When it comes to unraveling real estate wheeling-dealing, there’s nobody like The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, His Honor Mark V. Holmes. In support of the foregoing, I make an offer of proof in my blogposts “Basis for Dummies”, 11/24/11 and “The Sum of Its Parts”, 3/12/12.

And His Honor is on his game with Stephen M. Gaggero, 2012 T. C. Memo. 331, filed 11/29/12.

Steve thought his name was Blanchard from his earliest youth, until he met his natural father and became Gaggero. Though a high-school dropout, he taught himself carpentry, worked for film studios, bought and rehabbed real estate, and memorialized his youthful name in his wholly owned C Corp, Blanchard Construction Company (BCC). He employed 40 people at one point, but when the facts in this case came to a head, he was down to a dozen or so, including in-house counsel, designers, decorators and laborers. But high on Steve’s faves list was his trusty CPA, Jimbo Walters.

Steve was a success story. He bought a tumble-down shack in Malibu during one of California’s periodic real estate crashes, and made a deal with BCC: BCC will rehab the place and Steve will live there as his primary residence. “BCC redesigned, rebuilt, and expanded the house and grounds–adding amenities such as a small golf course, stadium tennis court, new pool and secret pathway that wound from the home through the woods to a private beach–and Gaggero personally paid approximately $1.5 million for the cost of these improvements.” 2012 T. C. Memo. 331, at p. 4. (Footnote omitted.)

In exchange for completing the rehab, if the house was ever sold, BCC would get half the gain over a stipulated $3 million value at contract signing. And there was a contract. And BCC did complete the work.

But the house wasn’t sold for six years. And when it was sold, to a Belgian biochemist after a contentious negotiation, it fetched $9.6 million. Steve never told the Belgian about his deal with BCC, but did file some papers later showing BCC’s involvement. He also paid BCC $3 million, which BCC reported as ordinary income.

Steve took whatever gain he had made on what he claimed was his piece of the deal and rolled it over under old Section 1034, whose effect ceased a few months after Steve’s mansion got sold. But the new house he bought within the two-year timeframe of old Section 1034 cost about $3 million less than the sales price of the mansion BCC built. Steve claimed he only got what the new house cost, and BCC got the rest.

IRS says no. IRS claims BCC was just a contractor with nothing more than a mechanics’ lien. No, says Judge Holmes. This was a real land sale contract. BCC did have equitable title and could have sued Steve. And the contract contemplated that Steve might sell BCC at some future point; while Steve could call the shots during development and rehab, if Steve sold BCC, all decisions would have to be unanimous between Steve and any future owner of BCC. The Belgian biochemist was a tough customer, the broker was trying to sabotage the deal, so Steve was justified in keeping quiet about BCC’s involvement.

“On completion of its development work, BCC had a share of the benefits and burdens in the property and received part-ownership in the property. We accept Gaggero’s explanation that disclosure of BCC’s interest to [the Belgian] would have jeopardized the sale of the property, but note that both Gaggero and BCC filed separate real-estate reporting solicitation forms to the escrow agent, showing that there were multiple transferors. Both Gaggero and BCC were paid directly from the escrow for their respective ownership interests. And the $9.6 million sale proceeds was allocated according to the Sale Agreement–$6.6 million to Gaggero, and $3 million to BCC.” 2012 T. C. Memo. 331, at p. 27.

So Steve’s sale to BCC is real. But Steve never reported the capital gain on his sale to BCC.  And BCC only reported ordinary income on the $3 million it got (a corporation couldn’t use Section 1034).

So Judge Holmes carefully crafts a table, and calculates percentages wherewith to fill in the blanks (which see, at pp. 36-50; yes, it’s long, and yes, it’s prosy, but it’s vintage Holmes).

And Steve owes capital gains tax on his sale to BCC, which he can’t bury in the new house because he already used his share.

Now as to penalties, to wit, substantial understatement, as Steve never mentioned $3 million in gain. Steve claims he relied on Jimbo. Judge Holmes looks to the usual three-part test, competence of expert, information given expert and actual good faith reliance. IRS claims Steve didn’t rely in good faith, because he knew as much as his lawyer at the trial, suggesting questions, overruling his attorney’s advice, manifesting a deep understanding of tax law. Just the sort of client an adviser should love.

