Nothing doing in Tax Court today, 4/30/14. True, there are two designated off-the-benchers from that obliging Jurist, Judge David Gustafson, Mufutau Sanni, Docket No. 013190-13, filed 4/30/14, and Osvaldo Britez, Docket No. 08335-13, filed 4/30/14; but both are unreported income and indocumentado deductions cases. Poring over bank statements and self-serving testimony is all very well when it’s your client and your case, but there are no useful pointers here for the in-the-trenches preparer or practitioner.

So it’s getting close to the time to prepare this month’s bills and get them off. And that’s a better endeavor than rehashing well-known principles.

Hence the headline for this blogpost.

Yes, horseracing continues with Merrill C. Roberts, 2014 T. C. Memo. 74, filed 4/29/14, but also on tap today is another couple entries (hey, Judge Holmes, this one’s for you) in my “best excuses” no-prize sweepstakes, although Judge Paris, while amused, isn’t buying either.

Merry was a nightclubber turned horse trainer, and the case, fact-intensive as they all are, involves four runnings of the Section 183 vs. Section 162 optional allowance races, with Merry taking the last two and IRS winning the first two.

As an extra added attraction, a short course in claiming race tactics can be found at p. 10, footnote 12.

And if you thought that tax cases were only dull regurgitations of statutes and parsings of obscure regulations, here’s a note on how some trainers try to fix a horserace, and how to outwit their skullduggery: “For example, petitioner learned of ruses that unscrupulous racers would use to maximize profit potential. In one case, petitioner heard of racers affixing raw cuts of meat to a horse’s ankles so that the horse would appear to be in poor shape and not be claimed. A racer that is aware of the ruse may claim the horse and profit from the transaction.” 2014 T. C. Memo. 74, at p. 27.

Howbeit, we come to the excuses aforementioned.

Merry lost some records due to his firebrand ex-girlfriend, and tries thereby to excuse one year’s late filing: “Petitioner contends that he had reasonable cause to file his return late because some of his records were burned in a fireplace by a former girlfriend. Petitioner cites a case where a taxpayer was not held liable for a section 6651(a)(1) addition to tax because a hurricane destroyed critical tax documents. The wrath of a former girlfriend may be a formidable force, but it is not analogous to a hurricane-like natural disaster, and it does not constitute a reasonable cause outside petitioner’s control. Further, petitioner did not present any evidence showing the records were actually destroyed or document any attempts to find the lost information.” 2014 T. C. Memo. 74, at p. 48.

And Merry claims he suffered from high anxiety because IRS had audited him: “Petitioner also suggests that the Commissioner’s audits of prior-year returns was a reasonable cause for his delay. He contends that he knew the …tax return would likely be audited, and he spent extra time to make sure the return was correct. Preoccupation with an audit, however, does not constitute a reasonable cause for failing to timely file a Federal tax return.” 2014 T. C. Memo. 74, at p. 48 (Citations omitted).

Well, I’m giving Merry one “Taishoff good try” for the ex-girlfriend story, and he’s entered for the no-prize best-excuse sweepstakes.

Edited to add, 8/23/21: Judge Posner (who else?) reverses Tax Court in Roberts v. CIR, 820 F.3d 247 (CA 7, 2016). But Judge Posner treats Judge Paris a lot nicer than he did poor Judge Wherry_”We mustn’t be too hard on the Tax Court. It felt itself imprisoned by a goofy regulation (26 C.F.R. § 1.183-2, Treas. Reg. § 1.183-2: Activity Not Engaged in for Profit Defined; see, e.g., Faulconer v. Commissioner, 748 F.2d 890 (4th Cir. 1984)) that we feel bound to set forth in its full tedious length….” 820 F. 3d 247, at p. 250.

For Lawyers

 Following on my blogpost “The Phone Call”, 4/15/14, a further cautionary tale for lawyers emerges today from the word processor of Judge James S. (“Big Jim”) Halpern, a reminder that Judge Big Jim keeps the Section 6673(a)(2) hammer by his side.

