No, not the religious group. This blogpost is about the minimum five percent of net asset value of a NIMCRUT, calculated annually, required to be distributed each year in order to make sure the charitable remainderer gets at least 10% of NAV, calculated at inception.

Since the noncharitable income beneficiaries could get enough more (with a catch-up in any year when the assets didn’t yield the required distribution, thus making the Charitable Remainder Unitrusts, or CRUTs, into Net Income with Make-up Charitable Remainder Unitrusts, or NIMCRUTs) to torpedo the charitables at the end of the twenty-year income stream, no charitable deduction for the remainder claimed by Estate of Arthur E. Schaefer, Deceased, Kathleen J. Wells, Executor, 145 T. C. 4, filed 7/28/15.

Section 664 and the regs are not models of clarity, but Judge Buch finds the Senate memo shows what Congress intended, and gives it weight.

“A second modification of the annuity trust and unitrust rules made by the committee provides that the charitable remainder trust must be required by the trust instrument to distribute each year 5 percent of the net fair market value of its assets (valued annually in the case of a unitrust and valued at the time of the contribution in the case of an annuity trust) or the amount of the trust income, whichever is lower. In valuing the amount of a charitable contributions deduction in the case of a remainder interest given to charity in the form of an annuity trust or a unitrust, it is to be computed on the basis that the income beneficiary of the trust will receive each year the higher of 5 percent of the net fair market value of the trust assets or the payment provided for in the trust instrument. * * * S. Rept. No. 91-552, supra at 89-90, 1969-3 C.B. at 481 (emphasis added).” 145 T. C. 4, at .pp. 14-15.

IRS issued Rev. Ruls. and Rev. Procs following that lead, although the regs aren’t clear, and the Code is not much better. So IRS’s guidance gets Skidmore deference.

Clear? Thought not.

The Section 7206 plea-cop is a minefield. I blogged this once already; see my blogpost “A Cool Cat,” 4/16/13.

But Husam A. Abu-Dayeh 2015 T. C. Memo. 136, filed 7/28/15, and his attorney (whom I’ll not name, as he will probably suffer, or has already suffered, enough) obviously missed my blogpost, because Husam copped to one count of a Section 7206(2) rap for writing fiction on Forms 1040, but got hit with civil penalties thereafter.

The Federales hit Husam for a cool $79K in losses to the fisc by reason of Husam’s chicanery regarding some 36 (or maybe 39) spurious returns Husam’s taxprep business prepared and filed.

Comes now IRS and nails Husam for $39K in $1K increments, the civil preparer penalties.

Husam and lawyer yell they gave at the office. No says IRS, read your plea bargain. And if you don’t, Judge Nega will read it for you.

“The plea agreement specifically states that it is ‘limited to the Office of the United States Attorney for the Middle District of Florida and cannot bind other federal, state, or local prosecuting authorities’. The plea agreement is a total of 12 pages, all of which are initialed or signed by petitioner except for page 10. Page 10 contains an explicit statement of petitioner’s guilt in filing materially false tax returns: ‘[D]efendant is pleading guilty because defendant is in fact guilty.’” 2015 T. C. Memo. 136, at p. 3.

Husam tries to get a CDP on his own, but his OIC is defective (no first payment, no income certification and no fee). And the first AO he spoke to cut the penalties from $39K to $36K.

Judge Nega concludes: “While we understand petitioner’s frustration at having been assessed penalties after he paid restitution to the IRS, SO X followed the requirements of section 6330(c), and her decision to uphold the NFTL was not an abuse of discretion.” 2015 T. C. Memo. 136, at p. 10. (Name omitted).

Criminal defense lawyers, read those plea agreements. Make sure they cover Treasury and IRS civil and criminal penalties. Merely covering DOJ or the US Attorney is not enough, unless you’ve warned your client and have informed written consent to go ahead.

And tell ‘em Husam sent you.

Make a Lovely Sight?

No, not if you remember The Crests’ 1959 hit; that was about candles. Maybe, if you’re Altera Corporation and Subsidiaries, rejoicing in your win over Treas. Reg. 1.482-7(d)(2), in 145 T. C. 3, filed 7/27/15, with ten (count ‘em, ten) lawyers on your side and six (6) for IRS.

