Spring is coming, so it’s time for baseball. And here’s an example of an old baseball phrase, courtesy of  Judge Wells, in Kenneth Melvin Pisetzner, 2012 T.C. Mem. 64, filed 3/8/12, a special date for a certain employee of Apple Corp.; happy birthday!

Back to K-Mel’s problem. He filed his return for the year at issue but didn’t pay the tax shown thereon. IRS assesses tax as shown,  sends Notice of Intent to Levy, and K-Mel asks for a CDP.

One tele-hearing is set, but K-Mel asks for adjournment. Granted, but K-Mel must file Form 433-A, the wage earner show-and-tell by the adjourned date.

K-Mel asks for second adjournment, as he needs his accountant’s help with “the form”, and said accountant is recuperating from surgery. Adjournment granted.

Next time the AO asks for adjournment, as she is on emergency leave. She adjourns CDP tele-hearing for approximately 60 days. In her letter, “(S)he wrote:  ‘Please be advised that we will make a determination in the Collection Due Process hearing you requested by reviewing the Collection administrative file and whatever information you have already provided. If you would like to provide information for our consideration, please do so within 13 days (August 17, 2011) from the date on this letter.’ On August 15, 2011, petitioner mailed [the AO] a letter requesting to reschedule the conference for after Labor Day because petitioner planned to be on vacation during the scheduled conference. [The AO] received petitioner’s letter on August 19, 2011, and she denied his request to reschedule the conference. Instead, she reviewed the information in the file and, on the basis of that information, issued a notice of determination sustaining the proposed collection action.” 2012 T.C. Mem. 64, at pp. 4-5.

Needless to say, there was no Form 433-A in the file, because K-Mel never sent one. He claims the AO never sent him the Form 433-A, but Judge Wells knocks that one out of the park. “Although petitioner does not dispute that he failed to submit a Form 433-A, he contends that the reason he failed to submit a completed Form 433-A is that [the AO] never sent him a Form 433-A. However, petitioner’s contention that [the AO] never sent him a Form 433-A is contradicted by his own letter to [the AO] dated May 31, 2011. In that letter, he referred to the ‘complex form’ sent to him by [the AO] and the ‘form and accompanying documents’ that he needed to submit to her. Accordingly, we conclude that petitioner did receive the Form 433-A from [the AO]. Although he had months to complete the Form 433-A and submit the accompanying documents, he failed to do so.” 2012 T.C. Mem. 64, at p. 5.

K-Mel had plenty of time to submit the Form 433-A. He didn’t. “Despite [the AO]’s warning in her August 4, 2011, letter that she would proceed with her review of petitioner’s case on the basis of the administrative file if petitioner failed to contact her at the scheduled time on August 17, 2011, petitioner failed to contact her at the scheduled time. His written request to reschedule the telephone conference was not timely. As we explained in Roman v. Commissioner, T.C. Memo. 2004-20: ‘The statute only requires that a taxpayer be given a reasonable chance to be heard prior to the issuance of a notice of determination.’ We conclude that petitioner was given a reasonable chance to be heard and that [the AO] did not prematurely conclude the hearing.” 2012 T.C. Mem. 64, at p. 7.

Judge Wells concludes that IRS was neither arbitrary nor capricious, and acted with a sound basis in law. K-Mel, yer out.

Takeaway: if you want an adjournment, request same timely.  File the show-and-tell form. And call before you write.

Judge Wherry, Of All People

Who says Tax Court cases, and Tax Court judges, can’t be whimsical? Judge Wherry struts his whimsical stuff in Tonda Lynn Dickerson, 2012 T.C. Mem. 60, filed 3/6/12.

Tonda was a Waffle House waitron whose dream came true. She hit the FL lottery for $10 million without even buying a ticket. While Tonda was table-hopping one fine day in her hometown, Grand Bay, AL, a Mr. Edward Seward, himself a whimsical gentleman who would go off to FL to buy fistfuls of lottery tickets and give them to his favored waitstaff (gambling being illegal in AL at the time), left her a ticket in a plain sealed envelope. Neither Mr. Seward nor anyone else knew the ticket was worth a lot more than I or the greatest number of my readers will ever see, in this world or the next. Like the aforesaid $10 million.

Tonda checked the number and had her Daddy confirm it: she was wealthy beyond the dreams of any but a Wall Street hedgefundie. Tonda claims she had an agreement with her family to split the proceeds of any such windfall, so she and Daddy, with the help of a local abogado, form an S Corp, hand out shares to the famiglia, and go off to FL to grab the booty.

Don’t be shocked, but Tonda’s fellow waitrons claim they had an agreement to split if ever Seward’s Folly hit, and try to enjoin FL from handing over anything to anybody. The waitrons win below, but ALSC (Alabama Supreme Court) tosses them, because contracts bottomed on gambling are illegal in Alabama, suh.

