Fans of Douglas Adams’ Britcom classic “The Hitchhiker’s Guide to the Galaxy” will doubtless remember the Answer to the Ultimate Question of Life, the Universe, and Everything is 42.

So that should have answered my interlocutor Lee. Remember Lee? No? Well, check out my blogposts “Angst”, 11/4/13, and “We May Never Know”, 11/26/13.

The far from ultimate question posed, both by Judge Laro and by Lee, is whether Lee Ang’s immigration status (or lack thereof) has anything to do with his ability to proceed in Tax Court.

And when last heard of, it seemed that either IRS had conceded the point, or else Judge Laro wasn’t interested any more.

Well, those breathlessly awaiting an answer might be heartened to discover that Judge Laro is sending Lee and IRS to trial. You remember Judge Laro bounced IRS’ summary judgment motion right before Thanksgiving. So a trial there must be.

I cannot guarantee, warrant or represent that the answer will emerge on the trial, but those who want a ringside seat can show up in New York, New York on Thursday, December 12, 2013 at 10:00 a.m., at the Jacob K Javits Federal Office Building, 26 Federal Plaza, on that island off the coast of North America,  and ask for Judge Laro’s part, thus bewildering the security team and assuring that the diligent seekers for the answer will be led on a wild goose chase.

But it’s a date and time certain, so unless IRS and Lee Ang make a deal, it’s “Game On”.

Anybody going? If so, please let me know the answer, if any.

Nothing new out of Tax Court or anywhere else 12/5/13. So I was checking the hits on this blog, and found that, on 12/4, someone from the Peoples Democratic Republic of Vietnam landed on this blog. Now I’ve had visitors from all over the place, but that was a first. I had visited the aforesaid Peoples Democratic Republic many years ago, when it wasn’t called that, on an all-expenses-paid tour organized and paid for by the government of the Republic of the United States of America. The reception I received was hardly what one would call friendly, but then again, I didn’t expect it would be.

Still, nice that someone from over there looked me up after all these years.

 We got a T. C. Opinion today (Vidal Suriel, 141 T. C. 16, filed 12/4/13), but it’s about the tobacco settlement agreement, and therefore unlikely to occur in the world in which my readers and I practice. In short, “economic performance” means something that changes your bank balance, and Vidal’s jousting with the Master Settlement Agreement Fund didn’t get there until Vidal’s Sub S wrote the check.

But we did get an order out of Ch J Thornton, J S Karaoke, LLC and John E. Strauser, Docket No. 17867-13, filed 12/4/13, that brings out a point we ordinary practitioners might consider.

IRS moves to toss J S Karaoke, LLC, from John’s petition and from the caption of the case, because they never issued a SNOD or NOD to, about or concerning J S Karaoke, LLC.

John objects. “Although petitioners object to the motion, petitioners state in the motion that John E. Strauser is the sole owner of J S Karaoke, LLC.” Order, at p. 1.

There should be a racehorse named “readtheregulations” (wow, just 18 characters!).

Ch J Thornton: “The ‘check-the-box’ regulations contain provisions concerning a business entity’s classification for Federal tax purposes. See Medical Practice Solutions, LLC v. Commissioner, 132 T.C. 125 (2009); sec. 301.7701-3(a) and (b)(1), Proced. & Admin. Regs.” Order, at p. 1.

So IRS, read the regulations, and Ch J Thornton will give you an open-book quiz.

“…respondent [IRS] shall file a Supplement to his motion to dismiss. In that Supplement respondent shall set forth and discuss fully respondent’s position as to classification of J S Karaoke, LLC for Federal tax purposes and Mr. Strauser’s ownership interest in petitioner J S Karaoke, LLC.” Order, at p. 2.

Disregard the disregarded at your peril.

No, not the old Saturday Night Live crew, but rather the case of Michael D. Brown and Mary M. Brown, 2013 T. C. Memo. 275, filed 12/3/13. The problem is the bonus depreciation Mike took on his Bombardier Challenger 604 flying machine.

