The few  who  read this blog may remember Steve and Lori Esrig, who featured in my blogpost “Whose Line Is It, Anyway?”, 2/8/12. They were finalists in my Best Excuse For Late Filing sweepstakes. Steve claimed his accountant, who was supposed to prepare the returns for the years at issue, failed to do so “because she had to serve a very long prison sentence for murdering her husband, and the person in her office who took over their account made a slew of mistakes.” T. C. Memo. 2012-28, at p. 18.

But Judge Holmes, The Great Dissenter (The Judge Who Writes Like A Human Being), wasn’t buying it, as Steve adduced no proof of this outré assertion.

Not so Special Trial Judge Armen, The Judge With A Heart, dealing with Andrew M. Ross, Docket No. 19691-10S, filed 9/28/12.

Andy’s on for trial October 10, 2012, and needs a continuance of the trial date to get needed documents. IRS says they’ll make available to Andy and counsel “’a large amount of documentation that petitioner produced during the original audit’ and suggests that this documentation should suffice for trial next month in Peoria. Yet in his pre-trial memorandum respondent states that ‘To date, petitioner has not provided sufficient documentation to support the disallowed deductions under either the Cohan rule or I.R.C. sec. 274 [and that] Petitioner’s failure to maintain adequate records and fully substantiate the deductions claimed for the 2006, 2007, and 2008 taxable years constitutes negligence under I.R.C. sec. 6662.’” Order, at pp. 1-2.

But IRS doesn’t say that the missing documents Andy seeks wouldn’t help his cause. And that won’t play, even in Peoria.

Oh, where are the missing documents? Andy says “the Department of Justice seized all of the tax records that I had pertaining to the case on 4-12-11 [and that] after multiple attempts via my attorney all requests [for the return of such records] have been ignored at this time.” Order, p.1.

And, says STJ Armen: “As exhibits to his motion petitioner attached, inter alia, a copy of a Search And Seizure Warrant dated April 11, 2011, issued by a magistrate judge of the United Stated District Court for the Central District of Illinois that authorized the search of a building owned and/or used by petitioner in Springfield, Illinois and the seizure of, inter alia, all business records (specifically including all tax and client records), all computers and computer-related equipment, and all computer hardware and software (specifically including all internal and peripheral storage devices). Also attached as an exhibit to the motion was a 4-page inventory prepared by agents of the Federal Bureau of Investigation of items seized from petitioner’s premises on April 12, 2011, pursuant to the search and seizure warrant.” Order, p. 1.

Best excuse yet for inability to go to trial. Andy, you’re in the sweepstakes.

Ex parte communication between Appeals and IRS is a no-no, per Rev. Proc. 2000-43, 2000-2 C.B. 404, which provides Q&As to flesh out the 1998 IRS reorganization act. But when the IRC specifically requires Appeals to talk to IRS, specifically Area Counsel per Section 7122(b), all bets are off. So we learn from Norman Hinerfeld, 139 T. C. 10, filed 9/27/12, Judge Gale writing for Tax Court.

Norm was looking at $471K in TFRPs, which he didn’t contest, from his former corporation Thermacon Industries, Inc. Norm made an OIC of $10K based on collectibility, but when the SO determined his RCP was $74K, he upped the ante accordingly (and he got a second chance, unlike the hapless B.M. Vanmali and Bhari Vanmali; see my blogpost “Give It Your Best Number”, 4/9/12). The kindhearted SO was ready to buy it, but had to get clearance from Area Counsel.

Area Counsel, a nosy sort, discovered that Norm and his loving wife Ruth were being sued by a creditor of Thermacon for having sold substantially all Thermacon’s assets, alleged to have an equity of $2.2 million, to a corporation owned by the aforesaid Ruth and the Hinerfeld offspring, purchase price to be paid in worthless paper.

The SO asks Norm about this, but his answers contradict the answer he filed in the litigation, so the SO suggests the matter be placed in “currently not collectible” status pending the outcome of the lawsuit. Norman doesn’t agree, so the SO’s boss, the Appeals Team Manager (ATM, but the kind who takes money, not gives it), who’s got to approve an OIC, bounces Norm’s proposed OIC and approves a levy.