The kerfuffle is about whether SBCs have to be included in QCSAs. If you’re partial to offshore Base Erosion and Profit Shifting, this is your cup of Lapsang Souchong.

Altera made a license deal with its Cayman Islands (surprise, surprise) sub, giving the sub  “the right to use and exploit, everywhere except the United States and Canada, all of Altera U.S.’s intangible property relating to [programmable logic devices] and programming tools that existed before the R&D cost-sharing agreement (pre-cost-sharing intangible property). In exchange for the rights granted under the technology license agreement, Altera International paid royalties to Altera U.S. in each year from 1997 through 2003. As of December 31, 2003, Altera International owned a fully paid-up license to use the pre-cost-sharing intangible property in its territory.

“Under the R&D cost-sharing agreement, Altera U.S. and Altera International agreed to pool their respective resources to conduct research and development using the pre-cost-sharing intangible property. Under the R&D cost-sharing agreement, Altera U.S. and Altera International agreed to share the risks and costs of research and development activities they performed on or after May 23, 1997. The R&D cost-sharing agreement was in effect from May 23, 1997, through 2007.” 145 T. C. 3, at pp. 5-6.

Of course the Cayman Islands are chock-a-block with programmers and software developers. Roger that, as I said in an earlier incarnation.

Also of course, “In Xilinx Inc. v. Commissioner, 125 T.C. 37 (2005), aff’d, 598 F.3d 1191 (9th Cir. 2010), we held that, under the 1995 cost-sharing regulations, controlled entities entering into qualified cost-sharing agreements (QCSAs) need not share stock-based compensation (SBC) costs because parties operating at arm’s length would not do so. In 2003 Treasury issued sec. 1.482-7(d)(2), Income Tax Regs. (final rule). The final rule requires controlled parties entering into QCSAs to share SBC costs.” 145 T. C. 3, at p. 1.

And, per the reg, it doesn’t matter if there are no comparables, let it all hang out.

So we have a Chevron (or maybe State Farm, Motor Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)) faceoff. Was Treasury arbitrary and capricious or in manifest disregard of the law by requiring stock-based compensation to be included in Qualified Cost-Sharing Agreements?

Judge Marvel says yes.

There are no arms’-length comparables for stock-based compensation in cost-sharing deals among unrelateds. Testimony during the comment period preceding the final reg featured all the white-shoe and big-four players, who uniformly agreed that stock-based compensation was too speculative to value at inception, was subject to variables beyond the control of the parties to the cost-sharing agreement, could be uncontrollably large, and besides, you could look at EDGAR and see nobody did it, and so an arms’-length comparable didn’t exist.

And courts can’t substitute their own judgment for the agency’s, and can’t go beyond what the agency said. All a court can do is consider the factors the agency articulated (sound like Chenery to you? It’s actually State Farm), and if any meets the test (and would have been followed even if the agency articulated defective reasons), the reg must be sustained.

And we all remember the Chevron two-part test. But mox nix.

“Because the validity of the final rule turns on whether Treasury reasonably concluded that it is consistent with the arm’s-length standard, the final rule must–in any event–satisfy State Farm’s reasoned decision-making standard. Accordingly, we will examine whether the final rule satisfies that standard without deciding whether Chevron or State Farm provides the ultimate standard of review.” 145 T. C. 3, at p. 48.

In any case, this is legislative regulating and has the force of law. And any Treasury booboos aren’t harmless error.

Judge Marvel nails Treasury and the reg thus: “Because the final rule lacks a basis in fact, Treasury failed to rationally connect the choice it made with the facts found, Treasury failed to respond to significant comments when it issued the final rule, and Treasury’s conclusion that the final rule is consistent with the arm’s-length standard is contrary to all of the evidence before it, we conclude that the final rule fails to satisfy State Farm’s reasoned decisionmaking standard and therefore is invalid.” 145 T. C. 3, at p. 69.

Bad day at 1111 Constitution Ave, NW.

No, not Tommy Hardy’s 1878 Venn diagram (beloved pun of my high school days), rather we have Judge Holmes viewing the scene of the conservation easement in another designated hitter concerning Anthony M. Kissling & Suzanne R. Kissling, Docket No. 19857-10, filed 7/24/15.

