Archive for April, 2013|Monthly archive page


In Uncategorized on 04/18/2013 at 20:14

Nancy Louise Field tries telling  Tax Court not to play favorites, but Judge Thornton isn’t joining Nancy Lou’s Constitutional parade in 2013 T. C. Memo. 111, filed 4/18/13.

However, Judge Thornton has that message for Kenneth J. Taggart in 2013 T.C. Memo. 113, filed 4/18/13.

Ladies first, so here’s Nancy Lou’s story. “On July 16, 2008, petitioner and her husband, who is petitioner’s counsel of record, were married. They did not live apart during the last six months of 2009. On her 2009 Federal income tax return petitioner claimed a status of married filing separate and claimed that under section 23(a) she was entitled to a qualified adoption expense credit of $10,144, which exactly offset her reported tentative tax of the same amount.” 2013 T.C.Memo. 111, at p. 2.

The only thing wrong is that one must be in married filing jointly status to take the Section 23(a) credit; see Section 23(f)(1).

When IRS gigs Nancy Lou, she yells “denial of equal protection”. “She alleges that before she married in 2008 she adopted 15 children, that her husband has never adopted any of these children, and that for all practical purposes she has been their only support. Petitioner contends that the effect of the joint filing requirement is to penalize her for having married in 2008. She contends that in ‘this unique situation of hers * * * she should be treated as * * * unmarried’.” 2013 T.C.Memo. 111, at p. 4.

Give her attorney-husband John M. Mooney, Jr., a round of applause. With 15 adopted kids and another rounding third and heading for home, John M. is a man among men for signing aboard.

Judge Thornton: “The Supreme Court recently reiterated its longstanding holding that ‘‘a classification neither involving fundamental rights nor proceeding along suspect lines * * * cannot run afoul of the Equal Protection Clause if there is a rational relationship between the disparity of treatment and some legitimate governmental purpose.’’ See Armour v. City of Indianapolis, __ U.S. __, __, 132 S. Ct. 2073, 2080 (2012) (quoting Heller v. Doe, 509 U.S. 312, 319-320 (1993)).” 2013 T.C. Memo. 111, at pp. 4-5.

The burden Section 23 imposes, Nancy Lou, is tangential, and doesn’t impermissibly interfere with your getting married or adopting as many children as you wish.

“A tax classification is ‘constitutionally valid if “there is a plausible policy reason for the classification, the legislative facts on which the classification is apparently based rationally may have been considered to be true by the governmental decisionmaker, and the relationship of the classification to its goal is not so attenuated as to render the distinction arbitrary or irrational.’” 2013 T. C. Memo. 111, at pp. 5-6 (Citation omitted).

Nancy Lou’s claim that she got away with the married filing separately dodge in another year doesn’t help, as each tax year stands upon its own.

Nancy Lou, meet Navajo tribal elder Lucy Gabey, the star of my blogpost “Losing My Religion”, 1/17/13. Congress can play tax favorites with adoptions.

Now for KenTag and 2013 T. C. Memo. 113. KenTag is fighting a NFTL, lost in Appeals and petitions timely. The underlying taxes are those he himself reported but didn’t pay, so KenTag gets no second bite at the apple.

KenTag has numerous arguments why IRS should not be allowed to lien on him, but they all founder on the fact that while KenTag owed $60K in tax, he refinanced two properties he owned, pulled out cash in excess of $60K, and paid creditors ahead of IRS. He paid IRS nothing.

IRS gets rightly peeved, and accuses KenTag of dissipation. “A dissipated asset, defined as any asset that has been sold, transferred, or spent on nonpriority items or debts in disregard of an outstanding tax liability, may be included in a taxpayer’s RCP. The record indicates that during the Appeals hearing petitioner failed to show that he used the dissipated assets for necessary living expenses so as to make them excludable from RCP. Nor, despite his assertions to the contrary, has petitioner made any such showing in this proceeding.” 2013 T. C. Memo. 113, at pp. 13-14. (Citations omitted).

So KenTag, pay in full.

In short, Nancy Lou and KenTag, Congress can play favorites when it comes to tax, but taxpayers can’t.


