Robin S. Trupp was an Olympic equestrian prospect in his youth, but turned to practising law for a living. He never gave up his equestrian ambitions, developing a specialized practice in horse law. His son Austin carried on the dream, competing in equestrian events, at which Dad showed up to cheer on young Austin and incidentally promote his equestrian law practice, as the family cognomen blared from the loudspeakers.

Robin ran up $72K in equestrian-related expenses one year, didn’t file a return, and got a SFR and a SNOD. Robin sought redetermination, and Judge Goeke obliges, in Robin S. Trupp, 2012 T.C. Mem. 108, filed 4/12/12.

Robin loses his cellphone and travel deductions for the usual want-of-substantiation, but gets $2K for storing his files (his cheapskate firm won’t pay for that), and $78 for tax preparation services. Robin, don’t spend it all in one place. Now we come to the horses.

Robin claims that traditional advertising in the horsy set print media gets nothing, so he starts hanging around the horse shows when young Austin is saddled up, expecting the fans to hear the name “Trupp” and come at the gallop. He claims he got 35 clients that way, but produces no retainers and doesn’t show more than  $2K in horse-related income for that year. The rest of his hefty paycheck came from non-horse clients or from clients he picked up years before.

Now a taxpayer can combine horses (or any other hobby-type activity) with another real-live business activity, provided the combination is reasonable and not artificial. And getting business by showing up at equestrian events, without media advertising, can be reported as a combined business activity.  See Topping v. Com’r., 2007 T.C. Mem. 92.

Tracey L. Topping designed barns. Print advertising did nothing for her, so Tracey entered equestrian events, hired tables at events  at which she hobnobbed with potential customers, kept records and made money. And she beat IRS past the Tax Court finish line.

Judge Goeke: “Multiple undertakings of a taxpayer may be treated as one activity if the undertakings are sufficiently interconnected. Sec. 1.183-1(d)(1), Income Tax Regs. The most important factors in making this determination are the degree of organizational and economic interrelationship of the undertakings, the business purpose served by carrying on the undertakings separately or together, and the similarity of the undertakings. Id. The Commissioner generally accepts the taxpayer’s characterization of two or more undertakings as one activity unless the characterization is artificial or unreasonable. Id.

“Other factors considered in determining whether a taxpayer’s characterization is unreasonable include: (1) whether the undertakings are conducted at the same place; (2) whether the undertakings were part of the taxpayer’s efforts to find sources of revenue from his or her land; (3) whether the undertakings were formed as separate activities; (4) whether one undertaking benefited from the other; (5) whether the taxpayer used one undertaking to advertise the other; (6) the degree to which the undertakings shared management; (7) the degree to which one caretaker oversaw the assets of both undertakings; (8) whether the taxpayer used the same accountant for the undertakings; and (9) the degree to which the undertakings shared books and records.” (Citations omitted.)

And note the magic word “land” in item 2 on the Regulation laundry list; Robin argued his combined horse and legal experience was a capital asset that might increase in value, like land, but Judge Goeke wasn’t buying. The matrimonial judges around here seem to think a professional practice is a substantial capital asset.  For my part, I can only say that mine kept me and mine eating for 45 years–none too shabby, as they say.

But Robin’s horsey takings were a tiny fraction both of his overall income and of the expenses he wanted to deduct in furtherance of his horsing business. He produced no records, didn’t compete himself, and didn’t rent tables at events (Robin said that cost too much), so he didn’t show a sufficient profit motive and thus he can’t combine his law practice with anything equine.

Before heading for the barn, one more point. Robin didn’t represent himself (good move), but the marshalling of evidence wasn’t of the best. Trotting out some timesheets showing his weekend chat-ups with the dressage crowd at the show ring while Young Austin did his thing, and bringing in a few retainers he got during the year at issue (even if the billings didn’t show much that year, a few bills from the next ensuing years might show that mighty oaks from little acorns grow, and a lot of revenue doesn’t accrue to an attorney in Year One anyway; I’ll testify to that anywhere and everywhere), would have helped enormously. Judge Goeke dismissed Robin’s attempted Section 7491(a)(1) burden-of-proof shift with the usual “not enough, and anyway preponderance says you lose.” We see that story told again and again, so here’s a takeaway:

Beside wood-shedding the client, get the papers. And be a little outside-the-box when looking for evidence; remember that “And then what happened?” shouldn’t be relegated to bedtime stories.

