I mean persons who are seeking frequent litigator points in Tax Court. They gravitate to 400 Second Street, NW, in Our Nation’s Capital, as moths to a cliché. We have two of them back today, one a multiple previous participant in my blogposts, and one swum fresh into my ken.

Randy Thompson is back again. You remember Randy, who inspired The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being and implacable foe of the partitive genitive, Judge Mark V. Holmes, to a memorable dissent, as to which see my blogpost “The Great Dissenter”, 12/28/11. And Randy even got Eighth Circuit to praise Judge Holmes, as more fully set forth in my blogpost “The Great Dissenter Vindicated”, 11/12/13.

But Randy stipulates and capitulates, so the point that Judge Holmes raised is moot. See Randall J. Thompson and Karen G. Thompson, 2014 T. C. Memo. 154, filed 7/31/14.

Judge Wherry gets in the last word, but Randy really handed it to him. “The Court of Appeals found that we have jurisdiction to determine Mr. Thompson’s outside basis in his partnership interest. We need not make such a determination, however, because the parties have stipulated the deficiency. See Thompson v. Commissioner, 137 T.C. at 223-224. Our task on remand is, therefore, limited to entry of a decision formalizing that agreement.” 2014 T. C. Memo. 154, at p. 8. (Footnote omitted).

Finally, in United States v. Woods, 571 U.S. ___, 134 S. Ct. 557 (2013), the Supremes said that Tax Court could apply the overvaluation chop at a partner-level proceeding, but how that impacts each partner necessitates a partner-level proceeding. Unless, as here, the partnership is a sham, so a fortiori (as my high-priced colleagues say), the partners’ outside basis is zero, and the chop is purely computational.

So if Randy is still unhappy, let him pay and sue for a refund.

The new rounder is Alvin Sheldon Kanofsky, 2014 T. C. Memo. 153, filed 7/31/14. Al has been around. He lost in Tax Court, lost again in Third Circuit, filed for cert with the Supremes (denied), and moved for rehearing (ditto). Al never filed a bond on appeal, so IRS proceeded with collection.

Al, of course, asked for a CDP and raises the same arguments that got blown away before. Appeals says no, so does Tax Court, Alvin hits the Third Circuit trail again, loses, moves for rehearing en banc, knocks on the Supremes’ door and gets denied.

Al is a physics professor at Lehigh University. He didn’t follow the dictum misattributed to his famous colleague from Princeton, Dr. Einstein: “Insanity is doing the same thing and expecting a different result.”

Judge Dawson: “Petitioner is no stranger to this Court. He was warned in prior proceedings that his conduct could subject him to a penalty if he continued to repeat the arguments he made in earlier cases before this Court and the Court of Appeals for the Third Circuit in his deficiency and levy cases for the tax years 1996, 1997, 1998 and 2000. He has also litigated in this Court in docket No. 3774-11 his case involving income tax deficiency for 2006 and 2007. In each case, petitioner has continued to raise arguments of fraud, corruption, and whistleblowing activities nearly identical to those raised in this lien case.” 2014 T. C. Memo. 153, at pp. 16-17. (Footnote omitted).

Now that sounds like a Section 6673 chop is on the way.

Especially since, when trying the docket No. 3774-11 case, Al got what Rudy Kipling would have called a “wigging”:

“Now, to the extent that you start off on side trips that I don’t think are relevant, I’m going to warn you. But if it turns out that you persist in making arguments — now, you know the government has been yelping about the fact that you’re taking positions they view as frivolous and groundless. And to some degree, if those positions are the same positions you asserted in your previous two visits to the Tax Court [Kanofsky I and II], I may well agree with them.

“If I do, you’ve run the risk that you might be penalized because there is a penalty under the Internal Revenue Code that I can impose in my discretion if I conclude that various arguments and positions are being asserted that are frivolous, groundless, have been rejected over and over again. So you just need to be forewarned.” 2104 T. C. Memo. 153, at p. 17.

Of course Al appealed. Third Circuit gave Al the usual. So Al is back for the fourth (count ‘em, fourth) time in Tax Court. And that’s enough.

“Petitioner is a well-educated individual who admits that he understood cautions and warnings given by this Court, yet he continues to reiterate the same irrelevant and groundless arguments.” 2014 T. C. Memo. 153, at p. 19.

