Archive for June, 2013|Monthly archive page


In Uncategorized on 06/18/2013 at 18:36

No, not a law firm, but rather enough activity to create taxable self-employment income for Rollin J. Morehouse and Maureen B. Morehouse, in 140 T. C. 16, filed 6/18/13.

Rolly was a marketing man who inherited some South Dakota farmland and bought some more, but instead of growing, Rollie hired a manager to plant, till and weed ground cover as part of the US Dep’t of Agriculture’s Conservation Reserve Program (CRP). This pays landowners not to grow anything but ground cover on erosion-prone land.

Rollie claims it’s exempt as rent, but IRS says it’s self-employment income subject to FICA.

First, Rollie says he himself did nothing. IRS says that’s not disqualifying, many people carry on businesses through agents, and Judge Marvel agrees.

Next, Rollie claims CRP payments are exempt from SE. IRS says Congress only exempted CRP payments to landowners who receive Social Security, and Rollie doesn’t claim he does.

But was Rollie engaged in a trade or business? The self-employment tax provisions of Section 1401 are to be broadly construed. No question Rollie was in the CRP to make money, and he did.

Judge Marvel: “He negotiated and executed the CRP contracts and, by doing so, obligated himself, as the owner of the properties to satisfy significant contractual obligations regarding planting, maintenance, and use of the properties enrolled in the CRP and compliance with CRP requirements. Although petitioner did not actually perform the planting and maintenance work required by the CRP, he hired an individual, Mr. Redlin, to perform the work according to CRP specifications, purchased necessary materials, such as seed, and provided them to Mr. Redlin, and regularly inspected the properties to ensure that they were being maintained and used in accordance with the CRP contractual obligations. On these facts we find that petitioner engaged in the business of participating in the CRP and managing his CRP properties with the primary intent of making a profit.” 140 T. C. 16, at pp. 20-21.

That Rollie employed Redlin doesn’t mean Rollie wasn’t in business.

And even though USDA called the CRP payments “rent”, that doesn’t make it so. Rent is for use and occupancy of property; USDA could come and inspect, but they didn’t occupy or use the property. Rollie still had command and control. And just because the local USDA people called what Rollie did “farming”, that doesn’t make it so either.

Doing soil conservation is work, making a profit at it is carrying on a business, so Rollie owes SE tax, and Tax Court is unanimous, with no concurrences or dissents.



In Uncategorized on 06/18/2013 at 01:22

No, not Dostoyevsky’s 1864 novella, but rather Judge Morrison’s foray into the subterranean depths of underground telephone infrastructure, more about which is to be found in Patrick D. Montgomery and Patricia A. Montgomery, 2013 T. C. Memo. 151, filed 6/17/13, while I was walking the battlefield of First Manassas. Thus this delayed posting.

Pat D’s dad founded a Sub S design company for putting telephone infrastructure in the cold cold ground, which Pat D took over upon Dad’s decease. But the design company couldn’t do the actual construction, so Pat D and Pat A formed a new LLC.

The Pats personally guaranteed a million-dollar loan for the Sub S, which defaulted. The Pats also defaulted, and the lender got a judgment against the Pats for $425K.

The Pats claimed an NOL for the amount of the judgment and also operating losses from the LLC.

IRS claimed Pat A didn’t materially participate in the LLC’s business. IRS loses that one. First, Pat D’s participation helps out Pat A, per Section 469(h)(5).

Judge Morrison takes up the rest: “Both Patricia Montgomery and Patrick Montgomery were integral in the process of setting up and establishing UDI Underground, LLC. The company began in April 2007 with no employees. The Montgomerys hired 250 employees on behalf of UDI Underground, LLC, by the end of 2007. Although the Montgomerys performed some services for Utility Design, Inc., during 2007, this older company already had established its business operations. The Montgomerys spent more of their work time on UDI Underground, LLC, than on Utility Design, Inc. They did not hold any jobs outside the two companies. They credibly testified that they worked thousands of hours for UDI Underground, LLC, during 2007. We find that the Montgomerys participated in UDI Underground, LLC, for more than 500 hours during 2007. On the basis of all the facts and circumstances we also find that the Montgomerys participated in UDI Underground, LLC, on a regular, continuous, and substantial basis during 2007.” 2013 T. C. Memo. 151, at p. 10.

