The saga of Philip D. Long, A.K.A Phil Long, continues, in 2013 T. C. Memo. 233, filed 10/21/13. For those who tuned in late, see my blogpost “Honor Your Partner – Part Deux”, 9/5/13, where Judge Morrison turned back a late claim by IRS that Phil had been relieved of indebtedness when his alleged partner-co-venturer, an entity fetchingly named Steelervest, took $800K for an $875K loan. But the issue of a joint venture remained, and that one Phil loses.

Though Phil had a joint venture with Steelervest in another deal, here the Luna factors (see my blogpost “Substance Over Form”, 2/11/11) militate against Phil’s supposed joint venture.

Judge Morrison: “1. The August 2006 agreement provided only that Steelervest would receive a share of Long’s profits from LOT. Neither this agreement nor any prior agreements purported to create a joint venture.

“2. Steelervest did contribute money.

“3. Besides its profit share, Steelervest had no right to control LOT’s assets or to receive money from LOT.

“4. Steelervest’s interest in LOT’s profits was capped at $875,000 and it had no liability for LOT’s losses.

“5. Neither Long’s ownership of LOT nor LOT’s operations were conducted in Steelervest’s name.

“6. Long and Steelervest did not file partnership returns or otherwise represent to the IRS or others that there was a joint venture.

“7. No evidence shows that separate books of account of any joint venture were maintained.

“8. Long possessed all control over his ownership interest in LOT and over LOT’s operations; there was no control by Steelervest.” 2013 T. C. Memo. 233, at p. 18.

It turns out, contrary to my query in my earlier blogpost “Honor Your Partner – Part Deux” abovecited (as the high-priced lawyers say), Phil did sell a lawsuit for $5.75 million. And he claims capital gains, at least on the portion of gain he did report.

No, says Judge Morrison, ordinary income. The lawsuit arose out of a busted condominium development deal, and Phil is in the condominium development business. IRS says Phil was going to build and sell condominium units, and had gotten zoning approvals, prepared sales literature, hired architects, and gotten deposits for 20% of the putative units from purchasers.

This is a business, and that the lawsuit caused Phil (he says) to change his mind and try to sell the land to a developer to build out the job doesn’t change the fact that Phil is a real estate developer.

No capital gains, Phil.

This is a far easier scenario than that appearing in my blogpost “Deal(er) Or No Deal(er)”, 8/28/12.

Quoting me quoting Ralph Waldo Emerson, from my blogpost “Foolish Consistency?”, 5/5/11, ‘A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.’ Ralph Waldo Emerson, 1803-1882.”

But The Great Dissenter, a/k/a The Judge Who Writes Like A Human Being, Judge Mark V. Holmes, invokes the principle with great force in Brett Van Alen and Kimberlee Van Alen, and its sibling (and Brett’s), Brandon D. Tomlinson and Shana C. Tomlinson, 2013 T. C. Memo. 235, filed 10/21/13.

Brett and Shana are the grandbabies of the redoubtable Joseph “Pop” Preuschoff, who fared forth from the Old World to 2345 acres of California ranch land, thirteen-sixteenths of the which went to Brett and Shana via their Daddy’s first wife, daughter of the aforesaid “Pop”.

But when their Daddy shuffled off this mortal coil, Brett and Shana got the ranch. Brett was a mere youth, and Shana not much older, so Brett was represented by his guardian ad litem, natural Mom, the daughter of “Pop”. The executor of “Pop”’s estate, third wife Bonnie, set up the estate tax return.

Even though Bonnie had the ranch valued by the County probate referee (as required by California law), she put down a lower number and claimed the Section 2032A(d)(2) write-down. And Brett’s Mommy and Shana signed aboard.

Judge Holmes expatiates: “This section helps those who inherit property by letting them use an asset’s value in its actual use at the time of death, rather than in its hypothetical highest and best use. (The paradigmatic case is a family farm that otherwise might have to be sold to a developer.) Not all kinds of property, and not all kinds of heirs, qualify for this deviation from the general rule that death tax is calculated on an estate’s fair market value. And the heirs have to promise not to sell the property right away, or shift its use to something more valuable. If an estate wants to use this lower value, it has to make a section 2032A election, and there are forms that have to be filled out and sent in with the return.” 2013 T. C. Memo. 235, at p. 7.

But Bonnie did a double-dip after IRS challenged her valuation, and got away with it, to the astonishment of Judge Holmes. Thus, the basis of the ranch in the hands of Brett and Shana, when they ultimately got their hands on it, was extremely low.

