C. L. Edson’s immortal parody of Longfellow’s Hiawatha gives me my text for today’s blogpost, Deborah L. Smith, 140 T. C. 3, filed 2/28/13.

Debs was inside the USA when IRS mailed a SNOD to her P. O. Box in San Francisco, CA, alleging she and husband (unnamed in the opinion and whereabouts not stated) “were liable for an $8,911,858 deficiency, a $2,044,590 section 6651(a)(1) addition to tax, and a $1,782,372 section 6662(a) accuracy-related penalty.” 140 T. C. 3, at p. 3.

The SF PO Box was the address shown on Debs’ most recent return, but Debs split for Canada with her kids and got permanent residency there a couple of months (partitive genitive, guys) before IRS posted the SNOD. However, on the day IRS mailed the SNOD and on the day it hit her PO Box, Debs was back in SF packing up some goods preparatory to shipping them to her new domicile in The True North Strong and Free.

Debs never checks her old PO Box, she claims, but gets wind of the SNOD and petitions Tax Court 148 days after the mailing date of the SNOD. IRS claims a Section 6213(a) late mailing penalty and moves to toss Debs’ petition.

IRS says Debs was inside the USA when they mailed the SNOD, and whether she got it or not is irrelevant, and anyway the 150-day overseas extender only applies to SNODs “addressed to a person outside the United States”. 140 T. C. 3, at p. 5.

Debs says she was a Canadian resident when the notice was mailed and delivered, and therefore is entitled to the 150-day extender for filing a petition.

Judge Foley buys Debs’ tale.

Debs has burden of proof on jurisdiction, and jurisdiction here depends upon a SNOD (which everyone admits there was) and a timely filed petition.

Judge Foley: “The phrase ‘addressed to a person outside the United States’ is ambiguous, and the Court has consistently construed it broadly. See Looper v. Commissioner, 73 T.C. 690, 694 (1980); Lewy v. Commissioner, 68 T.C. 779, 781-782 (1977).  Where a statute is capable of various interpretations, we are inclined to adopt a construction which will permit the Court to retain jurisdiction without doing violence to the statutory language. See Lewy v. Commissioner, 68 T.C. at 781, 783-786 (holding that the 150-day rule is applicable to a foreign resident who is in the United States when the notice is mailed, but outside the United States when the notice is delivered); see also Levy v. Commissioner, 76 T.C. 228, 231-232 (1981) (holding that the 150-day rule is applicable to a U.S. resident who is temporarily outside of the country when the notice is mailed and delivered); Looper v. Commissioner, 73 T.C. at 694-695 (holding that the 150-day rule is applicable where a notice is mailed to an address outside the United States); Hamilton v. Commissioner, 13 T.C. 747, 754 (1949) (holding that the 150-day rule is  applicable to a foreign resident who is outside the United States when the notice is mailed and delivered). Our holding is consistent with our jurisprudence, is a practical construction of section 6213(a), and leaves the statutory language unscathed.” 140 T. C. 3, at p. 6.

“In sum, a foreign resident’s status as a person ‘outside of the United States’ is not vitiated by the resident’s brief presence in the United States on the notice’s mailing date.” 140 T. C. 3, at p. 9.

Finally, Debs was one of the people Congress wanted to help when they enacted the 150-day extender in Section 6213(a). “She was a Canadian resident (i.e., when the notice was mailed and delivered); was not at the address to which the notice was delivered; and received the notice, in Canada, 127 days after the notice’s mailing date. Although petitioner was in San Francisco when the notice was mailed and delivered, her status as a person ‘outside of the United States’ is largely a function of her residency and is not vitiated by her brief presence in the United States. In short, the 150-day rule is applicable.”  140 T. C. 3, at p. 11.

Judges Thornton, Colvin, Vasquez, Gale, Wherry, Paris and Kerrigan agree; Judge Goeke concurs in result only. Judge Marvel sits this one out, but the Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, Mark V. Holmes, joins Judges Gustafson and Morrison in agreeing with Judge Halpern’s dissent. Judge Halpern’s point is that Debs was inside the USA for two weeks while the SNOD was in the mail and inside her PO Box; she should have checked. But he says it with a lot more words.

Finally, C. L. Edson: “Made he mittens, Mudjekewis/ He, to keep the warm side inside/ Put the skin side inside/ He, to keep the cold side outside/ Put the stout side outside/ Then he turned them inside outside.”