Those words might have started a hit single for Otis Redding and Steve Cropper in 1968, but they don’t help Nelson Toshito Uyemura and Wendi Michiko Uyemura, 2012 T.C. Mem. 102, or Patrick T.W. Lum and Libby S. Lum, 2012 T.C. Mem. 103, or even Scott R. Wilson and Christine R. Yano, 2012 T.C. Mem. 101, all three filed 4/10/12, with Judge Cohen aboard for all three, as the facts are virtually identical.

All the taxpayers wanted solar hot water. None of them wanted to pay for the installation of the solar panels and concomitant electrical doodads. So they all went to Mercury Solar, yet another vendor of something-for-nothing. The deal was simple: buy one and get two free. Bring in another customer (known as a “ratepayer”), or let Mercury hook you up with one. Buy both installations on time. The ratepayer pays utility bills to a Mercury-provided entity, which entity pays State and local excise taxes, pays the debt service on both installations to Mercury, and remits any profit to the bringer-in.

The bringers-in claim they’re in the TOB of selling electrical power, take a Section 179 write-off for the installation and a Section 48 business activity energy credit. Mercury warns the bringers-in that they must (a) have some income tax liability and (b) “meaningfully participate” in the electric utility business.

Of course they don’t. Instead, in Otis’ immortal words, they’re just “sittin’ in the mornin’ sun, and they’ll be sittin’ there when evenin’ comes”, watching the deduction and credit roll in.

Except that, while they roll in, the bringers-in “watch  ’em roll away again”, as Section 469 passive loss rules wipe out deduction and credit.

Judge Cohen: “In general, a passive activity is a trade or business in which the taxpayer does not materially participate. Sec. 469(c)(1). A taxpayer materially participates in an activity when he or she is involved on a regular, continuous, and substantial basis. Sec. 469(h)(1). Participation generally means all work done in connection with an activity by an individual who owns an interest in the activity. Sec. 1.469-5(f), Income Tax Regs.” 2012 T.C. Mem. 102, at pp. 5-6.

So much for Nelson and Wendi. Also Patrick T. W. (Libby admits she did nothing). Patrick at least sold five other units for Mercury, but never looked at them.

Scott claims he did do something: “Petitioner visited his ratepayer’s residence at least monthly to inspect the solar equipment and consult with the ratepayer about the solar service. During these inspections, petitioner checked the solar roof panels and the inverter, which are components of the photovoltaic system. Petitioner tried to find other ratepayers, but was not successful. He did not refer any sales leads to Mercury Solar.” 2012 T. C. Mem. 101, at p. 5.

Judge Cohen does not let the sun shine in on Scott. “Petitioners have not proven or presented adequate evidence to shift the burden of proof that any of the material participation tests they rely upon are satisfied. Petitioner argues that, as the sole owner of the micro-utility activity, he performed all ‘tasks, functions and services of and for the business, including management’ with the exception of sending invoices to and collecting payments from his ratepayer. However, because individuals with … (Mercury’s recommended biller) collected payments, maintained records regarding the income, and made petitioner’s loan and State excise tax payments and individuals with Mercury Solar installed the equipment at his ratepayer’s home, petitioner’s participation did not constitute substantially all of the participation of any individual in the micro-utility activity.

“Petitioners also have failed to prove that petitioner participated in the micro-utility activity for more than 100 hours during each of the years in issue.” 2012 T.C. Mem. 101, at p. 7. (Footnote omitted.)

Even worse, Scott flunks the paper trail: “Petitioner maintained no business records such as appointment books, calendars, or logs. His testimony was based solely on his recollections and was completely lacking in detail with respect to dates and time spent performing specific tasks. While the regulations permit some flexibility regarding the records required to prove material participation, they do not allow this type of postevent ‘ballpark guesstimate’, and we are not bound to accept the unverified, undocumented testimony of taxpayers.” 2012 T. C. Mem. 101, at p. 8 (citations omitted.)

