Fridays are usually slow days on the Tax Court website. Very rarely is there an opinion; even the 7463s seem to have the day off. The designated hitters are rarely the stuff of game-changing pronouncements, so the earnest blogger is put to his own devices to fill the ether with engaging blather.

Not today, May 10, however.

You’ll remember Jetstream Business and its siblings. If not, see my blogposts “More Shell Games”, posted 9/2/11, “Mr Rogers’ Neighborhood – The Adventure Continues”, posted 11/12/11, and “Mr Rogers Tries Again”, 4/17/12. There, now, you remember the celebrated Mr. John E. Rogers, who has a B.A. in mathematics and physics from the University of Notre Dame, a J.D. from Harvard Law School, and an M.B.A. from the University of Chicago, with a concentration in international finance and econometrics.

Well, his famous marriages of big US capital gainers with distressed Brazilian debt, a/k/a DADs, cratered big-time, and now, as Judge Wherry predicted, the time has come for the “silent waters that run deep”–the dozens of deep-pocketed investors who acquired ownership interests in the various holding companies, which in turn sought to exploit the inflated basis of the chimerical receivables. After all the linen is washed, these investors constitute the fonts whither the promised tax savings from chimerical losses would have drained and whence the required tax payments for determined deficiencies and accuracy-related penalties will flow.

IRS wants Judge Wherry to fire Jetstream (and Mr Rogers) as tax matters partner for the multiplicitous entities that shared in Mr Rogers’ attempted raid on the US fisc.

Judge Wherry: “…the Court does not intend to grant respondent’s motion to remove Jetstream as tax matters partner in these cases. The Court also notes that these ultimate investors, to the extent they have an interest in the proceedings under section 6226(d), have a right to participate in these proceedings under section 6226(c). Generally, such notices of election to participate should be made within 90 days of the date of service of the petition by the Clerk on the Commissioner. Rule 245(b). Pursuant Rule 245(c), the Court may grant leave to file such notices of election out of time upon a showing of sufficient cause. In these cases, the Court would be inclined to grant motions for leave to file a notice out of time.” Kenna Trading, LLC, Jetstream Business Limited, Tax Matters Partner, Et Al., Docket No. 7551-08, filed 5/10/13.

But if any of you want to settle, the name and phone number of IRS counsel is in the Order.

Maybe this will finally end this unworthy successor to the Kersting nightmare.

And Chief Judge Colvin is culling out all the non-filers and non-payors who filed unsigned or otherwise improper petitions, dismissing them sua sponte and en masse, as the high-priced lawyers say. So many orders today.

Finally, this is a non-political blog. I will refrain from comment on the IRS’ apology to conservative groups for improperly singling them out during the previous election. I am sure others will have plenty to say.

I just finished the second of two mediations, successfully I might add, in which I was informally called upon to bridge some troubled waters. Though taxing, no tax issues were involved, but I derived much satisfaction from being able to help, as well as some cash.

Well, here’s STJ Lew (right spelling) Carluzzo getting into the act, via a designated hitter courtesy of Chief Judge Colvin. The matter is Charles T. & Mary A. Bruce, Docket No. 29005-10, filed 5/9/13.

Here’s the story: “… the Joint Motion for Appointment of a Mediator Pursuant to Rule 124(b)(5) is granted, and this case is assigned to Special Trial Judge Lewis R. Carluzzo for purposes of conducting the mediation, to be concluded by not later than May 17, 2013. It is further

“ORDERED that Special Trial Judge Lewis R. Carluzzo shall have access to the Court’s files and any other documents held by the trial judge and shall have authority to direct or order the parties to provide further information to aid him with his consideration of and his assistance with this case.” Order, p. 1.

And by the way, guys, to keep y’all focused, “…this case remains calendared for trial at the Court’s May 20, 2013 Mobile, Alabama trial session.” Order, p. 2.

Go to it, STJ Lew.

 “Direct or indirect”, that is the question, and the ever-obliging jurist, Judge David Gustafson has the answer, namely and to wit, “any which way you slice it”, in Lawrence F. Peek and Sara L. Peek, 140 T.C. 12, filed 5/9/13.

