Federal Express First Overnight delivery service, that is, as Shelby Nash-Hunter learns in a designated hitter, Docket No. 28031-12, filed 6/21/13, Judge Goeke finding that Shelby is a day late and a lot more than a dollar short.

Shelby responds to a SNOD with a letter sent by FedEx First Overnight. The online dispatch date is Day Ninety, so Section 7502 bails out Shelby if Fed Ex First Overnight is one of the chosen few Private Delivery Services (PDSs) blessed by IRS.

Let’s not worry about whether the letter can be deemed to be a petition. We needn’t get there.

Judge Goeke: “In Notice 2004-83, 2004-2 C.B. 1030, an updated list of companies and classes of delivery service that constitute ‘designated delivery service’ for purposes of section 7502 was established by the Commissioner. Notice 2004-83 expressly states that FedEx is not designated with respect to any type of delivery service not expressly identified in its listing. See Scaggs v. Commissioner, T.C. Memo. 2012-258; Austin v. Commissioner, T.C. Memo. 2007-11.” Order, at p. 2.

For more about the Scaggs case, see my blogpost “A Busy Day”, 9/10/12.

Now the IRS has blessed only some of FedEx’s multiplicitous means of getting paper from any place to 400 Second Street, N.W., in Our Nation’s Capital.

Judge Goeke: “Insofar as FedEx is concerned FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2 Day, FedEx International Priority, and FedEx International First are among the delivery services explicitly listed in Notice 2004-83. FedEx Overnight is not explicitly listed in Notice 2004-83 as a ‘designated delivery service’. Thus, the timely mailing/timely filing rule of section 7502 does not apply to FedEx First Overnight.” Order, at p. 2.

Shelby withdraws any opposition to IRS’ motion to dismiss for want of jurisdiction.

I quote myself: “But wouldn’t it be nice if IRS included the approved list in the notice telling taxpayers where, where and how to file a Tax Court petition? Maybe we should add a category to ‘Don’t Ambush the Indians’, 4/7/11, ‘Don’t Ambush the Accountants, Either’, 8/7/11 and ‘Don’t Ambush the IRS’, like ‘Don’t Ambush the Taxpayers’.” From my above-cited blogpost “A Busy Day.”

 Lori Lamb and husband Gary used Gary’s construction business, Gary Lamb Construction, accounts as pocket money for gambling. Being Oklahomans, they patronized the Kickapoo Casino. When the run of play turned against them, Lori and Gary used the Gary Lamb Construction ATM cards to keep them in the game.

 Should be a taxable distribution, right?

Maybe not, and in Lori’s and Gary’s case definitely not. See Lori R. Lamb, 2013 T. C. Memo. 155, filed 6/20/13. Gary’s case is consolidated with Lori’s, so you’ll find them under one caption, Judge Marvel having drawn both this happy couple and their attorney, the redoubtable Freddie, star of my blogpost “How Not To Do It”, 11/20/12.

Freddie’s up to his old tricks, not handing over documents, trying to smuggle in evidence he never told opposing counsel about, and claiming since a paralegal from IRS asked him for documents he didn’t have to produce them, because he had to answer only to another attorney. Freddie’s a real peach.

But Freddie wins one piece of the case.

Judge Marvel: “Although petitioners both testified that they regularly withdrew cash from the business bank accounts for personal gambling purposes, respondent has failed to show that these withdrawals constituted taxable income to them. Respondent [IRS] failed to introduce any evidence regarding the financial status of Gary Lamb Construction or whether Gary Lamb Construction earned any taxable business income during the year in issue. More importantly, respondent failed to introduce any evidence to show that the withdrawals represented taxable income to petitioners during the year in issue, rather than, for example, a nontaxable return of capital or a loan repayment. Accordingly, we are unable to find that petitioners received additional unreported taxable income attributable to their cash withdrawals from the business bank accounts during the year in issue.” 2013 T. C. Memo. 155, at p. 17.

IRS had burden of proof since IRS wild-carded in the deemed distribution argument post-deficiency.

So Freddie gets his clients a Rule 155 for the rest, although it doesn’t look too good for his clients.

You probably won’t win a Rule 161 reconsideration either. That’s Judge Vasquez’s lesson for B.V. Belk, Jr., and Harriet C. Belk, in 2013 T. C. Memo. 154, filed 6/19/13.

Y’all remember B. V. and Miz Harriet? No? Well, see my blogpost “A Thing Of Beauty – Accept No Substitutes”, 1/28/13, wherein I discussed B. V.’s and Miz Harriet’s North Carolina golf course scenic easement, which included a mix-and-match clause. Judge Vasquez upheld IRS’ denial of the $10 million deduction because of the mix-and-match (the donors could swap other properties for the donated property subject to the not-unreasonably-withheld consent of the donee), but B. V. and Miz Harriet want to give it another shot.

But first, the obligatory incantation: ““Reconsideration is not the appropriate forum for rehashing previously rejected legal arguments or tendering new legal theories to reach the end result desired by the moving party.’ Estate of Quick v. Commissioner, 110 T.C. at 441-442.” 2013 T. C. Memo. 154, at p. 6.

B. V. and Miz Harriet argue that Section 170(h)(2)(C) only requires they donate some property, not which specific property. Wrong, says Judge Vasquez, there are no floating easements. The donation of a partial interest (the scenic easement) splits the property into two pieces, namely, the donated and the retained. “Petitioners’ interpretation of the statute would allow the donated portion (i.e., the easement) to encumber any piece of property; it could be the retained portion or another piece of property that the taxpayer owns. This is inconsistent with the taxpayer taking a charitable deduction for giving up part of his or her property (i.e., a partial interest). If the donated portion does not restrict the use of the retained portion, then the taxpayer has retained 100% of the economic value of the property for which he or she is taking a deduction.” 2013 T. C. Memo. 154, at p. 8.

Next, B. V. and Miz Harriet says North Carolina law allows parties to modify contracts by mutual consent, and since the easement document provides for amendment, Tax Court should apply State law here. In support of their position, they cite two PLRs. But of course PLRs have no precedential value for anyone but the taxpayer who obtained them.

And in any case those PLRs permitted limited modifications to the existing servient estate (as the high-priced lawyers call the land burdened by the easement), not a swap meet.

Anyway. since when does State law trump the IRC?

B. V. and Miz Harriet argue they intended to create a scenic easement, and that should control. But Judge Vasquez says he can’t ignore the plain words of the easement that allowed for the mix-and-match.

Judge Vasquez: “It is inappropriate for the Court to ignore provisions included in the conservation easement agreement simply because petitioners planned to deduct the value of the conservation easement agreement. Our interpretation of the parties’ intention is governed by what the parties actually included in the conservation easement agreement. It is well settled that a taxpayer’s expectations and hopes as to the tax treatment of his conduct in themselves are not determinative….” 2013 T. C. Memo. 154, at p. 12. (Citations omitted).

Finally, B. V. and Miz Harriet claim that Tax Court has failed to trust the donee (the charitable organization which can enforce the easement) to protect the scenic easement. No, says Judge Vasquez, because even though any dominant tenant (the one who benefits from an easement, if you went to an expensive law school) can refrain from enforcing its legal rights, either by choice or neglect, that’s nothing to the point when you explicitly provide for a loophole like the swap meet provision in your easement agreement.

In short, B. V. and Miz Harriet, if at first you don’t succeed in Tax Court, pay for the appeal; don’t waste time with reconsiderations.

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.

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.

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.

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.

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.

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.”

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.