Second Circuit weighed in on an oldie-but-goodie, Alphonso v. Com’r., 137 T.C. 247, reversing Judge Chiechi in Alphonso v. Com’r, Docket No. 11-2364-ag, dated 2/6/13. For background, see my blogpost “A New York Cooperative Conundrum”, 3/18/11.

Thanks and praise to Eric Levine and that generous purveyor of pizza and pasta to hungry attorneys and accountants at the joint ABA-NYSBA Committee on Taxation of Cooperatives and Condominiums, Charlie Baller, for winning this one.

Essentially, New York’s crazy-quilt of rights embodied in cooperative apartment corporations’s certificates of incorporation, by-laws, shares, proprietary leases and house rules, which concatenation our State’s highest court has called sui generis, and as a result of our State’s lower courts wrestling with same, equals a property right sufficient to pass the Section 165(c)(3) test for casualty loss deductibility.

While of great interest to New York practitioners, the case is of limited use elsewhere, as State law dictates property rights.

And as for the victorious Ms Alphonso and her 200 fellow tenant-shareholders, IRS may have lost the battle, but there remains the war over whether the property damage was indeed a casualty loss; and that Second Circuit expressly said they did not decide.

Stay tuned.

Taking my cue from the greeting in the old Montreal Forum, here’s the Tax Court’s latest bright light, Judge Albert G. Lauber, summa cum laude from Yale, with a M.A. from Clare College Cambridge, etc. etc., appointed to Tax Court January 31, 2013, the newest star in the Tax Court line-up.  Most impressive resume, and should be a fine addition to the Tax Court Bench.

Hopefully, he will not be wasting his sweetness on the desert air, as Tommy Gray lamented in 1751, writing the ten-thousandth “you didn’t attach a Form 8332, so no child credit” case, such as poor Judge Kerrigan had to deal with today, in Paul Edward Vokovan, 2013 T. C. Memo. 37, filed 2/5/13.

I’ll spare you most of the details, dear reader, the story is one often told. Paul Edward claims he attached a signed original Form 8332 to a return from twelve years ago, produces an unsigned copy on the trial, but has neither return nor copy of the signed Form 8332, and IRS can’t find it either. So he’s fighting about a $1500 deficiency.

No dice, Paul Edward; you must have a signed original Form 8332, or an original signed equivalent so near to the Form 8332 in substance that you might as well just use the Form 8332, attached to each and every return for each and every year until each and every would-be qualifying child reaches adulthood, or death relieves you of this burden.

Judge Kerrigan: “Petitioner stipulated that he did not attach a signed Form 8332 to his 2008 Federal income tax return. If petitioner did not attach a signed Form 8332 or a statement conforming to the substance of Form 8332, he did not satisfy section 152(e)(2) and the prior existence of a Form 8332 is immaterial; petitioner needed to attach a copy of a signed Form 8332, or a statement conforming to the substance of Form 8332, every year to his tax return or he is not entitled to the exemption deduction. See Chamberlain v. Commissioner, T.C. Memo. 2007-178, slip op. at 7.” 2013 T. C. Memo. 37, at pp. 7-8.

So Judge Lauber, a man of distinguished academic and professional stature, a scholar and a seasoned practitioner, must now apply his formidable intelligence and magisterial experience to such as this.

Welcome to Tax Court, Judge Lauber.

Once again the Section 7502 saga is played out, this time by a lawyer who should know better than to entrust to a post office employee the mailing of a petition on the last day for file-by-mail. The lawyer escapes, but this is a cautionary tale (and I doubt the lawyer’s client was paying for this Tax Court trial).

The case is Earl D. Glenn and Carolyn J. Glenn, 2013 T. C. Memo. 33, filed 1/4/13, as told to Judge Marvel.

