Originally published on Passive Activities and Other Oxymorons on June 17th, 2011.
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Betty L Klebanoff v. Commissioner, TC Summary Opinion 2011-46
I've been going back and forth whether to make much of this one or not. Taxpayer entered into a business venture, whether as a partner or not is a little unclear. They received a $51,000 "draw" against profits that never materialized. When her return was due it wasn't clear what she was supposed to report so she didn't report anything. Then they gave her a K-1 which said she had received a guaranteed payment. The venture had by then fizzled. Soon after the IRS audited her. Her position was that the $51,000 was not reportable. IRS said it was ordinary income subject to SE tax.
The Tax Court ended up with short term capital gain - distribution from a partnership in excess of basis. Not only was there no SE tax, there was also no penalty, which I think was on the generous side :
Petitioner was aware that she received $51,000 in payments from Mirus during 2007. She did not understand the legal or technical ramifications of those payments. She made attempts to contact Mirus and Messrs. Buck and Colson, but she did not receive any response regarding the $51,000 in payments. Petitioner did not receive any notification from Mirus before her 2007 income tax return was due and was filed. At the time her 2007 income tax return was due and being filed in 2008, petitioner's lawyer was engaged in negotiations in an attempt to work out some settlement of her interest in Mirus. There was uncertainty about whether petitioner would receive additional amounts from Mirus and/or Messrs. Buck and Colson and as to the nature of the payments already received. Petitioner decided to wait and file an amended return for 2007 after she was able to better address the taxability of the $51,000 in payments.
The events that culminated in the filing of the first Mirus partnership return and petitioner's income tax return were followed in relatively short order by respondent's audit of petitioner's return and the issuance of a notice of deficiency. Petitioner consulted tax professionals who advised her and caused her to file an amended partnership return for Mirus reflecting that the $51,000 in payment was a draw and that Hospice and Rock were the partners of Mirus.
It was therefore reasonable for petitioner to take the position that the $51,000 was not taxable in her 2007 tax year. Under those circumstances, petitioner's actions were reasonable and she is not liable for an accuracy-related penalty.
I really don't see a defensible argument for not reporting the $51,000 somehow or other, but it was a confusing mess, so I'm glad she got a break on the penalty.
Tuwana J. Anthony v. Commissioner, TC Summary Opinion 2011-50
If you have a business that involves selling various items, inventory is likely to enter into your tax computations. You can't just deduct what you spent on the stuff from what you got paid for stuff in each year. You have to consider stuff that is bought in one year and sold in a different year. If you are talking about big items you might specifically identify them, but if its a lot of small stuff you need to take a short cut. The short cut is this. To figure your cost of goods sold you take the amount that you spent on stuff during the year ("purchases") and add the cost of stuff you had on hand at the beginning of the year "opening inventory". That is your cost of goods available for sale. To get your "cost of goods sold" (which is the number that you get to reduce your income by) you need to subtract the cost of stuff you didn't sell, "ending inventory". Getting that number can be a bit of production. It's one thing if you have an auto dealership with paper work on each vehicle from the factory. If you have a retail store with all sorts of little tchotchkes it can be more of a production. One way to approach it is to list out all the items with their selling prices and then reduce the total by your mark-up.
Ms. Anthony apparently forgot that last step. She was audited for 2004 and was able to convince the Tax Court that her ending inventory was overvalued because it was at retail selling price.
During settlement negotiations in docket No. 5791-07S, petitioner affirmatively raised, inter alia, the issue of whether the $41,097 reported ending inventory on petitioner's 2004 Federal income tax return should have been reported as $20,548. Specifically, petitioner took the position that she erroneously reported her 2004 ending inventory using her retail selling price—rather than her cost—for the inventory.
The 2004 case was settled in 2009. There was a little problem though. The incorrect 2004 closing inventory was used as the 2005 opening inventory. This could have been a gotcha on the IRS, since the statute was closed on 2005, but that is not the way it worked out:
In Tuwana J. Anthony v. Commissioner, Docket No. 5791- "07S”, based on representations made by you, the Tax Court made a determination that your ending inventory for 2004 was $20,548, instead of $41,097 as reported by you. Under section 1311, the same adjustment is required to be made to your beginning inventory for 2005. *** This results in an increase to your [2005] income of [$20,549]. On the basis of the above inventory adjustment and other adjustments that petitioner and respondent agreed to, respondent determined a $5,516 deficiency in petitioner's 2005 Federal income tax. Although the section 6501 3-year period of limitations for 2005 had expired at the time respondent issued the notice of deficiency on January 7, 2010, respondent relied on the mitigation provisions of sections 1311 through 1314 to issue the notice of deficiency to petitioner.
On the basis of the foregoing, we find that all requirements of the applicable mitigation provisions have been met and that respondent properly relied thereon in issuing petitioner the notice of deficiency for 2005. Petitioner's opening inventory for 2005 is reduced from $41,097 to $20,548 consistent with the adjustment made to her 2004 ending inventory.
Jose B. Magno, et al. v. Commissioner, TC Summary Opinion 2011-43
This was another case about the real estate trade or business exception to the passive activity loss rules. The taxpayer hadn't made the aggregation election and his testimony about time spent was not persuasive:
During the audit stage of this proceeding, Mr. Magno told respondent's revenue agent that he worked approximately 25 to 30 hours per week on his financial planning and services business. That conversation was documented in the revenue agent's notes, and the revenue agent testified credibly to its contents at trial. At trial, however, Mr. Magno testified that he worked principally as a financial consultant from January through August 2005. He also testified that he became a full-time manager of the first and second residences in 2006 and 2007 and that he reduced the number of hours which he devoted to his financial consulting services business to “about” 500 hours per year.
We credit the testimony of respondent's revenue agent and therefore conclude that Mr. Magno must have worked more than 1,250 hours during each subject year in real property trades or businesses to qualify as a real estate professional under section 469(c)(7)(B)(i). 6 Mr. Magno was not able to corroborate with written documentation his assertions that more than one-half of the personal services he performed in trades or businesses during the subject years were performed in real property trades or businesses. Accordingly, we find that Mr. Magno has not proven that he meets the requirements of section 469(c)(7)(B)(i).
I'm starting to find these cases a little tedious, but I'm going to continue to report on them.
Timothy O. Micek v. Commissioner, TC Summary Opinion 2011-45
In 1999 petitioner and Ms. Micek orally agreed that petitioner would help support Ms. Micek by paying her $1,250 every 2 weeks. To memorialize this agreement, on November 10, 1999, petitioner signed a spousal support affidavit, stating that he promised to pay Ms. Micek $1,250 biweekly via direct deposit. A notary public of the State of New Jersey notarized the spousal support affidavit. Throughout the years at issue, petitioner made payments to Ms. Micek pursuant to the spousal support affidavit.
While petitioner was making payments, he was diagnosed with multiple sclerosis and was forced to stop working. As a result, in 2003 petitioner stopped making the required payments. On April 21, 2003, petitioner's attorney received a letter from Ms. Micek's attorney inquiring why petitioner had terminated the “alimony/expense payments”.
The issue before us is whether the spousal support affidavit qualifies as a written separation instrument as defined by section 71(b)(2). The spousal support affidavit is a written instrument, signed by petitioner, promising to pay Ms. Micek $1,250 every 2 weeks. As discussed above, a separation instrument does not require a specific medium or form and does not have to be signed by both husband and wife. Further, even though Ms. Micek did not sign the spousal support affidavit, petitioner testified that he reached an oral agreement with Ms. Micek with respect to support payments during their separation. This meeting of the minds not only is memorialized by the spousal support affidavit, but also is supported by the letter from Ms. Micek's attorney received by petitioner's attorney on April 21, 2003, describing the payments she had been receiving from petitioner as alimony payments. Accordingly, the spousal support affidavit qualifies as a written separation instrument as defined by section 71(b)(2), and petitioner is entitled to his claimed alimony deductions for the years at issue.
It looks like the IRS may have been whipsawed by this decision. If not I would not like to be in the shoes of Ms. Micek's attorney since his use of the word "alimony" was an important element in the decision. He should have been aware of whether his client was reporting the payments as taxable income.
Showing posts with label partnerships. Show all posts
Showing posts with label partnerships. Show all posts
Saturday, July 12, 2014
Sunday, July 6, 2014
Having Your Cake and Eating it Too
Originally published on Passive Activities and Other Oxymorons on May 30th, 2011.
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Larry E. Tucker v. Commissioner, TC Memo 2011-67
I could probably make a full length post out of this one, but I told a similar story not long ago and that one had much more dramatic numbers. Unlike the attorney who managed to lose over $20,000,000 he had earned before he bothered to pay the taxes on it, Mr. Tucker was dealing with more modest sums:
In January 2003, Mr. Tucker received payment in advance for some independent contractor web design project to be performed by him later in the year. He knew he would need this money to live on during the year, but he also knew he owed taxes and other creditors. In retrospect unwisely, he decided to try to leverage currently-unneeded funds into profits by which he could pay off his back tax debts and other creditors. So, he wire transferred some of the funds from his checking account to a newly-opened E-Trade account between January 10, 2003 and April 3, 2003. During January, he put $23,700 into the E-Trade account. Then, he began day trading. By the end of January, he showed a small profit, since the account was valued at $25,873.16 on January 31, 2003. From there, however, everything went south.
We don't learn from the case what happened to the "web design project". The case is about the IRS "abusing its discretion" in not allowing Mr. Tucker a work-out on his tax debts. The Court went with the IRS on this one:
The losses that Mr. Tucker sustained were not due to an unforeseeable event but rather were commonplace (especially for a neophyte) in such a highly volatile activity. Mr. Tucker knew he owed outstanding taxes; and he had the cash in hand that would have paid in full the taxes and accruals he owed as of early 2003 (i.e., for tax years 1999, 2000 and 2001); and yet he chose instead to devote that money to a risky investment. Mr. Tucker's foray into day trading was purely speculative, and his already slim chances of success were undermined by his inexperience. In short, Mr. Tucker's circumstances were of his own making. Therefore, we cannot criticize the Office of Appeals' conclusion that Mr. Tucker's losses associated with his day trading were a dissipation of assets that should be considered for inclusion in RCP as contemplated by IRM pt. 5.8.5.4.
John L. Parsley, et ux. v. Commissioner, TC Summary Opinion 2011-35
The decision was about penalties. There was a slightly convoluted fact pattern:
Myrna L. Parsley (petitioner) has been a real estate agent for more that 30 years. Petitioner in 1999 or 2000 took classes to learn about section 1031, involving so-called like-kind exchanges. She takes continuing education courses to maintain her real estate license and is a member of various real estate professional associations. Petitioner married her current husband, petitioner John Parsley, in 2000. He is also in the real estate business.
Petitioner's ex-husband, Joseph Benedict (Benedict), was a real estate broker. While married to petitioner Benedict purchased commercial property on Agler Road (the property) in his name only in June 1990. Petitioner learned of the purchase in 1992. After petitioner confronted Benedict with her discovery, he deeded to her an undivided interest in the property as a tenant in common. At that time petitioner was not engaged in the sale of commercial property. In January 1998 petitioner and Benedict divorced.
As part of the 1998 divorce settlement, Benedict was ordered to deed to petitioner his remaining ownership interest in the property, making her sole owner of the property. In September 2000 the State court caused Benedict to issue a quitclaim deed to petitioner for the property. Petitioners sold the property in February 2006 for $700,000. Petitioners reported a capital gain of $256,272 from the sale on their 2006 Federal income tax return. Petitioners calculated their gain using a basis of $502,205. Benedict purchased the property for $320,000. Respondent computed a capital gain on the sale of $488,071. The record does not reflect the extent to which depreciation affects the parties' calculations of basis and gain.
The taxpayers had told their preparer that their basis in the property was around $500,000. Because of the sparseness of the record the tax court gave them credit for basis of $320,000 (Nobody seems to have given them information on depreciation). Part of the reason for upholding the penalties was that the taxpayers had the professional knowledge to find out what Mrs. Parsley's ex-husband had paid for the property.
Todd A. Dagres, et ux. v. Commissioner, 136 T.C. No. 12
This one had a fairly interesting return presentation problem. Mr. Dagres was a venture capitalist. He loaned $5,000,000 to a business associate, who in addition to paying AFR would provide him leads on profitable investments. Apparently the business associate was not himself such a great investor as he was unable to pay the interest on the loan. Ultimately it was settled with Mr. Dagres taking a loss of $3,635,218 on the transaction. His position was that it was a business bad debt. The IRS said it was a non business bad debt, which would give rise to a capital loss. Alternatively they argued that if it was a business bad debt it was related to his business of being an employee of a venture capital firm, which would subject it to the 2% floor and make it non deductible.
