Archive for May, 2012|Monthly archive page


In Uncategorized on 05/17/2012 at 18:54

So holds Judge Gustafson in Bilal Salahuddin and Monique Salahuddin, 2012 T. C. Mem. 141, filed 5/17/12. Bil and Monique owe taxes based on their filed returns, but can’t pay, so when they get the Final Intent letter, they ask for a CDP and proffer a Form 433-A. The SO asks for supporting documents and offers a phonecall CDP hearing; Monique asks for time to gather documents in support of her already-submitted Form 433-A, and this is granted.

Before the due date, Monique calls the Appeals Team Manager (ATM). ATM tells her the file has sufficient information, so Monique need not send any more, and enters the conversation in the case activity file. Monique confirms this phone conversation by letter to the SO, which letter is also in the file.

Finally, three months later, having never told Monique or Bil anything or held a phone hearing, the SO shoots down the proposed installment agreement, and sends a NOD, which gets the facts wrong, claiming Bil and Monique didn’t submit the supporting documents and dodged a phone hearing. Unhappily, based on their own, ultimately unsupported figures, Bil and Monique’s offer is way low.

IRS moves for summary judgment. And loses.

Judge Gustafson: “The Commissioner argues that because the Salahuddins offered an amount ($900 to $1,000 per month) that was less than their own reckoning of their surplus monthly income (about $5,800 more income than living expenses), it could not be an abuse of discretion for Appeals to reject such an offer. This might be a winning argument, except for two problems that arise under the facts as we are required to assume them for purposes of deciding a motion for summary judgment.” 2012 T. C. Mem. 141, at pp. 14-15.

IRS said that what Bil and Monique had submitted was “sufficient.” So Appeals could not deny Bil and Monique on the ground they had not submitted information, when Appeals told them they didn’t need to. And the NOD didn’t discuss the low-ball with sufficient particularity to constitute an independent ground for the denial.

While IRS might have tossed Bil and Monique based on the low-ball offer (see my blogpost “Give It Your Best Number”, 4/9/12) Judge Gustafson finds IRS didn’t: “We can easily imagine a denial of an installment agreement based on two clear alternative grounds–i.e., (1) that the taxpayer failed to provide documentation to substantiate his financial information, and separately (2) that the amount offered by the taxpayer was inadequate even assuming accurate the taxpayer’s unsupported financial information. If the notice of determination stated such grounds, then the Commissioner could well argue that the first was harmless error, because the second was independent and sufficient. However, our role under section 6330(d) is to review actions that the IRS took, not actions that it could have taken. As the Supreme Court stated in SEC v. Chenery Corp., 318 U.S. 80, 93-95 (1943):

“[The agency’s] action must be measured by what the * * *[agency] did, not by what it might have done. * * * The * * *[agency’s] action cannot be upheld merely because findings might have been made and considerations disclosed which would justify its order as an appropriate safeguard for the interests protected by the Act.

“There must be such a responsible finding. * * *” 2012 T. C. Mem.141, at p. 16.

Judge Gustafson does take pains not to go too far; Bil and Monique don’t get a free pass: “We do not by any means hold that a notice of determination must be error-free in order to be sustained. However, in this circumstance, the error suggesting that the Salahuddins had failed to respond to Appeals’ letter has an unfortunate resonance with the unfair determination that they had failed to provide supporting information; and the error suggesting that a telephone conference had been scheduled raises the question whether the SO was confusing two different cases–the Salahuddins case and another case in which other taxpayers had made a material failure to produce information that was requested. Under Rule 121 we cannot hold that there is no genuine issue as to the reason for Appeals’ determination to deny an installment agreement and the absence of an abuse of discretion in that determination.” 2012 T. C. Mem. 141, at pp. 17-18.

Judge Gustafson goes even further,  warning Bil and Monique to get serious: “We do not hold that these facts constitute offer (by the Salahuddins) and acceptance (by Appeals), giving rise to a contract. Nor do we hold that Appeals was barred in any way from rejecting the proposal and demanding more. We hold rather that there is a genuine issue of material fact as to whether Appeals induced the Salahuddins to believe that their information was “sufficient” and that their proposal would be accepted–i.e., whether Appeals thus misled the Salahuddins by inducing them to leave their proposal pending and unrevised–and whether it was an abuse of discretion for Appeals to terminate the CDP hearing by rejecting that proposal, rather than soliciting a satisfactory substitute proposal.” 2012 T. C. Mem. 141, at p. 18.