Here’s the background. “Petitioners retained Attorney Julie M.T. Walker to file their petition. Ms. Walker received her bachelor of arts degree from Hampshire College in 1977, her juris doctor degree from Howard University School of Law in 1980, and her master of laws degree in taxation from Emory University School of Law in 1984. From October 6, 1980, through May 4, 1998, Ms. Walker was employed as an attorney by respondent’s Office of District Counsel in Atlanta, Georgia. From May 5, 1998, through December 31, 2005, Ms. Walker served as a full-time judge on the City Court of Atlanta. In April 2006 Ms. Walker started a solo law practice.” 2013 T. C. Memo. 33, at p. 2.

Maybe the bio is there to show Julie M.T. is a member of the judges’ club in good standing, so she gets cut some slack.

Howbeit, Julie M. T.’s clients got a SNOD, so Julie M. T. prepared a petition, got it signed, assembled her supporting documents, made copies and headed to the post office. She filled out her certified mail slips, prepared a return receipt, prepared a return envelope to her office for the “stamped filed” copy she wanted to get back, and asked the postal employee to figure out the postage and put the petition and copies in the right envelopes, and send them.

Of course, the postal employee put the wrong labels on the wrong envelopes, got the postage wrong, and Julie M. T. never checked that the postal employee had got it right. So Tax Court never got the petition until Julie M.T. discovered the mistake, eleven days too late, whereupon she fired off the petition to Tax Court. Of course, IRS moved to dismiss for late filing want of jurisdiction.

But Judge Marvel sustains Tax Court jurisdiction. Julie M.T. has certified mail receipts showing the mailing on the magic day to the right address, and the postal employee testifies on the trial that he didn’t remember whether he messed up the envelopes (I wonder how much that trial cost). And Tax Court did ultimately get the petition, albeit late.

So Julie M.T. gets a bye.

Takeaway–Remember the unlucky Portney; see my blogpost “Wait Just A Minute, Mr. Postman – Part Deux”, 9/11/12. Prepare the envelopes and receipts yourself. Buy a postage scale if you don’t have one, if there isn’t one at the local PO, or better still, use the self-service machine if your PO has such a thing (mine has two). Don‘t trust anyone else; unlike Julie M.T., with her high-priced resume, you might not be so lucky.

No, this post is not a prelude to Valentine’s Day. I’m writing about Judge Boasberg’s modification to his injunction against Dougie Shulman’s Legacy, the RTRP regulations.

You’ll remember that Judge Boasberg in D.C. District Court enjoined IRS from proceeding with the RTRP registration and CPE requirements; see my blogpost “Chevron, Mayo- I’m Loving It”, 1/21/13.

IRS says it will appeal, but hasn’t done so yet. IRS asks Judge Boasberg to lift his injunction pending appeal. Judge Boasberg says “no, but you can keep the PTIN program because Section 6109(a)(4) authorizes it, and Congress enacted that requirement, unlike the RTRP that Dougie Shulman made up”.

And IRS’ yelp about the money expended combines moneys that came in from PTINs and from RTRP registrations, so maybe the loss isn’t that great. Anyway, IRS can keep its existing staff on the job, and the testing centers open. Preparers may sign up voluntarily, to get an extra credential, and the PTIN operation can go on (but without requiring PTIN holders to take tests and CPE).

So here’s Judge Boasberg’s modification of the Loving injunction. “The Injunction is MODIFIED to make clear that the IRS is not required to suspend its PTIN program, nor is it required to shut down all of its testing and continuing- education centers; instead, they may remain, but no tax-return preparer may be required to pay testing or continuing-education fees or to complete any testing or continuing education unless and until this injunction is stayed or vacated by the Court of Appeals.” Order, p. 7.

Finally, in a slap against us bloggers, “The Service next maintains that staying the injunction would not substantially harm Plaintiffs both because their attorney allegedly told a blogger from Forbes that they planned to continue preparing returns this season even without an injunction and because they still have until the end of the year to pass the exam. See Mot. at 8. The Court, as a threshold matter, credits sworn declarations of parties over blog posts that attribute comments to an attorney. And here, as noted in the Opinion, two Plaintiffs indicated that the new regulations would cause them to close their tax-preparation businesses. See Loving, 2013 WL 204667, at *4.” Order, p. 5.