But the Pats had no logs, so how did they prove what they did? “The Montgomerys provided details of the nature of the activities they conducted in starting and managing UDI Underground, LLC. The tasks they described included founding the company, negotiating contracts with AT&T, hiring 250 employees, and conducting daily business. They credibly testified they worked on the business ‘day in and day out.’ They were credible witnesses and were forthcoming with information about their activities regarding UDI Underground, LLC. We find that the proof the Montgomerys provided meets the requirements of section 1.469-5T(f)(4), Temporary Income Tax Regs., supra.” 2013 T. C. Memo. 151, at p. 11.

So testimony might work even when there are no logs or appointment books.

The Pats will get some losses passed through to them. But they founder on the big loss, the $425K judgment.

Section 1366(d)(1) limits S Corp shareholders’ losses to their adjusted basis in their S Corp stock plus their basis in S Corp debt. The Pats can’t prove any basis in their stock (surprising since Pat D inherited it; but as Dad lived in FL, I suspect it was all in a trust to avoid probate. Still, why was no Form 706 filed?).

So they need the judgment from the defaulted loan to show basis in Sub S corp debt.

No dice, says Judge Morrison: “When an S corporation shareholder guarantees a loan by a bank to the S corporation, no debt has been created between the S corporation and the shareholder. However, once the S corporation shareholder pays the bank pursuant to a guarantee, the S corporation becomes indebted to the shareholder. As we held in Underwood v. Commissioner, 63 T.C. at 476, ‘it is the payment by the guarantor of the guaranteed obligation that gives rise to indebtedness on the part of the debtor to the guarantor. The mere fact that the debtor defaults and thereby renders the guarantor liable is not sufficient.’”  2013 T. C. Memo. 151, at p. 18 (Citations omitted).

Had the Pats taken out the loan, made the S Corp assume the loan obligations as primary obligor, and stepped back as guarantors, that might have worked even if they defaulted, but there is nothing in the record to support that the Pats did anything like that. See 2013 T. C. Memo. 151, at p. 19, footnote 6.

Sometimes straight forward isn’t the way forward, especially underground.


In Uncategorized on 06/13/2013 at 22:10

No, not the would-be risqué line of my misspent youth (what a flop that was!), but Special Trial Judge His Honor Lewis (Love That Name) R. Carluzzo letting Al J. (“Big Al”) Schneider III, executor of the estate of Al J. Schneider, Jr., know that he has world enough and time to deal with the IRS’ amended answer and the additional tax and penalties IRS wishes to strew around.

The story is a designated hitter, Estate of Al J. Schneider, Jr., Deceased, Al J. Schneider, III, Executor, Docket No. 4556-10, filed 6/13/13.

The case had been on for trial twice, but each side got an adjournment (which Tax Court calls a continuance), and no date and time certain has been fixed for the main event.

STJ Lewis gives the usual Section 6214(a) bow, stating that IRS has the burden of proof as to the matters pled in the amendment, to wit, the increased deficiency and the penalties. I’d warn Big Al that he shouldn’t get too elated; the Section 6214(a) waltz usually ends with “I decide based upon the preponderance of the evidence, without regard to the burden of proof.”

Howbeit, here’s STJ Lewis: “We acknowledge petitioner’s claims of unfair surprise and prejudice, and appreciate petitioner’s point about the timing of the motion. Nevertheless,we do not share petitioner’s view that respondent’s motion should be denied on those grounds. After all, leave to amend a pleading is ‘to be given freely when justice so requires.’ Rule 41(a).

“According to petitioner, the expert report relied upon by respondent relevant to the matters covered in the amendment to answer was received on January 23, 2013. Petitioner will have had sufficient time to review and respond to that report by the time that the trial, if any, in this case is held.” Order, at pp. 1-2. (Citations omitted).

Apparently Big Al is peeved because IRS waited from January, when they had their expert’s report, until April, when they made their motion to amend. As IRS held back amending, I’d guess Big Al’s trial strategy did not contemplate addressing the increased potential liability or, perhaps, the need to engage other experts to rebut.

