Opinion
14273-17
11-17-2022
BUCKELEW FARM, LLC F.K.A. BIG K FARMS LLC, BIG K LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Christian N. Weiler Judge
Trial for this case commenced on October 17, 2022, at a special session of the Court in Atlanta, Georgia and is set to resume on November 30, 2022. This case concerns a syndicated conservation easement transaction and various penalties. Respondent notes that "[o]ne of the main issues for trial is the proper valuation of the subject property."
Background
On September 30, 2022, October 10, 2022, and October 14, 2022, the parties filed a First, Second and Third Stipulation of Facts, respectively. The three (3) Stipulations of Facts collectively total 466 consecutive numerical paragraphs and contain trial exhibits 1-J through 340-J.
In each of the filed Stipulations of Facts, petitioner made evidentiary objections. Prior to the beginning of the trial, petitioner's objections principally included relevancy, hearsay, and hearsay within hearsay to several of the numerical paragraphs and to the introduction of some of the trial exhibits. As trial continued, several of petitioner's objections were either ruled on by the Court or withdrawn by petitioner.
More specifically, and by agreement of the parties, at trial on October 18, 2022, the parties read into the record those exhibits and numerical paragraphs in which petitioner was waiving or withdrawing its relevancy objection to the First, Second and Third Stipulations of Facts. The waiver included exhibits: 11-J-23-J, 67-J, 68-J, 72-J-82-J, 103-J-107-J, 144-J-147-J, 248-J, 258-J, 259-J- 263-J, 287-J, and 323-J-332-J, as well as paragraphs: 39-79, 157-158, 193, and 244 to the First, Second and Third Stipulations of Facts.
Currently there remain objections to the parties First, Second and Third Stipulation of Facts. Specifically, petitioner objects to the introduction of Exhibits 58-J and 59-J on the grounds of relevancy. Petitioner also objects to the statement: "This Exhibit was not included in any production by petitioner to respondent during the audit or during discovery" found in paragraphs 165, 166, 173, 178-181, 205, 223-230, 232, 243, 249, 255, 267, 270-272, 274-276 of the First, Second and Third Stipulations of Facts.
At trial, the parties made arguments with respect to the disclosure of Jim Adams' Form 1040, U.S. Individual Income Tax Return (Exhibit 58-J), and the Forms 8886, Reportable Transaction Disclosure Statement, for Big-K, LLC, Lontrac, LLC, Battelle Glover Investments, LLC, and White Path, LLC (collectively Exhibit 59-J).The parties also made arguments with respect to petitioner's relevancy objection to a frequent statement found in the foregoing paragraphs of the First, Second and Third Stipulations of Facts. The Court took petitioner's objections under advisement and is now prepared to rule on these objections reserved by petitioner in the First, Second and Third Stipulations of Facts.
In the Stipulations of Fact, the documents in Exhibit 59-J are referred to as "IRS Forms 8886-A"; however, the documents are actually entitled "IRS Forms 8886" and there appears to be no" IRS Form 8886-A."
Mr. Adams' Form 1040 and Form 8886 for Big-K, LLC concern tax year 2013. Form 8886 for Lontrac, LLC concerns tax year 2014, and Forms 8886 for Battelle Glover Investments, LLC, and White Path, LLC concern tax year 2015.
Other objections remain reserved by petitioner in the First, Second and Third Stipulations of Facts, which are not being addressed in this order. The Court will reserve ruling on these remaining objections until the appropriate time and when trial resume on November 30, 2022.
Analysis
I. Petitioner's Objections to Exhibits 58-J and 59-J.
At trial, petitioner argued that respondent's disclosure and introduction of Jim Adams' Form 1040 and the Forms 8886 with respect to the four above mentioned LLCs are violative of the confidentiality afforded to taxpayers under section 6103(h). While respondent argued section 6103(h) is not applicable in this case since Mr. Adams is considered a party to the current case under section 6226. Petitioner also objected to the introduction of Mr. Adams' Form 1040 and the Forms 8886 on the grounds of relevancy under rule 403 of the Federal Rules of Evidence (FRE). Below we will consider petitioner's objections to these exhibits.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code (Code), Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
A. Jim Adams's Form 1040 and Big K, LLC's Form 8886
Section 6103 governs the confidentiality and disclosure of returns and return information. Unless otherwise authorized by the Code, no officer or employee of the United States, nor any government, or certain private recipient of the information is permitted to disclose any information contained in a taxpayer's tax return. I.R.C. § 6103(a). Section 6103(h) governs the disclosure of returns and return information to certain federal officers and employees for the purpose of tax administration. Specifically, this subsection governs the disclosure of tax returns and return information to the Department of Treasury and the Department of Justice I.R.C. § 6103(h)(1) and (2).
