But IRS’ plea, echoing the Marvelettes’ 1961 hit (covered by the immortal Beatles), falls on Judge Wells’ deaf ears, and Scott White’s petition is dismissed in the eponymous not-for-nuthin’ Section 7463, 2012 T.C. Sum. Op. 53, filed 6/11/12.

Scotty’s fighting about a $500 deficiency. He claims he never got the SNOD IRS claims they sent, but instead Scotty got a letter from IRS, which he attached to his petition, that gave the wrong date for filing the petition, more than 90 days after the mailing of the SNOD. IRS claims Scott is too late, and moves to dismiss for want of jurisdiction.

But IRS fails the proof test. Judge Wells: “A U.S. Postal Service (Postal Service) Form 3877 offered by respondent at trial and with his motion stated that the notice of deficiency was mailed on August 30, 2010, to petitioner at his last known address, which was also the address he used throughout his correspondence with the IRS and this Court. However, at trial, because the Form 3877 respondent offered was not signed by a Postal Service employee and because it did not state the number of items the Postal Service received, respondent moved to withdraw his motion to dismiss for lack of jurisdiction.” 2012 T.C. Sum. Op. 52, at p. 3. (Footnote omitted.)

But after trial, IRS tries to reopen the record to put in a print-out from USPS’s online track-and-confirm showing mailing and attempted delivery, and claims “business record in ordinary course” to get around hearsay. For non-lawyers, hearsay means that the person who said or did whatever must be proved is not in Court, and someone else is saying what the absent person said or did, although they themselves weren’t there. That’s generally a no-no, as the trier of fact (judge or jury) and the opposing party need to look the witness in the eye and cross-examine.

But there is an exception in this case. A business record kept in the regular course of business (even by a non-profit), made roughly contemporaneously with the activity in question by someone whose job it is to make the record, certified by a representative of the recording entity (even if not the person who made the record), can be admitted as evidence. For more about this penguin than you want to know (unless you’re studying for the Tax Court Admissions Exam in November), see Fed. R. Evid. Section 902.

Guess what? There’s yet another exception (don’t you just love this stuff?). Judge Wells lays it out: “However, rule 902(11) of the Federal Rules of Evidence contains a notice requirement: A party intending to offer a record into evidence ‘[b]efore the trial or hearing * * * must give an adverse party reasonable written notice of the intent to offer the record–and must make the record and certification available for inspection–so that the party has a fair opportunity to challenge them.’” 2012 T.C. Sum. Op. 52, at p 6.

See my blogposts “Don’t Ambush the Indians,” 4/7/11, and “Don’t Ambush the Accountants, Either,” 8/17/11. And here Scotty is the ambushee, because the trial is over and he never got to see this record IRS wants to use to sandbag him, in advance of trial.

Even if IRS had tried to introduce the printouts at trial, Scotty got no pre-trial warning. Now Fed. R. Evid. Section 902 doesn’t prescribe a specific number of days, hours or even minutes for giving notice before trial, but the Courts have said it has to give the opposing party a fair chance to check out the record and those who made it.

So no go, IRS. The Postal Service 3877 is no good because doesn’t state the number of articles presented and not signed by the USPS clerk, the printouts are no good because Scotty never saw them pre-trial, so case dismissed for want of jurisdiction, but not because Scotty is late.

Why Taxpayers Need Representation in Tax Court

The few people who read this, my blog, may remember my blogpost “A Book and a Modest Proposal”, 5/22/12. I said that Tax Court is a minefield, that even experienced practitioners have taken nasty falls there, and that the current “closed shop” of a virtually unpassable admission examination restricts effective representation to all but those able to afford expensive and experienced counsel.

The taxpayer with a small claim (small to others but not to the taxpayer) is left to advance his or her claim unaided, while IRS has battalions of attorneys who do nothing but Tax Court practice.

Case in point, as usual a Section 7463 small claim, little noted nor long remembered, William L. Weaver and Dorothy J. Weaver, 2012 T. C. Sum. Op. 52, filed 6/7/12. This was a Rule 122 stipulated facts case, so there was no hearing and no oral testimony.

