No, not Jodie Foster vs. Anthony Hopkins in the  1991 thriller; rather, it’s Tax Court announcing its weekend shutdown to roll out the brand-new eFiling system (which we devoutly hope is not Tax Court’s answer to the healthcare website, about which the less said, the better).

Anyway, eFiling is offline from Friday, January 17, 2014, at 8:00 a.m., EST, until Tuesday, January 21, 2014, at 6.a.m., EST.

eFiled documents due on Friday, January 17, 2014, will be deemed timely if filed before Wednesday, January 22, 2014, at 6 a.m., EST. Of course, Monday, January 20, 2014 is a holiday in DC, so nothing due that day. But only eFileds get a bye; petitions and notices of appeal are still paper-only, so if your magic date is Friday, January 17, 2014,  remember Section 7502 and get to the Post Office or your nearest approved overnighter.

For the lowdown on the new eFiling system, go to the Tax Court homepage, http://www.ustaxcourt.gov/, and check it out.

Going for the hat trick today, three (count ‘em, three) posts, I have to reach back to yesterday, 1/9/14, for the final story to tell. As usual, the last race on the card is a small-claimer, Yong J. Dong and Lijun Weng, 2014 T. C. Sum. Op. 4, filed 1/9/14, as told by The Judge With A Heart, STJ Armen.

And the story is of special interest to New York City practitioners.

Yong and Lijun wanted a home of their own, so they got a loan of $130K from Yong’s Mom and Dad, wherewith to assist them to purchase what everyone agrees is their principal residence in Queens County, New York, a Borough of the City of New York. And they sign two documents in favor of the aforesaid parents, a “‘Home Equtty [sic] Loan Agreement’ (loan agreement) and ‘Home Equiity [sic] Deed of Trust’ (deed of trust). The loan agreement allows for a loan amount up to $130,000 with an interest rate of 3.5% plus a prime rate not to exceed a 12% annual rate. This was not a purchase money mortgage; rather, it appears to have been a credit line mortgage.” 2014 Sum. Op. 4, at p. 3.

The issue before Tax Court, of course, is deductibility of the payments Yong and Lijun made pursuant to the terms of the Home Equtty [sic] Loan Agreement.

By now, every New York City practitioner reading this should have calculator and tax table in hand; no, not the income tax tables in the Form 1040 instructions, rather the tax table for New York State and City mortgage recording tax, imposed by Article 11 of the New York State Tax Law, and shown on Form NYSDTFMT-15.

Did you get $2665.00? Well, Yong and Lijun didn’t get anything, so they are out the deductions, even though they paid in accordance with the documents and IRS asserts no intrafamily shenanigans.

What scuttles Yong and Lijun is that the indebtedness, though real, is not secured by their principal residence. And the Regulations to Section 163 require that the security interest of the lender must be perfected under local law, by recording or otherwise.

Now all New York practitioners worth their sodium chloride know that, for realty, the only way to perfect is to record. STJ Armen: “Petitioners have not, however, alleged or shown that they perfected the deed of trust or the loan agreement in any other way. Neither have they established that there is another way to perfect the deed of trust or the loan agreement under New York State law, nor are we aware of any such way. Thus, petitioners have not satisfied the third element of a secured debt under the regulations requiring that a mortgage or deed of trust be recorded or otherwise perfected under applicable State law.” 2104 T. C. Sum. Op. 4, at p. 11.

So they saved $2665.00 in recording tax (and practitioners in other jurisdictions may well gasp at that number, but New York State, the State That has Everything, has had such a tax since 1909), but lost about $30K of deductible interest.

Oh, and from the looks of the paperwork, they may have saved something less than a grand in legal fees for preparing the documents. And spent a lot more than that on legal fees for bringing this case.

Even if you prevail in your Jacobean wrestling with IRS, you still have to limbo your way under the $2 million net worth bar to get your Section 7430 goodies, the legal and administrative fees awarded to those parties who prevail at the metaphorical ford of the Jabbok (see Genesis 32:22-32).

Estate of Mildred T. Quidley Deceased, Karen Q. Pierce, Executor, actually prevails in her bout with the IRS; and mirabile dictu, IRS concedes she did.

You can read it for yourself in Docket No. 7799-10, filed 1/10/14, a designated hitter over the signature of the redoubtable Chief Judge, Michael B. (“Iron Mike”) Thornton.