The Peeks and their pals the Flecks think that putting out fires is the way to wealth, so they decide to buy a fire suppression company. They go to Chris Blees, CPA, who suggests each couple set up a traditional IRA, form a corporation, all of whose stock is split between the two trad IRAs, and buy the suppressor in the corporation.

But Chris warns against the Section 4975 prohibited transactions, which torpedo IRAs per Section 408, in general terms, not mentioning what Peek and Fleck eventually do (and never tell Chris about). The seller of the suppressor wants cash, which Peek and Fleck give via the corporation, but come up short. The corporation offers its note, but the seller wants personal guarantees from Fleck and Peek.

These they gave, and that’s when the trouble starts, but isn’t apparent for years.

Down the road, but before the suppressor hits the jackpot, Fleck and Peek each roll their stock from the trad to a Roth, paying minimal tax.

A few years later the suppressor goes big time, and the corporation sells the suppressor for mucho moolah, pays off the note, and parks the cash in the Roths.

IRS calls capital gains from Fleck and Peek personally, claiming the guarantees violate Section 4975(c)(1)(B): “any direct or indirect– * * * (B) lending of money or other extension of credit between a plan and a disqualified person”.

Peek and Fleck claim that the subsidiary corporation isn’t the plan, but agree that a guaranty is a “lending of money”.

Judge Gustafson: “This reading of the statute, however, would rob it of its intended breadth. Section 4975(c)(1)(B) prohibits ‘any direct or indirect * * * extension of credit between a plan and a disqualified person’. (Emphasis added.) The Supreme Court has observed that when Congress used the phrase ‘any direct or indirect’ in section 4975(c)(1), it thereby employed ‘broad language’ and showed an obvious intention to ‘prohibit[] something more’ than would be reached without it. Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152, 159-160 (1993). As the Commissioner points out, if the statute prohibited only a loan or loan guaranty between a disqualified person and the IRA itself, then the prohibition could be easily and abusively avoided simply by having the IRA create a shell subsidiary to whom the disqualified person could then make a loan. That, however, is an obvious evasion that Congress intended to prevent by using the word ‘indirect’”. 140 T. C. 12, at p. 16.

So there was a prohibited act, terminating the trad IRA as of Day One of the year wherein the prohibited act occurred. But that’s not the year at issue. So Peek and Fleck claim the SNODs don’t cover that, and the termination year is closed.

Wrong, says Judge Gustafson: “The loan guaranties were not a once-and-done transaction with effects only in 2001 but instead remained in place and constituted a continuing prohibited transaction, thus preventing Mr. Fleck’s and Mr. Peck’s accounts that held the [corporation] stock from being IRAs in subsequent years. On January 1, 2006, it remained true that Mr. Fleck and Mr. Peek guaranteed the loan to [corporation]; if [corporation] defaulted, they would pay. By its nature, the loan guaranty that each man made put him and his account in an indirect lending relationship that would persist until the loan was paid off.” 140 T. C. 12, at p. 18 (footnote omitted).

So the conversion from trad to Roth was a nullity, because the trad was no longer an IRA when the purported “conversion” took place. And it probably is too late for Peek and Fleck to try to get back any tax they paid.

Now of course Peek and Fleck claim they relied on Chris, but Chris was a promoter, and besides they never proved they told Chris what they were doing with the guarantees.

“Direct or indirect”? Any which way you slice it.

But Don’t Push Your Luck

Judge Buch, known as one who is loath to cut slack for attorneys who don’t cover their clients’ cases (see my blogpost “Throwing the Buch?” 3/5/13), nevertheless will cut a self-represented some slack, if good faith be shown.

That’s the story in Randy Lee Lother, Docket No. 26538-11, filed 5/8/13.

Randy Lee’s sole issue was to whom the Secretary of the Treasury had delegated authority to lay upon Randy Lee the two SNODs he was petitioning.

Judge Buch: “The information regarding to whom authority is delegated was important because Mr. Lother’s only argument was that the people who signed the notices of deficiency lacked the authority to do so. Other than the stipulations, Mr. Lother offered no evidence.” Order, at p. 3.

If Randy Lee had read the Rule 91(f) stipulations IRS had prepared and sent him pre-trial, he would have seen that authority was properly delegated. So IRS wants a Section 6673 frivolity penalty, because Randy Lee didn’t read the aforesaid stipulations until he was in front of Judge Buch and on the record. IRS claims delay of the game.

