A reminder to preparers from that obliging jurist Judge Gustafson: a house on wheels is still a house, and may suffice as a qualified personal residence for Section 280A (if you can show exclusive business use) and Section 163 purposes. The case is Keith Dunford and Ena Dunford, 2013 T. C. Memo. 189, filed 8/20/13.

Keith and Ena traveled a lot, and claimed it was for business, but their recordkeeping didn’t substantiate their claims. And they already had a house, rooted firmly to the soil of Quincy, Illinois.

I’ll spare you Judge Gustafson’s bean-count through the claimed deductions and NOL. Even though IRS unaccountably allowed Keith and Ena to deduct expenses for which they were reimbursed, nothing is new here.

Section 163 allows qualified principal residence mortgage interest deduction for principal residence plus one other elected by taxpayer, but neither the statute nor the regulations prescribe when and how to elect, and the caselaw permits election even during litigation.

So Keith and Ena’s Beaver Contessa (great name!) motor home, encumbered by a Bank of America mortgage on which Keith and Ena paid interest, qualifies for the deduction.

Keith’s claim that he used a countertop in the Beaver Contessa for his business operations doesn’t get it: “The Dunfords did not prove that there was an identifiable portion of their motor home that was used exclusively for business purposes. The area they seemed to put forward as the home office was the countertop that Mr. Dunford used as a desk; but (1) they did not make any showing of the percentage of the vehicle that constituted this area (it would be a very small percentage), and (2) it is implausible to suggest that, in the cramped quarters of a motor home, an unclosed area like the countertop would somehow be exclusively reserved to business activity. Accordingly, all deductions (other than deductions for interest expenses) the Dunfords claimed ‘with respect to the use of’ their motor home are disallowed under section 280A(a).” 2013 T. C. Memo. 189, at p. 17

IRS also claimed that, inasmuch as Keith and Ena lived in the motor home, their claimed Section 162 travel expenses weren’t for travel, because they were never away from their tax home. See my blogpost “Home Is Where the Heart Is’, 7/21/12. But IRS had allowed some expenses during examination, and didn’t change position in the litigation, so Judge Gustafson blows off that argument in a footnote.

“The Commissioner’s principal contention as to travel expenses is that the Dunfords have not substantiated them, beyond what the Commissioner has conceded. In response to a question raised by the Court, the Commissioner contended after trial that, for tax purposes, the Dunfords had no ‘home’ … (other than the motor home, from which they were not ‘away’ while traveling), so that ‘Petitioners are not entitled to deduct expenses arising from their travels… in amounts greater than already allowed by respondent.’ (Emphasis added.) Logically, the Commissioner should ‘allow’ zero away-from-home travel expense amounts if petitioners had no ‘tax home’; but he does not retract his prior concession. Since we uphold the Commissioner’s primary contention (lack of substantiation), and since the Commissioner continues to concede the deductibility of the amounts that were substantiated, none of the amounts in dispute turn on the ‘tax home’ issue, so we do not address it.” 2013 T. C. Memo. 189, at pp. 24-25, footnote 11.

But taxpayers using motor homes in their trade or business should beware: this issue will arise again.

But Judge Morrison Is On the Case

The few readers who have struggled through the summer doldrums might vaguely remember my blogpost “Delay of the Game”, 7/12/13, and its not-quite-sequel “Yonder Come Day”, 7/30/13, wherein I discussed the various delaying maneuvers of inventive taxpayers.

Judge Morrison, however, has no patience. He deals with one such in Clarence William & Susan M. Speer, Docket No. 581-12, filed 8/19/13.

C.W. and Sue are on for trial in LA next month, and Judge Morrison told them so back in April.

Less than two weeks ago, a little more than thirty days before trial, CW and Sue move for a continuance (that’s an adjournment in these parts), claiming they have plane tickets and can’t show for the trial.

Could be, but Judge Morrison is a follower of the Great Communicator: “Trust, but verify.”