Officers and employees of the Department of Treasury whose official duties require the inspection or disclosure of returns or return information for tax administration purposes are permitted to access such records without written authorization. I.R.C. § 6103(h)(1). This subsection likewise permits the disclosure of such returns in a Federal or State judicial or administrative proceeding pertaining to tax administration if certain requirements are met. I.R.C. § 6103(h)(4); see Mescalero Apache Tribe v. Commissioner, 148 T.C. 291, 294 (2017).
Disclosure will be warranted: (1) if the taxpayer is a party to the proceeding, or the proceeding arose out of, or in connection with, determining the taxpayer's civil or criminal liability, or the collection of such civil liability, in respect of any tax imposed under this title; (2) if the treatment of an item reflected on such return is directly related to the resolution of an issue in the proceeding; (3) if such return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding. I.R.C. § 6103(h)(4)(A)-(C).
Section 6103(h)(4) permits disclosure of tax returns or return information during a Federal or State judicial or administrative proceeding pertaining to tax administration only if the taxpayer is a party to such proceeding. IRC § 6103(h)(4)(A). In the context of a partnership, Rule 247 provides that a tax matters partner and any partner who satisfies the requirements of Code sections 6226(c) and (d) or 6228(a)(4) shall be treated as parties in a case before the Tax Court.
Section 6226(c)(1) provides that when a tax matters partner or partner files a readjustment to the Tax Court, each person who was a partner in such partnership at any time during such year shall be treated as a party to such action. This subsection shall not apply if such a partner does not have an interest in the outcome of the litigation. I.R.C. § 6226(d); see I.R.C. § 6228(a)(4).
Subject to certain limitations, the FRE permits the inclusion of evidence to the extent such evidence tends to make a fact more or less probable than it would be without the evidence. Fed.R.Evid. 401. The FRE provides that a court may exclude relevant evidence if its probative value is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence. Fed.R.Evid. 403.
Mr. Adams received, among other financial benefits, a noncash charitable contribution deduction of $960,724, from Buckelew Farms, $740,284 of which he claimed as an itemized deduction on his 2013 personal income tax return. Should this Court ultimately deny the charitable conservation easement deduction at the partnership level, Mr. Adams (as a partner) could potentially be denied the deduction as well. Therefore, we find Mr. Adams as the tax matters partner (through Big K, LLC) and partner in the partnership has a personal and financial interest in the outcome of the case. See I.R.C. § 6226(d).
Accordingly, we conclude the disclosure of Mr. Adams' Form 1040 and Form 8886 for Big K, LLC are not barred by section 6103(h) since they pertain to tax administration and Mr. Adams and Big K, LLC are parties (or treated as a party) to this action, for purposes of section 6226(c) and (d). See I.R.C. § 6103(h)(4). Furthermore, we will not exclude Mr. Adams' Form 1040 and Form 8886 for Big K, LLC since we find the probative value of this information is not substantially outweighed by any undue prejudice. See Fed. R. Evid. 403.
B. Forms 8886 for Lontrac, LLC; Battelle Glover Investments, LLC; and White Path, LLC
As previously discussed, section 6103(h) permits the disclosure of tax returns and tax return information "in a Federal or State judicial or administrative proceeding pertaining to tax administration, but only if the taxpayer is a party to the proceeding, or the proceeding arose out of, or in connection with, determining the taxpayer's civil or criminal liability." See I.R.C. § 6103(h)(4)(A)(emphasis added). It is unclear whether Lontrac, LLC; Battelle Glover Investments, LLC; and White Path, LLC (referred hereafter as "The Partnerships") are either "parties to the proceeding" or whose tax return or return information "arose out of, or in connection with, determining the taxpayer's civil or criminal liability." Id. Therefore we will consider both issues below.
