In Uncategorized on 07/01/2015 at 18:06

But Incompetence Isn’t Frivolous

Two for the price of one to open the July meet at Tax Court.

First we have Robert L. Porter, 2015 T. C. Memo. 118, filed 7/1/15. A self-employed cement subcontractor, Rob fell in with We The People, the Patriot Network, and Richard Cornforth. He liked what they sold him (the usual protester stuff), so he ditched his records, stopped filing returns and paying taxes, and when IRS handed him some SFRs, bombarded the RA with protester jive and irrelevant Forms 12153.

Then Rob tried to quash the subpoena for his bank records. When the USDCMDF tossed his motion, all Rob’s unreported income came tumbling down, and Rob saw the light.

Repentant Rob petitions the SNOD, hires a CPA, works with IRS and gets some deductions allowed, with the usual Cohan chops for inexactitude of his own making.

IRS wants the 75% fraud chop, and Rob has enough badges to become an Eagle Scout of Tax Fraud.

But Rob claims he came clean, albeit on the eve of trial.

Judge Marvel: “While we commend petitioner for his efforts to reconstruct his income and expenses for the years at issue and later years, later repentant behavior does not absolve a taxpayer of his antecedent fraud.” 2015 T. C. Memo. 118, at p. 53. (Citations omitted).

Rob’s previous misdoings are not absolved, at least for tax purposes, unlike another repentant sinner on “a green hill far away, outside the city wall,” in a much more exalted context.

Now Judge David Gustafson, that most Obliging Jurist, has an off-the-bencher that shows a good tactical move by a pro se, which we practitioners may wish to consider.

It’s Barbara Kupersmit, and she’s survived Judge Gustafson’s octopus juggling from last month. Remember Barb and Judge Gustafson’s multi-faceted strategic analysis? No?

Then see my blogpost “Judge Gustafson’s Conundrums,” 6/2/15.

Barb, faced with a menu that would tax (pun intended) the strategic wiles of the best amongst us, elects not to give Appeals “two bites at the apple” (Order, at p. 5).

Oh yes, the order in question is Barbara A. Kupersmit, Docket No. 13428-14L, filed 7/1/15.

So Barb goes for de novo review of her Section 6702 frivolous return chop at her Philadelphia trial. Judge Gustafson tossed IRS’s motion for continuance and remand back on 6/2/15, more particularly set forth in my blogpost abovecited, as my already-drinking-the-second-Grey-Goose-Gibson colleagues would say.

So Barb and IRS go at it, and the return at issue, filed by Barb and hubby Harold, don’t look so good.

Judge Gustafson: “The Kupersmits’ return reported taxable interest on line 8a as ‘Est 1,400’. On line 13 (‘Capital gain or (loss)’), it reported ‘LOSS 201,387’, but no Schedule D was attached. On Line 14 (‘Other gains or (losses)’), it reported ‘RACE TRACK GAMBLING LOSS 0′. On line 40 (‘Itemized deductions’) it reported ‘EST 12,500’. In the payments section it included two figures–3408 and 9125.76–that it appears to identify as ‘PRIOR YEAR UNCLAIMED REFUND’, and that are apparently added to yield the amount of 12,525.76, which as written straddles the line between line 73 (the amount overpaid) and line 74a (the amount to be refunded). That computation of the overpayment ignores the entries on line 64 (‘Federal income tax withheld’) and line 65 (‘2007 estimated tax payments’) that presumably should have increased the claimed overpayment. To the return were attached (1) a blank Form 1040 for the year 2011, and (2) five pages of copies of filings in a lawsuit brought against the Kupersmits by Citizens Bank of Pennsylvania, some of which appear to assert that the IRS should be enjoined from taking action against the Kupersmits.” Order, at pp. 3-4.

Oh, by the way, this return was filed five (count ‘em, five) years late.

Look like a Section 6702 frivolous return to you?

Well, not to Judge David Gustafson.

As you’ll remember from my aforesaid blogpost, Appeals never gave Barb the chance to challenge the 6702 chop, although she’d never had a chance to challenge it before. Then IRS’s counsel never put in evidence the IRS’s file imposing the penalty in the first place, thus impeding judicial review.