So IRS argues “the deal is too good to be true, and Sophisticated Stevie should have known it.” Moreover, IRS claims Steve may have carefully crafted his erroneous return so as to plead ignorance if caught.

Judge Holmes isn’t buying. Steve did the BCC deal six years before he sold the house. It had economic substance, Jimbo was with a big-ticket CPA firm and had substantial real estate and tax creds, and Steve was a credible witness.

So Steve must pay capital gains on his sale to BCC, but no penalty.

And again, Holmes fans, this is the real deal.

Even If It Isn’t

That’s Judge Ruwe’s lesson to IRS in a 7463 “not for nuthin’”, Terrance Dale Moore, Jr., and Rhonda R. Moore, 2012 T. C. Sum. Op. 116, filed 11/29/12.

TD and Rhonda got hit for $26K in tax, interest and penalty; they paid about $6K to IRS, who wanted the balance, but TD and Rhonda filed Chapter 13. IRS filed a proof of claim for $16K (by mistake, IRS trial counsel admits), TD and Rhonda get a Chapter 13 payment plan confirmed, and TD and Rhonda pay IRS’ claim in full.

After IRS got paid in full what they (erroneously) claimed they were owed, TD and Rhonda converted the 13 to a 7, and get discharged. IRS demands the balance, around $5K plus interest. TD and Rhonda claim they paid what IRS demanded in the Chapter 13, IRS gives them a levy letter and Appeals gives them a NOD, and so off to Tax Court.

Judge Ruwe: “A confirmed chapter 13 plan determines the amount each creditor will be paid. Parties who fail to object to the confirmation of a plan are generally barred from later attacking the confirmed plan. It is a well-established principle of bankruptcy law that a party with adequate notice of a bankruptcy proceeding cannot ordinarily attack a confirmed plan. Respondent did not object to the bankruptcy court’s confirmation of petitioners’ chapter 13 plan. Indeed, respondent received the full amount of the claim he made in petitioners’ chapter 13 bankruptcy case.” 2012 T. C. Sum. Op. 116, at p. 8. (Citations, internal parentheses and quotation marks omitted.)

Moreover, “In the bankruptcy proceeding petitioners listed the correct amount of their tax liability. There was no subterfuge by petitioners. Respondent then filed a proof of claim for a lesser amount. The mistake was solely the responsibility of respondent. In the final analysis respondent got everything he asked for in the bankruptcy proceeding and suffered no disadvantage in that proceeding when it was subsequently converted.” 2012 T. C. Sum. Op. 116, at p. 9.

IRS tried to argue that when the Chapter 13 was converted to Chapter 7, all bets were off and it was open season on TD’s and Rhonda’s liability. No, says Judge Ruwe, while that’s the rule as to creditors who weren’t paid in full what they claimed pre-conversion, IRS got what they asked for pre-conversion.

Based on the unique facts here, TD and Rhonda are off the hook. And as for the post-discharge interest on non-dischargeable debts, IRS didn’t state what the amount of interest was or how it was calculated, so clearly it was an abuse of discretion by Appeals to confirm a levy without having firm numbers.

TD and Rhonda win.

Down Mexico way, as more particularly bounded and described in the 1939 hit tune by Michael Carr and Jimmy Kennedy, the Ministry of Finance and Public Credit of the United Mexican States and the US Dep’t of the Treasury signed up to the FATCA bilateral agreement. So it was announced on 11/28/12.

The launderers and the dodgers now must be reported, each country to each, even if the name of the counterparty changes from The United Mexican States to Mexico.

Negotiations are in progress with numerous other countries, says Treasury, and all the world (the tax world, anyway) awaits further news of the spread of FATCA.

See my blogposts “You Wash My Back – Part Deux”, 7/27/12, and “You Wash My Back – Redivivus”, 11/8/12.

Judge Marvel gets a chance to decide what the SOL is for Section 6702 frivolity, but passes by the return-vs-activity test, with a sidetrip to Congressional intent, because Elizabeth O’Brien claims the statute began to run even before she got frivolous, in the eponymous 2012 T. C. Memo. 326, filed 11/27/12.