So the sun goes down on the bringers-in.

 Or, Agree With Thine Adversary Whilst Thou Art In the Way

It doesn’t matter if you’re below the settlement officer’s number, because if you’re below IRS’ final number when you submit your OIC at your CDP, you’re out. This is the lesson Judge Thornton has for B.M. Vanmali and Bhari Vanmali, 2012 T.C. Mem. 100, filed 4/9/12.

B.M. and Bhari were hit for $600K underpayment deficiency, asked for an OIC with their Form 12153, claiming collectibility, and offered less than fifty cents on the dollar.

The SO said they’d undervalued their takes from their seven Sub S corps, and claimed they had better than $1.3 million. The discrepancy came from the difference between what the tax returns showed as income from the Sub S corps and what B.M. and Bhari claimed they actually got.

The SO told B.M. and Bhari to up the ante, but they did nothing for 60 days, so the SO rejected the OIC, and sent a Notice of Determination. B.M. and Bhari petition.

The issue is abuse of discretion.

Judge Thornton: “…without conceding any error by the settlement officer, respondent [IRS] asserts that even if one were to assume, solely for purposes of his motion, the accuracy of ‘many’ of the items reflected in petitioners’ offer amount, their computation nevertheless contains ‘clear errors’. Respondent asserts that correcting these errors would indicate that, consistent with petitioners’ own assumptions, their offer should have been no less than $349,740, rather than the $295,805 they actually offered. Petitioners do not dispute this conclusion; to the contrary, they state that they will ‘assume Respondent’s changes are correct’. They observe, however, that “the difference between $349,740 and Petitioners’ offer of $295,805 is a lot less than the difference between $1,296,531 [their RCP as determined by the settlement officer] and $295,805.’ They assert that had the settlement officer determined their RCP to be $349,740, they would have been “ready, willing, and able to make a counter-offer in that amount.” Citing Lites v. Commissioner, T.C. Memo. 2005-206, they argue because the settlement officer’s alleged error was so central to his determination, he abused his discretion in rejecting their offer.

“Whatever error the settlement officer might have made in calculating petitioners’ RCP–and respondent does not expressly concede that the settlement officer made any error–the undisputed fact remains that petitioners could afford to pay significantly more than they offered. In these circumstances, notwithstanding alleged errors in the settlement officer’s calculation of petitioners’ RCP, he did not abuse his discretion in rejecting their offer.” 2012 T.C. Mem. 100, at pp. 8-9. (Citations omitted.)

“Petitioners assert that they would have counteroffered $349,740 if the settlement officer had properly advised them that this was the correct amount of their RCP. But petitioners have effectively conceded that it was their own errors that caused their offer to understate the amount they could afford to pay, even under their own financial assumptions. The settlement officer did not abuse his discretion in rejecting their admittedly too low offer.” 2012 T.C. Mem. 100, at pp. 10-11. (Footnote omitted.)

But one sentence from the omitted footnote says a lot.  “The record indicates that although the settlement officer raised this issue with petitioners and gave them an opportunity to respond, they never did so.” 2012 T.C. Mem. 100, at p.11, footnote 9.

Takeaway: Don’t wait until you get to Tax Court to raise the ante.

To all, litigants, judges, readers, best holiday wishes.

Off to visit new granddaughter in Houston, so I may be a day or two late with postings here.

Just a tax protester case from Tax Court today, with nothing really new about it, just a banking warehouse scheme, where the participants deposited all their income in a single pooled account in the name of a dummy, to hide it from IRS. A few subpoenas, and game over for taxpayer, who gets the 75% fraud penalty.

But the case I noted in passing two days ago, F. Lee Bailey, 2012 T.C. Mem. 96, filed 4/2/12 (see my blogpost “Service Trumps Sickness”, 4/2/12), has gotten a bit of buzz. Peter Reilly picked up the case and my blogpost, and commented on his blog. His post got some activity from the groundlings, so I thought I’d throw in my take.

