Originally published on Passive Activities and Other Oxymorons on April 25h, 2011.
What did you get, kid ?
I didn't get nothing.
I had to pay $50 and pick up the garbage
Estate Of Axel O. Adler v. Commissioner, TC Memo 2011-28
I thought I'd be able to make more out of this, but there is really a very simple point. If you want valuation discounts, don't rely on fractional interest in real estate. Form a family limited partnership.
Private Letter Ruling 201104066
I find that the hardest things to go through are private letter rulings. They come in fairly tedious batches of late S elections and IRA rollover mishaps. It's rare that there is anything really interesting except denials of exempt status. Nothing yet has risen to the level of comic masterpiece equivalent to the tax court decision in Free Fertility, but some of them are pretty good. This one was about horses. I think the IRS has something against horses:
The general purpose of this corporation shall be to identify, conserve, safeguard, and propagate the genetic integrity of the horse originally found in the possession of the Tr. in Country, and those bred in other countries by breeders whose foundation stock was drawn entirely from those tribes of the T
Your Articles further provide, "the purpose shall be accomplished through research of historical and genetic (scientific) data to add to the X or disqualify horses from the 'X', according to the standards as set down in said 'X'. The purpose shall be additionally accomplished through education of the international horse community, the general public, and youth (by publication), regarding historic, genetic and athletic value of these endangered genetic lines, and collection and sharing of historic artifacts, letters and documents."
I don't know. Sounds pretty good to me. IRS didn't like it:
You have not demonstrated that you do not inure to the benefit of private individuals. You, M, maintain a website, g, that contains links to private sellers of Q horses. Those breeders earn a profit, and private benefit, by being able to sell horses and/or stud services to interested persons. As a result, under section 1.501(c)(3)-d(1)(ii) of the regulations, you do not meet the requirements of section 501(c)(3) of the Code.
The Service did suggest that they might qualify under 501(c)(5):
You are similar to the organization described in Rev. Rul. 55-230. You are organized to guard the purity of the breed of Q horses; to promote interest therein; and to help fund research on the genetics of this breed of horses. You state that you are unlike this organization because you are not a horse registry. We disagree because you do maintain a partial horse registry, as you maintain listings of horses and their genetic parents in your newsletters. You are also similar to the organization described in Rev. Rul. 55-230 because you promote and fund research on the genetics of this particular breed of horse.
Michael P. Schwab, et ux. v. Commissioner, 136 T.C. No. 6
This is probably worth a full length post, but I'm not going to get to it. In case you've been holding your breath, it's what ties in to the quotation from Alice's Restaurant. The Schwabs had participated in something called an 'Advantage 419' plan, which then invested in variable life insurance policies. When I was interviewed by The Wandering Tax Pro one of his questions was what is the best tax advice I could give to anyone. Frankly, I lied. I save my best advice for paying clients, but the best advice, which I can give for free is pretty good- Sometimes you should just pay the taxes. It's pretty clear that paying the taxes and stuffing the after tax income in a mattress would have been a better deal than this plan worked out to be.
Because of IRS activity in the area, the Schwabs decided that their 419 plan wasn't such an advantage anymore. The variable life insurance policies were distributed. The taxpayers and the IRS were arguing about whether surrender charges should be considered in valuing the policies. There was no net surrender value after considering surrender charges, so the taxpayers argued that like Arlo they didn't get nothing. The Court after grousing about the poor record it had to work with took a different approach. It attempted to compute the fair market value of the policies, which as it turned out was something but not much. Because of a no lapse provision the policies provided coverage for a short time before they expired. The Court used standard valuation tables to come up with a value of about $2,000, which was more than 0, but a lot less than the $80,000 or so the IRS was arguing for.
Songie S. Milhouse, et vir., v. Commissioner, TC Summary Opinion 2009-012
This decision was dated 2/9/2011 so I suspect the number is wrong. That's what they have in RIA anyway and who am I to argue? It is an innocent spouse case in which the spouse is found innocent. Mrs. Milhouse had separated her finances from her husband because of a pattern of irresponsibility on his part. She put money into a joint account that she had access to, but he ran. The IRS thought that since she could have looked at the account, she should have known about his unreported income.
Respondent did not offer any corroborating evidence at trial to support a finding that petitioner had actual knowledge of the items giving rise to the deficiency, nor did respondent substantively cross-examine petitioner or Mr. Todd on the scope of petitioner's knowledge. Petitioner, on the other hand, credibly disavowed any actual knowledge of the items giving rise to the deficiency and provided a vigorous cross-examination after Mr. Todd's direct testimony. Accordingly, we hold that petitioner did not have actual knowledge of the items giving rise to the deficiency that would preclude the granting of relief under section 6015(c)
It was good that Mrs. Milhouse won the case, but I think the lesson here is that if you think your spouse is not financially responsible, think very carefully before filing a joint return. Just because the vast right wing conspiracy thinks civilization will end if gay people are allowed to file them doesn't mean they are always a good deal.