The tax is not at issue, so I’ll summarize quickly. Dottie was a US person employed by the Consulate of the True North Strong and Free to drum up business for the Canadians. Dottie got sick, and finally resigned due to sickness. Canada generously gave her a final payment based upon seniority and tenure under the Maple Leaf flag.

Dottie had her joint return with Willie the Weaver (Civil War buffs will remember the original words to “Dixie” featured Willie the Weaver, who was a gay deceiver, but no deceit here) done by an unnamed tax pro, who reported the Canadian Farewell as “other income”, and didn’t file a Form 1040SE or tell Dottie and Willie to pay self-employment tax thereon.

No question Dottie was an employee, and employees don’t usually pay self-employment tax, but (a) Dottie worked for a foreign government (see Section 3121 and my blogpost “Not An Employee For Tax Purposes?”, 5/24/11), and (b) the Canadian payment was based on tenure and seniority, and was not payment for bodily injury (see Section 104 and my blogposts “No Hurt, No Foul”, 11/1/11, and “Don’t Do It, Litigator”, 12/5/11).

So it’s severance pay, not disability pay, and therefore it’s ordinary income, not damages for bodily injury. So only self-employment tax is due, because Dottie paid income tax on the payment already.

So far, no big thing.

Now for the Section 6662(a) substantial underpayment penalty. No question there was substantial underpayment due to the SE, but Dottie claims she used a tax pro to prepare the return. Of course, the stipulated facts say nothing about what Dottie told the pro.

That’s enough to sink Dottie. Judge Kroupa: “Petitioners have not established that their reliance on their return preparer was reasonable and in good faith. This case was fully stipulated. That does not relieve petitioners, however, of their burden. Petitioners failed to demonstrate that they provided all the necessary and accurate information to the return preparer. We cannot turn a blind eye to this oversight and simply accept petitioners’ assertion alone that they relied upon the return preparer as a defense against the accuracy related penalty. See Peacock v. Commissioner, T.C. Memo. 2002-122. Moreover, petitioners failed to otherwise show that their failure to report the payment as selfemployment income was due to reasonable cause and was in good faith.” 2012 T. C. Sum. Op.at p. 10. Penalty sustained.

Now if there had been a trial, and Dottie had had a chance to call as a witness the tax pro she used, put him or her on the stand and have the tax pro tell Judge Kroupa what Dottie told him, or get on the stand herself and tell Judge Kroupa what she told the tax pro, she maybe would have had a chance to knock out the penalty ($1782.00).

But how could Dottie know that was what she had to do? And if she was disabled so she couldn’t work, presumably so that she couldn’t personally appear at a hearing, what choice had she but to stipulate? And how could she afford a representative, be that representative an attorney or a Tax Court Practitioner who had passed through the eye of a needle that is Tax Court admission for other than attorneys, who could tell her what to stipulate, and prepare an appropriate affidavit either from Dottie or from the tax pro for a Rule 122, much less brief and try a case, for a $1782 penalty?

Now this is not a political blog; I’m bored with saying I grind no axes here. And I don’t fault Judge Kroupa; she is bound by the record she has, not by the record Dottie maybe should have presented.

But this just isn’t right.

Or, If You Do It Right, You Can Do It Among Yourselves

That’s the takeaway from James Maguire and Joy Maguire, 2012 T.C. Memo. 160, filed 6/6/12.  Judge Ruwe is in the driver’s seat in this tale of two S Corps, one that sells used cars and the other that provides financing for those sales. Both the S Corps are owned by the Famiglia Maguire, hence these tears, as IRS claims the Famiglia’s mix-and-match with accounts receivable from one S Corp to the other to build basis for loss deductions didn’t really happen.

Oh no, says Judge Ruwe, the swap was real. “Held: Shareholders in two related S corporations are not prohibited from receiving a distribution of assets from one of their S corporations and then contributing those assets into another of their S corporations in order to increase their bases in the latter. The effect is to decrease the shareholders’ bases in the S corporation making the distribution and thereby reducing the shareholders’ ability to get future tax-free distributions from the distributing S corporation, while increasing the shareholders’ bases in the S corporation to which the contributions are made. The fact that the two S corporations have a synergistic business relationship and are owned by the same shareholders does not preclude accomplishing Ps’ goal, so long as the underlying distributions and contributions actually occurred.” 2012 T. C. Memo. 160, at p. 2.

