Archive for June, 2014|Monthly archive page


In Uncategorized on 06/20/2014 at 16:15

An e-mail from colleague Joel E. Miller, Esq., furnishes today’s blogpost. But first, see my blogpost “The Façade Collapses”, 3/21/14, the tale of the Primoli safeharborers and tax-break merchants sent to the sin-bin by Karen Hawkins and her myrmidons at OPR, offered subject to connection, as the high-priced lawyers say.

Now for today’s installment. It’s the last gasp of an old story, Huda T. Scheidelman v. Com’r., No. 13-2650, decided 6/18/14 by the long-suffering Second Circuit, which had give Huda a second bite at the cliché a couple of years back (as to which see my blogpost “Method to His Madness?”, 6/18/12; I got a lot of mileage out of Huda and her doings). (Emphasis by author).

Huda says the easement she gave the now-banished National Architectural Trust must have diminished the value of her Fort Greene townhouse. Fort Greene, once a slum, is now a chi-chi enclave in Brooklyn.

But you remember her appraiser “Iron Mike” Drazner’s opinion, though it slid under the regulatory tag as far as Second Circuit was concerned, certainly didn’t bind IRS or Tax Court.

The three-judge bench makes that clear, citing to its earlier decision: “As we emphasized, however, ‘[o]ur conclusion that Drazner’s appraisal meets the minimal requirements of a qualified appraisal mandates neither that the Tax Court find it persuasive nor that Scheidelman be entitled to any deduction for the donated easement.’” Opinion, at p. 5.

Now circuit courts of appeal treat Tax Court like a District Court, owing no Chevron-Mayo deference, reviewing law de novo, but reviewing facts only for clear error. Circuit courts of appeal don’t retry cases. If there’s substantial evidence in the record for what Tax Court (or a USDC) found, then game over.

And there’s plenty in the record to sustain Tax Court. While one would expect granting such an easement might diminish the value of the servient tenement (no, that’s not a 50-Shades-of-Grey hovel, that’s old English that I learned at an expensive law school), that’s no automatic result.

“To the contrary, the regulations provide that an easement that has no material effect on the obligations of the property owner or the uses to which the property may be put ‘may have no material effect on the value of the property.’. Treas. Reg. § 1.170A-14(h)(3)(ii). And sometimes an easement ‘may in fact serve to enhance, rather than reduce, the value of property. In such instances no deduction would be allowable.’ Id.” Opinion, at p. 8. (Footnote omitted, but read it; it quotes testimony from the VP and general counsel of the National Trust for Historic Preservation.)

Finally, Huda’s big witness on the Tax Court trial, Michael Ehrmann, had his expert opinion shredded, and, last year along with his firm, wound up being permanently enjoined by the USDC Northern District of Ohio “from preparing any further property appraisals for federal tax purposes.” Opinion, at p. 10, footnote 2.

Judge Polster did let Mr Ehrmann finish his engagement with Huda, and whatever matters he still had in his shop, even though IRS claimed “Ehrmann distorts data and provides misinformation or unsupported personal opinions to get artificially high values for conservation-easement donations.” Opinion, at p. 10, footnote 2.

And one of Huda’s own witnesses put the ball squarely in her net. This was the local preservation guru, whom I mistakenly said was a witness for IRS in my blogpost “Appraising the Appraisal (and Appraisers)”, 1/18/13, but I must plead in my own defense that I could not believe that the taxpayer would call a witness who would so testify.

I’ll let the Court tell this one: “Moreover, the Chairman of the Fort Greene Association (a witness for Scheidelman) explained that the Fort Greene Historic District, which provides guidelines to maintain the historic integrity of the District’s façades, has ‘actually has created Fort Greene to what it is today. It’s created — it’s an economic engine for Fort Greene.’” Opinion, at p. 11.

I did note at page 12 of the opinion that Second Circuit can’t tell a mortgagor from a mortgagee. Your Honors, a “mortgagor” is one who encumbers his, her, its or their property with a mortgage, generally to obtain a loan of money. A “mortgagee” is the party who lends money to the mortgagor, and secures the mortgagor’s obligation to repay same by placing a mortgage on the property.