IRS wants The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a the Inveterate, Indomitable, Irrefragable, Illustrious, Indefatigable, Implacable Foe of the Partitive Genitive, and Old China Hand, to check out the properties, and Tony and Suz don’t object.

“This case has only one issue — the value of conservation easements – and the first motion is to have the Court visit the properties to see what they look like, which might help in placing later testimony in context. The Kisslings don’t object and the general rule is that judges in a bench trial may view the property – the viewing is a form of evidence — as long as both counsel attend.” Order, at p. 1. (Citations omitted).

Anyway, the trial is in Buffalo, NY, the properties are there, so no biggie.

But what Judge Holmes said next surprised me.

“The Court thinks a viewing is especially useful in this case — the judge trying the case is a native of the area and is wary of letting his general knowledge displace the specifics of the building and neighborhood at issue.” Order, at p. 1.

Judge, I thought you were a native of Brooklyn, NY. But maybe that’s because of Holmes v. US, Dockets 95-6009. 95-6103, wherein is stated that you leased an apartment in the St. George Hotel in Brooklyn, right out of law school. I’d hoped to subtitle this blogpost “But a Judge Grows in Brooklyn.” Thwarted, alas. Funnily enough, I did work for the cooperative housing corporation that owned the building some years later.

Back to taxes.

IRS also wants to toss two experts’ reports that Tony and Suz want in.

One report involves the costs of keeping up an easement-encumbered property. I can testify from my own experience that these costs are not insubstantial, if the enforcer, be it municipal or not-for-profit, takes the job seriously. And the issue whether our old chum the National Architectural Trust is more likely to play enforcer than the City of Buffalo rings true to Judge Holmes’ ear.

I haven’t been in Buffalo in more than ten years, but when last I visited it wasn’t exactly preservationists’ Heaven.

And just because the expert quotes others, that doesn’t make him a mere conduit for the opinions of others. He brings his own experience and knowledge to the mix.

IRS wants the valuation expert’s report tossed, because it didn’t comply with Rule 143(g)(1), the expert’s report checklist.

“The Court’s review of this report shows that this is not true. Part of the report is [expert]’s appraisal of the ‘before’ value of the properties using the income approach. The Court may or may not ultimately find it persuasive, but even the Commissioner notes that it is one of the generally accepted ways to appraise rental properties. We might also agree with the Commissioner that [expert]’s 2004 estimation of the properties’ ‘after’ value — which was then (when the case was still before IRS examination) based on reports of percentage reductions in value in other cases — was not ‘helpful,’ but [expert] then did a more detailed analysis in 2007. That addendum is part of his present report. Maybe the Commissioner is right that this addendum is little more than a post hoc rationalization; maybe the Kisslings are right that if [expert] finds a discount –after doing a property-specific analysis — that falls in the range of discounts established in other cases it only strengthens his conclusion.

“But that dispute must await trial on the merits: The report as it now stands meets the criteria of Rule 143(g), Tax Court Rules of Practice and Procedure.” Order, at p. 3. (Name omitted).(Emphasis by the Court).

Did [expert] draw back from the Primoli percentage precipice? What will the native find upon his return?

Who needs Thomas Hardy when we have The United States Tax Court?

JOAN. Thou are a rare noodle, Master. Do what was done last time is thy rule, eh?

G. B. Shaw, Saint Joan, 1920

A designated hitter from Judge Halpern brought to mind Joan of Arc’s retort to Canon de Courcelles. This is Leroy Loudermilk a.k.a. Lee Loudermilk, Docket No. 12054-11, filed 7/23/15.

Lee is griping over IRS’s desire to nail him for transferee liability without having first pursued the transferor in the give-and-go he set up to dispose of the assets in his C Corp, while not paying corporate tax. The usual.

Of course, State law controls, and the Shockley case (see my blogpost “Gude Faith, He Maun Fa That”, 6/22/13) would sink Lee’s argument if Illinois follows Wisconsin.

Judge Halpern isn’t going there, because IRS told enough of its tale of woe to convince Judge Halpern that Lee has the bucks.

To bolster his case, Lee calls on Robert McKenzie, ex-IRS chaser of defaulting rogues. Robert is going to testify based on his report, as an expert.

