Archive for July, 2012|Monthly archive page


In Uncategorized on 07/09/2012 at 19:15

That’s Judge Kroupa’s lesson for Brookie Ashland, CEO of Cutler & Co., LLC, which checked the box as a partnership. The case is Stephan F. Brennan and Beth A. Brennan, T. C. Memo. 2012-187, filed 7/9/12, but Steph and Beth are consolidated with Brookie and Melvin W.

Cutler ran stock portfolios, and allegedly made a huge guaranteed payment to Melvin W. and another to Furey (a partner who bailed out and settled with IRS pre-trial), which resulted in a big loss pass-through to the Cutler partners. Meanwhile, Brookie and Melvin W. had created Airport Plaza, a partnership, to which Brookie and Steph contributed their membership interests in Cutler. So Airport Plaza was a partner of Cutler for tax purposes.

Brookie and Melvin W. take big loss carryforwards and carrybacks, as do Steph and Beth, but IRS blows up the whole deal. Brookie, Melvin W., Steph and Beth all petition, but admit that neither Melvin W. nor Furey ever got the guaranteed payments.

IRS moves in mid-trial to dismiss for lack of jurisdiction, as the issue of the pass-through loss from Cutler to Airport Plaza to Steph and Brookie are TEFRA (partnership) items, not individual items, and that the statute of limitations has run on TEFRA adjustments to Cutler for both IRS and Brookie.

After briefing and trial, Judge Kroupa bounces the whole case.

Subject-matter jurisdiction is critical, and can be raised at any time by any party or by the Court itself; it cannot be waived, because it goes to the heart of whether the Court has the right to decide anything.

And here, says Judge Kroupa, there is no right. Brookie claims that Cutler is exempt from TEFRA as a small partnership. “The parties’ dispute over Cutler’s TEFRA status centers around whether Cutler qualified for the small partnership exception to TEFRA. See sec. 6231(a)(1)(B). The small partnership exception exempts certain partnerships with 10 or fewer partners from the provisions of TEFRA on an annual basis. Id. The small partnership exception does not apply to a partnership for a taxable year if any partner in the partnership during that taxable year is a ‘pass-thru’ partner as defined in section 6231(a)(9). A ‘pass-thru partner’ means a partnership, estate, trust, S corporation, nominee or other similar person through whom other persons hold an interest in the partnership. Sec. 6231(a)(9).” T.C. Memo. 2012-187, at pp. 8-9.

So we come to Airport Plaza (AP). Was AP a partner in Cutler? If so, no small partnership exception to TEFRA, and Brookie is out.

AP was supposed to dissolve by its own terms the year before the big loss, except it didn’t. It was still executing documents during the year at issue. Even if it was winding down in that year, it was still a partnership until all assets were distributed and all activity ended.

Brookie claims AP wasn’t a real partnership, but that gets nowhere. She created AP, and signed AP’s tax return (a Form 1065). Judge Kroupa: “A taxpayer is free to conduct business through a variety of business organizations. Once a business form is chosen and reported on a return, however, the taxpayer bears the risk that its chosen form is valid for Federal tax purposes. The Court of Appeals for the Ninth Circuit has held the Commissioner may bind a taxpayer to an adopted business form that the taxpayer represents as valid. This rule holds true even if the adopted business form in substance is invalid for tax purposes. The rule exists because to permit taxpayers to challenge at will their own adopted form in favor of what they assert is actually the true substance would encourage post-transactional planning, promote unwarranted litigation by taxpayers, and raise a heavy administrative burden on the Government, including substantial problems of proof.

“We shall not allow the Ashlands to disavow Airport Plaza’s validity as a partnership for tax purposes under the circumstances.” T. C. Memo. 2012-187, at pp. 11-12 (Citations omitted.)

Takeaway–You choose it, you’re stuck with it.


In Uncategorized on 07/06/2012 at 15:53

Or At Least No More Than 25 Questions

So says IRS, unless it’s to do with the deficiency specifically or to advance the Tax Court case. General objections to taxing authority do neither. So STJ Panuthos issues a protective order in favor of IRS in Nia Karan Young, Docket No. 1284-12. You can’t quote this, of course, but it’s an example of how interrogatories and requests for admission should be served and filed. And there were no decisions out of Tax Court today.

Nia’s request for admissions, she said,  “focused on the legitimate legal issue of how the statutes of the IRC actually make an identifiable declaration that a specific person or group of persons are plainly and clearly made LIABILE [sic] for the payment of the tax at issue”. Order, at p. 1. She also asked that she be permitted to reduce her list of interrogatories.