Huda also argued that the burden of proof should shift to IRS, as she satisfied the Section 7491 requirements. Mox nix, says Second Circuit, your evidence crumbles before IRS’ evidence.

You can see that this wasn’t a great day for Huda.

I am told her attorney remarked after reading the opinion that this was his first easement case, and that he would know better the next time. Supposedly words of like import were said by General Edward Braddock in 1755, after he was ambushed, his troops routed, and he mortally wounded.



In Uncategorized on 06/19/2014 at 16:36

It is often very hard to convince clients, especially sophisticated clients, that you, their tax adviser, actually know what you’re talking about and why they should follow your advice (for which, maybe, they’re actually paying you).

But clients sophisticated and otherwise should read and heed Judge Marvel’s opinion in Seventeen Seventy Sherman Street, LLC, Martin Wohnlich, Tax Matters Partner, 2014 T. C. Memo. 124, filed 6/19/14.

Mr Wohnlich and his copartners claimed they listened to Karl Leppman, Esq., a tax attorney they retained, when Mr Leppman told them they had to reduce the charitable deduction they were claiming for the granting of a façade easement in favor of Historic Denver, Inc., a 501(c)(3) dedicated to protecting, preserving and defending what remains of the history of the Mile-High City.

Unfortunately, Historic Denver, Inc., was, at the relevant time, a toothless tiger, so Mr Wohnlich and his copartners struck a tough deal with the City of Denver in exchange for granting the aforesaid easement, which had actual teeth.

The deal involved the façade and interior of the celebrated Mosque of the El Jebel Shrine of the Ancient Arabic Order of Nobles of the Mystic Shrine (El Jebel Shrine), which Mr Wohnlich and copartners wanted to turn into a high-priced condominium, and for which they got major concessions from the municipality. My kind of guys.

Well, Mr Wohnlich sent in the 1060 and 8283 claiming the deduction, backed up with appraisals, but IRS ripostes with its own hotshots, so Judge Marvel, invoking the mix-and-match rules, throws them all out and opines that, because Mr Wohnlich didn’t prove that the worth of what he got from the City was less than what he gave by way of the easement, there is no deduction.

Now for the penalty shots, which include the 40% substantial overvaluation chop.

Judge Marvel: “Petitioner contends that Seventeen Seventy acted with reasonable cause and good faith through its reliance on professional advice and therefore no section 6662(a) accuracy-related penalty is applicable. With regard to its compliance with section 170, Seventeen Seventy sought the advice of Mr. Leppman. Petitioner contends that Seventeen Seventy provided Mr. Leppman with all necessary and accurate information, and that it reasonably relied in good faith on the advice of Mr. Leppman. See Freytag v. Commissioner, 89 T.C. at 888. However, Mr. Leppman testified that he advised Seventeen Seventy that it had to reduce the value of the claimed charitable contribution deduction by the consideration received in the quid pro quo exchange. Seventeen Seventy did not follow Mr.Leppman’s advice to reduce the value of its deduction by the consideration it received. It would be unreasonable for us to believe that at the time of the contribution and at the time of filing Seventeen Seventy’s return, either Seventeen Seventy or its advisers believed that the contribution of the easements was an unrequited contribution or that the consideration received had no value. Consequently, Seventeen Seventy’s disregard of Mr. Leppman’s advice was not reasonable and in good faith, and therefore Seventeen Seventy cannot rely on the professional advice of Mr. Leppman to negate the section 6662(a) penalty. ” 2104 T. C. Memo. 214, at pp. 43-44. (Footnote omitted, but read it. Mr Wohnlich’s appraiser seems to be talking at cross-purposes).

So the deduction goes down the drain. But the substantial overvaluation 40% chop does also, because IRS introduces that post-answer, has the burden of proof, and its hotshots don’t carry it.

Finally, Mr Wohnlich and his copartners have four (count ‘em, four) trial lawyers trying this case, whereas, if they had listened to one tax lawyer, Mr Leppman, they would have saved themselves a lot of trouble.


In Uncategorized on 06/19/2014 at 07:57

“The payment of taxes has seldom proved the most soothing thing for doubtful tempers.” Chapter 153 of the Saga of Olaf the HolyHeimskringla of Snorri Sturluson, c. 1230, translated from the Old Icelandic by William Morris and Eiríkr Magnússon.