In Uncategorized on 04/18/2013 at 05:36

You know the rest. So now does Danial Robert Martin, after the lesson is once again taught by Chief Special Trial Judge Panuthos in Danial Robert Martin and Christina Martin, 2013 T.C.Sum. Op. 31, filed 4/17/13.

Like many a 7463, the plot is simple. Danial divorces Ruth after 29 years, and the decree requires Danial to pay $1K per month spousal support. Three years into the program, Ruth falls ill, loses her job, and asks Danial for more support. Danial stumps up an additional $1300, and wants the alimony deduction.

Of course, they don’t modify the divorce decree, exchange letters or anything else. Only a year later does Ruth come up with a couple of letters telling the story, and Danial has nothing but his good deed to show IRS.

CSTJ Panuthos: “The first requirement is that the payment be received by or on behalf of a spouse under a divorce or separation instrument. Sec. 71(b)(1).” 2013 T. C. Sum. Op. 31, at p. 5.

Now there’s plenty of latitude as to what constitutes a “divorce or separation instrument.” See my blogpost “The Magic Paper Saves the Deduction”, 4/7/11. Here, as there, IRS does not dispute Danial’s deal meets the rest of the Section 71(b) tests: (a) doesn’t say not includible in payee’s income; (b) payor and payee not in same household; and (c) no liability to pay after payee spouse’s death. See 2013 T. C. Sum. Op. 31, at p. 5, footnote 1.

But no writing.

CSTJ Panuthos: “The letters from Ruth that petitioner submitted do not show a meeting of the minds between her and petitioner and therefore do not collectively constitute a written separation agreement.

“Petitioner’s [Danial’s] testimony was credible, and his willingness to provide additional funds to his former spouse is admirable. While the result may seem harsh, we are bound by the provisions of the Internal Revenue Code defining the circumstances in which payments are deductible as alimony under sections 71(b) and 215(a).” 2013 T.C. Sum.Op. 31, at p. 7 (Citation and footnote omitted, but CSTJ Panuthos notes that Ruth didn’t report the payments as income, so Danial should not get the deduction, lest an “asymmetry” result).

An “asymmetry”, by the way, means if someone gets a deduction, someone else gets income.

So Danial and other generous divorcees, get it in writing–from both of you.


In Uncategorized on 04/17/2013 at 00:52

Thus Judge Goeke admonishes Barnes Group, Inc. and Subsidiaries, in 2013 T.C. Memo. 109, filed 4/16/13.

Barnes is a publicly-traded Delaware metalsmithy founded in 1857 with worldwide reach. Barnes wanted to acquire new businesses, and had ginormous sums of untaxed cash stashed in Singapore. Barnes’ legal beagles claimed Singapore company law prevented ASA, Barnes’ Singapore subsidiary, from acquiring other companies’ stock. And Barnes’ high command wanted to bring the cash home anyway, tax-free of course.

So Barnes went shopping for a way to make it happen without paying tax. Deloitte and E&Y had nothing that pleased Barnes’ management, but PwC had a database with canned solutions for every problem.

Enter the reinvestment plan, a mix-and-match of loans and stock swaps among Barnes in the US and subsidiaries in Singapore, Canada, France and the UK.

The deal comes unglued over step transaction (interdependence of the steps) and our old friend economic substance.

Though Barnes tries to argue Singapore company law and some Delaware State tax benefit, Judge Goeke rebukes Barnes: “The only specific reference to Singapore law restrictions was in the PwC memo mentioning section 21 of the Singapore Companies Act. Oddly, petitioners do not cite section 21 of the Singapore Companies Act in their brief, nor do they explain the reason this restriction required involving Bermuda in the reinvestment plan. We will not attempt to do petitioners’ research or make their argument for them.” 2013 T.C. Memo. 109, at p. 52 (Citations omitted).

