Not in Tax Court, Anyway

That’s the lesson Judge Gustafson teaches Hershal Weber in the eponymous case, 138 T.C. 18, filed 5/7/12.

Hersh overpaid his 2006 personal income tax and asked for the overpayment to be applied to what he’d owe for 2007. But IRS hit him with TFRPs for payroll taxes not withheld by an outfit called S&G, in which Hersh had some unspecified role, enough to make him a responsible person. And the Section 6672 TFRPs ate up his 2006 overpayment, so IRS held him for tax due for 2007, but that wasn’t much. Again Hersh asserted he had a previous overpayment to carry forward, so he wanted this applied to 2008. No, says IRS, nothing to apply, it’s all gone, and this time Hersh owes serious money.

IRS sends notice of levy for withholdings, and Hersh asks for a CDP. While waiting for Appeals, some other S&G types pay enough to satisfy the unpaid withholding taxes, and IRS says “no levy, withholding paid.” Hersh sues for a refund in US District Court, but no disposition of that case is brought to Judge Gustafson’s attention.

Meantime Hersh still owes personal income tax for years 2007 and 2008, so IRS sends Hersh a letter so stating, and a new notice of levy. Hersh asks for CDP hearing, alleges the TFRPs were paid and his payments should be applied as he requested, resulting in no tax due, but Appeals says “we have no jurisdiction for 2006 and 2007.” Hersh petitions Tax Court.

Judge Gustafson gives IRS summary judgment. Abuse of discretion is the standard. IRS can abuse its discretion in applying overpayments, but IRS has broad discretion per Section 6402(a): “The statute and case law are clear that the discretionary authority of the IRS supersedes any desires or wishes on the part of a taxpayer to have their overpayment credited to specific, preexisting, tax liabilities”). For purposes of the Commissioner’s motion for summary judgment, we assume that, in a collection due process case, we can review for an abuse of discretion the IRS’s decision under section 6402 to credit an overpayment to a nondetermination year rather than to the year at issue.” 138 T. C. 18, at p. 14, footnote 5 (Citations omitted).

While a taxpayer can ask that one year’s overpayment be applied to another year’s liability, Congress has given IRS regulatory authority to decide how to do this, but in any case, Reg. 301.6402-3(a)(6) makes it clear that IRS isn’t bound by what a taxpayer asks for.

Here TFRPs create a problem. While IRS can collect the penalty only once, there may be multiple payors, and in fact (as occurred here) the sum of the parts may be greater than the whole. So the IRS deems the TFRPs collected only after two years have gone by from last payment with no claim from the employer or any responsible person for a refund. In any case, Section 6672(d) allows responsible persons and the employer to sue one another for contribution if one of them paid more than their fair share.

Hersh’s overpayment, if there was one, applies to his Section 6672 TFRP payment, not his 2006 income tax withholding. Judge Gustafson: “…if the IRS holds Mr. Weber’s money wrongly, it holds it not as an overpaid 2006 income tax but as an overpaid section 6672 penalty. But there is no regulation that permits a taxpayer to elect to have an overpayment of a section 6672 penalty to be applied to his income tax liability, and there is no line on the Federal income tax return form that permits the reporting of an overpaid section 6672 penalty as a credit to income tax. A credit elect overpayment can be an issue in a CDP case…, but Mr. Weber has no valid claim of a credit elect overpayment. After the 2006 income tax overpayment was credited against the section 6672 penalty, the 2006 income tax overpayment was no longer available for application to 2007 income tax. In the absence of that credit elect overpayment, Mr. Weber had no 2007 income tax overpayment that could be credited to his liability for 2008 income tax. The 2008 income tax liability could thus not be satisfied by cascading credit elect overpayments from 2006 and 2007.” 138 T.C. 18, at pp. 24-25.