Mike was a flying insurance salesman, selling big-ticket multi-million-dollar policies to the very rich, to get around estate taxes. So successful was Mike that IRS generated Notice 2002-59, 2002-2 C.B. 481, just a scant three weeks after Mike trumpeted a split-dollar life insurance maneuver that, so he told the New York Times, could save $9 in tax for every $1 of premium.

Amazing how these tax maneuverers feel compelled to spill the beans at the very door of 1111 Constitution Avenue, NW. Like IRS doesn’t read the papers.

And as for the split-dollar gambit, see my blogpost “The Split”, 8/29/12, wherein it appears that Steve Neff and Brad Jensen, master builders, were blown up when IRS torpedoed Mike’s brilliant maneuver.

Back to the main story. Mike needed to jet around the country, to meet and greet his high-priced clientele. Commercial travel wasn’t convenient, and chartering meant he was at the mercy of an owner who might whisk his magic carpet away just when Mike most needed it.

So he bought his own. But he had to get it placed in service by year’s-end, and he had a very narrow timeframe to do it. Moreover, he wanted special modifications, like a $200K conference table and a couple of widescreen monitors, and extra subhydraulics (whatever those may be) and a few doodads, so the total bill was $500K, and there was no way his jet  would be completely modified before year’s-end.

Thus, he’d be back to 30% bonus depreciation and not the 50% one-time Congressional largesse special.

Mike, never taking “no” for an answer, paid for and took delivery of the plane at year’s-end, signed a post-delivery agreement with the builders to soup up the plane as Mike required. Mike testifies on the trial he absolutely has to have the conference table and the widescreens in order to wow the stratospheric highrollers he’s trying to sell (and also the CPAs and lower-echelon brokers who send him leads).

Just before the ball drops at Times Square, Mike takes the plane as unmodified, flies to Seattle and then to Chicago, and gets letters signed by a client and a fellow broker saying how they talked business.

Of course the flight logs and the fuel receipts don’t jibe. IRS busily nails Mike for tax fraud on other items, and they settle, but Mike wants to fight for the bonus depreciation. He did pay for the plane, took title and flew it.

But that intrepid unraveller of depreciation, The Judge Who Writes Like a Human Being, a/k/a The Great Dissenter, Judge Mark V. Holmes, isn’t flying with Mike.

For Judge Holmes’ disquisitions on depreciation, see my blogposts” Basis For Dummies”, 11/24/11, and “The Sum of Its Parts”, 3/12/12.

Mike did use the plane, and he claims it was ready for air transport, which it was. But that’s not the point. Placing an item of property in service means not only that it works generally, but is fit for the specific use the taxpayer intended, and is ready for that specific use on a regular, ongoing basis, unless frustrated by circumstances beyond the taxpayer’s control.

Reviewing the cases, Judge Holmes concludes: “These cases teach us that not just any use of an asset will satisfy the placed-in-service standard. An asset must instead be available for its intended use on a regular, ongoing basis before we can find it ‘placed in service’ in the tax year in question.” 2013 T. C. Memo. 275, at p. 37. (Emphasis by the Court).

Any use will not suffice. The specific intended use is what controls, and as Mike testified, without the conference table and the widescreen monitors, the plane didn’t answer Mike’s specific insurance-flogging needs.

“The problem with the Challenger was that, although it would have been, as Brown said, ‘perfect for some buyers,’ it wasn’t complete for him without the ’two business requirements that [he] needed.’ And without those two …modifications, the Challenger wasn’t ‘in a state of availability for the specific intended function in Brown’s insurance business….” 2013 T. C. Memo. 275, at p. 37.

Mike does avoid the 75% fraud chop, because, though he may have filed fraudulent returns in other years, IRS couldn’t prove he committed fraud with the Challenger. But Mike does get hit with the 20% substantial understatement.

No, not Karl Marx. This is the story of Crescent Holdings, LLC, Arthur W. Fields and Joleen H. Fields, A Partner Other Than The Tax Matters Partner, 141 T. C. 15, filed 12/2/13, another romp through the wonderful world of TEFRA, FPAA, and the alleged collision between Section 721 and Section 83.