Ten grand, Al.

But check today’s orders, namely and to wit, Alvin Sheldon Kanofsky, Docket No. 21821-13 L, filed 7/31/14. Judge Lauber, that man of many talents, can use them in dealing with Al yet again.

Will Al get twenty? Stay tuned.

A classic case of deer-in-the-headlights gives me my blogpost for today. The one T. C. Memo. for 7/30/14, is a reiteration of the old story–for an OIC you must file a Form 656 and follow the Regs to the letter. There’s not a lot of new learning here, so I’m not blogging it.

And the one order I am blogging is really a warning to those who will not read it–the self-represented. Ch J Michael B. (“Iron Mike”) Thornton may have thought he was doing Deborah Loftsgard, Docket No. 15923-14, filed 7/30/14, a favor by saving her $60. Of course Debs is pro se.

I submit that he was assisting her (most likely unwittingly) to deprive herself of prepayment judicial review.

The facts are so simple. And for once I’m including the dates, because they really matter.

“On July 8, 2014, the Court received from petitioner a letter which referenced a notice of determination dated June 6, 2014, issued to petitioner with respect to the 2001 taxable year. To protect petitioner’s statutory time period within which to begin a case, the Court filed that letter as a petition to commence this case at docket No. 15923-14. On July 15, 2014, the Court issued an Order directing payment of the filing fee for this matter on or before August 29, 2014. On July 28, 2014, the Court received from petitioner a letter indicating that petitioner did not intend through her initial correspondence with this Court to commence a case herein. Rather, petitioner is seeking information regarding the basis for the determination made by Internal Revenue Service (IRS).” Order, at p. 1.

Debs, if you want to find out the basis for what IRS did, send IRS a Branerton letter. If you don’t know what that is, read my blog or Google Branerton v. Com’r.

But do it after you pay the $60 bucks and move to vacate this Order. If ordered to amend your petition, just state you disagree with whatever IRS did, need informal discovery and have sent a Branerton letter. Tax Court loves Branerton letters.

Even if IRS wants to fight, talk to their attorney and suggest you can settle if you can talk.

But what happens here sinks Debs.

Ch J Iron Mike: “Petitioner is advised that the IRS and the Commissioner are separate from this Court and that petitioner would need to contact the IRS directly for such inquiries as to IRS activities and determinations. Accordingly, it appearing that petitioner does not intend to pay the filing fee as directed in the Court’s Order dated July 15, 2014, it is

“ORDERED that, on the Court’s own motion, this case is dismissed for lack of jurisdiction.” Order, at p. 1.

Debs, if this was a NOD and not a SNOD, you just lost any chance of Tax Court review, whatever IRS tells you or doesn’t tell you. And whatever IRS tells you or doesn’t tell you, if you want to fight you have to pay in full and sue in District Court or Federal Claims. And best of luck with that.

If what you got was a SNOD, you might have time to petition again, but whether SNOD or NOD, it’s simpler to ask for a Rule 162 motion to vacate.

Just mail in a $60 check with your letter, and say you were unaware you were giving up your right to Tax Court review, and you want your petition to stand. But do it now. You only have 30 days.

With so many self-representeds, winning is easy for IRS.

Edited to Add: Of course, the foregoing should not be construed, and may not be used, as (a) legal advice, or (b) to abate in whole or in part any interest or penalties for, related to, or in connection with any tax or imposition by any governmental authority having or asserting jurisdiction, or (c) solicitation of retention or employment, or for the furnishing of legal or non-legal services, or (d) to create a client-attorney relationship or privilege.

All recipients hereof are advised that a qualified common interest privilege is asserted, both as to the substance of this communication or any claims in connection herewith or in consequence hereof.

It’s been a many-times-told tale, but payments in a divorce case by way of property settlements, whether or not actually so denominated, aren’t deductible.

Of course, the record in today’s illustration doesn’t make clear whether it was the divorce lawyer who advised taking the disallowed deduction. I do hope it wasn’t; I’ve beaten up enough on the family law bar.

