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GREENBERG DECISION---MAKE SURE SUPERVISOR AT IRS SIGNS OFF ON PENALTY, OR IT WON'T COUNT

06 / 30 / 2018

Greenberg v. IRS, T.C. Memo 2018-74 (May 31, 2018)

In this Tax Court case, the Tax Court had to wait on certain criminal charges to work themselves out, before getting into the merits of the civil case before them.  The case involves the actions of GG Capital.  Did it make a valid TEFRA election in 1997?  Did it abandon its interest in a company (DBI) so that it could report a loss of over $30 million?  Were the option spreads at issue "legitimate investments"?  Did GG Capital, in fact, have lossess from "sales" of thelong legs of three option spreads in 2000 and 2001?  or was the entire AD Global transaction just another Son-of-BOSS deal--a sham, lacking in economic substance?  

When deciding the validity of a TEFRA election, it was duly noted that the Form 1065 had three K-1s attached, but "special" was written on the lines of the K-1 where percentages are supposed to be listed, and there was NO K-1 for a "partner" listed on the election (a foreign partner which held an indirect interest through Greenberg which then made Greenberg a pass-thru partner).  Thus, GG Capital could not be a "small partnership" and was therefore not eligible to make a TEFRA election; its attempted election was ineffective.  The election was not signed by each person who was a partner during the tax year for which the election was made.  

As for the tax returns, the IRS relied on the checking of a box "no" on the return, as to whether the TEFRA rules applied.  The Tax Court would not allow Greenberg, a CPA, to disavow the clear statements he made on the return, as admissions.  Therefore, the issuance by the IRS of notices of deficiency, in lieu of FPAA, was held to be valid.  

GG capital could not be shown to have actually owned a partnership interest, or where GG Capital intended to abandon its interest or the affirmative steps taken to do so, for a loss of an interest worth allegedly $34 million.  As the Tax Court put it, if GG Capital had truly abandoned an interest worth $34 million, a trail of documents would be expected, especially when ther purported transactions were put together by a lawyer and a CPA.  The testimony of these taxpayers was not viewed as credible, and the abandonment loss was denied.

Greenberg, the petitioner, was a CPA and partner at KPMG, working in KPMG's Stratecon Group, which focused on the design, marketing, and implementation of shelters like the one at issue.  He wrote several self-serving opinions.  Goddard, a practicing tax attorney, worked at Arthur Andersen and Baker McKenzie, where he dealt with sophisticated corporate and international transactions.  As the Tax Court put it, "(b)oth knew what they were doing."  

The taxpayers argued that GG Capital was a "real business" and they simply used their expertise to take advantage of gaps in the digital options market.  The IRS comes back and says, they have heard all of this nonsense before, that all of the structured transactions were used for a single purpose--to create tax losses, and it should be disallowed.  

The Tax Court sides with the IRS.  The Tax Court finds that the members never intended to run a business through AD Global or another entity, and they did not join these entities with the intent to share in profits and losses from business activities.  The option spreads were done to further a tax avoidance scheme, compelling that the partnerships be disregarded for tax purposes.  

When it came to penalties, the Tax Court had no problem saying that the transactions were just like other Son-of-BOSS transactions that just don't work--and that here, "we have a feather against a gymful of barbells--but, because under IRC Section 7491(c), the IRS bears the burden to show that the penalties were "personally approved (in writing) by the immediate supervisor of the IRS employee who made the initial determination to assert them in the notice of deficiency, and the IRS failed to do that, the IRS cannot meet its burden of production, and taxpayers not liable.  IRS Section 6751(b).