In Uncategorized on 06/18/2014 at 17:00

CSTJ Peter Panuthos has some (qualified) good news for Georgette M. Klat-Ginex, Docket No. 17275-13S, filed 6/18/14.

Georgette was in bankruptcy when she filed her petition, but IRS didn’t know about it (either someone obviously messed up the creditor matrix, or decided Georgette’s tax debts weren’t dischargeable so didn’t list them, and in either case didn’t tell IRS). So when the case got to trial, the bankruptcy proceeding was over and the extended time to petition after dismissal or discharge was also over.

So no valid petition, and no jurisdiction.

CSTJ Panuthos: “There is no doubt that it would have been helpful to this pro se petitioner if respondent had filed his motion to dismiss at some earlier point in time thus permitting petitioner to file a petition after the automatic stay had been lifted but within the extended period provided by section 6213(f). However, our jurisdiction can be questioned by either party at any time, and the failure to do so by a certain point in time does not constitute a waiver of this right.” Order, at p. 1. (Citations omitted).

But CSTJ Panuthos has a thin rope to throw Georgette: “Given the circumstances of the timing of the filing of respondent’s motion and the fact that petitioner did not have an opportunity to have a judicial review of the adjustments set forth in the notice of deficiency the Court encouraged petitioner to pursue an audit reconsideration. Counsel for respondent advised that the Commissioner would be receptive to such reconsideration.” Order, at p. 2.



In Uncategorized on 06/18/2014 at 16:25

Judge Ruwe reminds us of the exceptions to the draconian and much-reviled provisions of Section 274 for business truckers, per Section 280F(d)(4)(C), which “… provides that listed property under section 280F(d)(4)(A)(ii) does not include ‘property substantially all of the use of which is in a trade or business of providing to unrelated persons services consisting of the transportation of persons or property for compensation or hire.’” 2014 T. C. Memo. 122, at p. 6.

The whole cite is Lee Anthony Baker, 2014 T. C. Memo. 122, filed 6/18/14.

Now Lee Anthony Baker did run his Mack tractor and pull trailers he didn’t own, for Advantage Tank Lines, which he didn’t own, and he did work for others, so he’s an IC and can deduct based upon his less-than-perfect numbers (in fact he had nothing but some credible testimony).

Of course, he gets a lot less than he would have gotten if he had good numbers, like George M. (“Give My Regards to Broadway”) Cohan teaches us, plus the substantial understatement, non-filing, non-payment and non-withholding chops.


In Uncategorized on 06/18/2014 at 15:57

I’m giving the late great Edward R. Murrow’s signature sign-off to Judge Diane Kroupa, whose retirement from Tax Court on 6/16/14 was announced this date. I echo the comment of the gang at 400 Second Street, November Whiskey (as we used to say): “The Court is deeply grateful for the excellent judicial service that Judge Kroupa has rendered in her eleven years on the Court.”


In Uncategorized on 06/17/2014 at 16:04

Echoing the words of a former President of the United States of America, I know just how David H. Garza, starring in 2014 T. C. Memo. 121, filed 6/17/14, feels.

Dave traveled far and wide in his truck, at the behest of his employer, Time Warner Cable. And he did have a calendar planner, wherein he jotted down odometer readings at least monthly during the year at issue. Now he did use the aforesaid truck for his own use, and concedes about 10% of his recorded mileage was personal use. But Time Warner Cable did not reimburse Dave for his vehicular expenses.

So Dave took unreimbursed employee business expense deduction on his 1040.

Judge Cohen believes Dave did drive a lot of miles for business. But that isn’t good enough for Section 274(d)’s strict substantiation.

“Petitioner’s calendar planner, while contemporaneous, is not reliable substantiation for the claimed expenses because petitioner failed to meet the criteria set out in section 1.274-5T(b)(6), Temporary Income Tax Regs., supra. Petitioner did not record the amount, the time, or the business purpose of each business use of his truck because, in his words, ‘it was just too much to do.’ Accordingly, his deduction must be disallowed.” 2014 T. C. Memo. 121, at pp. 6-7.