Remember the Section 6673(a)(2) hammer? No? Well, it’s the delay of the game by reason of unreasonably and vexatiously multiplying the proceedings of a case. Stale pun (sorry, Judge Posner, but you don’t read my blogposts anyway): vexatious (Vic Seixas) played on the US Davis Cup teams, winning the 1953 David Cup matches.

Back to serious business. The case in point is Leonard L. Best and Evelyn R. Best, 2014 T. C. Memo. 72, filed 4/28/14.

I’m limiting my frivolity discussion to L.L.’s and Eve’s attorney, whom I shall call Mac.

Judge Big Jim hits L.L. and Eve with a $5K Section 6673(a) chop, notwithstanding that L.L. and Eve claim: “‘Petitioners, who are high school educated and lack any sophistication, in good faith relied on their competent, qualified, and independent counsel; this alone is sufficient to demonstrate good cause, thus negating imposition of the sanction sought.’” 2014 T. C. Memo. 72, at p. 20.

Judge Big Jim isn’t listening: “…petitioners’ arguments that (1) [the SO] abused her discretion in relying on computer transcripts to verify that their unpaid tax had been properly assessed and (2) collection cannot proceed because respondent has failed to furnish them records of the assessments of their … tax lack merit and are contrary to established law. The deficiencies in petitioners’ arguments are well known. Indeed, the Commissioner has taken pains to describe for taxpayers the requirements of section 6203, the procedures implementing that section, and the procedures for answering a taxpayer’s request for a copy of the record of the assessment. See Rev. Rul. 2007-21, supra. Arguments very much like the ones petitioners here make are described in Notice 2010-33, 2010-17 I.R.B. 609, listing positions identified as frivolous for purposes of application of the section 6702 frivolous tax submissions penalty. Respondent’s counsel brought the revenue ruling and the notice to the attention of [Mac] in February 2012, three months before the parties jointly moved for leave to submit this case for decision without a trial. Petitioners could have pulled the plug then and very likely avoided any sanction.” 2014 T. C. Memo. 72, at pp. 20-21.

Finally, “The purpose of section 6673 is to compel taxpayers to think and to conform their conduct to settled principles before they file returns and litigate.” 2014 T. C. Memo. 72, at p. 22.

What about Mac? “Rule 33(b) sets standards in connection with counsel’s signature on a pleading and provides that upon our own motion we may sanction counsel for failure to meet those standards. Although we have found petitioners deserving of a section 6673(a)(1) penalty, we believe that [Mac]’s conduct may be deserving of a sanction for unreasonably and unnecessarily bringing and prolonging these proceedings. Indeed, in his declaration in support of petitioners’ response to respondent’s motion to impose a sanction on petitioners, he acknowledges that, following the earlier deficiency proceeding in this case, petitioners ‘had a major collection problem and * * * I decided to try the assessment issue believing there is some chance of lack of proper assessment which will result in voiding the assessment and causing the clients to be free of the debt as a result of the statute of limitations’.” 2014 T. C. Memo. 72, at p. 23.

And Mac then concedes one of his arguments is “a dead letter”. 2014 T. C. Memo. 72, at p. 22.

But since Mac hasn’t had a chance to defend himself, Judge Big Jim tells him to show cause why he shouldn’t get either the Rule 33(b) you-signed-it sanction or the Section 6673(b)(2) vexatious-unreasonable-multiplication chop.

Counsel, you have been warned.

A rare occurrence in ice hockey, when a player is deprived of a clear scoring opportunity, principally on a breakaway, where the player has eluded all opposing players and has a clear path to the opposing goal, but is thwarted by a foul committed by the opposing team (e.g., grabbing from behind or slashing with a stick).

Here, although IRS may be clear of opposition from Vernice B. Kuglin, Docket No. 14065-13L, filed 4/25/14, STJ Lewis (That Man Can Spell) Carluzzo won’t award IRS the penalty in this designated hitter.

IRS seeks dismissal for failure to state a claim, and throws in a request for the Section 6673 frivolity chop. To support its penalty seeking, IRS says Vernice has a track record of commencing cases and then conceding on the eve of trial, causing much waste of resources.