No, says Judge Buch. “After reviewing this material for what appeared to be the first time, Mr. Lother appeared to withdraw his delegation of authority argument, which  was appropriate, given that the declarations clearly resolve the issue. He presented no other arguments and no evidence concerning errors in the notice of deficiency.” Order, at p. 4.

Judge Buch: “Whether IRS personnel ‘have acted outside their delegated authority can be consequential.’ The Court does not fault Mr. Lother for merely having raised the delegation of authority  argument. Where Mr. Lother can be faulted, however, is for not having read the materials that were sent to him that clearly answer the question. The Court could impose on Mr. Lother a penalty for delay. Once the information was provided to him in January, he should have abandoned this argument. But to his credit, once the Court called the information to his attention, he did not perpetuate the argument. It also should be noted that the Court has not identified a prior proceeding in which Mr. Lother presented frivolous arguments or was warned about possible sanctions under section 6673.” Order, at p. 5.

Neither could IRS’ counsel point to any like infraction by Randy Lee.

So Judge Buch shows Randy Lee the  yellow card, as the footballers say. “The Court warned Mr. Lother on the record, and restates it here in this bench opinion, that perpetuating frivolous arguments or causing needless delay of a proceeding before this Court may subject him to sanctions in the future.” Order, at p. 7.

Read and heed, you self-representeds.

To Play It

If you want to fight in Tax Court about interest on your deficiency, you have to pay the deficiency and the interest, and then petition.

That’s Judge Foley’s directive to James B. & Jane Z. Paternostro, Docket No. 15753-10, filed 5/8/13.

JB & JZ agreed that their Sub S, Skidmarks, Inc., was not entitled to some $200K of Schedule E losses over a two-year period, plus Section 6662(a) accuracy (or better-styled, inaccuracy) penalties.

But when IRS moved to enter decision, JB & JZ objected, complaining about IRS’ computation of interest.

Judge Foley: “The Court’s jurisdiction to redetermine a deficiency generally does not extend to statutory interest imposed pursuant to section 6601. The Court may redetermine a section 6601 interest computation if the taxpayer petitions the Court within one year after the date the decision of the Court becomes final, an assessment has been made by the Commissioner which includes interest, the taxpayer has paid the entire amount of the deficiency plus interest, and the Court determines that the taxpayer has made an overpayment. The Court has not entered a final decision and petitioners have not paid the deficiency plus interest relating to the years in issue. Accordingly, petitioners may not challenge respondent’s interest computations.” Order, p. 2. (Citations omitted).

Pay to play, guys. And don’t jump the gun.

No, not Jean-Paul Sartre’s 1943 opus, but rather Tax Court considering the effect of a corporation flickering in and out of existence. The corporation is John C. Hom & Associates, Inc., whose existential travails are more particularly bounded and described in 140 T. C. 11, filed 5/7/13.

John C. came into being in 1986, but was deprived of its powers, rights and privileges by the California Franchise Board in 2004. John C. thereby lapsed into nothingness, but while John C. sojourned in nothingness, in 2011 the IRS sent John C. a SNOD for some five years of income taxes, additions, penalties and interest.

Both SNOD and petition occurred in 2011, but John C. was restored to being in 2012, on the eve of trial.

IRS wants to dismiss for want of jurisdiction.

John C. first argued the SNOD was defective because it gave the web address (URL) of the National Taxpayer Advocate, and not the address and telephone number, as required by Section 6212(a).

Judge Cohen dumps that one. Section 6212(a) doesn’t say the omission invalidates the SNOD, and anyway “…courts have held repeatedly that a notice of deficiency is valid if it notifies the taxpayer that a deficiency has been determined and gives the taxpayer the opportunity to petition this Court for redetermination of the proposed deficiency.” 140 T. C. 11, at p. 5. (Citations omitted).

John C., via its officer John C. Hom, did so petition. And he never showed he tried to contact NTA.

As for the existential question, Judge Cohen gives John C. short shrift: “Rule 60(c) states in part: ‘The capacity of a corporation to engage in such litigation [in this Court] shall be determined by the law under which it was organized.’ Petitioner’s corporate capacity was suspended at the time the petition was filed on June 13, 2011, and was not reinstated until April 2012, shortly before trial. Under the same scenario, in David Dung Le, M.D., Inc. v. Commissioner, 114 T.C. 268 (2000), aff’d, 22 Fed. Appx. 837 (9th Cir. 2001), interpreting California law, we concluded that the Court lacked jurisdiction. That case is controlling here.” 140 T.C. 11, at p. 9.