As for Delaware, “Petitioners have not explained what ‘state tax benefit’ they are referring to, and as noted supra, we will not attempt to do their research or make their argument for them. Furthermore, while we recognize that many large corporations create financing subsidiaries for various legitimate nontax business reasons, petitioners’ inability to show that the form of the plan was respected, discussed infra, renders any further consideration of petitioners’ ‘cash management’ argument moot.” 2013 T. C. Memo. 109, at pp. 53-54.

In short, do your homework.

Now for the clean room. Barnes had built some clean rooms wherein one could make green sheets, whatever they are, in one of Barnes’ warehouses. IBM used them for a while, then quitclaimed them to Barnes. Barnes reported gain on the deal, but now wants to claim it got back the clean rooms at the end of a lease, so Section 109 says no gain.

Judge Goeke: “Crucial in our determination is the fact that Barnes not only constructed the clean rooms in its warehouse, but also maintained control of and used those clean rooms for approximately 16 years making green sheets for IBM. In return Barnes was paid by IBM for its services; these payments reimbursed Barnes for all direct and indirect costs as well as a 10% fee. Although IBM had legal ownership of the clean rooms, Barnes was the party using those clean rooms in its own warehouse for its own benefit. The fact that the clean rooms were stored in the warehouse may have provided some indirect benefits to IBM (such as protection from the elements), but the direct benefit was to Barnes, which was able to use the clean rooms to obtain a profit as a result of its deal with IBM. We thus believe that IBM was not using or occupying Barnes’ warehouse and was therefore not a tenant to a lease.” 2013 T.C. Memo. 109, at pp. 58-59.

Judge Goeke notes that Second Circuit law rules here per Golson. After that Court’s gyrations to find a lease in Alphonso v. Com’r, Docket No. 11-2364-ag, dated 2/6/13, it might be worth Barnes’ team to do some homework and take an appeal. Oh yes, and read my blogpost “A New York Cooperative Conundrum – Part Deux”, 2/6/13.

Disclosure– A member of my immediate family works for PwC, but was not involved in this project. I did not very often have to tell her to do her homework or clean up her room.


In Uncategorized on 04/16/2013 at 05:28

But however cool you may be, cat, watch those stipulations. See my blogposts “Watch That Stip”, 3/20/13, and “Stipulate, Don’t Capitulate”, 9/23/11.

Mary A. Laciny should have heeded my words when she copped to some Section 7206 fraudulent return counts, as told by Judge Thornton in Joseph E. Laciny and Mary A. Laciny, 2013 T.C. Memo. 107, filed 4/15/13.

Mary A. was a triple-threat: she took unsubstantiated deductions on her corporate and personal returns, failed to report income, and diverted corporate monies to personal use.

Mary A. and Joe were the corporate czars of Sta-Cool Air Conditioning & Heating, Inc. Mary A. ran the back office and stayed cool, until nailed by the Federales. Mary A. and IRS stipulated to certain of Mary A.’s delictions, which Judge Thornton can’t reconstruct from the record, but Mary A. “signed a plea agreement, attached to which was a statement of facts which she signed and a worksheet calculating the ‘Total Unreported Diverted Funds’. 2013 T. C. Memo. 107, at p. 5 (Footnote omitted).

“Pursuant to her plea agreement Mrs. Laciny was sentenced to 12 months and 1 day of prison and 1 year of supervised release; she was also ordered to pay restitution of $195,938.” 2013 T. C. Memo. 107, at p. 5 (Footnote omitted).

The $195,938 supposedly covered “a calculated tax loss for criminal purposes.” 2013 T. C. Memo. 107, at p. 5, footnote 4.

Mary A. pays up in full when restored to society. But when IRS claims she owes more tax and fraud penalties, her defense “I gave at the office” avails her not.

“At trial petitioners’ counsel argued that Mrs. Laciny’s restitution payment should be applied to petitioners’ deficiencies. Respondent’s counsel agreed that the restitution payment should be applied to any deficiencies determined by this Court but argued that the restitution payment has no effect on the redetermination of petitioners’ deficiencies in this case. The District Court, in ordering that Mrs. Laciny make restitution payments as part of the judgment, did not determine petitioners’ civil tax liability and did not bar respondent from assessing a greater amount of civil tax liability against petitioners or from assessing civil fraud penalties. Accordingly, petitioners’ deficiency or underpayment is not affected by the restitution payment. See Morse v. Commissioner, 419 F.3d 829, 833-835 (8th Cir. 2005), aff’g T.C. Memo. 2003-332; Hicks v. Commissioner, T.C. Memo. 2011- 180.” 2013 T.C. Memo. 107, at p. 13, footnote 9.