While I recognize people were, and are, playing games with vehicle, and travel and entertainment, expenses, I stopped claiming most of mine because I agree with Dave: keeping track is too much to do. It was all very well when I was in a law firm, whether large or small, which had billing programs and reimbursement policies. Keeping track was someone else’s job.

But when I went solo six years ago, I decided I was a lawyer, full-time, not a bookkeeper, not even part-time. No thanks; if I wanted to be a bookkeeper, I would be.

And Dave is a cable guy, and I assume not a bookkeeper either. Full or part-time.


In Uncategorized on 06/16/2014 at 17:13

A heartwarmer for an elderly chap like me comes from Liz Wallace at KPMG (thanks, Liz) and the Sixth Circuit. Sixth Circuit revisits their sixtysix year old decision in Cleveland Allerton Hotel, Inc. v. Comm’r, 166 F.2d 805 (6th Cir. 1948), and finds it’s just as good today as it ever was.

I won’t ask if you remember Cleveland Allerton, because I sure don’t. It involved a hotel operator enmeshed in a disastrous lease. CA could buy the hotel for way less than it would be paying over the remaining lease term, and negotiated a buyout. Of course, the owner-lessor charged CA well above the odds, to compensate for the lost income stream.

IRS claimed that the entire buyout price was acquisition cost of the hotel, and must be capitalized. But, back in the day, Sixth Circuit agreed with CA, saying that the purchase price was FMV (which CA backed up with an appraisal), and the overage was a currently deductible business expense, to be rid of the nettlesome lease.

Well, IRS is back, and this time its target is ABC Beverage Corporation, No. 13-1701, decided 6/13/14, while I was flying back from the Magnolia City. Note that the full caption is ABC Beverage Corporation v. United States of America, because ABC stumped up the tax and sued for a refund; USDC Western District of Michigan gave ABC a “thumbs up”, and IRS appealed.

IRS loses. CA may be old, but it’s good, and intervening learning from the Supremes, and an amendment to Section 167(c) don’t change Sixth Circuit’s mind.

IRS claims four (count ‘em, four) Supreme decisions wipe out CA.

The first, Millinery Center Building Corp. v. Commissioner, 350 U.S. 456 (1956), doesn’t apply because the Milliners didn’t prove that the lease they bought was burdensome. So essentially they paid FMV, as there was no burdensome lease to get out of.

The second, Woodward v. Commissioner, 397 U.S. 572 (1970), involved legal, brokerage, accounting and appraising fees for a dissident stockholder buyout. But there the issue was whether these costs were part and parcel of the acquisition of the dissenters’ shares, and the Supremes said they were. The test is not the taxpayer’s primary purpose, but rather the claim originated in the acquisition of the asset.

Next is Commissioner v. Idaho Power Co., 418 U.S. 1 (1974). The Idahoans wanted to depreciate construction equipment they bought to build a new facility. The Supremes said that buying and operating that equipment in building the facility was again part and parcel of the construction cost , but to the extent the Idahoans used the construction equipment for operations, they could depreciate that part.

And, finally, our old friend INDOPCO, Inc. v. Commissioner, 503 U.S. 79,(1992), a Tax Court favorite vying with Neonatology Associates as the most-cited case in Tax Court’s canned opinions. After usual deference to facts and circumstances, the Supremes held that the expenditures INDOPCO made to be acquired by a friendly fellow company, (a) benefitted INDOPCO beyond the year paid or incurred, and (b) “bear the indicia” of a capital rather than an ordinary expenditure. And deductions must be construed narrowly.

That’s not the case here, says Sixth Circuit. Getting rid of the lease is deductible, and IRS concedes that, but fights about the acquisition of the hotel.

So the origin of the claim, a la Woodward, is ABC’s desire to get out of the lease, not to buy the hotel. And while INDOPCO teaches us that deductions are to be narrowly-construed, IRS already conceded that the lease buyout would be currently deductible. And Idaho Power allows a capital item to be capitalized and depreciated in different tranches, depending upon facts and circumstances.

