Another sequel to an old blogpost, in this case “We Wuz Robbed”, 8/7/12, and again the plot is theft by deceit. Replacing as villain the improbably-named but larcenously-inclined Yuri Debevc Derivium, we have the equally larcenous Dariusz Potok. Starring as victims-taxpayers in 2013 T. C. Memo. 66,  filed 3/5/13, let me present James M. Urtis and Gaetana R. Urtis. And our host for this tale of woe is Judge Goeke.

Jim and Gae need more space for their six-child family, and hire Onyks Construction, an Illinois corporation, to demolish a large part of their old house and build a massive extension. The aforesaid Dariusz is the boss of Onyks, and absconds with about $400K of Jim and Gae’s cash, fobbing them off with excuses, a cancelled insurance policy (which Jim and Gae have to sue to get) and finally by dying with his toxicologic status unresolved.

Jim and Gae sue, as aforesaid, but all they get is $10K nuisance value from the insurance carrier. Jim and Gae take a $188K theft loss in the year they discover that Dariusz’s corporations have been dissolved and no probate or administrative proceedings have been begun for the estate of the late Dariusz.

IRS claims (a) no theft and (b) if there was one, it was in the year before Jim and Gae took the loss on their 1040.

State law governs what is theft, and Judge Goeke finds the Illinois statutory offense of home repair fraud defines what Dariusz did as theft. Judge Goeke: “Respondent [IRS] argues that petitioners failed to prove that Mr. Potok’s improper taking of their money was anything more than ‘a failure to comply with the terms of the construction agreement.’ We disagree.

“It is clear that by virtue of his criminal fraud Mr. Potok induced petitioners to enter into a contract which allowed him to obtain significant funds from them. Nearly half of those funds ($188,070) were then improperly used for purposes other than construction on petitioners’ home. We will not attempt to distinguish Mr. Potok’s criminal intent in causing petitioners to enter the contract from his intent in taking the improperly used $188,070 from them; we believe these intertwined actions were part of a scheme by Mr. Potok to wrongfully obtain funds belonging to petitioners. We therefore find that petitioners were the victims of a “theft” as that term is defined for purposes of section 165 and may claim a theft loss deduction under that section.” 2013 T. C. Memo. 66, at p. 14.

Next, IRS relies on a pre-trial letter Jim wrote that seems to say he knew the year before he’d get nothing back from the late Dariusz, his estate or anyone else. Now Jim is a lawyer, and that should tell against him, but Judge Goeke brushes the letter aside.

“We do not assign a great deal of weight to Mr. Urtis’ letter. The letter was written to explain the ways in which petitioners sought to recover from Mr. Potok, Onyks Construction, and Essex Insurance. In doing so, the letter focuses on the ways in which recovery was attempted and is vague or simply incorrect about the dates involved and the order of events.” 2013 T. C. Memo. 66, at pp. 19-20.

Apparently Jim was a plausible witness on the trial. Still, be careful what you write to IRS; everything you say can and will be used against you.

So Jim and Gae win. They wuz robbed.

My long-suffering readers will remember Lucy Gabey, Navajo tribal elder and sole support of her clan-nephew, who starred in my blogpost “Losing My Religion”, 1/17/13; Lucy has a disciple, George Thompson, who features in 140 T. C. 4, a full-dress opinion filed 3/4/13.

Geo files a Section 6330 petition after Appeals bounces his proposed partial pay installment agreement because he included his tithe to his Church (with a capital “C”) in his necessary living expenses. Geo claims this violates the First Amendment to the Constitution and the Religious Freedom Restoration Act of 1993 (RFRA”), Pub. L. No. 103-141, sec. 3, 107 Stat. 1488 (current version at 42 U.S.C. sec. 2000bb-1(a) and (b) (2006)), just like Lucy G.

