It’s that simple to form a partnership for Federal income tax purposes, whatever State law may say. That’s the story from The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being (and this time doesn’t mess up the partitive genitive), His Honor Mark V. Holmes.

Oh yes, the case in point is Abdolreza T. Azimzadeh and Zohra Ehsan, 2013 T. C. Memo. 169, filed 7/23/13. The partnership story is all about Ab; Zohra is in it only for some W-2 wages she never bothered to report.

Ab isn’t big on recordkeeping, and that sinks a lot of his used-car dealings, with Judge Holmes preparing his usual tables.

Ab claims he was partners with Ray Barghi, or maybe Ray’s car business Luxury For Less.  If Ab was partners with Ray or LFL, his tax bite would be less, as Ray would be in it with him.

IRS says State law (California) should decide the partnership question.

“The Commissioner doesn’t think that Azimzadeh and Barghi were partners, and asked us to look at California law to see if they were. But federal tax law, and only federal tax law, controls the classification of  ‘partners’ and ‘partnerships’ for federal tax purposes.” 2013 T. C. Memo. 169, at p. 5. (Citations omitted.)

Judge Holmes goes on: “A partnership is a business entity with two or more owners. The business entity requirement doesn’t mean that the partnership needs to exist separately from its owners or otherwise be recognized under state law…, so it’s not fatal that Azimzadeh and Barghi didn’t form a separate state-law entity to do business. Rather, the hallmark of a partnership is that ‘the participants carry on a trade, business, financial operation, or venture and divide the profits therefrom.’” 2013 T. C. Memo. 169, at pp. 5-6 (Citations omitted).

Well, Ray could sign the business checks and did write himself a bunch of checks, some of which he labeled “Draw”, and he was around, but Barghi never shows up to testify. And there’s no written agreement, and Ab’s recordkeeping, as aforesaid, is almost non-existent. And of course Ab never filed a Form 1065 or issued K-1s. So Judge Holmes can’t tell what Ray contributed, or what he did, and Ab’s testimony doesn’t help.

In fact, Ab has “dented” his credibility generally. “Azimzadeh actually admitted at trial that he had changed the dates on numerous receipts that he had given to the Commissioner. We find this admission credible, and its natural effect is to reduce the weight we give his testimony on this and other issues.” 2013 T. C. Memo. 169, at p. 22, footnote 6.

Remember the Luna factors? If not, see my blogpost “Substance Over Form”, 2/11/11, where Judge Haines “distills” the Luna factors for deciding who is a partner and what is a partnership.

Burden of proof  is on Ab, and he flunks. No partnership.

No, not the 2009 Faith Anthony and Jill Wesolik opus, but rather a look at Section 107, of which I was only dimly aware but on which a close relative of mine was at one time an expert. Case in point– Ricky R. Williams and Pamela D. Williams, 2013 T. C. Sum. Op. 60, filed 7/22/13, a “not for nuthin’” Section 7463 small-claimer.

Ricky was a duly ordained Baptist minister and was employed under the terms of a written agreement at the St. Johns Missionary Baptist Church.

The employment agreement was the problem. It set forth Ricky’s wages, but specified a $500 monthly housing allowance for the first six months of Ricky’s employment. The payment could be extended by vote of the Church’s Deacon Ministry, but the agreement said nothing else, and apparently neither Ricky nor the Deacons did anything else.

Ricky and the Deacons tried to amend the agreement retroactively seven years after the fact, and after IRS audited Ricky and Pam and blew away most of their Schedule A and Schedule C deductions, and nailed them for unreported Schedule C income.

No go, says CSTJ Panuthos.

“Section 107(2) provides that the gross income of a minister does not include ‘the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.’ As a prerequisite for this exclusion, the taxpayer must establish that there was a designation of the rental allowance pursuant to official church action before payment. Sec. 1.107-1(b), Income Tax Regs. The regulations state in pertinent part:

The term ‘rental allowance’ means an amount paid to a minister to rent or otherwise provide a home if such amount is designated as rental allowance pursuant to official action taken * * * in advance of  such payment by the employing church or other qualified organization when paid after December 31, 1957. The designation of an amount as rental allowance may be evidenced in an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action. The designation referred to in this paragraph is a sufficient designation if it permits a payment or a part thereof to be identified as a payment of rental allowance as distinguished from salary or other remuneration.” 2013 T. C. Sum. Op. 60, at p. 6.