I met Mr. Bailey forty years ago in my youthful days in our State’s Attorney General’s office, when we put a client of his out of business. He already possessed a formidable reputation, which only grew over the years. I best remember him as a member of the O.J. Simpson Dream Team in 1995, at the same time the witches’ brew of facts later described in his Tax Court case was percolating.

Mr. Reilly thinks Mr. Bailey had a fool for a client, as he tried the case himself, with apparently no idea of burdens of proof or recordkeeping requirements. Mr. Bailey seems to have thought it was a criminal trial.

But maybe it’s not that simple.

I was surprised at the DOJ lawyers, who entrusted Mr. Bailey with $5.9 million worth of publicly-traded stock belonging to his incarcerated client, and allowed Mr. Bailey to deal with the stock in an account he controlled in a Swiss bank, with no requirement to account periodically (only at the end), pay at stated intervals, and with no written agreement embodying this extraordinary deal.

But the AUSA (who later became a US Attorney) who made this deal stated: “…Mr. Bailey’s work on the repatriation of Mr. …’s assets was very good; and the Court of Federal Claims found that his work was ‘far more than usual for a defense attorney’.” 2012 T.C. Mem. 96, at p. 15.

Moreover, the AUSA also said he “…he has never heard of any other case in which a criminal defense attorney agreed with the Government to manage assets, to postpone for years any payment of his fees, and to risk complete nonpayment of fees if the assets’ value declined.” 2012 T.C. Mem. 96, at p. 72, footnote 35.

Obviously the AUSA was star-struck by the extraordinary undertakings of this famous lawyer. The AUSA never thought to question the great man, much less dare to require him to put in writing these incredible terms. The AUSA was not alone; many were spellbound. And remarkably, the great man delivered.

Once a tyrant asked one of his minions, “What is the most deadly poison gas?” The minion replied, “Incense is invariably fatal, Excellency.”

Mr. Bailey obviously believed himself to be everything his reputation said he was. A Tax Court trial should be a stroll on the boardwalk for him. It wasn’t.

Takeaway–Never believe your own press releases. Never fool yourself.

Or, The Case of the Vanishing Note

What is genuine becomes bogus in Roy Zeluck, 2012 T.C. Mem. 98, filed 4/3/12. Roy goes into an oil and gas deal at the urging of his brother Kevin’s old buddy, mass-tortist trial lawyer Weitz. Roy has his accountants suss out the deal, and they say it appears okay.

So Roy ponies up $110K, signs a note to the partnership for $200K, putting up his partnership interest and his rights to distributions as collateral. The note is payable at stated times with stated interest and stated maturity. The partnership agrees to withhold interest and deduct from any liquidating distributions to Roy to pay whatever is due on the note, and Roy is personally liable.

The note is then hocked to a turnkey driller owned by the promoter of the deal, and for one year all the required payments are withheld.

The partnership is supposedly managed by Weitz’s brother-in-law, a CPA with zero oil drilling experience.

In year two, the promoter dissolves the partnership without telling his partners. But distributions keep getting paid, at first with token withholding against the sums due on the note but nowhere near what should be withheld, and then for years without withholding.

IRS blows up the deal and hits Roy with a SNOD, claiming Section 465(e) at-risk requires Roy to recognize the whole $200K as income, as he was no longer at risk from year two onward. IRS doesn’t raise cancellation of debt income, interestingly.

Roy says if I’m not at risk because there is no debt, I never was at risk from day one, so IRS should assert I got the $200K in year one. But everyone agrees that’s a closed year and no fraud asserted, so good night, IRS.

No, says IRS, and Judge Goeke agrees. The note was a genuine debt obligation in year one. Let’s review what is a debt:  written evidence of indebtedness (note duly signed); interest charged and collected per note during year one; fixed and stated dates of repayment; collateral given to secure repayment (partnership interest and right to receive distributions); whether payments were made (and they were in year one, although in years two and beyond payments were minimal); and had borrower (Roy) a reasonable prospect of repaying the loan (Roy testified at trial he didn’t have $200K, but he did have $110K in 2003, and if proper withholding had been taken from his distributions he would have paid 80% of the interest due).

Of course the turnkey driller, to whom the note was hocked, did nothing to collect, even though Roy was getting distributions and was personally liable. Most of the partners never even found out the partnership had been dissolved years before until they got SNODs.