C’mon Judge, we bloggers really try to tell it like it is.

In the somewhat altered words of Samuel Taylor Coleridge, echoed by The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, Mark V. Holmes, in Diamond Packaging Corporation, Docket No. 24763-10, a designated hitter for a Friday when, as usual, no decisions are forthcoming.

See my blogpost “Guy on Board”, 9/13/12, wherein Special Trial Judge Daniel A. (“Yuda”) Guy, Jr., told the IRS and Diamond Packaging to play nice and do a proper Rule 70-Branerton show-and-tell. They didn’t listen.

Judge Holmes: “This case is the oldest one on the Court’s May 20, 2013 trial calendar for Buffalo, New York. Well less than a $1 million is at issue, yet the discovery spigot has seemingly been opened to its widest position; there are three pending motions to compel or review the sufficiency of responses to previous rounds of discovery, and filings with titles like ‘reply by respondent to petitioner’s response to respondent’s motion to compel responses to respondent’ first request for production of documents.’ It is not in the taxpayer’s or the Court’s interest to have to keep swimming in such a sea of paper given the stakes involved.” Order, p. 1.

Judge Holmes does a teleconference with the lawyers, tells them to do an agreed pretrial order, setting trial within six months, or if they can’t agree, each submits their own and Judge Holmes, unlike the Ancient Mariner, need stoppeth only one of two.

Until he does stoppeth one of two, or gets a joint pretrial order, “(T)he Court will hold in abeyance until then its action on the various discovery motions and will, if necessary, discuss them in a teleconference rather than order more written responses.” Order, p. 2.

Takeaway: Discovery is not the trial.

Sherlock’s famous jibe to Watson from The Valley of Fear introduces a Tax Court case that’s actually fun to read, bringing a smile even to my jaded visage.

George Schussel first used Bermuda to stash the cash from his cash-cow Digital Consulting, Inc., but when DCI cratered, he moved his loot to the Bay State and set up Driftwood Massachusetts Business Trust, whence he claimed the loot was either loans to DCI or DCI’s payment for his intellectual property.

His hideaway in the “still vex’d Bermoothes” was Digital Consulting Limited, Inc., a Bermuda shell that did no business except cash checks made out to its US sibling DCI and divert same as Georgie directed, which neither DCI nor Georgie ever reported as income.

You’ll find the whole story, as told by Judge Cohen, in 2013 T. C. Memo. 32, filed 1/31/13.

Georgie claimed that, because DCI was a C Corp., he wanted to avoid double taxation. What he did in fact was evade any taxation, whereupon IRS descended heavily, and First Circuit affirmed Georgie’s conviction for tax evasion and conspiracy to defraud the USA.

Restored to society and litigating Section 6901 transferee liability for the Driftwood cash, Georgie’s trial testimony was blown away by Judge Cohen. Running money through DCLI violated Massachusetts’ fraudulent conveyance statute (see my blogpost “Game Ends in No Score”, 5/30/12, for more about fraudulent conveyances), and there’s no proof that Georgie transferred any intellectual property to DCI, for which Driftwood was obligated to pay him, nor any documentation of any loan from Georgie to Driftwood or anyone else.

Nothing exciting here, so why do I blog this run-of-the-mill case?

Georgie’s never-say-die attitude and his delightfully unencumbered moral sense make reading Tax Court cases fun: “…in early November 1997, while auditing DCI’s return for 1995, a revenue agent began questioning checks payable to DCI deposited in DCIL’s account. Petitioner prepared a bogus contract between DCI and DCIL allegedly for a term of two years beginning January 4, 1994, to be presented to the revenue agent by the lawyer he had hired to represent DCI in the audit. Petitioner picked the dates of the contract to coincide with termination of the practice of sending money to Bermuda, which was supposed to stop on December 31, 1995. While he was preparing the contract, he looked out the window of his home and observed his gardener mowing the lawn. Petitioner signed the name of his gardener as the ‘managing director’ executing the contract on behalf of DCIL.” 2013 T. C. Memo. 32, at p. 6.