Mr. Dagres, being a venture capitalist, had a pretty good salary $2,640,198. That is, of course, chump change compared to his capital gains of $40,579,41. The capital gain was not mainly from his own investing. It was the "profits interest" or "carry" from being a managing member of a venture capital partnership.
I would have been scratching my head about the return presentation problem. His advisers solved it by creating a Schedule C for his venture capital business and putting the bad debt deduction there. Not elegant, but it worked.
In exchange for this service, the fund manager receives both service fees and a profits interest, but neither the contingent nature of that profits interest nor its treatment as capital gain makes it any less compensation for services.
It looks to me like the Tax Court is letting the venture capitalists have their cake and eat it too. The partnership gets investor treatment which is attributed to the manager, but the manager is allowed trade or business treatment for purposes of taking a deduction.
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Larry E. Tucker v. Commissioner, TC Memo 2011-67
I could probably make a full length post out of this one, but I told a similar story not long ago and that one had much more dramatic numbers. Unlike the attorney who managed to lose over $20,000,000 he had earned before he bothered to pay the taxes on it, Mr. Tucker was dealing with more modest sums:
In January 2003, Mr. Tucker received payment in advance for some independent contractor web design project to be performed by him later in the year. He knew he would need this money to live on during the year, but he also knew he owed taxes and other creditors. In retrospect unwisely, he decided to try to leverage currently-unneeded funds into profits by which he could pay off his back tax debts and other creditors. So, he wire transferred some of the funds from his checking account to a newly-opened E-Trade account between January 10, 2003 and April 3, 2003. During January, he put $23,700 into the E-Trade account. Then, he began day trading. By the end of January, he showed a small profit, since the account was valued at $25,873.16 on January 31, 2003. From there, however, everything went south.
We don't learn from the case what happened to the "web design project". The case is about the IRS "abusing its discretion" in not allowing Mr. Tucker a work-out on his tax debts. The Court went with the IRS on this one:
The losses that Mr. Tucker sustained were not due to an unforeseeable event but rather were commonplace (especially for a neophyte) in such a highly volatile activity. Mr. Tucker knew he owed outstanding taxes; and he had the cash in hand that would have paid in full the taxes and accruals he owed as of early 2003 (i.e., for tax years 1999, 2000 and 2001); and yet he chose instead to devote that money to a risky investment. Mr. Tucker's foray into day trading was purely speculative, and his already slim chances of success were undermined by his inexperience. In short, Mr. Tucker's circumstances were of his own making. Therefore, we cannot criticize the Office of Appeals' conclusion that Mr. Tucker's losses associated with his day trading were a dissipation of assets that should be considered for inclusion in RCP as contemplated by IRM pt. 5.8.5.4.
John L. Parsley, et ux. v. Commissioner, TC Summary Opinion 2011-35
The decision was about penalties. There was a slightly convoluted fact pattern:
Myrna L. Parsley (petitioner) has been a real estate agent for more that 30 years. Petitioner in 1999 or 2000 took classes to learn about section 1031, involving so-called like-kind exchanges. She takes continuing education courses to maintain her real estate license and is a member of various real estate professional associations. Petitioner married her current husband, petitioner John Parsley, in 2000. He is also in the real estate business.
Petitioner's ex-husband, Joseph Benedict (Benedict), was a real estate broker. While married to petitioner Benedict purchased commercial property on Agler Road (the property) in his name only in June 1990. Petitioner learned of the purchase in 1992. After petitioner confronted Benedict with her discovery, he deeded to her an undivided interest in the property as a tenant in common. At that time petitioner was not engaged in the sale of commercial property. In January 1998 petitioner and Benedict divorced.
As part of the 1998 divorce settlement, Benedict was ordered to deed to petitioner his remaining ownership interest in the property, making her sole owner of the property. In September 2000 the State court caused Benedict to issue a quitclaim deed to petitioner for the property. Petitioners sold the property in February 2006 for $700,000. Petitioners reported a capital gain of $256,272 from the sale on their 2006 Federal income tax return. Petitioners calculated their gain using a basis of $502,205. Benedict purchased the property for $320,000. Respondent computed a capital gain on the sale of $488,071. The record does not reflect the extent to which depreciation affects the parties' calculations of basis and gain.
The taxpayers had told their preparer that their basis in the property was around $500,000. Because of the sparseness of the record the tax court gave them credit for basis of $320,000 (Nobody seems to have given them information on depreciation). Part of the reason for upholding the penalties was that the taxpayers had the professional knowledge to find out what Mrs. Parsley's ex-husband had paid for the property.
Todd A. Dagres, et ux. v. Commissioner, 136 T.C. No. 12
This one had a fairly interesting return presentation problem. Mr. Dagres was a venture capitalist. He loaned $5,000,000 to a business associate, who in addition to paying AFR would provide him leads on profitable investments. Apparently the business associate was not himself such a great investor as he was unable to pay the interest on the loan. Ultimately it was settled with Mr. Dagres taking a loss of $3,635,218 on the transaction. His position was that it was a business bad debt. The IRS said it was a non business bad debt, which would give rise to a capital loss. Alternatively they argued that if it was a business bad debt it was related to his business of being an employee of a venture capital firm, which would subject it to the 2% floor and make it non deductible.
Mr. Dagres, being a venture capitalist, had a pretty good salary $2,640,198. That is, of course, chump change compared to his capital gains of $40,579,41. The capital gain was not mainly from his own investing. It was the "profits interest" or "carry" from being a managing member of a venture capital partnership.
I would have been scratching my head about the return presentation problem. His advisers solved it by creating a Schedule C for his venture capital business and putting the bad debt deduction there. Not elegant, but it worked.
In exchange for this service, the fund manager receives both service fees and a profits interest, but neither the contingent nature of that profits interest nor its treatment as capital gain makes it any less compensation for services.
It looks to me like the Tax Court is letting the venture capitalists have their cake and eat it too. The partnership gets investor treatment which is attributed to the manager, but the manager is allowed trade or business treatment for purposes of taking a deduction.
Friday, June 27, 2014
Should IRS Gets Extra Time to Nuke Abusive Shelters ?
Originally published on Passive Activities and Other Oxymorons on April 27th, 2011.
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HOME CONCRETE AND SUPPLY, LLC v. U.S. 107 AFTR 2d 2011-767
BEARD v. COMM. 107 AFTR 2d 2011-552
GRAPEVINE IMPORTS, LTD v. U.S., Cite as 107 AFTR 2d 2011-1288
Back in October I wrote about Fidelity International Currency, the epic story of EMC founder Richard Egan's doomed tax shelters. One of the things that I highlighted in the case was attorney Stephanie Denby's meticulous documentation of the thought process that went into the transactions:
Denby also rated and commented with respect to the manner in which the tax loss was generated, noting a plus if the transaction was “harder for [the] IRS to find” and a minus if the transaction was “easier” for the IRS to find.
Denby also rated and commented with respect to their complexity, noting a plus if the complexity of the structure made it harder for the IRS to “unwind” or “pick-up” and a minus if the simplicity of the structure made it easier for the IRS to trace.
One of her comments concerned basis:
Secondly, some of the transactions focus on generating basis as opposed to capital loss. Basis is more discrete [sic] and less likely I believe to cross the IRS radar screen.
It reminded me of an apocryphal story about an accountant who advised his clients "Put in puchases. They never look there.", whenever he encountered a disbursement of dubious deductibility.
One of the commnents on that post was:
Jeff said...
ignoring the effectiveness of the reg, this case certainly shows the need for reg §301.6501(e)-1T(a)(1)(iii).
What's that about besides proving that Jeff is even more of a tax geek than I am ? Here's the deal. The statute of limitations is three years on tax returns. That means that if you filed timely you can relax about 2007. Of course there are exceptions. There are always exceptions, except when there aren't any, which would be an exception. The relevant one here is that if you omitted more than 25% of your gross income, the statute of limitations is 6 years. What the regualtion did for all returns that were still open in September of 2009 was "clarify" that an overstatement of basis was an ommission from gross income.
Home Concrete was a fairly typical "get some basis with a one sided entry" type of deal:
On May 13, 1999, each of the taxpayers initiated short sales 1 of United States Treasury Bonds. In the aggregate, the taxpayers received $7,472,405 in short sale proceeds. Four days later, the taxpayers transferred the short sale proceeds and margin cash to Home Concrete as capital contributions. By transferring the short sale proceeds to Home Concrete as capital contributions, the taxpayers created “outside basis” equal to the amount of the proceeds contributed. 2 The next day, May 18, 1999, Home Concrete closed the short sales by purchasing and returning essentially identical Treasury Bonds on the open market at an aggregate purchase price of $7,359,043.
They weren't at all ashamed of what they did:
Home Concrete's 1999 tax return reported the basic components of the transactions. Its § 754 election form gave, for each partnership asset, an itemized accounting of the partnership's inside basis, the amount of the basis adjustment, and the post-election basis. The sum of the post-election bases is indicated at the end of the form. On its face, Home Concrete's return also showed a “Sale of U.S. Treasury Bonds” acquired on May 18, 1999 at a cost of $7,359,043, and a sale of those Bonds on May 19, 1999 for $7,472,405. The return also reported the resulting gain of $113,362. Similarly, the taxpayers' individual returns showed that “during the year the proceeds of a short sale not closed by the taxpayer in this tax year were received.”
Eventually the IRS caught on:
Notwithstanding these disclosures, the Internal Revenue Service (“IRS”) did not investigate the taxpayers' transactions until June 2003. The IRS issued a summons to Jenkins & Gilchrist, P.C., the law firm that assisted the taxpayers with the transactions, on June 19, 2003. The parties agree that substantial compliance with the IRS summons did not occur until at least May 17, 2004.
As a result of the investigation, on September 7, 2006 the IRS issued a Final Partnership Administrative Adjustment (“FPAA”), decreasing to zero the taxpayers' reported outside bases in Home Concrete and thereby substantially increasing the taxpayers' taxable income.
Absent the six year statute, they were too late. They tried to argue that since the case hadn't been decided by September of 2009, the new regulation should apply, but the Court wasn't buying it:
In Colony, Inc. v. Commissioner of Internal Revenue, the United States Supreme Court held that an overstatement of basis in assets resulting in an understatement of reported gross income does not constitute an “omission” from gross income for purposes of extending the general three-year statute of limitations for tax assessments. 357 U.S. 28 [1 AFTR 2d 1894] (1958). Because Colony squarely applies to this case, and because we will not defer to Treasury Regulation § 301.6501(e)-1(e), which was promulgated during this litigation and, by its own terms, does not apply to the tax year at issue, we reverse and hold that the tax assessments at issue here were untimely.
The Beard decision was a similar deal. The Court gave a nice summary of the concept:
Short selling is often a way to hedge against the market, but a Son-of-BOSS transaction relies on the delayed tax recognition of a short sale for a gamble of a different kind. In Son-of-BOSS, the taxpayer contributes the proceeds of the short and the corresponding obligation to close out the short to another legal entity in which he has ownership rights (usually a partnership). The taxpayer (or, perhaps more accurately, the tax-avoider) then sells his rights in the partnership, claiming an inflated outside basis in the partnership corresponding to the amount of the transferred proceeds without an offsetting basis reduction for the transferred liability. This is advantageous for the taxpayer because the capital gains tax on such a transaction is calculated by subtracting the outside basis from the amount recognized in the sale of the ownership rights, so a higher outside basis means lower capital gains tax and more money in the pocket of the taxpayer. Therefore, the gamble in the Son-of-BOSS transactions was that the participant could legally increase his outside basis in a partnership by not reporting the offsetting transferred contingent liability of the short position on his tax return.
The timing in Beard was similar. It was a 1999 return that the IRS did not catch up with until 2006. The Court in Beard (Seventh Circuit as opposed to Fourth Circuit in Home Concrete) concluded that in a non-business transaction the six year statute applies:
Using these definitions and applying standard rules of statutory construction to give equal weight to each term and avoid rendering parts of the language superfluous, we find that a plain reading of Section 6501(e)(1)(A) would include an inflation of basis as an omission of gross income in non-trade or business situations. See Regions Hospital v. Shalala, 522 U.S. 448, 467 (1997); Hawkins v. United States, 469 F.3d 993, 1000 (Fed. Cir. 2006). It seems to us that an improper inflation of basis is definitively a “leav[ing] out” from “any income from whatever source derived” of a quantitative “amount” properly includible. There is an amount—the difference between the inflated and actual basis—which has been left unmentioned on the face of the tax return as a candidate for inclusion in gross income.
