Securities Industry Commentator by Bill Singer Esq

December 28, 2018

In William E.Gustashaw and Nancy D. Gustashaw, Petitioners, v. Commissioner of Internal Revenue (Opinion, United States Court of Appeals for the Eleventh Circuit, No. 11-15406 / September 28, 2012), the 11Cir Opinion states in its syllabus:

Although a tax shelter can be legitimate, Petitioner William Gustashaw, Jr., participated in one that was not. Gustashaw claimed substantial tax benefits from the shelter on four consecutive tax returns. The IRS later disallowed Gustashaw's claim and determined deficiencies in tax and accuracy-related penalties, including gross valuation misstatement penalties and a negligence penalty. Gustashaw conceded the deficiencies in tax, but contested the penalties. The Tax Court affirmed the IRS's imposition of the penalties. After review and oral argument, we affirm.

Fast forward -- or perhaps, slow forward -- to 2018, and after the Gustashaws made a $4.5 million partial payment for taxes and penalties, the IRS issued a notice of intent to levy for unpaid portions of their tax liabilities. In response, the Gustashaws requested and received a hearing to consider their proposed installment agreement or offer-in-compromise. William E.Gustashaw and Nancy D. Gustashaw, Petitioners, v. Commissioner of Internal Revenue (Memorandum Finding, United States Tax Court, T.C. Memo 2018-215, Docket No. 23873-14L / December 27, 2018) As set forth in the preamble to the Tax Court Memo [Ed: footnote omitted]:

The Gustashaws filed this collection case pursuant to section 6330(d) to challenge the Commissioner's notice of determination sustaining a notice of intent to levy for 2000 and 2003 Federal income tax liabilities. They argue that the settlement officer abused his discretion in denying their offer-in-compromise. Additionally the Gustashaws contend that the settlement officer erred in calculating their reasonable collection potential by overvaluing an investment partnership, including the cash value of a life insurance policy, and failing to properly account for the Gustashaws' out-of-pocket health care and vehicle expenses. 

The settlement officer did not abuse his discretion in denying the Gustashaws' offer-in-compromise because the Gustashaws' reasonable collection potential far exceeded their final offer amount. He also did not err in calculating the values of the investment partnership and allowance for health care and vehicle expenses. Although the settlement officer erred by including the cash value of the life insurance policy, we find his error harmless, because after omission of the value of the life insurance policy, the Gustashaws' reasonable collection potential still exceeded their final offer.

For Securities Industry Commentator readers, an interesting aspect of the Tax Court Memo involves the valuation of a real estate limited partnership with CHI Investments Corp. As noted in the Tax Court Memo, in 2012, the Gustashaws had:

[I]ncluded with their offer a letter from the investment partnership's president, which they used to substantiate the value of their interest. The letter included a list of the Gustashaws' investments "valued for custodial holding purposes at the amount of principal left in the Fund", totaling over $400,000. The president stated in her letter that the funds are illiquid and "[t]here is no market for regular sale of these funds." Despite their illiquidity the president stated that "there is a possible secondary market to which a FINRA Broker/Dealer may have access, however I am unaware of how to access that myself. About three years ago one of our investors did sell their Fund holdings on this secondary market, but I believed they received less [than] $.50 on the dollar valuation." The Gustashaws provided a handwritten document and supporting Schedules K-1, Partner's Share of Income, Deductions, Credits, etc., showing $9,767 of distributions from the investment partnership in 2011 but provided no other documentation substantiating its value.

In 2014, in a revised offer-in-compromise, the Gustashaws, among other things, calculated the investment partnership value to be $162,197 with a quick sale value ("QSV" -- typically an 80% valuation / 20% discount) of $129,758. In response, the settlement officer calculated the partnership's value at $405,493 with a QSV of 60% or $162,197. In response to the settlement officer's valuation:

The Gustashaws argued that the investment partnership was worthless and unmarketable. They included a followup letter from the president of the investment partnership stating that "it is unlikely that you could find a secondary market for sale of the funds and the structure of the private placement memorandum does not allow for liquidation of fund investments." Her letter further stated that two holdings had sold on the secondary market, but that "they sold at less than 50 cents on the dollar of remaining principal at that time." Finally she informed the Gustashaws that she was "not a FINRA broker or rep" and "cannot say with complete and total certainty that [they] might not be able to find some secondary market".