But KQ can’t show that the late Mildred T.’s real and personal property at the instant she quitted this vale of tears was worth less than $2 million. The top line on the Form 706 read north of $2.1 million.

While KQ argued that acquisition cost and not FMVDOD measured the asset side of the net worth calculation (and although the statute doesn’t define “net worth”, everyone agrees it’s FMV of assets minus liabilities), she dropped that argument, and, remarkably, couldn’t show any liabilities to offset.

She claimed the Section 2032A farmland election kept the late Mildred T.’s estate in bounds, but Ch J Iron Mike slugs that one. “Petitioner’s section 2032A election does not affect the fair market value of the estate’s assets for purposes of applying the net worth requirement. Generally, for estate tax purposes, property is valued at fair market value based on its highest and best use. See sec. 2031; sec. 20.2031-1(b), Estate Tax Regs. Section 2032A, however, permits an estate to elect to value real property used for farming and small business purposes on the basis of income capitalization rather than on the basis of highest and best use.  These special valuation rules apply, however, only for purposes of calculating estate tax liability. In fact, section 2032A(a), expressly states that the special valuation provisions apply for ‘purposes of this chapter [i.e., Chapter 11–The Estate Tax]’;  consequently they do not apply for purposes of Chapter 76–Judicial Proceedings, which includes section 7430.” Order, at pp. 4-5. (Citations and footnote omitted, but see my blogpost “Foolish Consistency? – Part Deux”, 10/21/13).

OK, we got the top line, the asset side, but KQ has nothing for the liabilities side of the calculation, so she (and the Estate) are out.

Except they don’t owe tax, interest or penalties.

That’s STJ Lew (Love That Name!) Carluzzo’s riposte to James Elbert Aldridge, Jr. & Shirley Lorraine Aldridge, Docket No. 13742-10,  a designated hitter (and a hitter it is) filed 1/10/14.

Jim and Lorraine want STJ Lew to reconsider his Order dated 12/12/13, which denied their motion to suppress evidence (but apparently what specific evidence upset them they didn’t say at the time).

STJ Lew: “Petitioners’ reliance upon Rules 30 and 37 in support of their motion for reconsideration of Order dated December 12, 2013, filed January 6, 2014 (motion), is misplaced. Those Rules relate to pleadings, not motions. Rulings on motions are governed by Rule 50(b). Contrary to their claim, nothing in any of the Court’s Rules or in any Order directed or entitled petitioners to file a response to respondent’s objection to their motion to suppress evidence.” Order, at p. 1 (footnote omitted).

Takeaway One- Respond only when spoken to by the Court.

STJ Lew again: “Similarly, Rule 52 of the Federal Rules of Civil Procedure, also relied upon by petitioners in support of their motion, provides no support for it. To the extent applicable to this Court, see Rule 1, and contrary to petitioners’ assertions, that rule provides, with exceptions not relevant here, that the Court ‘is not required to state findings or conclusions when ruling’ on a motion.

Takeaway Two- When it comes to motions, don’t ask for reasons.

Takeaway Three- Read the Rules, closely.

My delightful and charming granddaughter was visiting a couple of days ago. Looking at her and her equally delightful and charming mother, I was reminded of the days, so long ago, when I had to reply to a question from her mother thus: “Because I’m Daddy, that’s why.”

I know my readers were waiting, breathless, on his fate, so break out the champagne for John Schmittdiel, Esq. He passed the Tax Court Admission exam.

No, not the biennial horror designed to weed out 92%+ of those with the temerity to venture where only lawyers, admitted to practice before the highest court in any State, territory, possession or commonwealth belonging to or appurtenant to the US of A, may tread. This was Judge James S. Halpern’s mini-exam, which I blogged under the heading “Tax Court Admission Exam”, 9/6/13.

Judge Halpern unloaded on poor John, IRS attorney, when he failed to object to John Foran’s A.K.A. Arthur J. Maurello’s motion for summary judgment in the case of Stephanie Lynn Christie A.K.A. Stephanie Lynn Foran, Docket No. 24515-12S, back in September.

Read my blogpost for the questions. Then try answering them. It’s a hoot. And no, the answers aren’t available on-line.

But apparently John passed with flying colors, because Ch J Michael B. (“Iron Mike”) Thornton has relieved Judge Halpern of the case, leaving him only the clean-up task of resolving John’s A.K.A. Arthur’s motion for summary judgment.

