That’s the problem for Enterprise Water Works, Docket No. 20441-12L, filed 9/14/12. No decisions out of Tax Court today, and no Designated Orders, so this is the best of the plain-vanilla orders, from Chief Judge Thornton.

Enterprise files what looks like a timely petition, but it’s signed by “Tom B. King, ‘CPA – POA’”. Order, P. 1.

Chief Judge Thornton checks the shortlist of Tax Court admitteds, that miniscule number who made their way through the eye of the needle that is the admissions examination (see my blogposts “A Book and A Modest Proposal,” 5/22/12, and “Another Argument,” 6/7/12), and doesn’t find Tom’s name among the elect.

So he admonishes the waterworkers thus: “The Tax Court does not recognize powers of attorney.” Order, p. 1. Throw away those Form 2848s, guys.

He then directs the powerless waterworkers to “…file an amendment to petition, duly signed and bearing the original signature of its president or another officer authorized to institute this litigation on its behalf, ratifying and affirming the filing of the petition on its behalf.” Order, p. 1.

Chief Judge Thornton mercifully directs the Clerk of the Court to send a form to the waterworkers for the proper person to sign, ratifying whatever Tom did, because obviously the waterworkers will never get the paperwork right, and Tom is not among the chosen few who can advise them.

The relevant Rule is 23(a)(3), which requires that all papers filed with Tax Court shall be signed as follows: “The original signature, either of the party or the party’s counsel, shall be subscribed in writing to the original of every paper filed by or for that party with the Court, except as otherwise provided by these Rules. An individual rather than a firm name shall be used, except that the signature of a petitioner corporation or unincorporated association shall be in the name of the corporation or association by one of its active and authorized officers or members, as for example “‘Mary Doe, Inc., by Richard Roe, President’”.

And waterworkers, see also Rule 33. An unsigned pleading can be stricken, and if filed for an improper purpose can result in sanctions to the signer.

That’s Special Trial Judge Daniel A. (“Yuda”) Guy. Back on 4/24/12, when STJ Guy was appointed to the Tax Court bench, I greeted his appointment with the following comment: “We look forward to many interesting opinions from STJ Guy.” See my blogpost “Welcome, Judge Guy”, 4/24/12.

Well, it’s only a designated order, but it is interesting. It’s Diamond Packaging Corporation, Docket No. 27463-10, filed 9/13/12, and it deals with playing nice during informal discovery. The basic documents are Rule 70(a) and Branerton Corp. v. Commissioner, 61 T.C. 691, 692 (1974).

IRS made informal document requests from six of Diamond’s corporate clients, trying to track down the increasing research activities for which Diamond had claimed Section 41 tax credit for the years at issue.

Diamond replies with a motion for a protective order, claiming “…respondent’s actions circumvent the Court’s rules and procedures governing discovery, are unduly burdensome, and have unnecessarily tarnished petitioner’s reputation.” Order, p. 1.

Nope, says STJ Guy. “In the light of the record presented, we reject petitioner’s argument that respondent’s informal requests for documents circumvent the Court’s rules governing discovery. To the contrary, the Court has not prescribed rules specifically relating to informal pretrial discovery of potential witnesses. Moreover, it has been the Court’s longstanding policy to encourage the parties to attempt to attain the objectives of discovery through informal consultation and communications. There has been no showing that respondent’s requests are tantamount to the more formal administrative summons…. Although petitioner complains that respondent did not consult with petitioner before issuing the informal requests, the Court is not persuaded that this factor provides justification for a protective order.” Order, p. 2 (citations omitted).

Besides, four of the six clients Diamond wanted to protect are ready, willing and able to comply with IRS’ request, and raised no objection. The other two said they had nothing of the kind IRS sought, and IRS said they’re down with that.

“Petitioner’s final argument, that respondent’s informal document requests create ‘a stigma against petitioner that has already harmed its business interests’, is also unavailing. We agree with respondent that alleged harm to a party’s reputation generally is not sufficient to show good cause for the issuance of a protective order under Rule 103. See Willie Nelson Music Co. v. Commissioner, 85 T.C. 914, 921 (1985) (a showing that information in the public record would harm a party’s reputation is generally not sufficient to support the issuance of a protective order under Rule 103). Moreover, petitioner has failed to demonstrate any harm (financial or otherwise) that it has suffered or will suffer if its motion for protective order is denied. Id. at 925. Petitioner’s mere allegations of harm are insufficient to demonstrate good cause.” Order, at p. 2.