Geo is a pious fellow. Judge Ruwe explains: “Petitioner has been a member of the Church of Jesus Christ of Latter-Day Saints (Church) his entire life and has regularly contributed 10% of his monthly income to the Church. Petitioner is actively involved in the Church and holds a position as a shift coordinator in the Church’s Manhattan Temple. Additionally, petitioner is a stake scouting coordinator for the Church and is responsible for overseeing six scout troops in different congregations in New Jersey. Petitioner was not compensated by the Church for his shift coordinator or stake scouting coordinator responsibilities.” 140 T. C. 4, at p. 3.

Geo’s present problems are his TFRPs for the business entity he controls through a trust with his wife. He’s got $150K in current TFRPs, plus a previously defaulted installment agreement for personal taxes for a bunch of years and previous TFRPs, amounting to $731K, for a total of about $888K. Apparently rendering unto Caesar isn’t part of Geo’s religion.

Based on what Geo offered in his partial pay installment plan ($3K per month), it would take 24 years for Geo to pay off what he owes. Appeals offered Geo $8K per month, which Geo rejected, even though it would take nine years for Geo to pay off at that rate.

Tax Court doesn’t rewrite installment plans. If underlying liability is not at issue (and it isn’t), “arbitrary, capricious or contrary to law” is the rule.

Judge Ruwe: “The Commissioner has created guidelines for settlement officers to follow in determining the terms of a partial payment installment agreement for a taxpayer who cannot fully pay his liability but can pay some of it.

“In evaluating a taxpayer’s ability to pay, the Commissioner classifies a taxpayer’s expenses into two categories: (1) necessary expenses and (2) conditional expenses.” 140 T. C. 4, at p. 12.

If a taxpayer requests a partial payment installment agreement, which is what Geo wants, taxpayer is only allowed what expenses s/he needs to live, per the IRS regional guidelines.

Judge Ruwe again: “This issue involves whether petitioner’s asserted religious obligation to tithe can trump his obligation to pay substantial amounts of delinquent penalties and taxes. Petitioner does not meet the requirements of sec. 6159(c), which if met would require respondent to enter into a full payment installment agreement in a reasonably prompt manner. Petitioner introduced evidence, including a biblical passage from the Old Testament, to support his position. See Malachi 3:8-10. This brings to mind another biblical passage suggesting an answer to this type of dilemma: “Render therefore to Caesar the things that are Caesar’s, and to God the things that are God’s.” Matthew 22:21. However, even this formulation presents the dilemma of determining which things fall into the two respective categories. While we may be incapable of determining what belongs to God, we believe that we can, and must, decide what is Caesar’s. Therefore, we will consider this issue using the latter approach based on existing procedures and precedents.” 140 T. C. 4, at pp. 12-13.

Geo fails the test. His tithing may be necessary for his employment, but as he isn’t being paid that doesn’t count, notwithstanding a letter from his Bishop (with a capital “B”), which though admitted into evidence without objection is not deemed to be an official Church (with a capital “C”) position.

And as for his spiritual well-being, Tax Court doesn’t go there, and there’s copious Supreme Court learning on that score.

Finally, our friend “least intrusive” under RFRA. Geo is a long-time nonpayer, everyone agrees that collection of taxes is necessary, and Tax Court decides that Geo and his Church (with a capital “C”) cannot trump governmental functions.

So Geo, say hello to Lucy.

Tax Court gives second chances today, a no-opinion day. If you don’t want to play, however, you’re out. See my blogpost “We’ll Come to You–Yet Again”, 1/3/13, for an example of a second chance.

Here’s an example of a second chance not taken. See Judge Gale’s latest, Gordon F. McCaleb, Deceased, Docket No. 656-12S, filed 3/1/13.

You’ll remember that the late Gordo was fighting over a $4K deficiency plus an accuracy penalty when the clock ran out on him personally, but not on his case. Judge Gale sent an offer to join the dance to the late Gordo’s heirs-at-law, complete with copies of the relevant State law.

In the meantime, IRS concedes the penalty, but the heirs-at-law jointly and severally pass on the invitation, and Judge Gale determines the petition didn’t raise any substantive issues anyway, so he dismisses for want of prosecution.