Of course Georgie gets transferee liability in high seven figures for these shenanigans, but his story does have  “a certain unexpected vein of pawky humor”.

No, this blogpost is not about quantum mechanics, about which I understand virtually nothing. It is about avoiding a Section 6662(a) accuracy penalty where the tax incident giving rise to the deficiency was the result of uncertainty.

Special Trial Judge Lewis (right way to spell it, Judge) Carluzzo explains in Elliott Rodney Thomas and Mildred Marie Thomas, 2013 T. C. Sum. Op. 5, filed 1/30/13, a Section 7463 “not for nuthin’”.

There’s a fight about whether Hurricane Katrina relief applies to the Section 6651(a)(1) late filing addition to tax (ElRod and MilMarie lose, even though the property giving rise to the deficiency was in New Orleans and damaged by Katrina; their principal place of business and place of residence was California, and they filed too late even if they’d otherwise be entitled to Katrina relief). There’s a fight about whether the loss from their real estate activities is subject to the Section 469 passive loss rules, but IRS didn’t raise that in the SNOD, fails to sustain its burden of proof on the trial, and ElRod and MilMarie win that one.

But the deficiency arises because ElRod and MilMarie claimed the Katrina casualty loss twice. They claimed the casualty loss in one year, IRS said no, they petitioned Tax Court, and the casualty loss issue was settled pre-trial, with decision for ElRod and MilMarie.

But while the Tax Court proceeding was pending, the next year’s return was due, so ElRod and MilMarie took the loss on that year’s return as well, not knowing which year would be the right year. No way, says IRS, you clearly can’t get the same deduction twice, right? So it’s time for the Section 6662(a) accuracy penalty.

Not exactly, says Judge Lew. “The deficiency, the underpayment of tax required to be shown on petitioners’ 2006 return, and the understatement of income tax all result from the casualty loss deduction claimed on petitioners’ 2006 return and disallowed in the notice. At first glance it would seem that an underpayment of tax that results from the disallowance of a deduction allowed in a previous year would be subject to the penalty. According to petitioners, however, the penalty should not be imposed because they acted reasonably and in good faith with respect to the underpayment of tax that resulted from the disallowance of the casualty loss deduction. Because of the sequence of events, we agree with petitioners.

“The casualty loss deduction claimed on petitioners’ 2005 return and 2006 return relates to the same occurrence, that is, the loss they sustained on account of the damages suffered to the New Orleans house during Hurricane Katrina. They are obviously not entitled to two deductions attributable to the same loss. Their entitlement to the 2005 loss deduction, however, was in question as of the date their 2006 return was filed. Claiming the casualty loss deduction again for 2006 was intended to ensure that the deduction was allowed for one or the other of the years.” 2013 T. C. Sum. Op. 5, at pp. 14-15.

Given the uncertainty when they filed, ElRod and MilMarie acted reasonably and in good faith. No penalty. The uncertainty principle rules.

That’s Judge Gale’s tale for Lawrence J. & Estelle Mittenthal, Docket No. 998-12SL, filed 1/29/13, a designated hitter on a day when nothing else is doing at Tax Court.

Facts are simple. Larry and Stelle were assessed a deficiency, plus late file and late pay additions for 2008. Judge Gale’s Order doesn’t state whether Larry and Stelle had a chance to dispute the underlying tax deficiency, or whether they conceded the amount of tax due and unpaid, before IRS decided to levy. Howbeit, Larry and Stelle file a petition to review the levy, but in the meantime IRS grabs their 2009 overpayment to satisfy whatever Larry and Stelle owe, and moves to dismiss for mootness.

Larry and Stelle object that, although the tax may have been paid, they want to fight over the late file and late pay.

Judge Gale: “However, the Court’s jurisdiction over the underlying tax liability for 2008, including additions to tax, arises only as a result of petitioners’ challenge to respondent’s determination to proceed with the levy.” Order, pp. 1-2 (Footnote omitted).