While Tax Court can consider whether IRS abused its discretion in refusing to apply an available credit, there is no available credit here, because whatever credit Hersh has was applied to the TFRPs. Hersh wants Tax Court “not to consider a credit that is already ‘available’ (because it has already been determined) but rather to make ‘available’ a credit that is currently not available because the IRS has disallowed it. He contends that there is a positive balance in his penalty account and that we could decide this case in his favor as an almost arithmetical matter–but that is not the case: Whether the penalty has really been overcollected is a potentially complex question that may depend not only on the balance in his account (which in fact is still negative) but also on the pendency of refund claims by other responsible persons and on liabilities for interest and additions to tax. See supra pp. 17-19. Mr. Weber thus asks us not to allocate an uncontroversial credit but rather to adjudicate a disputed refund claim that is unrelated to the liability the IRS proposes to collect….” 138 T.C. 18, at pp. 35-36.

This would expand Tax Court’s jurisdiction in ways Congress never intended.

No dice, Hersh. Duke it out in District Court.

And Don’t Sweat the Numbers

Here’s good news for supporting parents, whose divorced or separated partners welsh on the deal to sign a Form 8332, delivered by none other than the Judge who writes like a human being, the Great Dissenter Judge Holmes. The case is Gary L. Scalone and Sandra Vieira Scalone, 2012 T. C. Sum. Op. 40, filed 5/2/12.

Unfortunately this is a Section 7463 “not-for-nuthin’”, so it’s useless as precedent. But read and heed, matrimonial lawyers; use the reasoning, and especially use the language. And please, even if it’s not necessary, get the SSANs.

Usual story. Gary and former spouse Denise have minor child N. S., who lives with mother, but Gary furnishes more than half of support. The separation agreement says “Gary ‘shall be entitled to claim’ N.S. as a dependent for tax purposes ‘[f]or calendar year 2000 and for any taxable years henceforth.’ And Denise promised to sign a declaration ‘on forms acceptable to the Internal Revenue Service’ that she would not claim N.S. as a dependent if Gary kept current on his child support.” Gary did, but Denise didn’t.

Incidentally, Gary and current spouse Sandra have a child who lives with them; IRS denied exemption and credit for both children, but conceded Gary and Sandra’s child, earning a wry compliment from Judge Holmes.

As to N.S., no Form 8332 or equivalent means no exemption and no credit; see my blogposts “Supported Child; Unsupported Exemption”, posted 7/11/11, and “Kicking Richard Nixon”, posted 11/25/11.

But Judge Holmes rides to the rescue, with a pardonable understatement: “What makes this part of tax law complicated is that some of the information that’s listed on the Form 8332 is absolutely required, and some is just helpful to the IRS in processing the return.” 2012 T. C. Sum. Op. 40, at p. 6.

Having no fully-executed Form 8332 from the welshing Denise, Gary and Sandra attached a signed copy of the separation agreement to their return for the year at issue. Both Denise and Gary signed. This gets past the critical hurdle: the custodial parent and the non-custodial parent must manually sign whatever document substitutes for the Form 8332. The cases say that the signatures are the “controlling factor.” 2012 T.C. Sum. Op. 40, at p.6.

Moreover, “…Gary correctly points out that almost all the information on a Form 8332 is in that agreement–the only things missing are his and Denise’s Social Security numbers. That Gary’s number isn’t in the agreement isn’t a problem–his number is elsewhere on the return–but the absence of his ex’s number may be a problem.” 2012 T.C. Sum. Op. 40, at p. 6.

Except it isn’t. IRS cites Richard A. Nixon, 2011 T.C. Mem. 249, but in that case there was nothing signed by Richard’s ex. Then  IRS cites Gessic, 2010 T.C. Mem. 88, but there taxpayer attached one initialed page from the separation agreement, and even that did not adequately specify to what years it applied. Even though Gessic produced a complete copy at the trial, it may not have been signed by the custodial spouse.

Gary had the magic language  “calendar year 2000 and for any taxable years henceforth.” That’s enough, says Judge Holmes.

“This turns out to be very important. The separation agreement here states that Gary ‘shall’ receive the dependency exemption ‘[f]or calendar year 2000 and for any taxable years henceforth.’ With this language, Denise was giving Gary the right to claim N.S. as a dependent for all years from 2000 into the future. The applicable regulations specifically allow this kind of general release. See sec. 1.152-4T, Q&A-4, Temporary Income Tax Regs., supra (release may be ‘for all future years’). We also specifically find that this phrase is Denise’s unconditional promise not to claim N.S. as a dependent.” 2012 T. C. Sum. Op. 40, at p. 9.

