Tra la, it’s May, the lusty month of MayThat lovely month when everyone goes blissfully astrayTra la, it’s here, that shocking time of yearWhen tons of wicked little thoughts merrily appear
Falling behind again, we are, as Yoda would say. So here we are reviewing the month of May with June half over. I did start sooner, but one of the May cases ended up deserving the full treatment, which took some time. You can check that out here – A Teachable Moment From The $1 Billion Texas Tax Shelter Indictment.
Some of the opinions are from late April, but I didn’t get around to reading them till May.
Dixieland Boondockery
Judge Holmes thoroughly narrates a pair of syndicated conservation easement deals in Kimberly Fulton 25 LLC. I didn’t note anything special about it. IRS arguments to totally disallow came to naught. As Lew Taishoff puts it in Every Casino, “Of course, the telephone-number appraisal gets shredded”. The two deals are allowed charitable contributions totaling $1,040,000 for the easements. I have to wonder if including 1040 in the number was a sly joke. That compares with $25,737,000 claimed. 4.04% allowed is not the lowest I have seen, but I am pretty sure it is below average.
The IRS announced a new settlement offer on May 13, but I will be giving that the full treatment. The most significant difference is that it does not require immediate payment. I’m thinking that there will be collection cases coming out of these deals long after I have gone. Consider my 2023 story Activision Blizzard CEO Bobby Kotick Hit With Huge Tax From 2001 Shelter.
More Relief For The 1%
So maybe the opinion in Flight Options LLC v US might even help out some of the 2 or 3 percent. Judge Sutton of the Sixth Circuit explains Flight Option’s business like this:
“Flight Options offers individuals a way to fly by private jet without having to buy a plane themselves.”
There are two models. One is fractional ownership and the other is a membership program. Fractional owners pay a fixed monthly fee, regardless of use, and a usage fee for time spent flying. At issue was what the 7.5% excise tax on “domestic transportation by air” applied to fixed monthly fee.
The district court had approved of IRS requiring collection of the excise tax on the fixed fee portion. The Sixth Circuit reversed after a long discussion, which you might find more interesting than I did which is why I gave you the link.
Trace Those Loan Proceeds
Jonathan Sawyer was dealing with a problem that I have covered quite a bit, the tax risks of life insurance policies, particularly when they are leveraged. Sawyer was facing an income pickup of $160,900 from a Northwestern policy that expired in 2015. By the way, Northwestern showing up in many of these cases is probably a sign that their policies perform pretty well. Sawyer’s policy was taken out in 1982. He had an automatic premium policy loan option which made up for some premiums that he skipped.
He owned a printing business that got in trouble. He ended up liquidating his 401(k) and running up $100,000 on his wife’s credit card to feed the business and borrowing $750,000 from his uncle. In 2009 he borrowed $80,000 on the life insurance policy which went straight into the business. He intended to transfer ownership of the policy to the business, but that never happened. In 2015 the game was up as premium loans ate up the cash surrender value of $205,433.81. There was the policy loan of $80.000 and associated interest of $40,107.22. And then there were the premium loans of $42,750.07 and associated interest of $42,576.52. It adds up. I used a calculator, although you probably did it in your head. The investment in the policy was $44,533.42 so that made for a taxable distribution of $160,900.39. Sawyer did not file at all in 2015. He thought the 1099 he received was wrong.
Anyway he was allowed an investment interest deduction on the interest attributable to the $80,000 which might have made the trip to Tax Court worthwhile. Also he got out of the failure to pay penalty although not the failure to file. The failure to pay penalty was let go, because he didn’t have the money and could not raise it,
Lew Taishoff gave Sawyer’s attorneys a “Good Job”.
Transferee Liability And Deficiency Interest
Dillon Trust Company LLC, As Trustees For Trusts 709204, 709210, And 8545 V US was an appeal to the Federal Circuit of a 2022 Court of Claims decision and a 2023 Court of Claims decision. The trusts had owned stock in Humboldt Shelby Holding Company which had had a lot of low basis assets. After the corporations sold the assets the trusts sold the corporation, which essentially had cash in the bank and a whopping big capital gain to pay tax on, to Diversified Group Inc for 95% of the cash. The trust were tagged with transferee liability, as DGI used a sketchy Son of Boss deal to avoid the corporate tax.
There was also an issue about a $71 million deposit to stop the running of interest. It was not allocated among the trusts and the IRS refused to allocate it. That seemed kind of nasty, but the court upheld it along with the transferee liability. There have been quite a few of these transferee liability cases over the years. They go both ways and often make interesting stories. Generally the moral of the story is that there should have been an S election in 1987. That would probably have been really challenging for the Dillon Trusts.
Moving On
There are a couple of others that seemed interesting, but I can’t really make much out of. I will endeavor to do better with June come July. My excuse for my slow work in June is a trip to New Orleans for the American Friends of Lafayette. Then there is the catching up on CPE for Massachusetts CPA license number 7715 issued March 16, 1983 and scheduled to expire June 30, 2026 – 25 hours still to go.
For great value in continuing professional education check out the Boston Tax Institute.
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