Criminal defenders, make sure you deal with this in your plea bargains, and let your clients know that restitution may not be the end.

Mary Larceny learned this the hard way.

A quick by-the-way. This blogpost was delayed because of the effects of some recent dealings of mine with orthopedic professionals. But not those in Charles L. Barocas and Heidi Cohen, 2013 T. C. Memo. 106, filed 4/15/13, even though Charley is the director of the American Society of Orthopedic Professionals (ASOP). I broke my collarbone. Please omit flowers.


In Uncategorized on 04/12/2013 at 19:40

The latest brouhaha over the aged e-mail controversy (does the right of privacy improve with age, or deteriorate?), featuring IRS vs. ACLU, doesn’t provoke in me the righteous indignation most often encountered in the professionally righteously indignant. I never expected my e-mails were private, any more than any other electronic interchange.

The 1997 example of then-House Speaker Gingrich should ever be before us.

I was asked to comment by a certain Director at a major accounting firm. So I will remind her of her grandmother’s remark: “Every communication needs a salutation: Dear So-and-so and ladies and gentlemen of the jury.”


In Uncategorized on 04/10/2013 at 20:39

No, not an extract from the 1984 Starship opus “We Built This City”, that won Rolling Stone’s “worst song of the 80s” title for Bernie Taupin, Martin Page, Dennis Lambert and Peter Wolf, but the story of Aries Communications Inc. & Subs., 2013 T.C. Memo. 97, filed 4/10/13, with Judge Wherry being more mathematical than whimsical.

But even though the issue is the reasonableness, and therefore deductibility, of executive compensation, the star of our show is N. Arthur Astor, radioman first class.

Judge Wherry: “N. Arthur Astor has been in radio broadcasting for over 60 years. He was involved in several television shows, did a little film work, and worked as a talent in radio broadcasting before he decided to become involved in broadcasting sales. After many years of managing sales for a multitude of different radio broadcasting companies, Mr. Astor in June 1970 was employed as general manager of KADY, a 50,000-watt radio station in Los Angeles owned by Atlanta-based Rollins Broadcasting. In 1975 he was employed by Dratch & Knott Enterprises, which owned three radio stations and was the number one programing company supplying programing and special features to radio stations nationally.” 2013 T.C. Memo. 97, at p. 3. Two “m”s in “programming”, Judge, but it’s radio, right?

NAA starts buying radio stations as owner-operator. Aries is his flagship, but he has various subsidiaries. “Mr. Astor was Aries’ president, chief financial officer (CFO), and sole shareholder from its incorporation in 1983. Mr. Astor acted as general manager of each of petitioner’s radio stations. He was a ‘hands-on’ manager who was actively involved in many aspects of petitioner’s day-to-day operations. Mr. Astor’s duties included: (1) oversight of petitioner’s other management personnel; (2) planning and overseeing the execution of programming; (3) negotiating and communicating with petitioner’s lenders; (4) participating in sales meetings; and (5) communicating with outside advisers (such as lawyers and accountants).” 2013 T.C. Memo. 97, at p. 5.

Aries ran into tough times, but NAA sold off stations from Aries’ stable for top dollar, and guaranteed loans that kept Aries afloat while he haggled and higgled for the last centime out of other would-be czars of the airwaves.

When Aries finally had cash on hand, he voted himself a handsome bonus. Aries took the Section 162 deduction, and IRS said no, disguised dividend.

So we’re back to comparable pay for comparable work (like women who still are fighting that fight), and when that fails, our hypothetical friend, the unrelated investor looking for maximum return.

