Or At Least No More Than 25 Questions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

National Taxpayer Advocate Olson, please copy.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Doesn’t get you a charitable deduction this time, says Judge Dawson, in Upen G. Patel and Avanti D. Patel, 138 T.C. 23, filed 6/27/12.

Upen and Avanti wanted to demolish the house on land they bought in Vienna, VA, up the road a piece from us here at the NSTP Summer Session. The Fairfax County Firefolks had a program whereby they would burn down your house (with your consent and your mortgagee’s, of course) to train their firefighters. Upen and Avanti wanted the house removed anyway, so they handed the keys to the firefolks and told them to do their thing, claiming a charitable deduction.

IRS invokes the Section 170(f)(3)(A) amendment to Section 170, the “no partial interest deduction” rule, claiming the most that Upen and Avanti gave the Vienna Firefighters was a license to go onto their land and burn down a structure for which (a) Upen and Avanti had obtained a demolition permit and (b) obtained construction financing for a brand-new house and (c) in which Upen and Avanti never lived.

The house and the land are inseparable, under Virginia law. Judge Dawson: “Where a taxpayer contributes to a charity an interest in a building that is part of the land under State law but retains all title to and interest in the remaining land, the taxpayer has donated less than his entire interest in the land.  The taxpayer will not be allowed a charitable contribution deduction unless the donated interest falls within the exceptions of section 170(f)(3)(B).

“In the case at hand, the house was attached to the land and was conveyed to petitioners along with the land when they purchased the Vienna property.  Under the common law and the laws of Virginia, the house was part of the land that is the real estate we refer to as the Vienna property.  Petitioners’ purported contribution of the house to FCFRD [the firefighters] was a contribution of less than their entire interest in the Vienna property.” 138 T.C. 23, at p.19.

So, no charitable contribution for Upen and Avanti.

But they dodge penalties, because when they filed their return, the law had not been settled as it is now, and old pre-amendment precedent existed that might have justified their position.

In Bob Dylan’s words from his 1970 ballad, “You’ll not see nothin’ like the mighty Quinn”, but hers is a sad tale, told by Judge Kroupa, in Jacynthia Quinn, 2012 T.C. Memo. 178, filed 6/27/12.

Jacynthia (great name) was a longtime IRS tax compliance officer, still employed by IRS at time of trial. But Jacynthia went rogue, fabricating medical and dental deductions and inventing charitable contributions. I won’t go into the sorry details, the blatant forgeries and continuous efforts to thwart the resolution of this matter.

Her husband testified against her, as did officers of the various charities to which Jacynthia claimed she made contributions and proffered altered documents to substantiate. She was unable to spell the name of the doctor to whom she claimed she had paid substantial medical bills.

And she claimed dependent exemptions for dependents who clearly weren’t.

In short, there was clear and convincing evidence enough for the imposition of civil fraud.

It’s sad that someone would throw away their career for $17,000 of deductions. And sadder that it would be one sworn to uphold the law.

I’ll be down in Virginia for the next few days, at the NSTP Tax Round-up, getting some CPE hours for my EA (which still hasn’t been renewed, although IRS got my money timely).

Meantime, no interesting cases, just a Memo on a tax protester, and two 7463s, one a single mom whose testimony was credible enough to sustain her entitlements and the other an innocent spouse whose version of the “most significant” issue upon which she prevailed for her Section 7430 expense reimbursement didn’t jibe with Judge Marvel’s view.

Nothing novel here.

I’ll try to find something interesting to blog from Ol’ Virginny.

Doesn’t Matter, She Was In Too Deep

So sorry, says Judge Marvel to Sari Diehl, in Sari F. Deihl, 2012 T.C. Mem. 176, filed 6/21/12, only partial innocent spouse for you, 50%.

It’s the usual cocktail of facts, which occupies 37 pages of Judge Marvel’s prose, but I’ll spare you. The facts of your case will vary at least as much as your mileage.

But what’s interesting is the “blended” approach Tax Court will take post-Notice 2012-8, 2012-4 I.R.B. 309, which revised the old standby Rev. Proc. 2003-61, 2003-2 C.B. 296 (see my blogpost “Innocence Is Bliss,” 1/6/12).

Now both parties want Tax Court to use Notice 2012-8 standards and not the old Rev. Proc. 2003-61. Tax Court held a conference call in January on the subject, and the parties were agreed.

But Judge Marvel isn’t. “…in Sriram v. Commissioner, T.C. Memo. 2012-91, slip op. at 9 n.7, we took the position that we would ‘continue to apply the factors in Rev. Proc. 2003-61, 2003-2 C.B. 296, in view of the fact that the proposed revenue procedure is not final and because the comment period under the notice only recently closed.’ Additionally, because our holding in Sriram did not turn on any single factor as revised in the proposed revenue procedure, we called attention in the opinion to the effect, if any, of a revised factor only to the extent we deemed it necessary for clarity. Id. We adopt a similar approach here. We shall decide whether petitioner is entitled to relief under section 6015(f) by considering all of the relevant facts and circumstances, evaluating them through the prism of Rev. Proc.  2003-61, supra, and noting where appropriate how the analysis used in Rev. Proc. 2003-61, supra, would change if the proposed revenue procedure in Notice 2012-8, supra, had actually been finalized.” 2012 T. C. Mem. 176, at p. 29.