STJ Lew told Vernice either to amend her petition or oppose IRS’ motion. Of course she did neither.

STJ Lew: “We consider petitioner’s failure to reply to the above-referenced Order to reflect her concession that respondent’s motion is well-made as it relates to petitioner’s challenge to the determination made in the notice. Moreover, we view the allegations contained in the petition to be meritless challenges to respondent’s statutorily authorized procedures. Those allegations do not give rise to any justiciable issues.” Order, at p. 1.

Time for the Section 6673 chop?

No, STJ Lew is scrupulous. “Given the burden imposed upon respondent pursuant to section 7491(c), however, we do not consider petitioner’s failure to respond to the above-referenced Order to be a concession that she is liable for a section 6673(a) penalty. Furthermore, although positions advanced in the petition might suggest the imposition of a section 6673(a) penalty, we do not, under the circumstances, consider it appropriate to impose that penalty as part of this summary disposition.” Order, at p. 2.

Remember, Section 7491(c) provides: “Notwithstanding any other provision of this title, the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.”

All IRS has produced is that Vernice has a history of fooling around, and submitted a defective petition now. Not quite enough.

So Vernice’s petition is tossed, and IRS can go levy.

But STJ Lew doesn’t say Vernice is absolutely in the clear on the Section 6673 chop.

“Upon appropriate motion by respondent, the Court will vacate this Order of Dismissal and Decision in order to allow respondent to pursue his claim for the imposition of a section 6673(a) penalty.” Order, at p. 2.

Vernice, get those pads on and get into the goal crease.

In the immortal words of the late great Lorenz Milton Hart, master versifier, “I’ve seen a lot/I mean–a lot”. Hence the title of this blogpost.

But today, April 24, 2014, a day where nothing much is doing in US Tax Court (one small-claimer Section 152 jumpball, where Divorced Daddy can only prove half a year of quartering junior, when he needs more than one-half to get the credits, rebates, etc.; so at least theoretically Divorced Mommy can’t get the tax breaks either), there comes a one-paragraph order that makes me shake my balding head in wonderment.

Let us consider Enrique Rodriguez, Docket No. 30095-13, filed 4/24/14, from the word processor of Chief Judge Michael B. (“Iron Mike”) Thornton.

It’s a short story, and I’ll let Ch J Iron Mike tell it: On two separate occasions, “…the Court directed petitioner to file an Amended Petition and pay the Court’s $60.00 filing fee. Petitioner paid the Court’s filing fee, but failed to file an Amended Petition as directed.” Order, at p. 1.

Why one would pay the fee and not send in something, even a downloaded form with a halting narrative, does raise a question. There must be more to this story.

But Ch J Iron Mike has lost patience with Enrique, notwithstanding his unguided largesse directed at 400 Second Street, N.W.

“In view of the foregoing, it is ORDERED that, on the Court’s own motion, this case is dismissed for lack of jurisdiction on the ground that petitioner failed to file a proper Amended Petition.” Order, at p. 1.

And of course Tax Court will keep Enrique’s $60.00.

Enrique, time for a motion to set aside the order. And send in the Petition form with it.

That’s Judge Wherry’s answer to Bruce M. Kraft, in 142 T. C. 14, filed 4/23/14. Bruce was petitioning off a NOD in a levy CDP.

Bruce admitted he owed the taxes he reported for the year at issue, but claimed that invading his irrevocable grantor trust to pay the tax plus interest and penalties would cost him less in interest than IRS taking his distributions.

Now self-reported tax liabilities can be contested “generally” at a CDP, but Bruce didn’t raise that issue, so it’s off the table.

So are years which Bruce wants considered but for which SNODs or NODs haven’t yet been issued, and also whether Bruce wanted an installment agreement (although at the hearing before Judge Wherry he said he didn’t, he did check that box on his Form 12153), because that’s irrelevant now.

Bruce’s spendthrift trust is the issue. Applicable law (DC) says a creditor can reach the maximum amount the beneficiary-spendthrift could reach. Here, the trustee could give Bruce the entire trust corpus, so it’s all up for grabs.