Oh yes, and trial will be held in Aberdeen, SD. See my blogpost “Delay of the Game”, 7/12/13.

You can read all about it in Stephanie Lynn Christie A.K.A. Stephanie Lynn Foran, Petitioner And John Foran A.K.A. Arthur J. Maurello, Intervenor, Docket No. 24515-12S, filed 1/9/14.

 That’s Judge Wherry’s unwhimsical advice to David L. Carreon, et al. (the et als being David’s several alter ego corporations), in 2014 T. C. Memo. 6, filed 1/9/14. IRS wanted to nail Dave with the 75% fraud hit, but although Dave’s story’s rather dicey, IRS can’t muster clear and convincing proof.

It’s all about Dave’s QuickBooks accounts. Dave kept records of all his diversionary tactics, and only hid a little bit of his unreported income with purported charities, fetchingly named “Helping Hand, Jubilee, and Brother’s Keeper”, 2013 T. C. Memo. 6, at p. 13; Dave, of course, had signatory power over the account wherein such checks were deposited.

Dave blames the promoter of this swindle for his predicament. While that doesn’t cut it for negligence or substantial underreporting, it does help for fraud, provided one is as unsophisticated as Dave. Although Dave runs a credit-card processing outfit, he claims innocence as to tax, and Judge Wherry is buying it.

Background: “In 1999 Mr. Carreon and Ms. Portugal [Mrs. Dave] were introduced by a mutual friend to Clementine Estrada. Ms. Estrada provided advice to Mr. Carreon and Ms. Portugal on how to set up entities for their business. Ms. Estrada also gave them advice about asset management protection and a financial strategy referred to as the ‘agent-principal’ relationship. Mr. Carreon understood that the concept was set up to operate by taking the net gross receipts from their credit card processing business…after business expenses including their salaries and put those funds into other entities such as a trust. These other entities were to be designated as a business trust, a charitable trust, and a management trust. There was also to be a ‘living trust’ to hold and protect their property, such as their home, personal property, etc.

“Additionally, Ms. Estrada explained that the management trust would be managed by a company called Builders, which would charge a fee for services of 11% of the first $70,000 of credit card processing receipts and 6% for any excess money managed beyond $70,000. Ms. Estrada also referred Mr. Carreon and Ms. Portugal to Robert Holcomb in order to hear more about the ‘agent-principal’ relationship, since they were equal owner members of the business and Ms. Portugal was the managing member.” 2013 T. C. Memo. 6, at pp. 5-6.

Holcomb turns Dave and Ms. Portugal onto a CPA, who is ex-IRS but who knows about agent-principal from the travel agencies, where the move is legitimate.

There, the travel agent gets the money from the voyager, takes it in as gross receipts, but then pays most of it over to the hotel, airline, cruise ship operator, etc., for the benefit of the voyager. The payover then comes off the agent’s taxable income. For an analogous case, see my blogpost “Stamp Out Smoking”, 11/19/13.

But in Dave’s case, he was paying over the ostensible principal’s payover for himself, and that’s a no-no.

In short, an unprincipled principal.

Lucky for him, Dave kept good records, didn’t deal in cash, didn’t give far-fetched excuses, cooperated (mostly) with IRS when they blew the doors off his little fiddle, and said he relied on Holcomb and the CPA.

So Dave dodges the 75% fraud bullet.

As for Holcomb, Estrada and the CPA, Judge Wherry has nothing to say. But I would quote Abraham Lincoln anent all these wiseguys who arrange tax fraud for a piece of the action: “Must I shoot a simple-minded soldier boy who deserts, and not touch a hair of the wily agitator who induces him to desert? I think that in such a case, to silence the agitator and save the boy, is not only constitutional, but withal a great mercy.”

IRS please copy.

No, this is not a reprise of the 1886 hit song by Alfred Cellier and B. C. Stephenson, which featured in the long-running London hit musical Dorothy, subject of a celebrated critical pan from George Bernard Shaw.

Rather, this is a lesson that would have profited the late-filers, whose alchemistic manoeuvres, trying to turn ordinary income into capital gains, founder in Cordell D. Pool, et al, 2014 T. C. Memo. 3, filed 1/8/14.

Cordell and the et als bought some land in an LLC, created a corporation which they controlled, sold the land to the corporation on the installment plan, used the corporation to subdivide and develop the lots, and sell them. Of course, the sales price of the land from LLC to corporation was heavily marked up.

