5-Hour Energy Says IRS Raises New Issues in Petition for Redetermination

INNOVATION VENTURES, LLC, MANOJ BHARGAVA,
TAX MATTERS PARTNER,
Petitioners,
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent

UNITED STATES TAX COURT

REPLY TO AMENDED ANSWER

Pursuant to Rules 37 and 41 of the Tax Court's Rules of Practice and Procedure, Petitioner hereby respectfully replies to Respondent's Amended Answer, which Respondent filed as a matter of right within 30 days of filing his Answer, as follows:

10.a.5. Denies, to the extent this averment is an allegation rather than a legal conclusion to which no response is required.

10.a.7. Denies, to the extent this averment is an allegation rather than a legal conclusion to which no response is required.

10.a.11. Denies. After examination of Mr. Bhargava's¹ Form 1040, Mr. Bhargava agreed to Respondent's disallowance of his charitable contribution deduction on the grounds that a contemporaneous written acknowledgement could not be located.

10.a.15. Denies second sentence, to the extent this averment is an allegation rather than a legal conclusion to which no response is required.

10.a.18. Denies first sentence, to the extent this averment is an allegation rather than a legal conclusion to which no response is required.

10.a.20. Denies, to the extent this averment is an allegation rather than a legal conclusion to which no response is required.

10.a.21. Denies, to the extent this averment is an allegation rather than a legal conclusion to which no response is required.

10.a.22. Denies, to the extent this averment is an allegation rather than a legal conclusion to which no response is required.

10.b.3. Denies first sentence, to the extent this averment is an allegation rather than a legal conclusion to which no response is required.

10.b.4. Denies, to the extent this averment is an allegation rather than a legal conclusion to which no response is required. MIR was Mr. Bhargava's wholly owned entity at the time it obtained the 10,656 Class A Units, but it was subsequently owned by Nevada 5.

10.b.5. Denies, to the extent this averment is an allegation rather than a legal conclusion to which no response is required.

12. Denies, to the extent this averment is an allegation rather than a legal conclusion to which no response is required. The FPAAs adjusted the section 754 amortization deductions reported by Petitioner by disallowing a portion of the amounts, as reflected in the table below. Respondent's Amended Answer now increases the disallowed amounts, as further reflected in the table below.

Tax Year	Amount Reported as Shown in FPAAs	Amount Disallowed in FPAAs	Amount Disallowed as Alleged in Respondent's Amended Answer	Net Increase to Amount Disallowed as Alleged in Respondent's Amended Answer
2009	$60,570,917	$43,166,039	$60,570,917	$17,404,878
2010	$88,271,269	$75,065,401	$88,271,269	$13,205,868
2011	$117,533,657	$104,327,789	$117,533,657	$13,205,868
2012	$125,120,025	$111,914,157	$125,120,025	$13,205,868
2013	$125,120,025	$111,914,157	$125,120,025	$13,205,868

These are new matters under Rule 142(a)(1) of the Tax Court's Rules of Practice and Procedure, upon which Respondent bears the burden of proof.

12.a. Admits.

12.b. Denies for lack of sufficient knowledge or information.

12.c. Admits.

12.d. Denies each and every allegation contained in Respondent's Paragraph 12.d.

12.e. Denies first sentence for lack of sufficient knowledge or information. Admits that the pleadings in Indu Rawat v. Commissioner, Dkt. No. 15340-16, are consistent with second sentence. Alleges that Respondent's assertions in his Amended Answer are contrary to Respondent's assertions in Indu Rawat v. Commissioner, Dkt. No. 15340-16, pending before this Court.

12.f. Admits that Edward Snyder gave 5,050 Class A Units to RIST.

Denies that Savindar Sajwan gave 606 Class A Units to RIST. Admits that Ravinder Sajwan gave 606 Class A Units to RIST.

12.g. Denies. Alleges that Acquisition Co. purchased 5,050 Class A Units from RIST by issuing a secured promissory note in the amount of $5,130,000 and separately purchased 606 Class A Units from RIST by issuing a secured promissory note in the amount of $615,000.

