TAX COURT OPINION

Case: 2590 Associates, LLC, 5615 Associates, LLC, as Successor in Interest to, 5615 Associates, LP, Tax Ma
Docket Number: 12924-16
Judge: Goeke
Opinion Type: bench
Filed: 06/14/2019
Pages: 16

SD UNITED STATES TAX COURT WASHINGTON, DC 20217 2590 ASSOCIATES, LLC, 5615 ASSOCIATES, ) LLC, AS SUCCESSOR IN INTEREST TO, 5615 ) ) ASSOCIATES, LP, TAX MATTERS PARTNER, ) ) ) ) ) Docket No. 12924-16. ) ) ) ) COMMISSIONER OF INTERNAL REVENUE, Respondent Petitioner(s), v. ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the transcript of the hearing in the above case before Judge Joseph Robert Goeke at New Orleans, Louisiana containing his oral findings of fact and opinion rendered at the trial session at which this case was heard. In accordance with the oral findings of fact and opinion, petitioner's Motion for Reasonable Litigation or Administrative Costs, filed March 1, 2019, will be denied. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. June 14, 2019 SERVED Jun 14 2019 Bench Opinion by Judge Joseph Robert Goeke May 31, 2019 2590 Associates, LLC, 5615 Associates, LLC, as successor in interest to, 5615 Associates, LP, Tax Matters Partner 3 v. Commissioner of Internal Revenue Docket No. 12924-16 THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and 1 2 3 4 5 6 7 8 9 10 opinion. The oral findings of fact and opinion shall not 11 12 13 14 15 16 17 be relied upon as precedent in any other case. This opinion is rendered pursuant to Rule 152 of the Tax Court Rules of Practice and Procedure, and Rule references in the remainder of this Bench Opinion are to the Tax Court Rules of Practice and Procedure. Section 7459(b) provides further support for the rendering of this Bench Opinion. This section is in the Internal Revenue 18 Code, and all section references in this Bench Opinion are 19 to the Internal Revenue Code, as applicable to the case 20. before us, except where noted. 21 22 23 24 25 Before us is petitioner's motion for litigation and administrative cost. We previously issued an opinion in this case, 2590 Associates, LLC, 5615 AssociatehLA Tax Matters Partner v. Commissioner, T.C. Memo 2019-3. The issue addressed in that opinion was whether petitioner is entitled to deduct a worthless debt of $2,926,692. 4 Petitioner is a TEFRA Partnership. We held for petitioner in the previous opinion. As part of the analysis in our previous opinion we relied upon the 13 nonexclusive factors set forth by the Court of Appeals for the 5th 1 2 3 4 5 6 Circuit to determine whether bonafide debt exists. Egtalg 7 8 9 10 11 12 13 14 15 of Mixon v. U.S., 464 F.2d 394, 402 (5th Circuit 1972). The fourth factor is especially appropriate regarding the pending motion. That factor is a legally enforceable right of repayment. The extensive facts of the underlying case in chief are set forth in our previous opinion and will not be restated here. We focus on the events in the IRS audit and the pretrial preparation of this case once it was set for litigation. During the audit and pretrial preparation 16 of the case, IRS personnel consistently sought the actual 17 debt instrument for which the bad debt was claimed. 18 Petitioner's responses to these requests are very 19 important to the present analysis. 20 21 In any administrative or court proceeding that is brought by or against the United States in connection 22 with the determination, collection, or refund of any tax, 23 the prevailing party may be awarded reasonable 24 administrative and litigation costs incurred in connectioh 25 with that proceeding. Section 7430(a). To recover its shum p731406-2250)opentionseescribersnet|www.escnbersaet incurred cost, a taxpayer must establish that 1) 5 it is the prevailing party, 2) it exhausted the administrative remedies available to it, 3) it did not unreasonably protract the proceeding, 4) the amount of the cost it is requesting are reasonable, and 5) petitioner meets the net worth requirements of section 7430(c)(4)(a)(ii). The only issue which is addressed relative to these factors in this Bench Opinion is whether the petitioner is the prevailing party. That issue involves an analysis of whether respondent's position was substantially justified. There's no question that 1 2 3 4 5 6 7 8 9 10 11 12 petitioner was the party which won the prior litigation, 13 14 as referenced in our opinion. However, petitioner will not be considered the prevailing party if respondent's 15 position is substantially justified. Section 7430. 