Note that Diamond doesn’t claim the clients don’t have relevant information or that IRS is on a fishing expedition, digging for irrelevant information.

So no dice, Diamond. No protective order. Play nice. Welcome, Judge Guy.

Judge Kroupa blows off Cigna Corporation in T. C. Memo. 2012-266, filed 9/13/12. The issue was whether Cigna could reserve for maximum guaranteed death benefits when it was reinsurer, using a method not approved at the time by the relevant State regulator, although subsequently it was generally adopted.

IRS conceded the deficiency, and the parties stipulated that IRS would accept Cigna’s numbers for every year except those that pre-dated the year at issue. Even though those years are not before the Court, Cigna claims it’s vital for the life insurers to know whether the magic method can be used for the years before it was adopted.

Nope, says Judge Kroupa. “It rests within our discretion to issue an opinion on the merits even where the Commissioner concedes that there will be no deficiency for the years before the Court.” T. C. Memo. 2012-266, at p. 7. But Cigna shouldn’t get too elated.

“Petitioner suggests the ‘interests of justice’ entitle petitioner and other taxpayers to an opinion resolving the tax reserve issue. See McGowan v. Commissioner, 67 T.C. at 604, 608. We disagree. In McGowan we were asked to decide whether a compulsory employee contribution constituted a State income tax that the taxpayer could deduct. Id. at 602. The Commissioner conceded the deficiency and asked us to enter a decision in the taxpayer’s favor. Id. We rejected the concession and issued a substantive opinion at the taxpayer’s request. Id. at 608. The interests of justice compelled us to issue the substantive opinion. See id. at 607. First, unlike here, we found that the unresolved issue would arise in the upcoming tax year for thousands of taxpayers. Id. at 601, 608. A substantive opinion would consequently alleviate confusion in an area that lacked clarity. Second, the taxpayer rejected the unilateral concession in its entirety. Id. at 606.” T. C. Memo. 2012-266, at pp. 9-10.

But in this case, Cigna agreed to the concession; the reserve issue affects only a small group of taxpayers, not thousands; the new method is already in place and IRS will allow it for future years, so it is only past years (not before the Court) that are at issue. While it might be nice for Cigna if Tax Court sorted out those years, to do so would be an advisory opinion, and we don’t give those.

In short, Cigna, you won, go home. And on the way, see my blogpost “Victory is Not Vindication,” 5/1/12, where Judge Kroupa teaches the same lesson.

Means no Section 7430 relief. That’s the story of Terry L. Worthan, T. C. Memo. 2012-263, filed 9/12/12.

The fight started over a defunct machine tool company. Trust fund taxes were paid late, with a request to allocate the payment to trust fund taxes (employees’ share), per Rev. Proc. 2002-26. IRS, of course, applied the payment to non-trust fund payroll taxes (employer’s share), and presents Terry with a NFTL.

Judge Marvel recounts the lengthy saga, wherein William Holman, Terry’s representative duly admitted to practice before IRS, runs up $11K in fees getting IRS to straighten out the payment, which finally happens.

Bill wants the money under Section 7430, because he prevailed in an administrative proceeding. IRS says “no, collection is not administrative, and anyway, you didn’t prevail.”

Judge Marvel doesn’t rule on who prevailed.  “Section 7430(c)(5) defines the term ‘administrative proceeding’ as ‘any procedure or other action before the’ IRS. Pursuant to section 301.7430-3(a), Proced. & Admin. Regs., an administrative proceeding does not include ‘[p]roceedings in connection with collection actions (as defined in paragraph (b) of this section)’. A collection action includes any action that the IRS takes to collect a tax or any action a taxpayer takes in response to the IRS’ act or failure to act in connection with collection of a tax. See sec. 301.7430-3(b), Proced. & Admin. Regs. Specifically, collection actions include actions taken by the IRS to collect a tax through the filing of a notice of lien with respect to a taxpayer and actions the taxpayer takes in response to the IRS’ filing of a notice of lien.” T. C. Memo 2012-263, at pp. 13-14.

Here there was a notice of lien, and everything took place without litigation. Thus, no recovery of administrative costs.

Hope the client paid you, Bill.