Originally Liz filed a 1040 with husband Danny Boy and got it right, but later filed a 1040X that claimed compensation for services wasn’t income and sought a refund. Judge Marvel heard this frivolous old song before. So she’s ready to sustain the Section 6702(a) $5K hit to Liz (Danny Boy being out of the case because his determination letter wasn’t a NOD).

Judge Marvel must also bypass an interesting question. IRS wants to impose a separate 6702(a) hit on Danny Boy and on Liz. “Because the case with respect to Mr. O’Brien has been dismissed, we need not decide, in the case of a frivolous return document that is a purported joint Federal income tax return, whether respondent is entitled to impose a sec. 6702(a) penalty on both filers, or whether respondent is limited to imposing one sec. 6702(a) penalty per frivolous return document.” 2012 T. C. Memo. 326, at p. 14, footnote 11.

Now to Liz’s claim that SOL ran, per Section 6501(a), the 3SOL, before the Section 6702(a) hit was imposed. Liz claims the 1040X relates back to the tax year for which she timely filed her original (nonfrivolous) 1040. “Neither party addressed the issue of whether petitioner’s liability for the sec. 6702(a) penalty is properly considered to be a part of her Federal income tax liability for 2004. Although the notice of determination shows that respondent assessed the sec. 6702(a) penalty with respect to petitioner’s 2004 tax period, the harm targeted by sec. 6702(a) is the same as that targeted by sec. 6700, the conduct of the taxpayer. Sec. 6702(a) specifically targets the conduct of a taxpayer in filing a frivolous return document and, like the sec. 6700 penalty, applies to specific acts and transactions and not to a specific time period.” 2012 T. C. Memo. 326, at p.16, footnote 12.

“This Court has not decided whether a statute of limitations applies for the assessment of a section 6702(a) penalty. In fact, it appears that no court has. While it may be appropriate to decide this issue in the future, we need not do so in order to resolve this case. We need examine only when a period of limitations, assuming one is applicable for the assessment of the section 6702 penalty, would begin to run under accepted limitations analysis.” 2012 T. C. Memo. 326, at p. 19.

The general rule is that, as against the United States, if there is no clear SOL, then there’s no limit. And Liz’s relation-back argument is ridiculous, since the SOL (if there is a SOL) would have started running before she did anything frivolous.

So the SOL for frivolity, if there is one, starts when the party acts frivolously, not when the tax return is due.

Stay tuned. We may yet find out when the SOL for Section 6702(a) frivolity ends.

Once again, litigation settlement costs aren’t deductible, according to The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, Mark V. Holmes, in James A. Cavanaugh, Jr., 2012 T. C. Memo. 324, filed 11/26/12.

Big Jim was a heavy cleanup hitter, having founded and operated Jani-King International, Inc., a Sub S that was one of the world’s leading janitorial-services franchisors. To take a break from cleaning up, Big Jim, his bodyguard Rock Walker, and a Jani-King employee named Erica Fortner (job title unclear), took a Thanksgiving holiday at Big Jim’s villa on St. Maarten, strictly for fun (as everyone stipulates).

Unfortunately, Big Jim brings along 27-year-old Ms. Colony Anne (Claire) Robinson. Unhappily, their holiday in the sun is marred by the death of Ms. Colony Anne (Claire), whose death is caused by an overdose of cocaine.

Momma Robinson sues all and sundry, claiming Big Jim and his employees provided the drugs that killed her baby.

Fearing that his corporation’s good name and his own would wind up in the trash, with the Texas jurors acting as the janitors,  Big Jim’s Sub S, echoing the words of Paul Simon, says “so here’s to you Mrs. Robinson”, forking over $2.3 million to Momma Robinson, of which Big Jim kicks in $250K, but gets reimbursed by his Sub S. Oh, and Big Jim’s Sub S also claims $180K in legal fees it paid to its own lawyers to get it out of the case.

Judge Holmes cuts to the chase: “From Cavanaugh’s perspective, it is an unfortunate fact of business life that corporations and prominent individuals get sued, sometimes on dubious facts and theories of liability. Settling such suits may be distasteful, but even a small chance of an enormous payout may justify a deal that protects assets from the uncertainty of litigation and protects a business reputation from scandal.