But, of course, facts and circumstances rule (Sir Ed Elgar really needed to write a march using that name). So preponderance-of-evidence, credibility of witnesses and de novo standard and de novo scope of review bring Judge Marvel to the same conclusion, whatever yardsticks the parties want to use. “In any event, our approach to deciding whether petitioner qualifies for relief under section 6015(f) and our conclusion remain the same regardless of whether we apply the analysis of Rev. Proc. 2003-61, supra, or adopt the approach proposed in Notice 2012-8, supra.” 2012 T. C. Mem. 176, at p. 29.

Sari’s tax problems stemmed from two corps she and her late husband founded and owned. She was enough involved in operations and management so her ownership wasn’t merely nominal. Her claimed abuse wasn’t substantiated by hospital or police reports, and her son’s testimony that Daddy was a bad actor isn’t enough, as Sonny stands to gain a lot of cash if Mommy’s tax problems go away.

So either way, sorry, Sari.

There’s a Lawsuit

So said Addison Mizner, and Judge Goeke is prepared to go even further, because there’s a lawsuit even though there wasn’t a will until thirteen years after the testatrix died; at least so far as anyone knew.

That’s the story behind Estate of Alfred J. Richard, Deceased, Gary H. Richard and Peter C. Richard, Co-Executors, 2012 T. C. Mem. 173, filed 6/20/12.

Alf was the father, Gary and Peter the sons, and Victoria was mom and Mrs. Alf. Victoria exits this life in 1997, holding 140 Class A preferred shares of the family’s holding corp, par value $1000 each, 8% non-cumulative, voting, convertible. Victoria also had a secret; she had made a will back in 1991, but nobody knew about it (they claim), there was never probate or a 706 filed, and as far as anyone knew Vicky never had a will.

Vicky’s will said her sons were execs, and should sell or redeem the shares and pay out to her sons and grandkids. The will had sat in a lawyer’s vault, and nobody tipped off the kids that there was a will, much less that they were named execs.

So since all Alf and Vicky’s other property was held as joint tenants with right of survivorship (last one standing takes all), when Alf buckets in 2004, his execs list 740 shares of Class A on the 706, when Alf really only had 600 shares.

There’s also a minor issue between the execs and IRS. The execs valued the stock at $1000 per share, or $740,000, but IRS claims “… the shares were worth $142,203,000 because the 740 preferred shares constituted over one-third of the voting shares in A.J. Richard & Sons, sufficient to block any major change from occurring to the corporation.” 2012 T. C. Mem. 173, at p. 6, footnote 8.

Oh yes, and IRS tacks on substantial undervaluation penalty, so we’re talking $68 million in tax and $27 million in penalty. So if Alf didn’t have the 140 shares, the bite would be about 19% less if the 600 shares he still had could stymie any major change, but  a lot less than that if they couldn’t.

IRS argues that Alf exercised dominion over the 140 shares as if they were his, but that doesn’t fly; there were no shareholder meetings so he never voted the shares, no dividends  were paid, Alf never tried to transfer the shares out of Vicky’s name (whether to himself or anybody else), and though IRS argues that no one would have stopped him if he did, that’s not enough. “Might have” doesn’t get it.

Under applicable State law (Florida, where else?), title vests per will at date of testatrix’s death,  even if no one knows about the will. And the local probate court admitted Vicky’s will as soon as the execs found it and filed it. That of course isn’t the end, as State court decisions don’t bind IRS even on State law until the State’s highest court has affirmed.

But even though Tax Court could look de novo, Alf did nothing contrary to Vicky’s title. IRS lambastes the execs for failing to include Vicky’s car and jewelry in her estate tax return, failing to redeem or sell the stock (although they claim they tried to redeem but the Corp said ‘no’), and for not holding shareholder meetings. But not including the car and jewels doesn’t negate the fact they did include the 140 shares as soon as they got Vicky’s will probated; as for failing to redeem, that may raise a claim for breach of fiduciary duty, but that’s for another court and another day. Finally, closely-held family corporations don’t have Warren Buffet style annual meetings, and Tax Court finds nothing nefarious in the fact that no meetings were held.

IRS claims that, under FL law, there’s a two-year statute of limitations on claims against a decedent’s estate, and that ran on Alf’s estate years ago. But this claim arose after Alf’s death, it was the execs and not Alf who included the 140 shares in Alf’s estate, so the FL statute doesn’t apply.

And the new will is cogent proof why the execs aren’t bound by the 706 they signed, including the 140 shares in Alf’s estate.

So Vicky’s estate has the 140 shares.

Takeaway- All preparers, please please please tell your clients who have wills to let some trusted person know where they are.

And lawyers, look in your vaults occasionally; you never know what you might find there.