In Uncategorized on 09/21/2018 at 17:18

This is an old gripe of mine, but it needs to be refreshed and rebooted. Today, Alfred P. Ray & Hazel Carla Ray, Docket No. 13535-18, filed 9/21/18, provide me with my launchpad.

Alf & Hazel had separately petitioned two other years, with cases pending. They want to consolidate the year at issue with these, so they argue against IRS’ motion to dismiss for want of jurisdiction “…that because they have received a multitude of notices from the Internal Revenue service, presumably the including the CP2000 they provided to respondent, the Court should impute a notice of deficiency, invoke jurisdiction, and consolidate this case with their above-mentioned cases….” Order, at pp. 1-2.

Here’s Ch J Maurice B (“Mighty Mo”) Foley to tell Alf & Hazel the bad news.

“Petitioners have not established their burden with respect to [year at issue]. A Notice CP 2000 is a notice to taxpayers that the IRS intends to make changes to the return and invites the taxpayers to either agree or disagree. It is not a notice of deficiency. See I.R.C. sec 6313(b)(1)[sic; I think you meant 6213(b)(1), Judge]. Moreover, the taxpayer has no right to file a petition with the Tax Court based on such a notice, and the IRS is not prohibited under I.R.C. sec. 6213 (a) from collection activity. Id. Likewise, if a letter notice is not a notice of deficiency, then the Court lacks jurisdiction.” Order, at p. 2.

OK, Ch J, if it’s simply a numbers mistake, then Section 6213(b) rules. Likewise if it were a criminal restitution or claim-of-right carryback.

I’ve already ranted about IRS’ doublewide definition of “clerical” mistakes. See my blogpost “Manifest Injustice,” 5/4/18. I hope the taxpayer filed for a refund and won. Or that Nina E (“The Big O”) Olson laid a class-A whuppin’ on IRS.

And what about the Letter 4313C game, where the letter says there was a SNOD already issued, but IRS later says “Haha and hoho, fake out, no there wasn’t”?

There’s no mandatory form the SNOD must take. And the statute doesn’t mandate any.

“The notice [SNOD] ‘is only to advise the person who is to pay the deficiency that the Commissioner means to assess him; anything that does this unequivocally is good enough…. [M]istakes in the notice which do not frustrate its purpose, are negligible.’ O’Rourke v. United States, 587 F.3d 537 (2nd Cir. 2009), quoting Olsen v. Helvering, 88 F.2d 650, 651 (2d Cir. 1937).

So how is a civilian, unlearned in tax law, to know what is and what is not a SNOD, and whether or not s/he is in peril if s/he doesn’t blast in the sixty bucks and a petition to The Glasshouse?

Can IRS play cutesy with Alf & Hazel, litigate the other years separately to see how they come out, and leave Alf & Hazel hanging until IRS decides to drop a SNOD for the year at issue (assuming no SOL issue)? And claim issue/claim preclusion when Alf & Hazel petition the belated SNOD?

Apparently IRS can.

So everyone should petition everything except that which says in plainest English “two plus two is four, not three, dodohead.”

Or maybe IRS can decompose some brain tissue and do what I suggested a year ago in my blogpost “Should You Petition Everything?” 8/15/17.

“IRS can solve this simply. Atop everything they want to assert is a SNOD, put these words in bold-faced capital letters: STATUTORY NOTICE OF DEFICIENCY: PETITION TAX COURT, NOT IRS, IN 90 DAYS FROM DATE BELOW. SEE NOW.”




In Uncategorized on 09/20/2018 at 18:20

It’s been nearly a year since I last animadverted to Herman Melville’s classic tragedy, but Belair Woods, LLC, Effingham Managers, LLC, Tax Matters Partner, 2018 T. C. Memo. 159, filed 9/20/18, brings to mind the melancholy refrain of the immortal scrivener.

It’s yet another scenic easement. My colleague Mr Peter Reilly CPA was blogging about the recent Champion Retreat opinion (see my blogpost “Not Endangered – Except the Benderdinker,” 9/10/18). There’s lots of these scenic easement dodges, but political considerations raise their heads, so I’ll forbear to comment further.

The Belairs sent in the Form 8283 with appraisal attached. So far, so good. But one number is missing, and thereby hangs the cliché.