In short, as I said in my earlier blogpost, Give It Your Best Number. That goes for both taxpayer and IRS.


In Uncategorized on 05/17/2012 at 18:15

Judge Holmes, The Great Dissenter, really rattled the D.C. Circuit’s cage when he dissented in Tigers Eye Trading, LLC, Sentinel Advisors, LLC, Tax Matters Partner, 138 T. C. 6, filed 2/13/12 (see my blogpost “The Great Dissenter – Part Deux,” 2/15/12). DC Circuit remands Petaluma III to Tax Court, asking whether Tax Court overruled Petaluma III and requesting Tax Court to report the current status of Petaluma III, in Petaluma FX Partners, LLC, Ronald Scott Vanderbeek, A Partner Other Than The Tax Matters Partner, 2012 T. C. Mem. 142, filed 5/17/12.

Apparently D. C. Circuit was concerned that Tax Court exceeded its limited statutory jurisdiction. Oh no no no, says Judge Goeke, and he takes 16 pages to say so.

Judge Goeke declares Tax Court has hewn at all times to the line established by the Supremes 120 years ago for lower courts when they get a remand from on high: “That [lower] court cannot vary it, or examine it for any other purpose than execution; or give any other or further relief; or review it, even for apparent error, upon any matter decided upon appeal; or intermeddle with it, further than to settle so much as has been remanded. [In re Sanford Fork & Tool Co., 160 U.S. 247, 255 (1895).]” 2012 T. C. Mem. 142, at p.11, footnote 9.

Moreover, Judge Goeke raps Judge Holmes’ metaphorical knuckles. “In its remand order, the D.C. Circuit quotes a sentence from a dissent in Tigers Eye. See Petaluma FX Partners, LLC v. Commissioner, 2012 U.S. App. LEXIS 4011 (citing Tigers Eye Trading, LLC v. Commissioner, 138 T.C. at ___, (slip op. at 205) (Holmes, J., dissenting) (‘Our decision today overrules Petaluma III.’)). The cited passage does not represent the position of this Court. No other Judge of the Court agreed with the part of the dissent from which the quoted sentence was taken. As noted supra, no part of any of the opinions by the Judges of this Court in Tigers Eye purported to explicitly alter or overrule the decision in this case or to revise the language of the Court’s Opinion in Petaluma III. To the extent the remand order was intended to provide this Court with the opportunity to alter or amend any aspects of Petaluma III, we respectfully decline to do so.

“In summation, we hold that the Court’s Opinion in Tigers Eye did not overrule or alter Petaluma III and that the current status of Petaluma III is unchanged.” 2012 T. C. Mem. 142, at pp. 15-16.

So there, D. C. Circuit, we’re good kids, really we are. And Great Dissenter Holmes, go stand in the corner.


In Uncategorized on 05/17/2012 at 17:49

Equal Opportunity in Tax Court

The $500K/$50K limitations on Section 168(h) largesse (home acquisition indebtedness deduction and home equity indebtedness deduction) receive yet another full dress Tax Court opinion in Faina Bronstein, 138 T.C. 21, filed 5/17/12.

Faina and father-in-law buy a residence. It’s Faina’s principal residence; while  Faina’s husband lived there, he was never in title, never signed either note or mortgage, and never paid a cent of debt service (nor was he ever legally obligated to do so). Faina paid every cent of debt service on the $1.35 million mortgage. Faina files “married filing separately” and tries to take interest on the full $1.1 million that Section 168(h) allows, claiming the $500K/$50K limitation for marrieds filing separately is only there to keep two marrieds from each taking deductions for interest on $1.1 million. Cf. Charles J. Sophy, 138 T. C. 8, filed 3/5/12, and my blogpost “Sophy’s Choice” 3/6/12.