Next is a reminder to taxpayers offering collection alternatives, from The Judge Who Writes a Like a Human Being, The Great Dissenter, Judge Mark Holmes. The case is Thomas W. Brombach, T. C. Memo. 2012-265, filed 9/12/12. Tommy owes IRS $150K, accumulated over years; he said he would pay when the number was $60K, but never did, and the interest kept mounting.

Tommy had already lost in Tax Court on the $60K many moons ago, so abuse of discretion is the issue here.

Tommy offers IRS $28K on an OIC, but IRS says his RCP (reasonable collection potential, after applying the manual number for living expenses) is $113K, and tells Tommy no-go, and serves a levy.

I’ll skip Judge Holmes’ lengthy assurance to Tommy that his present wife will not lose her share of marital property, and his unpacking, at great length, of the differences between Tommy’s RCP and IRS’ (for Judge Holmes doing his best unpacking, see my blogpost “The Sum of Its Parts”, 3/12/12).

Tommy is still way light on the numbers, despite Judge Holmes’ massage thereof.

The issue is whether the IRS had any obligation to respond to Tommy’s $28K with anything but a flat rejection and a levy. “The Appeals officer credibly testified that ‘We were so far apart that we didn’t get into * * * the negotiation of one or two particular items [that] would have brought us together.’ Citing this refusal, Brombach makes one final procedural argument–that the Commissioner failed to give him an opportunity to negotiate or amend his offer before issuing the notice of determination, and that this was itself an abuse of discretion.” T. C. Memo. 2012-265, at p. 26.

Now “…Brombach doesn’t point us to, and we have not found, any legal authority that  mposes a duty on the IRS to negotiate a collection alternative in any particular way. He does point to one source that seems to impose a lesser duty on the Appeals officer–a duty to give the taxpayer a chance to match the RCP before outright rejection. Brombach says the Commissioner’s offer-in-compromise explanation packet states: ‘The examiner may decide that a larger offer amount is necessary to justify acceptance. You will have the opportunity to amend your offer.’ Form 656-B, Offer in Compromise Booklet (March 2009), at 15. This language suggests that if the examiner finds that a higher offer might be accepted, he’ll at least give the taxpayer a chance to take it or leave it. This is not what happened in Brombach’s case. He sent in an offer and received a rejection. While it’s understandably frustrating to Brombach that the guidelines weren’t followed in his case, instructions and other IRS publications are not authoritative sources of federal tax law. Taxpayers must look to authoritative sources of Federal tax law such as statutes, regulations, and judicial decisions and not to informal publications provided by the IRS.” T. C. Memo. 2012-265, at pp.26-27 (citations omitted).

So Tommy is out. “Brombach hasn’t shown that an opportunity to amend his offer is required by the Constitution or by any statute, regulations, or caselaw. The opportunity to amend an offer is not a taxpayer’s right but is within the Commissioner’s discretion, and the Commissioner has no binding duty to negotiate with a taxpayer before rejecting his offer.” T. C. Memo. 2012-265, at p. 28.

But see my blogpost “A Busy Day”, 9/10/12, with the sad story of Marcius J. Scaggs and Andrea L. Scaggs. “Don’t Ambush the Taxpayers”,  IRS. Your booklet is misleading. Why not make it clear that “you may have a chance to amend your offer, but maybe not, if you’re too low or play games”?

Still, the better path is “Agree with thine adversary whilst thou art in the way, lest the judge hand thee to the bailiff, and ye be cast into prison. Truly I tell thee, thou shalt not be let out until thou hast paid the last farthing.”  See my blogpost “Give It Your Best Number”, 4/9/12.

Or, The Whistleblower Gets Supremely Blown

I am in favor of whistleblowers. If they didn’t exist, much skullduggery would go un-dug. Unhappily, many whistleblowers are also among the unrighteous, as it is rare for saints to be present when the skullduggers are plotting or doing the nasty.

Now I was at a CLE this morning at which representatives of our State Attorney General’s Taxpayer Protection Bureau lectured us on Section 194 of our State’s Finance Law. This is our version of the Federal Statute, and it differs from the Federal False Claims Act (“Lincoln Law”), in that taxes are part of the State Finance Law’s scope, unlike the Federal, where tax whistleblowing is found in IRC Section 7623 (and see my blogposts “The Whistleblower Blows It”, 6/20/11, “IRS Loses a Double-header”, 7/12/11, and “Whistleblowers, Beware!”, 9/7/11).