However, by whomever they were advised, Joseph Peery and Dawn Shannon Chapel come seriously unglued in 2014 T. C. Memo. 151, filed 7/29/14, as Judge Ruwe lands them with an $18K deficiency plus a substantial understatement 20% chop.

Simple facts. Joe casts away his loved-once, Katrina H. Peery, and marries Dawn Shannon. As part of the casting away, Joe signs on to a certain separation agreement, which is incorporated into the divorce decree.

Said sep agreement provides, in pertinent part: “Paragraph 1 of the separation agreement sets forth certain items of ‘property’ that Ms. Peery ‘shall have as her own, free and clear of all claims of * * * [petitioner].’ As part of her property rights, subparagraph 1(I) of the separation agreement assigns to Ms. Peery ‘[a]n award of property settlement in the sum of $63,500.00, which amount shall be paid within thirty (30) days’….” 2014 T. C. Memo. 151, at p. 3.

Joe pays and tries to take the alimony deduction.

Judge Ruwe: “Section 71(b)(1)(B) provides that, in order to be considered deductible
alimony, ‘the divorce or separation instrument does not designate such payment as
a payment which is not includible in gross income under this section and not allowable as a deduction under section 215′. Generally, property settlements incident to a divorce are not taxable events and do not give rise to deductions or recognizable income.” 2014 T. C. Memo. 151, at pp. 8-9. (Citations omitted, but there’s a bushelbasketful.).

Joe does get a $3K payment, because IRS raises the objection late and can’t show that it wasn’t spousal support.

Even so, there’s a substantial understatement and a 20% chop, as soon as the Rule 151 beancount is over.

And check out page 4 for some interesting scrivener’s errors in the separation agreement.

Or, Who Says Tax Is Unromantic?

Today is a rare day for this old softy. I’ve got a love story and a tax takeaway, and here’s STJ Daniel A. (“Yuda”) Guy with hearts, flowers and Schedule A, and a bye on the Section 6662(a) accuracy penalty for Lauren Elizabeth Miller, 2014 T.C. Sum. Op. 74, filed 7/28/14.

Lauren E. was the NYC rep for a California start-up called BrandingIron Worldwide, Inc. BrandingIron might have been long on iron but it was short on gold, at least while Lauren E. was repping them in the Apple. They had no office in NYC and weren’t going to get one, so Lauren E. had to work out of her apartment.

So the unreimbursed employee business expense I want to cover today is a fact of NYC life that y’all who live on the bayous, prairies, and Great Plains of our land wot not of, the NYC studio. Lauren E. had a large one, “…a single room with a total living area of 700 square feet. She provided a sketch of the apartment in which the space is divided into three equal sections: (1) an entryway, a bathroom, and a kitchen area; (2) office space, including a desk, two shelving units, a bookcase, and a sofa; and (3) a bedroom area including a platform bed and dressers. Petitioner had to pass through the office space to get to the bedroom area.” 2014 T. C. Sum. Op. 74, at p. 4. And she occasionally used the “office” space for personal purposes.

I lived in something that size for a year-plus, prior to finding the apartment of my dreams (and the Girl of My Dreams), with both of whom I am still happily affiliated.

Now exclusivity of the home office sinks most deductions (see my blogpost “Lock The Door!”, 8/18/11), but STJ Yuda is not oblivious to reality (and realty).

“Although petitioner admitted that she used portions of the office space for nonbusiness purposes, we find that her personal use of the space was de minimis and wholly attributable to the practicalities of living in a studio apartment of such modest dimensions. See Hughes v. Commissioner, T.C. Memo. 1981-140.” 2014 T. C. Sum. Op. 74, at p. 14.

So Lauren E. gets at least some of what she claims. As her annual rent for the palazzo in question was $26K (don’t gasp, you denizens of The Great Wide-Open; that’s what Manhattan costs), she gets about one-third, plus a piece of her cleaning bill.

IRS wants a Section 6662(a) accuracy penalty, but STJ Yuda says no.

“Petitioner provided her tax records to Mr. Letta, a certified public accountant, and she consulted with him regarding deductions for her business expenses. Mr. Letta reviewed petitioner’s tax records, considered them to be complete and accurate, and discussed the return with her before filing it. When he learned that many of petitioner’s original tax records had been lost, Mr. Letta contacted TurboTax in an ultimately unsuccessful attempt to retrieve worksheets that he completed while preparing the return for electronic filing.