Interestingly, Sophy isn’t cited in Faina. Maybe Judge Goeke doesn’t read Judge Cohen’s decisions. For sure no Tax Court Judges read my blogposts.

Anyway, as with Sophy, the decision goes against Faina on plain language. Judge Goeke: “We believe section 163(h)(3)(B)(ii) clearly states that a married individual filing a separate return is limited to a deduction for interest paid on  $500,000 of home acquisition indebtedness. Similarly, we believe section 163(h)(3)(C)(ii) clearly states that a married individual filing a separate return is limited to a deduction for interest paid on $50,000 of home equity indebtedness.

“Petitioner has not offered any unequivocal evidence of legislative purpose which would allow us to override the plain language of section 163(h)(3)(B)(ii) and (C)(ii).7 As a result, we agree with respondent that petitioner is not entitled to a deduction for the interest paid on the entire $1 million of acquisition indebtedness incurred in purchasing the property. Rather, petitioner is entitled to deduct interest paid on only $550,000 of the mortgage indebtedness.” 138 T.C. 21, at pp. 8-9.

And what’s more, the statutory language is so unambiguous that Faina gets a 20% accuracy-related (understatement) penalty.

That’s Tax Court for you: Equal treatment for both married and unmarried couples, same-sex or opposite-sex; all are $500K/$50K limited.


In Uncategorized on 05/16/2012 at 18:29

And a new Circular 230 person?

Although abuse-of-discretion in CDPs is rare, here’s one filed today, Shawn Michael Lewis, 2012 T.C. Mem. 138, filed 5/16/12. Shawn was hit with SNODs, but filed Chapter 11. He and IRS jousted about the deficiencies in Bankruptcy Court, but eventually IRS’ second amended proof of claim carried the day, after Shawn signed a Form 4549, Income Tax Examination Changes.

IRS proceeds to levy, and Shawn asks for a CDP. It takes a year for his request to get assigned to a SO. He asks for a face-to-face, which is granted, so he gets sent from one SO to another. The second SO asks for documents Shawn says he sent but the SO says he never got, so he issues a NOD sustaining the levy for failure to furnish documents.

Shawn can’t challenge the underlying liability, of course. Judge Paris: “Where a taxpayer has filed a bankruptcy action and the Commissioner has submitted a proof of claim for unpaid Federal tax liabilities, the taxpayer has had the opportunity to challenge the underlying tax liability for the purposes of section 6330(c)(2)(b). See Kendricks v. Commissioner, 124 T.C. 69, 77-79 (2005). Additionally, a taxpayer who consents to additional assessments by signing Form 4549 is also deemed to have had the opportunity to dispute his or her tax liability for the years included in the Form 4549. Aguirre v. Commissioner, 117 T.C. 324, 327 (2001).” 2012 T.C. Mem. 138, at p. 8. Incidentally, it’s a proceeding in Bankruptcy Court, not an action, but that doesn’t help Shawn, he’s barred from contesting the liability.

But the second SO dropped the ball. He never gave Shawn a face-to-face, and Shawn had only one phonecall with the SO before the SO issued the NOD. Judge Paris:  “During the call petitioner reasserted his desire for a face-to-face conference on the basis of the complexity of his bankruptcy issues, asked for a total of his liabilities, and restated his desire to explore collection alternatives. SO X advised petitioner that he would have to submit the financial documentation requested in his previous letter in order to be eligible for collection alternatives. At no point did SO X indicate that the phone call would constitute petitioner’s CDP hearing. SO X had no further contact with petitioner until the issuance of the notice of determination….” 2012 T. C. Mem. 138, at p. 11 (Name and date omitted).

Judge Paris throws out the NOD. “In reviewing the administrative record, it is difficult to conclude that SO X dedicated much effort to a meaningful review of the issues presented by petitioner’s CDP hearing request.