Norm claims Area Counsel had a prohibited ex parte communication with Appeals. No, says Judge Gale: “Rev. Proc. 2000-43, Q&A-11, 2000-2 C.B. at 406, specifically addresses communications between Appeals and the Office of Chief Counsel. Acknowledging the need for Appeals employees to obtain legal advice from the Office of Chief Counsel, A-11 provides three limitations on communications between Appeals employees and Office of Chief Counsel attorneys: (1) Appeals employees must not communicate with Chief Counsel attorneys who have previously provided advice to the IRS employees who made the determination Appeals is reviewing; (2) requests for legal advice where the answer is uncertain should be referred to the Chief Counsel’s National Office and handled as requests for field service advice or technical advice; and (3) although Appeals employees may obtain legal advice from the Office of Chief Counsel, they remain responsible for making independent evaluations and judgments concerning the cases appealed to them, and Counsel attorneys are prohibited from offering advice that includes settlement ranges for any issue in an appealed case.

“There is no evidence that the Area Counsel attorneys with whom Appeals conferred in this case had previously advised any employee who made the determination under Appeals review; that is, any employee of the Collection Division who made the determination to levy on petitioner’s property. In addition, the administrative record establishes that while SO X disagreed with Area Counsel’s recommendation to reject petitioner’s amended OIC, the decision to reject the OIC was made by ATM Y who, rather than SO X, had the authority to do so. Unlike SO X, ATM Y agreed with Area Counsel’s recommendation to reject. Given the substantial evidence that Area Counsel had marshaled to support the conclusion that petitioner had made a fraudulent conveyance, we are satisfied that ATM Y exercised independent judgment as contemplated in Rev. Proc. 2000-43, supra, when he agreed with Area Counsel’s recommendation.” 139 T. C. 10, at pp. 14-15. (Footnotes omitted).

But Judge Gale points out he isn’t deciding that Norm in fact made a fraudulent conveyance, only that ATM Y had sufficient evidence to bounce Norm’s proposed OIC.

Anyway, IRC 7122(b) requires a letter from Chief Counsel (or delegate, and Area Counsel is a delegate) to be in any file approving an OIC where the amount at issue is more than $50K. So Appeals must consult with Area Counsel and get an OK letter.

And kindhearted SO X’s opinion doesn’t matter, as ATM Y is the decider.

Now in an OIC, a nonliable spouse is not considered, unless a party to a fraudulent conveyance. And while Area Counsel should not reconsider facts determined by Appeals, Area Counsel is charged by the IRM to consider fraudulent conveyance issues.

Judge Gale:  “If anything, this case illustrates not an abuse of discretion by IRS employees but instead the wisdom of requiring the Office of Chief Counsel’s review of fraudulent conveyance issues.” 139 T. C. 10, at p. 23.

Takeaway–When you make a big OIC, Chief Counsel (or delegate) will be watching you.

No, this blogpost is not about Jules Pfeiffer, cartoonist, whose long-running Village Voice strip was so entitled. It concerns an SO whose disregard of the medical condition of A. DeeWayne Jones and his wife Shirley Jones (not to be confused with the Academy-Award winner of that name) earns a remand to Appeals from Judge Marvel in T. C. Memo. 2012-274, filed 9/26/12.

DeeWayne is a dentist for the county, working the local hoosegow. Shirley is retired. DeeWayne’s health is not good, he says, and Shirley’s is poor. DeeWayne has to keep working to pay his bills and the $51K of accumulated unpaid income taxes he owes, and which he doesn’t contest.

IRS levies on a bank account he has for $900, then gives him a CDP on the NFTL they want to file for the rest. DeeWayne wants a collection alternative, claiming he’s old, sick and broke, and Shirley is likewise.

There’s much back-and-forth about the worth of some real estate DeeWayne owns, but the house burned down and the SO included some insurance proceeds in DeeWayne’s RCP even though they were trust funds.

The point I’m making here is that the SO said that DeeWayne and Shirley were in good health, denied any OIC, and demanded payment in full. To the NOD denying any collection alternative, “The Appeals Office attached a statement prepared by Settlement Officer X and a copy of her worksheet. In the statement Settlement Officer X stated that Dr. Jones is ‘in apparent good health’ and that Mrs. Jones has ‘no known health problems.’” T. C. Memo. 2012-274, at p. 11. (Name omitted).