“The Commissioner has a different view–he argues that however jumbled and wrinkly the legal topography created by the collision of Code, regulations, and caselaw may sometimes seem, it cannot possibly hide a crevice dark enough to successfully shelter an argument that the price paid for the death of the boss’s girlfriend is a deductible corporate business expense.” 2012 T. C. Memo. 324, at p. 6.

The issue is origin versus consequences. Did the claim that the parties settled arise out of business operations, that is, out of the use of business premises, business property, business equipment or in furtherance of a business purpose? Or was the origin of the claim a personal, nonbusiness matter?

While damage to reputation is certainly a concern, “(O)ur Court has never held that naming a company as defendant in a lawsuit ipso facto makes legal fees or settlement costs into business expenses.” 2012 T. C. Memo. 324, at p. 10.

And Tax Court doesn’t consider the merits of the claim that was settled; to do so would punish those who settle, and that would be a bad result; judges want settlements. The claim was that Jani-King’s employees, Big Jim, Rock and Erica Fortner plied poor Colony Anne (Claire) with blow, causing her death, and both the employees and the employer (respondeat superior) are liable.

But the analysis doesn’t end there. They may be employees, but were they engaged in business activities? No. “The Commissioner argues that the parties stipulated that the trip to St. Maarten involved no business conduct, and that this fact alone means that he should win. Cavanaugh argues that tort claims against company employees are nearly certain to arise in business today, and that this makes them proximately related to undertaking business operations. But Cavanaugh cites no authority to support such a broad assertion.” 2012 T. C. Memo. 324, at p. 15.

What cases there are that would sustain Big Jim’s deduction all involve use of business property or business activity, for profit; and going to St. Maarten was none of the above.

Big Jim might argue that Rock was acting for the Sub S in the course of the St. Maarten’s trip, but the evidence is too scanty to say what Rock was doing.

To sum up, here’s part of a Judge Holmes footnote that says it all: “If the Jani-King employees had been attending a conference in St. Maarten or if they had given Robinson the drugs that killed her back in Dallas, at Jani King’s offices, and during business hours, our analysis might be different.” 2012 T. C. Memo. 324, at p. 18, footnote 7, last sentence.

And while his Sub S by-laws provided for indemnification and reimbursement of an officer of Jani-King, when made party to litigation, those benefits are limited to litigation in the indemnitee’s capacity as officer or director, acting in good faith and in the best interests of Jani-King, and Jani-King’s Board and counsel must so find. No evidence of this, so no deduction for the reimbursement to Big Jim of the $250K. And if the $250K is treated as a voluntary payment by the Sub S, it still needs a business purpose, and we don’t have that here.

Finally, IRS wants to claim the $250K is a constructive dividend to Big Jim. But that involves us in all the Sub S E&P, AAA and basis computations. “For an S corporation that does have accumulated earnings and profits, a shareholder distribution is more complicated. The amount of a distribution that exceeds the corporation’s accumulated adjustment account (AAA) is a dividend– but only to the extent it does not exceed the S corporation’s accumulated E&P. See sec. 1368(c)(2). The portion of the distribution that doesn’t exceed the AAA is taxable only to the extent it is greater than the shareholder’s basis in his stock. See sec. 1368(c)(1).

“When Jani-King reimbursed Cavanaugh $250,000 in 2005 its reported AAA was nearly $6.4 million. But the Commissioner introduced no evidence of Jani-King’s accumulated E&P or Cavanaugh’s basis in his Jani-King stock, which leaves us with no grounds to decide if the distribution is a constructive dividend.” 2012 T. C. Memo. 324, at p. 27.

See my blogpost “Well-Settled – No Deduction”, 11/7/2012.

That’s Judge Paris’ message for the many-named Carletta Ragan A.K.A. Carlotta Ragan A.K.A Karen Ragan, Docket No. 14909-11L, filed 11/26/12.

IRS says  “that petitioner self-reported a tax liability on her 2007 amended income tax return, that petitioner does not owe tax because her net earnings did not exceed $400, and that respondent has fully abated petitioner’s 2007 income tax liability and, therefore, the Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330, dated May 19, 2011, for petitioner’s tax year 2007 is moot.” Order, p. 1.

So dismiss the petition, says IRS, nothing going on here.