“Respondent does a commendable job of attempting to argue that each individual defect in SO X’s administrative review can be rebutted to show that said defect was not an abuse of discretion. However, respondent’s argument seeks to quilt together a string of exceptions to account for SO X’s deviation from what one would consider a thorough review of petitioner’s case. While each individual defect on its own may be insufficient to support a holding that respondent abused his discretion, the cumulative effect of such defects demonstrates that SO X acted both arbitrarily and capriciously in rendering his determination. Accordingly, the Court holds that respondent abused his discretion in sustaining the proposed levy.” 2012 T. C. Mem. 138, at pp. 12-13 (Name omitted).

An also-ran among the Tax Court Memoranda filed May 16 is Gabriel S. Garcia and Maria Garcia, 2012 T. C. Mem. 139. This is another unsubstantiated deduction case, not worth commenting on, except for one interesting remark by Judge Cohen: “Petitioners’ tax returns for 2007 and 2008 were prepared by petitioner’s brother, Richard Garcia. Richard Garcia is not an accountant or an enrolled return preparer.” 2012 T.C. Mem. 139, at p. 3.

Was there such a thing as an “enrolled return preparer” in 2008 and 2009 (when presumably the 2007 and 2008 returns, respectively, were filed)? There certainly were enrolled agents, enrolled actuaries, and enrolled retirement plan agents in those years, and unenrolled return preparers abounded (and probably still do, notwithstanding the latest Circular 230), but Registered Tax Return Preparers only came into existence this year, and so far as I know the candidates are still being tested and screened for registration.

Never heard of an “enrolled return preparer” before 2009, or since. Anybody know who or what they were?


In Uncategorized on 05/15/2012 at 15:57

If the Deal Has No Economic Substance

This is a Hewlett-Packard disaster you can’t blame on Carly Fiorina, as Lewis Platt OK’d this one (right way to spell “Lewis”, though). It’s Hewlett-Packard Company and Consolidated Subsidiaries, 2012 T.C. Mem. 135, filed 5/14/12. And Judge Goeke has to wade through 82 pages to reach a simple conclusion.

Some tax wits at AIG concocted a Netherlands Guilder-USD shellgame, using an allowance of deductible contingent interest asymmetry between the IRC and the Dutch tax code. Essentially, AIG was going to lend ABN (that’s Algemene Bank Nederland) multiple millions and ABN was going to pay nominal real interest but a ton of contingent interest (currently taxable by Dutch law but not US law), disguised as “preferred stock dividends”,  via a stooge intermediary with the obviously stooge name Foppingadreef.

All of the interest, real and contingent, would be characterized for Dutch law as preferred dividends, and would be taxed, setting up a huge foreign tax credit for HP, which had tons of foreign income but no available foreign tax credits.

ABN’s ethics committee blesses the deal, the Dutch tax authorities give the equivalent of a PLR based on Dutch law, and various high-priced law firms sign off.

AIG flogs this unexploded ordnance to HP for a mere $15 million.

Cutting through the wheeling and dealing, Judge Goeke finds that the “dividends” weren’t; they were interest on a debt from ABN, Foppy being disregarded. HP got a minority interest in Foppy, but had stranglehold rights to bail out and get paid if the tax laws changed or the majority shareholder (ABN) tried to invest in anything but ABN notes. The actual interest HP got was less than 2%, at a time when US government bonds were paying over 6%, but when the foreign tax credits were factored in, HP got better than 9%, with ABN, one of the strongest banks in the Netherlands, essentially guaranteeing the deal.

HP wanted to deduct as a capital loss the upfront $15 million they paid AIG for the deal. No, says Judge Goeke. HP didn’t pay a commission to buy preferred stock, they paid a fee to AIG to facilitate a tax shelter. And that’s a non-starter first class.

Judge Goeke doesn’t have to get to economic substance, he says, but after reading the 82 pages, I couldn’t find any economic substance.


In Uncategorized on 05/15/2012 at 13:05

When You Get a Piece of Their Disability Pension

Shannon Fernandez finds this out the hard way in the eponymous Tax Court full-dress opinion, 138 T.C. 20, filed 5/14/12. Judge Wherry is the bearer of the bad news in this case of first impression.

Shannon’s loved-once, Mr. Fernandez, was another disabled L. A. County Sheriff, like Jay Sewards (see my blogpost “Service Trumps Sickness”, posted 4/2/12), but unlike Jay, Mr. took the disability option because he didn’t have the 20 years of service he needed for full benefits. He and Shannon split, and Shannon gets a piece of Mr.’s pension.