Section 6702 chops aren’t assessable, so no SNOD and no prior opportunity before Collections shows up, breathing fire and slaughter. And Section 7491(c) lays burden of going forward squarely on IRS’s shoulder, when penalty shots are on the line.

So IRS’s counsel is in the unhappy Michael Corleone position.

“Only if the Commissioner met that burden did the burden then shift to Ms. Kupersmit to convince us otherwise. Because the penalty liability was the only issue in the case, the Court instructed the Commissioner to proceed first at trial, in order to attempt to carry his burden of production to show that the return was subject to penalty under section 6702(a). The only evidence he put on was the tax return (which the parties had stipulated) and testimony of Mr. and Mrs. Kupersmit.” Order, at pp. 7-8.

Not good enough.

There’s an accuracy penalty, but that’s a Section 6662(a) chop, not Section 6702. There’s no showing that the return was intended to espouse an identified frivolous position. The items shown on the return aren’t facially frivolous, nor are there 1099s or any other third-party info in the record to show intentional misstatements or contradict what Barb and hubby Harold put down.

Mere slop doesn’t equal chop.

IRS tries a finesse on the post-trial brief, but it’s a loser. IRS contends that the return is an attempt to delay or impede tax administration, per Section 6702(a)(2)(b). But the record was closed at that point, that position was never argued pre-trial or during trial, and IRS put in no evidence of delay or impedance, so it’s a total nonstarter.

“Counsel seemed to suggest that the most confounding irregularity on the Kupersmits’ return was its omission of Schedule D to itemize the capital loss reported on line 13. That is indeed a serious irregularity; but such an omission is explicitly characterized by the Code not as a frivolous position but as a ‘mathematical or clerical error’, sec.  6213(g)(2)(D), for which the Code gives the Commissioner a decisive solution, see sec.6213(b)(1) . Against the Commissioner’ s argument that the return ‘reflects a desire to delay or impede the administration of Federal tax laws’, a contrary argument that is more persuasive to us, particularly after observing the Kupersmits’ testimony and demeanor, is that the return simply reflects a lack of competence. We do not think that the penalty of section 6702(a) was intended to penalize that defect.” Order, at pp. 10-11.

IRS’s counsel has suffered enough, so I won’t name him. But why not mention every basis for a Section 6702 chop in your answer? Why not get the file, or have someone able to testify to its absence, and get the RA and the AO to testify?

But for those of us on the other side of the table, think about taking a remand. Is it always a good idea? Go over Judge Gustafson’s conundrums. Think about this case. Then take a deep breath before asking for, taking, or declining a remand to Appeals.

And tell ‘em Barb and David sent you.


In Uncategorized on 06/30/2015 at 17:26

If You Want to be Taxed Thereon

 No, this is not The Weavers’ classic injunction to the union miners; au contraire, this is the story of a Harvard-Stanford trained venture-capitalist who sought to keep his hand upon the dollars locked up in his super-successful start-ups. And gets taxed therefor.

Come along with me, if you will (in the words of the late W. David Curtiss, Esq., from long ago and Far Above), as we follow the trail of Jeffrey T. Webber, 144 T. C. 17, filed 6/30/15, with Judge Lauber as our guide.

JT got a Cayman Island insurer to write two variable life policies on elderly relatives. Variable life means no fixed premium and no fixed benefit; the policyholder puts up cash or securities. These are investments, whose success or failure fund the policies. If the investments make money, the benefit goes up. If they lose, the policyholder stumps up enough cash to cover the mortality risk (actuarially-derived) of the insured life departing this vale of tears, and the benefit is whatever is left.

JT had a bushelbasketful of startups, a messy divorce, a couple kids (hi, Judge Holmes) and an allergy to income taxes.

His trusty lawyer puts him into these deals, warning him of the risks of “investor control.”

If JT lets the independent investment advisors furnished by the Cayman Islanders choose the investments and keeps his hands off same, all the accretion on the accounts is tax-free to JT, and when the old folks head to the last round-up, death benefits are tax-free to JT.