Carletta, a/k/a Carlotta, a/k/a Karen, says no (just once, not three times). She “claims that respondent’s abatement of her self-reported tax liability has an effect on her Social Security earnings as a sole proprietor of a small business…. Petitioner’s remaining arguments are based on the original income tax return she filed with the Internal Revenue Service and are irrelevant because the liability underlying the Notice of Determination stems from petitioner’s amended income tax return.” Order, p. 1.

Caselaw provides that if the liability underlying the NOD is satisfied (whether by payment, discharge, SOL or whatever), there is no longer any case or controversy for Tax Court to determine.

So petition dismissed, and Carletta, a/k/a Carlotta, a/k/a Karen, can deal with Social Security Administration.

Or, The Ballad of Feckless Freddie

Tax Court is off to the turkeys today (11/21/12), so no opinions filed, but Judge Holmes, The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, has a Designated Order, delivering a harsh chastisement for an attorney who evinces too casual an attitude toward Standing Pretrial Orders, timely motions, and showing up for calendar calls.

Once again I point to Rule 200(a)(2), the mail-order admission for attorneys. I’ve posted about this before, so I won’t cite to those posts yet again. If Tax Court is prepared to let in any attorney, without inquiring into his or her knowledge of Tax Court practice and procedure, or the Code and Regs, then Judge Holmes should not be surprised by Freddie and others of that ilk.

You’ll find the Designated Order at Docket No. 20997-11, Brad Walters. There are two other cases, but they get consolidated. The attorney (hereinafter “Freddie”) has behaved in this casual fashion before now, and Judge Holmes is out of patience.

Freddie misses the calendar call, but shows up at recall.

Here’s just an abstract of Freddie’s derelictions: “He appeared and asked for a continuance, despite Tax Court Rule 133 which tells those who appear before us that motions for a continuance filed 30 days or less before calendar call will ordinarily be deemed dilatory, and that continuances in general are granted only in exceptional circumstances.

“These cases are exceptionally unexceptional. All three appear to involve only questions of substantiation. We must say ‘appear ’, because petitioners’ counsel didn’t even follow our rules and attach complete copies of the notices of deficiency to the petitions he prepared. He and his clients also failed to answer respondent’s requests for a Branerton conference to engage in informal discovery. He didn’t file pretrial memoranda in any of these cases, despite our standing pretrial order requiring him to do so. He didn’t even have his clients appear at calendar call.” Order, p. 1.

Judge Holmes tells Freddie that whatever he turned over to IRS (late) is all he can introduce on the trial, and that he’d better settle. Moreover, “He is advised to reform the way he prepares for trial in our Court.” Order, p. 1.

Maybe a test would have kept Freddie out, and spared Judge Holmes.

As the song says, “Call me, don’t be afraid, you can call me”, and that’s the message Jean Bridgmon has for the IRS Appeals Office, who claims they did call, but Judge Morrison finds they didn’t, in 2012 T. C. Memo. 322, filed 11/20/12.

Jean was fighting a levy (she never filed returns for the two years at issue, and never petitioned to contest the SNODs she got), and IRS’ curious computations of her liabilities. “It is not obvious how some of the amounts of the additions to tax reflected in the assessments and notices relate to each other or how they were computed. Our description does not attempt to resolve these questions.” 2012 T. C. Memo. 322, at p. 2. See also 2012 T. C. Memo. 322, at p. 7, where a column of figures from IRS, supposedly showing Jean’s liabilities, don’t add up.

And a number of IRS notices to Jean don’t get into the record either. As Jean is pro se, it’s not surprising she doesn’t know how to build a record, but IRS trial counsel should.

Anyway, Jean’s Error Number One, the issue of computations, is off the table, as Jean never petitioned for review of  the SNODs.

“The second error Bridgmon alleges is that the Appeals Office failed to consider her proposal to make installment payments of her tax liabilities. The reasons the Appeals Office did not consider the proposal are that Bridgmon allegedly failed to telephone the Appeals Office at the time and date scheduled for her hearing with the Appeals Office and that she did not submit financial information that the Appeals Office had requested. We find that Bridgmon did call the Appeals Office at the scheduled date and time. We further find that the Appeals Office did not telephone Bridgmon at the scheduled date and time. The scheduled telephone conference was to be Bridgmon’s primary opportunity to discuss her installment agreement proposal with the Appeals Office. Under these circumstances, we hold that the Appeals Office erred in failing to make better efforts to contact Bridgmon (such as telephoning her) even though Bridgmon did not submit the requested financial information. Bridgmon should be afforded another opportunity for a hearing with the Appeals Office.” 2012 T. C. Memo. 322, at pp. 2-3.

