Opinion
6225-16 16847-16
07-27-2022
MICHAEL R. KELLY, ET AL., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Joseph Robert Goeke Judge
On July 8, 2022, respondent filed a computation for entry of decision under Rule 155, and on July 15, 2022, petitioner filed a computation for entry of decision and a Motion for Leave to File Motion for Reconsideration of Findings or Opinion Pursuant to Rule 161.
All Rule references are to the Tax Court Rules of Practice and Procedure, and all section references are to the Internal Revenue Code in effect for the relevant years.
The parties agree to the computations for 2007, 2008, 2009, and 2011, and disagree over the computation for 2010. Respondent's July 8, 2022, computation seeks to increase the amount of the deficiency for 2010 from the amount in his December 3, 2021, computation, on the basis of inclusion of approximately $19.2 million in cancellation of indebtedness (COD) income that was not reflected in his prior computation.
Rule 155 Computations Procedures
When the parties in their respective Rule 155 computations disagree about the amount of tax due, the Court affords them an opportunity to express their views. Rule 155(b). Such argument is "confined strictly to consideration of the computation of the amount to be included in the decision"; a Rule 155 computation is not regarded as "affording an opportunity for retrial or reconsideration" or for the parties to raise new issues. Rule 155(c); Vento v. Commissioner, 152 T.C. 1, 8 (2019), aff'd, 836 Fed.Appx. 607 (9th Cir. 2021). If the parties disagree about the amount of tax due, the Court, after considering the parties' arguments, will determine the correct amount and will enter its decision accordingly. Rule 155(b). There is no requirement in a Rule 155 case that the parties reach agreement on the ultimate tax computation.
Our role is to determine whether the decision documents proposed by the parties are in accord with our opinion. We determine that respondent's computation for 2010 that he filed on December 3, 2021, is in accord with our Opinion and is correct except with respect to the amount of capital gain. We determine that petitioner had capital gain of $22,729,956 for 2010, as reflected in respondent's revised computation filed July 8, 2022.
Respondent's computation for entry of decision filed December 3, 2021, did not include the $19,329,039 adjustment for COD income, but this adjustment is included in his July 8, 2022, computation. We determined this amount to be COD income unrelated to NSI. T.C. Memo. 2021-76, at 40-41. However, it is improper to include this adjustment in the computation as it raises issues with respect to the solvency computation. The entire amount could be excluded from petitioner's gross income on the basis of his insolvency and we find that respondent's failure to include the adjustment in his prior computation is a concession that it is so excluded.
We direct the parties to file a decision document on the basis of respondent's December 3, 2021, computation for 2010 with the correction of the amount of capital gain of $22,729,956, and in accordance with the parties' agreement to the deficiencies and penalties, if applicable, for 2007, 2008, 2009, and 2011.
Procedural Background
On December 3, 2021, the parties each filed computations for entry of decision. By Order, dated December 7, 2021, we directed the parties to state their disagreement with each of the specific items in the opposing party's computation and to explain the basis for any disagreement.
In response in a January 31, 2022, memorandum, respondent provided a detailed explanation of his computation including a detailed explanation of how he computed capital gain of $46,546,551 for 2010, which included capital gain related to pre-2008 NSI debt and 2010 NSI distributions totaling $38,981,696 plus 7 other components of the capital gain calculation that account for the remainder of the $46,546,551, or $7,564,855.
Petitioner stated in his January 31, 2022, memorandum that the parties agreed to the capital gain computation except with respect to pre-2008 NSI debt. Thus, petitioner agreed to capital gain from NSI distributions of $3,451,696 during 2010 and the $7,564,855 of other capital gain, for a total concession of $11,016,551. P. Memo. (Jan. 31, 2022) at 12. Petitioner only disagreed with inclusion of the pre-2008 NSI debt, which respondent computed as $35,500,000, arguing that it should be excluded from his gross income in its entirety on the basis of his insolvency.
Respondent's revised computation includes the $11,016,551 in capital gains conceded by petitioner and also includes the pre-2008 NSI debt of $35.5 million less petitioner's negative net worth of $23,818,095 in accordance with our Order dated February 4, 2022, that stated that pre-2008 NSI debt is excluded from petitioner's gross income to the extent of his insolvency.
Despite petitioner's concession and/or failure to address $11,016,551 in capital gain, his July 15, 2022, computation includes capital gain of only $2,526,188. Petitioner's failure to acknowledge his concession and repeated failure to provide clear information to the Court and respondent with respect to his computations has significantly impaired our ability to enter a prompt decision, establishes a lack of good faith, and reflects the poorly maintained business records that we have dealt with throughout this proceeding.
In his latest papers, petitioner continues to assert his disagreement with our insolvency computation. In our Opinion, T.C. Memo. 2021-76, we held that the insolvency computation requires the elimination of loans from petitioner's closely held companies. Id. at 3-4. We further stated that for purposes of the insolvency computation, we adopted respondent's computation of petitioner's liabilities of approximately $88.5 million for the Rule 155 computation. Id. at 64.
On March 4, 2022, respondent filed a supplemental memorandum in which he conceded that petitioner had additional liabilities of approximately $6 million, had total liabilities of $94,550,519.95, and a negative net worth of $23,818,095. Accordingly, respondent's computation correctly excludes $23,818,095 of the COD income from the pre-2008 debt from gross income. This exclusion is reflected in the capital gain adjustment in respondent's July 8, 2022, computation.
Upon due consideration, it is
ORDERED that petitioner's Motion for Leave to File Motion for Reconsideration of Findings or Opinion Pursuant to Rule 161, filed July 15, 2022, is denied. It is further
ORDERED that the parties are directed on or before August 22, 2022, to submit to the Court signed decision documents, or in the alternative, to file with the Court a joint written report as to the then current status of these cases.