Then the inadvertent bestower of unguided largesse, Mr. Seward, demands a piece of the action, but he, too, is sent empty away, courtesy of ALSC.

So FL disgorges to Tonda et famille. Happy ending? Not so fast. Comes now Toya Sue Washington, Esq. Toya Sue, an attorney in the IRS Estate Tax Division, demands a 709 from Tonda. Tonda to Toya: no tax due. Toya to Tonda: wrong, bitsy, y’all owe Oncle Sam’l $771,570, plus interest. Gift tax, y’know.

Daddy files petition for Tonda, and we’re off to the races. Judge Wherry, under such delightful captions as “I. She’s Got a Ticket to Ride”, “II. Family Values”, “III. Inc.-ing the Deal”, “IV. Eye on the Booty” (good one, Judge!), “V. House of Waffling”, and “VI. Looking a Gift Horse in the Mouth”, unpacks the facts.

Now the humor ends. Tonda, while she may be a loyal child, can’t prove there was a contract to share. While the family were generous toward one another, there was no writing, no systematic chasing after lottery gold, and anyway the booty was split otherwise than equally this time, unlike the other times when there was joy to share.  And you did no business, so there was no partnership. In any case, the law of the Sovereign State of Alabama says it’s illegal to make contracts based on gambling, and that’s what got the Waffling Waitrons and the generous Mr. Seward tossed.

Pay up, Tonda.

And a Heavy Duty Penalty

Two Tax Court cases filed 3/5/12 each illustrate a point.

First is a “not-for-nuttin’” section 7463, Paul Michael Gritz and Janice Lee Gritz, 2012 T.C. Sum. Op. 20.

Paul’s story is the usual unsubstantiated employee business expenses and disallowed commuting costs. Paul was a pilot who flew from various airports, all in the general vicinity of his home. His employer reimbursed him for travel between airports, but Paul had to pick up the tab from home to whichever airport he was flying out of. He tried to deduct those expenses. No, says Judge Ruwe, commuting (homeplace to workplace and back) is personal. “It is well settled that, as a general rule, the expenses of traveling between one’s home and his place of business or employment constitute commuting expenses which are nondeductible personal expenses, while the costs associated with travel between work assignments are deductible. See Fausner v. Commissioner, 413 U.S. 838 (1973); Commissioner v. Flowers, 326 U.S. 465 (1946); Feistman v. Commissioner, 63 T.C. 129 (1974); Heuer v. Commissioner, 32 T.C. 947; see also secs. 1.162-2(e), 1.262-1(b)(5), Income Tax Regs.” 2012 T.C. Sum. Op 20, at p. 8.

Janice Lee’s story is more interesting. Schoolteacher Janet Lee bought a computer, manuals and similar items that she claimed she needed for her job, and expensed them. She could have claimed reimbursement from her school, but chose not to. Here’s her story: “…Mrs. Gritz consciously elected not to be reimbursed for her expenses, because if she were reimbursed, the items purchased would belong to the school district. Petitioners specifically indicated that they found reimbursement to be unappealing because Mrs. Gritz desired to amass a personal library of books and electronic devices. When an employee has a right to reimbursement for expenditures related to her status as an employee but fails to claim reimbursement, the expenses are not deductible because they are not “necessary”; i.e., it is not necessary for an employee to remain unreimbursed for expenses to the extent she could have been reimbursed. Orvis v. Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), aff’g T.C. Memo.1984-533; Lucas v. Commissioner, 79 T.C. 1, 7 (1982).” 2012 T.C. Sum. Op. 20, at p. 11.

Part Two is how to get a Section 6673(a) frivolity penalty equal to three-quarters of your gross income. Performing this feat is Dennis C. Jackson, 2012 T.C. Mem. 58. I’ll spare you the particulars. This tale goes back to 1999, but the year at issue here is 2002.

Judge Thornton: “Petitioner’s deemed admissions establish that in 2002 he received income of $21,179. This amount is made up of net gains from the sale of stock, interest, dividends, royalties, partnership gains, and retirement income from a pension fund, as reported to the IRS by third parties. Under the Code, these items are clearly taxable. See sec. 61(a)(3), (4), (6), (7), (11), (13). Petitioner has not expressly disputed receiving any of this income or presented any evidence or made any judicially cognizable argument to properly challenge his 2002 underlying liability. Instead, petitioner has espoused frivolous and groundless arguments, including, notably, the argument that he made in objecting to respondent’s request for admissions, that the amounts and sources of his 2002 income are ‘irrelevant’. This argument appears to emanate from his nonsensical contention, as appears repeatedly in his petition and in other materials filed with this Court, that he is not liable for Federal income taxes because he is not a ‘taxpayer’.” 2012 T. C. Mem. 58, at pp. 14-15.