Judge Kerrigan exhibits great patience, but next friend Alexander Salvagno hasn’t done much for incompetent Raul in Raul Salvagno, Incompetent, Alexander Salvagno, Next Friend, Docket No. 16800-07, filed 2/26/13, a designated hitter on a slow day in Tax Court.

Judge Kerrigan: “…we granted Alexander Salvagno’s motion to be recognized as next friend of petitioner. His motion stated ‘there is no other person better suited to serve as next friend, for the purpose of conducting the presentation of the Tax Court trial’ and assured the Court that he was ‘familiar with the facts of [his father’s] case and principles of law” from having ‘worked in a law library for nearly five years’. Despite his assurances, petitioner’s next friend has repeatedly been non-responsive to the Court’s Orders, and non-compliant with the Tax Court Rules of Practice and Procedure….” Order, p. 1.

On the day of trial, Alex asks for appointment of counsel (Tax Court doesn’t do that, and Alex was told so) and for a continuance. We all know you ask for a continuance thirty days in advance of trial, unless you have a total catastrophe. Alex didn’t.

IRS moved to dismiss for want of prosecution on two separate occasions, but patient Judge Kerrigan gave Alex more time each time.

Now she tells him the record is closed, as she has enough to decide; let Alex brief whatever points of law he has (time to hit the libe again, Alex) before April 1, 2013 (an appropriate date), or have his case tossed.

With friends like him….

Well, You Shouldn’t Be

IRS has caused DOJ to file notice of appeal in Loving v. IRS (see my blogposts “Chevron, Mayo–I’m Loving It”, 1/21/13, and “Modified Loving”, 2/4/13). I don’t know what took them so long.

Of course, if DOJ is unsuccessful on appeal and IRS must wait for Congress to act, all the unregistered preparers will have plenty of time to study for the RTRP test. As Congress presently is behaving, they may well have years.

On the Tax Court front today, only two cases, one brought by a veteran both of the United States Air Force and the United States Postal Service, who should get an audit reconsideration (and even IRS agrees), and the other by a real estate operator who trusted his CPA not wisely but too well, and thereby escapes substantial understatement penalties, as he alleges the aforesaid CPA, while preparing all his books and tax returns, stole more than $1 million from him.

Nothing here to paralyze one with shock, either.

My patient readers will remember my blogpost “Smiling ‘Til It Hurts”, 4/19/12, recounting Judge Kroupa’s docudrama Lee Storey and William Storey, 2012 T. C. Memo. 115, filed 4/19/12.

Well, Bill departed this life thereafter, I hope smiling ‘til the end, but Lee, having won in Tax Court, wants her legal and administrative costs and fees, so Judge Kroupa is back at it in Lee Storey and William Storey, Deceased, 2013 T. C. Memo. 59, filed 2/25/13.

When Bill and Lee’s counsel told Judge Kroupa that Bill had departed this vale of tears, counsel didn’t bother to say if an estate proceeding had, or will be, commenced. Thus the changed caption, although Tax Court frowns upon dead people appearing without an executor or administrator having been duly appointed. Practice tip– Get your executor or administrator on deck, or if not yet official, state that proceedings to appoint have been commenced.

Well, having won last April, Lee was in good shape, except she bypassed Appeals, even though Appeals gave her a shot in the 30-day letter. But Lee wanted no part of Appeals.

Judge Kroupa: “It is unclear exactly why petitioners chose to forgo the Appeals process. Petitioner’s affidavit reflects that she believed respondent [IRS] was intransigent in his position with respect to the film activity. Her affidavit also reflects that she believed that if she did not wage a major counter-attack at the administrative level, she would face ‘a life sentence of IRS audits.’ It appears that petitioners elected to bypass Appeals as part of their litigation strategy. This does not relieve them of the requirement to exhaust all available administrative remedies before filing the petition if they wish to preserve their right to seek litigation costs. See Haas & Assocs. Accountancy Corp. v. Commissioner, 117 T.C. 48, 62 (2001), aff’d, 55 Fed. Appx. 476 (9th Cir. 2003).” 2013 T. C. Memo. 58, at p. 7, footnote 8.

Section 7430 says that not only must you win, but you must exhaust administrative remedies, that is, go up the chain-of-command (as we used to say).

And the issue in Lee’s case, the Section 183 business-vs-hobby calculus, is fact-specific, with a cruise through nine factors, no one of which is controlling and all of which must be weighed, considered, and balanced.