16 17 The following facts are uncontested. The IRS commenced the audit of petitioner's 2011 form 1065 U.S. 18 Return of Partnership Income, with an initial contact 19 20 letter dated February 24, 2014. After an initial conference with petitioner's first power of attorney on 21 March 26, 2014, the IRS issued a form 4564 Information 22 Document Request to the petitioner which sought 23 24 25 information regarding bad debts claimed on the partnership return. This Information Document Request specifically (973)452256|operationseescriben.netlwwwascribers.net requested documentation of the debts such as contracts or 6 notes that established a debtor/creditor relationship. On 1 2 3 April 9, 2014, the IRS issued another Information Document 4 5 6 7 8 9 Request to the taxpayer. In that Information Document Request, the IRS sought a copy of the note from Perkins Rowe to 2590 Associates, information as to who signed the note on behalf of 2590 Associates, what was any security that was provided for such note, and whether there was any collateral provided for such note. 10 At a meeting on April 25, 2014, the taxpayer 11 Provided a copy of a $2 million promissory note dated 12 April 11, 2006, payable to Nick L. Saban. Hereinafter 13 14 referred to as Mr. Saban, by Perkins Rowe Associates, LLC, and Perkins Rowe Associates II, LLC. 15 pri-1 -had f rnrn t b o nota (cid:16)040-n Pa r1 16 17 18 19 20 21 22 . Then on May 27, 2014, respondent issued another Information Document Request to the taxpayer. In that Information Document Request, the government requested that petitioner produce and provide the following: A copy of the front and back of a cancelled check, or of an electronic confirmation that Mr. Saban or TLS Investments, LLC, transferred $2 million to 23 Perkins Rowe. 24 On June 4, 2014, and July 1, 2014, the taxpayer 25 provided copies of Perkins Rowe's bank statements showing cribers Ø(cid:0)575(cid:0)540) 406-2250 toperationseescribertnétj www.escriben.net receipt of a $2 million wire transfer on April 12, 2006, 7 and a copy of the wire transfer document that included the requested account number and name of the account owner, Mr. Saban. On October 1, 2014, the IRS sent a revised timeline to the petitioner via facsimile. In that facsimile the IRS requested that the taxpayer produce and provide the following: Documentation of the extension of the maturity date of the April 2006 promissory note, verification of whether the April 2006 promissory note had been defaulted before petitioner held it, and evidence of the value of the April 2006 promissory note. The taxpayer responded on October 1, 2014. In that response the taxpayer admitted that the April 2006 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Promissory note reached its default date, but asserted 15 16 17 18 19 that the note remained in full force and effect. In their response the taxpayer also provided a memorandum dated July 26, 2008, from Joseph T. Spinosa to Mr. Saban. On January 21, 2015, the IRS issued a Notice of Proposed adjustment to the taxpayer. In that Notice of Proposed 20 Adjustment the IRS asserted that Mr. Saban's cash transfer 21 to Perkins Rowe did not create a bonafide debt or 22 alternatively, if it did create a bonafide debt that the 23 24 25 debt was extinguished on December 2, 2008, when Mr. Saban received an ownership interest in the taxpayer. On September 8, 2015, the IRS issued a revised shun 9733406-2250lcperatiönsøescribersmet[www.esciibersaet Notice of Proposed Adjustments. 