Now STJ Lewis says, “you’ve had the report, and trial isn’t next week, so go prepare.”

But I have some sympathy for Big Al’s position. See my blogposts “Don’t Ambush the Indians”, 4/7/11, and “Don’t Ambush the Accountants, Either”, 8/17/11.


In Uncategorized on 06/12/2013 at 16:38

Cesare Giaquinto confronts the famous line from the 1977 Mel Brooks classic “High Anxiety” when his attempt to claim he’s not responsible for a bunch of TFRPs from his employer founders on his failure to claim the certified letter from IRS containing the Letter 1153, the key to appealing from the determination to assess the TFRPs of his employer against him as a responsible person.

Judge Marvel has the story in 2013 T. C. Memo. 150, filed 6/12/13.

Cesare worked for Salvadeo, and filled out a Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes, when a Revenue Officer called to find out why Salvadeo hadn’t paid $95K worth of withholdings.

But Cesare never sent in a Form 433-A, because Salvadeo told him not to. Cesare also didn’t pick up his certified mail on three occasions, and only got the Letter 3172 telling him about the tax lien IRS was filing against him.

IRS gets a USPS employee to testify that they left USPS Forms 3849s, attempted delivery notices, for Cesare. “Where the Commissioner has shown that he properly sent the appropriate notice to a taxpayer by certified mail and that the mail carrier left USPS Forms 3849, we have sometimes found that the taxpayer’s failure to claim delivery of the certified mail was deliberate.” 2013 T. C. Memo. 150, at p. 12 (Citations omitted).

“Petitioner contends that he had no reason to avoid or refuse any mailing from the IRS that would have given him the opportunity to contest the sec. 6672 trust fund recovery penalties. Our cases, however, are replete with instances where taxpayers thought that ignoring or refusing mail from the IRS would make their tax problems disappear.” 2013 T. C. Memo. 150, at p. 14, footnote 9 (Citations omitted).

Needless to say, Cesare lost his chance to contest his responsible personhood. His tale of nonreceipt doesn’t convince Judge Marvel, who finds deliberate refusal to receive the Letter 1153.

Compare and contrast with Antonio Lepore’s story, as told in my blogpost “You Didn’t Get It – Part Deux”, 5/31/13.


In Uncategorized on 06/11/2013 at 15:58

Now all of us senior citizens (I hate that phrase, but what will you? We’re stuck with it) know that when confronted with a computer wardrobe malfunction, younger is better. It’s the old phrase made famous by the Berkeley Free Speech Movement (and if any of this makes sense to you, you probably should heed it when dealing with a computer): “Don’t trust anyone over thirty.”

Well, Javad Bigdeli and Ashraf Bigdeli took that advice in 2013 T. C. Memo. 148, filed 6/11/13, but Judge Morrison wasn’t impressed.

Javad was a traveling dentist who tried to write off his commute and stayovers. And Ashraf defaults at the trial. It’s the usual Section 162 meets Section 274; nothing to long detain the tourist here.

Here’s the rub: “The Bigdelis’ daughter, who did not have experience in tax, accounting, or any related fields, helped them prepare their tax returns using TurboTax computer software for both tax years 2008 and 2009.” 2013 T. C. Memo. 148, at p. 4.

So even though IRS argues the Bigdelis conceded the Section 6662(b)(1) penalties by not addressing same in their petition (see Rule 34(b)(4), and my blogpost of even date herewith, “An Interest(ing) Question – Or Two”), Judge Morrison says he’ll assume but not decide that the Bigdelis did say something about penalties somewhere. Howbeit, they were still negligent.

Judge Morrison: “In preparing their tax returns, they relied entirely on their daughter and on TurboTax. They attempted to deduct personal expenditures without doing any research or consulting any expert to decide whether the deductions were proper. A reasonable and prudent person would not have tried to claim the deductions they claimed without making at least a minimal effort to ensure that they had some legal basis for doing so.” 2013 T. C. Memo. 148, at p. 13.

A young computer whiz with no tax background doesn’t cut it in Tax Court.


In Uncategorized on 06/11/2013 at 15:32

Tax masochists who follow my blog will remember that we left John Crimi and his family, at the end of my blogpost “Stick It”, 2/14/13, with “their deduction (or at least some of it).”