You’ll remember that one of the sharpest arrows in IRS’ quiver for shooting down whistleblowers is that the information tendered is public.  The Supremes said “Amen”, 5 to 3, with Justice Elena Kagan, daughter of my old friend and colleague the late Bob Kagan, Esq., sitting it out, on 5/16/12, in Schindler Elevator Corp. v. US ex rel. Kirk, 10-188.

Kirk spilled the beans on Schindler’s supposed hiring of veterans that never happened, he said, relying on his wife’s Freedom of Information Act request to US Department of Labor. He used the results to back-check Schindler’s list of hires, as he worked for Schindler and was himself a veteran.

The Supremes said that the DOL information was public, available through FOIA, therefore constituted a “report” as defined by FFCA, thus barring any recovery by Schindler.

Now the problem is obvious: it needs the whistleblower to connect the dots. Some dots may be public, some private, some hidden, some in plain sight. But in the immortal words of the late great Bill Klem, “Some is balls and some is strikes, but they ain’t nuthin’ till I calls ‘em.” Somebody has to call ‘em, or at least put it all together, so the party charged with “callin’ ‘em” can in fact call ‘em.

Does no one remember Edgar Allen Poe’s classic short story “The Purloined Letter”? The essential document was in plain sight all along, but disguised. It took an expert’s eye to find it, and an expert’s hand to recover it for the true owner.

If the public policy of the United States is to create a disincentive to the knowledgeable coming forward, who will connect the dots? The Supremes saved pennies, and threw away dollars.

Fortunately, New York State does not bar whistleblowers who use public disclosure in addition to their own knowledge to connect the dots.

But a word of caution. If the whistleblower needs to make a NYS Freedom of Information Law request, let them first craft a disclosure and check in with the Taxpayer Protection Bureau at the Attorney General’s Office, and apply for some “cold comfort” before proceeding.

And in any event beware of the Federal FOIA; here be dragons.

Judge Wherry, again unwhimsical (but see my blogpost “A Whimsical Judge”, 3/6/12), has a lesson for IRS lawyers (but not only IRS lawyers) in Peter Kuretski and Kathleen Kuretski, T. C. Memo. 2012-262, filed 9/11/12.

The tax itself is uncontested, and the levy is sustained based on lack of hardship and the lack of meeting of the minds between AO and taxpayer’s rep on a full-pay installment agreement. Liability was more than the Section 6159(c)(1), (4) limit of $10K and payout more than three years, so no automatic installment agreement, thus IRS has discretion and on the facts here discretion wasn’t abused.

Now for the lawyer issue. IRS wanted the 6654(a) underpayment of withholding addition to tax. As we all know, the rule is 90% of current year’s tax as shown on return (or 90% of tax due if no return filed), or 100% of tax shown on previous year’s return (unless previous year was less than twelve months or no return filed).

But IRS introduces nothing to show what the prior year’s return, if any, showed as tax due, if anything. IRS counsel could have proffered the Form 1040 itself, or Form 3050 Lack of Record, or Form 4340, Certificate of Assessments, Payments, and Other Specified Matters. Instead, “The parties submitted a stipulated exhibit, Form 656, Offer in Compromise, in which petitioners stated that they sought to compromise tax liabilities for the 2006, 2007, and 2008 taxable years. This exhibit suggests that petitioners had a tax liability for the 2006 year but sheds no light on whether it was an income tax liability. In any event, this cursory statement is insufficient for us to determine the tax shown on the return for the 2006 taxable year.” T. C. Memo. 2012-262, at p. 16, footnote 4.

So no addition.

Takeaway- Determine each element of your prima facie case for each claim or defense. Determine what evidence you need to prove or establish each thereof. Obtain, collect and collate your evidence. Offer it.

Or, Portney’s Complaint

This is the sad story of Anthony Tesoriero, and his long-time (but probably by now his ex) accountant, Jack Portney, CPA. Read all about it in Anthony Tesoriero, T. C. Memo. 2012-261, filed 9/11/12, Judge Wherry the Whimsical Judge (see my blogpost “A Whimsical Judge”, 3/6/12) being anything but whimsical here.

Tony’s problem was that his withholding was way low for the year at issue. Jack, not a bit dismayed “…did not adjust the estimated tax liability for wage income and did not adjust the total …payments for withholding credits. Nor did he adjust any entries to reflect Ms. Tesoriero’s income despite the fact that he knew she was employed by petitioner’s corporation.” T. C. Memo. 2012-261, at pp. 3-4 (footnote omitted).