“Considering all the circumstances, we conclude that petitioner reasonably relied on Mr. Letta to assist her in preparing a proper tax return for 2009. We likewise conclude that there was reasonable cause for, and petitioner acted in good faith with respect to, the underpayment in this case.” 2014 T. C. Sum. Op. 74, at pp. 21-22.

Now where was the romance I promised you? It comes in a footnote.

“Petitioner provided her tax records, including original receipts and invoices of her business expenses … to Michael Letta.” 2014 T. C. Sum. Op. 74, at p. 9 (Footnote omitted, but here it comes).

“Petitioner married Mr. Letta in August 2013.” 2014 T. C. Sum. Op. 74, at p. 9, footnote 3.

May they file jointly happily ever after.

Or, How Not To Do It

I can understand a little creativity in the tax world, and even some post hoc tax planning, but there comes a point–well, maybe it comes too late for Raymond E. Gardner and Sherry N. Gardner, 2014 T. C. Memo. 148, filed 7/28/14, as told by Judge Ruwe.

Ray did insurance big-time, and real estate medium-time, from his North Carolina home, when he went into the cattle-breeding business with a peripatetic cattle breeder from Indiana.

Except it wasn’t a business, and Ray loses the Section 183 roundup. I’ll spare you the cattle by-product that permeates this 70-page account of breached contracts (on both sides, that neither side pursued), unpaid bills, unpaid and unenforced promissory notes, unregistered genetics, endless spreadsheets with no substantiation (we call it “back-up” in the trade), and dubious testimony.

But the takeaway here is the post hoc tax planning.

“Due to the manner in which petitioner conducted his cattle operation, we take a critical view of the coinciding of the substantial increase in petitioner’s net loss from his cattle operation in the same year that the income from his insurance business and other ownership interests also substantially increased.

“We note that petitioner reported $780,729 of net losses for the taxable years 2001 through 2004. The 2005 tax year was the first year that petitioner reported a net income from his cattle operation. Coincidentally, the IRS began an examination of petitioner’s cattle operation during 2005. The initial appearance of a profit in the taxable year in which the IRS commenced an examination is conspicuous.

“We find that this factor is neutral.” 2014 T. C. Memo. 148, at pp. 59-60.

Maybe the factor is neutral, but I’m sure IRS’ reaction wasn’t. And maybe IRS’ reaction isn’t the only one.

No, it’s not a parody of the classic New York doo-wop 1959 gold record “Sixteen Candles” (by the Crests, notable for being one of the rare integrated groups of the time, three black members (one of whom was female), one Puerto Rican, and one Italian-American: real New York).

But it could be, if someone is inclined to write it.

No, it’s the number of attorneys Amazon.com, Inc., and subsidiaries puts on a partial summary judgment motion that Judge Lauber blows off in ten pages (double-spaced).

Read all about it in 2014 T. C. Memo. 149, filed 7/28/14.

You’ll remember my earlier blogpost “Win Your Case at Discovery”, 7/3/14. Well, this is a follow-up, since The Big A made this motion while IRS was seeking more discovery concerning the allocations of expenses attributable to the components of this deal between Jeff Bezos’ still-in-the-USA retailing octopus and the Luxembourg subsidiary with which it was allegedly creating all this IP.

“Petitioner has yet to demonstrate that the T&C category contains nontrivial costs that are properly characterized as something other than IDCs. Respondent has sought discovery on this issue and was seeking additional discovery at the time this motion was filed. At the moment, therefore, it is a disputed question of material fact whether the T&C category contains ‘mixed’ costs. Until petitioner establishes that the T&C category contains a nontrivial amount of ‘mixed’ costs, we cannot rule as to whether respondent abused his discretion in determining that 100% of T&C category costs constitute IDCs.

“Petitioner contends that it is not required by the regulations to show that its T&C costs are ‘mixed’ before applying an allocation formula. In petitioner’s view, it need only prove that the allocation formula it developed and applied is ‘reasonable.’ If that formula is ‘reasonable,’ petitioner contends, the formula necessarily allocates costs correctly as between the intangible development activity and other business activities.