As usual in the dealership-vs-investment scenarios, it’s all about the evidence, and Cordell and the et als aren’t talking much, claiming the papers tell it all.

Not to Judge Goeke. He finds for IRS on burden of proof.

Now as this is purely a fact-driven case, I’m not dwelling on the evidence. Nor need I dwell upon the proposition that one can divide one’s holdings among controlled entities in order to minimize the liabilities of one from spilling over onto the others. Nor that one can acquire property with one purpose in mind, but then change one’s mind and devote the property (by some affirmative act) to another; acquisition intent is not an albatross around one’s neck.

But as Cordell and the et als flunk all the tests, and as I nevertheless found this opinion worthy of note, here’s the point (and I can hear my readers say “At last!”).

Cordell and the et als all filed their 1040s late. Cordell and one of the et als were seven and two days late, respectively. The remaining et al (MFJ filers), although they had filed the extension, didn’t file for eight months after that.

Think that could have awakened somebody? If you’re trying one, don’t stand out. If you’re going to be a wiseguy, be wise in time.

I once drafted an affidavit for a client suffering from prosecutorial excesses, and my ultimate paragraph read “Enough already.”

The judge agreed, and the excesses halted. Of course, the client didn’t pay my final bill, but that’s another story.

But I have to love that slangy, would-be folksy, jurist, The Judge Who Writes Like a Human Being, a/k/a The Great Dissenter, Mark V. Holmes. He has moments that make me forgive even his war on the partitive genitive.

Here’s a top-notch example, a designated hitter, John Ryskamp, Docket No. 13681-11L.

John is an old rounder. “There have been a great many motions from petitioner to what he calls ‘this idiot Court,’ Ptrs. Second Supp. Brf. at 2, or (less concisely), ‘a Court as flippant, stupid, ignorant and corrupt as this one,’ Ptrs. Brf. in Resp. to the Supp. Notice of Det’n at 3.” Order, at p. 1.

Clearly, John believes the old adage that flattery will get him nowhere.

However, Judge Holmes proves John wrong.

“The Court has already denied most of them in other orders, but in one sided with petitioner — this case began with respondent’s refusal to grant petitioner a collection due process hearing after he requested one.” Order, at p. 1.

Judge Holmes doesn’t care for Appeals’ cavalier treatment of John. He may be unpleasant, but he, even he, is entitled to the protection of the laws.

“It is (or was) apparently respondent’s practice when he concludes that a taxpayer hasn’t raised any nonfrivolous grounds in his request to try to make his conclusion unappealable by refusing to issue the allegedly offending taxpayer a notice of determination. Respondent thought this deprived the Court of jurisdiction to review his decision.

“The Court had held in another case that respondent is wrong.” Order, at p. 1. (Citation omitted).

Form letters denying CDP that don’t cite specific frivolous positions or obvious intentions to impede tax administration don’t cut it.

Of course, once he got his long-awaited CDP, John never provided financial information to support his requested withdrawal of the NFTL IRS had filed, nor showed that he was in current compliance.

IRS moved for summary judgment that this time they followed all the rules, and John replied in his wonted fashion.

“The Court notes that Mr. Ryskamp does not contest these underlying facts, but argues that the routine request for financial information was a Fifth Amendment violation, and argues that the Court ‘takes some bizarre pleasure in indulging its police state penchant for sophistry’ in denying this. See Fifth Supp. Br. at 2-3.” Order, at p. 3.

Judge Holmes has the last word: “Enough.” Order, at p. 3.

A classic scene from a classic movie, one of the all-time greats. I can hear the voices.

Captain Renault: What in heaven’s name brought you to Casablanca?

Rick: My health. I came to Casablanca for the waters.

Captain Renault: The waters? What waters? We’re in the desert.

Rick: I was misinformed.

It worked for Humphrey Bogart as he confronted Claude Rains, but Garry Zephyr & Marthe R. Menard don’t fare so well, in Docket No. 22613-11S, filed 1/6/14, a designated hitter from the desk of STJ Lew (Love That Name) Carluzzo.

Having been bounced for failure to prosecute back in November, Zeph and Marthe want a vacation (that is, they move to vacate the decision entered on their default).

Unhappily for them,  STJ Lew isn’t buying.

STJ Lew: “In a Notice Setting Case for Trial, served on petitioners by the Court on May 28, 2013 (notice), they were advised as to the time, date and location of trial. The information shown on that notice is straight forward, and the address of the court room where the trial was scheduled to take place is shown separately immediately following the caption of the case.