8 In that revised Notice of Proposed Adjustments the IRS again asserted that Mr. Saban's cash transfer to Perkins Rowe did not create a bonafide debt. And in the alternative, that if it did create a bonafide debt, the debt was extinguished on December 2, 2008. In an email dated October 9, 2015, the taxpayer advised the IRS that it did not want to receive a 60-day letter with a chance to file a protest with Appeals. Instead, the taxpayer asked the IRS to move 1 2 3 4 5 6 7 8 9 10 forward with the issuance of a Notice of Final Partnership 11 Administrative Adjustment. Such a notice was issued and 12 13 14 15 16 17 that precipitated this litigation. For purposes of the present motion, respondent concedes that the oetitioner exhausted the administrative remedies available to it, and that the petitioner did not unreasonably protract the proceeding. Respondent, however, argues that the petitioner is not the prevailing 18 party, and that the respondent's position in the 19 administrative and litigation proceedings were 20 21 22 23 24 substantially justified. Respondent also denies that the amount of the cost petitioner claims are reasonable, and that the petitioner meets the net worth requirements in order to receive reimbursement for fees. The only issue which is addressed in this Bench 25 Opinion is whether respondent's position was substantially M)406-2250toperationsee¢ribers.net|wwwascribers.net justified. The requirement that respondent's position be 9 substantially justified to avoid a finding that the taxpayer is a prevailing party, is set forth in section 7430(c) (4)(B) (i). To be substantially justified the government's position must have a reasonable basis in both law and fact. Pierce v. Underwood, 487 U.S. 552, 565 (1989). In general, the government's position will be substantially justified if, based on all of the facts and circumstances and the legal precedents related to the case, the government acted reasonably. The relevant inquiry 1s whether the government's position was reasonable given the available facts and circumstances at the time it took the position. Even if the government's 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Position is incorrect, it still may be substantially 16 justified if a reasonable person could think that the 17 position was correct. Maagie Management Company v. 18 Commissioner, 108 T.C. 430 (1997). 19 The IRS position in the administrative 20 proceeding is established by the earlier of the Appeals 21 decision or the issuance of a Notice of Deficiency or 22 23 24 FPAA. Section 7430(c)(7) (B) and Treas. Regs. Section 301.7430-3 (c)(3)(i), because the Office of Appeals did not issue any decision in this case before the issuance of 25 the FPAA, on March 2, 2016, the IRS's position in the cribers 197334¾2250loperattomeestriber5.net1www.esctberséet administrative proceeding is the position taken in that 10 FPAA. In the FPAA, respondent disallowed the $2,926,692 bad debt deduction that petitioner claimed on its 2011 return based on the determination that the transfer of funds by Mr. Saban to Perkins Rowe in April 2006 was not a bonafide loan. The bad debt deduction taken by petitioner at issue in this case was based upon a Promissory note dated December 2, 2008, in the amount of $2,926,691.58 payable by Perkins Rowe. However, when respondent issued an IDR to the petitioner on March 26, 2014, requesting documentation of the debts, such as contracts or notes that established a debtor/creditor relationship, the taxpayer did not provide respondent with a copy of the December 2008 promissory note. The only 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 promissory note the taxpayer provided during the audit of 17 18 19 20 21 22 23 24 25 the 2011 return regarding the bad debt in question was a copy of the April 2006 promissory note. Consistently throughout the audit in its responses to the request by the IRS examination division, the taxpayer referenced only this April 2006 promissory note. In addition, the taxpayer consistently contended that it was the April 2006 promissory note that TLS Investments transferred to the petitioner. Applying the factors set forth in the Estate of Mixon, previously cribers 733406+2250l operatipns®eselbertnet J www.escribersnet 11 1 2 3 4 5 6 7 8 9 referred to, during the examination division, the respondent found that several of the factors did not support the petitioner's claim of a bonafide debt. This analysis was based upon the taxpayer's production of the April 2006 promissory note and the failure to produce any other documentation. Given this circumstance, we find that the IRS was substantially justified in determining in the FPAA that Mr. Saban's transfer of $2 million to Perkins Rowe on April 12, 2006, 10 did not create a bonafide debt which would generate a bad 11 12 13 debt deduction for the petitioner. We now turn to the litigation position and note that respondent's position in the litigation proceeding is 14 generally established when it files an answer. Huffman v. 15 C_oh, 978 F.2d 1139 (9th Circuit 1992) . The 16 17 answer in this case was filed on July 29, 2016. In the answer, respondent took the position that there was no 18 bonafide debt due from Perkins Rowe and Perkins Rowe II to 19 Mr. Saban. Respondent also asserted that there was no 20 bonafide debt transferred to the petitioner and that there 21 was no bonafide debt due from Perkins Rowe to the 22 petitioner. 