After deconstructing the real estate valuation arguments, with a sideswipe at Zillow.com as a source for real property valuations, Judge Marvel goes on: “Additionally, the notice of determination does not disclose that Settlement Officer X gave any consideration to the impact petitioners’ advanced age and asserted poor health might have on petitioners’ ability to pay, as required by IRM pt. 5.8.4.4. In fact, the statement attached to the notice of determination appears to confirm that Settlement Officer X gave no consideration to petitioners’ age or claims of poor health. There is no documentation in the administrative record showing that Settlement Officer X ever asked for documentation of or disputed petitioners’ asserted poor health, and respondent has offered no explanation for Settlement Officer X’s statement that Dr. Jones is ‘in apparent good health’ and that Mrs. Jones has ‘no known health problems.’ Although the Appeals Office does not have to list ‘every single fact that it considered in arriving at * * * [its] determination’, Barnes v. Commissioner, T.C. Memo. 2006-150, 92T.C.M. (CCH) 31, 35 (2006), aff’d in part, vacated in part sub nom. Keller v. Commissioner, 568 F.3d 710 (9th Cir. 2009), it cannot misstate or fail to address significant and obviously relevant facts.” T. C. Memo. 2012-274, at p. 23 (Footnote omitted, but read it. DeeWayne’ income comes from his profession, not investments; if he’s sick, he can’t work).

So remand to Appeals is appropriate, as IRS has too many gaps to fill to rescue SO X’s flawed analysis.

But isn’t this just another example of an overworked, under-resourced IRS, where the need to close cases becomes more important than closing them correctly? Congress, please copy.

And That’s An Understatement–Not!

Connoisseurs of the anfractuosities of, and travelers through the Byzantine labyrinth that is, Title 26 of the United States Code will appreciate BLAK Investments, Kyle W. Manroe Trust, Robert Manroe and Lori Manroe, Trustees, Tax Matters Partner, 2012 T. C. Memo. 273, filed 9/25/12. Judge Vasquez is our guide for this journey into the unexpected and counterintuitive.

To paraphrase Charles Dickens, the deal was dead to begin with. It was agreed by the parties, and “stipulated that ‘BLAK Investments was a sham, lacked economic substance, and was formed and/or availed of to claim deductions of artificial losses solely for tax purposes’ and conceded that a 20% accuracy-related penalty under section 6662(a) applies to the entire underpayment of tax resulting from the transaction. The sole issue remaining for decision is whether petitioner is liable for the higher 40% penalty rate for a gross valuation misstatement under section 6662(h).” 2012 T. C. Memo. 273, at p. 2.

Slam dunk for the IRS, no? BLAK is a son-of-BOSS, a mix-and-match of short sale of U. S. treasuries with an unliquidated liability to cover, using the old Section 752 dodge, pre-amendment. See my blogpost “Woodshedding Your Experts–Stobie Creek Part Deux”, 1/10/11. So a phony basis builder gets blown up, and a thumping capital gain gets laid on the Manroes.

Now what about the 40%? Judge Vasquez: “We have held that when the Commissioner asserts a ground unrelated to value or basis of property for totally disallowing a deduction or credit and a taxpayer concedes the deduction or credit on that unrelated ground, any underpayment resulting from the concession is not attributable to a gross valuation misstatement. See McCrary v. Commissioner, 92 T.C. 827, 851-856 (1989). Petitioner conceded the deductions on the grounds that BLAK Investments is a sham and lacks economic substance–grounds unrelated to the value or basis of the Treasury notes, foreign currency, or any other property in the transaction.” 2012 T. C. Memo. 273, at p. 6.

Game over for IRS? Not quite. “Nonetheless, it has long been the Court’s view that the gross valuation misstatement penalty does apply when the Court determines that an underpayment stems from deductions or credits that are disallowed because a transaction lacks economic substance or a participant is a sham.” 2012 T. C. Memo. 273, at p. 7 (Citations omitted, but one of them is the celebrated Petaluma case; see my blogposts “The Great Dissenter – Part Deux”, 2/15/12, and “Judge, He Didn’t Mean It”, 9/17/12).

So which is it, 20% or 40%? The answer is ambiguous. The Courts of Appeal are all over the lot. Ninth Circuit, where these California taxpayers could appeal, felt constrained by stare decisis to follow an earlier decision that said that a sham is not an understatement (cf. Home Concrete v. US , and my blogpost “Colony Lives”, 4/26/12).