Now the comparable pay gambit means a regression analysis, which, Judge Wherry explains “…is a statistical technique designed to determine the effect that one or more explanatory independent variables have on a single dependent variable. This method may allow an expert to test the causal relationship, if any, between the explanatory independent variables and the dependent variable.” 2013 T.C. Memo. 97, at p. 14, footnote 9.

So we have the duelling experts and judicial mix-and-match extracted from their opinions, with such oracular pronouncements as “(3) on the basis of the P-values of the coefficients in all of the regressions, the coefficients are not useful; and (4) on the basis of the R-squareds of the regressions, the regressions do not explain the variation in either the fixed compensation or the variable compensation.” 2013 T.C. Memo. 97, at p. 15.

Reminds me of Malvolio’s celebrated comment in “Twelfth Night”: “…this is my lady’s hand these be her very C’s, her U’s and her T’s and thus makes she her great P’s.” Act II, Scene V.

Finally, however, NAA’s rescue gets some reward above what IRS would allow, notwithstanding Aries’ barely going-concern state and NAA’s total control of its affairs. NAA gets compensated for previous years when he was underpaid. And Aries gets to deduct about one-third of what it paid NAA.

But because neither NAA or anyone else can say what info Aries gave its accountants, who prepared the returns for the years at issue, it’s 20%-penalty time.


In Uncategorized on 04/09/2013 at 15:51

No, not a law firm (although it could be an appropriate moniker for several I know of), but rather the sad tale of Johnny Steven Vallejo, Petitioner, and Elfida O. Vallejo, Intervenor, 11397-11S, filed 4/9/13, a designated hitter from Judge Daniel A. (“Yuda”) Guy, Jr.

Johnny Steven stips to entry of an order that he’s not an innocent spouse. What Elfida does is not stated. After the 90-day Section 7481(b) period has run and the stipulated order is final, and the Rule 162 30-day period for moving to revise or set aside has run, Johnny Steven moves to set aside.

Johnny Steven claims he has Post Traumatic Stress Disorder and was confused about the effect of the stip he signed.

That’s a thwacking great xin loi, good buddy, says Judge Yuda.

“The Tax Court normally lacks jurisdiction to vacate a decision once it becomes final. The Court of Appeals for the Ninth Circuit recognizes a narrow exception to the general rule, holding that the Tax Court may vacate an otherwise final decision if it was obtained through fraud on the Court.” Order, at pp. 1-2. (Citations omitted). The Ninth Circuit gets involved as this is a California case, appealable to Ninth Circuit.

Johnny Steven doesn’t claim he was defrauded, or that the Court was defrauded. He was confused.

No good. I have no jurisdiction to set the stipulated order aside, says Judge Yuda.

Nothing like litigating with a confused, traumatized and stressed self-represented, huh, IRS?


In Uncategorized on 04/09/2013 at 14:54

No, not a misspelling of some lyrics from Dave Guard’s 1958 hit “Scotch and Soda”, but rather the latest FATCA trademark for compliant FFIs (Foreign Financial Institutions), the Global Intermediary Identification Number. IRS announces the list schema 4/8/13, so we can all see who is a Global Intermediary Icon.

Check it all out at


In Uncategorized on 04/08/2013 at 18:02

But a Good Try

A multi-million-dollar estate and GSTT case turns out to be a lot less when Judge Morrison boils it down, in Estate of John F. Koons III, Deceased, A. Manuel Zapata, Personal Representative, 2013 T.C. Memo. 94, filed 4/8/13.

I was hoping for some hot news on GSTT, but only got the usual battle of the appraisers. The only interesting part was worthy of a Taishoff “good try”, when A. Manuel borrowed $10,750,000, but claimed an interest deduction north of $71 million.

The late Koons was a Cincinnati beer brewer who transitioned to bottling Pepsi-Cola; he really hit the spot, and got bought out by Pepsi for telephone numbers. He dies in the middle of the buy-out, and the estate needs cash to pay the estate tax.

Of course, no such deal as this is complete without LLCs, trusts, children, grandchildren, ex-spouses and the whole corps de ballet. So here’s Judge Morrison with the story: “On February 27, 2006, CI LLC’s Board of Managers executed a consent resolving that ‘it is in the best interests of the Company to loan the * * * [Revocable Trust] the principal amount of $10,750,000.’