Judge Morrison: “…(p)etitioners shall, on or before September 3, 2013, file a supplement to their motion for continuance. Petitioners’ supplement shall include an attachment with copies of petitioners’ airplane tickets referred to in petitioners’ motion, along with documents showing the airplane tickets were purchased prior to receiving the April 18, 2013 notice of trial.” Order, p. 1.

Should be an interesting supplement.

No, not another essay on parenting, but Ch J. Michael Thornton’s announcement of the latest improvements to Tax Court paperwork and procedures, which was released today, August 19, on Tax Court’s website, are worthy of comment.

Here’s the whole story. What follows is a digest.

Counsels’ rooms in select locations, where practitioners and clients can meet to discuss their cases before showing up for calendar call, will be made available to Bar-sponsored calendar call programs and low-income tax clinics. Certainly a welcome accommodation  to the assisters of those unable to afford the highly-credentialed and even more highly-paid practitioners who take their ease therein.

Judge Thornton also announces a new line of stuffers. These are not the products of Mr. Frank Perdue’s massive operation, but rather enclosures to accompany various Tax Court mailings to the self-represented, informing them in simple terms of some of the numerous twists and turns in the Tax Court path.

There’s also a kinder, gentler application for waiver of the $60 filing fee, and new requirements for academic and non-academic clinics. But the volunteers should show up an hour before calendar call (that is, 8 a.m., as the new stuffer tells the petitioners to show up at 9 a.m.).

These improvements are the outcome of practitioner, volunteer and government input. It’s always a good thing when stakeholders collaborate to ease the process for all parties.

It’s mid-August, and while it’s not a “blazing hot day in August”, and “a depleted bank account”, while depleted, still has enough so I can take a three-day holiday, nevertheless I sympathize with Dr. Watson, as he tells the story in “The Adventure of the Cardboard Box”: “But the morning paper was uninteresting. Parliament had risen. Everybody was out of town, and I yearned for the glades of the New Forest or the shingle of Southsea.”

Congress isn’t around, and my equivalent of the “morning paper”, the Tax Court website, is really uninteresting today.

Nothing new, so relax and enjoy.

 Riding the Dawn Patrol out of New York Penn Station to the Capital of the Confederacy, I remembered to blog an opinion from what is now yesterday, 8/15/13, Staffmore, LLC, 2013 T. C. Memo 187.

Again the mantra: the SNOD is the ticket to Tax Court.

Does any reader remember Karl E. Cross and his travails before His Honor Big Julie, a/k/a Judge Julian Jacobs (hereinafter HHBJJJJ)? No? Not surprised; the same are more particularly bounded and described in my blogpost “Got Your Ticket?”, 12/13/12.

Well, Staffmore’s problems are different to Karl E.’s, inasmuch as Karl E.’s SNOD, dodgy as it was, was still a SNOD. Staffmore never had one, so its attempt to appeal the employee reclassification of the pseudonymous SH, and stay IRS from making public the SS-8 letter so holding until its appeal is decided, fails.

By the way, Staffmore’s business is to provide personnel to providers of mental and behavioral health services. Good training for Tax Court and the Internal Revenue Code generally.

HHBJJJJ gets this one, and he kicks Staffmore to the curb.

Background, per HHBJJJJ: “…petitioner’s attorney… mailed a letter to respondent objecting to respondent’s employment status determination and stating: ‘We are requesting that this redacted determination letter be deleted and not published at all during the review and appeal period as we plan to petition the Tax Court on both issues. It is our understanding that the release of this letter is prohibited pending reconsideration and appeal of the SS-8 determination.’” 2013 T. C. Memo 187, at p. 5. (Name omitted).

Following the obligatory incantation that Tax Court’s jurisdiction is limited, and only by express Congressional grant can Tax Court live, move and have its being, HHBJJJJ goes straight to Section 7436(a): “…in connection with an audit of any person, there is an actual controversy involving a determination by the Secretary as part of an examination”, 2013 T. C. Memo. 187, at p. 7.

Staffmore’s counsel, hereinafter Johnny T., says that the SS-8 notification letter was a determination (maybe he read the whistleblower cases).

IRS says it wasn’t a Section 7436(a) determination, and in any case there’s no audit.