“In particular, Belair did not disclose on that form, as was required, the ‘cost or adjusted basis’ of the property that was the subject of the contribution. Petitioner contends that Belair strictly or substantially complied with that requirement or, alternatively, had reasonable cause for failing to meet it.” 2018 T. C. 159, at p. 2.

The deal was originally going to be a housing development, but the 2008 Meltdown put paid to that. So to set up the big tax break and put it in play, the Belairs went to “Forever Forests, LLC (Forever Forests), a consulting firm specializing in structuring conservation easements to maximize tax benefits for donors.” 2018 T. C. Memo. 159, at p. 4.

The Forever Foresters so massaged the deal that what the Belairs bought at $2.7K per acre in 2007 was suddenly worth $33.7K per acre by 12/30/09.

But the cost or adjusted basis never made it into the appraisal or the Form 8283.

“Belair contacted Forever Forests about preparing the Form 8283, specifically with reference to reporting its ‘cost or adjusted basis.’  Forever Forests relayed advice that it had received in 2008 from Baker Donelson, a law firm.  At Forever Forest’s request, an attorney at that firm had reviewed the instructions to Form 8283 and concluded that ‘[i]t should not be necessary to include the basis in formation * * * if you attach an explanation to Form 8283 providing a reasonable cause for why it is not included.’  He further stated that ‘a reasonable cause for not including basis information should be that the basis of the property is not taken into consideration when computing the amount of the deduction’.” 2018 T. C. Memo. 159, at p. 7.

So that’s what the Belairs tell IRS, plus they have a 12-month holding period, so it’s a capital gain.

Well, Judge Albert G (“Scholar Al”) Lauber is not amused.

“Belair did not report its cost basis as the regulation requires and as Form 8283 directs.  And the explanation Belair attached to that form, far from showing that it was unable to provide this information, simply asserted that the information was not necessary.  In effect, Belair asserted that taxpayers are free to ignore the requirement that they report cost basis.  Asserting that one may ignore a requirement does not constitute strict compliance with it.” 2018 T. C. Memo. 159, at pp. 11-12.

Belair isn’t doing so great, but now they put in their entry for the Taishoff “Best Excuse” no-prize sweepstakes.

“Petitioner contends Belair had reasonable cause for omitting basis information because it did not know what basis to report.  On the facts here, petitioner says, the term ‘basis’ might refer to any of the following: (1) the cost of the parent tract, (2) the cost of the conserved portion of the parent tract, (3) the adjusted basis of the conserved portion minus the homesite parcels, or (4) the basis of the easement itself, which petitioner says is zero.  Because the term ‘basis’ in the context of a conservation easement is supposedly ambiguous, petitioner contends that Belair had reasonable cause for not supplying basis information.” 2018 T. C. Memo. 159, at p. 12.

But the Belairs didn’t mention this in the attachment to the Form 8283. The Belairs counter that Reg. 1.170A-13(c)(4)(iv)(H) says they don’t lose the deduction if they furnish the information to IRS on request, and they did. Three years later, at the audit.

Judge Lauber is definitely not amused.

“Belair supplied the required information three years after its return was filed and only upon learning the outcome of the IRS examination.  The regulations create a prophylactic rule designed to provide the IRS with information to help it decide whether to commence an examination.  This requirement would be meaningless if a taxpayer could cure noncompliance after the examination was completed.” 2018 T. C. Memo. 159, at p. 14.

Sort’a like getting the Boss Hoss sign-off after the tax has been assessed on the trial, Judge?

“When a taxpayer claims a charitable contribution deduction for recently purchased property, a wide gap between cost basis and claimed value raises a red flag suggesting that the return merits examination. Unless the taxpayer complies with the regulatory requirement that he disclose his cost basis and the date and manner of acquiring the property, the Commissioner will be deprived of an essential tool that Congress intended him to have.” 2018 T. C. Memo. 159, at p. 17.

The Belairs says IRS could wade through their return to find the basis. Another nonstarter.

“Specifically, petitioner contends that Belair supplied information from which its cost basis could be derived in one or more of the following attachments to its Form 1065:  (1) Schedule L, Balance Sheets per Books, (2) Schedule M-1, Reconciliation of Income (Loss) Per Books With Income (Loss) Per Return, (3) a section 743(b) election and calculation sheet, and (4) the attached appraisal, which included a history of the parent tract.