12.h. Admits that RIST is a qualified tax-exempt charity under section 501(c)(3). Denies the remainder for lack of sufficient knowledge or information.

12.i Denies each and every allegation contained in Respondent's Paragraph 12.i.

12.j. Denies each and every allegation contained in Respondent's Paragraph 12.j.

12.k. Denies each and every allegation contained in Respondent's Paragraph 12.k.

12.l. Admits first sentence. Denies second sentence. Denies third sentence for lack of sufficient knowledge or information.

12.m. Denies first sentence and second sentence. Admits that RIST was not allocated any income or loss but denies the remainder of third sentence. The FPAAs adjusted the section 754 amortization deductions reported by Petitioner by disallowing a portion of the amounts as reflected in the table above in Paragraph 12. Respondent's Amended Answer now increases the disallowed amounts as further reflected in the table set forth above in Paragraph 12. These are new matters under Rule 142(a)(1) of the Tax Court's Rules of Practice and Procedure, upon which Respondent bears the burden of proof.

12.n. Denies first sentence. Admits second sentence. Denies third sentence. Denies fourth sentence for lack of sufficient knowledge or information.

12.o. Denies first sentence for lack of sufficient knowledge or information. Admits that David Lieberman executed the First Amendment to the Knowledge Medical Research Charitable Trust, with an effective date of March 31, 2009, but denies the remainder of second sentence for lack of sufficient knowledge or information. Denies third sentence for lack of sufficient knowledge or information.

12.p. Admits. Alleges that Petitioner's 2009 amended return reported $58,792,357, not $60,570,917.

12.q. Admits first sentence. Denies second sentence for lack of sufficient knowledge or information.

12.r. Admits.

12.s. Denies that Mr. Bhargava transferred Class A Units through RIST to Nevada 5. Denies the remainder for lack of sufficient knowledge or information.

12.t. Denies first sentence, to the extent this averment is an allegation rather than a legal conclusion to which no response is required. Denies second sentence, to the extent this averment is an allegation rather than a legal conclusion to which no response is required. The FPAAs adjusted the section 754 amortization deductions reported by Petitioner by disallowing a portion of the amounts as reflected in the table above in Paragraph 12. Respondent's Amended Answer now increases the disallowed amounts as further reflected in the table set forth above in Paragraph 12. These are new matters under Rule 142(a)(1) of the Tax Court's Rules of Practice and Procedure, upon which Respondent bears the burden of proof. Alleges that after examination of Petitioner's Form 1065 for 2008, Petitioner and Respondent entered into an agreement in which the parties agreed: Indu Rawat sold her interest to Acquisition Co.; Mr. Bhargava was entitled to a section 743(b) adjustment; and the amount of the section 743(b) adjustment would be adjusted to reflect the reclassification of a portion of 15-year goodwill property as inventory, which amount was deductible in 2008.

12.u. Denies, to the extent this averment is an allegation rather than a legal conclusion to which no response is required. The FPAAs adjusted the section 754 amortization deductions reported by Petitioner by disallowing a portion of the amounts as reflected in the table above in Paragraph 12. Respondent's Amended Answer now increases the disallowed amounts as further reflected in the table set forth above in Paragraph 12. These are new matters under Rule 142(a)(1) of the Tax Court's Rules of Practice and Procedure, upon which Respondent bears the burden of proof.

12.u.1. Denies first sentence, to the extent this averment is an allegation rather than a legal conclusion to which no response is required. Denies second sentence, to the extent this averment is an allegation rather than a legal conclusion to which no response is required. The FPAAs adjusted the section 754 amortization deductions reported by Petitioner by disallowing a portion of the amounts as reflected in the table above in Paragraph 12. Respondent's Amended Answer now increases the disallowed amounts as further reflected in the table set forth above in Paragraph 12. The FPAAs did not include Respondent's allegations set forth in Respondent's Paragraph 12.u.1. These are new matters under Rule 142(a)(1) of the Tax Court's Rules of Practice and Procedure, upon which Respondent bears the burden of proof.