Today’s a big day for second chances in Tax Court, though,  so The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, Mark V. Holmes, does a designated hitter in Alison T. O’Neil, Petitioner, and Michael J. O’Neil, Intervenor, Docket No. 28711-09. This is a Rule 161 motion, which “are good tools for ‘correcting substantial errors of fact or law and allow[ing] the introduction of newly discovered evidence that the moving party could not have introduced, by the exercise of due diligence, in the prior proceeding.’ Estate of Quick v. Commissioner, 110 T.C. 440, 441 (1998).” Order, p. 1.

Of course, Judge Holmes finds Alison has nothing new, but must cruise through his de novo findings on Alison’s innocent spouse claim, because Alison lived in California when this case started.

Judge Holmes: “And, because of the Ninth Circuit’s recent decision in Wilson v. Commissioner, ___F.3d___, 2013 WL 174395 (9th Cir. Jan. 15, 2013), aff’g T.C. Memo. 2010-134, it is the ‘de novo’ portions of our opinion–and not the portions where we reviewed the Commissioner’s exercise of his discretion–that we discuss.)” Order, p. 1.

For those who tuned in late, Ninth Circuit decided in Wilson that Tax Court had jurisdiction to consider matters outside the administrative record in reviewing an innocent spouse denial, following Eleventh Circuit. Judge Bybee dissented, saying the Administrative Procedures Act prevents this; Tax Court is limited to reviewing what IRS did with the evidence it had for abuse of discretion.

So Judge Holmes looks at Alison’s story, finds nothing new, and “( S)ome of the remaining discussion in Ms. O’Neil’s motion (her health as a factor that the Commissioner improperly considered in issuing the notice of determination, and her suggestion of remand to the IRS) are no longer tenable after Wilson. See Wilson, ____ F.3d______ at_______,  2013 WL 174395, at *8, *11.” Order, p. 3.

No second chance for Alison, either.

C. L. Edson’s immortal parody of Longfellow’s Hiawatha gives me my text for today’s blogpost, Deborah L. Smith, 140 T. C. 3, filed 2/28/13.

Debs was inside the USA when IRS mailed a SNOD to her P. O. Box in San Francisco, CA, alleging she and husband (unnamed in the opinion and whereabouts not stated) “were liable for an $8,911,858 deficiency, a $2,044,590 section 6651(a)(1) addition to tax, and a $1,782,372 section 6662(a) accuracy-related penalty.” 140 T. C. 3, at p. 3.

The SF PO Box was the address shown on Debs’ most recent return, but Debs split for Canada with her kids and got permanent residency there a couple of months (partitive genitive, guys) before IRS posted the SNOD. However, on the day IRS mailed the SNOD and on the day it hit her PO Box, Debs was back in SF packing up some goods preparatory to shipping them to her new domicile in The True North Strong and Free.

Debs never checks her old PO Box, she claims, but gets wind of the SNOD and petitions Tax Court 148 days after the mailing date of the SNOD. IRS claims a Section 6213(a) late mailing penalty and moves to toss Debs’ petition.

IRS says Debs was inside the USA when they mailed the SNOD, and whether she got it or not is irrelevant, and anyway the 150-day overseas extender only applies to SNODs “addressed to a person outside the United States”. 140 T. C. 3, at p. 5.

Debs says she was a Canadian resident when the notice was mailed and delivered, and therefore is entitled to the 150-day extender for filing a petition.

Judge Foley buys Debs’ tale.

Debs has burden of proof on jurisdiction, and jurisdiction here depends upon a SNOD (which everyone admits there was) and a timely filed petition.