“We are not persuaded.  The regulations require that ‘an appraisal summary shall include’ information concerning basis.  Sec. 1.170A-13(c)(4)(ii)(E), Income Tax Regs.  The explicit disclosure of basis on Form 8283 is essential in alerting the Commissioner as to whether (and to what extent) further investigation is needed.” 2018 T. C. Memo. 159, at pp. 19-20.

“The IRS reviews millions of returns each year for audit potential, and the disclosure of cost basis on the Form 8283 itself is necessary to make this process manageable.  Revenue agents cannot be required to sift through dozens or hundreds of pages of complex returns looking for clues about what the taxpayer’s cost basis might be.” 2018 T. C. Memo. 159, at p. 20.

The Belairs claim they relied on the Forever Foresters and their lawyer. But it’s a fact question how expert the Forever Foresters were, what the Belairs told them and whether the Belairs relied in good faith.

Takeaway- “I would prefer not to” works only in literature.


In Uncategorized on 09/20/2018 at 17:06

Jonathan Zuhovitzky and Esther Zuhovitzky, 2018 T. C. Memo. 158, filed 9/20/18 are with us again, but it’s neither reality tv nor the Hague Convention on Evidence.

For the story on the tv show, see my blogpost “Come From Away – Part Deux,” 11/17/17.

This time, the question is Esther.

Esther is a citizen both of Israel and Austria, but not the US. Jonathan is a citizen both of Israel and the US. Esther never resided in the US. Esther and Jonathan both reside in Germany, you’ll remember.

Esther and Jonathan filed MFJ for the eight (count ‘em, eight) years at issue, and plenty more years before. But Esther failed or forgot to mention her Swiss bank account to the extent of $2.2 million, with 75% fraud chops to match.

The only question is whether Esther is to be treated as a US taxpayer. The NRA spouse (no, that’s not a pistol-packin’ momma, that’s a Non-Resident Alien) of a US person cannot file MFJ unless election is made per Section 6013(g). And everyone agrees she never made such election.

Judge Vasquez: “As the election treats the nonresident spouse as a U.S. resident for purposes of chapters 1 and 24 of the Code, it also subjects that spouse’s foreign-source income to U.S. taxation.  See secs. 1, 61; sec. 1.6013-(6(a), Income Tax Regs.” 2018 T. C. Memo. 158, at pp. 4-5.

IRS wants summary J nailing Esther’s Swiss hoard on two grounds: substantial compliance and duty of consistency (quasi-estoppel).

IRS says “Y’all filed MFJ for years, thereby manifesting intent to election 6013(g) treatment.” Esther and Jonathan say “No, we didn’t intend nothing.” Judge Vasquez says that’s an issue of fact.

The duty of consistency means a taxpayer can’t take a position in a closed year, and once IRS has gone along with that position based on incomplete information, take another in an open year.

IRS claims that Esther could have satisfied the substantial presence test unbeknownst to IRS, and therefore didn’t need to make the election, because a NRA who is “substantially present” in the US don’t need no stinkin’ Section 6013(g) election. And Esther and Jonathan had been filing MFJ for years before the eight years in question, but those returns were accepted and the SOL has run.

IRS surmises that the reason they filed MFJ was to give them favorable treatment on their US taxes and Jonathan’s world-wides, while Esther concealed the Swiss hoard and taxes thereon. I’ve been tough on judicial surmises before now (see my blogpost “Deal(er) or No Deal(er)?” 8/28/12), but IRS’s surmise looks pretty good to me.

Esther and Jonathan’s legal team say IRS well knew Esther never filed a Section 6013(g) election, and that she needed to do so, before processing the returns. So Esther didn’t draw IRS offside.

But something never made it into the summary J motion papers.

Like Jonathan’s and Esther’s tax returns for the years at issue.

“Like the substantial compliance analysis, the duty of consistency analysis requires factual determinations.  Without access to petitioners’ returns for the years at issue, we cannot discern what facts petitioners provided to respondent about Esther’s residency.  Accordingly, we are not able to determine the nature of petitioners’ representation or whether respondent had actual or constructive knowledge that petitioners erroneously filed joint returns.  Therefore, matters of material fact are in dispute, and this issue is inappropriate for summary judgment.  As we cannot proceed with our analysis under either the duty of consistency or substantial compliance, we will deny respondent’s motion for partial summary judgment as a whole.” 2018 T. C. Memo. 158, at p. 10.

So it looks like the reality tv show live from Berlin is back on track.