Summary judgments are a way to decide an issue or a case without the need for a trial. Taxpayers or the IRS seek summary judgments when they believe a trial is unnecessary since all the factual issues are settled or one-sided. The tax court will grant a motion for summary judgment only if there is no genuine dispute as to any material fact and a decision is merely a matter of law.
In T.C. Memo. 2014-97 (Estate of Bernard Kessel), the IRS requested a partial summary judgment.
In this case, the taxpayer had invested $610,000 of his pension plan in Madoff Investments (of Ponzi scheme infamy). When the taxpayer died in 2006, the balance in the account was valued on the estate tax return at $4,811,853, and the estate paid the tax based on that value.
In 2008, when the Madoff Ponzi scheme came to light, the executor of the estate attempted to recover the money purportedly in the account. When the Madoff trustee denied the claim, the executor filed for a refund from the IRS, and prepared an amended estate tax return showing the value of the Madoff assets as zero.
The IRS denied the refund. The IRS says the value of property included in an estate must be determined at the time the property is transferred (generally the date of death). The value is what a willing buyer would pay a willing seller when both have reasonable knowledge of the facts. Events occurring after transfer date that affect value are only relevant if they were reasonably foreseeable at the time of the valuation.
Since a Ponzi scheme, by its very nature, is not reasonably knowable or foreseeable until it is discovered or it collapses, the IRS argues that the Madoff Ponzi scheme was knowable or foreseeable only at the point when it collapsed–when the amount of money flowing out of Madoff Investments was greater than the amount flowing in. Therefore, the reduction in value of the assets should be denied.
What do you think?
In T.C. Memo. 2014-99 (Reri Holdings I, LLC), the taxpayer made the request for a partial summary judgment.
In this case, the taxpayer was a limited liability company taxed as a partnership that made a charitable contribution of approximately $33 million to a university. The contribution consisted of a successor member interest in another LLC that owned real property.
The IRS agrees a gift was made. However, the IRS says the LLC was organized solely for tax avoidance purposes, lacked economic substance, was a sham, and is not a valid partnership for tax purposes. Therefore, the entire transaction was a sham and the economic substance doctrine should be applied to deny the deduction.
The taxpayer argues that the IRS has conceded there was an unrequited gift to a qualified recipient, and the court has decided in other cases that the doctrines of sham and lack of economic substance “are not” (i.e., can never be) applicable or relevant to the determination of whether a contribution to a charitable organization is deductible. Applying those doctrines would mean a charitable contribution would never be deductible.
In addition, the taxpayer says its members did, in fact, put up the funds that were actually used to purchase the successor member interest that was contributed to the University. The deduction should be allowed.
What do you think?
Wondering why the IRS wants to deny the deduction when the tax court has said repeatedly that gifts to charity need have no economic substance beyond the mere fact of the gift? Here’s a graphic that explains the IRS’s interest in the transaction.
Taxing Lesson: The truth is just ahead.
The court said: For purposes of this motion, at least, we disagree.
Some people had suspected years before Mr. Madoff’s arrest that Madoff Investments’ record of consistently high returns was simply too good to be true. Whether a hypothetical willing buyer and willing seller would have access to this information and to what degree this information would affect the fair market value of the Madoff account or the assets purportedly held in the Madoff account on the date decedent died are disputed material facts.
Thus, we will deny the IRS’s motion.
The court said: Whether the LLC was organized solely for tax avoidance purposes and lacked economic substance may be a relevant issue in determining whether its contribution to the university entitled its members to charitable contribution deductions on account thereof. It remains to be seen whether that is the case.
Therefore we will deny the motion.