“Petitioner’s argument puts the cart before the horse. The regulations permit costs to be allocated only ‘[i]f a particular cost contributes to the intangible development area and other areas or other business activities.’ Sec. 1.482-7(d)(1), Income Tax Regs. The status of costs as ‘mixed,’ in other words, is a precondition to the application of an allocation formula. Petitioner must show that this condition has been satisfied before it can proceed to the next step, which is to show that its allocation formula reasonably allocates mixed costs. At this stage of the litigation, we cannot rule as to whether respondent abused his discretion in declining to permit the use of an allocation formula with respect to T&C category costs.” 2014 T. C. Memo. 149, at pp. 8-9.

Amazon.com seems to think establishing the mixing would be tedious and time-consuming, but Judge Lauber says they can use sampling methods or a review of critical cost centers to do the sorting out.

“One way or another, petitioner must establish that it has T&C category costs requiring allocation before the Court will permit petitioner to allocate such costs.” 2014 T. C. Memo. 149, at p. 10.

No summary judgment.

IRS has only five lawyers; Amazon.com and Subsidiaries has sixteen (count ‘em, sixteen), all  white-shoe, I’ll wager, with the meters running. No wonder Amazon Prime went from $80 to $99 per year.

How often over the last thirty-five or forty years have I wished for a little black box, not larger than three cubic inches, that would sit quietly upon my desk. If I got mail (snail or e), or the phone (desk or cell) rang, on that wonderful little black box would glow either a red or a green light, not bigger than a nailhead. If green, the little black box would be telling me that I was about to acquire a really good-paying client, with either a solid case or an interesting transaction, with whom it would be a pleasure to work, with generous compensation.

But if red, the little black box was saying, in words I remember from long ago, “Incoming! Hit the dirt and grab an extra mag!” No lengthier gloss is needed.

Alas, I never had such a box. I wish I could have invented and patented it.

Such a box would be valuable beyond rubies before picking up the phone when the phonecall begins with “You are the third lawyer I’ve consulted….”

Case in point, a designated hitter from Judge Wherry, John W. Harris & Delilah E. Harris, Docket No. 20421-10, filed 7/25/14.

I won’t dwell on John’s efforts to extricate himself from the stipulation that sinks his case. Allegations of IRS skullduggery are occasionally true (cf. Kersting and his offspring), and so is alleged lawyer inadequacy, but more often these are the loser’s auto-condolences. Make up your own minds.

But the point of this blogpost (and I can hear my readers, those happy few, saying “I can’t believe it! Twice in one month he has a point!”) is just one sentence.

“We acknowledge that, at the time of the conference call, petitioners’ current counsel, the third attorney to represent them in this four year-old case, may not have been completely familiar with its procedural history.” Order, at pp. 7-8.

I’ll be prepared to wager ten new pence with my UK readers that this is not the only point in John W.’s & Delilah E.’s history with which said third lawyer is not “completely familiar”.

Would you be paralyzed with shock when I tell you that John W. is an attorney, and that he states on his website that “his expertise includes taxation, bankruptcy, public finance, real estate and commercial litigation, including eminent domain and other land use matters.”?

Automatic Tax Court admittee, of course. But read Judge Wherry’s order and decision.

In the immortal words of Monty Python, “nudge nudge, wink wink, say no more say no more.”

Woody Guthrie’s words and Billy Bragg’s music about sum it up for STJ John F. Dean, who “has retired after 20 years of service on the Court.  The Court deeply appreciates Special Trial Judge Dean’s outstanding service and dedication to the Court.”

Meets “Irrelevancies and Frivolous Contentions”

First up, batting for forthrightness, credibility and largely undisputedness is Patrick A. Davis, 2014 T. C. Memo. 147, filed 7/24/14.

Pat is a single Dad. He claims EITC and dependency for daughter Ashley, aged 19, full-time nursing student. Ashley lives with Dad and grandma (Dad’s mama) 20 miles from campus, works only for minimum wage part-time, and gets more than half her support from Dad, grandma, Ashley’s mama (from whom Pat was divorced years ago, but who was named custodial parent in the divorce decree), and the other grandma.