IRS of course moves to toss Expert Robert McKenzie.

“The report continues that, specifically, Mr. McKenzie will testify that, before proceeding against petitioner, the IRS should have made additional collection efforts against Midwest and its successors. The McKenzie report is 23 pages long. Two plus pages recite his qualifications. Two pages recite the facts he relied on in forming his opinion and the documents he reviewed. Two plus pages list additional efforts that he believes the IRS should have taken to collect the debt from the transferor and others. Thirteen pages recite numerous cases, statutes, regulations and provisions of the Internal Revenue Manual as the basis of his opinions. Finally, two plus pages, under the heading ‘Conclusion/Summary of Opinion’, express again all the things that the IRS should have done and express his opinion ‘that the IRS should have taken further steps to confirm the transferor’s inability to pay before seeking transferee liability against Loudermilk.’” Order, at p. 4.

“Principally, respondent argues that the McKenzie report will not assist the Court because, in the main, it does not help us to understand the evidence or determine a fact in issue, but, rather, it is a prohibited intervention into the function of the Court to draw legal conclusions; i.e., what are reasonable collection efforts. We agree. While perhaps the report contains a fine listing of collection efforts that the IRS could have taken, Mr. McKenzie’s conclusion that the IRS’s efforts ‘do not meet the standard of ‘reasonable efforts’ seems to hinge on just that, what the IRS could have done. Whether what it did do is sufficient is (if relevant) another story. Respondent is right. Without reference to external standards of reasonableness for the sufficiency of collection actions, Mr. McKenzie’s opinion is simply that, his opinion. As described below, based on his experience, we might receive his testimony as to industry practice, but, without more, we will not accept his testimony as to the reasonableness of the IRS’s collection actions.” Order, at p. 5.

Well, what is “industry practice”?

“What is reasonable can be informed by what is customary or usual practice. (‘What usually is done may be evidence of what ought to be done * * *’); (evidence of usual business practice relevant in determining whether contract performance was commercially reasonable). And experts may testify to usual business practice based on their specialized experience. Although we shall grant the motion in limine, there is still time pursuant to our standing pretrial order for petitioner, if he wishes, to submit Mr. McKenzie’s report as to industry practice. Although our rules contemplate that, if the Court permits, a witness may testify as to industry practice without a written report, see Rule 143(g)(3), we think that here, in fairness to respondent, if Mr. McKenzie or any other witness is to testify as to industry practice, a written report complying with Rule 143 is required.” Order, at p. 5 (Citations omitted).

Industry practice is “do what was done the last time,” rare noodle.

Isn’t Good Enough

At least for valuing real property for tax purposes, according to Judge Vasquez in Estate of John A. Pulling, Sr., Deceased, 2015 T. C. Memo. 134, filed 7/23/15. And I agree that “Estate of X, Deceased,” is a tautology, as only dead people have estates.

IRS wanted to argue that the late John A.’s tree farms in the Sunshine State were worth a mint, because they could be assembled with other property in which the late John A.’s friends and family owned the majority interest, and he a minority interest.

But the friends and family had turned down a chance to sell out before, and there was no evidence that any likely suitors were hovering.

Besides, merely because one owns jointly with friends and family doesn’t mean that the parties uniformly agree on everything. (Thanks to whatever gods there be, for friends and familes squabbles have kept me eating for many years.)

State law determines property rights, and Federal law determines how these are taxed. Federal law permits taxing on “reasonable probability” that property may have a better economic value if used otherwise than at present.

“If a special or higher use of the land is only possible when it is combined with other parcels, we may consider that special use, but ‘there must be a reasonable probability of the lands in question being combined with other tracts for that purpose in the reasonably near future.’” 2015 T. C. Memo. 134, at pp. 12-13. (Citation omitted).

But merely because friends and family own a majority interest in lands wherein taxpayer owns a minority interest doesn’t mean they’re all hot to sell.

“Both parties’ experts opined that assembling the estate’s property and [friends and family]’s property would yield the greatest economic benefits, and we agree. However, using that fact as evidence that combining of the properties was reasonably likely places the cart before the horse. The economic benefits of assemblage can only come into consideration once we have established that assemblage is otherwise reasonably likely. The only evidence in the record, however, suggests that assemblage was not likely.