IRS then claims Section 167(c)(2) bars adding leasehold basis to property acquired subject to lease for depreciation purposes. But Sixth Circuit says the exact language is ambiguous: does it mean only “while the property remains subject to a lease after acquired” or does it mean “if the property was subject to a lease at the moment of acquisition, whatever happens later”?

Legislative history says the provision was enacted to prevent taxpayers from using the Section 197 quick-kick depreciation while including in basis the leasehold interest in the property. Not the case here. And “subject to” is a phrase with much judicial glossing, all of which says “ongoing”, as in “subject to a mortgage”.

So Judge Cole concludes: “Because § 167(c)(2) does not prohibit ABC from deducting the lease expense at issue, and because no decision of the Supreme Court requires us to modify our prior decision, Cleveland Allerton remains in full effect, controls the outcome of this case, and permits ABC to deduct the lease expense.” Decision, at p. 12.

Us old guys keep going on and on and on….


In Uncategorized on 06/14/2014 at 12:39

IRS has promulgated what is called the “Taxpayers’ Bill of Rights”, a noble document that, one devoutly wishes, will actually have results, although I beg leave to doubt it.

You can read all about it in IR-2014-72, 6/10/14, which I missed while visiting the Bayou City, wherein reside my children and grandchildren.

Some things are so much more important than taxes.

Now back to business.

I would draw my readers’, all 101 of them, attention to Right Number Five, which provides as follows:

“The Right to Appeal an IRS Decision in an Independent Forum

“Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals’ decision. Taxpayers generally have the right to take their cases to court.”

While IRS admits that taxpayers now “generally” (oh, how I love that word! Keeps us all eating and putting many Huggies on a darling little person) have the right to take their cases to Court, IRS has systematically obstructed taxpayers, by misleading and confusing them.

Case in point, Yisroel Goldstein & Temi Goldstein, Docket No. 6373-14S, filed 6/13/14, from Ch J Michael B. (“Iron Mike”) Thornton.

Yis is trying, really he is, to resolve his differences with IRS. In responding to the usual IRS boilerplate you’re-too-late (108 days after SNOD) motion to dismiss, Yis says he is late, but details his “…efforts to resolve their tax matters administratively within the Internal Revenue Service (IRS) and detailed multiple attempts to submit information, explanation, and documentation. Petitioners further suggested that they should not be ‘penalized’ for the late petition when, given their prior submissions to the IRS and the merits of their substantive position, the need to instigate a court case should never have arisen.” Order, at p. 2.

Ch J Iron Mike well understands Yis’ plight: “The law is well settled, however, that once a notice of deficiency has been issued, further administrative consideration does not alter or suspend the running of the 90-day period. Even confusing correspondence, written or verbal, during the administrative process cannot override the clearly stated deadline in the statutory notice of deficiency. Such confusion is not uncommon given that the IRS frequently treats as separate processes or proceedings what taxpayers view as a single dispute. Taxpayers not infrequently have also conflated this Court with an IRS unit, but the IRS is a completely separate and independent entity from the Tax Court.” Order, at p. 2.

So, Yis, you have a right, but no one will explain this to you or tell you how and when to use it. And IRS has a license to mislead you or confuse you.

Forget rights. The law is well-settled. And it is settled wrong.



In Uncategorized on 06/14/2014 at 12:09

Mr. J. P. Finet, now or formerly legal editor of BNA Daily Tax Report, a periodical subsequently subsumed by the Bloomberg octopus, asked me for my views on Coffey v. Com’r, No. 11-1362, decided 12/2/11 by the Eighth Circuit, back on 12/2/11, and why anyone other than a VI practitioner should care.

See my blogpost “Somebody Does Read This Blog”, 12/4/11.

I responded thus: “So my reply to Mr. Finet’s request for ‘a sentence or two why practitioners should care’ is ‘All practitioners should care because it matters that taxpayers, and people, should know that when it’s over according to law, it’s over.’”

So now, only two-and-a-half years late, IRS has clambered onto the bandwagon (at long last), with the “Taxpayers’ Bill of Rights”, wherein Right Number Seven reads as follows:

“The Right to Finality

“Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit.”

I’ll have more to say about this document in another blogpost, coming soon to a screen near you.