A partner is considered a party to a proceeding per section 6226(c) and (d) when, in the case of a partner petitioning readjustment to the partnership's tax liability, such partner was a partner during the year in question and had an interest in the outcome of the case. Presumably, if a partner is a party to the proceeding, the government may disclose all tax returns or return information. Such disclosures are, nevertheless, subject to the FRE.
What remains unclear is how The Partnerships would be considered parties under 6103(h). The information sought to be disclosed are Forms 8886 from The
Partnerships. Presumably, respondent seeks to introduce these Forms 8886 under the theory that section 6103(h)(4) permits the disclosure of any tax returns or return information that pertains to Mr. Adams, as a partner to these partnerships and a party to the matter. However, it is unclear whether these Forms 8886 were included with (or part of) Mr. Adam's Form 1040, or whether respondent received these forms from The Partnerships. The Court also notes how these Forms 8886 relate to tax years 2013, 2014 and 2015.
According to the instructions, any taxpayer (including individuals and partnerships) that participates in a reportable transaction is obligated to file a Form 8886.
Alternatively, if we apply the 6226(c) and (d) partnership-party test at the entity level, The Partnerships would not necessarily constitute parties to the action and 6103(h)(4) would not permit disclosure of the Forms 8886. However, section 6103(h)(4)(A) also provides for the disclosure of tax information; therefore, we must now turn our analysis to the "in connection with" portion of the statute.
Previously, this court has interpreted the "in connection with" portion of section 6103(h)(4)(A) as a "but for" test. See Whistleblower 972-17W v. Commissioner, 159 T.C. 1, 10 (2022). In concluding that a case arose "in connection with" a taxpayer's tax return or return information, the court found that "the outcome of that action . . . are clear but-for causes of the proceeding before the Court." Id. Applying this same test here, it is not clear if the proceedings before us did (or did not) arise in connection with the filing of Forms 8886. It is also unclear whether these Forms have any bearing on the ultimate issue before the Court.
We conclude that we do not have sufficient information to rule on the admissibility of these Forms at this time. Accordingly, we will reserve our ruling until trial resumes on petitioner's objection as to the remaining Forms 8886 for Lontrac, LLC; Battelle Glover Investments, LLC; and White Path, LLC, found in Exhibit 59-J.
II. Statements contained in the First, Second, and Third Stipulations of Fact are relevant
Petitioner has objected to the repeated statement contained in the First, Second, and Third Stipulations of Fact, as substantially more prejudicial than probative under the FRE. According to respondent the repeated statement is relevant since it's evidence as to a badge of potential fraud by petitioner. See Fed. R. Evid. 403; Sestak v. Commissioner, T.C. Memo. 2022-41 (2022).
Evidence of fraudulent intent may require a "(1) understated income, (2) keeping inadequate records, (3) giving implausible or inconsistent explanations of behavior, (4) concealing income or assets, or (5) failing to cooperate with tax authorities." Id. at 12-13. Presumably, the inclusion of these statements in the stipulation of facts is to show that petitioner (or Mr. Adams) failed to cooperate during audit or discovery.
We find the statement, at a minimum, relevant to respondent's allegations of fraud. The Court is also comfortable that the statement's probative value is not in danger of being substantially outweighed by unfair prejudice to petitioner.
Based on the foregoing, it is
ORDERED that petitioner's objection as to Exhibit 58-J is overruled, and petitioner's objection to Exhibit 59-J is overruled in part, as to Form 8886 for Big K, LLC. It is further
ORDERED that petitioner's objection to statement: "This Exhibit was not included in any production by petitioner to respondent during the audit or during discovery" found in paragraphs 165, 166, 173, 178-181, 205, 223-230, 232, 243, 249, 255, 267, 270-272, 274-276 of the First, Second and Third Stipulations of Facts, is overruled. It is further
ORDERED that we reserve ruling on petitioner's objection to Exhibit 59-J, as to the remaining Forms 8886 for Lontrac, LLC; Battelle Glover Investments, LLC; and White Path, LLC.