See the omitted footnote: “Absent respondent’s attempt to levy, petitioners could not have obtained prepayment judicial review of the liabilities they dispute, which consist of additions to tax for late filing and late payment under sec. 6651. See sec. 6665(b) (allowing summary assessment of additions to tax under sec. 6651 where the additions are not attributable to a deficiency in tax).” Order, p. 2, footnote 2.

So do Larry and Stelle go to U. S. District Court or Court of Federal Claims? Unless the failure to file and failure to pay are heavy-duty dollars, it’s probably too expensive.

Bad result.

Kicking off T. C. Volume 140, B. V. Belk, Jr., and Harriet C. Belk learn from Judge Vasquez that a thing of beauty must not only be a joy forever, but must be the same thing of beauty forever, which means you can’t swap one thing of beauty with another. See 140 T. C. 1, filed 1/28/13.

BV Jr. and Harriet had a couple of hundred acres of North Carolina adjacent to, if not on top of, Old Smoky, which was held by Olde Sycamore, LLC, the membership interests of which BV Jr and Harriet owned 99% and 1%, respectively. BV Jr and Harriet subdivided the land and sold homesteads thereon, reserving 185 acres for a golf course, around and among which lay the homesteads in question.

Olde Sycamore wanted to subject the golf course to a Section 170(h) scenic easement, incidentally picking up a $10 million charitable deduction. See my blogpost “Valuable Consideration?” 10/3/12, for a similar gambit.

Olde Sycamore’s problem wasn’t the “ten dollars and other valuable consideration” boilerplate, but rather BV Jr and Harriet trying to play mix-and-match with the golf course.

Their deal with the fetchingly-named Smoky Mountains National Land Trust, n/k/a Southwest Regional Land Conservancy, a 501(c)(3) whose purpose was keeping unspoiled our national patrimony, included a provision allowing B V Jr. and Harriet to swap other land for the golf course, to which Smoky couldn’t unreasonably object, provided the conservation purpose was maintained.

The latter is designed to satisfy Section 170(h)(5) conservation purpose. But Judge Vasquez says that doesn’t satisfy the Section 170(h)(2)(C) perpetuity purpose. The two are separate. Section 170(h)(5) allows for a form of cy pres where changed circumstances make the originally donated property unsuitable for continued conservation purposes. But the property has to satisfy Section 170(h)(2)(C) to begin with, that is, subject to the restriction in perpetuity.

So the real issue is the Section 170(h)(2)(C) use requirement that a partial interest in real property must be restricted in perpetuity. And Judge Vasquez says this is a case of first impression, thus a Tax Court full-dress opinion is warranted.

Judge Vasquez: “Petitioners [BV Jr and Harriet] argue it does not matter that the conservation easement agreement permits substitution because it permits only substitutions that will not harm the conservation purposes of the conservation easement. However, as discussed above, the section 170(h)(5) requirement that the conservation purpose be protected in perpetuity is separate and distinct from the section 170(h)(2)(C) requirement that there be real property subject to a use restriction in perpetuity. Satisfying section 170(h)(5) does not necessarily affect whether there is a qualified real property interest. Section 170(h)(2), as well as the corresponding regulations and the legislative history, when defining qualified real property interest does not mention conservation purpose. There is nothing to suggest that section 170(h)(2)(C) should be read to mean that the restriction granted on the use which may be made of the real property does not need to be in perpetuity if the conservation purpose is protected.

“We find it is immaterial that SMNLT must approve the substitutions. There is nothing in the Code, the regulations, or the legislative history to suggest that section 170(h)(2)(C) is to be read to require that the interest in property donated be a restriction on the use of the real property granted in perpetuity unless the parties agree otherwise. The requirements of section 170(h) apply even if taxpayers and qualified organizations wish to agree otherwise.” 140 T. C. 1, at pp. 19-20 (Footnote omitted).

So mixing-and-matching or swapping is out. And so is BV Jr’s and Harriet’s deduction.