12.u.2. Denies, to the extent this averment is an allegation rather than a legal conclusion to which no response is required. The FPAAs adjusted the section 754 amortization deductions reported by Petitioner by disallowing a portion of the amounts as reflected in the table above in Paragraph 12. Respondent's Amended Answer now increases the disallowed amounts as further reflected in the table set forth above in Paragraph 12. The FPAAs did not include Respondent's allegations set forth in Respondent's Paragraph 12.U.2. These are new matters under Rule 142(a)(1) of the Tax Court's Rules of Practice and Procedure, upon which Respondent bears the burden of proof.

12.u.3. Denies, to the extent this averment is an allegation rather than a legal conclusion to which no response is required. Alleges that Respondent's Paragraph 12.U.3 lacks the clarity and specificity required by Rules 31 and 36 of the Tax Court's Rules of Practice and Procedure. The FPAAs adjusted the section 754 amortization deductions reported by Petitioner by disallowing a portion of the amounts as reflected in the table above in Paragraph 12. Respondent's Amended Answer now increases the disallowed amounts as further reflected in the table set forth above in Paragraph 12. The FPAAs did not include Respondent's allegations set forth in Respondent's Paragraph 12.u.3. These are new matters under Rule 142(a)(1) of the Tax Court's Rules of Practice and Procedure, upon which Respondent bears the burden of proof.

12.v. Denies first sentence and denies allegations in the FPAAs and in Respondent's Amended Answer. Denies second sentence, to the extent this averment is an allegation rather than a legal conclusion to which no response is required. Under Rule 142(a)(1) of the Tax Court's Rules of Practice and Procedure, Respondent bears the burden of proof in respect of this new matter.

12.w. Denies first sentence and denies allegations in the FPAAs and in Respondent's Amended Answer. Denies second sentence, to the extent this averment is an allegation rather than a legal conclusion to which no response is required. Under Rule 142(a)(1) of the Tax Court's Rules of Practice and Procedure, Respondent bears the burden of proof in respect of this new matter.

12.x. Denies for lack of sufficient knowledge or information, to the extent this averment is an allegation rather than a legal conclusion to which no response is required. Under Rule 142(a)(1) of the Tax Court's Rules of Practice and Procedure, Respondent bears the burden of proof in respect of this new matter.

13. In FURTHER REPLY, Petitioner denies each allegation of Respondent's Amended Answer not specifically admitted in this Reply. Petitioner further incorporates by reference the allegations in the Petition.

14. Affirmative Defenses. FURTHER REPLYING that Respondent makes numerous new assertions and allegations in Respondent's Amended Answer, Petitioner alleges that Respondent should be precluded from asserting these new matters, which are inconsistent and contradictory to positions it has taken in prior years. The facts upon which Petitioner relies as the basis for its affirmative defenses are as follows:

14.a. Petitioner incorporates all allegations in its reply to Respondent's Paragraph 12, including all subparagraphs, set forth herein.

WHEREFORE, Petitioner prays that after due proceedings the Court:

(i) Provide the relief set forth in the Petition;

(ii) Determine that under equitable principles Respondent is precluded or estopped from asserting the new matters raised in Respondent's Amended Answer and determine that those new matters are improper.

Dated: July 12, 2019

Respectfully submitted,

Jennifer E. Breen
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue NW
Washington, D.C. 20004
Telephone No.: (202) 739-5577
Tax Court Bar No. BJ1937
jennifer.breen@morganlewis.com

Sheri A. Dillon
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue NW
Washington, D.C. 20004
Telephone No.: (202) 739-5749
Tax Court Bar No. DS0248
sheri.dillon@morganlewis.com

William F. Nelson
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue NW
Washington, D.C. 20004
Telephone No.: (202) 373-6782
Tax Court Bar No. NW0106
william.nelson@morganlewis.com

James G. Steele, III
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue NW
Washington, D.C. 20004
Telephone No.: (202) 739-5790
Tax Court Bar No. SJ2284
james.steele@morganlewis.com

Counsel for Innovation Ventures, LLC, Manoj Bhargava, Tax Matters Partner