Judge Vasquez: “We have similarly stated that stare decisis ‘generally requires that we follow the holding of a previously decided case, absent special justification. This doctrine is of particular importance when the antecedent case involves statutory construction’. Therefore, respondent bears the heavy burden of persuading us that we should overrule our established precedent.” 2012 T. C. Memo. 273, at p. 10 (Citations omitted).

IRS doesn’t bear the heavy burden, so stare decisis carries the day.

But IRS has one last round in its magazine. IRS claims its amended regulation under Section 6662(h) deserves Mayo Clinic deference (see my blogpost “Carpenter, Colony, Chevron and Mayo”, 4/26/11).

Judge Vasquez nails that one: “The Court of Appeals was well aware of the regulation when it decided Keller. We believe the Court of Appeals saw no need to address the regulation as the taxpayer there did not contest the amount of the overvaluation; he instead argued that section 6662(h) is not ‘applicable in the first instance’ because ‘his tax underpayment is not “attributable to” the valuation overstatement’. Keller v. Commissioner, 556 F.3d at 1059.

“The Court of Appeals agreed with the taxpayer and held that ‘When a depreciation deduction is disallowed in total, any overvaluation is subsumed in that disallowance, and an associated tax underpayment is “attributable to” the invalid deduction, not the  overvaluation of the asset.’ Id. at 1061. Because the Court of Appeals found that section 6662(h) was inapplicable, the regulation interpreting section 6662(h) would have been equally inapplicable.” 2012 T. C. Memo. 273, at p. 12 (Footnote omitted).

So the taxpayer’s sham transaction draws only a 20% penalty. At least in California, it’s better to create phony basis when you’re doing a completely phony deal, rather than creating phony basis in an economically substantial but nevertheless phony deal.

Don’t you just love this stuff?

Gross receipts, that is, when reckoning Average Annual Gross Receipts (AAGR) for Section 41 research tax credits.

That’s the lesson for Hewlett-Packard Company and Consolidated Subsidiaries, 139 T.C. 8, filed 9/24/12, Judge Goeke teaching the lesson.

This is not a replay of Foppingadreef and the Netherlands-US flimflam (see my blogpost “We Don’t Need No Stinkin’ Factors”, 5/15/12, Judge Goeke’s previous shootdown of a H-P ploy). No doubt H-P did research, but AAGR is a threshold that the researchers must cross before they can take the credit. Because the aim is to reward research that H-P otherwise wouldn’t have undertaken, the AAGR tries to exclude research that would have been undertaken, credit or no credit. The theory is that entities budget for research as a function of gross receipts, so by basing credit for new research on a threshold set at a function of gross receipts, the credit applies only to the new research, not the “anyway” research. This method also ties research into sales growth.

H-P tries to lower the threshold by not taking into account intercompany distributions (OK, says IRS, and so stipulates), and excluding nonsales income, like dividends, interest, rent, and other income, in computing AAGR (not OK with IRS or Judge Goeke).

H-P argues that only income from sales should be included in AAGR. “HP submits that by specifically excluding ‘returns and allowances’, a phrase connoting a merchant business association, Congress evinced a clear intention to limit gross receipts to solely sales receipts. Similarly, citing a Black’s Law Dictionary entry, HP asserts that the generally accepted definition of “gross receipts” focuses on sales or services income. See Black’s Law Dictionary 772 (9th ed. 2009) (defining ‘gross receipts’ as ‘The total amount of money or other consideration received by a business taxpayer for goods sold or services performed in a taxable year, before deductions. * * * [Sec.] 448; * * * [sec.] 1.448-1T(f)(2)(iv) [Temporary Income Tax Regs., 52 Fed. Reg. 22764 (June 16, 1987)].’).

“We are unpersuaded by HP’s contentions. Nowhere in the Code has the isolated term ‘gross receipts’ been construed as narrowly as HP suggests. On the contrary, an examination of the Federal income tax laws reveals that Congress widely embraces the notion of a broad, inclusive definition for the term. See, e.g., secs. 165(g)(3)(B), 993(f), 1244(c)(1)(C). Indeed, when adopting that term in a provision, Congress often qualifies the term’s comprehensive definition through specific exclusions or limitations to accommodate the relevant statutory scheme. See, e.g., secs. 448(c)(3)(C), 509(a)(2)(A)(ii), 1362(d)(3)(B) and (C).14 If, as proffered by HP, Congress intended to further limit the definition of ‘gross receipts’ in section 41, it undoubtedly recognized the constructional convention by which it had traditionally done so in numerous provisions.