Johnny T.’s not done, though: “Finally, petitioner asserts that if respondent’s motion is granted because of what petitioner refers to as ‘hyper-technical arguments’, the Court would be wasting judicial resources because the employment status of SH would eventually be resolved by the Court after respondent issues petitioner a notice of deficiency.” 2013 T. C. Memo. 187, at p. 8.

While to the legal mind judicial economy is a prime desideratum, it doesn’t go in Tax Court. Absent examination (audit) and SNOD, Tax Court can’t go there.

“Petitioner’s submission of Form SS-8 is in essence a request that the IRS make a determination as to a worker’s employment classification for a taxable period or periods separate and apart from the IRS’ normal audit and examination procedures. See Rev. Proc. 2005-32, sec. 4.03(2), 2005-1 C.B. 1206, 1207. The submission of Form SS-8 is analogous to a taxpayer’s request for a private letter ruling.” 2013 T. C. Memo. 187, at p. 8, footnote 3.

Wait for the audit and the SNOD, then go to Tax Court.

Now Section 6110(f)(3) gives Tax Court jurisdiction to determine disputes about what should be published in the IRS Electronic Reading Room. But that doesn’t help Johnny T., because he wanted publication of the entire SS-8 suspended “pending appeal”, and Tax Court has no jurisdiction to hear said appeal, so Johnny T.’s request for what amounts to an injunction pendente lite, as the high-priced lawyers say, is moot, because there will be no lite. Not yet.

So HHBJJJJ doesn’t need to do the “we ain’t got no general equitable jurisdiction either” foxtrot.

I don’t want to be misunderstood here. A critic of my blog claims I make fun of litigants, lawyers and judges, and calls down Divine wrath upon my balding head (I won’t send the bears after him; see 2 Kings 2:23-25).

Maybe I have gotten a trifle acerbic at times, but not here. My sympathies are with Johnny T. He is another lawyer who spins out in the chicane that is Tax Court and its labyrinthine anfractuosities. It’s not his fault. Obviously he is used to courts of general jurisdiction, where judges deal with matters head-on, generally.

But that isn’t Tax Court. Hyper-technical distinctions are where it’s at. So, as to Staffmore and the pseudonymous SH, in the immortal words of the late great Charles Dillon Stengel, you could look it up.

Or both of your clients’ petitions in one envelope. CSTJ Panuthos unravels this one in a designated hitter, Desiree Broadnax, Docket No. 6179-13, filed 8/15/13.

Des’ petition gets tossed for late filing (no jurisdiction). Des’ counsel replies that the petition that IRS claims was late-filed was a duplicate of an earlier petition he sent, together with a petition for an unrelated client, both of which were timely. He put them both in the same USPS Express Mail envelope.

CSTJ Panuthos: “The record–which includes the Supplemental Response filed by petitioner on July 3, 2013, and the sworn Affidavit attached thereto–reveals that on March 4, 2013, a member of petitioner’s counsel’s staff went to the U.S. Post Office and mailed two petitions–one for petitioner and one for a different taxpayer–in the same envelope. Attached to petitioner’s Response was a receipt from the U.S. Postal Service dated March 4, 2013, showing that an envelope weighing 14.40 oz was sent to the Court on that date. The envelope bearing the same tracking number as that listed on the receipt was received by the Court on March 5, 2013, but the Court has record only of having received the other taxpayer’s petition. In addition, the petition that was received weighed approximately half of the weight indicated on the U.S. Postal Service receipt. Further, the Court’s own records show that accompanying the other petition was a check for $120: twice the Court’s $60 filing fee.” Order, p. 1.

Because of these “unusual circumstances”, Judge Panuthos treats Des’ petition as timely, and orders IRS to file and serve an answer.

A personal note: Years ago, doing bank servicing, we sent off two loan payoff checks and documents in the same envelope. The envelope was lost. A total disaster. Separate envelopes ever after.

Takeaway–Separate envelopes, separate checks.