Fast forward ten years. Shana is living on the ranch as a stay-at-home mom, and Brett is a true cowboy, as Judge Holmes puts it, “… in the vaquero tradition, riding horses and four-wheelers to tend cattle for other ranchers.” 2013 T. C. Memo. 235, at p. 4. But the California Rangeland Trust shows up with the proverbial fistful of dollars, and buys an easement to keep the ranch forever ranchland for $1.12 million cash.

The thrteeen-sixteenths that Shana and Brett can split comes to $910K at capital gains rates.

Of course, neither Brett nor Shana reports the gain on their tax returns, but Brett didn’t report about a grand in interest income, and Shana somehow missed reporting the $15 K she got from an outfit called Ogle Productions, Inc. (which sounds a lot more interesting than this case).

So IRS rides up with a thwacking great SNOD.

Brett tries some post-mortem tax planning. “After receiving his notice of deficiency, Brett visited local CPA Paul Simmons. Brett showed him the notice as well as his father’s estate-tax return to ask him whether the Trust properly reported the basis of the Ranch Interest that led to the long-term capital gain on the K-1s. After reviewing those papers, Simmons testified that ‘it just didn’t seem right to me that something in 1994 was worth nothing hardly.’” 2013 T. C. Memo. 235, at p. 13.

True Western style.

Shana and Brett try to disavow Bonnie’s aggressive tax position, trot out the old probate referee (but don’t introduce his field notes in evidence, so they can’t use them on the trial), who testifies that his notes show a valuation way higher than what Bonnie put on the Form 706.

Now the 2032A gambit was enacted to keep the widows and orphans on the old homestead, since otherwise the farm could be valued at its value as vacant land to a developer, and the family forced to sell to pay the estate tax. Here’s what you need to do: “To elect the special-use valuation, section 2032A requires that the decedent must have been a citizen or resident of the United States; the property must be qualified real property; the executor must elect to apply section 2032A; and–pay attention here–each person who has an interest in the property must sign and file a personal liability agreement. Sec. 2032A(a), (b), (d). The parties agree that Joseph’s estate met all the requirements to elect the special-use valuation for the Ranch Interest.” 2013 T. C. Memo. 235, at pp. 17-18.

And don’t you just love Judge Holmes’ “pay attention here”?

Brett claims he was a minor and therefore not bound by Bonnie’s valuation shenanigans, so he never consented to nuthin’. That doesn’t work, because Judge Holmes finds his Mom was his guardian ad litem and, after a lot of palaver about privity and identity of economic interests, holds his Mom could bind him. And Shana was an adult her own self. Though Brett and Shana claim Bonnie was the evil stepmother and therefore shouldn’t be allowed to bind them, they don’t prove any breach of any duty by either their Mom or Bonnie.

But what about the old Form 706? Brett and Shana rely on the venerable Rev. Rul. 54-97, which says that the valuation on a Form 706 is presumptive, but a party can get around that with clear and convincing evidence. That old cowhand Judge Holmes: “Throwing a lasso around that language, Shana and Brett try to tie up their ample evidence–clear and convincing evidence, they say–that the reported section 2032A value was wrong.” 2013 T. C. Memo. 235, at p. 21.

They have the old field notes of the probate referee’s office.

But rather than decide that jumpball, Judge Holmes goes with that hobgoblin, consistency.

To invoke the doctrine of consistency, there must be a potential whipsaw. And Judge Holmes finds one here. There has a been a report or a representation to IRS (the old 706), the statute of limitations has run (and it has, about seven years before the year at issue), and the taxpayer is trying to get out of what they told IRS to the disadvantage of IRS (the higher valuation of the Ranch Interest, giving Shana and Brett a higher basis and therefore a lower taxable capital gain, after the estate got away with lower estate tax that IRS is now barred from contesting).

Game over. And Brett’s ex post facto tax consultation doesn’t get it, as he waited a year before he spoke to CPA Simmons. So penalties descend.

Nevertheless, Judge Holmes stresses that “(W)e are not saying that Shana and Brett engaged in any sort of ‘tax gamesmanship’… but we do reaffirm the principle that ‘a taxpayer may not, after taking a position in one year to his advantage and after correction for that year is barred, shift to a contrary position touching the same fact or transaction’”…. 2013 T. C. Memo. 235, at p. 33 (Emphasis by the Court; citations omitted).

 No, this is not a rant about the recent shutdown; that subject has been dealt with extensively elsewhere, and this is not a political blog. I want to show two designated hitters out of Tax Court today, which illustrate (as if illustration were necessary) the cost of inaction.