Moreover, the fact that the separation agreement was not incorporated in the divorce decree doesn’t matter, nor the fact that Denise’s declaration relinquishing exemption and credit is dependent upon Gary being current with this child support.

“The Commissioner has a second argument, though. He argues that even if the absence of the parents’ Social Security numbers doesn’t sink the Scalones, ‘conditional’ language in the separation agreement should. There is conditional language, kind of. But we disagree that it’s important. The language the Commissioner points to states that

‘Wife agrees to sign a written declaration on forms acceptable to the Internal Revenue Service that she will not claim the child as an income tax dependent exemption for any taxable year commencing calendar year 2000, provided that for the applicable calendar year she continues to receive child support payments as agreed from the Husband and such payments are current as of December 31 of the applicable tax year. The Wife further agrees to attach the declaration form required by the applicable rules and regulations of the Internal Revenue Code to her income tax return.'[Emphasis added.]

“This provision mentions a ‘written declaration’–clearly a Form 8332. And the Commissioner is correct that it has a quid pro quo. But it’s a very odd one: if Gary is current with support, Denise promises to complete a Form 8332 and attach it to her tax return–something that would have no effect on Gary’s right to claim N.S. as a dependent on his tax return, which she gave away in the preceding sentence of the agreement. It would sure have been a lot easier for Gary if Denise had given him a signed Form 8332, but as we pointed out earlier, the Code doesn’t require it.” 2012 T. C. Sum. Op. 40, at pp. 11-12.

Gary gets the exemption and the credit, and justice is done. Way to go, Judge Holmes.

Takeaway- Matrimonial lawyers, go and do thou likewise.

Or, Answering to a Higher Authority

Judge Goeke takes a look at a historic facade easement in Loren Dunlap and Nancy Dunlap, et al., 2012 T.C. Mem. 126, filed 5/1/12. And the easement is worth–nothing. That’s because their high-priced New York City condominium must, like a famous New York City hot dog, answer to a higher authority.

Loren and Nancy and their fellow unit owners in the chi-chi Cobblestone Loft Condominium, located in New York City’s Tribeca North Historic District, were sold the facade easement deduction by their managing agent. See my blogposts “Skimp on the Form but Attach the Appraisal”, 10/3/11, and “A Joy Forever”, 4/4/11.

Briefly, the National Architectural Trust (NAT), a Section 501(c)(3) not-for-profit, shepherded the Cobblestoners’ application through National Parks Service, got the condo designated as historic, and recommended a law firm (which had represented NAT and its for-profit affiliate SMS) to take care of drafting and recording the easement. A well-known appraisal firm (which had done other work for NAT) prepared an appraisal of the facade, which was distributed to all the Cobblestoners.

The appraiser never testified at the trial, however, and his report was thrown out as evidence. But it was good enough to let the Cobblestoners escape Section 6662 penalties.

The Cobblestoners took charitable deductions for their proportionate shares of the appraised worth of the easement.

The Cobblestoners had to make cash contributions to NAT, which IRS claimed was payment for services and not a Section 170 contribution. This doesn’t convince Judge Goeke, who finds the “services” to be minimal, and he allows the cash. But the facade deduction collapses.

Judge Goeke carefully deconstructs the appraisal and the expert testimony at trial, finding them deficient, but the point of the case is that the facade was already protected, and better protected, before NAT came on the scene, by the New York City Landmarks Preservation Commission (LPC), the governmental guardian of New York City’s architectural heritage.

Cobblestone was one of the very few buildings to achieve the LPC’s coveted “sound, first-class condition” status. As a result, Cobblestone entered into a continuing maintenance agreement with LPC.  Judge Goeke: “Under the continuing maintenance agreement, Cobblestone was required to have Cobblestone inspected every five years by a ‘Preservation Architect’ (to be selected from a list provided by the LPC) to make sure the building remained in sound, first class condition. The inspection was to cover various elements of both the interior and the exterior of the building. The preservation architect was required to prepare a report 45 days after each inspection which detailed work which should be completed to maintain the building in sound, first-class condition. Within nine months from the report date Cobblestone was required to either complete the work detailed in the report or else contest the required work with the LPC. The inspection, the report, and the work were all to be completed at Cobblestone’s expense. Other provisions of the continuing maintenance agreement imposed reporting obligations on Cobblestone in case of fire or other damage to the property.” 2012 T.C. Mem. 126, at p. 44, footnote 17.