They get there without even considering the IRS regulation. Had they needed it, though, they would have used it:
Much ink has been spilled in the briefs over whether temporary Treasury Regulation Section 301.6501(e)-1T(a)(1)(iii) would be entitled to Chevron deference if Colony were found to be controlling. This temporary regulation, which was issued without notice and comment at the same time as an identical proposed regulation, purports to offer taxpayers guidance by resolving an open question and stating definitively that in the case of a disposition of property, an overstatement of basis can lead to an omission from gross income. This temporary regulation has since been replaced by a nearly identical final regulation, issued after a notice and comment period. T.D. 9511 (eff. Dec. 14, 2010), 75 Fed. Reg. 78,897. Because we find that Colony is not controlling, we need not reach this issue. However, we would have been inclined to grant the temporary regulation Chevron deference, just as we would be inclined to grant such deference to T.D. 9511.
Grapevine Imports was close to an identical fact pattern to Home Concrete even to the extent of partiotically using contracts on US Treasuries to create phony basis. In Grapevine, the Federal Circuit reviewing a Court of Claims decisions says that the new regulations make all the difference:
The new Treasury regulations cannot, of course, change the Tax Code. But they may reflect the Treasury Department's exercise of authority granted by Congress to interpret an ambiguity in that code. Where an executive department, entrusted with interpretive authority, promulgates statutory interpretations that are reasonable within the circumstances established by Congress, then the courts must defer to that interpretation. Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843–44 (1984).
When the Court of Federal Claims entered judgment for Grapevine, the Treasury Department had not yet exercised its interpretive authority over the limitations periods at issue in this case. It now has, and we, like the Court of Federal Claims, are obliged to defer to that interpretation. We therefore reverse the entry of judgment for Grapevine and remand for further proceedings.
Frankly this stuff is all a little too lawerly for me being a simple minded CPA, who loves debits to equal credits. I would like to extract a practical lesson from it. There are probably some people who did Son of Boss deals or similar offenses against the fundamentals of double entry in 2005 or maybe even 2004 who thought they were home free and now have to start sweating again, while they vigorously root for the Fouth Circuit. The lesson is this. If you are thinking about a transaction or return filing positions and find yourself getting into a discussion of whether a three year statute or a six year statute would apply, just don't do it.
P.S.
I did a follow-up on this as the Tax Court just issued another ruling on this issue.
____________________________________________________________________________
HOME CONCRETE AND SUPPLY, LLC v. U.S. 107 AFTR 2d 2011-767
BEARD v. COMM. 107 AFTR 2d 2011-552
GRAPEVINE IMPORTS, LTD v. U.S., Cite as 107 AFTR 2d 2011-1288
Back in October I wrote about Fidelity International Currency, the epic story of EMC founder Richard Egan's doomed tax shelters. One of the things that I highlighted in the case was attorney Stephanie Denby's meticulous documentation of the thought process that went into the transactions:
Denby also rated and commented with respect to the manner in which the tax loss was generated, noting a plus if the transaction was “harder for [the] IRS to find” and a minus if the transaction was “easier” for the IRS to find.
Denby also rated and commented with respect to their complexity, noting a plus if the complexity of the structure made it harder for the IRS to “unwind” or “pick-up” and a minus if the simplicity of the structure made it easier for the IRS to trace.
One of her comments concerned basis:
Secondly, some of the transactions focus on generating basis as opposed to capital loss. Basis is more discrete [sic] and less likely I believe to cross the IRS radar screen.
It reminded me of an apocryphal story about an accountant who advised his clients "Put in puchases. They never look there.", whenever he encountered a disbursement of dubious deductibility.
One of the commnents on that post was:
Jeff said...
ignoring the effectiveness of the reg, this case certainly shows the need for reg §301.6501(e)-1T(a)(1)(iii).
What's that about besides proving that Jeff is even more of a tax geek than I am ? Here's the deal. The statute of limitations is three years on tax returns. That means that if you filed timely you can relax about 2007. Of course there are exceptions. There are always exceptions, except when there aren't any, which would be an exception. The relevant one here is that if you omitted more than 25% of your gross income, the statute of limitations is 6 years. What the regualtion did for all returns that were still open in September of 2009 was "clarify" that an overstatement of basis was an ommission from gross income.
Home Concrete was a fairly typical "get some basis with a one sided entry" type of deal:
On May 13, 1999, each of the taxpayers initiated short sales 1 of United States Treasury Bonds. In the aggregate, the taxpayers received $7,472,405 in short sale proceeds. Four days later, the taxpayers transferred the short sale proceeds and margin cash to Home Concrete as capital contributions. By transferring the short sale proceeds to Home Concrete as capital contributions, the taxpayers created “outside basis” equal to the amount of the proceeds contributed. 2 The next day, May 18, 1999, Home Concrete closed the short sales by purchasing and returning essentially identical Treasury Bonds on the open market at an aggregate purchase price of $7,359,043.
They weren't at all ashamed of what they did:
Home Concrete's 1999 tax return reported the basic components of the transactions. Its § 754 election form gave, for each partnership asset, an itemized accounting of the partnership's inside basis, the amount of the basis adjustment, and the post-election basis. The sum of the post-election bases is indicated at the end of the form. On its face, Home Concrete's return also showed a “Sale of U.S. Treasury Bonds” acquired on May 18, 1999 at a cost of $7,359,043, and a sale of those Bonds on May 19, 1999 for $7,472,405. The return also reported the resulting gain of $113,362. Similarly, the taxpayers' individual returns showed that “during the year the proceeds of a short sale not closed by the taxpayer in this tax year were received.”
Eventually the IRS caught on:
Notwithstanding these disclosures, the Internal Revenue Service (“IRS”) did not investigate the taxpayers' transactions until June 2003. The IRS issued a summons to Jenkins & Gilchrist, P.C., the law firm that assisted the taxpayers with the transactions, on June 19, 2003. The parties agree that substantial compliance with the IRS summons did not occur until at least May 17, 2004.
As a result of the investigation, on September 7, 2006 the IRS issued a Final Partnership Administrative Adjustment (“FPAA”), decreasing to zero the taxpayers' reported outside bases in Home Concrete and thereby substantially increasing the taxpayers' taxable income.
Absent the six year statute, they were too late. They tried to argue that since the case hadn't been decided by September of 2009, the new regulation should apply, but the Court wasn't buying it:
In Colony, Inc. v. Commissioner of Internal Revenue, the United States Supreme Court held that an overstatement of basis in assets resulting in an understatement of reported gross income does not constitute an “omission” from gross income for purposes of extending the general three-year statute of limitations for tax assessments. 357 U.S. 28 [1 AFTR 2d 1894] (1958). Because Colony squarely applies to this case, and because we will not defer to Treasury Regulation § 301.6501(e)-1(e), which was promulgated during this litigation and, by its own terms, does not apply to the tax year at issue, we reverse and hold that the tax assessments at issue here were untimely.
The Beard decision was a similar deal. The Court gave a nice summary of the concept:
Short selling is often a way to hedge against the market, but a Son-of-BOSS transaction relies on the delayed tax recognition of a short sale for a gamble of a different kind. In Son-of-BOSS, the taxpayer contributes the proceeds of the short and the corresponding obligation to close out the short to another legal entity in which he has ownership rights (usually a partnership). The taxpayer (or, perhaps more accurately, the tax-avoider) then sells his rights in the partnership, claiming an inflated outside basis in the partnership corresponding to the amount of the transferred proceeds without an offsetting basis reduction for the transferred liability. This is advantageous for the taxpayer because the capital gains tax on such a transaction is calculated by subtracting the outside basis from the amount recognized in the sale of the ownership rights, so a higher outside basis means lower capital gains tax and more money in the pocket of the taxpayer. Therefore, the gamble in the Son-of-BOSS transactions was that the participant could legally increase his outside basis in a partnership by not reporting the offsetting transferred contingent liability of the short position on his tax return.
The timing in Beard was similar. It was a 1999 return that the IRS did not catch up with until 2006. The Court in Beard (Seventh Circuit as opposed to Fourth Circuit in Home Concrete) concluded that in a non-business transaction the six year statute applies:
Using these definitions and applying standard rules of statutory construction to give equal weight to each term and avoid rendering parts of the language superfluous, we find that a plain reading of Section 6501(e)(1)(A) would include an inflation of basis as an omission of gross income in non-trade or business situations. See Regions Hospital v. Shalala, 522 U.S. 448, 467 (1997); Hawkins v. United States, 469 F.3d 993, 1000 (Fed. Cir. 2006). It seems to us that an improper inflation of basis is definitively a “leav[ing] out” from “any income from whatever source derived” of a quantitative “amount” properly includible. There is an amount—the difference between the inflated and actual basis—which has been left unmentioned on the face of the tax return as a candidate for inclusion in gross income.
They get there without even considering the IRS regulation. Had they needed it, though, they would have used it:
Much ink has been spilled in the briefs over whether temporary Treasury Regulation Section 301.6501(e)-1T(a)(1)(iii) would be entitled to Chevron deference if Colony were found to be controlling. This temporary regulation, which was issued without notice and comment at the same time as an identical proposed regulation, purports to offer taxpayers guidance by resolving an open question and stating definitively that in the case of a disposition of property, an overstatement of basis can lead to an omission from gross income. This temporary regulation has since been replaced by a nearly identical final regulation, issued after a notice and comment period. T.D. 9511 (eff. Dec. 14, 2010), 75 Fed. Reg. 78,897. Because we find that Colony is not controlling, we need not reach this issue. However, we would have been inclined to grant the temporary regulation Chevron deference, just as we would be inclined to grant such deference to T.D. 9511.
Grapevine Imports was close to an identical fact pattern to Home Concrete even to the extent of partiotically using contracts on US Treasuries to create phony basis. In Grapevine, the Federal Circuit reviewing a Court of Claims decisions says that the new regulations make all the difference:
The new Treasury regulations cannot, of course, change the Tax Code. But they may reflect the Treasury Department's exercise of authority granted by Congress to interpret an ambiguity in that code. Where an executive department, entrusted with interpretive authority, promulgates statutory interpretations that are reasonable within the circumstances established by Congress, then the courts must defer to that interpretation. Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843–44 (1984).
When the Court of Federal Claims entered judgment for Grapevine, the Treasury Department had not yet exercised its interpretive authority over the limitations periods at issue in this case. It now has, and we, like the Court of Federal Claims, are obliged to defer to that interpretation. We therefore reverse the entry of judgment for Grapevine and remand for further proceedings.
Frankly this stuff is all a little too lawerly for me being a simple minded CPA, who loves debits to equal credits. I would like to extract a practical lesson from it. There are probably some people who did Son of Boss deals or similar offenses against the fundamentals of double entry in 2005 or maybe even 2004 who thought they were home free and now have to start sweating again, while they vigorously root for the Fouth Circuit. The lesson is this. If you are thinking about a transaction or return filing positions and find yourself getting into a discussion of whether a three year statute or a six year statute would apply, just don't do it.
P.S.
I did a follow-up on this as the Tax Court just issued another ruling on this issue.
Thursday, June 26, 2014
Does Virginia Historic Decision Impact Boardwalk Holding ?
Originally published on Passive Activities and Other Oxymorons on April 20th, 2011.
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VIRGINIA HISTORIC TAX CREDIT FUND 2001 LP v. COMM., Cite as 107 AFTR 2d 2011-1523
When I consider all the really interesting tax things I write about besides same sex couple issues - breast pumps, soldiers of fortune, strip joints and even World of Warcraft - it is amazing that my second ranked post is a pretty geeky one. Historic Boardwalk Hall addressed the question of whether it was valid to allocate an historic rehabilitation credit to a partner who was investing for a very limited economic return. The Court found that the point of the historic credit was to encourage developments to be done in a way that would be less than economically optimal, but had other social utility. The fact that the development would not otherwise be feasible is the whole point of the credit. The post even got some comments, including a negative one, which I thought was really cool.
At least one commentator has speculated that the more recent decision in Virginia Historic Tax Credit Fund (VHTCF) has emboldened the IRS to appeal the Historic Boardwalk (HB) decision. Apparently they filed the appeal in Boardwalk just after this decision. I'm not a lawyer so the mysteries of litigation strategy are beyond me. With that said, it seems to me that the IRS should not so much be emboldened by winning this case, rather they would have been utterly bereft if they had lost it. The entities are partnerships and they have historic in their name. There is an issue as to whether people were in substance partners. That's about what they have in common. Otherwise they are very different.