No one demanded payment when the note matured. The contract driller never notified Roy or anyone else that it held the note, or demanded full payment of interest for years. Roy testified at trial he didn’t know who held the note, but no one asked him for money. The note evidenced a genuine debt in year one, but by year two it was a dead letter.

So Roy owes tax on $200K from 2003 onward.

Roy could not have relied on Weitz because Weitz was in the deal himself, was a crony of the promoter, and his brother-in-law supposedly ran the partnership. Besides, Weitz may have been a mass-tortist of high degree, but what he knew about taxation is nowhere stated (yet lawyers can practice in Tax Court with even less knowledge than that).

Roy could not rely on his accountants, although he had given them all the dope when he entered the deal, because he didn’t tell them anything in the year the debt went south, not even that he got a big check from the partnership that year. Moreover, Roy never asked what was going on or tried to find out anything about the deal.

20% accuracy penalty for Roy.

That’s the lesson Judge Haines has for Ramona Mitchell in the eponymous Ramona L. Mitchell, 138 T.C. 15, filed 4/3/12.

It’s another conservation easement case, so back to Section 170(h)(5)(a) and Regulation 1.170A-14(g)(2). Ramona, through the family limited partnership she and her late husband set up when his health was failing, gives Montezuma Land Conservancy, a qualified donee, the appropriate easement in gross, files the Form 8283 and appraisal. IRS wants to contest the appraisal, but as Tax Court disallows the deduction altogether, that never is decided.

The land was encumbered by a purchase money mortgage Ramona and her late husband had given to Lonesome Charley Sheek years before, that was being paid currently.

Judge Haines: “At the time the easement was granted, the deed of trust securing the debt to Sheek was not subordinated to the conservation easement held by Conservancy. From 2003 to 2005 the partnership had the money to pay off the promissory note, which the deed of trust secured, at any time. There were no lawsuits, potential or otherwise; all bills were paid; payments on the promissory note to Sheek were current, and casualty insurance was in place. Two years after the conservation easement was granted, Sheek agreed to subordinate his deed of trust to the conservation easement but received no consideration for the subordination. On December 22, 2005, Sheek signed the Subordination to Deed of Conservation Easement in Gross (subordination agreement).” 138 T.C. 15, at pp.6-7 (footnote omitted.)

We all know the easement must be “in perpetuity”, but we also know that “perpetuity” is a long time, and a lot can happen between now and then, so there is the Regulation 1.170A-14(g)(3) saver, “so remote as to be negligible.”

Ramona argues that between 2003 and 2005, when she finally got Lonesome Charley to subordinate, the risk of forfeiture was so remote as to be negligible, and she and Lonesome Charley had an oral agreement protecting the property.

IRS argues Regulation 1.170A-14(g)(2), and not (g)(3), controls. The mortgage was not subordinated, her oral agreement did not prevent Lonesome Charley from foreclosing, and the specific statutory enactment controls–as of date of granting the easement, any mortgage must be subordinated.

Case of first impression, says Judge Haines, because Ramona got a subordination, albeit two years too late. But the caselaw says that remoteness has nothing to do with subordination. See Gordon and Lorna Kaufman, 136 T.C. 13, filed almost a year ago to the day, 4/4/11, and my blogpost “A Joy Forever”, of the same date.

Judge Haines: “Though the subordination regulation is silent as to when a taxpayer must subordinate a preexisting mortgage on donated property, we find that the regulation requires that a subordination agreement be in place at the time of the gift. In order to be eligible for the charitable contribution deduction for 2003, petitioner had to meet all the requirements of section 170(h) and the underlying regulations, including the requirement that the Sheek deed of trust be subordinate to the conservation easement deed of trust. See sec. 1.170A-14(g)(2), Income Tax Regs. Sheek did not subordinate his deed of trust to the conservation easement deed of trust until December 22, 2005. Had petitioner defaulted on the promissory note before that date, Sheek could have instituted foreclosure proceedings and eliminated the conservation easement. The conservation easement was therefore not protected in perpetuity at the time of the gift. As a result, petitioner failed to meet the requirements of section 170(h) and the underlying regulations for 2003.” 138 T.C. 15, at p. 14.