Ya gotta like a Judge who makes it easy for the poor blogger.

The story:  Auto Acceptance (AA) sold cars, CNAC, Inc., financed the sales. CNAC made money, AA lost money. The Famiglia owned 100% of the stock of both, but their basis in AA was insufficient for them to take all the AA losses, as S Corp pass-through losses are limited to stock basis plus debt basis.

The Famiglia called their accountants, who told them to write a check from CNAC, where they had plenty of basis, to themselves and from themselves to AA, to increase their AA basis so they could take the losses. The Famiglia replied that the accountants could write their own checks, as the Famiglia didn’t have that much cash in the CNAC accounts.

Nothing daunted, the accountants (into whose professional credentials Judge Ruwe goes in some detail, for good-faith reliance purposes) suggest distributing to the Famiglia some receivables AA owed CNAC, whereupon the Famiglia would  transfer those to AA, and build basis thereby.

The Famiglia’s basis in CNAC was always positive after the distribution of the AA receivables to themselves and the contribution thereof to AA.

The Famiglia and the accountants papered the deals well, with corporate resolutions, adjusting journal entries, assignments, promissory notes for intraFamiglia borrowings, and took the AA losses.

IRS drops the SNODs, saying it was all a game of put-and-take.

Judge Ruwe: “In determining whether a particular transaction qualifies as a shareholder investment, a taxpayer must make an actual ‘economic outlay.’ A taxpayer makes an ‘economic outlay’ when he incurs a cost or is left poorer in a material sense after the transaction.” 2012 T. C. Memo. 160, at pp. 11-12 (Citations omitted).

IRS says there wasn’t any real economic outlay, but Judge Ruwe isn’t buying that. The Famiglia did transfer the receivables, in that there were adjusting journal entries on the respective corporate books, and there were resolutions, for each tax year at issue, timely made.

“When petitioners received the accounts receivable from CNAC, as they had every right to do, and contributed them to Auto Acceptance, that transaction reduced the liabilities of Auto Acceptance; made Auto Acceptance solvent in terms of its assets exceeding its liabilities; and increased the net worth of Auto Acceptance, exposing a greater amount of its assets to its general creditors. At the same time, petitioners’ bases in CNAC were reduced by the amounts of the accounts receivable that CNAC had distributed to them, thereby reducing their ability to receive future tax-free distributions from CNAC.” 2012 T. C. Memo. 160, at pp. 14-15 (Footnote omitted).

But the footnote says a lot: “Petitioners stress that the risk involved in exposing more of Auto Acceptance’s assets to its creditors was more than hypothetical, because by mid-2004 the Kentucky attorney general had instituted a lawsuit against petitioners and their businesses claiming millions of dollars on the basis of consumer fraud claims. Petitioners contend that the risk of the loss to Auto Acceptance’s creditors, including vendors that it alone dealt with, when viewed in consideration of the attorney general’s lawsuit, was very real and the additional net worth in Auto Acceptance created by the capital contribution was put at greater risk, making them poorer in a material sense.” 2012 T. C. Memo. 160, at p. 15, footnote 7.

Likewise the distribution from CNAC wasn’t taxable to the Famiglia under Section 1368(b), as the Famiglia still had basis in their CNAC stock after each distribution.

The Law of Relativity doesn’t torpedo the Famiglia either: “The fact that the CNAC accounts receivable were distributed to petitioners and then contributed to a related entity does not require a finding that there was no economic outlay. We have previously considered this issue and have held that ‘the fact that funds lent to an S corporation originate with another entity owned or controlled by the shareholder of the S corporation does not preclude a finding that the loan to the S corporation constitutes an “actual economic outlay” by the shareholder.’ The fact that petitioners contributed intangible assets to Auto Acceptance, rather than cash, does not preclude increases in their bases. The tax basis of an S corporation may be increased through the contribution of cash, tangible assets, or intangible assets (such as accounts receivable).” 2012 T. C. Mem. 160, at p. 16.

Or to put it simply, “(T)he fact that the two S corporations have a synergistic business relationship and are owned by the same shareholders should make no difference so long as the underlying distributions and contributions actually occurred.” 2012 T. C. Memo. 160, at p. 16.