This was far more than NAT ever did.

Judge Goeke again: “…we do not believe that the facade easement restrictions and enforcement were any more stringent than the LPC regulations and enforcement as of the date for which … valued the easement (December 29, 2003). The LPC is a well-staffed organization which works with community groups and preservation activists to enforce its regulations applicable to historic structures such as Cobblestone. Although the LPC’s regulations are slightly less rigorous than those promulgated by the Secretary of the Interior (which are the regulations purportedly enforced by NAT), Cobblestone had a special ‘sound, first- class condition’ designation with the LPC which caused it to be subject to a higher standard of preservation than most other historic structures in New York City. Only 150 of the 26,000 structures covered by LPC regulations had this special designation.” 2012 T.C. Mem. 126, at pp. 49-50.

Judge Goeke blasts NAT, finding its monitoring efforts to be poor or non-existent at the time the easement was granted, and that NAT was “…an organization more concerned with making money for SMS (a for-profit entity which employed many of the people who were held out to third parties as working for NAT and which was owned by the same two people who founded NAT and worked as directors and presidents of NAT) than monitoring and enforcing the terms of the facade easements it held.” 2012 T.C. Mem. 126, at p. 51.

So the easement was worth nothing. So no deductions.

Finally, the Cobblestoners acted reasonably and in good faith, so no penalties. The disregarded appraisal was attached to their tax returns, and they substantially complied with the requirements of the Form 8283 attached to their returns.

Nothing interesting out of Tax Court on April 30,2012, so here’s an Order from April 27.

You won, so go away. That’s the lesson Judge Kroupa teaches Frederick M. & Delores R. Nerlinger, Docket No. 27972-09 L, issued 4/27/12.

IRS made a full concession and asked that the case be dismissed. Fred and Del are completely off the tax hook.

But Fred and Del weren’t happy. When Judge Kroupa entered an order and decision in favor of Fred and Del, dismissing IRS’ claims entirely, Fred and Del moved to set the order and decision aside. They wanted a decision stating IRS abused its discretion.

No, says Judge Kroupa. “The Court finds that petitioners are abusing the purposes for which the collection review statutes, section 6320 and 6330, were adopted. Respondent fully conceded this case. Respondent acknowledged that petitioners did not receive the statutory deficiency notice. Respondent also abated (or would soon abate) the liabilities for 2001 and 2002 and the liens released. In addition, no levy action would occur for these years. Petitioners want respondent to admit he abused his discretion. This we cannot do nor, even if we could, the result remains the same. Respondent has made a full concession. There is no issue before us to decide.” Order, p. 1.

Leaving aside the grammatical lapses (the Court cannot admit the respondent abused his discretion; the Court can so find, but only respondent can so admit; and the word “nor” should be “and”), if you get a win, that’s all, folks.

COLONY LIVES

The United States Supreme Court, an exalted forum far above the Tax Court whence I customarily draw my blogposts, has affirmed Fourth Circuit, holding that overstating basis to minimize gain, even to the extent of gain greater than 25 percent of the amount of gross income stated in the return, does not invoke the six year statute of limitations. The standard three-year obtains, notwithstanding the understatement.

In short, don’t lower the bridge, raise the river.

The case is United States v. Home Concrete & Supply, LLC, No. 11-139, decided 4/25/12.

Harking back to The Colony, Inc. v. United States, 357 U.S. 28 (1958), Justice Breyer refuses to buy IRS’ argument that Reg. §301.6501(e)–1, which was promulgated in final form in December 2010, overturns Colony pursuant to Chevron and Mayo Clinic (see my blogpost “Carpenter, Colony, Chevron and Mayo”, posted 4/26/11).

Nope, says Justice Breyer: “We do not accept this argument. In our view, Colony has already interpreted the statute, and there is no longer any different construction that is consistent with Colony and available for adoption by the agency.”

Of course, this is a 5 to 4, with Justice Kennedy leading the dissenters. So there may be further developments.