L.A. gives Shannon a 1099-R but Shannon doesn’t report the income, replying on Section 402(e)(1)(A) as placing her in the shoes of Mr. as regards any distribution from an exempt trust, like the L.A. Sheriff’s retirement fund.

That’s fine, except neither Section 402 nor Section 72 (the annuity section) talks about Section 104 bodily injury payments. Judge Wherry: “Nowhere in section 402(a) or section 72 is section 104(a) mentioned. Section 402(e)(1)(A) explicitly provides: ‘For purposes of subsection (a) [of section 402] and section 72, an alternate payee who is the spouse or former spouse of the participant shall be treated as the distributee of any distribution or payment made to the alternate payee under a qualified domestic relations order ‘. If Congress had included section 104 in this portion of the statute, the result in this case might be different. However, without congressional approval we decline to expand the reach of section 402(e)(1)(A) beyond the sections specifically referred to in its text.” 138 T.C. 20, at pp. 6-7.

Going back to the earliest days of the income tax, the prehistoric, pre-IRC, Revenue Act days, Judge Wherry finds: “A version of section 104(a)(1) allowing an injured person to exclude disability income from his or her taxable income has been in the Code since the Revenue Act of 1918 when it was added because ‘Under the present law it is doubtful whether amounts received* * * as compensation for personal injury or sickness * * * are required to be included in gross income.’ H.R. Rept. No. 65-767 (1918), 1939-1 C.B. (Part 2) 86, 92. In all of the years since, to our knowledge, petitioner’s particular issue has not been before the Court. We note that petitioner did not suffer an injury, and the Senate explicitly stated ‘as compensation for personal injury’. In the case at hand the compensation was not for petitioner’s personal injury, but that of her former husband.” 138 T. C. 20, at pp. 7-8.

There’s no caselaw that anybody can find, so Shannon gets nailed. But “(T)his outcome should come as no surprise to petitioner. Although not controlling on this Court, we note that the order and stipulated division of retirement benefits stated that ‘[d]istribution under this Order shall be taxable to the Nonmember [petitioner] and not the Member [her former spouse].’ We further note that the State court did not decrease petitioner’s share of the disability payments because it believed that she would receive the money tax free.” 138 T. C. 20, at p.8, footnote 5.

But would the result been different had the State court in fact decreased Shannon’s share? I doubt it.


In Uncategorized on 05/11/2012 at 16:18

No cases out of Tax Court on May 11, but one typo in an order is worth noting. The order is Leona Allen, Docket No. 3680-12S, served 5/10/12. Chief Judge Colvin wrote: “No notice of determination concerning collection action was attached to the petitioner nor has petitioner produced one. Accordingly, the Court lacks collection jurisdiction with respect to petitioner’s taxable years 1993, 1994, and 1995.” Order, at p. 2 (Emphasis added.)

You may or may not wear your heart on your sleeve, but you’d better staple a Notice of Determination to your chest when you show up in Tax Court.


In Uncategorized on 05/10/2012 at 16:28

As I’ve said before “One sure way to drive a coach bananas is to fail to finish a play.” See my blogpost “Finishing the Play”, 3/26/12.

And today we have two cases out of Tax Court that prove the rule. First up is Stanley Patrick Zurn, 2012 T.C. Mem. 132, filed 5/10/12, Judge Gale calling the play.

Stan never bothered to file four years’ worth of returns (like a certain New York City Mayor), but got an audit notice anyway. Stan raises SOL on brief, but Judge Gale throws that out: in the immortal words of Carole King, “it’s too late baby, now it’s too late”. Judge Gale: “Petitioner did not plead the statute of limitations as an affirmative defense as required by Rule 39. Petitioner did not raise the issue during the evidentiary hearing, nor has he at any time moved to amend the pleadings so as to include this omitted affirmative defense. Petitioner’s failure to plead the statute of limitations in his petition or in an amended pleading constitutes a waiver of the issue. Moreover, petitioner’s raising of the issue for the first time on brief would prejudice respondent, who has been deprived of the opportunity to present relevant evidence, such as evidence that petitioner consented to extend the period of limitations. We decline to consider this issue.” 2012 T.C. Mem. 132, at p. 17 (Citations and footnote omitted.).