“On February 28, 2006, CI LLC lent the Revocable Trust $10,750,000 in exchange for a term promissory note in the principal amount of $10,750,000 at 9.5% per year interest with principal and interest due in 14 equal installments of  approximately $5.9 million each between August 31, 2024, and February 28, 2031. The terms of the loan prohibited prepayment. The total interest component of the 14 installments is $71,419,497. The proceeds of the loan would be used to make a payment toward the estate and gift tax liabilities.” 2013 T.C. Memo. 94, at pp. 30-31.

CI LLC is the buyer-out, and the Revocable Trust is the vehicle of the estate.

Good try, guys. Interest on a loan to pay estate taxes is deductible as an administrative expense, right?

Not twentyfive years’ worth.

In the first place, CI LLC was loaded with cash, and the Revocable Trust could force it to distribute, so no need to sell assets. Lending the money depletes CI LLC’s cash hoard as much as a distribution, and the Revocable Trust has almost no operating assets to protect from a forced sale to pay estate tax.

Finally, this deal keeps the estate alive for 25 years after the Late Koons became the Late Koons. Too long. But a good try, even though no deduction.


In Uncategorized on 04/05/2013 at 16:14

I’m quoting an old blogpost, “Thoroughness”, 10/27/11, and am about to reiterate, but gently, a very old rant. Adelbert Moot delivered a lecture at my alma mater in 1914 (and no, I wasn’t in attendance then) in which he spoke of thoroughness as being that which “settles the question in more cases than any other one thing as to whether or not a person will be successful.”

Well, Judge Buch encounters a lawyer who isn’t, but gives the client a break, in Swanson-Flosystems Co., Docket No. 27975-11.

It’s three weeks before trial (and remember Judge Buch gets peevish if attorneys aren’t ready to roll three weeks before trial; see my blogpost “Throwing the Buch,” 3/5/13), and SwanFlo’s attorney is begging for a continuance (that’s called an adjournment whence I come).

This is a monumental no-no under Rule 133; if you don’t have “exceptional circumstances” (like a death certificate), move to continue thirty days or more before the date, time and place certain, or be denied as dilatory.

Here’s SwanFlo’s attorney’s sad tale: “Petitioner’s various arguments in favor of a continuance, distilled to their essence, are all premised on a lack of preparation: the case appeared headed for settlement, and thus it was not adequately prepared; the case was more complex than counsel anticipated, and thus it was not adequately prepared; a flurry of procedural motions by respondent created a significant burden, and thus the case was not adequately prepared; respondent provided inadequate discovery responses, and thus the case was not adequately prepared.” Order, p. 1 (Footnote omitted, but Judge Buch notes that if SwanFlo’s attorney wasn’t happy with IRS’ discovery responses, s/he never made a motion to compel proper responses.)

Automatic admittee to Tax Court, ya think?

SwanFlo’s attorney admits in the motion for a continuance that s/he is outclassed and wants to add counsel. That’s not a reason for continuance, and IRS yelps they’ll have to start from scratch when new counsel (or supplementary counsel) waltzes in.

But Judge Buch has a heart. There’s $2 million at stake, Swan-Flo will be seriously prejudiced if they can’t go to the bullpen, and it doesn’t look like Swan-Flo or their attorney was playing tactical games. And even though Swan-Flo’s attorney didn’t mention it in his/her motion papers, the bullpen responded and the additional counsel has filed their notice of appearance, so “(T)he hiring of additional counsel, however, provides some assurance to the Court that, if a continuance were to be granted, this case would be adequately prepared.” Order, p. 2, footnote 2.

Hope springs eternal, eh Judge?

Now IRS will be inconvenienced, it’s true, and won’t have the advantage of an inept adversary (as they usually do, encountering the self-represented and the usual run of automatic admittees; rather like shooting very large fish in a very small barrel), but that’s not prejudice.

So time out, Swan-Flo, let your relief pitcher warm up, and to move things along, here’s a pretrial scheduling order for your reading pleasure. Follow it.