VHTCF does not concern the allocation of the federal historic credit. It is about the federal tax effects of dealings in a state historic credit. Many states make their historic credits and film credits freely transferable. It is a fairly convoluted story but this was true of Virginia credits up to a certain point. Subsequent credits though could only be used by owner of the building. The regulations, however, allowed partners in a partnership to allocate the credit any way they saw fit. That is not the way federal credits work.
VHTCF invested in partnerships that generated historic credits and also purchased some of the earlier transferable credits. Investors in VHTCF would receive $1.00 of Virginia credit for every $0.74 - $0.80 that they put in (VHTCF had bought the credits for around $0.55). In a subsequent year they would be redeemed for a nominal amount.
The promoters of VHTCF threw in a clever wrinkle. When they paid for the credits they recorded the amount paid as an expense. The money they received from the investors was considered a capital contribution. So the partnership had a loss. Frankly I get a headache when I try to think through the 704(b) issues that this transaction raises. My guess is that the "losses" were sheltering the promoter's income. If they were being allocated to the investors, I don't think anything very exciting would be happening, except maybe helping the investors stay out of alternative minimum tax. There are several rulings, including PLR 200348002, that hold that when you use a purchased tax credit certificate to offset your state tax, you are entitled to deduct your cost of the certificate under Code Section 164. I don't know what would have been happening from a federal income tax perspective to the VHTCF investors. If you paid $0.80 on the dollar to buy a certificate to apply to your state income tax and from a federal point of view you had a capital loss, that could work out to be a crappy deal unless you were in amt (which it seems almost everybody is nowadays) and had capital gains (which people used to have back in the good old days).
At any rate, the court ruled that what was happening in substance was a sale of the credits and there weren't any losses to allocate to anybody. Although it doesn't rise to the same level, this case has a little in common with some of the Son of Boss shenanigans that I have written about. When you try to put it into debits and credits, it's a little challenging. Bottom line, I don't think it was reasonable to expense the payments that were made for the credits, particularly if the loss was not being allocated to the partners who funded the deduction.
I really don't think there is any connection to the HB scenario. If the IRS were to prevail on HB, it will send shivers not just through the historic rehabilitation business, but also low income housing. In that industry, it is practically a given that the credit is not usable by the players actually doing the development. VHTCF appears to have been an effort to double dip on federal deductions.
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VIRGINIA HISTORIC TAX CREDIT FUND 2001 LP v. COMM., Cite as 107 AFTR 2d 2011-1523
When I consider all the really interesting tax things I write about besides same sex couple issues - breast pumps, soldiers of fortune, strip joints and even World of Warcraft - it is amazing that my second ranked post is a pretty geeky one. Historic Boardwalk Hall addressed the question of whether it was valid to allocate an historic rehabilitation credit to a partner who was investing for a very limited economic return. The Court found that the point of the historic credit was to encourage developments to be done in a way that would be less than economically optimal, but had other social utility. The fact that the development would not otherwise be feasible is the whole point of the credit. The post even got some comments, including a negative one, which I thought was really cool.
At least one commentator has speculated that the more recent decision in Virginia Historic Tax Credit Fund (VHTCF) has emboldened the IRS to appeal the Historic Boardwalk (HB) decision. Apparently they filed the appeal in Boardwalk just after this decision. I'm not a lawyer so the mysteries of litigation strategy are beyond me. With that said, it seems to me that the IRS should not so much be emboldened by winning this case, rather they would have been utterly bereft if they had lost it. The entities are partnerships and they have historic in their name. There is an issue as to whether people were in substance partners. That's about what they have in common. Otherwise they are very different.
VHTCF does not concern the allocation of the federal historic credit. It is about the federal tax effects of dealings in a state historic credit. Many states make their historic credits and film credits freely transferable. It is a fairly convoluted story but this was true of Virginia credits up to a certain point. Subsequent credits though could only be used by owner of the building. The regulations, however, allowed partners in a partnership to allocate the credit any way they saw fit. That is not the way federal credits work.
VHTCF invested in partnerships that generated historic credits and also purchased some of the earlier transferable credits. Investors in VHTCF would receive $1.00 of Virginia credit for every $0.74 - $0.80 that they put in (VHTCF had bought the credits for around $0.55). In a subsequent year they would be redeemed for a nominal amount.
The promoters of VHTCF threw in a clever wrinkle. When they paid for the credits they recorded the amount paid as an expense. The money they received from the investors was considered a capital contribution. So the partnership had a loss. Frankly I get a headache when I try to think through the 704(b) issues that this transaction raises. My guess is that the "losses" were sheltering the promoter's income. If they were being allocated to the investors, I don't think anything very exciting would be happening, except maybe helping the investors stay out of alternative minimum tax. There are several rulings, including PLR 200348002, that hold that when you use a purchased tax credit certificate to offset your state tax, you are entitled to deduct your cost of the certificate under Code Section 164. I don't know what would have been happening from a federal income tax perspective to the VHTCF investors. If you paid $0.80 on the dollar to buy a certificate to apply to your state income tax and from a federal point of view you had a capital loss, that could work out to be a crappy deal unless you were in amt (which it seems almost everybody is nowadays) and had capital gains (which people used to have back in the good old days).
At any rate, the court ruled that what was happening in substance was a sale of the credits and there weren't any losses to allocate to anybody. Although it doesn't rise to the same level, this case has a little in common with some of the Son of Boss shenanigans that I have written about. When you try to put it into debits and credits, it's a little challenging. Bottom line, I don't think it was reasonable to expense the payments that were made for the credits, particularly if the loss was not being allocated to the partners who funded the deduction.
I really don't think there is any connection to the HB scenario. If the IRS were to prevail on HB, it will send shivers not just through the historic rehabilitation business, but also low income housing. In that industry, it is practically a given that the credit is not usable by the players actually doing the development. VHTCF appears to have been an effort to double dip on federal deductions.
Monday, June 23, 2014
IRS Gets Mystical and Some Other Minor Developments
Originally published on Passive Activities and Other Oxymorons on April 1st, 2011.
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Since you folks seem to resist clicking on ads, I've been hanging on to my day job. I'm going to try to get a little ahead this last weekend in March. Right now the preparers are more swamped than the reviewers so I'll be taking Sunday off. This post will be the first April one. As usual I have quite a few interesting items that won't quite make it into full length posts that I want to share before they go stale.
I'd spent the first week in January pining for material from the Chief Counsel. When it finally came out I started a post called "Happy New Year Chief Counsel", but as the year developed I couldn't really make much out of them. It seems that the primary role of the Chief Counsel's office is to be confused about TEFRA. I can't say I blame them. Here's what you missed if you have been relying on me to screen the CCA's for you:
CCA 201101023
This one might be of practical use at some point if you are a partner and you can't convince the general partner to fix something. You would probably include Form 8082 with the amended return.
The failure of a non-TEFRA partnership to file an amended return does not procedurally bar partners from amending their own return to reflect changes to partnership income.
CCA 201101020
This one borders on the mystical:
The determination that a partnership is not a partnership is a partnership item if the partnership filed a Form 1065. See I.R.C. 6233(b) and Petaluma v. Commissioner (recent D.C. Circuit Opinion)
I think it means: "If it says its a partnership we must agree that it is a partnership in order to be able to say that it is not a partnership".
I think somebody was just back from a Zen retreat and was trying to work up a koan.
CCA 201101012
Which brings us to the paradox of the partnership - the non tax paying taxpayer:
As long as the partnership had an obligation to disclose a listed or reportable transaction under section 6011 and the regulations, it is liable for the 6707A for failing to so disclose. You are correct that because a partnership is not a taxpaying entity there is no decrease in tax on which to compute the penalty. Instead, the penalty will be the maximum penalty permitted by the new law. ——————
So much for the Chief Counsel's meditations on partnerships. Next comes
Asmark Institute, Incorporated v. Commissioner, TC Memo 2011-20
It was an appeal of a denial of exempt status. Asmark was providing compliance services to agribusiness. Appeals of exempt status denial sometimes have the makings of comic masterpieces like Free Fertility Foundation and this one had to do with fertilizer, so I thought there might be something there but overall it is pretty mundane. Basically, there activities were too commercial:
First, the IRS argues that Asmark competed with commercial firms. Second, the IRS argues that providing services to agribusiness is not an inherently charitable activity. Third, the IRS argues that Asmark Institute offered the same services, charged the same prices, and employed the same workers as its for-profit predecessor, Asmark, Inc. Fourth, the IRS argues that the Asmark Institute's commercial nature is evinced by the fact that its clients were for-profit businesses. Fifth, the IRS observes that Asmark Institute's relationships with trade associations were designed to increase its client base. Sixth, the IRS argues that Asmark did not educate the public because its educational and compliance materials were available only for a fee.
The tax court agreed with the IRS.
Gary L. Greenberg, et ux. v. Commissioner, TC Memo 2011-18
This was a pigs get fed, hogs get slaughtered type of case. Taxpayer had applied for disability benefits on an insurance policy that they purchased. They were turned down and appealed. They won and in addition to the disability benefits they dinged the Paul Revere Insurance for $2,400,000 in punitive damages. Nice result. Pay your taxes and go home happy. Mr. Greenberg decided that he wanted to exclude the punitive damages just like he was allowed to exclude the disability payments. Not surprisingly he lost. The bad part is the penalty:
Petitioners do not separately address the penalty issue. Given the plain language of the statute and the applicable caselaw, the arguments they provide in support of their position on the deficiency itself do not amount to substantial authority or reasonable cause. Petitioners did not provide any evidence that they relied on professional advice, and they did not disclose their position on their return. See sec. 6662(d)(2)(B). Petitioners have therefore not met their burden of proof and are liable for the penalty.
So in addition to the tax deficiency of $1,161,134, there is a penalty of $232,227 and possibly six years of non-deductible interest.
U.S. v. DOVE, Cite as 107 AFTR 2d 2011-634
This was IRS looking for a permanent injunction to prevent someone from preparing returns. It looks like they had a point:
Dove later described some of his tax preparation practices during a preliminary injunction hearing. Dove testified that he routinely deducted 10% of a client's income as a charitable contribution without determining whether his customer had documentation to support such a deduction. Dove also stated that he prepared a return for a customer in which he improperly reported various deductions for a piece of investment property that the customer never used as rental property.
The court agreed that Dove should take up another trade. There was one comment that was a little troubling:
Dove also testified that he would report whatever information his customers told him without requesting any documents to support their oral representations.
There seems to be an implication that preparers are supposed to be auditors. We in fact provide that level of service to many of our clients so that when they do get audited we can walk in with a book that documents every number on the return, but that is a step beyond preparation. Also as a practical matter, we will have all the W-2's, 1099's and K-1's since it is more efficient for us to interpret them. The comment is perhaps less disturbing in context.
Well that will do to start April off anyway.
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Since you folks seem to resist clicking on ads, I've been hanging on to my day job. I'm going to try to get a little ahead this last weekend in March. Right now the preparers are more swamped than the reviewers so I'll be taking Sunday off. This post will be the first April one. As usual I have quite a few interesting items that won't quite make it into full length posts that I want to share before they go stale.
I'd spent the first week in January pining for material from the Chief Counsel. When it finally came out I started a post called "Happy New Year Chief Counsel", but as the year developed I couldn't really make much out of them. It seems that the primary role of the Chief Counsel's office is to be confused about TEFRA. I can't say I blame them. Here's what you missed if you have been relying on me to screen the CCA's for you:
CCA 201101023
This one might be of practical use at some point if you are a partner and you can't convince the general partner to fix something. You would probably include Form 8082 with the amended return.
The failure of a non-TEFRA partnership to file an amended return does not procedurally bar partners from amending their own return to reflect changes to partnership income.
CCA 201101020
This one borders on the mystical:
The determination that a partnership is not a partnership is a partnership item if the partnership filed a Form 1065. See I.R.C. 6233(b) and Petaluma v. Commissioner (recent D.C. Circuit Opinion)
I think it means: "If it says its a partnership we must agree that it is a partnership in order to be able to say that it is not a partnership".
I think somebody was just back from a Zen retreat and was trying to work up a koan.
CCA 201101012
Which brings us to the paradox of the partnership - the non tax paying taxpayer:
As long as the partnership had an obligation to disclose a listed or reportable transaction under section 6011 and the regulations, it is liable for the 6707A for failing to so disclose. You are correct that because a partnership is not a taxpaying entity there is no decrease in tax on which to compute the penalty. Instead, the penalty will be the maximum penalty permitted by the new law. ——————
So much for the Chief Counsel's meditations on partnerships. Next comes
Asmark Institute, Incorporated v. Commissioner, TC Memo 2011-20
It was an appeal of a denial of exempt status. Asmark was providing compliance services to agribusiness. Appeals of exempt status denial sometimes have the makings of comic masterpieces like Free Fertility Foundation and this one had to do with fertilizer, so I thought there might be something there but overall it is pretty mundane. Basically, there activities were too commercial:
First, the IRS argues that Asmark competed with commercial firms. Second, the IRS argues that providing services to agribusiness is not an inherently charitable activity. Third, the IRS argues that Asmark Institute offered the same services, charged the same prices, and employed the same workers as its for-profit predecessor, Asmark, Inc. Fourth, the IRS argues that the Asmark Institute's commercial nature is evinced by the fact that its clients were for-profit businesses. Fifth, the IRS observes that Asmark Institute's relationships with trade associations were designed to increase its client base. Sixth, the IRS argues that Asmark did not educate the public because its educational and compliance materials were available only for a fee.
The tax court agreed with the IRS.
Gary L. Greenberg, et ux. v. Commissioner, TC Memo 2011-18
This was a pigs get fed, hogs get slaughtered type of case. Taxpayer had applied for disability benefits on an insurance policy that they purchased. They were turned down and appealed. They won and in addition to the disability benefits they dinged the Paul Revere Insurance for $2,400,000 in punitive damages. Nice result. Pay your taxes and go home happy. Mr. Greenberg decided that he wanted to exclude the punitive damages just like he was allowed to exclude the disability payments. Not surprisingly he lost. The bad part is the penalty:
Petitioners do not separately address the penalty issue. Given the plain language of the statute and the applicable caselaw, the arguments they provide in support of their position on the deficiency itself do not amount to substantial authority or reasonable cause. Petitioners did not provide any evidence that they relied on professional advice, and they did not disclose their position on their return. See sec. 6662(d)(2)(B). Petitioners have therefore not met their burden of proof and are liable for the penalty.
So in addition to the tax deficiency of $1,161,134, there is a penalty of $232,227 and possibly six years of non-deductible interest.
U.S. v. DOVE, Cite as 107 AFTR 2d 2011-634
This was IRS looking for a permanent injunction to prevent someone from preparing returns. It looks like they had a point:
Dove later described some of his tax preparation practices during a preliminary injunction hearing. Dove testified that he routinely deducted 10% of a client's income as a charitable contribution without determining whether his customer had documentation to support such a deduction. Dove also stated that he prepared a return for a customer in which he improperly reported various deductions for a piece of investment property that the customer never used as rental property.
The court agreed that Dove should take up another trade. There was one comment that was a little troubling:
Dove also testified that he would report whatever information his customers told him without requesting any documents to support their oral representations.
There seems to be an implication that preparers are supposed to be auditors. We in fact provide that level of service to many of our clients so that when they do get audited we can walk in with a book that documents every number on the return, but that is a step beyond preparation. Also as a practical matter, we will have all the W-2's, 1099's and K-1's since it is more efficient for us to interpret them. The comment is perhaps less disturbing in context.
Well that will do to start April off anyway.
Sunday, June 22, 2014
Another SE Scheme That Didn't Work
Originally published on Passive Activities and Other Oxymorons on March 28th, 2011.
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Renkemeyer, Campbell and Weaver, LLP, et al. v. Commissioner, 136 T.C. No. 7
I often tell my daughter stories about my grandmothers, Nanna Reilly and Nanna Lyons. When ever I start the story she has to clarify whether I'm talking about the one who liked TV wrestling or the one who smoked. In case she is reading this, this is about the one who smoked, Nanna Lyons, whose house I grew up in. Nanna Lyons had a great admiration for her deceased husband, for whom I am named, the New York Yankees and, possibly above all, Franklin Delano Roosevelt. I could hear her talking to herself from time to time about the greatness of FDR. It always started with "Social Security". You see Peter Lyons died in 1940, having paid by my rough estimate about $20 in social security taxes which his widow had more than recovered by the time my father took charge of the air raid wardens of Fairview NJ in 1942. She collected until her death in 1966 and I am certain that I had Franklin Delano Roosevelt to thank for all those nickels I earned going to the corner store to purchase packs of Kents.
Many of my contemporaries do not think that Social Security is quite the good deal that Nanna Lyons perceived and come up with a variety of schemes to avoid paying social security taxes (including self employment tax). Renkemeyer, Campbell and Weaver LLP (RCW) came up with an interesting one.
For the law firm's tax year ended April 30, 2004, three of the law firm's partners were attorneys performing legal services. The fourth partner was an S corporation owned by a tax-exempt ESOP whose beneficiaries were the law firm's three attorney partners. For tax year ended April 30, 2005, the law firm's only partners were the three attorneys.
Approximately 99 percent of the law firm's net business income for its tax year ended April 30, 2004, was derived from legal services rendered by the three attorney partners.
For tax year ended April 30, 2004, the law firm allocated 87.557 percent of its net business income to the S corporation.
There was a little bit of the shoemakers children phenomenon at work as the team of tax attorneys could not find their own partnership agreement.
Petitioner asserts that the special allocation of the net business income of the law firm for its 2004 tax year was proper because the allocation was made pursuant to the provisions of the partnership agreement. But as noted supra p. 4, the partnership agreement effective for the 2004 tax year is not in the record.
In 2005, they took a different approach. The corporation was eliminated as a partner and they divided their interest into general partnership interests and limited partnerships. Apparently the plan was that the income attributable to the limited partnership interest would not be subject to SE tax. That didn't work either.
The thing that was bothering me the most about this case is that there appear to have been no penalties asserted. In a similar SE avoidance scheme, which I have a recent post about, Dr. Tony Robucci, a psychiatrist, was assessed penalties even though he was relying on an attorney CPA advisor. The Tax Court seemed to think he should have sought a second opinion. At least one of these fellows was himself a tax attorney, so you would think they would be held to a higher standard.
Perhaps it is because of another adjustment:
Further, respondent reduced the law firm's gross business revenues by $905,000 (and consequently reduced the law firm's net business income) after determining that a legal fee in a like amount had not been received during the 2004 tax year.
Sometimes we lose track of the basics. Cash basis taxpayers who only report the income that they actually receive don't have to pay as much as those who report more than that. You would think that the Tax Matters Partner Troy Renkenmeyer would be sensitive to that given his background with Arthur Andersen, where they got into all those difficulties about revenue recognition.
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Renkemeyer, Campbell and Weaver, LLP, et al. v. Commissioner, 136 T.C. No. 7
I often tell my daughter stories about my grandmothers, Nanna Reilly and Nanna Lyons. When ever I start the story she has to clarify whether I'm talking about the one who liked TV wrestling or the one who smoked. In case she is reading this, this is about the one who smoked, Nanna Lyons, whose house I grew up in. Nanna Lyons had a great admiration for her deceased husband, for whom I am named, the New York Yankees and, possibly above all, Franklin Delano Roosevelt. I could hear her talking to herself from time to time about the greatness of FDR. It always started with "Social Security". You see Peter Lyons died in 1940, having paid by my rough estimate about $20 in social security taxes which his widow had more than recovered by the time my father took charge of the air raid wardens of Fairview NJ in 1942. She collected until her death in 1966 and I am certain that I had Franklin Delano Roosevelt to thank for all those nickels I earned going to the corner store to purchase packs of Kents.
Many of my contemporaries do not think that Social Security is quite the good deal that Nanna Lyons perceived and come up with a variety of schemes to avoid paying social security taxes (including self employment tax). Renkemeyer, Campbell and Weaver LLP (RCW) came up with an interesting one.
For the law firm's tax year ended April 30, 2004, three of the law firm's partners were attorneys performing legal services. The fourth partner was an S corporation owned by a tax-exempt ESOP whose beneficiaries were the law firm's three attorney partners. For tax year ended April 30, 2005, the law firm's only partners were the three attorneys.
Approximately 99 percent of the law firm's net business income for its tax year ended April 30, 2004, was derived from legal services rendered by the three attorney partners.
For tax year ended April 30, 2004, the law firm allocated 87.557 percent of its net business income to the S corporation.
There was a little bit of the shoemakers children phenomenon at work as the team of tax attorneys could not find their own partnership agreement.
Petitioner asserts that the special allocation of the net business income of the law firm for its 2004 tax year was proper because the allocation was made pursuant to the provisions of the partnership agreement. But as noted supra p. 4, the partnership agreement effective for the 2004 tax year is not in the record.
In 2005, they took a different approach. The corporation was eliminated as a partner and they divided their interest into general partnership interests and limited partnerships. Apparently the plan was that the income attributable to the limited partnership interest would not be subject to SE tax. That didn't work either.
The thing that was bothering me the most about this case is that there appear to have been no penalties asserted. In a similar SE avoidance scheme, which I have a recent post about, Dr. Tony Robucci, a psychiatrist, was assessed penalties even though he was relying on an attorney CPA advisor. The Tax Court seemed to think he should have sought a second opinion. At least one of these fellows was himself a tax attorney, so you would think they would be held to a higher standard.
Perhaps it is because of another adjustment:
Further, respondent reduced the law firm's gross business revenues by $905,000 (and consequently reduced the law firm's net business income) after determining that a legal fee in a like amount had not been received during the 2004 tax year.
Sometimes we lose track of the basics. Cash basis taxpayers who only report the income that they actually receive don't have to pay as much as those who report more than that. You would think that the Tax Matters Partner Troy Renkenmeyer would be sensitive to that given his background with Arthur Andersen, where they got into all those difficulties about revenue recognition.
Wednesday, June 11, 2014
Take A Walk on the Boardwalk - Collect a Big Historic Credit
Originally published on Passive Activities and Other Oxymorons on January 21, 2011.
____________________________________________________________________________
Historic Boardwalk Hall, LLC, et al. v. Commissioner, 136 T.C. No. 1
One of the problems with tax incentives is that the people who are interested in doing the things that are being incentivized often don't have sufficient tax liability to absorb the incentive. Some states have simplified this process with some of their credits. If, for example, you shoot a film in Massachusetts and jump through all the proper hoops, you get what you might call a tax coupon that you can transfer to anybody who can use it. There are people who facilitate these type of transactions like my friend Bob Dorfman of Dorfman Capital. So if you have a large Massachusetts or Rhode Island liability that you would like to settle for less than 100 cents on the dollar, you should check him out. Likewise if you are making a film, or renovating an historic structure or cleaning up some brownfields and would like to market your credit. Life is not as simple when it comes to federal credits.
If a building generates a credit you need to be the owner of the building in order to benefit from the credit. Some credits, like that for developing low income housing, would be pointless, if there wasn't a legitimate way to work around this. The most common solution is to use a partnership. Partnerships are sometimes used for abusive transactions, but as noted below getting the low income housing credit to investors is a proper use of partnerships
Reg §1.701-2. Anti-abuse rule(a)Intent of subchapter K. Subchapter K is intended to permit taxpayers to conduct joint business (including investment) activities through a flexible economic arrangement without incurring an entity- level tax. .....
Example (6). Special allocations; nonrecourse financing; low-income housing credit; use of partnership consistent with the intent of subchapter K.
(i) A and B, high-bracket taxpayers, and X, a corporation with net operating loss carryforwards, form general partnership PRS to own and operate a building that qualifies for the low-income housing credit provided by section 42.
The New Jersey Sports and Exposition Authority (NJSEA) built a convention center in Atlantic City. It also operated property known as East Hall (now known as Boardwalk Hall). Once the convention center was built East Hall would no longer be usable without substantial renovations. East Hall was a certified historic structure so its renovation would generate a substantial historic credit. NJSEA could not use the credit itself. Unlike a Massachusetts film credit, you can't just sell a federal historic credit.
So they formed Historic Boardwalk Hall LLC (HBH) and admitted Pitney Bowes (PB) as a partner. PB was entitled to a 3% priority distribution and was allocated the entire credit. Like many such deals it is fairly convoluted. PB has limited upside from the economics of the deal. There are also guarantees that the credits it gets will be sustained. The Service didn't like the deal alleging that :
(1) Historic Boardwalk Hall was created for the express purpose of improperly passing along tax benefits to Pitney Bowes and is a sham;
(2) Pitney Bowes' stated partnership interest in Historic Boardwalk Hall was not bona fide because Pitney Bowes had no meaningful stake in the success or failure of Historic Boardwalk Hall;
(3) the East Hall was not “sold” to Historic Boardwalk Hall because the benefits and burdens of ownership did not pass to Historic Boardwalk Hall. Accordingly, any items of income or loss or separately stated items attributable to ownership of the East Hall were disallowed;
(4) respondent pursuant to his authority in the antiabuse provisions of section 1.701-2(b), Income Tax Regs., had determined that Historic Boardwalk Hall should be disregarded for Federal income tax purposes; and
(5) all or part of the underpayments of tax attributable to the adjustments in the FPAA were attributable to either negligence, a substantial understatement of income tax, or both
The essence of the case is that PB would not have committed large amounts of capital for a stinking 3% return (Remember this was back in the days when you could actually earn interest on your money). The IRS is putting this deal in the same category with the shenanigans in Fidelity International Currency where paired options magically create basis and friendly Irishmen recognize huge currency gains so the wild geese could shelter their stock option income. The tax court does not see it that way though.
PB taking a low economic return on a real estate deal that provides historic credits is the whole point of the historic credits. Historic credits like low income credits are meant to encourage investments that might not otherwise be economically feasible. Although I can't hammer a nail straight I have seen enough of the numbers produced from various real estate ventures to know that the most cost efficient way to rehabilitate a building is to start with dynamite and some big dumpsters. Once you have a nice flat surface, the rest of the rehabilitation will go really smooth.
There is a question as to whether it is a good idea to use tax incentives to promote desired behaviors. While I've been working on this post, Professor Annette Nellen wrote a piece on the Mass Film Credit. BTW if you like serious discussion of how taxes should be her blog is a good choice. Although my general rule about taxes is: "It is what it is. Deal with it.", I'll weigh in just a bit here. The problem with unrestrained capitalism is that it does not account well for externalities. In other words your life might be enhanced if when you go to a great metropolis many of its historic facades are preserved and the number of people living in cardboard boxes is minimized. Then throw in the fact that people, particularly those with entrepreneurial personalities, love to chisel on their taxes. (The fallacy that critics of the credit fall into is the belief that absent the credit there would be that much more revenue rather than creative transactions with no incidental social utility). The credits just might direct that impulse into socially beneficial directions.
At any rate the Tax Court supported PB. Work was done on the building that entitled somebody to the historic credit. PB getting a lower economic return, is the point of having the credit. The point of the credit is to encourage people to preserve the historic facades when the sensible thing to do is to blow the buildings up and start over. As the Court puts it :
The legislative history of section 47 indicates that one of its purposes is to encourage taxpayers to participate in what would otherwise be an unprofitable activity. Congress enacted the rehabilitation tax credit in order to spur private investment in unprofitable historic rehabilitations. As respondent notes, the East Hall has operated at a deficit. Without the rehabilitation tax credit, Pitney Bowes would not have invested in its rehabilitation, because it could not otherwise earn a sufficient net economic benefit on its investment. The purpose of the credit is directed at just this problem: because the East Hall operates at a deficit, its operations alone would not provide an adequate economic benefit that would attract a private investor.
The Service's position in this case was a little disturbing. It is one thing to squash deals that border on economic fictions, but here we had people reaping tax benefits for doing what Congress wanted them to do. I hope its not that they are picking on New Jersey, because I'm from New Jersey.
____________________________________________________________________________
Historic Boardwalk Hall, LLC, et al. v. Commissioner, 136 T.C. No. 1
One of the problems with tax incentives is that the people who are interested in doing the things that are being incentivized often don't have sufficient tax liability to absorb the incentive. Some states have simplified this process with some of their credits. If, for example, you shoot a film in Massachusetts and jump through all the proper hoops, you get what you might call a tax coupon that you can transfer to anybody who can use it. There are people who facilitate these type of transactions like my friend Bob Dorfman of Dorfman Capital. So if you have a large Massachusetts or Rhode Island liability that you would like to settle for less than 100 cents on the dollar, you should check him out. Likewise if you are making a film, or renovating an historic structure or cleaning up some brownfields and would like to market your credit. Life is not as simple when it comes to federal credits.
If a building generates a credit you need to be the owner of the building in order to benefit from the credit. Some credits, like that for developing low income housing, would be pointless, if there wasn't a legitimate way to work around this. The most common solution is to use a partnership. Partnerships are sometimes used for abusive transactions, but as noted below getting the low income housing credit to investors is a proper use of partnerships
Reg §1.701-2. Anti-abuse rule(a)Intent of subchapter K. Subchapter K is intended to permit taxpayers to conduct joint business (including investment) activities through a flexible economic arrangement without incurring an entity- level tax. .....
Example (6). Special allocations; nonrecourse financing; low-income housing credit; use of partnership consistent with the intent of subchapter K.
(i) A and B, high-bracket taxpayers, and X, a corporation with net operating loss carryforwards, form general partnership PRS to own and operate a building that qualifies for the low-income housing credit provided by section 42.
The New Jersey Sports and Exposition Authority (NJSEA) built a convention center in Atlantic City. It also operated property known as East Hall (now known as Boardwalk Hall). Once the convention center was built East Hall would no longer be usable without substantial renovations. East Hall was a certified historic structure so its renovation would generate a substantial historic credit. NJSEA could not use the credit itself. Unlike a Massachusetts film credit, you can't just sell a federal historic credit.
So they formed Historic Boardwalk Hall LLC (HBH) and admitted Pitney Bowes (PB) as a partner. PB was entitled to a 3% priority distribution and was allocated the entire credit. Like many such deals it is fairly convoluted. PB has limited upside from the economics of the deal. There are also guarantees that the credits it gets will be sustained. The Service didn't like the deal alleging that :
(1) Historic Boardwalk Hall was created for the express purpose of improperly passing along tax benefits to Pitney Bowes and is a sham;
(2) Pitney Bowes' stated partnership interest in Historic Boardwalk Hall was not bona fide because Pitney Bowes had no meaningful stake in the success or failure of Historic Boardwalk Hall;
(3) the East Hall was not “sold” to Historic Boardwalk Hall because the benefits and burdens of ownership did not pass to Historic Boardwalk Hall. Accordingly, any items of income or loss or separately stated items attributable to ownership of the East Hall were disallowed;
(4) respondent pursuant to his authority in the antiabuse provisions of section 1.701-2(b), Income Tax Regs., had determined that Historic Boardwalk Hall should be disregarded for Federal income tax purposes; and
(5) all or part of the underpayments of tax attributable to the adjustments in the FPAA were attributable to either negligence, a substantial understatement of income tax, or both
The essence of the case is that PB would not have committed large amounts of capital for a stinking 3% return (Remember this was back in the days when you could actually earn interest on your money). The IRS is putting this deal in the same category with the shenanigans in Fidelity International Currency where paired options magically create basis and friendly Irishmen recognize huge currency gains so the wild geese could shelter their stock option income. The tax court does not see it that way though.
PB taking a low economic return on a real estate deal that provides historic credits is the whole point of the historic credits. Historic credits like low income credits are meant to encourage investments that might not otherwise be economically feasible. Although I can't hammer a nail straight I have seen enough of the numbers produced from various real estate ventures to know that the most cost efficient way to rehabilitate a building is to start with dynamite and some big dumpsters. Once you have a nice flat surface, the rest of the rehabilitation will go really smooth.
There is a question as to whether it is a good idea to use tax incentives to promote desired behaviors. While I've been working on this post, Professor Annette Nellen wrote a piece on the Mass Film Credit. BTW if you like serious discussion of how taxes should be her blog is a good choice. Although my general rule about taxes is: "It is what it is. Deal with it.", I'll weigh in just a bit here. The problem with unrestrained capitalism is that it does not account well for externalities. In other words your life might be enhanced if when you go to a great metropolis many of its historic facades are preserved and the number of people living in cardboard boxes is minimized. Then throw in the fact that people, particularly those with entrepreneurial personalities, love to chisel on their taxes. (The fallacy that critics of the credit fall into is the belief that absent the credit there would be that much more revenue rather than creative transactions with no incidental social utility). The credits just might direct that impulse into socially beneficial directions.
At any rate the Tax Court supported PB. Work was done on the building that entitled somebody to the historic credit. PB getting a lower economic return, is the point of having the credit. The point of the credit is to encourage people to preserve the historic facades when the sensible thing to do is to blow the buildings up and start over. As the Court puts it :
The legislative history of section 47 indicates that one of its purposes is to encourage taxpayers to participate in what would otherwise be an unprofitable activity. Congress enacted the rehabilitation tax credit in order to spur private investment in unprofitable historic rehabilitations. As respondent notes, the East Hall has operated at a deficit. Without the rehabilitation tax credit, Pitney Bowes would not have invested in its rehabilitation, because it could not otherwise earn a sufficient net economic benefit on its investment. The purpose of the credit is directed at just this problem: because the East Hall operates at a deficit, its operations alone would not provide an adequate economic benefit that would attract a private investor.
The Service's position in this case was a little disturbing. It is one thing to squash deals that border on economic fictions, but here we had people reaping tax benefits for doing what Congress wanted them to do. I hope its not that they are picking on New Jersey, because I'm from New Jersey.
Wednesday, May 21, 2014
Survey Says - No Discount For Family Limited Partnership
Originally published on Passive Activities and Other Oxyomorons on December 13, 2010
_________________________________________________________________
LEVY v. U.S., Cite as 106 AFTR 2d 2010-7205, 12/01/2010
Sometime in the last millennium there was a TV situation comedy called Angie. It was about the early days of a marriage between a fellow from a very wealthy Philadelphia family and a waitress from a family of more modest circumstances. In one of the episodes the two families compete on the game show Family Feud. Family Feud is a wonderfully egalitarian contest. Unlike Jeopardy, which requires you to come up with the one correct answer (Expressed in the form of a question) the questions in Family Feud are matters of opinion. If you get one of the top five or ten answers (something like that) that were determined by a survey you get some points. The more common the answer you come up with the more points it is worth.
I forget how the Angie episode worked out in its entirety, but at least early on the husband's wealthy family (including the butler of course) was getting creamed. People in the survey did not have champagne and caviar for snacks or start the day by checking stock prices. At one point the host goes up and explains to them that the survey answers come from average people not the ultra wealthy. They don't get it. The lawyers for the Estate of Meyer Levy might have learned something from watching that episode, but they were probably studying hard in law school or taking polo lessons, the better to meet wealthy clients, while I was squandering my time learning life's lessons by watching television.
The case was a family limited partnership case. Family limited partnerships can be a good idea for a multitude of reasons. They are particularly attractive to people, who not, yet, having come up with a way to take it with them, want to control it all till they draw their final breath without having it all included in their taxable estate. There's also the asset protection and as they say on Seinfeld yada yada yada. The thing that people get excited about, though, is the discounts. That's what the IRS gets excited about too. Take a bunch of stuff and put it into a family limited partnership. Say its a million dollars worth of stuff. Now give 10% of the partnership to your kid. How much is the gift worth ? $100,000 ? Do you think I would pay $100,000 for it ? Of course not.. As a limited partner I don't get to vote. On top of that your kid doesn't even have the right to sell it to me. You have to hire a valuation expert to value the limited partnership interest (I sometimes think the estate tax is, in reality, a white collar jobs program). She'll tell you its worth something like $65,000, more or less, depending on well yada yada yada. The IRS doesn't like this and is constantly attacking it.
Until recently they focused on poor execution which I discussed at length in one of my early blog posts. Assets aren't really transferred to the partnerships. Personal bills are paid directly by the partnership. Distributions are not made in proportion to partnership ownership. Tax returns are not filed or not done correctly. In a more recent case, Fisher, discounts were not allowed for a single asset partnership, because it lacked business characteristics. There was no discussion of flawed execution.
No discount was allowed to the Estate of Meyer Levy for the sale of its Plano real estate that was in a partnership. The estate appealed the verdict alleging error on the part of the trial court.
The Estate argues that the trial court erred when it allowed the admission of
(1) evidence of the ongoing negotiations over the sale of the property, specifically the offers and proposals;
(2) evidence of the listing price of the property, and the ultimate sale price of the property;
(3) valuation testimony by the Government's expert based on flawed methodology; and
(4) opinion testimony by a lay witness and hearsay testimony.
Wow. In a valuation case they considered what people were offering for the property and what it actually sold for. That's pretty outrageous. You see the problem was it wasn't a judge that had to think about these things. It was a jury. Who ends up on a jury ? I'm not sure exactly. I suspect that they have more in common with the people Family Feud surveys for its answers than the people I run into at tax conferences.
The Estate contends that the jury arbitrarily disregarded unequivocal, uncontradicted, and unimpeached testimony of an expert witness, bearing on technical questions of causation beyond the competence of lay people. The Government counters that the jury had the partnership agreement in evidence from which it could have determined that there was no lack of control or marketability.