As noted in the Tax Court Memo, the settlement negotiations failed and the:

The settlement officer informed the Gustashaws that he was not able to accept their position on the investment partnership, life insurance trust, and out-of-pocket health care and vehicle expenses. But agreeing to an adjustment for Mr. Gustashaw's leg injury and for other undisputed items, the settlement officer adjusted their reasonable collection potential to $2,300,683. Despite this reduction the settlement officer informed the Gustashaws that he was unable to recommend acceptance of their $1,507,413 offer. He suggested that if the Gustashaws amended their offer to the amount he had determined to be their reasonable collection potential, he would recommend acceptance. The following day the Gustashaws submitted an amended offer for $1,650,000.

In its analysis of the investment partnership issue, the Tax Court found that [Ed: footnotes omitted]:

In considering an offer-in-compromise the Commissioner values a taxpayer's assets at their net realizable equity. Net realizable equity is the "quick sale value (QSV) less amounts owed to secured lien holders with priority over the federal tax lien". The Commissioner generally calculates the quick sale value at 80% of the fair market value of the asset. 

The Gustashaws' initial Form 433-A assigned a value in the investment partnership of $199,347, while later Forms 433-A assigned a value of $162,197 and finally $129,758 after a 20% discount. They submitted letters from the president of the investment partnership indicating that the value of the partnership was difficult to determine and "[t]here is no market for regular sale of these funds." The letters referenced sales where, to the president's knowledge, sellers received "$.50 on the dollar" for their interest. The Gustashaws did not provide any other evidence relating to the investment partnership's value and argue that it is worthless with an appropriate value of zero. 

The settlement officer did not abuse his discretion in using a 60% discounted quick sale value for the partnership investment. The record shows that the settlement officer used the values reported by the Gustashaws and reviewed the accompanying documents indicating sales generating less than 50 cents on the dollar. These documents do not conclude that the investment partnership is worthless, only that it would be difficult to sell on the secondary market. Additionally the president's letter indicates that she is not a broker of these types of deals, simply stating that any discount a buyer "would want would probably erase a majority of the remaining value". Finally the letters indicate a possibility of selling the investment partnership interest on the secondary market through a Financial Industry Regulatory Authority (FINRA) broker or dealer. Despite this information the Gustashaws did not contact a FINRA broker and failed to produce further documentation regarding the value of the investment partnership. 

Without any further evidence as to the investment partnership's value the settlement officer assigned a discount value of 60%, a discount far greater than advised in the Internal Revenue Manual. The settlement officer's determination of the investment partnership's value is reasonably based on the information provided by the Gustashaws and is not an abuse of discretion.

In the Matter of the Arbitration Between Bruce L. Sanft Revocable Trust Bruce L. Sanft IRA, Claimants, v. UBS Financial Services Inc,, Respondents (FINRA Arbitration 17-01761/ December 27, 2018) 
Public customer Claimants filed a Statement of Claim in July 2017 asserting failure to supervise; negligent supervision; negligence; breach of contract; breach of fiduciary duty; misrepresentation; omission of material facts; and over-concentration in connection with investments in structured notes. Claimants sought $350,000 in compensatory damages, interest, and costs. Respondent UBS generally denied the allegations, asserted various affirmative defenses, and sought the expungement of the matter from the Central Registration Depository records ("CRD") of non-party Gerard L. Danzi. In June 2018 the matter settled without contribution from  Danzi, and the sole FINRA Arbitrator conducted a telephonic expungement hearing at which Claimants did not attend and did not contest the requested relief. The Arbitrator recommended the expungement of the matter based upon a finding that the claim, allegation, or information is factually impossible or clearly erroneous, and that Danzi was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. As noted in the Decision:

Non-party Danzi was merely an order taker. Claimants would request information regarding what was available and would direct non-party Danzi to make the purchase. There was no sales practice violation, as Claimants were very sophisticated investors and non-party Danzi worked to meet their investment demands.
In today's featured FINRA Arbitration we got a number. A BIG number. It's a demand by public customers for $7.8 million in damages from Morgan Stanley Smith Barney and Wells Fargo Advisors. In today's FINRA Arbitration we also have some interesting Claimants.  We got former New England Patriots, Philadelphia Eagles, and Atlanta Falcons cornerback Asante Samuels, who, for whatever it's worth, has a tattoo on his arm that says "Get Rich To This." We got former Madison Square Garden employee, James Groves, who in 2009 won half of a $336 million Mega Millions jackpot. Obviously, we're tossing around some big bucks here, and that makes for an all the more interesting lawsuit. Except, FINRA's a bit of a party pooper. The FINRA Arbitration Decision is more titillation than explanation, but since you can't always get what you want, we're gonna have to make due with what we have.