Well, John and family went through the Section 155 bean-count, and at the end they and IRS agreed as to some, but not as to all. Specifically, three of the nine consolidated cases were hung up on Section 6404(g) interest suspension.

You’ll remember that Section 6404(g) is the “you didn’t tell me I owed you for 36 months”. You didn’t remember? Well, neither did I, so I looked it up. And you should look it up, too, and thereupon please send a few dollars to the Cornell Law Institute, my alma mater’s on-line fount of all knowledge.

You’ll find this tale in John Crimi, Docket No.13252-09, filed 6/11/13.

Well, the Crimi clan claim the IRS didn’t tell them. But Judge Laro says IRS coldly responds thus: “‘[I]t is a long-standing principle that this Court generally lacks jurisdiction over issues involving interest.” Goode v. Commissioner, T.C. Memo. 2006-48, 91 T.C.M. (CCH) 901, 905-906 (2006). Further, it does not appear petitioner has made interest an issue in his petition, at trial, or on brief.” Order, p. 2.

Now remember Rule 31(c): “A party may state as many separate claims or defenses as the party has regardless of consistency or the grounds on which based.”

And Rule 34(b)(4), which requires that the petition contain: “Clear and concise assignments of each and every error which the petitioner alleges to have been committed by the Commissioner in the determination of the deficiency or liability. The assignments of error shall include issues in respect of which the burden of proof is on the Commissioner. Any issue not raised in the assignments of error shall be deemed to be conceded.”

So Judge Laro gives the Crimis homework. They must file, within a week, “a Memorandum of Points and Authorities, not to exceed 10 pages, addressing (1) whether we have jurisdiction over petitioner’s claim under section 6404(g) and (2) in any event why petitioner should not be deemed to have waived any issues relating to interest.” Order, p. 2.

And their lawyers should write on the blackboard 100 times: “I will raise every error I can possibly conceive of in every petition I file.”


In Uncategorized on 06/10/2013 at 16:27

Special Trial Judge Lewis (The Right Spelling) R. Carluzzo, that is. He gets some real doozies, and here’s an offer of proof, a designated hitter, Benjamin Whitfield, Docket No. 25987-12.

Tax Court has often been described as the “People’s Court”, the cheap home of justice for the overtaxed. But its jurisdiction is so limited, counterintuitive and labyrinthine that the people often get lost.

Ben doesn’t get lost, at least not physically; he’s in the slammer in FL.

But his refund check for 2010 doesn’t reach him; IRS sent it to his home, but it was forwarded to the Stony Lonesome, whereat the warders returned it to IRS.

So Ben petitions IRS in Tax Court.

STJ Lew gets this one. And deals with it as follows: “We are neither familiar with, nor have any jurisdiction with respect to the procedures for the receipt of mail applicable to a person incarcerated in the State of Florida.

“Correspondence between Florida prison officials and respondent is described in petitioner’s submissions, but copies of any such correspondence have not been provided. Furthermore, we are satisfied that the correspondence, as described, does not constitute a notice of deficiency for 2010 as petitioner argues. Consequently, and as noted in respondent’s motion [for dismissal], because respondent has not issued a notice of deficiency for 2010 to petitioner, we have no jurisdiction over his claim for a refund for that year. See sec. 6512(a).” Order, p. 1.

Ben should sue in US District Court or Court of Federal Claims.

And for sure, neither of  those is a place to find cheap justice.


In Uncategorized on 06/10/2013 at 16:07

That is, abandon hope of taking an ordinary loss if you abandon property subject to a mortgage, recourse or non-recourse.

That’s Judge Gerber’s take on Drucella T. Malonzo, 2013 T. C. Sum Op. 47, filed 6/10/13, a “don’t quote me” that furnishes a good refresher on FMV-exceeds-basis situations.

Drucella bought a house in Sacramento, CA, resided there for a while, moved to San Francisco and rented out the house, earning income and taking depreciation. But when her tenant left and no new tenant appeared, Drucella stopped paying her mortgage. The lender foreclosed and sent Drucella a 1099-A, Acquisition or Abandonment of Secured Property.