Well, he mightn’t have been a taxpayer before, but he sure will be now, as Judge Thornton socks ol’ Denny with a $15,000 Section 6673(a) penalty.

He Can Split the Interest Deduction, But Can’t Double-Up

That’s Judge Cohen’s conclusion, based on the “plain, everyday” meaning of the language of Section 163(h), the qualified personal residence interest section. The cases are Charles J. Sophy and Bruce H. Voss, 138 T. C. 8, filed 3/5/12.

Sophy and Voss weren’t married during the years at issue, but were joint tenants (co-owners) of two different residences, one principal and one secondary, during those years, and mortgaged the residences up to the hilt, some $2.7 million worth. Each claimed the one-and-one interest deduction, one million acquisition and one hundred thousand equity. No, says IRS, you are limited to one-and-one split between you, in whatever proportion you want, even though marrieds filing separately are limited to $500K, per Section 163(h)(3)(B)(ii).

IRS relies on a Chief Counsel Advice, C.C.A. 200911007 (Mar. 13, 2009). This Chief Counsel Advice states: “[T]he $1,000,000 limitation on acquisition indebtedness under §163(h)(3)(B)(ii) is used to determine the portion [of] Taxpayer’s interest payments that may be deducted. In particular, the amount of interest Taxpayer may deduct is determined by multiplying the amount of interest actually paid by Taxpayer on Taxpayer’s qualified residence by a fraction the numerator of which is $1,000,000 and the denominator of which is * * * the average balance of the outstanding acquisition indebtedness during the years in question.” 138 T.C. 8, at pp. 5-6.

Sophy and Voss argue that the one-and-one for marrieds is a “marriage penalty”, but Judge Cohen isn’t going there. Judge Cohen: “We begin our analysis by looking closely at the definitions of acquisition indebtedness and home equity indebtedness in section 163(h)(3)(B)(i) and (C)(i). The acquisition indebtedness definition uses the phrase ‘any indebtedness which is incurred’ in conjunction with ‘acquiring, constructing, or substantially improving any qualified residence of the taxpayer and is secured by such residence.’ We note that the word ‘taxpayer’ in this context is used only in relation to the qualified residence, not the indebtedness. Similarly, the operative language in the definition of home equity indebtedness is ‘any indebtedness’ that is secured by a qualified residence (other than acquisition indebtedness). Sec. 163(h)(3)(C)(i). Once again, the phrase ‘any indebtedness’ is not qualified by language relating to an individual taxpayer.” 138 T. C. 8, at p. 11.

Judge Cohen goes on: “From Congress’ use of ‘any indebtedness’ in the definition of acquisition indebtedness, which is not qualified by language regarding an individual taxpayer, it appears that this phrase refers to the total amount of indebtedness with respect to a qualified residence and which is secured by that residence. The focus is on the entire amount of indebtedness with respect to the residence itself. Thus when the statute limits the amount that may be treated as acquisition indebtedness, it appears that what is being limited is the total amount of acquisition debt that may be claimed in relation to the qualified residence, rather than the amount of acquisition debt that may be claimed in relation to an individual taxpayer.” 138 T. C. 8, at p. 12.

Finally, “(A)lthough we have reached our conclusion by reviewing the language of the statute, nothing in the legislative history of the section 163(h)(3) indebtedness limitations suggests that Congress had any other intention than what we have determined from an examination of the language. We conclude that the limitations in section 163(h)(3)(B)(ii) and (C)(ii) on the amounts that may be treated as acquisition and home equity indebtedness with respect to a qualified residence are properly applied on a per-residence basis.” 138 T.C. 8, at p. 16.

Especially not since Sophy’s choice of interpretative language would give same-sex or other unmarried couples a better tax deal than married couples. But nice try, guys.

But Innocence Helps Too

Such is the story of Norma L. Slone, Transferee, et al, 2012 T.C. Mem. 57, filed 3/1/12. This is the story of the Slone Family and their encounter with the infamous Midcoast Credit Corp. (see my blogpost “A Good Day for Taxpayers”, 3/15/11). Like the taxpayers in Griffin and Starnes (both cases cited in Slone), the transferees, pure in heart, walk away clean.

It’s the same old story. Daddy Jim Slone was a DJ-turned-station-owner, and built the family broadcasting empire, all concentrated in a C Corp. Daddy sells to a local mogul; as usual,  basis zero, gain astronomical. The sale is an asset sale, and the C Corp pays the first installment of tax. While the sale is pending, C Corp’s accountant gets a feeler from a Midcoast stooge. The accountant does nothing until the closing is past. The C Corp makes no distribution of the sales proceeds post-closing.