Make it real, and you’ve got the losses.

Or, If You’re Not Indicted You’re Not Stayed

In the words of Paul Simon’s 1970 blockbuster hit (No. 47 on Rolling Stone’s 500 greatest hits), “when you’re down and out, when you’re on the street, when evening falls so hard”, you’ll get no comfort from Tax Court unless you’ve at least been indicted. So rules hard-hearted Judge Goeke (he who gave The Great Dissenter, Judge Holmes, the Judge who writes like a human being, a firm time-out 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; see my blogpost “Judge, He Didn’t Mean It”, 5/17/12), in Ironbridge Corp. and Subsidiaries f.k.a. Pitt-Des Moines, Inc., 2012 T.C. Mem. 158, filed 6/5/12.

Ironbridge was another casualty of the Forex mix-and-match shenanigans of the late Nineties, whereby recognized major currency (Euro and Yen) puts were married to unrecognizable minor currency (Danish Kroner) calls, with offshore tax indifferents thrown in, so the economics zeroed out but not the tax benefits. A big-time accounting firm put Ironbridge into one of these, and IRS, Zeus-like, flung SNODs like thunderbolts.

Meantime, DOJ got into the act, and Haber, president and panjandrum of Ironbridge, was concerned that he might be principal soloist in a concerto for stool pigeon and Grand Jury.

While the foregoing was foregoing, Ironbridge petitions Tax Court, but IRS and Ironbridge seriatim ask for stays, saying that to try the case would prejudice DOJ (in that Ironbridge could get discovery of the criminal matters beyond that permitted by Fed. R. Crim. P.) and that Ironbridge couldn’t meet their burden of proof if Haber and certain of his unnamed minions took the Fifth at the trial.

However, DOJ finally sends Haber a “dear defendant” letter, wherein they state that they’re investigating, but not to worry, we have no present intention of indicting either you or your companies. Think IRS told DOJ to send that letter? No prize for the correct answer.

Anyway, “On March 27, 2012, petitioners filed a motion to dismiss the consolidated cases and enter decisions against them. Petitioners stated that they filed the motion as a result of their inability to present the testimony of Mr. Haber and other individuals who planned to invoke their Fifth Amendment rights. Petitioners claim that the lack of such testimony ‘would prevent the petitioners from being able to put on their case at trial’ because ‘Testimony from * * * [these] witnesses is critical to petitioners’ ability to meet their burden of proof in these cases’. Respondent objected to petitioners’ motion to dismiss on the grounds that ‘The principles of judicial economy require a final determination of these issues in this proceeding, which only a decision on the merits or an agreed stipulated decision can produce.’ Respondent is concerned that petitioners’ motion ‘is merely an attempt to unnecessarily prolong and delay this proceeding.’” 2012 T.C. Mem. 158, at pp. 4-5.

Oh yes, and in the alternative Ironbridge asked for yet another stay.

This launches Judge Goeke into a disquisition anent the stay of civil proceedings in criminal cases, which I’ll leave, as is my wont, to the law review writers and the terminally insomniac. Here’s a brief preview: “The District Courts of the Second Circuit have often used the following six-factor balancing test: (1) the extent to which the issues in the criminal case overlap with those presented in the civil case; (2) the status of the case, including whether the defendant (here, petitioners) has been indicted; (3) the private interests of the plaintiff (here, respondent) in proceeding expeditiously weighed against the prejudice to plaintiff (respondent) caused by the delay; (4) the private interests of and burden on the defendant (here, petitioners); (5) the interests of the courts; and (6) the public interest. Id. at 99-100. After considering each factor, as explained herein, we found the cumulative weight of the factors to favor denying the stay.” 2012 T. C. Mem. 158, at p. 6.

The bottom line, however, is “…petitioners are not at risk of criminal prosecution (thereby reducing the possible future use of collateral estoppel to zero), and it does not appear likely that Mr. Haber is in criminal jeopardy. Given that it is uncertain whether Mr. Haber will even be indicted, granting the motion could result in the imposition of a lengthy and indeterminable stay for no reason.” 2012 T.C. Mem. 158, at p. 9.