Worse,  Stan claims three Section 1031 like-kind exchanges, but has no recorded documents showing acquisition of replacement properties and no documents of any kind showing full payment of purchase price for any of them. He has closing statements from the escrow closings (California properties, so no sit-down closings such as we have back East), and not much else. And in one deal the statement shows what is called a “buyer’s credit”, making the purchase price as stated dubious. Stan never finished the play in any deal, so his 1031s don’t defer gain. But Stan does get something for his trouble– a negligence penalty.

Next is yet another Section 7463 “not for nuthin’”, George Saadian, 2012 T.C. Sum. Op. 44, filed 5/10/12. George and his mom lent a “distant relative”, who was also a compatriot, $200K for a real estate deal, got a promissory note and some payments, but the latter were desultory and never timely. George was reluctant to sue a compatriot, as that was supposedly taboo among compatriots, but finally George had his lawyer send a letter threatening suit.

George never followed through, so no lawsuit, and relative finally avoids the issue by dying. George asks relative’s sons, who were also involved in relative’s business, to make good, but never files claim against estate, and sons were never signatories to the note nor guarantors.

The last meeting with the sons took place the same year George had a big capital gain, and George says the sons told him not to expect payment, so George takes a nonbusiness bad debt deduction for the $200K.

No, says Lew Carluzzo, the STJ with the correctly-spelled first name. “The allowance of a deduction under section 166 [nonbusiness bad debt] requires that the debt to which the deduction relates was a valid debt and that the taxpayer claiming the deduction was the creditor.” 2012 T.C.Sum.Op. 44, at p. 7 (footnote omitted). STJ Lew assumes (without finding) that both prongs of the test are satisfied, although IRS disagrees.

The problem is not whether the debt went south, but when. There is no standard rule, it’s all facts and circumstances (Sir Ed Elgar could have composed a march by that name), but the creditor must use sound business judgment based on what information s/he could reasonably obtain at the time. The mere fact that collection might be difficult or uncomfortable doesn’t mean the debt is worthless.

STJ Lew drives home the point: “Petitioner’s decision not to enforce collection of the debt for personal rather than financial reasons, in and of itself, operates to deny him the deduction here in dispute.” 2012 T.C. Sum. Op. 44, at p. 8.

You have to run out the grounder, even if you know you’ll be thrown out. Finish the play, guys.


In Uncategorized on 05/08/2012 at 16:46

Two Tax Court dismissals today, both of interest, although one is another Section 7463 “not-for-nuthin’”.

First up is a case of first impression for Tax Court, and thus warrants a full-dress T.C., Thomas Edward Settles, 138 T.C. 19, filed 5/8/12. Tom had petitioned for a Section 6330(d) levy review, but before Tax Court ruled Tom filed Chapter 11 bankruptcy, and 11 USC §365(a)(8) automatically stayed  “the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor.”

While Tax Court stood frozen, Tom started an adversary proceeding in Bankruptcy Court to contest his tax liability and the computation thereof. He lost, as Bankruptcy Court said he was estopped from challenging IRS’ proof of claim. Now Tom, still in bankruptcy, moves to dismiss his Tax Court proceeding. IRS, of course, has no objection.

A petitioner cannot get dismissal of a proceeding to redetermine a deficiency. Judge Wells: “When the Tax Court dismisses a deficiency case for a reason other than lack of jurisdiction, we generally are required by section 7459(d) to enter a decision for the Commissioner for the amount of tax determined against the taxpayer in the notice of deficiency. Rule 123(d) requires that a decision entered pursuant to a dismissal on a ground other than lack of jurisdiction operate as an adjudication on the merits of the taxpayer’s case.” 138 T.C. 19, at p. 4 (citations and footnote omitted).

So be careful what you ask for, deficient taxpayer, because if you change your mind you might get both a lot less, and a lot more, than you bargained for.