The second agreement (or the amended agreement, whichever it is) was not executed before Ricky got the alleged payment. Therefore no exclusion and the deficiency stands.

“We understand that petitioners are not tax experts, but we conclude that they did not act with reasonable cause and in good faith and that they are liable for the accuracy-related penalty under section 6662(a)….” 2013 T. C. Sum. Op. 60, at pp. 9-10.

Parson, get it in writing and get it in advance, lest, like an exalted predecessor, you find you have not where to lay your head.

And No, That’s Not A Typo

 Our latest case of going postal involves Mr. Richard Postma of Grand Rappids (sic), MI, who claims he’s a notice partner but not a tax matters partner in Taurus FX Partners, LLC, Richard Postma, A Partner Other Than The Tax Matters Partner, 2013 T. C. Memo. 168, filed 7/22/13.

Richard was the sole member of FX Trading, LLC, which in turn was a partner in Taurus. Bricolage Capital, LLC was both managing partner and tax matters partner of Taurus, but FX was notice partner.

Then FX sold its interest to Littlefield, a Sub S of which Richard was sole shareholder.

When IRS began looking at Taurus’ return for the years in issue, they sent a Notice of Beginning of Administrative Proceeding (NBAP) to FX care of Bricolage, and to FX and to Richard at the Grand Rappids (sic), MI, address.

IRS dealt directly with Richard, asking him to send documents concerning his investment in Taurus and also asking him to sign a Form 872-P SOL extender, which he signed both as Authorized Signer and as TMP. His representative stated in a covering letter that Richard never was formally designated as TMP.

Bricolage, true to its name as something thrown together out of whatever came to hand, apparently did nothing while this was going on, but did file bankruptcy, thus disqualifying itself as TMP and turning all its partnership items into nonpartnership items.

IRS got around to sending the FPAA to Bricolage and some other investors, and also to FX at another Grand Rapids address (this time getting the spelling right).

Richard claims the FPAA was invalid because not sent to the proper partner, namely, him, as IRS knew all about him. And his petition was filed after the 150-day window had closed.

No, says Judge Buch, you’re too late, Richard.

Since partners come and go, and adjusted items may spread over years, “(T)he last known address rules applicable to notices of deficiency do not apply to FPAAs. Section 6223(c)(1) instructs that the partnership return is the starting point for identifying where to mail notices. The IRS must update that information only to the extent the updated information is provided in accordance with the regulations. The regulations require that updates be made by submitting a written statement, generally to the service center where the partnership return was filed….” 2013 T. C. Memo. 168, at pp. 8-9 (footnotes omitted, but you can tell Judge Buch was on law review, because he loves footnotes).

There’s a five-part test for what has to go into the notice, and nothing that Richard can produce shows he ever sent the relevant service center anything that comes close.

If you’re interested, the required notice has to (a) identify the partnership, each partner for whom information is supplied, and the person supplying the information by name, address, and taxpayer identification number; (b) explain that the statement is furnished to correct or supplement earlier information with respect to the partners in the partnership;(c) specify the taxable year to which the information relates; (d) set out the corrected or additional information; and (c) be signed by the person supplying the information.

And IRS can mail a generic NBAP or FPAA addressed to “Tax Matters Partner” at the partnership’s address as shown on the Form 1065 for the year at issue, without filling in the TMP’s name.

Richard says his prior dealings with IRS show IRS knew right well who and where he was. Says Judge Buch, while IRS “may” use whatever information they have to send you notices, that’s permissive and not prescriptive. See my blogpost “A Busy Day”, 9/10/12, which quotes one of the regs Judge Buch quotes here in Taurus.

IRS can send you notices if they know where you are, even if you haven’t told them per the regs, but they are not required to, and you have no beef if they don’t.

So Richard, you’re late and you’re out.

Tax Court echoes the Frank Silver and Irving Cohn 1922 opus (but they were concerned with bananas) in a rash of designated hitters and one plain-vanilla order.

First up, with a solid half-dozen designated hitters, all involving la famille Zerjav, and all being dealt with by Special Trial Judge Lewis (“His Name Is His Fame”) R. Carluzzo. They involve the Section 6707A penalty for failing to report reportable transactions, with a special extra hit for not reporting a listed transaction.

Tax Court has no jurisdiction over those. Congress has left review to the US District Courts (even the Court of Federal Claims can’t go there). See Smith v. Com’r, 133 T. C. 18, filed 12/21/09.