Take it away, STJ Panuthos: “Rule 90(b), Tax Court Rules of Practice and Procedure, requires that a party making a request for admissions ‘shall simultaneously serve a copy thereof on the other party and file the original with proof of service with the Court.’ Petitioner in this case has failed to file her original request for admissions with the Court as of the date of this order. Furthermore, the requests are generally directed at the Federal government’s authority to tax and do not appear to advance the development of the case.

“Petitioner’s interrogatories to respondent exceed 25 questions according to Rule 71(a), Tax Court Rules of Practice and Procedure. Additionally, pursuant to Rule 70(a)(2), petitioner served petitioner’s interrogatories to respondent before the expiration of 30 days after joinder of issue. See Rule 38, Tax Court Rules of Practice and Procedure. Furthermore, the interrogatories are not simple questions such as those contemplated by Rule 71 and are generally directed at the Federal Government’s taxing authority. See, e.g., Roat v. Commissioner, 847 F.2d 1379, 1382-1383 (9th Cir. 1988) (upholding this Court’s granting of a protective order against discovery where the taxpayers propounded interrogatories, dealing mainly with the Government’s authority to tax, to which a response would have been ‘onerous and pointless’, and made no effort to consult informally).” Order, at p. 1.

STJ Panuthos warns Nia than any more of these shenanigans will result in a Section 6673(a)(1) hit to her wallet.

Takeaway- If questions arise, try informally. And if all else fails, follow the rules.


In Uncategorized on 07/05/2012 at 16:33

It’s a many-times-told tale for the tax practitioners, but it’s news to Yoron D. Israel, in the eponymous T. C. Memo. 2012-185, filed 7/5/12.

Yoron and Mrs. Yoron parted ways, with Yoron getting the dependents’ exemptions for their three kids in odd-numbered years for the child support he paid–and paid–and paid. But what didn’t Yoron get (no prize for the correct answer)?

A properly completed and signed Form 8332; or a written declaration with the necessary information (wife’s SSAN, agreement not to claim dependents’ exemptions, and specific years to which the foregoing applies), that’s what.

Yoron attaches a copy of the divorce decree to his return for the year at issue, but it’s unsigned by the former Mrs. Yoron, and even though Yoron pursues her through the courts of Massachusetts (his home) and Arizona (whither she flees), he gets nada, as they say in Arizona.

Yoron tells his sad tale at a CDP, because he doesn’t file a petition when he gets the SNOD. He has entered into an installment agreement, but wants to contest his liability.

Judge Cohen could blow Yoron off with a simple “you’re too late to contest your liability, IRS wasn’t arbitrary or capricious, so have a nice day”.

But Judge Cohen is a softie, and anyway “(B)ecause petitioner’s efforts have been consistent and in good faith, we believe he is entitled to an explanation of why those exemptions were disallowed. So far as the record reflects, he has not been given an adequate explanation.”  T. C. Mem. 2012-185, at pp. 4-5.

Of course we know the answer. No Form 8332 or equivalent means no exemption, where taxpayer can’t establish child(ren) lived with taxpayer more than half the year. And Yoron admits they didn’t.

So Judge Cohen gives Yoron the bad news: “As unfair as it may seem to petitioner, the statute, regulations, and numerous cases subsequent to Miller v. Commissioner, 114 T.C. at 187-189, compel the conclusion that his former wife’s failure to execute the required declaration defeats his claim to the exemptions for 2007. See Santana v. Commissioner, T.C. Memo. 2012-49; Nixon v. Commissioner, T.C. Memo. 2011-249; Briscoe v. Commissioner, T.C. Memo. 2011-165; Himes v. Commissioner, T.C. Memo. 2010-97; Gessic v. Commissioner, T.C. Memo. 2010-88; Thomas v. Commissioner, T.C. Memo. 2010-11. T.C. Memo. 2012-185, at p. 8.

I blogposted Nixon, “Kicking Richard Nixon,” 10/5/11, and Briscoe, “Supported Child, Unsupported Exemption” , 7/11/11. And Judge Holmes’ goalline save in Gary L. Scalone and Sandra Vieira Scalone, 2012 T. C. Sum. Op. 40, filed 5/2/12, a Section 7463 “don’t quote me” (see my blogpost “Get the Years Right”, 5/2/12) doesn’t help, because there the wife signed Gary’s decree, and Mrs. Yoron didn’t.