But in this case Tom isn’t seeking a deficiency redetermination. Judge Wells again: “However, in the instant cases, petitioner petitioned the Court to review a collection action under section 6330(d), not to redetermine a deficiency under section 6213(a). In contrast to the deficiency context, a taxpayer who files a petition asking the Tax Court to review a collection action does have the option to withdraw that petition.” 138 T.C. 19, at pp. 4-5.

Since Rule 123(d) doesn’t answer the question in a collection case, Judge Wells turns to FRCP 41(a)(2), which lets judges dismiss on terms they consider proper. Although such a dismissal is normally without prejudice (meaning that the petitioner could refile, as nothing was decided), in this case time has run out and Tom can’t refile, so IRS doesn’t care, and the only remaining hurdle is 11 USC §365(a)(8).

The major concerns that the automatic bankruptcy stay addresses are giving breathing room to the beleagured debtor to try to make an offer to creditors, and to prevent the swift creditor from grabbing assets while leaving the slower creditor of the same class high and dry. Neither is a problem here. If the Tax Court case goes away, Tom has one less lawsuit to deal with, and the creditors have the status quo. Likewise, Tax Court need not examine or determine any underlying issues in the case before it to decide to dismiss, so there’s no “continuation” in this case. The stay only applies to commencement or continuation of a proceeding, and this motion does neither.

So Tom, you’re outta here.

Next is Rick E. Payne and Dee M. Payne, 2012 T.C. Sum. Op. 43, filed 5/8/12. Sad story: Rick loses job, son dies, Rick and Dee file bankruptcy, and Rick can’t pay the taxes although he filed the returns. IRS sends NFTL, and Rick and Dee appeal.

The SO is singularly unsympathetic, given that Rick is elderly and bewildered, and gives him a fast shuffle, like 48 hours to file a Form 433-A with supporting documents. Judge Wells doesn’t like this, and goes at length into the SO’s behavior as contrasted with the procedures set forth in the IRM. Is Rick in the clear on abuse-of-discretion?

No, because Rick delayed in seeking continuance of trial, and never provided a Form 433-A despite Judge Wells telling IRS’s counsel to offer Rick ample time to do so, to make up for the SO’s quick whistle. Rick did nothing. IRS moved to dismiss, or in the alternative for summary judgment

Judge Wells seems more than slightly steamed at Rick’s delay-of-the-game: “Throughout the pendency of their case, petitioners have repeatedly failed to file requested motions, responses, and other documents. Despite instructions from respondent’s counsel and ample time, petitioners failed to file a motion for a continuance until after respondent filed his motion for summary judgment. Petitioners failed to file a response to respondent’s motion for summary judgment, even after we extended the time for them to do so. Petitioners failed to submit a proposed collection alternative by February 1, 2012, in compliance with our order of November 16, 2011. According to respondent’s counsel, when he contacted petitioners on February 3, 2012, they informed him that they had elected not to complete a collection alternative form at this time. Petitioners have failed to prosecute the instant case despite repeated opportunities and ample time.

“On the basis of petitioners’ repeated failures to comply with our orders and apparent disinterest in pursuing any collection alternatives, we will dismiss their case for lack of prosecution. Accordingly, we will deny respondent’s motion for summary judgment as moot.” 2012 T.C. Sum. Op. 43, at pp. 14-15.

Takeaway–Do what the judge tells you. It is rarely a good idea to annoy the judge.


In Uncategorized on 05/07/2012 at 17:26

Not in Tax Court, Anyway

That’s the lesson Judge Gustafson teaches Hershal Weber in the eponymous case, 138 T.C. 18, filed 5/7/12.

Hersh overpaid his 2006 personal income tax and asked for the overpayment to be applied to what he’d owe for 2007. But IRS hit him with TFRPs for payroll taxes not withheld by an outfit called S&G, in which Hersh had some unspecified role, enough to make him a responsible person. And the Section 6672 TFRPs ate up his 2006 overpayment, so IRS held him for tax due for 2007, but that wasn’t much. Again Hersh asserted he had a previous overpayment to carry forward, so he wanted this applied to 2008. No, says IRS, nothing to apply, it’s all gone, and this time Hersh owes serious money.