It doesn’t matter that Ramona had cash on hand so she could have paid Lonesome Charley in full at any time during the two years. Congress said mortgages are never too remote to be negligible.

But Ramona avoids the accuracy penalty, in light of all the facts and circumstances. “We found all of petitioner’s witnesses to be credible and truthful. Petitioner attempted to comply with the requirements for making a charitable contribution of a conservation easement. Petitioner hired an accountant and an appraiser; however, she inadvertently failed to obtained [sic] a subordination agreement from Sheek. That said, upon being made aware of the need for a subordination agreement she promptly obtained one. Given the circumstances, we find that petitioner acted with reasonable cause and in good faith. Therefore we hold that petitioner is not liable for the accuracy-related penalty under section 6662(a) for 2003.” 138 T.C. 15, at pp. 27-28.

Thanks for setting out the reasonable cause parameters, Judge Haines.

 Disability Retirement Pay May Be Taxable

I’m skipping today’s big Tax Court case, Judge Gustafson’s 143 page extravaganza anent the decline and fall of F. Lee Bailey, formerly of the O.J. Simpson Dream Team. Judge Gustafson rightly calls it an archeological expedition, and brings out no new principles; the only interesting point is that the Department of Justice and Mr. Bailey failed to put in writing a massive asset repatriation agreement that provoked years of litigation. It goes to show that sloppiness is not merely the province of the small taxpayer.

The case with a lesson for the preparer in the trenches is Jay Sewards and Frances Sewards, 138 T.C. 15, filed 4/2/12, Judge Foley telling the story in eight pages. Jay was a 34-year employee of the L.A. County Sheriff’s Department who suffered a career-ending line-of-duty injury. He had a choice of retirement plans: a length-of-service plan (with no reference to injury) or a service-connected plan (known as an SCD), where his injury was taken into account. He took the service option at first, but then applied for an SCD, which was awarded retroactive to the beginning of his service-connected plan.

Judge Foley spells it out: “Thus, his SCD retirement replaced his service retirement. Individuals were eligible for SCD retirement if they were permanently incapacitated because of an injury or disease arising from their county employment. The SCD retirement plan would provide him with one-half of his final compensation (i.e., $7,046) or his full service retirement allowance (i.e., $12,861), whichever was higher. Thus, Mr. Sewards received his full service retirement allowance of $12,861 per month.” 138 T.C. 15, at p. 4 (citations omitted.).

Jay first got 1099-Rs, showing his service-connected was taxable, but then L.A. County sent amended 1099-Rs for the same years, stating taxability not determined. This continued until, five years into the program, L.A. County told Jay that 50% of his pension would be taxable.

Jay never reported the income. SNOD and petition follow.

Section 104(a)(1) exempts from taxable income pensions like workers’ compensation or equivalent. No one says that part of what Jay is getting isn’t from a statute equivalent to workers’ compensation. But, as always, there’s an exception: “Section 104(a)(1) does not apply, however, to the extent the payments are determined by reference to the employee’s age or length of service or the employee’s prior contributions, even if the employee’s retirement is occasioned by occupational injury. Sec. 1.104-1(b), Income Tax Regs.” 138 T.C. 15, at pp. 5-6.

Since the equalizer in Jay’s pension (the greater of one-half final compensation or full retirement allowance) is based on age and length or service, Judge Foley delivers the bad news: “SCD retirees were guaranteed an annual retirement allowance payable in monthly installments equal to 50% of their final compensation (guaranteed amount). If an individual qualified for a service retirement benefit that exceeded the guaranteed amount, however, that person was eligible to receive the higher amount. Accordingly, because Mr. Sewards’ service retirement benefit (i.e., $12,861) was higher than the guaranteed amount (i.e., $7,046), his SCD retirement benefit amount was increased to his service retirement benefit amount, which was determined by reference to his length of service. See sec. 1.104-1(b), Income Tax Regs.; cf. Picard v. Commissioner, 165 F.3d 744 (9th Cir. 1999) (holding that reduction of taxpayer’s disability retirement benefits was determined by reference to his date of hire rather than by his age or length of service), rev’g T.C. Memo. 1997-320. Thus, the portion exceeding the guaranteed amount is not excludable from income.” 138 T. C. 15, at pp. 6-7 (footnote and citations omitted.).