“According to petitioners’ motion, at the designated trial time, instead of appearing at the address for trial shown on the notice, they appeared at the offices of respondent’s counsel. According to petitioners, their error in this respect is attributable to misleading information contained in a letter they received from respondent’s counsel. A copy of the letter to which petitioners refer is attached to respondent’s response. Nothing in that letter suggests that the place of trial in this matter was at a location other than as shown in the notice.” Order, at p. 1.

This just might work once, but Zeph and Marthe are really trying it on.

Judge Lew: “Petitioners’ claim that they were confused as to the location of trial is not persuasive given that they used the same excuse for failing to appear at the designated trial location on a previously scheduled trial date.” Order, at pp. 1-2.

Not even a Taishoff “good try” for that one.

Is Better Than the Best Testimony

The old Chinese proverb I learned long ago was “the worst piece of paper is better than the best human memory”. Here, a variation on a theme from the first two small-claimers of the 2014 program; if the promissory notes you got in your IRA are worthless because the obligor real estate partnerships went bust, why not get a copy of the notes and a copy of any foreclosure judgments, bankruptcy filings, or correspondence?

Might help when the IRA trustee terminates your IRA and sends you a 1099-R claiming you got something, when in truth and in fact you got nothing.

Consolidated for trial only are Bernard L. Berks and Claire Berks, 2014 T. C. Sum. Op. 2, filed 1/6/14, and Steven C. Gist and Constance L. Gist, 2014 T. C. Sum. Op. 1, filed 1/6/14. So we get two opinions for the price of whatever.

Handling both cases is Special Trial Judge Daniel A. (“Yuda”) Guy, Jr.

Bernie and Claire and Steve and Connie handed over their self-directed IRAs to their old friend J. Richard Blazer, with instructions to invest in high-risk, high-reward real estate deals.

J. Richard does, giving the IRAs promissory notes from the various partnerships that he serves as general partner, but which go down in a blaze of anything but glory. J. Richard as 50% partner in one walks away from the deal, and the rest get foreclosed.

At the maturity of the promissory notes, the IRA trustee asks “what gives?”, and J. Richard does some epistolary jousting with the trustee. The trustee, losing patience, tells J. Richard and the gang that the notes are going back to them, along with 1099-Rs, stating the last known value of the notes. Needless to say, that “last known amount” wasn’t zero.

Claiming they got nothing, Bernie and Claire, and Steve and Connie, state the taxable portion of that IRA distribution was zero.

IRS is not amused.

STJ Yuda: “Mr. Blazer testified that all of the partnerships failed during the period 2001 to 2006 and that the promissory notes they issued to petitioners had become worthless. His testimony regarding the dates and circumstances related to the demise of the individual partnerships was vague and inconsistent. Remarkably, despite his central role in promoting the investments and his position as a general partner in the partnerships, he was unable to produce any documents or records to corroborate his own testimony.” 2014 T. C. Sum. Op. 1, at p. 12.

Of course, STJ Yuda is as careless with logical nomenclature as his colleagues Judges Holmes and Goeke are with the partitive genitive, although his point is valid. “Even accepting Mr. Blazer’s testimony that he did not retain any relevant partnership records, that circumstance begs the question why petitioners did not search public land records or similar sources in advance of trial in an attempt to unearth any documentation that might corroborate his testimony.” 2104 T. C. Sum. Op,. 1, at p. 12.

No, STJ Yuda, it does not “beg the question”. To “beg the question” is the English equivalent (mistranslated, of course) of the Latin petitio principi, meaning to assume the conclusion in the question, a form of circular reasoning. Here’s an example: “Your resume looks good but I require another reference.” “Joe will give me a reference.” “Yes, but how do I know Joe is reliable?” “I’ll vouch for him”.

What STJ Yuda means is that the lack of documentation raises or invokes the question why no search was made of the public records or elsewhere.

Trying a case means proving something. When all you have is somebody’s word, it might help if you have some corroboration as well.

And it wasn’t only the petitioners (who apparently knew nothing), nor even J. Richard, but the petitioners (in both cases) were represented by the same counsel, with the same result.

It’s not only the experts who have to go to the woodshed, nor even only the clients and their advisers, but counsel as well needs to prepare for trial; and if no woodshed is available, surely there are other places.

And the worst piece of paper still beats the best human memory–and testimony.