The famous Section 152 custodial-noncustodial dispute, with Form 8332 attached, is off the table, because no one disputes Ashley lived with Dad and grandma for more than half the year in question, and that fact, by virtue of Section 152(e)(4)(A), makes Pat the custodial parent.

So Ch J Michael B. (“Iron Mike”) Thornton blows off IRS’ counsel, whose sole argument seems to be the divorce decree from years ago.

IRS already conceded the penalty, and didn’t raise the issue whether Ashley, aged 19 (and therefore over age 18 during the year in question), might be emancipated by State law and therefore not anyone’s qualifying child. So, obviously convinced by Pat’s “forthright, credible and largely undisputed testimony” (2014 T. C. Memo.147, at p. 3), Ch J Iron Mike gives Pat the whole deal.

Can’t say IRS counsel covered himself with glory in this one, but we’ve all had such days.

Second batter, and looking at a lot tougher pitching, is Janice Marie Cross. There are two docket numbers, and thus two orders, for these designated hitters from that Obliging Judge, David Gustafson, but I’ll reference Docket No. 1439-13, filed 7/24/14. The texts of both orders are identical.

The cases were consolidated, but that doesn’t deter Janice Marie, who sent Judge Gustafson a billet doux entitled “Petition and Memorandum of Law”, which Judge Gustafson treats as a motion.

Judge Gustafson is not amused.

“..,.petitioner’s motion is denied in full. The motion lacks merit to the extent it (1) re-argues petitioner’s objection to consolidation of these two cases, (2) asks the Court to compel a deposition (without demonstrating compliance with Rule 74(c)), (3) asks the Court to compel certain discovery (without showing its relevance) or to enforce her alleged rights under the Freedom of Information Act (which rights are outside this Court’s jurisdiction), (4) asks the Court to order respondent to cite (or to provide copies of) Internal Revenue Code sections beyond those stated in the notice of deficiency, or (5) asks the Court to order the IRS make corrections in its records concerning petitioner (which would require mandamus authority the Court does not have). To the extent petitioner’s motion argues some aspects of the merits of her case pertaining to her … tax liability, the Court motion is denied, since those contentions are intermingled with irrelevancies and frivolous contentions. Petitioner will have an opportunity at trial to prove what her actual liability is.” Order, at p. 1.

Now Judge Gustafson twice before cautioned Janice Marie to eschew frivolity or face the Section 6673 fastball.

“Nonetheless, petitioner’s recent filings have been replete with frivolous contentions. If, in making these frivolous arguments, petitioner is following the advice of persons claiming to be knowledgeable, then she should realize that she is being misled.” Order, at p. 2.

Janice Marie, you’re going to have to prove your income, credits and deductions for the year at issue, so get with it.

No, not Rudy Kipling’s celebrated Boer War poem that made the Blighty hit parade when Sir Artie Sullivan put a tune to it. This is the story of Paul O. Reynolds, Docket No. 7405-14S, filed 7/23/14, a designated hitter that makes blogging Tax Court fun.

Paul petitions, apparently from a NOD, but he and IRS both agree there never was a NOD, it was a SNOD.

So when The Judge With a Heart, STJ Armen, tells Paul to produce said SNOD, Paul “… argues that he never received the original notice of deficiency and that the incomplete copy attached to the Supplement Objection was all he has.” Order, at p. 1.

IRS says oh yes, there was a SNOD, and Paul petitioned that SNOD a year ago.

STJ Armen pores through the files, and finds “…a timely petition was filed with the Court on July 9, 2013, in response to a notice of deficiency for tax years…. A copy of relevant pages of the deficiency notice… was attached as an exhibit to the petition. After the Court issued two separate Orders…directing petitioner to ratify the petition…, the case… was closed by Order Of Dismissal For Lack Of Jurisdiction… on the ground that the petition was not properly executed by petitioner as required by Tax Court Rules of Practice and Procedure. Petitioner did not move to vacate that Order of Dismissal, and it became final….” Order, at pp. 1-2. (footnotes omitted).

I omitted the footnotes, but read them both. Footnote 1 says the addresses on the SNOD, the petition in Case No. 1 and the petition in this case were all the same address. Footnote 2 says both orders told Paul to properly execute the petition or face dismissal; he didn’t and he did.

Sorry, Paul. No jurisdiction. No excuse for being absent-minded.