Drucella claimed ordinary loss, IRS claimed capital gain. They’re fighting over a $737 deficiency in tax, but Drucella’s loss would be well into six figures, if she can get it.

She can’t.

Judge Gerber: “Petitioner purchased the property, depreciated it, and, after her inability to rent it out, walked away when her mortgage obligation was in excess of the value of the property and also in excess of her adjusted basis in the property. Here, like the taxpayer in Crane [Crane v. Com’r, 337 U. S. 1(1947)], petitioner claimed depreciation based on her basis or cost. Even though she walked away from the property with the intention of no longer making payments on the mortgage, the subsequent foreclosure of the mortgage loan securing the property constituted a ‘sale or exchange’. See sec. 1.1001-2(a)(1), Income Tax Regs.” 2013 T. C. Sum. Op. 47, at p. 6.

Drucella’s position ignores the mortgage indebtedness, and Judge Gerber won’t. When Drucella walked, she’s deemed to have sold even though the mortgage exceeded the FMV of the property. She took depreciation, which IRS adds back to her basis, and calculates the gain. See page 4 of the opinion for the arithmetic.


In Uncategorized on 06/07/2013 at 14:21

As hockey fans know, certain acts by coaches and players can send an unoffending player off the ice, to serve two minutes in the penalty box for the sins of others.

Leslie A. Byrne, Docket No. 9242-10, filed 6/7/13, was sent off for keeps due to failure to prosecute, but it was her attorney who delayed the game and caused Leslie to be tossed. Her attorney ran to Second Circuit and threw himself on the mercy of that esteemed tribunal.

The Second Circuiteers reversed and remanded, reinstating Leslie and sending her attorney (whom I won’t name here, although Judge Kroupa is not so reticent as I) to face the music. And IRS gives Leslie, who claims to be an innocent spouse, a bonus for her trouble.

Judge Kroupa: “The Court held a telephone conference with the parties. Respondent indicated that he would reevaluate petitioner’s innocent spouse claim in accordance with the new standards promulgated in Notice 2012-8, 2012-4 I.R.B. 309. The parties agreed to remand the innocent spouse claim to the Cincinnati Centralized Innocent Spouse Operation (CCISO).

“The Court also discussed sanctions against petitioner’s counsel. We find it appropriate to sanction petitioner’s counsel for failing to obey the Pretrial Order. See Rule 104(c)(4). Petitioner’s counsel acknowledged his conduct unnecessarily delayed this matter.” Order, at p. 1.

Notwithstanding the numerous protestations by Tax Court that Notice 2012-8 is under review and won’t be followed there until final (cf. Sriram v. Commissioner, T.C. Memo. 2012-91, slip op. at 9 n.7), IRS said that they would apply the new procedures even though not final. See my blogpost “Innocence is Bliss”, 1/6/12. And Judge Kroupa lets it go, for now; but if Leslie loses at the Cincinnati injury clinic and comes back to Tax Court, Sriram may rise to bite her. See my blogpost “Diehl or No Diehl”, 6/21/12.

Meanwhile, back at the whipping post, Judge Kroupa hits Leslie’s dilatory attorney with a $500 sanction. And let us all remember Voltaire’s immortal words anent poor Admiral Byng, R.N., in a not totally dissimilar situation: “Dans ce pays-ci, il est bon de tuer de temps en temps un amiral pour encourager les autres .”

I need not, of course, translate.


In Uncategorized on 06/06/2013 at 20:12

No, not the 1935 Arthur Schwartz-Howard Dietz revue that introduced “What A Wonderful World” to the standard repertoire, nor yet the late Anthony Lewis’ Pulitzer-Prize-winning column so styled, but today it’s the story of James F. Daly and Candace H. Daly, 2013 T. C. Memo. 147, filed 6/6/13.

Or rather, it’s Jim’s story, as Sandy is safe in Utah, working full-time as a lobbyist, while Jim is off in Iraq and Afghanistan, working for L3 Communications.

Judge Kerrigan: “He was employed by L3 during the years in issue.

“During the years in issue L3 maintained its principal place of business in Salt Lake City, Utah. L3 contracted with the Department of Defense. Part of petitioner’s work for L3 involved L3’s contract with the Department of Defense.