I was so absorbed by Judge Wherry’s 114-page excursion through the wilderness of Nevada and appraisal practice yesterday (1/24/13), Estate of Shirley Giovacchini et al., 2013 T. C. Memo. 27, that I almost forgot Judge Goeke’s foray into similar territory on that same day, Jessie G. Yates III and Melissa Long Yates, 2013 T. C. Memo. 28, filed 1/24/13.

Although Judge Goeke has much to say about appraisals, we’re back to the Alice in Wonderland story of eating the cake that makes one smaller and imbibing the drink that makes one larger; but this time we have a principal residence and a business property transferred at the same time.

Jess and Mel had a home and a restaurant (the Hula Grill). They sold their home and bought a vacant lot, on which they built a house. They claimed they wanted to use the new house as a bed and breakfast, and included a statement to that effect in their purchase contract, but never checked the zoning or required their seller to obtain any permits or approvals, or conditioned their performance on obtaining same.

But they did move in and live there.

Next, the Hula Grill almost lost its grass skirt when their neighbor, Mr. Maynard, a seasoned real estate investor doing an assemblage for a Hilton hotel, terminated their lease on an adjoining lot, whereon Jess and Mel parked the cars of the Hula Grill diners. Without a parking lot, the Hula Grill was toast.

So Jess and Mel sold to Maynard, insisting he had to buy the new house as well as the Hula Grill. Jess and Mel wanted to do a Section 1031 like-kind exchange, wherein like for like can be swapped tax-free; but a Section 1031 exchange only works for property used in a trade or business, or held for investment.

Jess and Mel strike out on the new house as business property. Their testimony is self-serving, and the contract reference to a bed and breakfast is window-dressing, says Judge Goeke. See my blogpost “Welcome, Judge Guy”, 4/24/12, wherein I skim over the Reesink case, cited by Judge Geoke.

Now as to the Section 121 exclusion of gain on sale of principal residence. IRS agrees the new house was Jess’ and Mel’s principal residence. Since the new house is a principal residence, and Jess and Mel can satisfy the various two-out-of-five rules, they can exclude $500K of gain even if they can’t get Section 1031 benefit.

Judge Goeke: “Consequently, we are presented with the simultaneous application of section 121 and section 1031 to the exchange at issue. The Commissioner has indicated that in these circumstances ‘[s]ection 121 must be applied to gain realized before applying section 1031’. Rev. Proc. 2005- 14, sec. 4.02, 2005-1 C.B. 528, 529.” 2013 T. C. Memo. 28, at p. 5.

So each of the two properties sold must be treated as a separate exchange group, the Hula Grill as like-kind, and the new house as “boot” or unlike-kind. Jess and Mel spell out the relative values of the two properties in the contract, and Mr. Maynard, the real estate pro, initials the allocation and signs off. He isn’t doing a Section 1031 exchange; for him, it’s a straight purchase.

IRS claims Jess and Mel gerrymandered the allocation, to minimize the value of the Hula Grill property so as to sop up the gain from the new house. IRS also wants substantial undervaluation penalty.

No, says Judge Goeke. While the new house isn’t like-kind, the fact that the sale to Mr. Maynard was arms’-length, and adversarial; Maynard had shut down the Hula Grill and didn’t want the house. Maynard was doing a purchase, not an exchange.  Maynard testified he didn’t remember how the allocation came about, but Judge Goeke opines that, as a sophisticated real estate operator, Maynard would be expected to make sure each of the properties he bought would have basis appropriate for disposition or depreciation.

And since Jess and Mel cooperated with IRS, and since the agreement with Maynard was some evidence of an arms’-length valuation of the properties, IRS had Section 7491 burden of proof here, and IRS fails to discharge that burden.

So the allocation stands, and there’ll have to be a Rule 155 hoe-down to see how the numbers work.

But Jess and Mel may have a Section 6662 penalty, since they don’t put their accountant on the stand or provide either the accountant’s credentials, or what they told their accountant, or what their accountant told them.

Takeaway- Always, always put the preparer and advisor on the stand–if they have any credentials at all. See my blogpost “The Case of the Incoherent Accountant”, 3/1/11.