Even though IRS agreed that Catherine Marie Nunez was an innocent spouse, Judge Haines didn’t, and thereby hangs the tale of Catherine Marie Nunez, f.k.a. Catherine Marie Uriarte, Petitioner, and Robert F. Uriarte, Intervenor, 2012 T.C. Mem. 121, filed 4/25/12.

Catherine Marie and spouse Fighting Bob ran a copying service. Fighting Bob did the client contact, sales and service. Catherine Marie “took care of the administrative side of the business. She entered data into Quickbooks, organized and filed receipts and invoices, answered phones, wrote up service calls, and paid bills.” 2012 T.C. Mem. 121, at pp. 2-3. Catherine Marie was a signatory on the business bank account, wrote and signed checks (including to herself and her daughter from a previous relationship), and was listed as co-owner on permits, certificates and State returns.

Though they filed income tax returns for the years at issue, they never did get around to paying the taxes. Ultimately they both filed bankruptcy, but they never completed their payment plan and their proceeding got tossed. Sounds like another busted Chapter 13, one of the many that litter the bankruptcy trail.

But the fallout of the bankruptcy was the fallout of the marriage, and Catherine Marie and Fighting Bob divorced. Bob filed bankruptcy again, but Catherine Marie didn’t. When IRS got around to pursuing the pair, Catherine Marie claimed she was innocent, and the only reason her name was all over the copying business was their State’s community property laws.

IRS first said no, but Catherine Marie appealed and won. However,  Fighting Bob never got the Appeals decision. So Fighting Bob gets to argue that Catherine Marie should remain aboard. Appeals agreed in part, applied the community property rationale, and gave Catherine a 50% bye. Catherine petitions, arguing inequitable to hold her in as she believed Fighting Bob would pay, and IRS concedes she should get 100% relief.

Fighting Bob says “no way, Harry A.”, meaning Judge Harry A. Haines, who sides with Fighting Bob and socks it to Catherine Marie 100%.

IRS has discretion in inequitables like this, and argues abuse of discretion is the test for review. No, says Judge Haines, it’s de novo because Fighting Bob never got his turn at bat, and Catherine Marie flunks under Rev. Proc. 2003-61, the old rule (see my blogpost “Innocence is Bliss”, 1/6/12). In any case, it probably it wouldn’t matter even with the new rule announced in Notice 2012-8, as abuse wasn’t raised seriously.

Catherine Marie claims she’s in this mess solely because of community property law. Otherwise, it would all be Fighting Bob’s problem. But Judge Haines dismisses that argument: “Petitioner and respondent argue that Alpha was intervenor’s business and that any item of Alpha’s income or expense attributable to her is solely due to the operation of California’s community property law. We disagree. The record is filled with evidence that petitioner coowned Alpha [the copycat business] during the years at issue and was heavily involved in its operations. Petitioner took care of the administrative side of the business. She entered data into Quickbooks, organized and filed receipts and invoices, answered phones, wrote up service calls, paid the company’s bills, and coordinated and provided the accountant with all the tax preparation information. Petitioner also drafted budgets, attempting to have her say in how the business was run.

“Additionally, State filings and business records show that petitioner was an owner of Alpha during the years at issue. Petitioner was listed as an owner of Alpha on its business license and on California payroll tax deposit coupons. Petitioner was also listed on Alpha’s fictitious business name statement, which states that the business is conducted by husband and wife. Further, the marital settlement agreement divided community property between petitioner and intervenor. As part of the division petitioner assigned to intervenor as his sole and separate property all of her rights, title, and interest in Alpha.” 2012 T.C. Mem. 121, at pp. 10-11.

Catherine Marie was in deep enough to forfeit her innocence, IRS discretion to the contrary notwithstanding. Her interest was not imputed solely by community property law nor was her ownership nominal. As for abuse, though Catherine Marie brought in some evidence that Fighting Bob did abuse her, she worked with their accountant to prepare the tax returns for the years at issue, so she was hardly terrorized into acquiescing.

Note that Fighting Bob was pro se. Not bad work for a copycat, this marshalling the arguments and selling them to Judge Haines. Many a lawyer could do worse.