“During the years in issue petitioner husband performed services for L3 in Afghanistan and Iraq. L3 compensated petitioner husband for those services. When petitioner husband was working overseas, he was unable to choose where he would be working or for how long he would be there. He was informed of his departure date only one month in advance. He was informed of his return date only two weeks in advance. Petitioner husband, however, was aware in advance that his assignments in Afghanistan and/or Iraq would last approximately three months. The Department of the Air Force provided L3 with an official travel authorization for petitioner husband for travel from August 10, 2007, to August 31, 2008.” 2013 T. C. Memo. 147, at p. 3.

Jim was confined to base (Kandahar or Ballard) during his hundred-day tours, was flown in and out by the US Air Force, couldn’t bring family with him nor could he leave the base. Jim worked 12-hour shifts every day, weekends included.

Jim claimed Section 911(a) foreign earned income credit. No doubt he earned the money via personal services. And he prorated his earnings based upon time in-country, and requested a waiver of the 330-day out-of-USA requirement.

But he wasn’t foreign and wasn’t waivable, said IRS, and Judge Kerrigan agrees. See Section 911(d)(4). Jim had to be a bona fide resident who would have satisfied the 330-day requirement except that Treasury, after consultation with State, decided that USA nationals had to leave because of war or civil unrest.

But Jim wasn’t a bona fide resident. Judge Kerrigan: “Petitioner husband maintained strong ties to his home in Utah. He lived on U.S. Air Force bases when he was in Iraq and Afghanistan and was not allowed to leave the bases. His family did not go with him, and he did not travel. He did not open a bank account in Iraq or Afghanistan. … petitioner husband had ties to Iraq and Afghanistan that were severely limited and transitory during the years in issue.

“Petitioners contend that even if petitioner wife had been allowed to join petitioner husband in Iraq or Afghanistan, she nevertheless would have been unable to go because of her separate career. Petitioners also contend that petitioner husband maintained a residence in Utah because of petitioner wife’s business. Even if these contentions were true, they would not outweigh petitioner husband’s limited ties to Iraq and Afghanistan.” 2013 T. C. Memo. 147, at p. 12-13.

I can understand Judge Kerrigan, except for bit about the bank account in Iraq or Afghanistan; is it possible to have a bank account there, in a bank that hasn’t been blown up?

Jim claimed his USAF travel warrant was for more than a year, but that cuts no sand (forget about ice) with Judge Kerrigan: “Petitioners contend that petitioner husband’s residence was in Iraq or Afghanistan or both during the years in issue. They claim that his primary place of business was in Afghanistan and/or Iraq because he was ‘ordered to be present in these countries for an entire 12 months’. Petitioners refer to the travel authorization that L3 received from the Department of the Air Force, which authorized petitioner husband to travel from August 2007 to August 2008. Travel authorization alone is not proof that petitioner husband’s primary place of business (and therefore tax home) was in a foreign country. Petitioner husband’s temporary location in Afghanistan and Iraq does not change the fact that petitioners’ tax home was in the United States. Petitioners have failed to show that petitioner husband established a residence in a real or substantial sense in Afghanistan and/or Iraq in the years in issue.” 2013 T.C. Memo. 147, at pp. 13-14.

But finally, get this: “Petitioners failed to meet the requirements under section 911(d)(4)(B) because they failed to show that the Secretary determined that individuals were required to leave Afghanistan and/or Iraq because of war, civil unrest, or similar adverse conditions. The Secretary publishes a list of foreign countries where war, civil unrest, or similar adverse conditions exist for purposes of section 911(d)(4)(B). Sec. 1.911-2(f), Income Tax Regs. No list was published for 2007. The list that was published for 2008 does not include Iraq or Afghanistan. See Rev. Proc. 2009-22, sec. 2.04, 2009-16 I.R.B. 862, 863.” 2013 T. C. Memo. 157, at p. 16.

Oh yeah? There was no war or civil unrest in Iraq or Afghanistan in 2007 or 2008, according to the Secretary of the Treasury?

Anyway, Jim loses.

And for more about tax homes, see my blogpost “Home Is Where The Heart Is”, 7/21/11.