I need to thank Judge Mark Holmes of the Tax Court. Judge Holmes wrote an opinion today that is wonderful and has expanded my vocabulary. It’s also a great case.
Robert Willson bought a bar in Des Moines, Iowa. His bar burned down in 1994, but he persevered and rebuilt. However, Des Moines condemned his bar to expand the city’s airport. The IRS claimed that there was a large capital gain when the city condemned his bar. Mr. Willson disputed that, and the case ended up in Tax Court.
Mr. Willson’s bar catered to hair bands until one of the bands misused a smoke machine and caused the place to burn down. He rebuilt the bar, and rather than my paraphrasing the decision, here’s what Judge Holmes wrote:
He rented out the old house to a tenant who installed minor improvements (e.g., poles) and opened an establishment felicitously–and paronomastically–called the “Landing Strip,” in which young lady ecdysiasts engaged in the deciduous calisthenics of perhaps unwitting First Amendment expression…He also used $169,000 of his $200,000 insurance proceeds to rebuild the bar.
Two things happened around 1999: Des Moines condemned his property and the petitioner visited ClubFed. Mr. Willson did file his 2000 tax return, and the IRS did audit the return. The issue that had to be determined was Mr. Willson’s basis in the bar.
One key issue in the case is the fact that it is a small Tax Court case — an “S case.”
Rule 174(b) allows a taxpayer like Willson to introduce evidence in an S case that would otherwise not be admissible, and it lets us conduct the trial as informally as possible (consistent with orderly procedure) and to admit any evidence we decide has “probative value”–a fancy way of saying any evidence that helps or hurts Willson’s case. This looser rule is important here, because Willson presented his case quite credibly through his own testimony and that of others who worked at the bar or lived nearby during its heyday. Despite the raffish pasts of Willson and some of his witnesses, we found their testimony on his investment in the bar entirely credible.
Basis is always a troubling issue to explain, and this case is messy because of the fire. This case includes both ACRS and MACRS, boot, a fire, and other adjustments. The rest of the case goes into the formula that must be used to determine Mr. Willson’s capital gain. While “there are computations that still need to be made,” it appears that Mr. Willson will likely not owe as much as the IRS claimed.
Case: Willson v. Commissioner, T.C. Summary 2011-132