By the way, Tony never told Jack that Ms. Tesoriero was in the process of divorcing him and that she was going to file separately, using another preparer. But that wasn’t all.

Jack, relying on the old SALY principle (Same As Last Year), just toted up Tony’s estimateds, put that number ($69K) down on a 4868, and sent his secretary to post it off via first-class mail. Jack routinely put about half his clients on extension; not uncommon. And used first-class mail, not registered or certified. Also not uncommon.

You can guess the rest. The 4868 never got there, Tony’s actual tax liability was more like $280K, and Tony gets nailed for the Section 6651(a)(1) late-filing penalty.

Tony pleads that Jack mailed the 4868, albeit not registered or certified, nor by a sanctioned private delivery service. Judge Wherry: “This Court has allowed taxpayers to prove delivery through other extrinsic evidence, such as testimony that they mailed the document. Estate of Wood v. Commissioner, 92 T.C. 793, 799 (1989), aff’d, 909 F.2d 1155 (8th Cir. 1990). In certain circumstances, therefore, taxpayers may prove delivery, thus filing, through testimony. But, as we have cautioned taxpayers in the past, when a return is not sent by registered or certified mail, it is the taxpayer, not the Government, that bears the risk of nondelivery. Walden v. Commissioner, 90 T.C. 947, 951 (1988).”  T. C. Memo. 2012-261, at p. 7.

Tony being a New Yorker, Judge Wherry has to follow Second Circuit learning, and Second Circuit isn’t friendly to unorthodox mailers. Section 7502 is the exclusive remedy in New York, Connecticut and Vermont. And that means registered, certified or sanctioned private deliverers…nothing else.

And the new retroactive regulation concerning mailing doesn’t matter: “Respondent contends for the first time in his posttrial reply brief that sec. 301.7502-1(e)(2), Proced. & Admin. Regs, promulgated in 2011 and effective September 21 2004, controls. See 76 Fed. Reg. 52561 (Aug. 23, 2011). Because we are constrained by precedent of the Second Circuit that reaches the same conclusion, we need not address this argument.” T. C. Memo. 2012-261, at p. 8, footnote 4. See my blogpost “Mail Call”, 9/16/11.

Tony is out of luck, and he can’t claim he reasonably relied on Jack to get the 4868 to IRS on time. Reliance on an agent is not reasonable reliance, unless a question of law is involved, such as “no tax due”, but not “I’ll timely file”. Second Circuit is adamant on that point as well. Finally, “petitioner did not produce evidence of such reliance. Petitioner never requested that Mr. Portney file an extension request. Nor did petitioner present evidence that he followed up with Mr. Portney to ensure that the extension request was filed. Mr. Portney did not call petitioner to inform him that an extension request had been filed.” T. C. Memo. 2012-261, at p. 11, footnote 6.

Preparers, pay the two-and-a-half bucks and send it certified (nothing says return receipt requested is required).

And taxpayers, don’t grouse when your preparer charges you the two-and-change for certified mail. It’s truly cheap.

Tax Court’s back in full swing, with lots of new hints and kinks for the practitioner.

First, indirect partners please stand up. That’s the lesson from Judge Goeke in Gaughf Properties, L.P., Balazs Ventures, LLC, A Partner Other Than The Tax Matters Partner, 139 T. C., 7, filed 9/10/12. This case was another Jenkens & Gilchrist Section 754 basis-builder, matching a put-and-call in Japanese yen (the loss recognized, but not the offsetting gain). This, of course, buried the gain the Gaughfs got on their stock sale.

The deal used two LLCs, an L.P., and a sub S with the fetching name of Bodacious, Inc., thrown in. It takes IRS six years to unscramble the omelet, and I’ll spare you the story. IRS got lots of paper from the Gaughfs, none of which directly told IRS that they were behind the deals, but the Gaughfs claim IRS could have known their identities using the “other information” provision in Section 301.6223(c)-1T(f), and so the one-year statute of limitations when the NFPAA was issued had run before they got their deficiency notices.

Judge Goeke: “In its entirety, section 301.6223(c)-1T(f), Temporary Proced. & Admin. Regs., supra, provides–

“’Service may use other information. In addition to the information on the partnership return and that supplied on statements filed under this section, the Service may use other information in its possession (for example, a change in address reflected on a partner’s return) in administering subchapter C of chapter 63 of the Code. However, the Service is not obligated to search its records for information not expressly furnished under this section.’