“First, [friends and family] has had at least one prior offer to sell its property as part of a residential development, but it declined the offer. This fact tends to show that [friends and family]’s stakeholders were not interested in selling the property just because it would have been in their economic interests. Moreover, both parties’ experts testified at trial that they would not recommend to a hypothetical buyer of the estate’s property that he purchase the land as a possible investment. Not even respondent’s expert [IRS]’s believed that assemblage was certain enough to recommend purchase to a client.” 2105 T. C. Memo. 134, at pp.14-15.

Ultimately, while relativity may rule the universe, it doesn’t rule property valuation for estate tax purposes.

“The mere fact that they are related to decedent is not enough. See Estate of Bright, 658 F.2d at 1006 (rejecting application of family attribution for purposes of valuing property for estate tax purposes); see also Minahan v. Commissioner, 88 T.C. 492, 499 (1987) (‘It has been noted that the Congress has explicitly directed that family attribution or unity of ownership principles be applied in certain aspects of Federal taxation, and in the absence of legislative directives, judicial forums should not extend such principles beyond those areas specifically designated by Congress.’).” 2015 T. C. Memo. 134, at pp. 16-17. (Footnote omitted, but it says the Bright case is Golsenized onto this case).

So, like my Hong Kong investor of long ago, who pored over a proposed deal for a long time, murmuring “it might be, it could be, it could be, it might be,” and walked away, Judge Vasquez does likewise.

CSTJ Peter Panuthos is befogged by IRS’s counsel’s riding off in two directions at once, and I must say I’m equally befogged. Hence this headline.

I don’t know how James B. Cannon & Jeanmarie Cannon, Docket No. 30077-14SL, filed 7/22/15, feel about this, but if they’re as confused as CSTJ Peter and I, I wouldn’t be surprised.

Ya see, IRS moved to dismiss Jim’s & Jean’s petition off a NOD because Jim & Jean didn’t timely request a CDP. OK, no biggie, so let’s look at the mailing dates.

But IRS then “…filed a motion for summary judgement. In his motion respondent [IRS] asserts that the underlying liability is not in issue and further, that as a matter of law respondent did not abuse his discretion in that petitioners have not requested a collection alternative.” Order, at p. 1. (Emphasis by the Court).

By now my readers, those few, those happy few, know to respond to such an anomalous move with “Mein! Was ist das?”

CSTJ Peter is more demure. “The Court is perplexed by respondent’s position in this case. The filing of respondent’s Motion for Summary Judgment presumes jurisdiction in this case and would appear to be entirely inconsistent with the position taken in the motion to dismiss for lack of jurisdiction.” Order, at p. 1.

So, IRS, are you dropping the “no jurisdiction, so dismiss” motion? Or are you saying the two are consistent?

If the latter, please explain how a court can grant a motion when it has no jurisdiction.

Or more simply: is you is, or is you ain’t?

That’s a consolidated reporting  NOL, per Judge Ruwe, and you can read all about it in Marvel Entertainment, LLC, 145 T. C. 2, filed 7/21/15.

Marvie’s predecessor consolidati filed Chapter 11, and blew off some debt, giving it COD. Taking a short year, some members didn’t recognize the COD, but reduced their NOLs pro rata, per Seciton 108(b)(2)(A).

IRS says no, you can’t split up the Consolidated Net Operating Loss (CNOL), it’s all-in.

Judge Ruwe crystallizes: “Whether the NOL to be reduced under section 108(b)(2)(A) is the entire CNOL or an allocable portion of the CNOL is the sole issue for resolution in this case..” 145 T. C. 2, at p. 14.

IRS says the Supremes decided this years ago, in United Dominion Industries, 532 US 822 (2001).

Marvie says no, got nothing to do with that.