No, not the 1975 Fred Ebb-John Kander song from “Chicago”, nor yet the 1979 Bob Fosse film, but rather the small-claimer from Thomas Allen Gullion, 2013 T. C. Sum. Op. 65, filed 8/14/13, with Judge Kerrigan on the bench and Tommy the Taxpayer on sax.

Tommy was a musician. “Petitioner began performing on the saxophone at the age of eight. He has played professionally since the age of 16. He attended Indiana University, where he studied under David Baker, a distinguished professor of music and jazz education. He also toured with J. J. Johnson, a master of bebop trombone.” 2013 T. C. Sum. Op. 65, at p. 3.

Tommy’s musical efforts yielded far less than his specialized design activities for the years at issue. In fact, over a seven-year span, he took in $13K from his Driftwood Jazz Festival in Southwestern Wisconsin and four CDs, but lost $130K.

IRS says “no” to two years’ worth of losses.

Now the Section 183 hobby-loss mambo is facts-and-circumstances, no single factor determinative and a mere head-count is necessary but not sufficient.

Tommy was regular and continuous: he blew that horn wherever and whenever. But did he want to, and try to, make a profit?

But instead of going through all the factors, Judge Kerrigan cuts to the chase. Tommy was certainly trained to be a musician and did play with J. J. Johnson, of J. J. and Kai fame, as those of us who staggered into our high school classes sleep-deprived from listening to Symphony Sid remember fondly.

“Petitioner was dedicated to his music career. He organized a jazz festival in Wisconsin and recorded four CDs, including ‘Carswell’ in 2009. Petitioner’s testimony was credible concerning the time he spent on his music career. We have recognized that a taxpayer may engage in more than one trade or business at any one time. It is also well settled that the term ‘trade or business’ includes the arts.”  2013 T. C. Sum. Op. 65, at p. 8. (Citations omitted).

I’m sure the shades of Da Vinci, Michelangelo, Rembrandt, El Greco, Velasquez and Van Gogh are pleased to be recognized as having practiced a “trade or business”, at least as far as Tax Court is concerned.

Moreover, “(P)etitioner testified that the music industry has undergone changes over the years and that it is now difficult to make a profit. He testified that many of the jazz clubs closed in Chicago and that there were not that many opportunities. He further testified that less money is made when a musician plays another artist’s music. Petitioner contends that he made changes so he can become profitable. Petitioner moved to Wisconsin in part because the cost of living was lower and because he could continue to travel to Chicago and elsewhere. For instance he will embark on a tour in Spain in summer 2013. He referred to his time in Wisconsin as rebuilding years and stated that he would like to be able to leave the software industry and pursue music full time. In addition petitioner wanted to change the course of his career, placing more emphasis on his own music and focusing on composing. He wants to leave behind a legacy of work.” 2013 T. C. Sum. Op. 65, at pp. 9-10.

It’s true Tommy lost a bundle, but Judge Kerrigan understands. “We have found that ‘a history of losses is less persuasive in the art field than it might be in other fields’, as economic success in the arts, frequently takes longer to achieve than success in other fields. We believe that the arts include music.” 2013 T. C. Sum. Op. 65, at p. 10. (Citations omitted).

I’m sure the shades of J. S. Bach, G. F. Handel, W. A. Mozart, L. van Beethoven, and J. Brahms are pleased that music is included among the arts, and is therefore a “trade or business”, according to Tax Court..

IRS says that a $600 profit in a year not at issue, based on Tommy’s CD “Catharsis”, doesn’t erase $130K of losses over a seven-year stretch.

But Tommy, echoing the more successful songwriter Robert Alan Zimmerman, says “the times they are a-changin’”. “The music industry changed, and petitioner’s focus moved from performance to original composition and other aspects of music. Petitioner contends that he made adjustments and retooled his career and that he was profitable in 2011. A result of this retooling was the CD ‘Catharsis’, which includes his original compositions.” 2013 T. C. Sum. Op. 65, at p. 10.

Judge Kerrigan says Tommy didn’t have a lot of income from other sources. But he did pretty well at his software designing, $103K in one of the years at issue, and $130K in the next. So maybe Judge Kerrigan thinks that a six-figure income is modest, after her years in a white-shoe Washington, D.C. law firm.