On to the next case. Section 7428 Tax Court reviews of Section 501(c)(3) tax exemption disallowances do not permit Tax Court to enjoin IRS from yanking the exemption while the review is ongoing. Special Trial Judge John F. Dean refuses to enjoin IRS from yanking the exemption, and trumpeting same to all and sundry, in Consumer Education Services, Inc., Docket No. 6281-13X, filed 7/19/13.

Apparently IRS audited the educated consumers, yanked their 501(c)(3) letter retroactive to Day One, and then, when the consumers went to Appeals, confirmed the yank, but then rescinded the yank.

Consumers wanted the retroactive yank and its attendant publicity enjoined.

Now notwithstanding Tax Court’s limited general jurisdiction, and complete lack of equitable jurisdiction to give injunctive relief far and wide, there are exceptions, and STJ Dean lists them all. But Section 7428 isn’t one of them.

Even so, Consumers’ attorneys come up with a Taishoff “good try”. They agree that Tax Court’s jurisdiction in a Section 7428 is limited to declaring whether an entity does or does not qualify for Section 501(c)(3), as a special exception to the Declaratory Judgment Act, and they also agree the Anti-Injunction Act, Section 7421, bars enjoining collection of any tax.

“Petitioner argues, however, that notwithstanding the Declaratory Judgment Act’s general prohibition on declaratory judgments in tax cases, section 7428 actions are excepted from the prohibition. Petitioner posits the proposition that the Declaratory Judgment act is ‘coextensive and coterminous’ with the Anti-injunction Act. Because the two acts are coextensive and coterminous, according to petitioner, ‘an action allowed under one will not preclude relief afforded by the other’ and, therefore, the Court may, despite the prohibition of the Anti-injunction act, enjoin respondent’s actions pursuant to 5 U.S.C. sections 701 – 706 (2012), the Administrative Procedure Act (APA).” Order, at p. 4. (footnote and citations omitted).

Nice, but even if Consumers’ lawyers have it right, Tax Court’s jurisdiction is limited, its injunctive powers are confined to the specific instances that Congress has expressly granted, so no injunction from Tax Court.

Yes, we have no jurisdiction.

Announcing that it has found and implemented certain unspecified “cost cutting” measures, IRS has withdrawn its notice of furlough for July 22 (Monday), although certain local offices may nevertheless be closed.

Check your local listings.

Hamlet, Act I, Scene V

Judge Gustafson takes on the role of Hamlet’s Ghost in the latest iteration of Swanson-Flosystems Co., Docket No. 27975-11, and orders IRS to “swear”, in a designated hitter filed 7/18/13.

See my blogpost “Adelbert, Thou Should’st Be Living At This Hour”, 4/5/13. Swanflo’s original counsel, overmatched, begged Judge Buch for time to go to the bullpen for relief, and Judge Buch took pity.

As he and I said at the time: ‘(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?”

Having done his best, Judge Buch bailed out of the case in May, and in from the bullpen comes the ever-obliging Judge David Gustafson.

As we hoped, Swanflo’s new counsel are on the ball. IRS signs off on its responses to Swanflo’s interrogatories thus: “11. Pursuant to T.C. Rule 71 all of the above answers are made in good faith and are as complete as possible after a reasonable inquiry of the readily obtainable information.

“Paragraph 11 is followed by a conventional signature block. Respondent asserts that the interrogatory responses ‘are signed in conformance with T.C. Rules 71(a) and (c)’.” Order, p. 1.

Nope, says Judge Gustafson, that’s not sworn, as Rule 71 requires answers under oath, nor is it an unsworn declaration made under penalty of perjury (see 28 USC sec. 1746). The emphasis is by Judge Gustafson.

So weasel-wording doesn’t get it, IRS. As the Ghost said, “Swear!”

Look at the sad story of Amin Juma Abd, as told by Judge Kerrigan in a designated hitter, Docket No. 9592-12. Ami is late with his petition. No biggie, that’s gotten battalions of petitioners tossed before now.

But Ami’s case is unusual. As Ami puts it “Petitioner wants to bring to this honorable court attention, that he is detained by the Homeland Security at this time, awaiting the determination of his removal. Petitioner, humbly request from this court, to put aside this case until petitioner be released so he can litigate his case with full accesses of his file and discovery from Respondent.” Order, p. 1.

Too bad, Ami, IRS mailed your SNOD to your last-known address, Fort Dix, New Jersey, a location where I once was an overnight guest, but, unlike you, I was promptly released the next day.