Post-closing, the accountant and various lawyers check out the stooge, which is acknowledged to be a Mid-Coast entity, and, when the stooge appears legit, Norma and Daddy Jim agree to sell the stock of the C Corp to the stooge. The stooge has financing from Rabobank, and the deal closes, the stooge undertaking to assume the tax liability of the C Corp.

The rest is the usual story. The stooge does the mix-and-match with a phony tax loss to offset the gain, grabs the cash in the C Corp, and diddles around with IRS for as many years as it can get away with, finally collapsing under the weight of a $23 million deficiency.

Oh, did I mention the stooge never paid Penny One of the tax due?

IRS goes after Daddy Jim and Norma and their various trusts, as transferees. First Daddy Jim and Norma argue SOL, but that’s a nonstarter because of the stooge’s extensions of the SOL. Next Daddy Jim and Norma argue the stooge’s officer who signed the Form 872s extending the SOL had no authority, but Judge Haines finds “ostensible authority”, or what we called “apparent authority” in my young day, Far Above, etc.

First IRS claimed the deal was an “intermediary” transaction (a/k/a step transaction), but switched out of that theory because of the time lag between asset sale to local mogul and stock sale to stooge. Then IRS switches to substance over form: however the deal looked on paper, it was a sham, marrying a phony loss to a real gain. The stock “sale” was in fact a liquidating distribution from the C Corp, says IRS.

No, says Judge Haines: “We will respect the form of the transactions in this case. Respondent [IRS] has conceded that the asset sale was independent from the stock sale. The asset sale was negotiated by a media broker with Mr. Roberts providing accounting advice and Mr. Chandler legal advice. Mr. Roberts credibly testified that no tax strategies to offset the potential gain arising from the asset sale were discussed before the closing of the asset sale. The asset sale closed on July 2, 2001, more than five months before the closing of the stock sale. Slone Broadcasting’s [the C Corp] first installment of $3,100,000 of Federal income tax attributable to the asset sale was paid. There is no evidence that Fortrend, Midcoast, or Berlinetta [the three stooges] was involved in any way in the asset sale, nor is there any evidence that a sale of stock was anticipated at the time that the asset sale was negotiated and closed.” 2012 T. C. Mem. 57, at pp. 22-23.

Moreover: “Due diligence confirmed that Midcoast was a legitimate player in the debt collection industry and Fortrend and Midcoast had reputable law and accounting firms representing them. The purchaser of the stock, Berlinetta, was capable of closing by using funds provided by loans from Rabobank and other assets it owned. Berlinetta agreed that it would not use the assets of Slone Broadcasting for 10 days after the closing of the stock sale.” 2012 T.C. Mem. 57, at p. 23.

In fact, Daddy Jim, Norma and their advisers asked about Midcoast’s tax strategy, and got the brush-off from the Midcoast stooge. “Petitioners had no reason to believe that Fortrend’s methods were illegal or inappropriate. When Mr. Roberts and Mr. Phillips asked Fortrend for more information about how Berlinetta planned to offset the gains from the asset sale, they were told that Fortrend’s methods were ‘proprietary’. Petitioners did not have a duty to inquire further and are not responsible for any tax strategies Berlinetta used after the closing of the stock sale.” 2012 T.C. Mem. 57, at p. 24.

In a footnote, Judge Haines catalogs all the Midcoast cases, with the won-loss record, and it’s worth reading (2012 T. C. Mem. 57, footnote 9 at page 25).

Takeaway: Trust, verify–as far as reasonably possible. And don’t know too much.

To take a leaf from Stephen Sondheim’s and Leonard Bernstein’s song “When You’re a Jet” from the 1957 hit musical “West Side Story”. In this case, a 501(c)(3) exemption doesn’t disappear, even though the corporation did pay unrelated business income tax (UBIT) in three years of its hundred-year life, and unrelated debt-financed income tax (UDFIT) in two other years, when the corporation gets an employer reversion from a qualified retirement plan. That would ordinarily trigger a Section 4980(a) 20% excise tax.

But Research Corporation dodges the proverbial bullet in the eponymous case, Research Corporation, 138 T.C. 7, filed 2/29/12, a leap year bonus from Judge Haines. It’s a case of first impression.

Briefly, Research was a 501(c)(3) from the day 501(c)(3) first showed up in IRC 1954. Research was incorporated in 1912, and was exempt when the income tax was first inflicted in 1916. Research did have some UBIT to pay back in the 1950s, and some UDFIT in the early years of the current millennium.

Research had a defined benefit retirement plan for its employees from 1961 until 2003, which from inception through amendment always got favorable letters from IRS. In 2002, Research terminated the plan, setting up a $5.8 million reversion, but rolled 25% of that into a new plan, having gotten a favorable PLR that the reversion would not constitute UBTI to Research under Section 512(a)(1) (but interestingly, Research withdrew the part of its ruling request relating to Section 4980 treatment).

