TAX COURT OPINION

Case: Leroy L. Larweck & Mary K. Larweck
Docket Number: 23279-13
Judge: Holmes
Opinion Type: bench
Filed: 07/24/2015
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 fA LEROY L. LARWECK & MARY K. LARWECK, Petitioners , v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 23279-13. ) ) ) ) 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 trial in the above case before Judge Mark V. Holmes at St. Paul, Minnesota on June 19, 2015, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. July 24, 2015 SERVED JUL 2 8 2015 Capital Reporting Company 3 1 2 3 4 5 6 7 Bench Opinion by Judge Mark V. Holmes June 19, 2015 Leroy L. Larweck & Mary K. Larweck v. Commissioner Docket No. 23279-13 THE COURT: In the case of Leroy L. Larweck and. Mary K. Larweck, Docket No. 23279-13, the Court has decided to render Oral Findings of Fact and 8 Opinion and the following represents the Court's Oral 9 Findings of Fact and Opinion. This bench opinion is 10 11 12 13 14 made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended and Rule 152 of the Tax Court's Rules of Practice and Procedure. The Larwecks are longtime residents of 15 Minnesota and they were when they filed their 16 petition. Mr. Larweck started out actually being a 17 18 19 20 21 22 23 24 25 studentjbaking but he found a wonderful mentor who taught him the steel industry many years ago, and over those years he has engaged in a number of ventures in the steel industry. This particular case arose from one of those ventures, a specialty steel company that specializes in making steel products for the prison industry. Mrs. Larweck similarly has had a long career starting as a nurse but now with her own 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 business fighting against nosocomial infections, n-o- s-o-c-o-m-i-a-l. So in a sense they are both dealing 3 with institutions people really don't want to be in, 4 5 but they both have been together for a very long time and they actually know each other's businesses pretty 6 well after so many years. And Mrs. Larweck, in 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 particular, is very impressive in her plain and understandable explanation of this somewhat complicated time in their lives. I found them both to be completely honest and credible in their testimony. This case involves, however, the Larweckys) 2009 and 2010 tax years. The parties settled everÿthing except for two issues; a $120,000 non- passive Schedule C loss described on the Larweck's 2009 return as "partners unreimbursed expenses", then on their petition rather as "passive loss of business value when partnership dissolved". The second issue is the accuracy-related penalty that the government says they owe for the first position. Now why was there such confusion about this? The answer is that a deal that occurred back in 2005 went south. His 2005 transaction involved one of Mr. Larweck's ventures, a S Corporation that had several names over the years. I'll call it 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Panels here since all these names involve the initials PSI, but I'll talk about this S Corporation as Panels. Mr. Larweck was the majority owner of Panels but he was willing to sell control back in 2005 as part of a deal. The deal was a little bit complicated. Panels would sell its assets to a new company organized as a Limited Liability Company that had the name PSI as well, so that one became PSI, LLC. This was 60 percent owned by yet another company called Decimet, D-e-c-i-m-e-t, and 40 percent by Panels. There was some cash that was transferred to Panels as part of the asset sale and most importantly there was a note for about $420,000. That, from the Larwecki'J4 description, was a purchase 16 money note that was supposed to be paid back to 17 18 19 20 21 22 23 24 25 Panels over time. The note was from PSI, LLC to Panels. Instead what happened over the next four years was things did not go well. There were disagreements between Panels and the management of Decimet over operations of the new company, the advent of a new generation that appeared not to know how to fulfill the obligations of its contract and especially, no money was paid on the note. So Mr. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 Larweck, though a peaceful man, decided he had no choice but to sue, which he did late 2008 in State 3 Court here in Minnesota. The suit went to mediation 4 5 and settled in 2009. The basic terms of the settlement were that Decimet gave back its 60 percent 6 membership in PSI, LLC back to Panels. They were 7 8 supposed to return the checking account, the work in progress, the equipment, the inventory and all. 9 Essentially, unwind the deal that had been done the 10 11 12 13 14 15 16 17 18 four years before. But instead they seem to have established a parallel company to which it appears they transferred a good deal of what they were supposed to send back to Panels, instead leaving it with the specialty e mv=ht4 steel industry "Trinkets and Beads" behind. But as part of this deal, Mr. Larweck on behalf of Panels and PSI and all the lawyers and everybody involved engaged in a series involved, engaged in a series of 19 mutual releases. They wanted peace and they wanted a 20 21 22 23 24 25 total settlement. Now when Mr. Larweck got back what he got back, which is not what he was expecting he would get back, he naturally felt that this wasn't nearly adequate compensation for releasing a note for $420.,000, and he knows and Panels being an S 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 Corporation he, himself, suffered a loss, a big loss. 2 3 4 5 6 7 8 9 The Court agrees that he suffered a very large loss, but how should this be reported under the somewhat complicated provisions of the Internal Revenue Code. Now he reported and it a sense I understan why as partners unreimbursed expenses. Now that kind of describes it. There's a concept of unreimbursed employee business expenses that includes, among other things, business bad debts. But that's not quite the 10 right pigeon polÑ for this. because this is not, the 11 worthlessness of this note, the worthlessness of what 12 Mr. Larweck got back on behalf of Panels from PSI, 13 14 15 16 LLC is not really an expense of producing greater business, of conducting the greater business or producing income. And indeed it was the cancellation of the note/was part of the release by 17 all the parties of all the possible claims that they 18 19 20 21 22 23 24 25 had against each other. So it's not quite true under tax law to say that the note was worthless because it was part of the settlement, that the settlement itself had value to Panels and to everybody who signed the settlement and got out of this litigation that Mr. Larweck felt quite understandably he needed to get into. So the cancellation of the note and the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 loss that Mr. Larweck suffered may well figure into the computation of basis for the 60 percent of PSI, LLC membership units that Panels got in the settlement. So my conclusion is that the right way to report the loss that Mr. Larweck and Panels suffered is not in 2009. I do believe that Panels suffered a great loss as a result of this transaction and that when it comes time for Panels to sell or dispose or abandon PSI, LLC it will be able to take a very large loss unless that value rebounds between now and then. So my conclusion is with the Commissioner on this 13 matter. 14 But the penalties are another matter. As 15 Mrs. Larweck succinctly explained, this had never 16 17 18 19 20 21 22 happened to them before. They have never had this kind of trouble especially with regard to a complicated transaction like the Panels/PSI, LLC transaction. And then did what you'd expect them to do, they got legal and CPA advice. They have a great deal of business expertise, practically built up over many decades, but they hadn't had ne prior experience 23 with this kind of complicated tax consequences of 24 25 litigation that they really didn't want to be in in the first place. And so they solved it by using 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 advisors for everything. And truly, the position that they took on advice of their CPA in filling out their 2009 return was far from crazy. Sometimes settlements can produce current deductions. See, for example, tion f r .ions . See, for examnl e Racal 1 2 3 4 5 6 7 8 9 10 11 12 13 Electronics v. Commissioner, 60 T.C.M. 756, 768 14 (1990). It's certainly not so crazy a position that 15 Mr. Larweck was unreasonable in relying on the advice 16 17 18 19 20 21 22 23 24 that he got from his advisors. So no penalty but the Commissioner is right that they can't take the loss now. It's highly likely they could take it in the future when they dispose of the PSI, LLC membership units, and they settled so many other issues that decision will have to be entered under Rule 155. This concludes the Court's Oral Findings of Fact and Opinion in this case. Thank you, Mr. and 25 Mrs. Larweck. 866.488.DEPO www.CapitalReportingCompany.com 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Capital Reporting Company (Whereupon, at 10:10 a.m., the above entitled matter was concluded.) 10 866.488.DEPO www.CapitalReportingCompany.com