No stay, guys, and Section 7459(d) gives IRS judgment for the amounts stated in the SNODs upon dismissal of the petition on any ground other than want of jurisdiction. “The acceptance or rejection of a proffered concession is a matter within the discretion of this Court, and we should exercise our discretion in accordance with the ‘interest of justice’. See Jones v. Commissioner, 79 T.C. 668, 673 (1982); McGowan v. Commissioner, 67 T.C. 599, 607 (1976). Respondent has not suggested how the interests of justice would compel us to deny petitioners’ motion, and we can conceive of no injustice in granting petitioners’ motion.” 2012 T.C. Mem. 158, at pp. 10-11 (Footnote omitted).

Oh, and here’s the omitted footnote: “Respondent has stated that petitioners’ motion is merely an attempt to delay the proceedings and that judicial economy requires either a decision on the merits or else execution of ‘a stipulated decision effectuating a final, full, and complete concession of this case by petitioners.’ However, respondent has not specified how granting petitioners’ motion would delay the proceedings. We note that ‘A decision rendered upon a default or in consequence of a dismissal, other than a dismissal for lack of jurisdiction, shall operate as an adjudication on the merits.’ Rule 123(d); see also Settles v. Commissioner, 138 T.C. ___, ___ (slip op. at 4) (May 8, 2012); Estate of Ming v. Commissioner, 62 T.C. 519, 522-523 (1974.).” 2012 T.C. Mem. 158, at p 11, footnote 4.

As to Settles, above cited, see my blogpost “Dismissed!”, 5/8/12. And as to IRS’ demand for “either a decision on the merits or else execution of ‘a stipulated decision effectuating a final, full, and complete concession of this case by petitioners’”, see my blogpost “Victory is not Vindication”, 5/1/12. If the taxpayer can’t get “full, final and complete concession”, neither can IRS. You won, so go away.

Readers of my blogpost “To Have and Have Not”, 8/31/11, will remember the sad tale of Clyde W. Turner, Sr., who had when he should have had not, and thereby torpedoed his estate plan. But a happier fate befalls the Estate of George H. Wimmer, Deceased, George W. Wimmer, Personal Representative, in 2012 T.C. Mem. 157, filed 6/4/12.

George I and wife Ilse set up a Family Limited Partnership, ostensibly to invest in land and stocks. George I and Ilse, general partners, never bought land, but they bought some good dividend-paying, publicly-traded stock. And the trust instrument provided “…partnership profits are allocated to the partners according to their proportional partnership interests. All distributions of net cash flow are also shared among the partners in proportion to their partnership interests. Distributions must be made in cash pro rata. The partnership agreement, as amended, provides that the primary source for distributions is distributable cash derived from partnership income.” 2012 T.C. Mem. 157, at p. 6 (Footnote omitted).

Now the trust George I and Ilse set up for the grandchildren was a limited partner, the grandbabies had the right to annual distributions from the trust corpus, and the trust did get its dividends along with everybody else.

As usual, the initial limited partners were George I and Ilse, and they gifted out partial limited partnership interests every year, staying under the $10,000 (now $13,000) per head radar. Also as usual, transfers of the limited partnership interests, otherwise than interfamily, were strongly restricted.

Judge Paris didn’t seem sure whether any extrafamily transfer required 70% or 100% approval by all limiteds. “The transfer of limited partnership interests requires, among other things, the prior written consent of the general partners and 70% in interest of the limited partners. Upon satisfaction of the transfer requirements, the transferee will not become a substitute limited partner unless the transferring limited partner has given the transferee that right and the transferee: (1) accepts and assumes all terms and provisions of the partnership agreement; (2) provides, in the case of an assignee who is a trustee, a complete copy of the applicable trust instrument authorizing the trustee to act as partner in a partnership; (3) executes such other documents as the general partners may reasonably require; and (4) is accepted as a substitute limited partner by unanimous written consent of the general partners and the limited partners.” 2012 T. C. Mem. 157, at p. 3. Then again, the limited partnership agreement isn’t crystal clear, either.

Howbeit, every limited partner was entitled to receive net cash distributions, and they did, every year, in proportion to their respective limited partnership interests.

George I shuffles off this mortal coil, and IRS claims the limited partnership interests George I and Ilse gifted to the family are not gifts of present interests, therefore not excludable from gross estate of George I.