The record contains ample evidence to support the jury's verdict valuing the property at $25 million. The Estate listed the property, and eventually sold the property, for $25 million. It was immediately resold for $26.5 million. Sophisticated developers with no stake in the current litigation engaged in ongoing negotiations for the property for prices in the $20–25 million range. The Estate's expert testified that the market in Plano remained relatively flat during the period between Levy's death and the sale of the property. Also Jordan testified regarding the value of the property. Any of these provides sufficient support for the jury's verdict on the property.
The jury verdict regarding the discount also finds support in the record. The partnership agreement itself would be sufficient evidence. The jury could have rationally found that no discounts for lack of control or marketability were merited because the Estate controlled the general partner interest, which had nearly unfettered control over the Partnership's assets. The trial court did not abuse its discretion when it denied the Estate's motion for new trial.
I'm not a lawyer and I don't even play one on TV. I prepare and review tax returns and do tax planning. I also represent people who are being audited by the IRS, but there I'm generally dealing with accountants. If my clients end up in Tax Court and win I'll still think that I lost. I am fairly certain though, that it was the choice of the estate's lawyers to bring this matter to a jury. To have that privilege, they had to pay at least part of the tax in order to be able to sue for refund in district court. They could have instead gone to Tax Court where they would have had people who dealt with "technical questions beyond the competence of lay people" all the time and frequently allow discounts. Somehow though they thought they would do better with a jury.
Apparently though the government lawyers saw to it that the jury found out that the Estate got $25,000,000 and these simple minded people thought that might be indicative of whatever the estate had was worth. I suppose there was some sort of trial strategy that would keep this information undisclosed. In which case the jury would have had to weigh the government's yada, yada, yada against the Estate's yada, yada, yada. There might have been some logic to that. If I was playing Family Feud and the question was "Name a class of people that are very popular" I would venture neither multi-millionaires or IRS agents. If the question was "Name a class of people that are despised" I think I might score higher with "IRS agents". I mean no disrespect to IRS agents, their unpopularity is inherent in their jobs.
In a refund suit in district court either the government or the taxpayer can ask for a jury. I haven't been able to figure out which it was. I did find that the executor had been a potential candidate for mayor of Austin Texas and the late Mr. Levy had established a fairly well known charitable foundation. So there may have been a feeling that there was a home town advantage. There was also a sense in which the Estate was playing with the house's money if it was the one that gambled on a jury, as is noted in a footnote:
Although we have declined to set aside the jury's verdict of zero discount, we note that the actual discount applied in taxing the Estate was thirty percent. Given the valuation found by the jury, it would have had to find a discount of larger than thirty percent for the verdict to make a difference to the judgment in this case.
I don't know whether this case will have a chilling effect on family limited partnerships or not. My cumulative sense is that you should only do them if you think they are a good idea anyway. Oddly enough, that will make it more likely that you will succeed on the discount issue. I think the key planning point to take away from the case is the Court's comment that it would have been reasonable to find a zero discount because of the Estate's general partnership interest.
_________________________________________________________________
LEVY v. U.S., Cite as 106 AFTR 2d 2010-7205, 12/01/2010
Sometime in the last millennium there was a TV situation comedy called Angie. It was about the early days of a marriage between a fellow from a very wealthy Philadelphia family and a waitress from a family of more modest circumstances. In one of the episodes the two families compete on the game show Family Feud. Family Feud is a wonderfully egalitarian contest. Unlike Jeopardy, which requires you to come up with the one correct answer (Expressed in the form of a question) the questions in Family Feud are matters of opinion. If you get one of the top five or ten answers (something like that) that were determined by a survey you get some points. The more common the answer you come up with the more points it is worth.
I forget how the Angie episode worked out in its entirety, but at least early on the husband's wealthy family (including the butler of course) was getting creamed. People in the survey did not have champagne and caviar for snacks or start the day by checking stock prices. At one point the host goes up and explains to them that the survey answers come from average people not the ultra wealthy. They don't get it. The lawyers for the Estate of Meyer Levy might have learned something from watching that episode, but they were probably studying hard in law school or taking polo lessons, the better to meet wealthy clients, while I was squandering my time learning life's lessons by watching television.
The case was a family limited partnership case. Family limited partnerships can be a good idea for a multitude of reasons. They are particularly attractive to people, who not, yet, having come up with a way to take it with them, want to control it all till they draw their final breath without having it all included in their taxable estate. There's also the asset protection and as they say on Seinfeld yada yada yada. The thing that people get excited about, though, is the discounts. That's what the IRS gets excited about too. Take a bunch of stuff and put it into a family limited partnership. Say its a million dollars worth of stuff. Now give 10% of the partnership to your kid. How much is the gift worth ? $100,000 ? Do you think I would pay $100,000 for it ? Of course not.. As a limited partner I don't get to vote. On top of that your kid doesn't even have the right to sell it to me. You have to hire a valuation expert to value the limited partnership interest (I sometimes think the estate tax is, in reality, a white collar jobs program). She'll tell you its worth something like $65,000, more or less, depending on well yada yada yada. The IRS doesn't like this and is constantly attacking it.
Until recently they focused on poor execution which I discussed at length in one of my early blog posts. Assets aren't really transferred to the partnerships. Personal bills are paid directly by the partnership. Distributions are not made in proportion to partnership ownership. Tax returns are not filed or not done correctly. In a more recent case, Fisher, discounts were not allowed for a single asset partnership, because it lacked business characteristics. There was no discussion of flawed execution.
No discount was allowed to the Estate of Meyer Levy for the sale of its Plano real estate that was in a partnership. The estate appealed the verdict alleging error on the part of the trial court.
The Estate argues that the trial court erred when it allowed the admission of
(1) evidence of the ongoing negotiations over the sale of the property, specifically the offers and proposals;
(2) evidence of the listing price of the property, and the ultimate sale price of the property;
(3) valuation testimony by the Government's expert based on flawed methodology; and
(4) opinion testimony by a lay witness and hearsay testimony.
Wow. In a valuation case they considered what people were offering for the property and what it actually sold for. That's pretty outrageous. You see the problem was it wasn't a judge that had to think about these things. It was a jury. Who ends up on a jury ? I'm not sure exactly. I suspect that they have more in common with the people Family Feud surveys for its answers than the people I run into at tax conferences.
The Estate contends that the jury arbitrarily disregarded unequivocal, uncontradicted, and unimpeached testimony of an expert witness, bearing on technical questions of causation beyond the competence of lay people. The Government counters that the jury had the partnership agreement in evidence from which it could have determined that there was no lack of control or marketability.
The record contains ample evidence to support the jury's verdict valuing the property at $25 million. The Estate listed the property, and eventually sold the property, for $25 million. It was immediately resold for $26.5 million. Sophisticated developers with no stake in the current litigation engaged in ongoing negotiations for the property for prices in the $20–25 million range. The Estate's expert testified that the market in Plano remained relatively flat during the period between Levy's death and the sale of the property. Also Jordan testified regarding the value of the property. Any of these provides sufficient support for the jury's verdict on the property.
The jury verdict regarding the discount also finds support in the record. The partnership agreement itself would be sufficient evidence. The jury could have rationally found that no discounts for lack of control or marketability were merited because the Estate controlled the general partner interest, which had nearly unfettered control over the Partnership's assets. The trial court did not abuse its discretion when it denied the Estate's motion for new trial.
I'm not a lawyer and I don't even play one on TV. I prepare and review tax returns and do tax planning. I also represent people who are being audited by the IRS, but there I'm generally dealing with accountants. If my clients end up in Tax Court and win I'll still think that I lost. I am fairly certain though, that it was the choice of the estate's lawyers to bring this matter to a jury. To have that privilege, they had to pay at least part of the tax in order to be able to sue for refund in district court. They could have instead gone to Tax Court where they would have had people who dealt with "technical questions beyond the competence of lay people" all the time and frequently allow discounts. Somehow though they thought they would do better with a jury.
Apparently though the government lawyers saw to it that the jury found out that the Estate got $25,000,000 and these simple minded people thought that might be indicative of whatever the estate had was worth. I suppose there was some sort of trial strategy that would keep this information undisclosed. In which case the jury would have had to weigh the government's yada, yada, yada against the Estate's yada, yada, yada. There might have been some logic to that. If I was playing Family Feud and the question was "Name a class of people that are very popular" I would venture neither multi-millionaires or IRS agents. If the question was "Name a class of people that are despised" I think I might score higher with "IRS agents". I mean no disrespect to IRS agents, their unpopularity is inherent in their jobs.
In a refund suit in district court either the government or the taxpayer can ask for a jury. I haven't been able to figure out which it was. I did find that the executor had been a potential candidate for mayor of Austin Texas and the late Mr. Levy had established a fairly well known charitable foundation. So there may have been a feeling that there was a home town advantage. There was also a sense in which the Estate was playing with the house's money if it was the one that gambled on a jury, as is noted in a footnote:
Although we have declined to set aside the jury's verdict of zero discount, we note that the actual discount applied in taxing the Estate was thirty percent. Given the valuation found by the jury, it would have had to find a discount of larger than thirty percent for the verdict to make a difference to the judgment in this case.
I don't know whether this case will have a chilling effect on family limited partnerships or not. My cumulative sense is that you should only do them if you think they are a good idea anyway. Oddly enough, that will make it more likely that you will succeed on the discount issue. I think the key planning point to take away from the case is the Court's comment that it would have been reasonable to find a zero discount because of the Estate's general partnership interest.
Thursday, May 15, 2014
Phelan Decision Showed How To Get Capital Gains Treatment While Engaging In Development Acitvity
I wrote this quite a few years ago, but a recent case Boree v Com TC Memo 2014-85 has brought the issue of dealer versus investor to the fore. There will be piece on Boree on my forbes blog passive activities soon and this provides a supplement. If you want capital gains treatment for a land sale, Boree is more or less a what not to do case. Phelan, on the other hand shows how to make it happen.
I remember a time long ago when among young people, myself being one of them, when there would be discussion on “how far” one could go and still technically remain a virgin. Imagining the various gradations could be quite stimulating. Contemplating Phelan v. Commissioner, TC Memo 204-206 might bring similar feelings to those, myself among them, who struggle with the question of when an investor in real estate is no longer an investor. Why is the question important?
The most obvious reason and the one that was the concern in the Phelan case is the favorable rate for capital gains. The investor gets the favorable rate and loses it if he crosses over into being a developer or dealer. Even more significant the investor can avoid gain recognition by structuring the sale of one property and the purchase of another as a like-kind exchange under Code section 1031. If there are losses, it might be more favorable to be a developer or dealer, who will get ordinary loss treatment. Even in this area, the investor can come out better in some circumstances. Deductions may be allowed that would otherwise be suspended under the passive activity loss rules. In general, however, dealer developer status will be more favorable in loss situations. Nobody goes in expecting to lose, though, so planning will be to gain favorable treatment for sale.
If you buy land and don’t do anything but pay taxes and liability insurance, when a prospective buyer happens to notice the land (without any help from you), the resulting sale will be a capital gain. If, on the other hand, your sole source of livelihood is buying land, improving it and subdividing in order to sell as quickly as possible, the resulting sales will be ordinary income. There is a lot of room between the two extremes. The IRS and the taxpayer often differ as to whether the imaginary line has been crossed. Such was the Phelan case.
The Phelan brothers were involved in both real estate development and construction. Along with their partner they formed a single purpose entity (Jackson Creek Land Corporation-JCLC) to own the particular tract of land in question (which they designated Jackson Creek). JCLC was considered a partnership for income tax purposes. The court found the formation and operation of this single purpose entity very significant. It also noted that the Phelan’s real estate business conducted thorough other entities concerned commercial real estate rather than residential real estate projects, such as Jackson Creek.
The transactions involved in the Jackson Creek project were rather complex. The property was part of a larger tract that had been acquired by a developer (the Regency Group) in the 1980’s. In 1987 the developer entered into an agreement with Triview. Triview was a political subdivision of the state of Colorado, with the authority to levy taxes, issue bonds and assess fees. Regency, Triview and the adjacent town of Monument entered into an agreement obligating each of them to make infrastructure improvements and in the case of Regency pay fees. Monument annexed the land of the project to become part of the town, but the various agreements stayed in force. Shortly, thereafter Regency filed for bankruptcy.
Phelan acquired the property from J&L Higby trust which had acquired it form Regency. Shortly after acquiring the property in 1994, Phelan deeded the land to JCLC. The transfers were all subject to the various infrastructure agreements.
JCLC performed a Preliminary Geological Investigation on the land and finalized a development plan with Monument that allowed for the commencement of construction.
JCLC first capital gain transaction was in 1998 when it agreed to sell 102 acres (a bit les than 10% of the acreage) to Elite properties in three separate closings. JCLC agreed to cause Triview to make certain improvements and to make others itself. All the work ended up being done by Triview, including the portion that JCLC was supposed to do itself.