And though Tommy loved to blow his horn, that element of personal pleasure doesn’t negate a profit motive. You can have fun and make money.

Tommy gets nailed for some minor deductions, but he went to a fellow musician who is also a CPA and gave him all the records to do his taxes, so Judge Kerrigan knocks out all penalties.

Takeaway– If you represent artists, you can catch a break if the hits don’t just keep on comin’.

No, not the way the universe will end when, according to some theorists, the universe will have expanded such that all heat will be so evenly distributed that none is left to do any work and everything stops.

No, this is the story of Dr. Woody and Dr. Kumar, two battling oncologist radiologists, and how Judge Vasquez decides Dr. Kumar’s tax fate, in Ramesh T. Kumar and Pushparani V. Kumar , 2013 T. C. Memo. 184, filed 8/13/13.

Woody and Ram were shareholders, 60-40, in a sub S. As is not unusual among partners, a dispute arose and Woody froze Ram out, told him nothing, and gave him nothing except a K-1 for $215K in ordinary business income and $2k in interest.

Of course Woody gave Ram no cash. So Ram sued, got an accounting, and settled by selling his stock to the sub S in complete redemption of his interest.

Ram never reports the business or interest income from the K-1, and IRS issues a deficiency, but following my blogpost “Don’t Get Yourself Into A State”, 5/11/11, IRS concedes the penalty.

But Ram owes the tax.

Judge Vasquez: “Petitioners argue that they are not liable for tax on [the S Corp’s] income because Dr. Kumar was not the beneficial owner of his [S Corp] shares in 2005. When the record owner of S corporation stock holds that stock for the benefit of another, such as a nominee, an agent, or a passthrough entity, then income, losses, deductions, and credits of the corporation are passed through not to the record owner but to the beneficial owner of the stock. A taxpayer is the beneficial owner of property if the taxpayer controls the property or has the economic benefit of ownership of the property. We have previously noted that cases applying the beneficial ownership test involve an arrangement between parties who had some agreement or understanding regarding their relationship with each other.” “ 2013 T. C. Memo. 184, at p. 6. (Citations and name omitted).

Ram argues that because Woody froze him out, Woody grabbed his beneficial ownership.

No go, says Judge Vasquez: “However, petitioners have not cited any cases, nor are we aware of any, where one shareholder was able to take beneficial ownership of stock away from another shareholder absent an agreement between the two shareholders or a provision in the corporation’s governing articles to that effect. On the contrary, we have held that when one shareholder merely interferes with another shareholder’s participation in the corporation as a result of a poor relationship between the shareholders, such interference does not amount to a deprivation of the economic benefit of the shares.” 2013 T. C.Memo. 184, at p. 7. (Citation omitted).

Ram and Woody never agreed. So Ram is on the hook for the tax and interest. And since he stipulated when he settled with Woody that each would bear his own tax consequences, he’s out there by himself.

If IRS gives you a Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing, you have thirty (count ‘em, 30) days to file your petition with Tax Court. If you miss the cut-off, even if IRS later on gives you a second Letter 1058 covering the same tax(es) and same year(s), you don’t get a second chance.

But if the second Letter 1058 has new tax(es) or new year(s), your petition may be timely for those if you hit the thirty-day cut-off.

That’s the lesson Judge Vasquez teaches B. Gordon LaForge, in 2013 T. C. Memo. 183, filed 8/12/13.

And he does it in a footnote. “…a taxpayer must request a CDP hearing within 30 days of receiving the notice of intent to levy. Sec. 6330(a) and (b). Once the Secretary issues a notice of intent to levy and notice of right to a sec. 6330 hearing, a subsequent notice, more than 30 days later, that the IRS intends to levy on property of the taxpayer for the same tax and tax period as in the initial notice does not entitle the taxpayer to a sec. 6330 hearing. Sec. 301.6330-1(b)(2), Q&A-B2, Proced. & Admin. Regs.” 2013 T. C. Memo. 183, at pp. 6-7, footnote 3.