I won’t go into the whole chronology that Judge Morrison lays out. Jean is a credible witness, says she called the AO and waited on hold as long as two hours with no response (2012 T. C. Memo. 322, at p. 10; Nina Olson and Taxpayer Advocate Service please copy). All IRS’ evidence shows that someone tried to call Jean at some point, but the calls seemed to come from Automated Collection, not Appeals. 2012 T. C. Memo. 322, at p. 17.

So Jean gets sent to Appeals again; hopefully someone will pick up the phone this time and call her.

But If It’s Not a Return, It Doesn’t Count

There is much in the saga of Karl Gregg Weatherly and Jinny H.S. Weatherly, 2012 T. C. Memo. 320, filed 11/19/12, and Judge Morrison deals with it all, but I’ll confine my comment to the single point: if a filed document isn’t a return, it can’t be a frivolous return.

Instead of the usual Form 1040 with schedules for Karl’s photography endeavors, Karl filed a document styled “Notice of Affidavit Statement in Rebuttal to Internal Revenue Code Section 6011 For Year Period Ending December 31, 2003” (“Notice of Affidavit”), 2012 T. C. Memo. 320, at p. 2, footnote 2. Eventually Karl filed a Form 1040 for the year at issue. IRS issued a SNOD that appears untimely, but Karl never raises SOL, and so Judge Morrison deems it waived. Practice tip–unless patently erroneous, raise SOL every time.

“The Notice of Affidavit could qualify as a valid tax return, thereby relieving Karl Weatherly of liability for the addition to tax, only if it meets all four requirements of the test set forth in Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986). See Oman v. Commissioner, T.C. Memo. 2010-276, slip op. at 16-24 (explaining why the Beard test determines whether a return was filed for the purpose of the addition to tax under section 6651(a)(1) in cases appealable to the Court of Appeals for the Ninth Circuit). The four requirements are that the document must (1) contain sufficient data to calculate the correct liability; (2) purport to be a return; (3) be an honest and reasonable attempt to follow the tax laws, and (4) be executed under penalty of perjury. Beard v. Commissioner, 82 T.C. at 777. The Notice of Affidavit is a 40-page list of spurious pseudolegal arguments. It does not contain sufficient data to calculate Karl Weatherly’s correct tax liability for 2003. It does not purport to be a return. And it is not an honest and reasonable attempt to follow the tax laws. Therefore, the Notice of Affidavit fails the first, second, and third Beard requirements. It is not a valid return.” 2012 T. C. Memo. 320, at pp. 17-18. (Footnote omitted, but read it. Karl tries to save the day by claiming his screed is a “notice”, but that doesn’t fly.)

See Section 6702(a)(1). That section imposes a penalty for filing a frivolous return. Karl’s return wasn’t a return. Because he eventually filed a proper return (late), he gets the late-filing and late-paying additions to tax.

But Karl escapes the Section 6673 frivolous proceedings penalty, as he makes a last-gasp repentance. “The Weatherlys’ arguments that they are entitled to deductions for legal expenses (for 2003 and 2004), a theft-loss deduction (for 2003), and a net operating-loss-carryforward deduction (for 2004) were advanced by Karl Weatherly’s testimony. We did not reach the question whether his testimony was sufficient to secure the deductions because the Weatherlys abandoned their claims on brief. Nonetheless, their initial claims were not frivolous. We do not want to discourage taxpayers from litigating colorable claims. Moreover, we note that while the arguments Karl Weatherly made in his Notice of Affidavit were frivolous, the Weatherlys did not pursue any of those arguments in their briefs or testimony to this Court. Thus, we decline to impose a penalty.

“However, we emphasize to the Weatherlys that they should expect to be penalized if they make frivolous and groundless arguments in the future.” 2012 T. C. Memo. 320, at pp. 21-22.

So beware, Weatherlys. You engage in frivolity at your peril.