Ami claims he was ordered by a US District Court to attend an Inmate Skills Development Plan in Chicago, and thus was away when the SNOD arrived at Fort Dix.

Too bad, says Judge Kerrigan, you should have told IRS where you were.

Unanswered in all this is Ami’s claim that as he’s been in detention since 2006 and the SNOD covers 2008, he can’t have taxable income.

So Judge Kerrigan falls back on the “we are a Court of limited jurisdiction” patter.

Ami, you’re out.

Today’s story is from the courtroom of the obliging Judge David Gustafson, who has a designated hitter for us in the case of Gregory Scott Savoy, Docket No. 12316-12L, filed 7/16/13.

No one disputes “(1) that Mr. Savoy, who has suffered from a long-term illness, may not have been given an adequate opportunity to challenge his 2007 liability, (2) that Mr. Savoy may not have been given adequate time, in view of his illness, to submit tax returns for 2003 to 2010 (the submission of which was a prerequisite to his eligibility for certain collection alternatives), and (3) that there may also be a defect of ‘verification’ under section 6330(c)(1), involving the notice of deficiency underlying the 2007 liability.” Order, at pp. 1-2.

So IRS asks Judge Gustafson to send Greg back to Appeals, so he can get a fair shake all around on the numerous defects from his prior visit to Appeals. And Judge Gustafson did.

Is Greg happy? No. He wants Judge Gustafson to certify, per Section 7482(a)(2)(A), whether the Americans With Disabilities Act (the ADA) applies to IRS, so he can take an interlocutory appeal.

You’ll remember that taxpayers’ batting averages with interlocutory appeals are hardly what will qualify one for the All-Star Game. See my blogpost “Too Late And Not Timely”, 4/25/13. And Greg fares no better than Carol Diane Gray did back in April.

For an interlocutory appeal (an appeal from an order that does not finally determine the case or controversy; that’s an order where neither side has won or lost–yet), you need two things: first, a controlling question of law is involved where there is a substantial ground for a difference of opinion, and second, that the appeal may materially advance the termination of the litigation.

Well, by its terms the ADA doesn’t apply to the Federal government, leaving aside Jimmy Madison’s famous comment from The Federalist No. 57: “I will add, as a fifth circumstance in the situation of the House of Representatives, restraining them from oppressive measures, that they can make no law which will not have its full operation on themselves and their friends, as well as on the great mass of the society. This has always been deemed one of the strongest bonds by which human policy can connect the rulers and the people together. It creates between them that communion of interests and sympathy of sentiments, of which few governments have furnished examples; but without which every government degenerates into tyranny. If it be asked, what is to restrain the House of Representatives from making legal discriminations in favor of themselves and a particular class of the society? I answer: the genius of the whole system; the nature of just and constitutional laws; and above all, the vigilant and manly spirit which actuates the people of America—a spirit which nourishes freedom, and in return is nourished by it.”

But this is a non-political blog, right?

However, the Rehabilitation Act of 1973, which does apply to the Federal government, has the standards of the ADA engrafted thereon. “In sum, the ADA does not apply to Federal agencies; but the Rehabilitation Act of 1973, employing the ADA’s definition of ‘disability’, does apply to the Federal agencies. If this is Mr. Savoy’s position, then he is correct. If he disputes this proposition, there is no substantial ground for difference of opinion.” Order, at p. 4.

So Greg, what’s the difference of opinion? ADA standards apply.

IRS will put Greg in CNC (currently not collectible status) and review his case. “It is therefore not clear whether there will actually be any dispute that would implicating [sic] the provisions of the Rehabilitation Act (or, if it were applicable, the ADA). We therefore cannot say that an immediate appeal of any legal question about the applicability of the ADA would ‘materially advance the ultimate termination of this litigation’, for purposes of section 7482(a)(2)(A). “ Order, at pp. 4-5.

So Greg loses, and goes back to Appeals.

And doesn’t anybody proofread these orders?

As we reach the midsummer All-Star break, I am reminded of an axiom every batter learns in his or her earliest hour: make the pitcher throw pitches. If she or he throws enough of them, one of them will be the pitch you want.

The corollary extends to Tax Court, as Judge Chiechi teaches in John D. Nye and Rose M. Nye, 2013 T. C. Memo. 166, filed 7/15/13.

Raise every issue you possibly can in your petition, and argue it in your brief, even if your case is as thin as a spider’s web (just don’t be frivolous). Make IRS, and Tax Court, deal with every issue. Make ‘em throw pitches.