Bottom line–Divorce lawyers, one of these cases is going to result in a professional liability claim if you don’t get duplicate original Forms 8332, filled in and signed by adversary spouse, before you enter the final decree, and make sure your client attaches one to the first return where the client claims the exemptions. Keep the duplicate originals in case IRS loses one. Or if the adversary spouse refuses to provide signed Form 8332, warn your client in writing.


In Uncategorized on 07/03/2012 at 16:07

So that taxpayers might be more completely confused and misled. Or perhaps I missed something: is it not the aim of our system of taxation to confuse and mislead taxpayers so as to deprive them of whatever rights Chief Justice Roberts will still allow to them?

No decisions out of Tax Court today, so here’s an order from Chief Judge Thornton, Michele A. & Ray V. Vunovich, Docket No. 6493-12, filed 7/3/12.

Mich and Ray got a SNOD, and filed their petition with Tax Court 100 days later; of course that’s a no-no, as the magic number is ninety (90) days, per statute. The section 7502 savings clause says timely mailed is timely filed, but must be properly addressed.

Here’s Mich and Ray’s story, as told by Chief Judge Thornton: “’The paperwork sent to us by the IRS included a self addressed envelope with the IRS address on it. Since the paperwork was a notice to us about our right to appeal their determination, it seemed obvious that any response we had was to be directed to the address on the envelope.

“’That is why we sent our appeal to that address. And when we were notified that we sent it to the wrong address, we promptly forwarded it to the proper address.’

“Consistent with petitioners’ representations, the record herein reflects that the petition was initially addressed and sent by certified mail to the ‘Internal Revenue Service, Kansas City Appeals Office’ in Kansas City, Missouri, on February 28, 2012. The materials likewise show that the petition was received by that office on February 29, 2012. It was then returned to petitioners and resent by them to the Tax Court, with the original envelope included.

“Thus, petitioners’ objection and other documents in the record show that, after receiving the notice of deficiency, petitioners continued to communicate with the IRS.” Order, at p. 2.

Doesn’t help; Chief Judge Thornton again: “Even confusing IRS responses or correspondence during the administrative process cannot override the clearly stated deadline in the statutory notice of deficiency. Such confusion is not uncommon given that the IRS frequently treats as separate processes or proceedings what taxpayers view as a single dispute. Here, it appears that petitioners may have conflated this Court with an IRS unit, but the IRS is a completely separate and independent entity from the Tax Court. Similarly, the inclusion of an pre-addressed envelope directed to the IRS, while understandably confusing, is likely explained by the fact that a notice of deficiency provides taxpayers with several options, some of which occur administratively between the taxpayer and the IRS (such as submitting a waiver rather than contesting the deficiency before the Tax Court).” Order, at p. 2.

How unrepresented, pro se litigants are supposed to know this, when I am prepared to wager that a large proportion of the attorneys admitted to practice law  in any jurisdiction wherein the Tax Court sits (and who are presumably eligible for automatic admission to Tax Court) haven’t a clue, is nowhere explained.

Short answer: Mich and Ray are out, their petition is filed too late, misleading information from IRS to the contrary notwithstanding. But if the correspondence from IRS contains numerous options, might it not be well to state in plain English: “If you want to go to Tax Court, which is not part of the IRS so don’t write to us, file your petition with them at 400 Second St NW Washington DC, nowhere else, within 90 days. If you don’t, you’re out!”?

National Taxpayer Advocate Olson, please copy.


In Uncategorized on 07/02/2012 at 17:12

In the modification of a divorce decree, that’s where, according to Judge Marvel, in a Section 7463 “don’t quote me”, James P. Chiavacci and Joyce L. Chiavacci, 2012 T.C. Sum. Op. 63, filed 7/2/12.

Jim and Leigh parted ways years ago. Jim asked for a modification of alimony awarded in the judgment of divorce (which expressly stated alimony ended with death or remarriage). Leigh said no, but the divorce court judge said “talk among yourselves”, so they negotiated a $20,000 buyout.

Unfortunately, Jim’s lawyer just sent Leigh’s lawyer the bank check from Jim, and asked Leigh’s lawyer to draft up something for the divorce court that the alimony portion of the judgment of divorce was modified. Jim’s lawyer also represented Jim in Tax Court.