I’d been running a little contest for the best excuse for not filing a tax return (see my blogpost “Whose Line Is It, Anyway?”, 2/8/12), which I expanded to cover best excuse for not providing documents and records (see my blogpost “A Good Excuse”, 9/28/12). But today’s entry falls far short, and Judge Goeke gives the excuse short shrift in Fred Deutsch, 2012 T. C. Memo. 319, filed 11/15/12.

The cast of characters and mise-en-scene brought back memories. Petitioner Fred was a wheeler-dealer thirty years ago, but in this case he was collateral damage in the great savings & loan meltdown in the early 1990s, when the Resolution Trust Company was engineering Real Estate and Bank Bailout No. 1 (the first of many). He claimed to be what we used to call a “hard-money lender”, one who lent quickly and without the paperwork a bank or institution would require. One of the loans he made was to an architect I knew and worked with years ago (around 1990). He claimed the loans he made tanked, with huge losses, and he took a big hit on loans he personally guaranteed for his own deals.

Fred was represented by a colleague I respect, who drew a miserable fact pattern in this case.

Fred’s problem was he claimed NOLs from these defaulted loans and personal guarantees, but didn’t have documents. Fred claimed that long ago an IRS Special Agent went through his records, took them, and never gave them back, but the Special Agent did help the US Attorney give Fred a felony information, to which Fred pled guilty, specifically to signing a false return (see Section 7206(1)).

At Fred’s current trial, the Special Agent testified he gave them back ten years ago, either to Fred’s trial counsel or tax accountant, neither of whom testified.

Fred tried to shift the burden of proof to IRS because of the unreturned documents. “Petitioner submits that he has satisfied all requirements to shift the burden of proof as to the propriety of his claimed NOL deduction to respondent. In particular, petitioner refers the Court to respondent’s revenue agent report, prepared by Revenue Agent C at the conclusion of his examination of petitioner’s 1997 NOL claim, to demonstrate that credible transactional records were maintained and that he is entitled to an NOL deduction as a matter of law. Alternatively, he avers that, but for respondent’s alleged failure to return business records that were submitted for purposes of respondent’s criminal investigation into petitioner’s taxable year 1997, he would have been able to fully substantiate his NOL with supporting primary documentation. Petitioner, in essence, asserts that respondent’s supposed error should not be used against him in this case.” 2012 T. C. Memo. 319, at p. 10 (Name omitted; footnote omitted, but read it; as Judge Goeke is interested in the scope of Tax Court’s discretion to shift the burden. This isn’t the case, however.)

Nice try by my colleague, but hard-hearted Judge Goeke isn’t buying. “Logically, for petitioner to even proceed with this novel argument it was incumbent upon him to, at minimum, establish the chain of custody of the supposed evidence to demonstrate that the pertinent documents were never returned. At trial petitioner merely testified that he sent the documents to his criminal attorneys, who thereafter delivered the documents to respondent. Petitioner did not call Mr. Criminal Attorney or Mr. Tax Accountant at trial to verify this assertion. Special Agent C, however, testified that he returned petitioner’s documents to petitioner’s attorneys several months after the conclusion of the criminal case in 2002 or 2003. While Special Agent C was unable to specify whether he gave the documents to Mr. Criminal Attorney or Mr. Tax Accountant, he convincingly recalled that he personally returned those documents to one of their offices. This was the only credible testimony offered at trial concerning the present location of the documents.” 2012 T. C. Memo. 319, at pp. 12-13. (Names omitted.)

Even worse, “(P)etitioner never filed a motion to compel respondent to produce the records he allegedly possessed nor made any effort to inform the Court that all reasonable attempts to locate the relevant documents were exhausted. Instead, petitioner demonstrated that he was content to proceed in this case with an indeterminate record; however, we find this clearly insufficient to shift the burden of proof.” 2012 T. C. Memo. 319, at p.14.

Compare and contrast with Andrew M. Ross, the star of my blogpost “A Good Excuse”, supra as the high-priced lawyers say. Of course, Andy drew STJ Armen, The Judge With a Heart, who buys Andy’s tale (backed up with copies of a search warrant and an FBI inventory) that his documents were grabbed by the Federales, and that Andy’s attorney strove mightily to get the documents back, to no avail.

But here Fred was content to rely on his own testimony alone, a broken reed. And absent papers, Fred’s case goes south, just like his loans, guarantees and NOLs.