“Further, HP’s attempt to equate the common meaning of ‘gross receipts’ with the narrow definition Black’s Law Dictionary is unavailing. Specifically, the definition provided in Black’s Law Dictionary is undermined by the cited authorities, section 448 and section 1.448-1T(f)(2)(iv), Temporary Income Tax Regs., supra, from which the definition was purportedly derived.” 139 T. C. 8, at pp. 17-18. (Footnotes omitted).

So Black strikes out. And so does H-P.

Some few of my older readers may remember, in the dim recollection of a long-ago time, an advertising tune that began thus. But Pepsico, successor-in-interest to the ancient hawker of “twice as much for a nickel, too”, definitely gets twice as much, both from Judge Goeke in Pepsico Puerto Rico, Inc., T. C. Memo. 2012-269, filed 9/20/12 (and the reason it took me so long to blog this case is that the decision is 100 pages of tightly-written corporate finagling of the highest order, with five lawyers for Pepsi and four for IRS).

Pepsi wants to expand into emerging markets during the 1990s, but doesn’t want to export any US cash, so it uses cash flow from notes issued by Frito-Lay to Pepsi’s Netherlands Antilles subs that are taxed at a minimal rate in the Netherlands Antilles, and are exempt from US tax. This works until the Netherlands Antilles preference in the Netherlands treaty with the US expires, and Pepsico has to restructure.

So Pepsico transfers some of its high-risk overseas subsidiaries from N.V.s to B.V.s, Dutch corporations. The notes get restructured, and finally are sold to an indirect Pepsi sub in exchange for advance agreements.

Now it gets amusing. For Dutch tax purposes, these advance agreements have to be debt, so that interest paid by the Dutch subs to its parent are deductible for Dutch tax purposes, but must be equity for the Pepsi subs that hold them.

IRS calls a halt and hits the convoluted Pepsi corporate structure with about $370 million in deficiencies, claiming the advance agreements are debt, Pepsi got taxable interest, and substance controls form.

Not so fast, says Judge Goeke. “Respondent asks this Court to disregard the objective form of the advance agreements and examine the substance of the transactions in discerning their proper characterization for Federal income tax purposes. It is axiomatic that the substance of a transaction governs for tax purposes. This principle is equally applicable in debt-versus-equity inquiries.

“While cognizant that the substance-over-form doctrine permeates tax law jurisprudence, we believe it prudent to emphasize that the form of a transaction often informs its substance. See e.g., Hewlett Packard Co. v. Commissioner, T.C. Memo. 2012-135 (dismissing the labels afforded to transactional instruments, but examining their terms to discern the true substance of the economic arrangement). An analysis focused myopically on the ‘substance’ of a transaction, but devoid of any consideration of the obligations engendered by the terms of the governing instruments, would typically result in deficient, or wholly flawed, determinations.” T. C. Memo. 2012-269, at pp. 49-50 (Some citations omitted).

However, see my blogpost, “We Don’t Need No Stinkin’ Factors”, 5/15/12, wherein I discuss the Hewlett-Packard case.

Since all the parties to the deal are related and are under common control, Tax Court must take a hard look at the documents, because fudging is so easy when you’re on both (or all) sides of the table.

But Judge Goeke gives Pepsi a bye. “However, notwithstanding the greater scrutiny afforded to related-party transactions, we believe that disregarding petitioners’ international corporate structure based solely on the entities’ interrelatedness is, without more, unjustified.” T. C. Memo. 2012-269, at p. 52.

So we have a voyage through the papers, with testimony concerning how Pepsi’s lawyers got what amounts to a PLR from the Dutch Revenooers saying the advance agreements were debt for Dutch purposes.

At the end, after an exhaustive review of the terms of the advance agreements, Judge Goeke finds them to be equity. Pepsi has indeed hit the spot.

This case has to go to Second Circuit, and I’ll bet we get interesting learning there. Follow.

I take the title of this blogpost from the English band of that name, but it isn’t only Dylan Moody who will be blue. He’s blue enough, when his dependents’ exemptions and child tax credits are disallowed, despite Judge Goeke’s sympathetic declaration, in 2012 T. C. Memo. 268, filed 9/19/12.