“We believe that the permissive language of the regulation does not impose any obligations upon the Commissioner, see Murphy v. Commissioner, 129 T.C. 82, 86-87 (2007), and find that the Commissioner’s use of identifying information does not trigger the running of the one-year period described in section 6229(e).

“Before applying section 6229(e) to extend the statutory period for assessing tax attributable to partnership items, the Commissioner must often perform an extensive investigation of a partnership in order to determine whether the partnership properly reported profits and losses. The Commissioner must also engage in further investigation to discover the identity of partners who were not identified on the partnership return. During such an investigation involving an unidentified partner, we believe it quite common that the Commissioner will at some point come into possession of and use information identifying that partner, either to further the investigation or else to contact the unidentified partner (as occurred in this case after respondent received the J&G documents). Ruling that use of such information triggers the running of the one-year period described in section 6229(e) would hamper investigations of partnerships and partners, some of which go to great lengths to disguise their incomes, losses, and identities. We do not believe such a trigger to be the intended purpose of the permissive language of section 301.6223(c)-1T(f), Temporary Proced. & Admin. Regs., supra, as it relates to section 6229(e).” 139 T. C. 7, at pp. 44-46 (footnote omitted).

There’s a lot more about what partnerships have to tell IRS about their partners, direct and indirect (holders of interests in passthrough or disregarded entities) but the takeaway is simple. Name them all–or else.

Then there’s the sad story of Marcius J. Scaggs and Andrea L. Scaggs, T. C. Memo. 2012-258, filed 9/10/12. STJ Armen, the Judge with a Heart, delivers the bad news.

“Respondent mailed a notice of deficiency to petitioners’ last known address on April 8, 2011. The 90th day after respondent mailed the notice was Thursday, July 7, 2011, which was not a legal holiday in the District of Columbia. The petition was received by the Court and filed on July 12, 2011. The envelope in which the petition was received bears a Federal Express (FedEx) U.S. Airbill with handwritten entries dated July 7, 2011 (FedEx Airbill). The delivery service selected on the FedEx Airbill is ‘Express Saver Third business day’.” T. C. Memo. 2012-258, at p. 2 (footnote omitted).

Alas, Express Saver third business day is not on the approved list. As we know, Section 7502(f) permits IRS to designate the approved private delivery services, to supplement USPS registered or certified mail. Notice 2004-83, 2004-2 C.B. 1030 has the list. So even though Marc and Andy sent the package, it was sent by the wrong means, so no “deemed filed when sent” per Section 7502, and therefore no jurisdiction.

See my blogpost “Pay the Postman”, 8/21/12. But wouldn’t it be nice if IRS included the approved list in the notice telling taxpayers where, where and how to file a Tax Court petition? Maybe we should add a category to “Don’t Ambush the Indians”, 4/7/11, “Don’t Ambush the Accountants, Either”, 8/7/11 and “Don’t Ambush the IRS”, like “Don’t Ambush the Taxpayers”.

Sharon K. Hudgins had a shot at innocent spouse Section 6015(f) relief in T. C. Memo. 2012-260, filed 9/10/12, until it turned out that she had fraudulently conveyed some rental properties to her kinfolk, and hadn’t bothered to put that fact on her Form 433-A.

“Petitioner had the burden of proof as to persuasion, and if this were a matter of simply counting factors for and against relief, she would lose. In section 6015(f) cases, however, we do not simply count factors. We evaluate all of the relevant facts and circumstances to reach a conclusion. See Pullins v. Commissioner, 136 T.C. at 448; Rev. Proc. 2003-61, sec. 4.03(2). Some of the most compelling facts in our analysis are the findings that petitioner fraudulently conveyed the Linwood and Second Street properties and failed to disclose her interest in the Lincoln County property. These weigh heavily against relief in our view because a spouse requesting equitable relief under section 6015(f) should come to the table with clean hands. Petitioner took affirmative steps to minimize her asset ownership in order to distort the economic analysis conducted with respect to her section 6015(f) request for relief. Accordingly, we conclude that petitioner is not entitled to relief from joint and several liability under Rev. Proc. 2003-61, sec. 4.03.” T. C. Memo 2012-260, at pp. 39-40 (footnote omitted).

Takeaway- Tell the truth.