Judge Foley: “The phrase ‘addressed to a person outside the United States’ is ambiguous, and the Court has consistently construed it broadly. See Looper v. Commissioner, 73 T.C. 690, 694 (1980); Lewy v. Commissioner, 68 T.C. 779, 781-782 (1977).  Where a statute is capable of various interpretations, we are inclined to adopt a construction which will permit the Court to retain jurisdiction without doing violence to the statutory language. See Lewy v. Commissioner, 68 T.C. at 781, 783-786 (holding that the 150-day rule is applicable to a foreign resident who is in the United States when the notice is mailed, but outside the United States when the notice is delivered); see also Levy v. Commissioner, 76 T.C. 228, 231-232 (1981) (holding that the 150-day rule is applicable to a U.S. resident who is temporarily outside of the country when the notice is mailed and delivered); Looper v. Commissioner, 73 T.C. at 694-695 (holding that the 150-day rule is applicable where a notice is mailed to an address outside the United States); Hamilton v. Commissioner, 13 T.C. 747, 754 (1949) (holding that the 150-day rule is  applicable to a foreign resident who is outside the United States when the notice is mailed and delivered). Our holding is consistent with our jurisprudence, is a practical construction of section 6213(a), and leaves the statutory language unscathed.” 140 T. C. 3, at p. 6.

“In sum, a foreign resident’s status as a person ‘outside of the United States’ is not vitiated by the resident’s brief presence in the United States on the notice’s mailing date.” 140 T. C. 3, at p. 9.

Finally, Debs was one of the people Congress wanted to help when they enacted the 150-day extender in Section 6213(a). “She was a Canadian resident (i.e., when the notice was mailed and delivered); was not at the address to which the notice was delivered; and received the notice, in Canada, 127 days after the notice’s mailing date. Although petitioner was in San Francisco when the notice was mailed and delivered, her status as a person ‘outside of the United States’ is largely a function of her residency and is not vitiated by her brief presence in the United States. In short, the 150-day rule is applicable.”  140 T. C. 3, at p. 11.

Judges Thornton, Colvin, Vasquez, Gale, Wherry, Paris and Kerrigan agree; Judge Goeke concurs in result only. Judge Marvel sits this one out, but the Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, Mark V. Holmes, joins Judges Gustafson and Morrison in agreeing with Judge Halpern’s dissent. Judge Halpern’s point is that Debs was inside the USA for two weeks while the SNOD was in the mail and inside her PO Box; she should have checked. But he says it with a lot more words.

Finally, C. L. Edson: “Made he mittens, Mudjekewis/ He, to keep the warm side inside/ Put the skin side inside/ He, to keep the cold side outside/ Put the stout side outside/ Then he turned them inside outside.”

Judge Kerrigan exhibits great patience, but next friend Alexander Salvagno hasn’t done much for incompetent Raul in Raul Salvagno, Incompetent, Alexander Salvagno, Next Friend, Docket No. 16800-07, filed 2/26/13, a designated hitter on a slow day in Tax Court.

Judge Kerrigan: “…we granted Alexander Salvagno’s motion to be recognized as next friend of petitioner. His motion stated ‘there is no other person better suited to serve as next friend, for the purpose of conducting the presentation of the Tax Court trial’ and assured the Court that he was ‘familiar with the facts of [his father’s] case and principles of law” from having ‘worked in a law library for nearly five years’. Despite his assurances, petitioner’s next friend has repeatedly been non-responsive to the Court’s Orders, and non-compliant with the Tax Court Rules of Practice and Procedure….” Order, p. 1.

On the day of trial, Alex asks for appointment of counsel (Tax Court doesn’t do that, and Alex was told so) and for a continuance. We all know you ask for a continuance thirty days in advance of trial, unless you have a total catastrophe. Alex didn’t.

IRS moved to dismiss for want of prosecution on two separate occasions, but patient Judge Kerrigan gave Alex more time each time.

Now she tells him the record is closed, as she has enough to decide; let Alex brief whatever points of law he has (time to hit the libe again, Alex) before April 1, 2013 (an appropriate date), or have his case tossed.

With friends like him….

Well, You Shouldn’t Be

IRS has caused DOJ to file notice of appeal in Loving v. IRS (see my blogposts “Chevron, Mayo–I’m Loving It”, 1/21/13, and “Modified Loving”, 2/4/13). I don’t know what took them so long.

Of course, if DOJ is unsuccessful on appeal and IRS must wait for Congress to act, all the unregistered preparers will have plenty of time to study for the RTRP test. As Congress presently is behaving, they may well have years.

On the Tax Court front today, only two cases, one brought by a veteran both of the United States Air Force and the United States Postal Service, who should get an audit reconsideration (and even IRS agrees), and the other by a real estate operator who trusted his CPA not wisely but too well, and thereby escapes substantial understatement penalties, as he alleges the aforesaid CPA, while preparing all his books and tax returns, stole more than $1 million from him.

Nothing here to paralyze one with shock, either.

My patient readers will remember my blogpost “Smiling ‘Til It Hurts”, 4/19/12, recounting Judge Kroupa’s docudrama Lee Storey and William Storey, 2012 T. C. Memo. 115, filed 4/19/12.

Well, Bill departed this life thereafter, I hope smiling ‘til the end, but Lee, having won in Tax Court, wants her legal and administrative costs and fees, so Judge Kroupa is back at it in Lee Storey and William Storey, Deceased, 2013 T. C. Memo. 59, filed 2/25/13.

When Bill and Lee’s counsel told Judge Kroupa that Bill had departed this vale of tears, counsel didn’t bother to say if an estate proceeding had, or will be, commenced. Thus the changed caption, although Tax Court frowns upon dead people appearing without an executor or administrator having been duly appointed. Practice tip– Get your executor or administrator on deck, or if not yet official, state that proceedings to appoint have been commenced.

Well, having won last April, Lee was in good shape, except she bypassed Appeals, even though Appeals gave her a shot in the 30-day letter. But Lee wanted no part of Appeals.

Judge Kroupa: “It is unclear exactly why petitioners chose to forgo the Appeals process. Petitioner’s affidavit reflects that she believed respondent [IRS] was intransigent in his position with respect to the film activity. Her affidavit also reflects that she believed that if she did not wage a major counter-attack at the administrative level, she would face ‘a life sentence of IRS audits.’ It appears that petitioners elected to bypass Appeals as part of their litigation strategy. This does not relieve them of the requirement to exhaust all available administrative remedies before filing the petition if they wish to preserve their right to seek litigation costs. See Haas & Assocs. Accountancy Corp. v. Commissioner, 117 T.C. 48, 62 (2001), aff’d, 55 Fed. Appx. 476 (9th Cir. 2003).” 2013 T. C. Memo. 58, at p. 7, footnote 8.

Section 7430 says that not only must you win, but you must exhaust administrative remedies, that is, go up the chain-of-command (as we used to say).

And the issue in Lee’s case, the Section 183 business-vs-hobby calculus, is fact-specific, with a cruise through nine factors, no one of which is controlling and all of which must be weighed, considered, and balanced.

Judge Kroupa: “Notwithstanding our conclusion regarding the merits, respondent presented facts supporting his position that petitioner’s primary objective in conducting her film activity was not to make a profit. And respondent’s arguments with respect to this highly fact-intensive issue were reasonable. Although we did not ultimately agree with respondent’s legal conclusion, respondent has persuaded us that his position had a reasonable basis in fact and law. We hold, therefore, that respondent’s administrative position regarding the for-profit issue was substantially justified and that petitioner is not entitled to an award of administrative costs under section 7430.” 2013 T. C. Memo. 59, at p. 11.

So Lee is out on legal fees because she didn’t exhaust her administrative remedies, and out on administrative fees because IRS was substantially justified.

End of Storey.

Not quite the Kingston Trio’s 1959 hit of that name, from their album “Stereo Concert”, but IRS has decided to drop blackberries, raspberries and papayas from the over-two-year list that requires capitalizing costs, both direct and indirect, under Section 263A.

So all you old men who used to grow the stuff but whose dreams have turned to dust, as the KT sang it fifty-five years ago, see Section 263A(d)(1)(A)(ii), and look out for Notice 2013-18, which will appear in IRB 2013-14, on April 1, a special day in my family.