It’s the usual Section 152(e)(2) story. This time Dylan has a divorce decree that gives Dylan the exemptions (doesn’t mention the credit, but that’s not at issue) and states that Tammy Jean, his loved-once, shall sign Form 8332 each year by January 10, so long as Dylan pays the child support. Tammy Jean is custodial parent, of course.

Dylan pays. Dylan attaches a Form 8332 for each of their two children, but neither is signed by Tammy Jean. He subsequently submits the divorce decree, but Tammy Jean didn’t sign that either. Besides, says Judge Goeke, it isn’t IRS’ function to police or enforce divorce decrees.

Of course, signature by the custodial parent is the essential element of Section 152(e)(2), so game over for Dylan.

But I’ve suggested before that the matrimonial Bar should make sure that 8332s are prepared, signed and filed at the point the divorce decree is issued. If the non-custodial spouse welshes on the child support, any tax refunds, among other monies, are attachable. And there’s jail time as well.

Some lawyers could get in trouble if the payor doesn’t get what she or he expected.

Judge Gustafson is an obliging fellow. Remember the boost he gave hapless ol’ Khadija Duma? Read all about it in my blogpost “Go For It”, 1/23/12. Now Judge Gustafson again extends a helping hand, sort of,  in an Order, Docket No. 30786-09, filed 9/18/12, the story of John Carter.

John applied for a Writ of Habeas Corpus Ad Testificandum back in February, but it was denied by then-Chief Judge Colvin, because John hadn’t provided for the costs of bringing him to The Home of the Bean and the Cod (that’s Boston, Mass) from his abode, in order to try his tax case.

Apparently, John was a guest of the people and the government at the time, and needed to be in the courtroom in The Hub to try his case. No go, so C.J. Colvin then handed John’s case over to Judge Gustafson.

Now Judge Gustafson deals with John’s problems. First, he told John to mail a list of his trial witnesses both to the Court and to IRS. John doesn’t bother with IRS (which is probably the root cause of his problems with IRS; IRS gets peevish when ignored), but sends Judge Gustafson the following sad tale: “…the letter does state that Mr. Carter will not be calling any witnesses, because of: financial difficulty; the adverse nature of some potential witnesses; and the logistical difficulty of locating helpful witnesses.” Order, p. 1.

Tough to try a case when you’re in the Stony Lonesome. But remember Robert L. Willson, the hero of Justice Holmes’ (The Judge Who Writes Like a Human Being) famous lecture on basis. See my blogpost “Basis for Dummies”, 11/24/11. IRS kindly waited until Willie was restored to society before trying his case.

But Willie had some barfly witnesses. John has none, as aforesaid. And apparently John may be away longer than Willie.

But Judge Gustafson is willing to go more than halfway: “We point out that, in part because of Mr. Carter’s apparent inability to pay for his own transport to a Boston trial (see order of March 21, 2012), we have scheduled his trial to take place at his prison, which is the most we can do to address his financial difficulty and facilitate his presentation of his case. As for locating helpful witnesses, we note (1) that this case has been pending for more than two and a half years, during which Mr. Carter has not located these witnesses, and (2) that he does not suggest (nor does it appear) that the situation will change in the future.” Order, p. 1.

So Judge Gustafson orders the Clerk of Tax Court to send a copy of John’s missive to IRS, and, lest IRS feel even more neglected, orders John to show  the Court that he’s sending IRS copies of all his correspondence.

And now, Tax Court goes to jail. That’s my kind of court.

And, A Footnote

Loretta Lea Wanat, formerly a highflyer with Northwest Airlines, doesn’t bother with tax returns for three years, the IRS assesses deficiencies, apparently without bothering with Section 6020 SFRs, Loretta Lea petitions Tax Court, and, the day before trial of the eponymous 7463, Loretta Lea hands IRS counsel purported returns for the three years at issue.

Now this should call for a “Don’t Ambush the IRS, Either”. But STJ Lew Carluzzo (the Judge who spells our name correctly), seeing the IRS didn’t use the famous Rule 70 “the Court expects the parties to attempt to attain the objectives of discovery through informal consultation or communication before utilizing the discovery procedures provided in these Rules”, decides to wade through Loretta Lea’s last-second impromptu 1040s. His exegesis is found in T. C. Sum. Op. 2012-92, filed 9/17/12.