Research filed Form 5330 with respect to the reversion for 2003, but only paid the ratio that its lifetime UBIT and UDFIT bore to its entire income for three years, around $14K. IRS issued a SNOD for the whole enchilada, around $4.4 million, in 2010, claiming that by filing the Form 5330 and paying the $14K, Research conceded its liability for the Section 4980 excise tax.

Judge Haines blows off the concession argument in a footnote: “We do not view either the submission of Form 5330 or the statement as a concession. We note that all concessions are subject to the Court’s discretionary review and may be rejected in the interests of justice. If the submission of the Form 5330 and the statement contained therein can be viewed as a concession, we reject it. Petitioner has maintained throughout this proceeding in its petition and its briefs that it is not subject to excise tax.” 138 T.C. 7, at p. 6, footnote 2 (Citation omitted).

IRS conceded that Research never made any contributions to any of its employee plans to offset either UBIT or UDFIT whenever it owed any,  so no tax benefit inured to Research from any contributions.

Also of interest, Research never raised SOL, even though the SNOD was issued more than six years after the filing of the Form 5330, so Judge Haines deemed the argument waived. Possibly Research didn’t raise SOL because it also sought a refund of the $14K in the case (but it loses on that one on Section 6512(b)(3) grounds…too many years gone by since filed and paid, so no Tax Court jurisdiction to award a refund).

The whole case goes off on Section 4980(c)(1)(a). The excise tax applies to a “qualified plan”. IRS claims Research’s plan was qualified; Research says no. The magic language: “The term ‘qualified plan’ means any plan meeting the requirements of section 401(a) or 403(a), other than a plan maintained by an employer if such employer has, at all times, been exempt from tax under subtitle A. Sec. 4980(c)(1)(A).” 138 T.C. 7, at pp. 8-9. (Emphasis by the Court.)

But Research wasn’t “at all times” exempt, says IRS. They paid UBIT three times, and UDFIT twice, since 1954.  Those are both Subtitle A taxes, so Research wasn’t exempt at all times.

Judge Haines buries that argument with Section 501(b), as to the plain meaning of which he finds that, notwithstanding the UBIT and UDFIT, which Section 501(b) states does not disqualify a 501(c)(3) like Research, Research never lost its 501(c)(3) exemption.

IRS says it’s not seeking disqualification of Research as a tax-exempt, but to collect an excise tax, not an income tax. More magic language from Judge Haines: “Respondent [IRS] would like us to ignore the plain language of section 501(b), which provides that a section 501(c)(3) organization shall be subject to tax to the extent it has UBTI but, notwithstanding any unrelated business income tax paid, the organization ‘shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes’.” 138 T.C. 7, at p. 12. (Emphasis by the Court.)

Any law means any law. And the issue isn’t whether Research or any 501(c)(3) ever paid any tax. It’s whether Research was exempt under Subtitle A, because that’s what the plain language says.

IRS wants Tax Court to look at legislative history. Not necessary, says Judge Haines, because no ambiguity. But he’ll humor IRS. Here’s IRS’ last hope: “‘The agreement provides that the excise tax does not apply to a reversion to an employer that has at all times been tax-exempt. Of course, this exception does not apply to the extent that such employer has been subject to unrelated business income tax or has otherwise derived a tax benefit from the qualified plan.’ H.R. Conf. Rept. No. 99-841 (Vol. II), at II-483 (1986), 1986-3 C.B. (Vol. 4) 1, 483.” 138 T.C. 7, at p. 16. IRS says the sentence is disjunctive, and therefore either portion applies; so if Research ever paid UBIT, they must pay excise tax on the whole unrolled-over reversion.

No, says Judge Haines: “We do not agree with respondent’s argument. Respondent [IRS] ignores the phrase “to the extent”. That phrase limits the application of the legislative history to a specific set of facts. When coupled with the phrase “or has otherwise” the legislative history addresses a set of facts where the tax-exempt organization, whether it incurred unrelated business income tax or not, derived a tax benefit from the qualified plan. Respondent has conceded that petitioner did not derive a tax benefit from the plan.” 138 T.C. 7, at pp. 16-17.

So Research loses the $14K refund in Tax Court, but dodges the $4.4 million bullet. Not a bad swap.

When It Comes to SE Tax

 A net operating loss (NOL) from a trade or business, whether operated as a partnership or derived from from self-employment, whether carried forward or carried back, is generally a valid deduction. But where? Here’s the story of Joe Decrescenzo, or more properly, Joseph Decrescenzo, 2012 T.C. Mem. 51, filed 2/27/12, Judge Marvel at the helm.