Now a present interest is an unrestricted right to the possession, use and enjoyment of property or the income therefrom. “The terms ‘use, possess or enjoy’ connote the right to substantial present economic benefit, that is, meaningful economic, as opposed to paper, rights.” 2012 T. C. Mem. 157, at pp. 8-9 (Citations omitted).

But limited partnership interests may or may not be present interests. The interests the grandbabies and other limited partners got might not differ from what they would get if they were beneficiaries of a trust. Here, however, Judge Paris finds that, although the donees of the limited partnership interests did not get an unrestricted right to those interests, they sure got the right to the income.

Judge Paris: “…the estate must prove, on the basis of the surrounding circumstances, that: (1) the partnership would generate income, (2) some portion of that income would flow steadily to the donees, and (3) that portion of income could be readily ascertained.” 2012 T. C. Mem. 157, at p. 10 (Citation omitted).

Well, the limited partnership held dividend-producing, publicly-traded stock, so there should have been income (and there was), it would flow steadily (the generals were fiduciaries under State law and the limited partnership agreement said they had to distribute net cash), and the amount was readily ascertainable (just check the dividend history of the corporations whose stock was held).

Result: the grandbabies and the other limited partners had, and George I’s estate had not, so the gifts were properly excluded from George I’s estate.

One Burden, But Not Another

The truck driver in this case is David W. Bauer, and his eponymous case is 2012 T.C. Mem. 156, filed 6/4/12. But Dave is no over-the-road California Turnaround Jack Greene type. Dave hauls personal effects, furniture and furnishings for relocating businesspeople and others who have to get out of Dodge (or wherever).

To do his job, Dave needs to wrap and pack, and unwrap and unpack, his customers’ future entries on Antiques Roadshow. To make all this happen, he hires roustabouts, day laborers and casual folks at start and at destination, whom he gets from local moving companies. The casuals only take cash, because Dave is here today and gone with Chuck Berry’s cool breeze tomorrow.

Dave keeps a logbook, wherein he records his trips and what he pays his pickup crews. As he roams from town to town, he never hires the same people twice, so he doesn’t send out 1099s or W-2s, as nobody gets more than $600 from Dave.

IRS audits Dave. Dave doesn’t like IRS’ numbers, so he petitions, and introduces his logbook, looking for a Section 7491(a) burden of proof shift. No, says Judge Paris, you can’t upshift this one. “Petitioner claims that he met the requirements to shift the burden of proof to respondent because he substantiated his contract labor expenses with a logbook and testimonial evidence. Although the logbook purports to document petitioner’s daily expenses during the tax years at issue, its omission of periods of time and, as petitioner acknowledges, its mathematical errors and other inconsistencies, undermine the credibility of the logbook and the expenses recorded therein. The Court does not accept the logbook as credible evidence within the meaning of section 7491(a), nor does the Court accept petitioner’s uncorroborated and selfserving testimony to overcome the logbook’s unreliability. See, e.g., Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Thus, the Court holds that petitioner has not shown that he complied with the requirements of section 7491(a), and the burden of proof remains with him.”  2012 T. C. Mem. 156, at p. 6 (Footnote omitted).

Dave flunks the burden of proof, as he admits his logbook is inaccurate.

Now for the penalties. Even though Dave’s logbook fails to shift the first time, it works to shift the penalties. Judge Paris: “Although inadequate to substantiate his expenses, petitioner’s logbook demonstrates that, given the circumstances of his profession, he made a good faith effort to maintain a record of his contract labor expenses for substantiation purposes. Petitioner paid each contract laborer less than the $600 reporting threshold amount of section 6041(a).13 Therefore, except for substantiation purposes, petitioner did not have a business reason to keep detailed records of payments made to contract laborers. Moreover, because petitioner generally hired itinerant workers, he was compelled to make payments in cash. Although he did not use the more reliable recording options available for other types of payments, petitioner kept hand notations of his cash payments in a logbook.

“Accordingly, even though petitioner’s attempt to keep a record of his contract labor payments fell short for substantiation purposes, his recordkeeping demonstrates that he made a good faith effort for purposes of section 6662(a).” 2012 T. C. Mem. 156 at pp.11-12 (Footnote omitted).

Keep on truckin’, Dave.