So John C. is flung back into nothingness, except that it can pay the tax and sue for a refund.

“Abstract from the Tax Court website. ‘Generally, a Tax Court Opinion is issued in a regular case when the Tax Court believes it involves a sufficiently important legal issue or principle.’ ‘Generally, a Memorandum Opinion is issued in a regular case that does not involve a novel legal issue. A Memorandum Opinion addresses cases where the law is settled or factually driven.’

“So one expects a Tax Court Opinion to have a certain gravitas;  if not an Olympian pronouncement, then at least an oracular quality.”

See my blogpost “This Old House”,  1/30/12, from  which the foregoing is taken.

So I question why Michael Keith Shenk, 140 T. C. 10, filed 5/6/13, is so favored.

After all, Mike’s story is a many-times-told tale of matrimonial counsel’s ineptitude, awarding dependency exemption and child tax credit to the non-custodial Mike, but not requiring custodial Julie to give Mike a Form 8332 or equivalent. So non-custodial Mike wanted all of it, but custodial Julie split the exemption and credit, for the three minor offspring they have bestowed on the world.

IRS gave custodial Julie the two she claimed, and Mike one of three (like the Ancient Mariner). Mike says “No, I should have it all per the divorce decree.” And he asked for a continuance of the trial to get one from custodial Julie or modify the divorce decree to require her to give him one.

IRS says non-custodial Mike can file the Form 8332 late, but in this case the statute is about to run for IRS to recover from custodial Julie the exemptions and credits she took for the year at issue.

The ever-obliging Judge Gustafson: “Because Mr. Shenk made no accounting for his having waited a year to try to obtain Form 8332, the Court denied Mr. Shenk’s motion for a continuance, stating that the parties should ‘go ahead and have today the trial that you are ready to have now, to put on the evidence you have to put on now,’ and that the Court would then ‘entertain at the end of it whatever motion you want to make about keeping the record open.’ Mr. Shenk put on his case and contended he is entitled to a dependency exemption deduction for all three children. At the end of trial, he again moved that the record be left open so that he could obtain and offer a Form 8332 signed by his ex-wife for 2009. We denied the motion without prejudice and stated that we would delay issuing any opinion in the case until after April 15, 2013, in order to give Mr. Shenk the opportunity to obtain the Form 8332, if he could, and to move to reopen the record of this case by that date. He did not do so.” 140 T. C. 10, at p. 7.

Non-custodial Mike argues that under the divorce decree and State law, custodial Julie should have signed the Form 8332, and custodial Mike is therefore entitled.

The ever-obliging Judge Gustafson can’t go that far. “But ultimately it is the Internal Revenue Code and not State court orders that determine one’s eligibility to claim a deduction for Federal income tax purposes, and Mr. Shenk does not meet the criteria of the Code for claiming the disputed dependency exemption deduction. He is the noncustodial parent, and the custodial parent did not sign the required declaration.” 140 T. C. 10, at p. 11.

And “coulda woulda shoulda” doesn’t get it. Neither does a Form 8332 obtained after custodial Julie got the tax benefits, and it’s too late for IRS to go after her. Then both custodial Julie and non-custodial Mike would get the benefits, and that’s a double-dip.

So what else is new?

No, not the 1960 Jules Dassin-Melina Mercouri film that gave rise to that year’s Oscar-winning tune, but rather the sad tale of Sunday G. Agwu, caught up in the toils of Tax Court and the IRS.

You’ll find the whole shebang in Docket No. 12997-12S, and Judge Buch tells the tale. You can learn more about Judge Buch from my blogpost “An Open Buch”, 1/16/13.

Anyway, here’s the mise-en-scène:  “…respondent [IRS] submìtted to the Court, prior to the call of the calendar, a stipulated decision that had been signed both by petitioner (Mr. Agwu) and on behalf of respondent.