Joe was a CPA who got a heavy-duty SNOD. After extensive negotiations between Joe and IRS, the only thing left for determination was where Joe could take a $51K NOL, on his Schedule C or on his 1040. If on his 1040 and not his Schedule C, he owes $15K in SE tax.

After Joe’s arguments about burden of proof are dismissed (there’s nothing to prove, as he and IRS stipulated everything but the one question of law), Judge Marvel goes to the magic language of Section 1402(a)(4): “'(E)arnings from self-employment’” means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business, plus his distributive share (whether or not distributed) of income or loss described in section 702(a)(8) from any trade or business carried on by a partnership of which he is a member; except that in computing such gross income and deductions and such distributive share of partnership ordinary income or loss–

* * * * * * *

(4) the deduction for net operating losses provided in section 172 shall not be allowed;” 2012 T.C. Mem. 51, at p. 8.

Joe argues that paragraph (4) applies only to partnerships, not individuals like him, since paragraph (5) begins with the word “if”, and goes on to discuss partnerships. Judge Marvel buries that one in a footnote: “Petitioner contends that para. (4) of sec. 1402(a) does not apply to individuals but instead applies only to partnerships. He contends that, because para. (5) of sec. 1402(a) begins with the word “if,” para. (4) of sec. 1402(a) is applicable only if the taxpayer meets the requirements of either subpar. (A) or (B) of sec.  1402(a)(5). Paragraphs (1)-(17) of sec. 1402(a) set forth specific rules for computing net earnings from self-employment. Each numbered paragraph contains a separate rule. Paragraph (4) of sec. 1402(a) operates independently of para. (5) of sec. 1402(a), and the application of para. (4) of sec. 1402(a) is not dependent on the taxpayer’s satisfaction of subpar. (A) or (B) of sec. 1402(a)(5).” 2012 T. C. Mem. 51, at p. 9, footnote 6.

There’s a bushelbasket of cases holding you can’t take NOL against SE. Joe tries to distinguish only one, and fails.

So Joe has the deduction on his 1040. But since he stipulated to the additions to tax if he lost on the SE, he owes those. He tries to get out of the stipulation, saying he suffers from acute anxiety disorder and couldn’t attend the trial, but Judge Marvel kicks that one to the footnotes again: “While petitioner argues that he was unable to appear at trial because of an acute anxiety disorder, he introduced no evidence that he was suffering from the acute anxiety disorder at the time he executed the stipulation. See King v. Commissioner, 121 T.C. 245, 252-253 (2003). Petitioner is bound by the stipulation of settled issues.” 2012 T. C. Mem. 51, at p. 11 (continuation of footnote 8 from p. 10).

I can understand anyone being acutely anxious about taxes, even a CPA like Joe.

Or, Sly and the Family Stone  Do It Right

That’s the lesson Judge Goeke has for us in Estate of Joanne Harrison Stone, Deceased, Cosby A. Stone and Michael D. Stone, Personal Representatives, 2012 T.C. Mem. 48, filed 2/22/12.

The late Jo was a Sunday school teacher for 60 plus years, up to the Sunday before she died, at the age of 81. In her spare time, she and husband Roy produced six children, and the six produced a platoon of grands.

When not spreading the good news, Jo worked with Roy and some of their kids in the family publishing business, while acquiring 740 acres of Cumberland County, Tennessee. To create a lake next to the property of son Steve, and to protect and preserve (and maybe develop), along with kids and grandkids, the woodland parcels next the lake site, Jo and Roy set up the Stone Family Limited Partnership (FLP), under the guidance of local attorney Harry Sabine (and I mention his name because he got it right, and saved his client’s estate $2.5 million in estate tax).

They had the land appraised (and this appraisal was apparently so good IRS didn’t attack it),  gifted limited partnership interests to kids, kids’ spouses and grandkids (inartfully, but well enough to survive), and paid gift tax based upon the appraisal (with no blockage or fractional interest discount).

The issue here is the Section 2036(a) landmine. Did Jo still have enough hold on the partnership assets so that they belong in her estate?

Judge Goeke unpacks the Section 2036(a) landmine thus: “Section 2036(a) generally provides that if a decedent makes an inter vivos transfer of property other than a bona fide sale for adequate and full consideration and retains certain enumerated rights or interests in the property which are not relinquished until death, the full value of the transferred property will be included in the decedent’s gross estate. Section 2036(a) is applicable when three conditions are met: (1) the decedent made an inter vivos transfer of property; (2) the decedent’s transfer was not a bona fide sale for adequate and full consideration; and (3) the decedent retained an interest or right enumerated in section 2036(a)(1) or (2) or (b) in the transferred property which he or she did not relinquish before death.” 2012 T.C. Mem. 48, at pp. 10-11.