Except IRS doesn’t have to grab it, and it isn’t an abuse of discretion for a SO not to try.

“Petitioner [Bruce] asserts that respondent [IRS] should levy the Kraft Trust because it is a quicker and a more efficient way to satisfy his tax deficiency; however even if respondent were to levy upon the Kraft Trust there is a very real possibility that the trustees of the Kraft Trust could feel that their fiduciary duties require them to oppose such a levy, which could cause even more litigation and additional delay.” 142 T. C. 14, at pp. 14-15, footnote 5.

“Even if the Commissioner was inclined to specifically levy on the Kraft Trust, there would first need to be a ‘thorough investigation’ into the status of the specific property. See sec. 6331(j)(1). There is no evidence in the record that a ‘thorough investigation’ of the Kraft Trust has occurred. Caselaw has made clear that while there must be an inquiry of whether, inter alia, there is enough equity in property owned by the taxpayer, such matters occur later in the collection process.” 142 T. C. 14, at p. 15 (Footnote omitted).

And there is no statutory requirement for IRS to make such an investigation. The statutory lien for taxes encompasses everything a taxpayer owns.

So Bruce’s distributions will be grabbed until he’s paid up in full.

Petitioning Tax Court can be hazardous–to your wallet if not to your health. And not just to attorneys, as to whom see my blogpost “Practicing In Tax Court Can Be Hazardous”, 1/28/14.

Case in point: Dwight A. Newby & Sally A. Newby, Docket No. 5153-14, filed 4/23/14. Yes they are, but I’ve forsworn the obvious pun. I’ve no desire to incur a judicial beat-down as a result of lame attempts at humor, such as Judge Posner laid on poor whimsical Judge Wherry in Superior Trading LLC in the Seventh Circuit. See my blogpost “There Goes The Neighborhood”, 9/3/13.

The point of all this? Oh yeah, the point; almost forgot.

Dwight and Sally A. sent in their petition and the requisite $60.00 check, which the clerks at 400 Second Street, N.W., fell upon and negotiated with their wonted celerity.

A month or so later, Dwight and Sally A. sent in an Application for Waiver of the filing fee, and affidavit in support thereof.

Even if said Application was meritorious (and Ch Judge Michael S. (“Iron Mike”) Thornton isn’t telling), “(U)nfortunately, however, Tax Court procedures and systems do not contemplate the issuance of refunds of filing fees once paid, thus rendering petitioners’ application moot.” Order, at p. 1.

As Judge Gustafson recently reminded us in one of the Joe Insigna episodes, Tax Court can’t cut checks or tell anyone else to do so. See my blogpost “We Don’t Need No Stinkin’ Badges”, 4/2/14.

So Dwight and Sally A. are out the $60.00.

Takeaway- When preparing petition, check out the form of Application for Waiver and Affidavit, at http://www.ustaxcourt.gov/forms/Application_for_Waiver_of_Filing_Fee.pdf

And if you qualify, you can save the $60.00.

Judge Laro should really designate some of his comprehensive orders, rather than waiting for me to sift through six pages of nothing-in-particular (barring Judge Goeke following Judge James S. (“Big Jim”) Halpern and giving another boot to James (“Little Jim”) Haber in a replay of my blogpost “Immunology”, 3/18/14; see Vance Finance and Holding Corporation and Subsidiaries, Docket No. 7245-08, filed 4/22/14*).

Judge Laro has another couple of Fifth Amendment immunologists on his hands in Jeffrey J. Manquen & Camille A. Manquen, Docket No. 26666-12, filed 4/22/14.**

IRS wants Jeff and Cam to tell them their educational and employment histories, and who set up a couple of LLCs, wherewith Jeff and Cam dealt with their IRAs (either trads or Roths), and provided tax and valuation advice in connection therewith. Sound like the old Notice 2004-8, 2004-1 C.B. 333, Abusive Roth IRA Transactions deals?

Howbeit, Jeff and Cam claim that to tell would set them up for a criminal tax case.