IRS sends notice of levy for withholdings, and Hersh asks for a CDP. While waiting for Appeals, some other S&G types pay enough to satisfy the unpaid withholding taxes, and IRS says “no levy, withholding paid.” Hersh sues for a refund in US District Court, but no disposition of that case is brought to Judge Gustafson’s attention.

Meantime Hersh still owes personal income tax for years 2007 and 2008, so IRS sends Hersh a letter so stating, and a new notice of levy. Hersh asks for CDP hearing, alleges the TFRPs were paid and his payments should be applied as he requested, resulting in no tax due, but Appeals says “we have no jurisdiction for 2006 and 2007.” Hersh petitions Tax Court.

Judge Gustafson gives IRS summary judgment. Abuse of discretion is the standard. IRS can abuse its discretion in applying overpayments, but IRS has broad discretion per Section 6402(a): “The statute and case law are clear that the discretionary authority of the IRS supersedes any desires or wishes on the part of a taxpayer to have their overpayment credited to specific, preexisting, tax liabilities”). For purposes of the Commissioner’s motion for summary judgment, we assume that, in a collection due process case, we can review for an abuse of discretion the IRS’s decision under section 6402 to credit an overpayment to a nondetermination year rather than to the year at issue.” 138 T. C. 18, at p. 14, footnote 5 (Citations omitted).

While a taxpayer can ask that one year’s overpayment be applied to another year’s liability, Congress has given IRS regulatory authority to decide how to do this, but in any case, Reg. 301.6402-3(a)(6) makes it clear that IRS isn’t bound by what a taxpayer asks for.

Here TFRPs create a problem. While IRS can collect the penalty only once, there may be multiple payors, and in fact (as occurred here) the sum of the parts may be greater than the whole. So the IRS deems the TFRPs collected only after two years have gone by from last payment with no claim from the employer or any responsible person for a refund. In any case, Section 6672(d) allows responsible persons and the employer to sue one another for contribution if one of them paid more than their fair share.

Hersh’s overpayment, if there was one, applies to his Section 6672 TFRP payment, not his 2006 income tax withholding. Judge Gustafson: “…if the IRS holds Mr. Weber’s money wrongly, it holds it not as an overpaid 2006 income tax but as an overpaid section 6672 penalty. But there is no regulation that permits a taxpayer to elect to have an overpayment of a section 6672 penalty to be applied to his income tax liability, and there is no line on the Federal income tax return form that permits the reporting of an overpaid section 6672 penalty as a credit to income tax. A credit elect overpayment can be an issue in a CDP case…, but Mr. Weber has no valid claim of a credit elect overpayment. After the 2006 income tax overpayment was credited against the section 6672 penalty, the 2006 income tax overpayment was no longer available for application to 2007 income tax. In the absence of that credit elect overpayment, Mr. Weber had no 2007 income tax overpayment that could be credited to his liability for 2008 income tax. The 2008 income tax liability could thus not be satisfied by cascading credit elect overpayments from 2006 and 2007.” 138 T.C. 18, at pp. 24-25.

While Tax Court can consider whether IRS abused its discretion in refusing to apply an available credit, there is no available credit here, because whatever credit Hersh has was applied to the TFRPs. Hersh wants Tax Court “not to consider a credit that is already ‘available’ (because it has already been determined) but rather to make ‘available’ a credit that is currently not available because the IRS has disallowed it. He contends that there is a positive balance in his penalty account and that we could decide this case in his favor as an almost arithmetical matter–but that is not the case: Whether the penalty has really been overcollected is a potentially complex question that may depend not only on the balance in his account (which in fact is still negative) but also on the pendency of refund claims by other responsible persons and on liabilities for interest and additions to tax. See supra pp. 17-19. Mr. Weber thus asks us not to allocate an uncontroversial credit but rather to adjudicate a disputed refund claim that is unrelated to the liability the IRS proposes to collect….” 138 T.C. 18, at pp. 35-36.

This would expand Tax Court’s jurisdiction in ways Congress never intended.

No dice, Hersh. Duke it out in District Court.