The IRS has a present for you. “Notice 2013-18 supersedes Notice 2000-45 to remove blackberry, raspberry, and papaya plants from the list of plants with a preproductive period in excess of two years, for purposes of determining the applicability of section 263A to taxpayers engaged in the farming business.

“Notice 2013-18 will be published in Internal Revenue Bulletin 2013-14, dated April 1, 2013.”

So join me in the chorus: “Blackberries, strawberries, the good wines we brew, pass me a papaya and I’ll share some wine with you.”

That’s the word from Judge Lewis (right way to spell it, Judge) Carluzzo, in a designated hit on Henry J. Langer, Docket No. 24035-11L, filed 2/22/13, a day when Tax Court issued no decisions.

Henry J’s problems started when he lost a deficiency case in Tax Court back in 2005 and appealed to Eighth Circuit. Big Eight bounced Henry J in 378 Fed. Appx. 598 (2010), aff’g 2008 T. C. Memo. 255.

Meantime, IRS assessed the deficiency and proposed a levy before Big Eight nailed Henry J’s appeal. Henry J filed a CDP, contesting the underlying tax liability and claiming the levy was premature.

Judge Lew:  “The petition filed in this case challenges the determination made in the notice of determination upon two grounds. (1) the decision in the deficiency case is erroneous; and (2) The underlying liability was improperly assessed while petitioner’s appeal of the decision in the deficiency case was pending.

“Petitioner’s objection to respondent’s [IRS] motion advances only his claim that respondent’s motion should be denied because the decision in the deficiency case is ‘in error’. Nevertheless, we consider both challenges to the proposed collection action as contained in the petition and find neither has merit.” Order, p. 2.

Henry J can’t collaterally attack the decision of Tax Court in a Tax Court proceeding; he could, and did, appeal, and whatever Big Eight decided would bind him and IRS.

But Henry J didn’t post a bond. Section 7485(a) says if you appeal from a decision that you owe IRS money, you must post a bond for the money. If you don’t bond, IRS can lien or levy, and if you win your appeal, you get unliened or refunded the levy.

But if you appeal while unbonded, ask Henry J what happens.

Two cases from Tax Court today (2/21/13) get entered in  the  “nice try, but no prize” stakes.

First up is Thomas A. Wagoner, 2013 T.C. Sum. Op.14, filed 2/21/13, Judge Vasquez fielding this one. Tom claims that because his seven years’ worth of unpaid income taxes, penalties and interest gave rise to a lien on his principal residence, the interest and penalties were deductible as qualified residence interest under Section 163(h)(3)(A). Would you be surprised if I told you Tom was a lawyer?

Judge Vasquez: “However, his argument is erroneous insofar as neither a Federal tax lien nor the filing of a notice of Federal tax lien caused his tax indebtedness to be secured by a qualified residence. See sec. 1.163-10T(o)(1) (flush language), Temporary Income Tax Regs.,  supra. Furthermore, section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), specifically provides that interest paid on income tax liabilities of individuals, regardless of the source of the income or other adjustments to which the tax liabilities relate, is to be treated as personal interest.” 2013 T. C. Sum. Op. 14, at pp. 9-10. (Footnotes omitted).

So Tom gets some more penalties and interest. Still, nice try, Tom.

Next entry is Philip C. Smoker, star of 2013 T. C. Memo. 56, filed 2/21/13. Smokin’ Phil has a variable rate mortgage on his principal residence, but the monthly payment has a ceiling. If the rate breaks the ceiling, the excess interest is capitalized.

Phil tries to deduct the capitalized interest currently, even though he is a cash-basis taxpayer like the rest of us. No go; the interest may be secured, but it wasn’t paid.

Smokin’ Phil tries the “paid or accrued” language in Section 163(h), but Judge Laro isn’t buying. He deluges Smokin’ Phil with all the “if you didn’t pay it you can’t deduct it” cases, and smothers Smokin’ Phil’s only authority, which is based on an accrual-basis taxpayer. I’ll spare you the welter of citations.

Smokin’ Phil goes down in flames, but joins Tom in the “nice try, but no prize” stakes.