Question presented- Did Art get a capital interest or an income interest? And if the interest was subject to substantial risk of forfeiture, when did he get whatever he got?

Art was running real estate deals for a subsidiary of Duke Power. Duke sold out to a slew of Morgan Stanley hedge funds, and Art got a 2% piece of the LLC wherein Duke kept the balance of its interest, along with the fundies.

But Art had to stick around at the helm of the LLC for three years, or else his interest was forfeit, and he made no Section 83 election to recognize the FMV of what he got in Year One.

Nevertheless, Art got two hefty K-1s for profits he never got. He paid the tax thereon for each year, but yelped that he got no cash. So the LLC fronted him the money to pay the taxes.

Whereupon the LLC started to go south, Art bailed before the magic three years, and the DIP brought an AP in Bankruptcy Court to claw back the cash they paid Art. Art settled, and then petitioned the FPAA that said he was a partner.

The DIP intervened in the Tax Court case, claiming what Art got was an income interest, not a capital interest.

No, says Judge Ruwe, it was capital. Read the Agreement, as amended. If the LLC liquidated the minute after Art signed the deal, he was entitled to a distribution out of capital.

And Section 721 applies to property, not services. What Art provided was services, not property. But Section 83 covers property for services where the right to that property is subject to substantial risk of forfeiture. Art’s 2% never vested; there was a substantial risk.

As for any conflict between Section 721 and Section 83, here’s Judge Rowe: “Section 83 governs the timing of income recognition when property is transferred in exchange for services. Section 721 provides that the contribution of property to a partnership in exchange for an interest in the partnership is a nonrecognition event for the partner and partnership. Section 83 does not conflict with section 721.” 141 T. C. 15, at p. 39.

“Since petitioner forfeited his right to the 2% interest before it substantially vested, he never owned the interest. Petitioner never received any of the economic benefits from the undistributed partnership income allocations to the 2% interest. Requiring petitioner to recognize the partnership allocations in his income is inconsistent with the fact that he received no economic benefit from the allocations. When petitioner’s interest was forfeited to Crescent Holdings, his right to the 2% interest and to receive any benefit from the partnership income allocations reverted to Crescent Holdings.” 141 T. C. 15, at p. 46 (Footnotes omitted).

So the tax on the 2% piece belonged to the LLC, not Art. He never got nothin’.

 Even When He Gets It Wrong

Another life insurance small claimer, the usual loan against cash value, with a deemed distribution not an annuity, so it’s taxable. And it’s not cancellation of debt, it’s repayment of a loan (extinguishment of debt), so Section 72 makes it taxable whether or not the distributee is insolvent, thus Section 108 doesn’t apply.

Ordinarily I wouldn’t blog a case like Samuel Brach and Lillian Brach, 2013 T. C. Sum. Op. 96, filed 12/2/13, except that Sam and Lil get off the 20% understatement chop because they relied on Moses (“Mighty Mo”) Neuman, EA.

Sam was disabled, and when he couldn’t make premium payments on his life insurance policy, Guardian Life sent him $3K and a 1099-R stating Sam got $65K, of which $32K was taxable and the rest was his investment in the contract (now where have we heard those words before? No prize for the correct answer).

Sam and Lil gave Mighty Mo every W-2 and 1099 they got. Mighty Mo went over their financial position, decided they were insolvent and therefore the $32K wasn’t taxable, and thus Sam and Lil’s Social Security wasn’t taxable either.

Mighty Mo never attached a Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), nor their 1099-SSAs, nor the 1099-R, to Sam and Lil’s Form 1040.

Deficiency time. Sam and Lil petition.

Of course the distribution from Guardian wasn’t cancellation of debt, it was repayment of the loan, and therefore treated as if Guardian wrote Sam a check and Sam wrote Guardian a check. Everything over Sam’s aggregated paid-in premiums is taxable, and therefore so is the Social Security, at least in part.

What about the 20% understatement chop?