“A few hours after the call of the calendar (and after the Court had initially concluded for the day), petitioner arrived at Court and began an off-the-record conversation with respondent’s counsel. Because of the apparent disagreement between the parties, the Court intervened and held an off-the-record conference with the parties. The Court then went on the record to describe the issues and confirm with the parties that the Court was accurately describing the apparent dispute.

“Petitioner stated that he was misled into signing a stipulated decision. He understood that, if he signed the stipulated decision, the IRS would not pursue collection activity against him.” Order, p. 1.

Nice work if you can get it, Sunny, but not quite.

“Respondent’s counsel stated that she advised petitioner that he could work with the IRS to address collection alternatives, including an offer in compromise, an installment agreement, or being placed in currently not collectible status.” Order, p. 1.

Now whether Sunny understood Word One of the foregoing is a good question. Ya gotta wonder how the self-representeds fare in a Court where even seasoned litigators often come seriously unglued. I’ve blogged this so often I won’t even cite to my past blogs. The “People’s Court” is a minefield that makes Afghanistan look like a kindergarten playground.

So Judge Buch catechizes Sunny, tells him this is liability and not collection, and elicits the following: “In this regard, Mr. Agwu stated that he does not dispute the terms of the stipulated decision. Indeed, he agrees that the 2006 and 2008 tax deficiencies shown in the stipulated decision document are correct; he agrees that he did not file tax returns for 2006 and 2008; and he agrees that he did not pay his taxes for 2006 and 2008. These oral concessions conform to the terms of the stipulated decision and also conform to the notices of deficiency on which this case is based.” Order, p. 1.

Sunny’s story is “I ain’t got no money, honey.”

Sunny having thus offered himself up as a living sacrifice, Judge Buch files the stipulated decision, and directs Sunny to file “…a response to this Order in which he explains (shows cause) why his case should not be dismissed for failure to state a claim upon which relief can be granted.” Order, p. 2.

And the best of luck, Sunny. Did you understand Word One of the foregoing?

The old legal principle that the employer is responsible for the malfeasance of the employee, known to the expensively-schooled as the doctrine of “respondeat superior” (let the master answer for the servant), gets turned around when trust funds like FICA and FUTA, and the TFRPs concomitant therewith, are concerned.

Case in point: Solucorp, Ltd., 2013 T. C. Memo. 118, filed 5/2/13. Solucorp is the Canadian parent of EPS Envtl., Inc., whose checkered history is told elsewhere in Tax Court annals. EPS didn’t remit withheld trust funds, and while EPS’ troubles were wending their way through Tax Court, IRS fired off 1153s for the TFRPs to Solucorp , which asked for IRS to wait until EPS’ troubles were resolved.

IRS gave Solucorp levy notices, and Solucorp petitioned, saying IRS should have waited before going after Solucorp.

No, says Judge Wells. “Petitioner contends that the Appeals Office abused its discretion by not suspending collection action pending the outcome of the EPS proceeding before this Court. Specifically, petitioner contends that respondent’s collection action, determination, and motion for summary judgment were premature until the EPS proceeding was fully adjudicated. We disagree. Section 6672(a) imposes a penalty on persons, other than the employer, who are responsible for withholding taxes (trust fund taxes). ‘[L]iability under section 6672(a) is not derived from, or dependent upon, an employer’s outstanding [trust fund] tax [withholding] obligation. Rather, the section imposes a penalty upon persons who fail to perform a specified statutory task.’ Bradley v. United States, 936 F.2d 707, 710 (2d Cir. 1991). The liability imposed on responsible persons pursuant to section 6672 is separate and distinct from the employer’s liability for trust fund taxes. Consequently, the Commissioner is not required to attempt to collect the underlying trust fund taxes from the employer before attempting to collect the section 6672 penalty against a responsible person. Petitioner’s liabilities for section 6672 penalties are separate and distinct from EPS’ Form 941 tax liabilities. Accordingly, the Appeals Office did not abuse its discretion in sustaining collection actions against petitioner for its outstanding TFRPs for the periods in issue.” 2013 T. C. Memo. 118, at pp. 11-12 (Citations and footnote omitted).

Takeaway- Pay those withheld taxes, or face the consequences.

No, not the prequel to the 1977 John Travolta production, but Tax Court’s website going down at 9 p.m. EDST on Friday May, 3, until 9 a.m., Saturday, May 4.

And the Tax Court webmeister announces the outage in red letters, thus: