Or, A Little Learning Is a Dangerous Thing

Once again I quote Alexander Pope, as I did in my blogpost “A Dangerous Thing”, 4/13/11:

A little learning is a dangerous thing;
Drink deep, or taste not the Pierian spring:
There shallow draughts intoxicate the brain,
And drinking largely sobers us again.

This was advice an unnamed Missouri law firm should have heeded, but their failure to read and heed bails out DeeDee Dennis, in Denise Diana Dennis, 2011 T. C. Sum. Op. 134, filed 12/5/11.

Echoes of poor ol’ Debbie Crane (see my blogpost “No Hurt, No Foul?”, 11/1/11). DeeDee wins a discrimination suit (race this time, not sex), claiming damages for “loss of self-esteem, humiliation, emotional distress and mental anguish and pain, and related compensatory damages.” 2011 T.C. Sum. Op. 134, at pp. 2-3.

What’s wrong with this picture? No physical injury or illness.

Now for the kicker. Judge Wells takes up the story:  “…petitioner signed a document from her attorneys titled ‘Settlement Distribution – Tax Consequences’, which stated, among other things:

“‘Counsel has informed client that there are complicated issues surrounding the taxability of employment discrimination awards and/or settlements. Counsel has further informed Client [sic] that payment for non-physical injuries are generally taxable * * *.

*******

“‘Counsel informed Client [sic] that the law is unsettled as to whether emotional damages in non-physical injury cases are taxable. Counsel informed client about the decision in Murphy v. Internal Revenue Service 460 F.3d 79 (2006) holding that such damages are not always taxable. Counsel has urged client to obtain professional tax advice and provide a copy of the attached case to the tax professional to determine what, if any, impact it has on the resolution of the issue of the tax consequences associated with this settlement. Counsel has informed Client [sic] that there has been an appeal of that case and the case may be overturned and/or may not be followed by the Courts in Missouri * * *’.

“The case mentioned in that document, Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 2006), was later vacated by the Court of Appeals for the District of Columbia Circuit on December 22, 2006, Murphy v. IRS, 99 AFTR 2d 2007-396, 2007-1 USTC par. 50,228 (D.C. Cir. 2006). The Court of Appeals subsequently heard additional arguments before issuing another decision on July 3, 2007, in which it held that the taxpayer’s compensatory award for emotional distress was taxable. Murphy v. IRS, 493 F.3d 170 (D.C. Cir. 2007). However, petitioner was not aware of those developments.” 2011 T.C. Sum. Op. 134, at pp. 3-4.

DeeDee and her lawyers were both unaware that Murphy’s Law had trumped the Murphy case. If anything could go wrong, it did.

DeeDee went to a franchise tax preparer when she got the 1099-MISC showing her recovery in the lawsuit. The franchisee didn’t have a clue whether the award was or was not taxable, although Section 104(a)(2) had not changed. DeeDee, disappointed at the clueless franchisee, went to another preparer, whose address she did recall but whose name she did not, obtained that preparer’s oral opinion that the award was not taxable, and rewarded that preparer by taking her business to still another preparer. She never showed that preparer the 1099-MISC (DeeDee said she had lost it), said the settlement was confidential, and the preparer, taking her at her word (serious mistake), never put the settlement income on DeeDee’s return.

IRS wants the Section 6662(a) accuracy penalty.

Judge Wells again: “Petitioner is obviously unfamiliar with tax law. She was advised by the attorneys who handled her lawsuit that she should seek professional advice regarding the tax treatment of her income from the settlement. By advising her of the Court of Appeals’ holding in Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 2006), those attorneys also provided her with a reason to believe that the income from the settlement might not be taxable. Petitioner consulted three different tax preparation services, and none of them advised her that the income from the settlement was taxable. On the basis of petitioner’s background, education, and actions seeking advice on a complex tax issue, we conclude that petitioner had reasonable cause for her position and acted in good faith on her belief, although mistaken, when she failed to report her income from the settlement.” 2011 T.C. Sum. Op. 134, at pp 9-10.

Judge Wells finds that the tax advice her attorneys gave was erroneous when given, as Murphy I had already been overturned by the time they wrote their disclaimer.

As with Debbie Crane, litigators–don’t give tax advice unless you know what you’re talking about. Drink deep, guys and gals. Or leave the stuff alone.

Or, A Sentence or Two

Somebody reads my blog. I got an e-mail on Friday, 12/2/11, from J. P. Finet, Legal Editor with the BNA Daily Tax Report, asking me to comment on Coffey v. Com’r, No. 11-1362, decided 12/2/11 by the Eighth Circuit. I’ll quote the relevant portion of the e-mail: ”That decision appears to be at odds with the Third Circuit’s ruling in Appleton v. Commissioner, which allowed the U.S.V.I. to intervene. What I am looking for is just a sentence or two from Mr. Taishoff about why practitioners should care about the ruling.”