Judge Laro agrees to this extent: “Respondent argues that the possibility of criminal prosecution is too remote because he ‘neither has an open criminal case against petitioners nor contemplated a criminal tax prosecution against petitioners.’ A criminal case need not be pending to justify a claim of the Fifth Amendment privilege. Because a witness who fails to assert the privilege in a non-criminal case also forfeits the privilege in a subsequent criminal case, ‘it is necessary to allow assertion of the privilege prior to the commencement of a ‘criminal case’ to safeguard the core Fifth Amendment trial right.’ Chavez v. Martinez, 538 U.S. 760, 771 (2003). Moreover, it is likewise insufficient that respondent does not currently contemplate prosecuting a criminal tax case against petitioners. As long as there is a reasonable possibility of criminal prosecution, which petitioners have demonstrated, we must sustain petitioners’ Fifth Amendment claim.” Order, at p. 4.

However, that sustentation is good only as to Jeff’s and Cam’s assistants. Judge Laro doesn’t see how Jeff and Cam telling their work and school histories sets them up for anything. And he’s the Judge.

“It is the providence of the Court, not the witness, to determine whether a claim of the Fifth Amendment privilege is justified. Rechtzigel v. Commissioner, 79 T.C. 132, 137 (1982). ‘The trial judge in appraising the [Fifth Amendment] claim “must be governed as much by his personal perception of the peculiarities of the case as by the facts actually in evidence.”’ Hoffman v. United States, 341 U.S. 479, 487 (1951) (quoting Ex parte Irvine, 74 F. 954, 960 (C.C.S.D. Ohio 1896)). Order, at p. 3.

“Providence”, not province? Does anybody proofread these opinions?

But forcing Jeff and Cam to disclose their helpers, enablers, guides, philosophers and friends “could: (1) support a conviction that they conspired with their advisors to commit criminal tax fraud; or (2) lead to the discovery of evidence from their advisors that they committed tax fraud.” Order, at p. 4. So IRS, no go on that one.

That was the good news for Jeff and Cam. Now the bad news.

“Invoking the Fifth Amendment privilege is not, however, without consequence in a civil proceeding. The Supreme Court “has recognized ‘the prevailing rule that the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them’. Mitchell v. United States, 526 U.S. 314, 328 (1999) (quoting Baxter v. Palmigiano, 425 U.S. 308, 318 (1976)); see also Sanders v. Commissioner, T.C. Memo. 1997-452. Moreover, we have held that where a party invokes the Fifth Amendment privilege in response to a request for interrogatories, we may place restrictions on the invoking party’s ability to introduce evidence with respect to matters over which he has asserted the privilege to assure fairness to the other party. See e.g. Traficant v. Commissioner, 89 T.C. 501, 502-504 (1987). Finally, the Fifth Amendment privilege may also be waived. Where a party voluntarily testifies in a case, ‘the Fifth Amendment does not allow him to refuse to answer related questions on cross-examination.’ Kansas v. Cheever, 134 S. Ct. 596, 601 (2013). This rule ensures that a party may not ‘set forth * * * all the facts which tend in his favor without laying himself open to a cross-examination upon those facts.’ Id. (quoting Fitzpatrick v. United States, 178 U.S. 304, 315 (1900)).” Order, at p. 3.

So Jeff and Cam, spill about your education and employment, but as for your coadjutors, your lips are sealed. Unless you want to testify on the trial, that is.

*Vance Finance 7245-089 4 22 14

**Manquen 26666-12 4 22 14

 Well, Sort Of

 Ashley Jeffrey Ponticello, Docket No. 15483-13S, filed 4/21/14, wasn’t doing so great. Judge Gale had warned Ashley last October to show up for trial or have her petition tossed. Ashley didn’t show, and she hadn’t responded to IRS’ attempts to get hold of Ashley by mail and by phone to get information about adjustments to the SNOD. Ashley stood mute throughout.