The only cases other than run-of-the mill indocumentados today, April 23, were (1) a Section 1031 like-kind exchange (Patrick A. Reesink and Jill Mitchel Reesink, 2012 T.C. Mem. 118, filed 4/23/12) where the taxpayer’s witnesses were able to establish investment intent in the replacement property based on timing between purchase of replacement property and sale of principal residence, coupled with attempted rental activity of the replacement property before taxpayer took occupancy; strictly fact-driven; and (2) litigation delay never being a ground for abatement of interest under Section 6404 (Michael Coleman, 2012 T.C. Mem. 116,  filed 4/23/12), even when the tax matters partner in this phony shelter was under criminal investigation and ultimately went to jail.  As I’ve said before, partners beware; the tax matters partner holds your tax life in his hands.

Nothing really novel here, so I move to the announcement that Daniel A. “Yuda” Guy has been elevated from Tax Court General Counsel to Special Trial Judge.  A graduate of McDaniel College and the University of Baltimore Law School,  STJ Guy has been on the Tax Court team for more than twenty years. We look forward to many interesting opinions from STJ Guy.

Judge Kroupa blazes a trail through the tangle of Section 181 election to expense filmmaking costs in Lee Storey and William Storey, 2012 T.C. Mem. 115, filed 4/19/12. The decision is so fact-driven, with facts unlikely to be encountered by the average preparer-in-the-trenches that I won’t be going into much detail here. My interest stems from the buzz the case has gotten in the independent film production world as it wended its way to Tax Court.

A lot of the indie producers filed briefs amici, a thing rarely allowed in Tax Court. More usually, the amici are told to craft a joint brief with the taxpayer to raise whatever arguments they may have. See my blogpost “A Joy Forever”, posted 4/4/11.

Briefly, Lee worked her way up from a Detroit assembly line to a specialization in Indian water rights law, while directing community theater and sculpting bronze on the way. Her husband William was a member of the 1960s group Up With People, a counter to the counter-culture. When Lee found out about Will’s musical past, she decided to make a movie, and called it “Smile ‘Til It Hurts”. She did all the right things–took courses, consulted with experts, hired bookkeeping help to keep careful records, got tax counsel and campaigned her documentary at all the right festivals.

IRS called it a hobby or a labor of love to celebrate her husband’s youth (although he got a big 4 minutes out of the 79 in the final cut), and disallows Lee’s deductions.

Judge Kroupa blows off the hobby and labor of love arguments with a lengthy recounting of the facts and applying the Section 183 laundry list to show Lee’s serious moneymaking intention.

Now for the Section 181 election. The statute grew out of the runaway film producers who had to capitalize production expenses if they shot in the USA, but got favorable tax treatment and even subsidies if they shot overseas. To bring them back, Congress allowed them to expense production costs in the 2004 American Jobs Creation Act.

As usual, it took IRS a while to catch up with Congressional largesse, and IRS’ arguments ignored its own guidance and temporary regulations. IRS’ post-trial brief sported a 314-page appendix itemizing Lee’s variances from the substantiation requirements of the regulations, but Judge Kroupa doesn’t look at it, as “(S)tatements in briefs do not constitute admissible evidence and may not be considered by the Court. Respondent’s 314-page appendix, even if it were argument instead of evidence, causes the brief to exceed the page limits the Court established at trial. We will not consider respondent’s appendix as either evidence or argument and therefore we hold that respondent has not met his burden of proof on the substantiation issue.” 2012 T. C. Mem. 115, at p. 45. (Citations omitted.)

The point is substantial compliance. Lee’s paperwork meets the test of conforming to the statutory requirements, albeit without every last detail required by the regulations. “Close enough”  can apply to a Section 181 election as well as to horseshoes and hand grenades.

So Lee can smile, and feel good about it.

Takeaway- Sometimes close enough is good enough.

Or, There Goes the Neighborhood

The inventive James E. Rogers tries a longshot Rule 161 reargument and a Rule 162 vacatur to avoid the fallout from his cratered distressed asset/debt (DAD) non-partnership deals (see Superior Trading, LLC, Jetstream Business Limited, Tax Matters Partner, et al., 137 T.C. 6, filed 9/1/11 (Superior Trading I), and my blogposts “More Shell Games”, posted 9/2/11, and “Mr Rogers’ Neighborhood – The Adventure Continues”, posted 11/12/11”). The latest chapter in the story is Superior Trading LLC, Jetstream Business LLC Tax Matters Partner, 2012 T.C. Mem. 110, filed 4/17/12.