I was out getting a drink when Mr. Finet’s e-mail arrived, so I didn’t respond at once. My apologies, sir.

However, anyone who has ever read this blog, much less ever encountered me in any other context, knows that I never limit myself to “a sentence or two.” Wind me up, and I’ll give the Energizer Bunny a decent run for his/her loose change.

Coffey is not “at odds” with Appleton, except for a hyper-technical parsing of FRCP 24, which I leave to the law review editors. See my blogpost “Missed It, But Better Late Than Never,” 8/24/11, wherein I summarized the Third Circuit’s decision, reversing Tax Court. Third Circuit remanded the case, stating that Tax Court (Judge Jacobs) got intervention under FRCP 24 wrong.

Appleton talks about as-of-right intervention. Coffey talks about either as-of-right or permissive intervention. But Third Circuit and Eighth Circuit agree. Holding in both cases: USVI should be allowed in at the trial stage. Appleton involves an argument about effective and orderly tax administration. Coffey goes off on the administration of USVI’s “unique” economic development program, but that’s embodied in Section 934.

Effective tax administration or economic development program, call it what you will, is, and of right ought to be, an essential governmental interest, beyond economics. And in Appleton and Coffey the issue is statute of limitations. In both cases, returns were filed per Code; three-year period ran; and no IRS  claim of tax-protester phony returns or fraudulent returns. IRS says, “You filed with BIR (United States Virgin Islands Bureau of Internal Revenue), per Section 932(c)(4). But the statute of limitations is open because you never filed with IRS.” Eighth Circuit noted that Section 932(c)(4) says filing with BIR satisfies filing requirement.

If IRS is right, no VI taxpayer who filed properly per Section 932(c)(4) has ever filed a return. And even if they were audited by BIR, paid up, and case closed–they are still subject to IRS audit.

So USVI has a very real interest. If BIR says it’s over, is it over?

Why should practitioners care? Other than VI practitioners, of course. Because it matters when it’s over. For everybody. We all know that the economic development program for our beautiful but insolvent Islands in the Sun, like all unguided Congressional largesse, led to game-playing. Were the taxpayers in Appleton and Coffey pure of heart and clean of hand? I don’t know. But good or bad, if the law, as embodied in the Acts of Congress, says it’s over, it’s over.

So my reply to Mr. Finet’s request for “a sentence or two why practitioners should care” is “All practitioners should care because it matters that taxpayers, and people, should know that when it’s over according to law, it’s over.”

In-the-trenches tax preparers should welcome IRS’ December 8 town meeting concerning real-time matching of 1099s and W-2 to e-filed returns. The idea is that, if IRS detects a non-reporting, the preparer and taxpayer get immediate notice and a chance to amend. As matters stand, it may be a year or eighteen months before the error is found, triggering interest and penalties.

I know some preparers have objected that this system will allow IRS to match W-2 and 1099s, prepare an individual’s return and mail it to him/her/them for signature, thus cutting out the preparers, paid and unpaid. Is this the thin end of the wedge? I can’t tell. Just sayin’, this year the decree went out from Douglas Augustus that all preparers must be registered; this is the first registration, when Douglas was Commissioner of Internal Revenue and Timothy was Secretary of the Treasury.  Of  course, all the world was to be taxed long before this.

But I just blogged Kurt C. Olsen, 2011 T.C. Sum. Op. 131, filed 11/23/11. Briefly, Olsen updated his tax software in order to report income from a K-1 his wife got, neither his wife nor he ever having seen a K-1 before. He hit the wrong key and, though he accurately reported the payor, didn’t report the income on their Schedule E or transfer that income to their joint 1040. When IRS asserted substantial underreporting long afterwards, Special Trial Judge Armen let Kurt off the hook for the five-and-ten penalty because he clearly acted in good faith. Of course, Kurt still owes tax and interest.

How much time, effort, energy and agita could have been avoided, had Kurt got a next-day e-mail that read something like this: “Hey, dude, where’s the $X your wife got from Y? You got a 1099 but didn’t show it on your 1040”. Time to correct (and presumably avoid penalty), minimal interest, no need to waste scarce Tax Court resources–the benefits could be substantial.

What do you guys think?

Now You See Her, Now You Don’t

The late Jane H. Gudie wanted to avoid probate. She played the living trust gambit, and that worked as far as her native California went. She also wanted to avoid estate tax, but that isn’t going to go so well.  Her trustee/beneficiary Mary Helen Norberg filed a 706 and listed herself as executor, even though she never qualified and never planned to qualify in California or anywhere else. Judge Wherry tells the story, finding that Tax Court has jurisdiction, in Estate of Jane H. Gudie, Deceased, Mary Helen Norberg, Executor, 137 T.C. 13, filed 11/30/11.

