Nadine, merged their finances, filed MFJ, and then died with credit still unused.

Nadine took the remaining credit. IRS disallowed and handed Nadine a SNOD.

Judge Nega asks, what about previous wife? Both IRS and Nadine assume that late husband William owned the whole thing. But when late husband William and previous wife split, there was no Section 53(c) largesse, so there was no credit to split.

Now does the credit belong to Nadine, since late husband William is late husband William?

This is a case of first instance. So Judge Nega analogizes to deductions, although Nadine’s attorneys claim they aren’t the same. Maybe not always, says Judge Nega, but here it’s close enough.

“Marriage affords its entrants certain benefits, among them the option of filing joint returns.  The Code treats married taxpayers who file jointly as one taxable unit; however, it does not convert two spouses into one single taxpayer.  Joint filing allows spouses to aggregate their income and deductions but ‘does not create a new tax personality’. 146 T. C. 12, at p. 12. (Citations omitted).

Whom the Code hath joined together maybe aren’t really together.

“Thus, petitioner and William Vichich remained separate taxpayers even though they merged finances and filed joint returns during their marriage.  And while joint filing may permit spouses to ‘overr[i]de the limitations incident to separate returns’, see Taft v. Helvering, 311 U.S. 195, 198 (1940), it generally does not permit either spouse to inherit or otherwise retain after the marriage ends a tax benefit that was originally conferred upon the other spouse.  This reasoning is supported in both the Code and the caselaw.” 146 T. C. 12, at pp. 12-13.

Judge Nega cites some NOL cases to show that the spouse who incurred the losses is the one who keeps them, and the losses die with that spouse. And Rev. Rul. 74-175, 1974-1 C.B. 52 (which Judge Nega Skidmore’s into this discussion) says NOLs are decedent’s income and go on the final 1040, not on the estate’s 1041.

“While we recognize that the purposes of the AMT credit and the NOL carryover are not identical, we nonetheless find informative the authorities limiting the transfer of NOL carryovers between spouses.  Petitioner offers us no reason not to extend those authorities to this case.  She grounds her claim to the credit in issue entirely in the remedial purposes she alleges underlie section 53(e) and (f).  Those subsections, however, have no bearing on her ability to take into account, for purposes of section 53(b)(1), the adjusted net minimum tax imposed on her husband before their marriage.  Therefore, because petitioner could not deduct for a postmarital year an NOL incurred by her husband even during their marriage, much less before it, we conclude, on the basis of the record and the arguments before us, that, she was not entitled to take into account under section 53(b)(1) her husband’s premarital adjusted net minimum tax liability in computing her own minimum tax credit….” 146 T. C. 12, at p. 16.

I do want to give a Taishoff “Good Try, First Class” to Nadine’s counsel, Stephen L. Kadish, esq., and Matthew F. Kadish, esq. As the golfers say “Never up, never in.”

Amy Ndiaye Delia* had a tough renewal clause in the lease for the shopping mall booth where she ran her hair-braiding operation. Amy wasn’t licensed cosmetologist, so all she could do was braid; her licensed competitors ran full-service operations. So when the 2008 crash brought major economic hurt to her clientele, and a fashion trend turned away from hair-braiding, Amy was hurting.

The landlord insisted on the five-year automatic reboot in the lease, but backed off to three when Amy pleaded poverty. Amy says she kept the shop going to try to offset the rent, and didn’t walk on the lease lest the walk hurt her credit score.

But Amy was a trifle lackadaisical about recordkeeping, so IRS kicked her deductions, and so does Judge Lauber. The IRS also claimed Amy wasn’t in business.

Judge Lauber is more generous. “We regard several of the regulatory factors as neutral in this case.  The only factor that weighs heavily against petitioner is the salon’s persistent history of losses.  Despite that fact, we are convinced that she conducted her hair-braiding business with an actual and honest (if unduly optimistic) objective of making a profit.” 2016 T. C. Memo. 71, at p. 9.

“She credibly testified that this business failed for reasons beyond her control, including the 2008-2010 financial crisis, an over-concentration of similar businesses in her community, and a marked change in taste among her prospective customers.  It might have been prudent for her to have exited this business before she did, but the long-term rental contract posed a serious obstacle. She concluded, not unreasonably, that trying to salvage as much profit as she could was preferable to risking damage to her credit rating by defaulting on her lease commitment.  She closed the business promptly after extricating herself from the lease.” 2016 T. C. Memo. 71, at p. 9.

“She kept business records and undertook marketing efforts that seem reasonable relative to the scale of her activity.  Operating the salon during [the year at issue] was not a source of great personal pleasure or recreation, and it was surely not a ‘sport’ or a ‘hobby.’  Sec. 1.183-2(a), Income Tax Regs.  Although petitioner had a nostalgic fondness for hair braiding, sitting in an empty booth in a shopping mall is not as much fun as (say) riding horses.” 2016 T. C. Memo. 71, at pp. 9-10.

I’ve blogged enough horsey cases to prove that, Judge. Likewise, Amy wasn’t rolling in wealth, so she didn’t need to generate an offsetting loss while having fun.

But her recordkeeping was poor, she tried to write off meals as a business expense with zero backup, so she gets the 20% negligence chop for those expenses.

Takeaway—If your client has a plausible reason for continuing to operate in the face of losses, and isn’t trying to shelter a lot of other income by having fun, go for it.

*Amy Ndiaye Delia 2016 T C Memo 71 4 20 21