Judge Wherry disdainfully brushes off Mr. Rogers: “The motions before us to reconsider and vacate are a curious admixture of a regurgitation of unfounded assertions and half-baked theories soundly rejected in Superior Trading I, a disingenuous criticism of our holdings in that Opinion, and fanciful claims of newly discovered evidence that allegedly undermines our findings of fact supporting those holdings. Consequently, these motions merit no more than a summary denial.” 2012 T.C. Mem. 110, at p.8.

But TEFRA rears its ugly head. So Judge Wherry has to deal with the unfounded, the half-baked, the disingenuous criticisms, and the fanciful claims. Though the blown-up “partnership” is initially the promoter’s problem, the fallout affects the individual returns of the investor-partners.

“Yet we recognize that the dispute at the center of the consolidated cases could morph and present itself in other manifestations. Therefore, to provide additional guidance on our interpretation of the applicable law, we have set forth in some detail our reasons for denying the motions. In so doing, we have no illusions of persuading all moving petitioners. Instead, we write now for the benefit of the “silent waters that run deep”–the dozens of deep-pocketed investors who acquired ownership interests in the various holding companies, which in turn sought to exploit the inflated basis of the Arapua receivables. After all the linen is washed, these investors constitute the fonts whither the promised tax savings from chimeral losses would have drained and whence the required tax payments for determined deficiencies and accuracy-related penalties will flow.

“Under section 6231(a)(2)(B), ‘The term “partner” means * * * any * * * person whose income tax liability under subtitle A is determined in whole or in part by taking into account directly or indirectly partnership items of the partnership.’ As we described in Superior Trading I, the investors in the holding companies were never members in the same limited liability company as Arapua. Regardless, to the extent their income tax liability is affected by the basis of the Arapua receivables, a partnership item in these partnership-level proceedings, these investors are partners for purposes of these proceedings.

“Consequently, pursuant to section 6226(c)(1), each such investor ‘shall be treated as a party to such action’. And though it is already too late for these deemed parties to participate in these proceedings, it might not be too early for them to begin preparing for what is surely coming down the pike–computational adjustments by means of either direct assessment or partner-level deficiency proceedings. See generally Thompson v. Commissioner, 137 T.C. 220 (2011).” 2012 T. C. Mem. 110, at pp. 8-9.

Judge Wherry is here referring to the famous Thompson case, which features Judge Holmes’ famous dissent. See my blogpost “The Great Dissenter”, 12/28/11.

So for 39 pages, Judge Wherry slogs through Mr. Rogers’ smokescreen, with footnotes long enough to pass for decisions themselves. And having yet again deconstructed Mr Rogers’ cardboard neighborhood (the details of which I leave to law review writers and the terminally insomniac), Judge Wherry turns to the great defect in TEFRA.

“We are mindful of the fact that the ultimate burden of what we say and do here will be borne by those not before us–the individual investors in the various holding companies. That, however, is a necessary consequence of the essential design of TEFRA. TEFRA, quite perversely, hands the keys to the (sand) castle to those with everything to gain and nothing to lose. Nonetheless, our duty is to apply the law as written by Congress and reasonably interpreted by the Secretary. But even as we fulfill that obligation, we caution all unsuspecting taxpayers who have already been, or may in the future be, tempted to invest in such ‘too-good-to-be-true’ sheltering transactions, or to tie up this Court in TEFRA’s procedural knots. The wheels of TEFRA may grind slowly, but grind they will, and the grist they mill could have been the investors’ half a loaf.” 2012 T.C. Mem. 110, at p. 48-49.

Remember Beverly Bernice Bang,  2011 T.C. Sum. Op. 1, filed 1/4/11, and my blogpost “Bang – A Warning to Tax Matters Partners (and their advisors)”, posted 1/5/11.

The investors might give some serious thought to going after the tax matters partner.

School’s out at Tax Court for the weekend, as they fiddle with their telecom, so here’s something much more delightful:

My granddaughter Kathryn.