Judge Kroupa: “Notwithstanding our conclusion regarding the merits, respondent presented facts supporting his position that petitioner’s primary objective in conducting her film activity was not to make a profit. And respondent’s arguments with respect to this highly fact-intensive issue were reasonable. Although we did not ultimately agree with respondent’s legal conclusion, respondent has persuaded us that his position had a reasonable basis in fact and law. We hold, therefore, that respondent’s administrative position regarding the for-profit issue was substantially justified and that petitioner is not entitled to an award of administrative costs under section 7430.” 2013 T. C. Memo. 59, at p. 11.

So Lee is out on legal fees because she didn’t exhaust her administrative remedies, and out on administrative fees because IRS was substantially justified.

End of Storey.

Not quite the Kingston Trio’s 1959 hit of that name, from their album “Stereo Concert”, but IRS has decided to drop blackberries, raspberries and papayas from the over-two-year list that requires capitalizing costs, both direct and indirect, under Section 263A.

So all you old men who used to grow the stuff but whose dreams have turned to dust, as the KT sang it fifty-five years ago, see Section 263A(d)(1)(A)(ii), and look out for Notice 2013-18, which will appear in IRB 2013-14, on April 1, a special day in my family.

The IRS has a present for you. “Notice 2013-18 supersedes Notice 2000-45 to remove blackberry, raspberry, and papaya plants from the list of plants with a preproductive period in excess of two years, for purposes of determining the applicability of section 263A to taxpayers engaged in the farming business.

“Notice 2013-18 will be published in Internal Revenue Bulletin 2013-14, dated April 1, 2013.”

So join me in the chorus: “Blackberries, strawberries, the good wines we brew, pass me a papaya and I’ll share some wine with you.”

That’s the word from Judge Lewis (right way to spell it, Judge) Carluzzo, in a designated hit on Henry J. Langer, Docket No. 24035-11L, filed 2/22/13, a day when Tax Court issued no decisions.

Henry J’s problems started when he lost a deficiency case in Tax Court back in 2005 and appealed to Eighth Circuit. Big Eight bounced Henry J in 378 Fed. Appx. 598 (2010), aff’g 2008 T. C. Memo. 255.

Meantime, IRS assessed the deficiency and proposed a levy before Big Eight nailed Henry J’s appeal. Henry J filed a CDP, contesting the underlying tax liability and claiming the levy was premature.

Judge Lew:  “The petition filed in this case challenges the determination made in the notice of determination upon two grounds. (1) the decision in the deficiency case is erroneous; and (2) The underlying liability was improperly assessed while petitioner’s appeal of the decision in the deficiency case was pending.

“Petitioner’s objection to respondent’s [IRS] motion advances only his claim that respondent’s motion should be denied because the decision in the deficiency case is ‘in error’. Nevertheless, we consider both challenges to the proposed collection action as contained in the petition and find neither has merit.” Order, p. 2.

Henry J can’t collaterally attack the decision of Tax Court in a Tax Court proceeding; he could, and did, appeal, and whatever Big Eight decided would bind him and IRS.

But Henry J didn’t post a bond. Section 7485(a) says if you appeal from a decision that you owe IRS money, you must post a bond for the money. If you don’t bond, IRS can lien or levy, and if you win your appeal, you get unliened or refunded the levy.

But if you appeal while unbonded, ask Henry J what happens.

Two cases from Tax Court today (2/21/13) get entered in  the  “nice try, but no prize” stakes.

First up is Thomas A. Wagoner, 2013 T.C. Sum. Op.14, filed 2/21/13, Judge Vasquez fielding this one. Tom claims that because his seven years’ worth of unpaid income taxes, penalties and interest gave rise to a lien on his principal residence, the interest and penalties were deductible as qualified residence interest under Section 163(h)(3)(A). Would you be surprised if I told you Tom was a lawyer?

Judge Vasquez: “However, his argument is erroneous insofar as neither a Federal tax lien nor the filing of a notice of Federal tax lien caused his tax indebtedness to be secured by a qualified residence. See sec. 1.163-10T(o)(1) (flush language), Temporary Income Tax Regs.,  supra. Furthermore, section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), specifically provides that interest paid on income tax liabilities of individuals, regardless of the source of the income or other adjustments to which the tax liabilities relate, is to be treated as personal interest.” 2013 T. C. Sum. Op. 14, at pp. 9-10. (Footnotes omitted).