Judge Marvel: “…the district court entered an order amending the divorce judgment (amending order). The amending order contains the following statement: ‘By agreement of the parties, Spousal Support is terminated effective September 2, 2007. In all other respects, the Divorce Judgment dated January 10, 1994, as amended on August 31, 2001, remains in full force and effect.’ The amending order makes no reference to Mr. Chiavacci’s $20,000 payment to Ms. Charles.” 2012 T.C. Sum. Op. 63, at p. 5.

That sinks Jim. The $20,000 payment is a debt from Jim to Leigh, not alimony any more. By terminating the entire alimony obligation, the “death or remarriage” clause was also terminated, and under State law (Maine in this case), while alimony terminates with death, debts don’t. That Leigh was alive when she got the check “mox nix”, as we old Army types say, “don’t matter”.

Divorce lawyers, please don’t forget to add the words “this obligation terminates with death” to every document, every letter, every modification. I don’t name Jim’s lawyer, because I’m sure Jim will make him suffer enough.


In Uncategorized on 07/01/2012 at 23:50

I take my text from the 1965 Richard Rodgers-Stephen Sondheim musical, because we are given a waltz indeed, courtesy of Steven J. Stanwyck, Petitioner, and Joan Stanwyck, Intervenor, 2012 T.C. Mem. 180, filed 6/28/12. I come late to this dance, having been absorbed by, and absorbing, the National Society of Tax Professionals summer jamboree in sunny Williamsburg, VA.

The chief waltzer here is Steve the disbarred attorney. Joan was his wife of 32 years and his bookkeeper, but we hear nothing about her.

Steve did plenty. Judge Kroupa: “Petitioner continues his pattern of delay and attempts to prolong our review by failing to provide a post-trial brief.  Instead he has made various nontraditional motions.  Petitioner is an experienced trial attorney.  The Court warned him on several occasions that we would decide this case based on the record if he failed to provide a post-trial brief.  The Court established a briefing schedule at the end of trial.  Petitioner disregarded the Court’s order, and his inaction is independent grounds to deny his request for us to consider respondent’s denial of his claims. See Rule 123.  Failure to provide the post-trial brief is also grounds to decide against the party with the burden of proof.” 2012 T.C. Mem. 180, at pp. 7-8. (Citations omitted.)

Not a whit dismayed, Steve asks for innocent spouse relief. This is denied, as the items giving rise to the deficiencies are entirely Steve’s.

Finally, Steve objects to the collection process. Judge Kroupa: “We again note that petitioner failed to file any post-trial brief. Petitioner’s testimony and examination of witnesses were incoherent and irrelevant.  We therefore must look to the defects petitioner set forth in the petition.  They are the same issues petitioner raised in requesting a hearing.” 2012 T.C. Mem. 180, at p. 16.

Steve claimed he was disabled and not accommodated, but later admitted he was not disabled. He sought discovery, but that isn’t allowed on a CDP. What is allowed is the filing of a NFTL while a section 6015 innocent spouse request is being decided by Appeals.

To sum up, “In toto, petitioner bombarded respondent for 18 months with irrelevant information, failed to provide requested information and ultimately ignored communications from respondent.  Petitioner requested in-person hearings to resolve each issue, yet failed to appear.  There were more than 20 written communications and 10 phone calls between petitioner and respondent. Respondent verified that legal requirements were met, considered all issues raised, and concluded that the collection action was no more intrusive than necessary. Respondent did not abuse his discretion by sustaining the collection action.

“As a final matter, we address whether it is appropriate for us to impose a penalty against petitioner on our own motion under section 6673.  This section authorizes the Tax Court to require a taxpayer to pay to the United States a penalty of up to $25,000 whenever it appears that proceedings have been instituted or maintained primarily for delay or that the taxpayer’s position in such proceedings is frivolous or groundless. The Court has indicated its willingness to impose such penalties in collection review cases.

“It is apparent from the record that petitioner instituted this proceeding in continuation of his refusal to acknowledge and satisfy his tax obligations.  Such proceedings waste the Court’s and respondent’s limited resources, taking time away from taxpayers with legitimate disputes.  Although we do not impose a penalty on petitioner pursuant to section 6673(a)(1) at this time, we admonish petitioner that the Court will consider imposing such a penalty if he advances arguments similar to those raised here.” 2012 T. C.Mem. 180, at pp. 19-20 (Citations omitted.)

Judge, if you don’t impose the section 6673 penalty in this case, in what case will you impose it?