Most important in establishing adequate and full consideration, there was a bona fide non-tax purpose in the FLP. “Testimony at trial established that a significant purpose of decedent’s transfer of the woodland parcels to SFLP was to create a family asset managed by decedent’s family. Decedent and Mr. Stone desired that their children, their children’s spouses, and their grandchildren work together to develop and sell homes near the lake. We have previously found that a desire by a decedent to have assets jointly managed by family members, even standing alone, is a sufficient nontax motive for purposes of section 2036(a).” Estate of Mirowski v. Commissioner, T.C. Memo. 2008-74.” 2012 T.C. Mem 48, at p. 14.

When two of their kids divorced, and the outgoing spouses deeded back their interests in the land (but not in the FLP),  and Jo and Roy paid the nominal real estate taxes from their own funds and not FLP funds, IRS attempted to blow up the FLP because partnership formalities weren’t followed. But Judge Goeke didn’t buy it.

“We agree with respondent that the partners of SFLP failed to respect some partnership formalities.

“Other factors, however, support the estate’s argument that a bona fide sale occurred. First,  decedent and Mr. Stone did not depend on distributions from SFLP as no distributions were ever made. Second, decedent and Mr. Stone actually did transfer the woodland parcels to SFLP. Third, there was no commingling of partners’ personal and partnership funds, as SFLP had no partnership funds. Fourth, no discounting of SFLP interests for gift tax purposes occurred; decedent and Mr. Stone had the woodland parcels appraised and valued the SFLP interests so that that the total value of SFLP interests was equal to the appraised value of the woodland parcels. Finally, the evidence presented tended to show that decedent (and Mr. Stone) were in good health at the time the transfer of the woodland parcels was made to SFLP. Although decedent was over age 70 at the time of transfer in 1997, she lived until 2005 and was healthy enough to continue teaching Sunday school up to and including the last Sunday before she passed away. Although Mr. Stone was over age 80 at the time of transfer, he was still alive at the time of trial in June 2011.” 2012 T.C. Mem. 48, at pp. 16-17.

Thereby the late Jo’s estate avoids the Section 2036(a) landmine. Good job, Harry.

Such is the lesson of Robert B. Anderson, 2012 T. C. Mem. 46, filed 2/21/12. Bob was accused of frivolity for his 2006 and 2007 returns, which showed zero. However, his 2008 and 2010 returns showed (apparently valid) refunds, which IRS grabbed, thus satisfying IRS’ claims for 2006 in full, while Bob’s timely CDP request was pending.

Bob never got a SNOD, just a letter stating he was frivolous. Bob’s request for a collection alternative went down in flames when he failed to file a Form 433-A, despite two requests from IRS.

IRS moves for summary judgment on 2006; Bob is fully paid up via the grab of his 2008 and 2010 refunds, so nothing more to fight about. Bob cries “foul, they grabbed my refunds while my CDP was pending, which was a levy, and CDP suspends all collection activity.”

Nope, says Judge Halpern. This was an offset, not a levy. There’s Circuit Court of Appeals learning on this point (Boyd v. Commissioner, 124 T.C. 296, 300 (2005), aff’d, 451 F.3d 8 (1st Cir. 2006). Yer out, Bob. 2006 is history.

But as for 2007, IRS wants partial summary judgment. No go, IRS, says Judge Halpern. Even though Bob attached to his CDP request a preprinted 23-item checklist (on which he checked 21 items), and all but two seemed frivolous: “[R]espondent appears to argue for summary adjudication in his favor with respect to the first assignment of error on the ground that petitioner’s initial 2007 return, showing zero wages, was incorrect ‘due to petitioner’s frivolous position echoed in his CDP request, petition, and amended petition.’ While there is much in the attachment to the CDP request, the petition, and the amended petition that strikes us as frivolous, paragraph 7 of the attachment does state that petitioner had no opportunity to challenge the penalty and paragraph 20 of the attachment does raise claims of denial of due process and of the right to appeal imposition of the penalty. Those do not strike us as frivolous positions; indeed, they raise genuine issues as to material facts.” 2012 T. C. Mem. 46, at p. 7.

Bob wanted to be sent back for a face-to-face conference with Appeals (a standard delaying dodge), but Judge Halpern heads that off, telling Bob to save his arguments for the trial in Tax Court.

Lest Bob should feel too elated by his goal-mouth save on summary judgment, Judge Halpern shows him the Section 6673(a)(1) $25,000 frivolity penalty yellow card: “We are concerned that petitioner may have instituted this proceeding to delay collection of the penalties at issue. We caution petitioner to proceed with section 6673(a)(1) in  mind.” 2012 T.C. Mem. 46, at p. 9.