As it’s a motion to dismiss, Judge Wherry stresses he isn’t finding facts, just backstopping Tax Court subject matter jurisdiction.

Mary Helen and her sister Ms. Lane were the nieces and sole beneficiaries of the late Jane H.’s largesse–and it was large, about $5 million. Mary Helen and Ms. Lane went through a purported deal whereby the nieces agreed to make annuity payments to the late Jane H. in exchange for Jane H.’s promissory note, secured by the trust assets. If the note was bona fide, the claim against the estate would wipe out those assets. Of course, the nieces never made Payment One to the late Jane H. This carefully-crafted piece of estate tax planning was the work of Robert P. Hess, qualifications unstated.

Jane H. shuffles off this mortal coil. Mary Helen files a 706, signing as executor, although she never was and claims she never will be. IRS, not impressed either with the annuity-note gambit nor Mary Helen’s now-you-see-me, now-you-don’t routine, hits the estate with a great deficiency, claiming GST, gifts within the 3 years before death, and sundry other delictions.

Mary Helen moves to dismiss her own petition for want of subject matter jurisdiction, claiming IRS’ SNOD was sent to her as executor, which she isn’t and never was, and not to the trustees.

Judge Wherry finds Mary Helen was in possession, whether actual or constructive is not stated and it doesn’t matter, of the property of the late Jane H., at least enough to trigger Section 2203 and make her a statutory executor. “…Ms. Norberg, because she was in actual or constructive possession of property of decedent, was a statutory executor. As such, she had the responsibility and authority to file the estate tax return. By filing the estate tax return, she notified respondent of a fiduciary relationship and was the proper person to receive the notice of deficiency.

“Section 2203 defines ‘executor’ for purposes of the Federal estate tax as ‘the executor or administrator of the decedent, or, if there is no executor or administrator appointed, qualified, and acting within the United States, then any person in actual or constructive possession of any property of the decedent.’ In her objection, Ms. Norberg states she ‘was never in possession of any assets of the probate estate of Jane H. Gudie, or of other estates, with respect to any and all times relevant to our motion to dismiss.’ Ms. Norberg attached to her objection the signed declaration of Mr. Hess, who also states that ‘Norberg was not ever in possession of any assets of the probate estate of Jane H. Gudie’. Ms. Norberg and Mr. Hess carefully confine their statements to the ‘probate estate’. The fact that the property Ms. Norberg received did not pass through probate is immaterial to this discussion. This Court has previously held in situations like this that ‘the fact that * * * property interests passed * * * directly rather than as part of decedent’s probate estate is immaterial.’ Estate of Guida v. Commissioner, 69 T.C. 811, 813 (1978); see also Estate of Wilson v. Commissioner, 2 T.C. 1059, 1083-1084 (1943) (stating that if taxpayers could distinguish between probate and nonprobate property to defeat the estate tax, ‘the law would soon be a nullity’).” 137 T. C. 13, at pp. 10-11.

Mary Helen argues that IRS’ affidavits and exhibits are insufficient evidence to defeat her motion, but Judge Wherry steers a course between the motion for summary judgment and the motion to dismiss. In the latter case, the Court is free to look at what it likes. In the former, FRCP 56(e) rules the roost, and there must be admissible evidence. So IRS’ papers stay in, and so does Mary Helen.

Mary Helen claims she never filed Form 56, notifying IRS of her executorship, and therefore she wasn’t. Judge Wherry notes that the Form 56 instructions say a fiduciary may (my emphasis) so notify IRS, but there are other ways–like filing a 706 and signing it as executor. And since Mary Helen never gave notice that she wasn’t a fiduciary until after the SNOD, Mary Helen is definitely in.

Finally, Mary Helen, in her usual style, both raises and doesn’t raise the statute of limitations, but Judge Wherry steers that aside. “Although the argument is unclear, in her motion to dismiss Ms. Norberg appears to argue that the period of limitations on assessment has expired. In her objection to respondent’s (IRS’) objection, Ms. Norberg states she ‘did not and is not asserting in this motion any issue regarding statute of limitations’ and asks us not to rule on this issue. We need not analyze this issue here but do note two things. First, pursuant to sections 6503(a)(1) and 6213(a), the period of limitations on assessment, if open when a notice of deficiency was sent, would generally be suspended if a timely petition was filed until such time as the Secretary is no longer prohibited from assessing the tax. Second, the statute of limitations is an affirmative defense, not a jurisdictional matter. See Rule 39; Freytag v. Commissioner, 110 T.C. 35, 41 (1998).” 137 T. C. 13, at p. 15.

Don’t expect surprises at trial or in the decision.