In Uncategorized on 10/04/2012 at 18:02

And,  “Lift Up Thy Voice”

Twofers from Tax Court today, 10/4/12, the tales of the two Bobbys.

First Bobby is Robert S. Yarish and Marsha M. Yarish, 139 T. C. 11, filed 10/4/12. It’s all Bobby’s problem, as his ESOP craters in 2004 retroactive to Day One (2000). Judge Kroupa, unraveller of tangled webs, has the floor: “Respondent (IRS) determined in the revocation letter that the Yarish ESOP did not meet the requirements under section 401(a) for failing to satisfy section 410(b) and that the trust under the Yarish ESOP was not exempt from tax under section 501(a). This Court sustained respondent’s determination to retroactively disqualify the Yarish ESOP for the 2000 to 2004 taxable years. See Yarish Consulting Inc. v. Commissioner, T.C. Memo. 2010-174.” 139 T. C. 11, at p. 4.

Apparently Bobby’s ESOP was a fable, because it was a Sub S holding corporation ESOP and disqualified. See my blogpost “The Unanswered Question”, 6/13/12, involving a Nonqualified Sub S ESOP that gets by when it dissolves.

So Bobby claims that, since 2004 is the only open year when he gets hit, he only need pay tax on the contributions made to his now-defunct ESOP for that year, relying on the “(other than the employee’s investment in the contract)” parenthetical in Section 402(b)(4)(A). This provision requires the disqualified beneficiary to pay tax on whatever he gets (in this case $2.43 million) less whatever he contributed or his employer, his captive Sub S, contributed for him.

OK, but does he pay tax on the whole enchilada or only what accretions there were in 2004, the only open year? Case of first impression, and no disputed facts, so Judge Kroupa has to parse the statute and grant summary judgment.

IRS argues that the only “employee’s investment in the contract” is what the employee actually paid tax on, and Bobby never paid tax from Dime One until now, so Bobby owes everything, whenever it accrued to his benefit, and as he was fully vested in the exploded ESOP from Day One, he owes tax from Dime One.

Bobby argues that the magic words, not defined in Section 402 but as defined in Section 72, are terms of art but Judge Kroupa isn’t buying: “First, petitioners argue that ‘investment in the contract’ as defined in section 72 is an established term of art that applies universally throughout the Code and thus we should look to section 72 for its definition. We recognize that where Congress uses a term of art that has had an established specific meaning over long periods, Congress presumably incorporates that meaning when it uses the term. We disagree, however, that the phrase ‘investment in the contract’ is an established term of art.

“While section 72 defines the phrase ‘investment in the contract,’ nowhere in that section or its accompanying regulations is there any indication that the definition applies outside the context of section 72. Moreover, the definition of ‘investment in the contract’ in section 72 that petitioners argue applies for purposes of section 402(b)(4)(A) is expressly limited in scope to specific subsections of section 72. See sec. 72(c)(1), (e)(6), (f). Thus, we are not convinced that the phrase ‘investment in the contract’ as defined in section 72 is an established term of art that applies throughout the Code.” 139 T. C. 11, at pp.11-12 (Citation omitted).

Neither is Section 72 of similar purpose and intent to Section 402 so as to make the definition in pari materia (that’s high-priced lawyer babble for “same same”), and thus applicable.

Finally, Bobby argues each year stands on its own, and the closed years are off the table (IRS isn’t arguing nonfiling, fraud or substantial overvaluation, so standard 3SOL applies). No, says Judge Kroupa, there are plenty of places where Congress has moved otherwise taxable events from one year to another, and here the aim is to hit the heavies when their deferral schemes blow up, to the extent they haven’t sooner “given at the office”. And Bobby hasn’t, so the whole nine yards are taxable.

Next is another Bobby, Robert G. Fielder and Deborah R. Fielder, T. C. Memo. 2012-284, filed 10/4/12. Bobby is fighting a levy, and there’s much back-and-forth about whether his 433-A was complete or not, what his farm was worth, and whether he disclosed Debby’s business income, when he offered a collection alternative that Appeals rejected and sustained the levy.

But for sure he never got a SNOD, and he did file the necessary return to be considered timely for collection alternative purposes. IRS wants summary judgment affirming Appeals’ rejection, but Judge Laro says no.

There are questions of fact. First, as Bobby never got a SNOD, he can contest the deficiency, and that includes additions to tax, interest and penalties. “Respondent (IRS) takes the position in his motion that petitioners did not properly assert they are not liable for the additions to tax because they did not raise the dispute in their Form 12153 hearing request. As respondent sees it, the record supports his assertion that petitioners were merely confirming the accuracy of the information given to them by the IRS and were not substantively disputing the existence or amount of the liability.” T. C. Memo. 2012-284, at p. 15.

But the SO’s case activity record says that Bobby said he thought the penalty was unfair, that his return was late because his accountant quit on him and he prepared the return as fast as he could, and the SO tried to explain to Bobby why the penalty was proper. And the SO’s determination didn’t consider Bobby’s objection to the additions and penalty, although Section 6330(c)(3)(B) required him to do so.

“Nor do we accept respondent’s position that petitioners were precluded from challenging the additions to tax because they did not raise the issue in their Form 12153 hearing request. Neither the statute nor our caselaw requires a taxpayer to raise the liability issue in the request for a CDP hearing for it to be considered properly at issue. The statute provides only that a taxpayer may raise the issue of underlying tax liability at the CDP hearing if the taxpayer did not receive a notice of deficiency or did not otherwise have an opportunity to dispute such tax liability, and the determination by an Appeals officer is subject to judicial review under section 6330(d). The statute does not speak to the timing for raising the issue. The issue of underlying liability will be considered properly raised if a taxpayer raises it at any time during a CDP hearing.” T. C. Memo. 2012-284, at pp. 16-17 (Citations omitted).

So Bobby will get a trial.

Takeaway–When at a CDP, if you didn’t get a SNOD, take your text from Isaiah, Ch. 40, verse 9: “Lift up thy voice with strength; lift it up, be not afraid” even if you left it out of your Form 12153.

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