But first he gives Loretta Lea and IRS a piece of his judicial mind: “Issues arising from deductions yet to be shown on a Federal income tax return are contemplated in the petitions filed in these cases. Ignoring what petitioner labeled as ‘preliminary’ returns submitted to respondent’s counsel after the petitions were filed, the returns on which the deductions here in dispute are claimed were not provided to respondent’s counsel until the day before trial. Sometimes late is just as bad as never.

“Petitioner’s procrastination, coupled with respondent’s restraint from using formal discovery in cases subject to a sec. 7463 election, in effect transformed one of the traditional roles of a trial, that is, to resolve factual disputes between litigants, into an exercise more in the nature of an examination of petitioner’s untimely submitted returns. A trial even as informal as contemplated under Rule 174(b) is ill suited for such purposes.” T. C. Sum. Op. 2012-95, at p. 4, footnote 3.

Loretta Lea made her beds, but it wasn’t where she lay her head; it was dog beds she made to sell. And STJ Lew gives her some deductions in that regard. Her real estate venture deductions fall apart on non-substantiation and failure to distinguish between personal and business use. And she held the realty for appreciation in value, not in a trade or business, so at best she’d have the Section 212 production-of-income deductions, but can’t prove them. There’s an appendix in which the purported deductions are shown, and STJ Lew sends her and IRS off to a Rule 155 bean-count.

But why should Tax Court judges, even special trial judges, engage in what amounts to return preparation? Loretta Lea should have gone to Liberty, Jackson-Hewitt or H & R Block; she would have saved the additions to tax for nonfiling and nonpayment. But maybe she thought that the $60 filing fee and an overnight to 400 Second St, N.W., was cheaper. Better not let the word get out, STJ Lew. You might find yourself  overwhelmed on April 14.

And now the footnote. See my blogpost “The Rule of Reason – Circular 230 Revisited”, 9/15/12. As I have been preparing marketed opinions for at least 35 years, I am somewhat loath to throw my old Section 10.35 language away; I rather think that my modification will be much less extensive than my blogpost suggested.

Of course, if and when the proposed Regulations go temporary, I won’t send the “cigarette pack” warning on every piece of paper or electron I send out, but I will use a variant in my opinions. While the proposed regulations are well and good, neither IRS nor Treasury can overrule Section 6664(c). As long as that is the law, a serious disclaimer is in order, at least in marketed opinions, and not just for avoiding penalties either.

 IRS Drops the §10.35 Cigarette Pack Warning

In a burst of realistic thinking, the IRS has finally decided to get rid of the §10.35 “don’t rely on this to avoid penalties” boilerplate warning in Circular 230. The good news is to be found in REG-138367-06, notice of proposed rulemaking and public hearing.

You can read all about it here.

Finally realizing that the “cigarette pack” warning was being pasted on every e-mail every practitioner sent, whether it had anything to do with taxes or not, IRS decided to dump the whole thing. Nobody understood what it meant outside the tax profession, anyway. And if I sent a non-professional friend an e-mail on my office stationery saying “let’s meet for drinks tomorrow”, he or she would ask me “what do you mean I can’t use this to avoid penalties on my taxes?”

IRS also wants to get rid of the reliance-marketed tax opinion conundrum, which made us try to figure out exactly into what pigeonhole our opinions fitted, wasting time and energy.

Best of all, the proposed regulations establish a reasonable standard of competency, taking all facts and circumstances into account before hanging us out to dry; but with a heightened standard in abusive situations.

I’ve written a bunch of marketed opinions under the present §10.35, with no ill effects to person or property. I’ve got the boilerplate in my word processing software. But I can’t say I’ll be sorry to get rid of the rigamarole. I’ll have to put in a simpler statement when the new regulation comes into effect, and, as always, concentrate on the facts and the law.

Oh, and a word of warning. If a practitioner fails to file four out of five annual returns the practitioner needs to file for self, or misses filing in five out of seven periods where returns are required more times than once annually (like 941s, 1040-ES) for self, then IRS can invoke expedited suspension. And reapplication for reinstatement, if you don’t win administratively or before an ALJ, can’t be made sooner than five years.

But read, heed and file your comments with Treasury electronically via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-138367-06) by November 16, 2012. And if you want to attend the December 7, 2012 public hearing in the auditorium at 1111 Constitution in Our Nation’s Capital, get a hold of Oluwafunmilayo Taylor at (202) 622-7180, and give him (or her) your vital statistics.

It may not be as much fun as Laura Nyro’s 1968 hit “Stoned Soul Picnic”, but surry down anyway.