So Tom gets some more penalties and interest. Still, nice try, Tom.

Next entry is Philip C. Smoker, star of 2013 T. C. Memo. 56, filed 2/21/13. Smokin’ Phil has a variable rate mortgage on his principal residence, but the monthly payment has a ceiling. If the rate breaks the ceiling, the excess interest is capitalized.

Phil tries to deduct the capitalized interest currently, even though he is a cash-basis taxpayer like the rest of us. No go; the interest may be secured, but it wasn’t paid.

Smokin’ Phil tries the “paid or accrued” language in Section 163(h), but Judge Laro isn’t buying. He deluges Smokin’ Phil with all the “if you didn’t pay it you can’t deduct it” cases, and smothers Smokin’ Phil’s only authority, which is based on an accrual-basis taxpayer. I’ll spare you the welter of citations.

Smokin’ Phil goes down in flames, but joins Tom in the “nice try, but no prize” stakes.

Two ClassicStar cases today from Judge Goeke, William G. Pederson and Jamie K. Pederson, 2013 T. C. Memo. 54, filed 2/20/13, and William T. Romanowski and Julie I. Romanowski, 2013 T. C. Memo. 55, filed 2/20/13.

For particulars of the ClassicStar scam, see my blogpost “Horsing Around?”, 8/15/11.

I therefore merely mention these cases, as they are cookie-cutter Section 183s, with same counsel for taxpayer and substantially similar facts in both. Romanowski dodges the penalties based on good faith reliance, but Pederson knows too much and thereby gets nailed.

Romanowski was a long-time NFL linebacker with Niners, Eagles, Broncs and Raiders over 16 years in the bigs, but taxes weren’t his thing.

The sad part of Romanowski is how his attorney, the “tax guru” at a highly-regarded law firm, was getting backhanders from ClassicStar while supposedly representing Romanowski. He denied it, but Judge Goeke wasn’t buying it.

The Isle of Man, a/k/a Mann, has done it again. Made a deal with Her Majesty’s Revenooers, that is, as of 19 Feb, mimicking the Liechtensteiner Facility deal.

I am advised, however, that there are some key differences, including, but not limited to, the fact that there will be no guarantee against criminal investigation for tax related offences.

So, to repeat the parting shot from my earlier blogpost “Man, Dig That Island”, 12/8/12: “Have the dodgers been voted off the island? Stay tuned.”

But unfortunately Steve Jarvis doesn’t get that far, in Steven L. Jarvis and Estate of Cynthia S. Jarvis, Deceased, Steven L. Jarvis, Special Administrator, 2013 T. C. Sum. Op. 11, filed 2/19/13. Judge Kerrigan has this one, but Steve really didn’t make any showing here, unlike Ronald Webster Moore, the star of 2012 T. C. Sum. Op. 83, filed 8/23/12, and my blogpost “Ambiguity Is the Best Policy”, of even date therewith, as the high-priced lawyers say.

Ronnie had Judge Goeke deconstruct the automatic premium loan payment option provisions in Ronnie’s youthful indiscretion with Nationwide Insurance (the company that’s On Your Side), which got Ronnie off the hook, but Judge Kerrigan doesn’t do that for Connecticut General or for their successor-in-interest, Lincoln National Insurance Co., upon whose side, if anyone’s, they are to be found is nowhere specified. So Steve gets deficiency and penalty when he failed to report the payoff of the $83K loan he had automatically racked up.

Judge Kerrigan appears to surmise that the premium loans were all timely made over the 18 years the automatic premium loan payment option was in effect. And Steve didn’t try for a burden-of-proof shift, which Ronnie did and got, nor claim he tossed the annual loan statements unread as sales pitches.

Steve claimed he never got the 1099-R from Lincoln National, showing the taxable amount of the automatic payment unwinding. Judge Kerrigan: “Petitioners contend that they did not receive the information regarding the taxable income, but Lincoln National Insurance Co. mailed the Form 1099-R to petitioners’ correct address, and they have not provided any evidentiary basis for a factual finding that they did not receive it.” 2013 T. C. Sum. Op. 11, at p. 8.

So Steve winds up like Jimmy Ledger, in my blogpost “The Wrong Side of the Ledger”, 8/2/11.

Steve’s testimony does not appear in the opinion, so I doubt he had much. And for the $6K in tax and the $1K in penalty it wasn’t worth getting a Tax Court admittee. Too bad, because a defense like Ronnie’s might have saved the day here.