Or, Settled vs. Settled Right

Once again, Judge Mark Holmes takes on his colleagues in a “Son of BOSS meets Petalumas” case, Tigers Eye Trading, LLC, Sentinel Advisors, LLC, Tax Matters Partner, 138 T. C. 6, filed 2/13/12, a real eye-glazer.

Echoing his dissent in Randall J. and Karen G. Thompson, 137 T. C. 17, filed 12/27/11 (see my blogpost “The Great Dissenter”, 12/28/11), Judge Holmes takes on Judge Beghe, who writes the Tigers Eye decision, and Judges Colvin, Cohen, Halpern, and Goeke. Judge Halpern concurs “only to add some small weight to what, in the main, I consider to be a forceful and persuasive analysis by Judge Beghe.” 138 T.C.  6, at p. 128.

In brief, Tigers Eye and IRS stipulated a decision blowing up Tigers Eye, a phony tax shelter, and raining penalties on the partners. It’s another no-outside-basis case, with the partnership-level versus partner-level TEFRA gloss.

But then came Petalumas I,  II and III, with D.C. Circuit deciding that Tax Court has no jurisdiction even though IRS had conceded and stipulated jurisdiction. So the taxpayer moves to revise the stipulated decision.

No way, say the majority. They decide not to follow the Petalumas, because of factual differences and the decision of the US Supreme Court in Mayo Clinic (131 S. Ct. 704 (2011)), which requires the courts to follow regulations unless they fail the Chevron tests (Chevron USA Inc. v. Natural Res. Def. Council, 467 U.S.837 (1984). See my blogpost “Carpenter, Colony, Chevron and Mayo”, 4/26/11). For the next 125 pages, the majority upholds its jurisdiction and enforces the stipulated decision–no revision.

Judges Gale and Paris concur without opinion, and Judge Foley dissents, likewise without opinion, but Judge Marvel has her own dissent (in part II of which Judge Kroupa agrees, and Judges Gale and Paris agree in part), which goes off on the Section 6662(a) understatement or overvaluation penalties applying irrespective of inside or outside basis in a disregarded sham partnership.

Judge Wherry has a separate concurrence, based on what Tax Court should do when it disagrees with the relevant Circuit, and rebuking Judge Holmes as a grammarian.

Judges Gustafson, Vasquez and Morrison pass on this one.

But Judge Holmes, bless his contrarian heart, comes out swinging, despite Judge Wherry’s disdain for his grammatical take on Section 6231(a)(3), 138 T.C. 6, at p. 143.

To begin with, whether Tax Court likes it or not, the Petalumas control here: “In our landmark decision in Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971), we held “that better judicial administration requires us to follow a Court of Appeals decision which is squarely in point where appeal from our decision lies * * * to that court alone.” (Fn. ref. omitted.) Golsen tells us not to bang our head against contrary appellate precedent, and we’ve consistently held that we must follow the precedent of the court that has appellate jurisdiction over a case.” 138 T.C. 6, at pp. 180-181 (Footnote omitted.)

Ignoring Golsen and its progeny will wreak havoc and engender endless appeals. “The tsuris this will cause us–where two circuit courts,  a few trial courts, the Department of Justice, and even the IRS (at times) all disagree with the position we’re taking–cannot possibly be worth it. Especially when it’s nothing more than a dispute about a complicated little bit of partnership-tax law–and not even substantive partnership-tax law, but partnership-tax-law procedure. And a point of partnership-tax-law procedure in a motion to revise a stipulated decision we entered in 2009. This was not the case to use to revisit Petaluma I: ‘[I]n most matters it is more important that the applicable rule of law be settled than that it be settled right.’ Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 406 (1932) (Brandeis, J., dissenting).” 138 T.C. 6, at p. 182. (Footnotes omitted.)

Judge Holmes sums it up: “In conclusion, I believe that we shouldn’t challenge the D.C. Circuit on the issue of our partnership-level jurisdiction over penalties any more than we should challenge it on the issue of outside basis as a partnership item.  Of all the routines in judicial gymnastics, few have a higher degree of difficulty than the reverse benchslap, and we’re trying for a combination double with our Opinion today.

“I’ll stand a safe distance off to one side, and respectfully dissent.” 138 T.C. 6, at p. 211. (Footnote omitted).

And because Judge Holmes writes cool footnotes, here’s the omitted footnote, footnote 17 at p. 211: “I’ll reiterate what I noted in Thompson: The Secretary should not view our Opinion as foreclosing the possibility that he could clear this area up much more efficiently through regulation than the Commissioner has been able to do through litigation. Thompson v. Commissioner, 137 T.C. at 244 (Holmes, J., dissenting).”

Oh yes, and Judges Kroupa and Thornton agree in part.