This was the title of the fictional rogue General Flashman’s memoirs, as discovered in a saleroom by the late G. M. Fraser. It suits well the departure of RPO chief David Williams, who implemented the current tax preparer registration regime, and the arrival at that Office of Ms. Carol Campbell, whose “vast understanding of tax law and of tax preparation issues” (to quote Mr. Williams’ farewell address) will doubtless be put to good use in the ongoing enrollment of all the world’s tax preparers.

Mr. Williams did indeed move the football. While giving heed to the stakeholders, he furthered Doug Shulman’s initiative with all due deliberate speed, and then some. He did get the Registered Tax Return Preparer initiative out of the starting gate and down the backstretch.

See my blogpost “An Important Town Meeting”, 11/12/11, about the Great Registration. “Just sayin’, this year the decree went out from Douglas Augustus that all preparers must be registered; this is the first registration, when Douglas was Commissioner of Internal Revenue and Timothy was Secretary of the Treasury.  Of  course, all the world was to be taxed long before this.”

Mr. Williams’ parting exhortation to the untested and unregistered: get tested, get registered and come over to the right side.

It remains to be seen, of course, how many Forms 14157 (a/k/a snitch and bitch) will wind up at Mail Stop 58 at Town & Country Commons, turning out the unregistered and unCirculared.

But I wish Mr. Williams all the best. And extend fraternal greetings to Ms. Campbell.

Means the start of the tax

Sharon F. Schilling finds herself without the help and support of three of her five children to avoid taxation on her alimony in T. C. Memo. 2012-256, filed 9/5/12, Judge Swift delivering the bad news.

This is yet another in a series I’ve posted on taxable alimony, but the first as to the recipient’s tax liability.

For the payor’s tax posture, see my blogposts: “Oh Death, Where Is Thy Sting?”, 7/2/12; “Same Again?”, 8/11/11; “Essmiss Essmoore, Esmiss Essmore”, 8/16/11; and “The Magic Paper Saves the Deduction”, 4/7/11.

Sharon split with husband (unnamed), 24 years and five children after they promised to love, honor, cherish and all that jazz. Their separation agreement carefully crafted reductions in alimony as each of the five offspring reached the age of 18 years. But the alimony entirely terminates on a date certain six years after it commenced.

Three of the five had so aged out as the year at issue (three years before the automatic termination) progressed.

The general rule, of course, is that alimony is taxable to the recipient unless it is either expressly designated as child support, or doesn’t terminate with recipient’s death (either explicitly or by operation of State law). While the agreement didn’t speak of termination at death, a critical feature in deductible alimony, relevant State law (Ohio) so provided.

Since no child aged out during the year at issue, IRS credited Sharon with whatever per-child amount was left for the remaining two kids who had not aged out, and declared the rest to be taxable.

Sharon first claimed the pre-1986 law controlled, relying on the lack of an express statement in the agreement (the divorce decree incorporated the agreement) that payment terminated at death, but the 1986 amendment to Section 71, putting State law into play, rendered that a non-starter.

Then she claimed that the automatic six-year termination was a reduction in alimony related to a child or a contingency referable to a child (see Section 71(c)(2)), thereby rendering the entire payment non-taxable to Sharon for the remaining years, including, but without in any way limiting the generality thereof (as the high-priced lawyers say), the year at issue.

Nope, says Judge Swift.

While Reg. 1.71-1T Q&A 18 seems to give Sharon some comfort, the favorable presumptions raised therein are conclusively rebutted by an automatic termination after six-years provision. The termination does not relate to a child, even though child C does turn 21 within 6 months of the termination date, because the termination is automatic. And child C aged out already, so there would need to be a child D to help out.

But there is no child D whose 18th birthday is within 6 months of the automatic termination date (poor timing, Sharon; but you can blame that on your ex). So termination is not clearly connected to a child or a contingency related to a child. Once all the child-related reductions are off the table, whatever’s left is taxable.

Of course, as the remaining two children age out (if they age out before the six-year cutoff), that’s another story, but those years aren’t in issue.

Moreover, “(B)ecause neither the separation agreement, the divorce decree, nor the shared parenting plan specifically designated any portion of the spousal support payments for the support of the children, the entire amount of such payments is includible in petitioner’s income as alimony….” T. C. Memo. 2012-256, at p. 12.

Apparently IRS didn’t seek penalties, because none are discussed in Judge Swift’s decision.