Judge Gale: “The Court may dismiss a case at any time and enter a decision against the taxpayer for failure properly to prosecute his case, failure to comply with the Rules of this Court or any order of the Court, or for any cause which the Court deems sufficient. In addition, the Court may dismiss a case for lack of prosecution if the taxpayer inexcusably fails to appear for trial and does not otherwise participate in the resolution of his claim.” Order, at p. 1 (Citations and footnote omitted).

So bye bye, Ashley. You never asked to shift the burden of proof, so you have the burden; and as you never showed up for trial, SNOD sustained.

So far run-of-the-mill. But not quite.

IRS hits Ashley with a Section 6662(a) 5-and-10 accuracy penalty, the substantial understatement variety. Now when IRS asserts a penalty, it has a burden of production of some evidence to sustain the imposition. Except here, of course, Ashley never expressly contested the penalty in her petition, or showed up to contest it on the trial.

So generally (I love that word) IRS isn’t required to produce anything, “at least where nothing in the record suggests the addition or penalty has been incorrectly computed.” Order, at p. 2.

But here it wasn’t correctly computed, because IRS did their numbers pre-Rand. Remember Yitz Rand and Shul Klugman? No? Then see my blogpost “The Rebate Debate – Part Deux”, 11/18/13.

This was the lead case in the child rebate series, when the rebates reduce taxes due below zero, so the deficiency was more than the tax shown on the return pre-rebate. But Tax Court, construing “underpayment” by the rule of lenity (penalties are strictly construed against the penalizer and in favor of the penalized), said the “underpayment” for penalty purposes was only so much of the deficiency that took the tax stated to zero, not below zero.

And that number in Ashley’s case is less than the greater of $5K or 10% of the tax due, so no Section 6662(a) understatement penalty, and IRS didn’t ask for negligence.

So Judge Gale doesn’t have to decide if the petition, alleging identity theft, somehow implicated a reasonable cause defense.

And even though Ashley never played show-and-tell, or showed up for the trial, still gets part of a win.

Mark A. Lovely, Docket No. 4855-14L, filed 4/17/14, gives me my text for today’s sermonette. Mark petitions and moves at once for summary judgment before IRS has answered.

I’ve already avowed my affection for summary judgment. See my blogpost “Summary Judgment – A Causerie”, 3/13/14. Where there are no disputed material facts to try, it’s a waste of time to go through pleadings, motions, discovery (formal and informal) and all that jazz, when by cutting to the chase, the outstanding legal issues can be addressed and adjudicated.

New York State recognizes this, but only in certain instances, and the Courts here are very strict in their arrest. The law says summary judgment motions instead of the usual complaints can only be used for  claims “based upon an instrument for the payment of money only”, and the Courts here take that to mean only promissory notes without concomitant security agreements, mortgages, et hoc genus omne.

But I would argue that, since a great number of Tax Court cases ultimately go to summary judgment, why not amend Rule 121(a) to let a petitioner ask for SJ off the bat? In the first place, the petitioner would have to lay out all the facts and attach all the papers.  In the second place, whatever petitioner says or attaches, she or he is stuck with it; no change of story afterwards, and no unsupported allegations allowed. Paper it or swear to it, but remember Tokarski; self-serving claptrap doesn’t count.  And unlike Hewlett-Packard and Consolidated Subsidiaries, Docket No. 10075-08, filed 4/17/14, we would have fewer motions for leave to file a fifth amended petition, and seven-page docket sheets. H-P seems to be averaging almost one amendment a year. Maybe they figure that eventually, by dint of the law of large numbers, they’ll get it right.

Oh yes, and in the third place, SJ narrows down whatever IRS has to deal with.

But Ch J Michael B. (“Iron Mike”) Thornton, correcter of sloppy paperwork, is constrained by the rules to bounce Mark’s lovely idea, as IRS hasn’t answered yet. Now all this required a reply from IRS to Mark’s motion for summary judgment. Would it not have been simpler for IRS to reply either (a) there are material facts in dispute, and these are they, or (b) there are no disputed facts, but the law is not what Mark claims it is? Under present Rule 121(a), there has to be an answer, which doubtless, when boiled down to essentials, will be one or both of the two foregoing alternatives. Then Mark can make his motion.

Time to amend Rule 121(a).