Judge Ruwe: “The Court explained portions of the consolidated return regulations pertaining to consolidated taxable income and CNOL as follows: ‘Under Treas. Regs. §§1.1502-11(a) and 1.1502-21(f), an affiliated group’s “consolidated taxable income” (CTI), or, alternatively, its “consolidated net operating loss” (CNOL), is determined by “taking into account” several items. The first is the “separate taxable income” (STI) of each group member. A member’s STI (whether positive or negative) is computed as though the member were a separate corporation (i.e., by netting income and expenses), but subject to several important “modifications.” Treas. Reg. § 1.1502- 12. These modifications require a group member calculating its STI to disregard, among other items, its capital gains and losses, charitable-contribution deductions, and dividends-received deductions. Ibid. These excluded items are accounted for on a consolidated basis, that is, they are combined at the level of the group filing the single return, where deductions otherwise attributable to one member (say, for a charitable contribution) can offset income received by another (from a capital gain, for example). Treas. Regs. §§ 1.1502-11(a)(3) to (8); 1.1502-21(f)(2) to (6). A consolidated group’s CTI or CNOL, therefore, is the sum of each member’s STI, plus or minus a handful of items considered on a consolidated basis.” United Dominion, 532 U.S. at 826.

I am reminded of Thomas Hobbes’ famous remark in Chapter VIII of Leviathan (1651): “When men write whole volumes of such stuffe, are they not Mad, or intend to make others so?”

I’ll try plain English. There’s only consolidated NOL for consolidati, nothing else. Ya can’t mix-and-match.

But if this sort of thing is really what does it for you (in which case I can but shrug my shoulders), you can read all 36 pages of Judge Ruwe’s exposition of the foregoing.

.com – Part Deux

Here’s a reprise of an oldie but goodie, my blogpost “Stamp Out Stamps.com,” 10/23/14, brought once again into my ken by the author of the order in my aforementioned blogpost, The Judge With a Heart, STJ Armen.

You’ll remember that poor old Joe Sanchez relied on a friend with a computer and stamps.com, which produced a mark dated the last day of the magic 90, but the USPS overrode that with a legible mark one day later, relegating Joe to Outer Darkness, with weeping, wailing and gnashing of clichés.

Well, today comes Robert H. Tilden, Docket No. 11089-15, filed 7/20/15, playing the stamps.com gambit, and he survives to fight another day—maybe.

Bob claims “a Stamps.com ‘postmark’ is ‘evidence of a timely filed petition pursuant to Reg. §301.7502-1.’ Order, at p. 1.

The magic last day of the 90 was April 21. STJ Armen takes it from there.

“The ‘Petition For Redetermination Of Deficiency (Regular Tax Court Case)’ was received by the Court in the late morning of Wednesday, April 29… and filed shortly before noon on that day. The petition was sent via the U.S. Postal Service (USPS) by first-class mail. The envelope containing the petition bears a mailing label with a ‘postmark’ by ‘Stamps.com’ of April 21…. The envelope also bears a ‘certified mail’ sticker with a 20-digit tracking number (the tracking number).

“Because of the aforementioned tracking number, the USPS website provides tracking information regarding the flow of the petition through the USPS mail system from arrival through delivery. Thus, the first entry reflects an arrival date and time of April 23… at 2:48 p.m. at USPS facility in Salt Lake City, UT 84199, and the last entry reflects a delivery date and time of April 29… at 11:02 a.m. at Washington, D.C. 20217. (The latter ZIP Code, 20217, is the Court’s dedicated ZIP Code.). Order, at p. 2.

IRS moves to toss Bob’s petition, citing the USPS Tracking Number as showing real mailing April 23, two days late.

Bob parries with “…the envelope containing the petition ‘bears a postmark date within the time for filing’, citing section 301.7502-1(c)(1)(iii)(B), Proced. & Admin. Regs., regarding ‘Postmark[s] Made By Other Than U.S. Postal Service’ for the proposition that a postmark ‘which, although not made by the U.S. Postal Service still complies with the timely mailing/timely filing rules of I.R.C. §7502.’ Order, at pp. 2-3.

STJ Armen wants a reply from IRS on the subject. I can imagine what it will be. And where Bob’s petition is going.

But Bob gets a Taishoff “good try, first class” nevertheless.

This is, as I have said many times, a non-political (by which I mean nonpartisan) blog. If anyone desires to wallow in the toxic filth that passes for partisan politics, let him or her go elsewhere, with my deepest sympathies.

I must say, however, that as a war veteran who was not, by the grace of God, a prisoner of war, I really do not care whether or not Donald (“five deferments”) Trump likes me or not.

I was about to use rather tougher language, but remembered that this blog is meant for family reading.