23 24 25 In determining whether respondent's position was substantially justified as of a given date, a significant factor is whether the petitioner had presented all À Cribers 1973)406-2isoloperstbnseescribetsmt|www.escribersaet relevant 12 information and legal arguments supporting their position. Treas. Regs. Section 301.7430-5(d)(1). In the Present case it's notable that in the petition the only promissory note which was referenced was the April 2006 Promissory note. In the petition it was asserted that the April 2006 promissory note that was transferred to the Petitioner became the debt which was the basis for the bad debt deduction. The position in respondent's answer, that there was no bonafide debt from Perkins Rowe and Perkins Rowe II to Mr. Saban, was based upon the same information that substantially justified respondent's position in the FPAA. The relevant inquiry was whether respondent's position was reasonable given the available facts and circumstances at the time it took the position. Even if respondent's 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 position is incorrect, it may be substantially justified 17 if a reasonable person could concur in that result, as 18 Previously stated. Mr. Spinosa's July 2008 memo was 19 20 21 22 23 24 25 submitted to respondent with petitioner's October 10, 2014, letter. In part the October 10, 2014, letter states that E July 2008 memo sent from Mr. Spinosa to Mr. Saban proposed various ways to satisfy Mr. Saban's debt. Petitioner asserts in the petition that the July 2008 memo proposed various ways to satisfy the debt due from Perkins Rowe to Saban, and that Saban and TLS cribers (973)4064N0)operationseèscribemneywww.esalbersnet 13 Investments chose option three, which was ownership in the petitioner. aespondent's position and the answer that there was no bonafide debt and that there was no bonafide debt due from Perkins Rowe to the petitioner was based upon Mr. Saban's acceptance of one of Mr. Spinosa's options for the payment of the debt due to Mr. Saban from Perkins Rowe, and the fact that petitioner never made any loans to Perkins Rowe. After respondent filed the answer, the case was transferred to the Office of Appeals for consideration. The parties were unable to settle the case in appeals and the case was referred back to respondent's trial counsel for preparation for trial. In it's pretrial memorandum, 1 2 3 4 5 6 7 8 9 10 11 12 13 14 petitioner continued to assert that the April 2006 15 promissory note was the one transferred to it by TLS 16 17 Investments, and that 4kat note was the basis for the debt7L for which it claimed the bad debt deduction. After the 18 parties had completed the filing of the pretrial 19 memorandum, there was a conference call between the 20 parties about the discrepancies concerning the promissory 21 22 note transferred to petitioner. On December 7, 2017, just four days before the 23 beginning of the trial of this case, petitioner for the 24 25 first time forwarded to respondent a copy of the December 2008 promissory note. Petitioner also forwarded, for the Cribers Whpasojapentionsearknetlw.usenhn« first time, a copy of a promissory note dated May 29, 14 2007, in the amount of $2,362,958.90 payable with accrued interest by Perkins Rowe and Perkins Rowe II to Mr. Saban on June 1, 2008. Based upon this new evidence, which was forwarded to the respondent only five days before the trial in the case, and based upon testimony received at trial that provided new evidence regarding the actions taken after Mr. Saban agreed to accept the ownership in 1 2 3 4 5 6 7 8 9 10 petitioner for the debt due to him by Perkins Rowe and 11 Perkins Rowe II, respondent was substantially justified in 12 trying the case and filing the brief urging respondent's 13 Position that there