Now does Jay owe substantial understatement penalty? No, because L.A. County sent him inconsistent and variable statements of what was and was not taxable. Jay acted in good faith. He owes tax, but not penalty.

Or. Clyde Senior Redivivus

Readers who have sedulously followed my blog may remember ol’ Clyde Turner, Senior, of my blogpost  “To Have and Have Not” fame, posted 8/31/11. Then,  Judge Marvel found Clyde Senior had, at date of death, the assets he supposedly transferred to the family partnership, and applied the Section 2036 clawback, sending Clyde Senior’s executor off to a Rule 155 faceoff with IRS.

Not surprisingly, Clyde’s trusty executor W. Barc throws a monkey wrench into the Rule 155 by claiming that if the assets belonged to Clyde at date of death, the marital deduction clause in Clyde’s will, a standard “whatever can be excluded from tax if passed to spouse is passed to spouse” means the clawed-back assets go to Miss Jewell, are therefore deductible for estate tax purposes, and game over, IRS.

So here comes W. Barc’s motion for reconsideration under Rule 160, back to Judge Marvel, in Estate of Clyde W. Turner, Sr., Deceased, W. Barclay Rushton, Executor, 138 T. C. 14, filed 3/29/12.

After the usual “Rule 160 is not for rehashing arguments you lost before” invocation, Judge Marvel disposes of some straw-grasping by W. Barc, who’s trying to get Judge Marvel to reverse her previous factual findings. The only point of interest is that “(T)he estate also mistakenly contends that respondent’s lack of objection to certain of its proposed findings of fact creates binding stipulations that the Court must find as relevant facts. Although we have on occasion deemed the lack of objection to a proposed finding of fact to be a concession that it is correct except to the extent that it is clearly inconsistent with the opposing party’s brief, see Fankhanel v. Commissioner, T.C. Memo. 1998-403, aff’d without published opinion, 205 F.3d 1333 (4th Cir. 2000); Estate of Freeman v. Commissioner, T.C. Memo. 1996-372, we find facts on the basis of the record as a whole, and we are not obligated to find facts that we do not consider relevant or necessary to our holdings. The estate has pointed to no instance where we found or failed to find facts inappropriately or erroneously.” 138 T.C. 14, at p. 7.

Now to the marital deduction. Section 2036 claws back the assets transferred to the partnership for computing tax, but Clyde Senior transferred fractional interests in the partnership to persons other than Miss Jewell and used a discounted value for valuing those interests. Now Miss Jewell never owned those interests. “The estate argues that it would be inconsistent to conclude that Clyde Sr. retained a right to possess or enjoy assets he contributed to the partnership and at the same time ignore the values of those assets included in the gross estate under section 2036 in calculating the marital deduction.” 138 T. C. 14, at p. 16.

But here Reg. 20-2056(c)-2(a) rears its ugly head. A property interest passes to a surviving spouse (whether by will, intestacy or whatever) only if it passes to the spouse as beneficial owner. Those assets went first to the partnership and then Clyde Senior gifted partnership interests to persons other than Miss Jewell.

Judge Marvel breaks the bad news: “These regulations read as a whole suggest that irrespective of whether property is included in the decedent’s gross estate, property that passed to a person other than a surviving spouse cannot also be considered as passing to the surviving spouse. Because Clyde Sr. transferred the underlying assets to the partnership and then transferred the portions of the limited partnership interest as gifts during his lifetime, any property interest in either the partnership interest transferred to persons other than Jewell or the assets underlying that interest could not and did not pass to Jewell for purposes of section 2056. Therefore, the estate may not recalculate the marital deduction to include the transferred partnership interest or the underlying assets.” 138 T. C. 14, at p. 19.