JT follows the paths of many clients: his lawyer can say what he likes, and JT does what he likes.

Though a set of trusts, from Alaska to the Bahamas to Delaware, and investment managers and banks, create an illusion of independent management, JT, via trusty lawyer, pays the piper and calls the tune.

Every investment is in one of the startups wherein JT already has a substantial stake. The advisers do whatever trusty lawyer tells them to do (of course with JT’s blessing on each and every act or forbearance), exchanging e-mails in which they call the biggest trust, fetchingly named “Boiler Riffle,” “Jeff’s Wallet.” Oh, those cutesy names. And, oh those e-mails, more than 70,000 discoverable ones.

Judge Lauber decides that Skidmore deference is due Rev. Rul. 77-85, 1977-1 C.B. 12.

You remember that “Skidmore deference…is the lowest. If Mayo deference is the equivalent of ‘Aye aye, sir’ and salute the quarterdeck, then Skidmore is the equivalent of ‘yeah, ok’, ranking just above ‘meh’. This is from my blogpost “The Junk Mailer Gets Trashed,” 10/24/13.

And even though Rev. Rul. 77-85 had to do with annuities, and even though a USDCDC case threw it out, the Circuit Court of Appeals reversed the case for want of jurisdiction. And IRS has been telling the same story time out of mind.

If you hand is on the dollar, or the means whereby the dollar is realized, it’s your money for income tax purposes.

So JT gets nailed.

But trusty lawyer wasn’t an enabler; he didn’t get more than his usual hourly rate. And relayed JT’s orders to the Caymans. But he did do some due diligence, had credentials, knew the whole story, and JT didn’t understand variable life insurance and its anfractuousities.

JT beats the 20% chop.


In Uncategorized on 06/29/2015 at 18:58

Once again we visit Form 2848, to see what it cannot do. That Steven N. Levi and Cristina Levi learn the hard way; thereby hangs the tale of 2015 T. C. Memo. 118, filed 6/29/15.

And it is a cautionary tale, both for preparers and their clients. The form doesn’t solve all your problems. In fact, it can be a landmine. Read the instructions, then the Regs therein cited, and govern yourselves accordingly.

Judge Dawson: “…petitioners hired Florida attorney S to prepare their Form 1040, U.S. Individual Income Tax Return…. …petitioners executed Form 2848, Power of Attorney and Declaration of Representative, appointing Ms. M and her assistant, Misty…, as their representatives. Ms. M prepared, signed, and timely submitted petitioners’ … return on their behalf, attaching thereto Form 2848, which states in relevant part: ‘Acts authorized. * * * the authority does not include * * * the power to sign certain returns’.” 2015 T. C. Memo. 118, at p. 2. (Names omitted).

In fact, an agent (not a power of attorney; a power of attorney is a piece of paper. An agent is one who acts by virtue of a POA) cannot sign a 1040 or other return except as set forth in Reg. 1.6012-1(a)(5).

Check out that Reg. And make sure you remember it. If you want the “good cause” exception, spell it out and file it in the right place (and attach it to the POA as well, for good measure), and get clearance as stated in the Reg, before you file the return. Ms. M may be getting The Phone Call; don’t y’all get it.

Steve’s and Cris’ attorney appears, disappears and asked to be restored. This is done, but none of Steve nor Cris nor attorney reply to IRS’s request for admissions. These track Reg. 6012-1(a)(5).

“The return of income may be made by an agent if, by reason of disease or injury, the person liable for the making of the return is unable to make it. The return may also be made by an agent if the taxpayer is unable to make the return by reason of continuous absence from the United States (including Puerto Rico as if a part of the United States) for a period of at least 60 days prior to the date prescribed by law for making the return. In addition, a return may be made by an agent if the taxpayer requests permission, in writing, of the district director for the internal revenue district in which is located the legal residence or principal place of business of the person liable for the making of the return, and such district director determines that good cause exists for permitting the return to be so made.” Re. 1-6012-1(a)(5).

That’s it, guys.

So the return Ms. M filed is no return at all. Even if IRS processed it, that doesn’t make it a return. So nonfiling chop follows, and if underpayment of withholding or ES, that follows too.


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