was no bonafide debt transferred to 14 15 16 17 18 19 the petitioner, and that no bonafide debt from Perkins Rowe existed to the petitioner. Where the resolution of an issue depends on a factual determination, respondent's position will be substantially justified until the respondent has adequate substantiation and the respondent has had a reasonable 20 time to verify the substantiation. Guertler v. 21 22 23 24 25 gommissioner, T.C. Memo 2003-136. Trial testimony can be included in the information which respondent should be allowed adequate time to consider. Hall v. Commissioner, T.C. Memo 2003-159. Information provided by taxpayer or petitioner after the answer is filed in the case is a significant 15 factor in determining if the respondent is substantially justified in pursuing the position in litigation. Section 1.7430-5(c)(1), Income Tax Regs. The Court should consider whether the taxpayer provided all relevant information under its control before respondent took a Position, which is in dispute relative to a motion for fees. Corson v. Commissioner, 123 T.C. 202, 202-207; Flynn v. Commissioner, T.C. Memo 2005-8. We reiterate the key points that are pertinent to our consideration of whether respondent's position in the administrative proceeding and the litigation was 1 2 3 4 5 6 7 8 9 10 11 12 13 substantially justified. Petitioner repeatedly 14 misrepresented during the administrative process that 15 16 17 there was no extension of the 2006 note. The petition itself only refers to the 2006 note, and states incorrectly that the note was contributed to the 18 partnership, the petitioner in this case. The petitioner 19 did not produce the 2007 and 2008 notes, which are very 20 pertinent to the outcome in the case, until several days 21 before the trial of the case. 22 The petitioner's amendment to its pretrial 23 memorandum on December 8, 2007, three days before trial, 24 25 corrected the previous errors and stated for the first time that there were three notes, evidencing the loan from 673)40M250}operati ns@exrib net]wwtesaibershét Mr. Saban to Perkins Rowe. As a result of late 16 information received from the petitioner and based upon testimony heard at trial, on brief respondent conceded the original 2006 transfer was a bonafide loan, and instead argued that this debt from Mr. Saban was satisfied and extinguished under state contract law, because Mr. Saban received an ownership interest in 2590 Associates. We held in our prior opinion that respondent's position on state contract law was incorrect and we ruled for the petitioner. Petitioner's belated production of the most 1 2 3 4 5 6 7 8 9 10 11 12 critical piece of evidence in this case is inconsistent 13 with petitioner's assertion in its motion for fees, "The 14 15 IRS had all of the relevant evidence early in the audit, and none of it supported its position." We note that the 16 Petitioner not only failed to produce all the pertinent 17 18 notes, but that the petitioner misrepresented the fact that the 2006 note was the pertinent document. The facts 19 of the case surrounding the exchange of the Saban note for 20 equity also support respondent's substantial 21 22 23 24 25 justification, especially given the late production of the 2008 promissory note. Mr. Saban received equity in an entity unrelated to the Debtor and his original note, and the confusion on about the value of the notes he exchanged for that equity, (973)4002(cid:0)57550loperationseescriberr.net|wwwescriberspet as well as the circumstances of 17 those transactions create questions which were only resolved aftce trial. These h facts make it clear that respondent's position in the litigation was reasonable and that a reasonable person could conclude that respondent's position was correct, eSPecially at the various times in the course of the litigation when respondent learned new information and information that clarified prior misstatements by the petitioner. 1 2 3 4 5 6 7 8 9 10 Given these circumstances, we will deny the 11 motion for fees and administrative costs and an 12 appropriate order denying the motions will be issued. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 10:09 a.m., the above-entitled matter was concluded.) 13 14 15 16 17 18 19 20 21 22 23 24 25 973)406-2221opera5mseerribersaétivmw.esaibers et