First, that Obliging Jurist, Judge David Gustafson, throws a lifeline to Albert A. Seifert, Docket No. 24735-12L, filed 10/18/13.

Albert claims he e-filed for the year at issue, but IRS says he didn’t. Howbeit, Albert sold $114 million in stock (he claims he has a $113 million basis, and Judge Gustafson assumes he did), but the 1099s that IRS got say zip about Albert’s basis, so Albert gets hit with a $39 million deficiency. Albert admits he got the SNOD but says it was wrong, so he didn’t petition.

Of course, Albert gets nailed when he asks for a CDP; he had his chance, and he blew it. IRS followed the book, because Albert had a chance to contest but didn’t, and he never gave Appeals a Form 433-A or a Form 656.

Judge Gustafson: “When Mr. Seifert received the notice of deficiency, he had an opportunity to challenge that liability in Tax Court. He could have presented evidence of his cost basis in the securities and, depending on his proof, could have seen his liability reduced or eliminated. But he did not do so. Consequently, the IRS’s determination went unchallenged, and the IRS therefore had the right and the responsibility to assess and collect the tax it had determined. When the IRS undertook to collect the tax, then Mr. Seifert attempted for the first time to challenge that liability–in the CDP hearing.” Order, at p. 1.

Of course, contesting liability at a CDP, when you got the SNOD and did nothing, is a nonstarter. And trying to play lawyer when there are telephone numbers at risk is even worse. Paying a lawyer a few grand the minute Albert got the SNOD would have saved him a boatload of trouble.

Nevertheless, Judge Gustafson is obliging as always: “However, Mr. Seifert is strongly encouraged to consider accepting the invitation of the Commissioner (made at pages 2-7 of his reply filed September 30, 2013) either to request audit reconsideration or to submit an Offer in Compromise based on Doubt as to Liability, outside of the CDP context.” Order, at p. 2 (emphasis by the Court).

Albert, don’t drop the lifeline this time.

Next up is Edwin Madera, Docket No. 26314-12L, filed 10/18/13. Edwin mailed a letter that STJ Lewis (“Right Spelling”) Carluzzo treated as a petition, although “…the letter does nothing more that request the Court to ‘provide the necessary forms and rules for filing a petition to contest a determination’.” Order, at p. 1.

The trouble is, the letter was four years too late for the SNOD that IRS had issued. But it was timely, assuming Edwin properly amended it to state some kind of cognizable claim, for the NOD Edwin got concerning collection.

Of course, Edwin never amended or did anything else, despite STJ Lew having given Edwin three swings at the baseball.

So Edwin is out for failure to state a claim, and IRS can lien and levy.

I know the people who should read this won’t; the self-represented in Tax Court will continue to march, or dawdle, to disaster. But I suggest there should be at least a cigarette-pack warning on every SNOD–if you don’t petition Tax Court at 400 Second St, NW, Washington, DC 20217, you’re toast.

Or At Least Present It At Trial

Judge Laro’s advice to Kulwant S. & Karmjit K. Pawar, Docket No. 27396-11, filed 10/17/13, reopens the shutdown-shortened blogging season.

Kulwant and Karmjit want to reopen their trial record to put into evidence some cashier’s checks and cash receipts they say they had misplaced in their garage and could not find for trial.

Unhappily, IRS’ trial counsel responds to their motion that they had given her copies of all that prior to trial.

While Judge Laro has discretion, he’s not using it here. “In Link v. Commissioner, we denied the taxpayer’s motion to reopen the record to admit new evidence where the taxpayer had ample opportunity to provide the evidence both prior to and at trial. T.C. Memo. 2006-146, 92 T.C.M. (CCH) 23,24 (2006). In so holding, we explained that the Court’s policy is to try all of the issues raised in a case in one proceeding in order to avoid piecemeal and protracted litigation. Id. In the present case, petitioners were, at all relevant times, in possession of the evidence they now seek to introduce and thus had ample opportunity to do so both prior to and at trial.” Order, at pp. 1-2.

Use it or lose it, guys.

To paraphrase the Angels’ 1993 hit. Yes, Tax Court is up and running, and I’m back off break to bring you the latest from 400 Second Street, NW, in Our Nation’s Back-In-Action Capital.

Here’s a link to the Grand Reopening.

Click to access Startup_Announcement_Final_101713.pdf

IRS is shut down, Tax Court is closed, and I promised I’d make no political commentary here. As I told Mr. Patrick Temple-West of Reuters, I’m taking a break. I’ll be back when the fun starts again. So, y’all come back then and see us!