The next capital gain transaction was with Vision Development Corporation, an entity owned by the same people who owned JCLC in the same proportion. Vision was formed to do development work on 46.5 acres in order to prepare it for sale to a home builder. The plot now thickens. Triview it develops is in default on its bonds. Through a series of transactions involving other entities controlled by the Phelans, the bonds were refinanced and additional bonds were purchased. Presumably this is what allowed Triview to complete the infrastructure improvements it was obligated to perform...There was, however, no direct link between the two events.
Finally Vision and JCLC entered into a revolving loan agreement which would allow Vision to make improvements on a 184 acre parcel for sale to homebuilders.
The attached time line might help to clarify the transaction history.
Looking at it through the jaundiced eye of a revenue agent, it would appear that three people got together, bought some land cut it into pieces and directly or indirectly made substantial improvements. The court, however, ruled that the sales by JCLC produced capital gains.
The factors that the court considered in arriving at its opinion
- JCLC was formed with the investors knowing that the various pieces to allow its ultimate development were basically in place and expected the property to appreciate.
- The offer from Elite was unsolicited
- None of the owners of JCLC held broker’s licenses
- JCLC did not advertise or hire representatives.
- Although JCLC promised Elite that Triview would do certain things, this only gave Elite recourse against JCLC.
- JCLC had no employees. Although it was obligated to make improvements if Triview did not.
- The risks and rewards associated with the purchase of bonds by related parties were not directly tied to the Jackson Creek project.
- With respect to the sale to Vision, even though JCLC owners were not personally liable, they protected their interest in the balance of the land by carving off the portion going to Vision. This was a valid non-tax motivation for the transaction.
- The four year holding period and limited number of sales.
The court did not consider the geological survey, gaining approval for the final development plan and the limited subdivision sufficient to create a trade or business.
In considering the implications of this decision, there are two things to keep in mind. One is that the tax court emphasized that it was using principles from the tenth circuit. The other is that the involvement of the various entities with a quasi-governmental is an unusual circumstance. Nonetheless, it appears that you can go pretty far and still remain an investor.
Note
It can be pretty challenging to follow the decision. You might find this timeline helpful or not.
Note
It can be pretty challenging to follow the decision. You might find this timeline helpful or not.
Phelan Time-Line
July 27,1993- Centre Development Corporation formed to purchase a shopping center. Owned by Phelan, his brother and third party name Oldach,40/40/20.
1994 – Real estate agent inform Phelan of 1050 acres in Regency Park soon to be listed
1994 – Phelan, his brother and one other person Oldach) form Jackson Creek Land Company (a Colorado Limited Liability Corporation). Phelan and his brother each own 40%, Oldach owns 20%. Sole JCLC was to acquire Regency Park. None of the three owners held real estate licenses.
October 31, 1994 – Phelan buys 1050 acres for 2.9 Million Sale was subject to several infrastructure agreements with governmental agencies. (Triview Metropolitan District
December 7, 1994 – Phelan quitclaims property to JCLC for 2.9 million. Property is renamed Jackson Creek.
1996 (???)- Elite express no interest in developing 46.5 acres for sale to Keller Homes.
1996- Phelan brothers and Oldach form Vision Development Corp. Same 40/40/20 split
1996 – Preliminary Geological Survey
1996- Triview in default on bond 4.8 Million principal and 3.0 million interest.(bonds issued in 1987)
1996- Center Development (owned by JCLC owners) purchase defaulted bonds from Mass Development and Kemper. Uses margin loan and 1.5 Million borrowed from utility companies
1997 – Elite properties approaches JCLC to acquire part of the property
August 18, 1997 – P&S between JCLC and Elite properties
September 22, 1997 -, Centre and JCLC borrowed the 1.5 Millon from Colorado National Bank (CNB) to refinance loan from utilities. Guaranteed personally, by brothers and Colorado Structures (see below 1998) and mortgage of JCLC property, JCLC named as a borrower but receives none of the proceeds.
1998 – Utility companies purchase 1.5 million of new Triview bonds
1998- Colorado Structures purchases new Triview bonds from utilities
August 18, 1997 – P&S with Elite
January 5, 1998 – JCLC sells 46.5 acres to VDC for 1.6 million Partnership return reflects LTCG of 50k. Purpose of VDC was to develop 46.5 acres for sale to Keller Homes.
1998- Colorado Structures, which is owned 49% by Phelan brothers 51% by ESOP does 117Million of construction business. None of it is residential
March 19, 1998 – Revised P&S. Elite to purchase 102 acres in three separate closings. JCLC required to cause Triview to make some infrastructure improvements and JCLC to do others at its own expense. (Ultimately they were all done by Triview)
June 15th 1998 – First closing $792,880 – reported on partnership return as LTCG
1999- Colorado Structures purchases new Triview bonds
1999 – Second closing with Elite
2000- Third closing with Elite
Sunday, December 4, 2011
Another Round of Miscellany
This was originally published on PAOO on November 29th, 2010.
Original source documents appear in RIA and beg to be shared with my vast readership, Repeatedly they are pulled up and labored on. Time passes and more interesting matters easily transform themselves into full length posts as the promising material slowly begins to wither. Finally it comes to the time to fish or get off the pot. (Pardon my love of deliberately mangling common expressions.) Here are some brief summaries of the posts that go to oblivion unless one of my readers demand that they get the full treatment :
FOUNDATION FOR HUMAN UNDERSTANDING v. U.S., Cite as 106 AFTR 2d 2010-5862, 08/16/2010
This was shaping into a maudlin reminiscence of my father who used to go though this sequence with his hands that started with "This is the church" and ended with "Look inside and see all the people" as he turned his hands over and wiggled his fingers. The point being that the Foundation For Human Understanding failed to qualify as a church, because it didn't have a regular group getting together to worship as a body. It gets into the 14 factors that make a church a church for income tax purposes. It's a little troubling that Jesus and the Apostles would probably have had a hard time passing the test.
UNITED ENERGY CORPORATION v. COMM., Cite as 106 AFTR 2d 2010-6056, 08/27/2010
I was going to title this "The Trouble with S Corps". Probably the biggest deficiency to the S corp form compared to that of partnerships (which includes most LLC's) is that the liabilities of the S corp are not allocated to the shareholders even if they have guaranteed them.
S corps.—income and losses—basis— loans—guarantees—economic outlay—S corp. indebtedness to shareholders. Tax Court decision that shareholders in S corp. and other entities weren't entitled for passthrough loss deduction purposes to increase their bases in S corp. by amount of any of its debt, other than by amount of shareholder ledger debts, was affirmed, based on Court's reasoning that other debt, comprising bank loans or loans with related entities, wasn't “indebtedness of S corp. to shareholders” within meaning of Code Sec. 1366(d)(1)(B) because shareholders made no actual economic outlay in respect to same.
Consolidated returns—interco. transactions and obligations—deemed satisfaction—transfers to controlled corps.—basis—gain—discharge of indebtedness—S corp. indebtedness. Tax Court supplemental decision that new corp. realized taxable gain as result of deemed satisfaction of affiliated S corp.'s shareholder ledger debts, when those debts were contributed to corp. in Code Sec. 351 transaction, was affirmed, based on Court's reasoning regarding operative reg regime/former Reg. §1.1502-13(g)(4) and finding that corp. acquired ledger debts with built-in gain.
MAES v. U.S., Cite as 106 AFTR 2d 2010-6752, 10/13/2010
In this case taxpayer tried to argue that amounts she had reported as alimony were actually disguised child support or alternatively a property settlement. The first argument was based on the fact that amount ran until the year that children turned 20. The agreement did not explicitly reference the children and other evidence argued for alimony. The second argument was based on the fact that agreement did not explicitly state that payments terminated in the event of her death. The requirement was, however, fulfilled because of state law provision which terminates support obligations on death. This case reinforces the point that it is important to have good tax advice in the structuring of alimony.
These two are tax nerd tests. If they seem at all interesting, you are a tax nerd. I sometimes get the impression that in the Chief Counsel's office they spend half their time being confused about TEFRA.
CCA 201034021
A partnership cannot have an affected item in itself. Each partnership year is a separate cause of action whose partnership items are not computationally affected by adjustments to other partnership years. Thus, an amortization for one year will not keep the statute open for other partnership years as “affected items“.
CCA 201033037
That's up to Exam. But its probably unnecessary since we would have to conduct a TEFRA partnership proceeding for any year in which they took excessive deductions to determine the amount, character and allocation of partnership debt, and whether it was guaranteed by each respective partner in that year. These determinations would then be binding for purposes of generating any affected item notices of deficiency limiting loss to basis or at risk for that particular year.
Well that leaves me with enough material to finish out the year. I should be confident that more good stuff will be coming, but you never know.
Original source documents appear in RIA and beg to be shared with my vast readership, Repeatedly they are pulled up and labored on. Time passes and more interesting matters easily transform themselves into full length posts as the promising material slowly begins to wither. Finally it comes to the time to fish or get off the pot. (Pardon my love of deliberately mangling common expressions.) Here are some brief summaries of the posts that go to oblivion unless one of my readers demand that they get the full treatment :
FOUNDATION FOR HUMAN UNDERSTANDING v. U.S., Cite as 106 AFTR 2d 2010-5862, 08/16/2010
This was shaping into a maudlin reminiscence of my father who used to go though this sequence with his hands that started with "This is the church" and ended with "Look inside and see all the people" as he turned his hands over and wiggled his fingers. The point being that the Foundation For Human Understanding failed to qualify as a church, because it didn't have a regular group getting together to worship as a body. It gets into the 14 factors that make a church a church for income tax purposes. It's a little troubling that Jesus and the Apostles would probably have had a hard time passing the test.
UNITED ENERGY CORPORATION v. COMM., Cite as 106 AFTR 2d 2010-6056, 08/27/2010
I was going to title this "The Trouble with S Corps". Probably the biggest deficiency to the S corp form compared to that of partnerships (which includes most LLC's) is that the liabilities of the S corp are not allocated to the shareholders even if they have guaranteed them.
S corps.—income and losses—basis— loans—guarantees—economic outlay—S corp. indebtedness to shareholders. Tax Court decision that shareholders in S corp. and other entities weren't entitled for passthrough loss deduction purposes to increase their bases in S corp. by amount of any of its debt, other than by amount of shareholder ledger debts, was affirmed, based on Court's reasoning that other debt, comprising bank loans or loans with related entities, wasn't “indebtedness of S corp. to shareholders” within meaning of Code Sec. 1366(d)(1)(B) because shareholders made no actual economic outlay in respect to same.
Consolidated returns—interco. transactions and obligations—deemed satisfaction—transfers to controlled corps.—basis—gain—discharge of indebtedness—S corp. indebtedness. Tax Court supplemental decision that new corp. realized taxable gain as result of deemed satisfaction of affiliated S corp.'s shareholder ledger debts, when those debts were contributed to corp. in Code Sec. 351 transaction, was affirmed, based on Court's reasoning regarding operative reg regime/former Reg. §1.1502-13(g)(4) and finding that corp. acquired ledger debts with built-in gain.
MAES v. U.S., Cite as 106 AFTR 2d 2010-6752, 10/13/2010
In this case taxpayer tried to argue that amounts she had reported as alimony were actually disguised child support or alternatively a property settlement. The first argument was based on the fact that amount ran until the year that children turned 20. The agreement did not explicitly reference the children and other evidence argued for alimony. The second argument was based on the fact that agreement did not explicitly state that payments terminated in the event of her death. The requirement was, however, fulfilled because of state law provision which terminates support obligations on death. This case reinforces the point that it is important to have good tax advice in the structuring of alimony.
These two are tax nerd tests. If they seem at all interesting, you are a tax nerd. I sometimes get the impression that in the Chief Counsel's office they spend half their time being confused about TEFRA.
CCA 201034021
A partnership cannot have an affected item in itself. Each partnership year is a separate cause of action whose partnership items are not computationally affected by adjustments to other partnership years. Thus, an amortization for one year will not keep the statute open for other partnership years as “affected items“.
CCA 201033037
That's up to Exam. But its probably unnecessary since we would have to conduct a TEFRA partnership proceeding for any year in which they took excessive deductions to determine the amount, character and allocation of partnership debt, and whether it was guaranteed by each respective partner in that year. These determinations would then be binding for purposes of generating any affected item notices of deficiency limiting loss to basis or at risk for that particular year.
Well that leaves me with enough material to finish out the year. I should be confident that more good stuff will be coming, but you never know.
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