Sam and Lil got lucky; they drew The Judge with a Heart, STJ Armen: “Petitioners retained Mr. Neuman, an enrolled agent, to prepare their 2010 tax return. As an enrolled agent, Mr. Neuman practiced before the Internal Revenue Service as a tax professional, a fact known to petitioners.” 2013 T. C. Sum. Op. 96, at p. 13.

“The status of enrolled agent can tend to show competence. See Mills v. Commissioner, T.C. Memo. 2013-4; see also Mortensen v. Commissioner, 440 F.3d 375, 388 (6th Cir. 2006) (‘Much like a taxpayer’s reliance on an attorney or an accountant, reliance on an enrolled agent is a factor we may consider in determining the reasonableness of a taxpayer’s actions’.), aff’g T.C. Memo. 2004- 279. An enrolled agent is an individual who has displayed ‘special competence in tax matters’. 31 C.F.R. sec. 10.4(a) (2007). In the instant case, the record demonstrates both that petitioners reasonably believed that Mr. Neuman was competent to prepare their return and that they had no reason to question his advice.” 2013 T. C. Sum. Op. 96, at p. 14.

And Sam and Lil told Mighty Mo the whole story, and were unsophisticates. So no 20% chop.

Makes me feel good, as an EA, to know that my status “can tend to show competence” and that I have “displayed special competence in tax matters.”

That obliging jurist Judge David Gustafson once again makes the critical point about Tax Court practice and procedure: “The Tax Court exists in order to create a means for resolving tax disputes as inexpensively as possible. In every Tax Court case, the taxpayer’s opponent is his Government. A majority of Tax Court petitioners are self-represented; and many Tax Court cases involve amounts in dispute that are less than the cost of hiring counsel.”. Martin E. O’Neill, Docket No. 31218-12, filed 12/2/13, at p. 1.

 For yet another example of the foregoing, see my blogpost “Another Argument”, 6/7/12. Ailing Dorothy Weaver gets hit with a $1700 penalty because she didn’t call her tax preparer to testify on a trial. How can a self-represented, disabled person know to do this, or be physically able to do this, or to pay an attorney or a USTCP to do this? Judge Kroupa said she couldn’t turn a blind eye to the requirements of law. Maybe not, but it just isn’t fair.

Judge Gustafson refuses to allow IRS to depose Marty O’Neill, even though in the usual Federal (or even State) Court plenary case, party depositions are routine. We all learned on Day One of practice, when you serve the answer, simultaneously serve the notice to admit, the notice to produce, the notice to inspect, the demand for a bill of particulars, and deposition notices of all and sundry.

But that’s not how the Tax Court rules provide, even though “…respondent [IRS] reasonably seeks to take the deposition in order to obtain relevant information, and that the taking of the deposition would contribute to the efficiency of the development of the case and of subsequent settlement or trial.” Order, at p. 1.

Remember, this is the sixty-buck-ticket-to-justice. Judge Gustafson: “And even where (as here) the amount at issue justifies hiring counsel, the prevailing petitioner typically obtains no recovery that might cover litigation costs, and the relevant fee-shifting statute, section 7430, is remarkably stingy. However, the cost of depositions– including the cost of paying counsel to prepare for them and to attend and conduct them, and the cost of paying a court reporter to attend and to provide transcripts–is one of the major expenses of litigation, even for the non-deposing party who is merely defending against the other party’s discovery. It is a cost so significant that it is sometimes virtually disabling and makes litigation impractical.” Order, at pp. 1-2.

As for stingy Section 7430, when was the last time a petitioner got more than a soldier’s farewell from Tax Court in a Section 7430?

So Tax Court Rule 74(c)(1)(A) provides that depositions are allowed only in extraordinary circumstances. And so far IRS’ case seems ordinary. So if Judge Gustafson allows the depositions here, the door would be wide open for depositions in every case.

However, Marty isn’t completely safe at home: “Respondent may renew the motion upon a showing of extraordinary circumstances. Or, if respondent makes documented attempts at discovery but at trial is surprised by petitioner’s testimony, respondent may at that time move for appropriate relief, including negative inferences, the exclusion of evidence, or a continuance.” Order, at p. 2.

Practitioners, read and heed.