So a bunch of years are off the table. And anyway, B. Gordo doesn’t contest the tax liability, so abuse of discretion is the only test for the couple of years for which his petition was timely. Since B. Gordo’s 433-A wasn’t complete, the SO was not arbitrary in rejecting B. Gordo’s OIC or installment agreement. IRS need not keep the administrative record open indefinitely, or go hunting for what the petitioner should provide.

Takeaway–The first Letter 1058 is the hardest, but also the one you need to address–fully.

No, not William Empson’s 1930 classic of literary criticism; literary excellence is rarely found in the Internal Revenue Code or the regulations thereunder. Today we consider two varieties of dismissal, one from a SNOD redetermination and the other from a CDP.

First up, Jazmine M. Valte, Docket No. 8662-13S, filed 8/9/13, Ch J Thornton on deck. Jaz sends the Ch J a billet doux, stating “she wishes ‘to drop the case’ and requesting the Court to ‘discontinue everything.’” Order, at p. 1. Ch J Thornton, a stickler for proper form: “The Court will retitle petitioner’s Letter as a Motion To Dismiss.” Order, at p. 1.

Now our old friend Settles comes into the picture. See my blogpost “Dismissed!”, 5/8/12. Now Settles involved a CDP, not a SNOD, so the holding in Settles will apply to the CDP case I’ll discuss next.

But Ch J Thornton likes Judge Wells’ dicta in Settles enough to quote it: “In the deficiency context, once a taxpayer has filed a petition with the Tax Court, the taxpayer cannot withdraw that petition. See Estate of Ming v. Commissioner, 62 T.C. 519 (1974). When the Tax Court dismisses a deficiency case for a reason other than lack of jurisdiction, we generally are required by section 7459(d) to enter a decision for the Commissioner for the amount of tax determined against the taxpayer in the notice of deficiency. Id. at 522. Rule 123(d) requires that a decision entered pursuant to a dismissal on a ground other than lack of jurisdiction operate as an adjudication on the merits of the taxpayer’s case. [Fn. ref. omitted.]” Order, at p. 1.

So rather than treat Jaz’s note as consent to entry of decision, Ch J Thornton titles it as her motion to dismiss, and denies it. Now Jaz and IRS can do the entry of decision dance.

Next up, Geoffrey Weglarz, Docket No.11416-12SL, filed 8/9/13. Geoff petitioned from a NOD and IRS moved for summary judgment. Geoff moved for a continuance (that’s an adjournment), and IRS said “Okay”.

CSTJ Panuthos: “Petitioner did not file a separate objection to respondent’s [IRS’] motion for summary judgment, but it appears to the Court that petitioner’s motion for continuance contains his objections to respondent’s motion for summary judgment. The Court has not yet ruled on respondent’s motion for summary judgment.” Order, at p. 1.

Then Geoff files a motion to dismiss, stating he is unable to pay his taxes. Confused? So is CSTJ Panuthos.

“Granting petitioner’s motion to dismiss would have the effect of treating petitioner’s case as if it had never been filed. See Wagner v. Commissioner, 118 T.C. 330 (2002). Additionally, the statutory period under section 6330(d)(1) has expired in which petitioner may file (or refile) a Tax Court petition based on the Notice of Determination…. Consequently, should we grant petitioner’s motion, respondent will be able to take all appropriate collection action as provided by law.

“It is not clear to the Court that petitioner is aware of the consequences of filing a motion to dismiss, or that petitioner even intended the document he filed… to dismiss the case and allow respondent to take all appropriate collection action as provided by law. If petitioner indicates to the Court that he intended to proceed to trial rather than dismiss the case, the Court will rule on respondent’s motion for summary judgment. If the Court denies respondent’s motion for summary judgment, this case will be set for trial at a future trial session of the Court….” Order, at p. 2.

So CSTJ Panuthos tells Geoff to let him know soon whether he really intended to have his case dismissed as if it had never been filed, and let IRS levy, and if he says he doesn’t so intend, then it’s summary judgment time. But if Geoff says nothing or says he really wants the case dismissed, then IRS must tell CSTJ Panuthos if they object.

Clear? Thought not.