The idea behind the spousal deduction is deferral of tax for the life of the surviving spouse (helping widows and orphans). Applying this, if Miss Jewell gets the assets, her estate will pay the tax when Miss Jewell shuffles off this mortal coil. But legally that wouldn’t happen here, because, although the value of the assets would be included in Clyde Senior’s estate for tax purposes, the assets themselves would be in the partnership or the non-spousal partners, and not beneficially owned by Miss Jewell, so not includable in her estate. Thus the deferral becomes indefinite, rather than for the life of Miss Jewell. And there is no comparable clawback provision that would drag those assets into Miss Jewell’s estate.

So good try, W. Barc; Tax Court didn’t consider that argument the first time around, but it loses anyway.

Carol Diane Gray is too late to review collection, but in time for innocent spouse relief and abatement of interest, rules Judge Gale, in Carol Diane Gray, 138 T.C. 13, filed 3/28/12.

Carol Diane petitioned to review Appeals’ affirmance of a lien and levy against her, for Section 6015(e) innocent spouse relief and for Section 6404(h) abatement of interest. Carol Diane emerges the winner in two out of three.

Judge Gale extends the usual judicial indulgence to pro ses like Carol Diane: “All claims in a petition should be broadly construed so as to do substantial justice, and a petition filed by a pro se litigant should be liberally construed. See Rule 31(d); Haines v. Kerner, 404 U.S. 519, 520 (1972); Lukovsky v. Commissioner, T.C. Memo. 2010-117; Med. Practice Solutions, LLC v. Commissioner, T.C. Memo. 2009-214; Swope v. Commissioner, T.C. Memo. 1990- 82. Accordingly, we must consider whether the petition, liberally construed, sets out a claim over which we have jurisdiction.” 138 T.C. 13, at p. 7.

But Carol Diane strikes out on her Sections 6230 and 6330 requests, for want of jurisdiction. The magic 30-day date expired the day before her petition was postmarked. The Section 7502 “received when postmarked” bye doesn’t help, because the postmarked is a day late (and more than a dollar short). Congress meant thirty days when they said thirty days, and Tax Court’s tears cannot wash out a word of it.

Carol Diane argues that since her underlying tax liability was part of the collection determination, she should get ninety days, not thirty. No, says Judge Gale, separate considerations rule collections, and whether or not the underlying liability might have been contested plays no role.

Next Carol Diane claimed that since Appeals issued a separate determination abating additions to tax, so she should get thirty days from the second determination. No, says Judge Gale, the abatement made no reference to collection and there is no stand-alone Section 6404 proceeding.

Carol Diane did ask for innocent spouse status, however, and Appeals didn’t mention it in their collection determination, so Carol Diane is timely for Section 6015(f) equitable relief. But the record is incomplete. Carol Diane asked for innocence once before and didn’t get it, so no second bite, except if grounds or facts sufficiently dissimilar between previous request and this one. But the record doesn’t show anything about the old and the new, so further proceedings needed to see how dissimilar, if at all.

As to abatement, IRS claims the notice didn’t determine that, but Judge Gale blows that off: “The notice of determination issued to petitioner in connection with her section 6330 hearing states: ‘A review of your request for abatement shows that there is no basis for interest abatement, based on the criteria shown in IRC section 6404(e)’ and that ‘It was determined that the conditions of IRC section 6404(e) with regard to the abatement of interest were not met.’ The notice of determination satisfies us that petitioner made a request for interest abatement under section 6404(e) during her section 6330 hearing and that Appeals made a determination to deny it.

“To the extent respondent may be suggesting that there was no determination denying interest abatement because it did not occur in connection with a stand-alone request for interest abatement under section 6404 or because it was not made on a Letter 3180, Final Determination Letter for Fully Disallowing an Interest Abatement Claim, his contention is meritless.” 138 T.C. 13, at pp. 16-17.

Quoting Cooper (see my blogpost “The Whistleblower Blows It”, 6/20/11), Judge Gale says: “Regarding the form in which the determination was made, as we recently observed in Cooper v. Commissioner, 135 T.C. 70, 75 (2010): ‘the name or label of a document does not control whether the document constitutes a determination * * * our jurisdiction is established when the Commissioner issues a written notice that embodies a determination.’ 138 T. C. 13, at p. 17.

So Carol Diane gets to fight over her innocence and her interest.

Not bad, Carol Diane.