The case itself is another of the alimony night-of-the-living-dead cases. John settles with ex-spouse Alice for a $350K lump-sum payout, but the question is what would happen if Alice dies after the revised judgment of divorce is entered in FL county court, but before the payout actually happens?

It’s the old Section 71(b)(1)(D) problem, and Judge Chiechi grants IRS summary judgment.

I’m finding fault with the Court’s rationale, as it’s based upon an intermediate FL appellate court case. Judge Chiechi relied on dictum, as the court in that case didn’t need to reach the conclusion that the obligation to pay survived, in denying the deceased spouse’s executor’s petition to modify that divorce decree. In fact Judge Chiechi admits that the intermediate appellate court said several times it wasn’t going there. See 2013 T. C. Memo. 166, at p. 17, footnote 15.

So Judge Chiechi falls back on general contract law statements. But as we learned in James F. Moore, 2011 T. C. Memo. 200, filed 8/16/11, “(I)f State law is ambiguous in this regard, however, a ‘federal court will not engage in complex, subjective inquiries under state law; rather, the court will read the divorce instrument and make its own determination based on the language of the document.’ Hoover v. Commissioner, 102 F.3d 842, 846 (6th Cir. 1996), affg. T.C. Memo. 1995-183.” 2011 T. C. Memo. 200, at p. 6. And see my blogpost “Essmiss Essmoore, Essmiss Essmoore,” 8/16/11.

I submit State law was ambiguous on the specific point, the State’s highest court not having ruled on the point.

Howbeit, that’s for John and his lawyer to sort out, if they appeal.

What I want to stress, though, is that John’s lawyer never contested the Section 6662 accuracy penalty, even though Judge Chiechi asked for supplements to the parties’ papers. “In fact, petitioners alleged in the petition that ‘[t]he only issue is the deductibility of the $350,000 as alimony.’” 2013 T. C. Memo. 266, at p. 8, footnote 6.

So when she ruled against John on the deduction, the penalty was automatically included. See my blogpost “An Interest(ing) Question – or Two”, 6/11/13, wherein I said “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 fact, in James F. Moore, which I cited supra, as the high priced lawyers say, IRS conceded the penalty. But James’ lawyer obviously contested the penalty. Here, John’s lawyer (who also represented him in the divorce) didn’t.

As I’ve suggested in the analogical child-support Section 152 situation, some lawyer will get in trouble if his/her client doesn’t get what they expected. See my blogpost “Moody Blues”, 9/19/12.

It’s a game that two can play. First, Notice 2013-43, published 7/12/13, delays implementation of FATCA withholding for six months, so as to permit FFIs, PFFIs and QIs to get their acts together, and IRS to get the website up and running. Here’s the link.

And now for a really cool taxpayer tactic. You really wouldn’t notice it if you didn’t read between the lines of a couple of recent Tax Court orders.

I call it the “Lost in the Woods” variant on delay of the game. First up, Mordechai Yosef & Esther Gottfried, Docket No. 21322-12S, filed 7/10/13. Looks like a run-of-the-mill motion to dismiss for want of prosecution, and motion by petitioners to vacate denied. Petitioners never claim they didn’t get the notice of trial or the pretrial order, or give any adequate reason why they were no-shows. Dismissal stands.

Simple, right? Except Mordy and Esther live in Israel; and they requested trial in Aberdeen, South Dakota. Now a quick search on the internet finds that only airline that flies between Israel and Aberdeen, SD, lists the cheapest round-trip flight from Israel to Aberdeen, SD, at twice the cost of a flight from Israel to New York City. So why Aberdeen, SD?

Might be a one-off, maybe.

Or maybe not. See Ayala Misheli & Udi Jarlip, Docket No. 17656-12S, filed 7/12/13. Ayala & Udi coincidentally live in Israel, and promised to send settlement documents to IRS, but requested more time because of the difficulty of intercontinental transmission.

Time granted, but then the lines of communication went dead, and no further words or papers from Ayala & Udi.

Judge Goeke gives Ayala & Udi one last chance, but then will grant a motion by IRS to dismiss for want of prosecution.

Oh, I almost forgot. Place of trial is Billings, Montana. A quick internet search shows tickets just as expensive as Aberdeen, SD, and a 22 hour travel time.

Lost in the woods? Or delay of the game? In both cases petitioners were pro se, but someone was thinking.

Maybe Tax Court needs a rule that those seeking to lay venue need to show some nexus to the desired place of trial.