So No Penalty

That’s Judge Goeke’s lesson for IRS in Frank Sawyer Trust of May 1992, Transferee, Carol S. Parks, Trustee, Docket No. 5526-07, filed 8/29/14.

And it’s a good thing I’m not out on my yacht or in my house in the Hamptons at the start of the Labor Day weekend, like my $1200-per-hour colleagues, because I don’t have either a yacht or a house in the Hamptons, so that I can dig through seven (count ‘em, seven) pages of Tax Court orders to bring my now-118 followers the latest Tax Court skinny.

Remember Frank and Carol? No? Then refresh your recollection with my blogpost “Little Deuce Coup”, 6/25/14. Frank and Carol dodged the penalty there, but IRS is back with a Rule 161 try-again.

And it doesn’t work.

Judge Goeke: “The transfer to petitioner was not actually fraudulent as we found in the Court’s Memorandum Findings of Fact and Opinion (T.C. Memo. 2011-298) and was accepted as such by the United States Court of Appeals for the First Circuit. For a transfer to be constructively fraudulent, the transferor must receive less than reasonably equivalent value for it. The trust gave value for the transfer, but it was not reasonably equivalent value, so the transfer was constructively fraudulent. However, only the portion of the transfer that exceeds the value of the assets transferred was constructively fraudulent. Therefore, only that portion is subject to the Mass. UFTA and transferee liability….. In other words, a transferee’s liability is capped at the amount of the constructively fraudulent transfer it received.” Order, at p. 1 (Citations omitted).

State law (here Massachusetts) only lets the defrauded creditor get what they should have gotten, not a windfall.

“Allowing respondent to collect penalties would subject petitioner to transferee liability in excess of the amount of the fraudulent transfer it received, and consequently in excess of the maximum recovery provided by the UFTA.” Order, at p. 2.

IRS, you were wrong before and you’re wrong now.

And another tip of the Taishoff baseball cap to David R. Andelman, Esq., and the team at Lourie & Cutler, counsel for taxpayer.

No, not the 1982 Star Trek baddie (different spelling, he) nor yet the late actress and comedienne Madeline (and her performance in the 1974 Mel Brooks cult classic Blazing Saddles is a fond memory). No, this is Kathleen Kahn, Docket No. 1517-13L, filed 8/29/14, a designated hitter off the bat of STJ Lewis (“Our Name Is Our Fame”) Carluzzo, a walk-off hit before the last weekend of summer.

Kathleen is wroth because Appeals done her wrong, she says, and wants summary judgment in Tax Court. And she won’t go back to Appeals, even though IRS wants a remand.

Appeals has taken its lumps lately, mostly at the hands of that hard-charging but low-billing attorney-at-law Honest Eric William (EW) Johnson. In witness whereof, see my blogposts “Abate, Don’t Debate”, 8/25/14, and “Honest tax representation at reasonable rates”, 8/28/14). But Kathleen is on her own here.

And her objections to IRS’ remand request and her written statement in lieu of appearance at the argument of her summary judgment motion didn’t hit STJ Lew’s radar until after the hearing.

“During the hearing, however, it was clear that the Court intended to deny petitioner’s motion and, subject to conditions discussed at the hearing, grant respondent’s [IRS’] motion. Concerned that the remand would unnecessarily delay the matter further, the Court was persuaded by respondent’s argument that a remand would be beneficial because it would allow for respondent to review the administrative process giving rise to the underlying liabilities in dispute in this matter. Although it would seem that a remand could only work to petitioner’s favor, in her objection petitioner opposes the remand because: (1) it would cause further delay; and (2) she did not expect that the matter would be given fair consideration by respondent’s settlement officer.” Order, at pp. 2-3.

That’s something of a riposte to Judge David Gustafson’s sermonette to Barb and Wel Delon in my blogpost “I’m From the Government and I’m Here to Help”, 8/20/14.

So STJ Lew finds questions of fact and jurisdiction in Tax Court to review Kathleen’s liabilities de novo.

“It is clear from petitioner’s submissions that she does not want to participate in further administrative proceedings. Mindful that we have jurisdiction in this matter to review, de novo, the underlying liabilities here in dispute, we weigh the likely benefits of a remand against petitioner’s (and the Court’s) concerns about any additional delay that a remand might cause. In so doing, we find that the scale tips ever so slightly in petitioner’s favor.” Order, at p. 2.

So no summary judgment, no remand, let IRS answer or amend its answer, and Kathleen need not reply, as any allegations in an amended IRS answer will be deemed denied.

Takeaway 1- Note Rule 50(c). You can make a written statement in lieu of showing up for a hearing on a motion. This saves shlep time (and money).

Takeaway 2- Note that skipping a remand may be good tactics. Don’t always take the bait without thinking. IRS may be using the remand to clean up its act, as seen in my blogposts aforesaid.

No, this is not an advertising pitch from me. This is a direct quotation from the webpage of that hard-charging hero of my blogpost “Abate, Don’t Debate”, 8/25/14, Eric William (EW) Johnson, now or formerly of St. Paul, MN.

And EW again shows his stuff in Eladio Duarte and Azucena Bailon-Rivas, 2014 T. C. Memo. 176, filed 8/28/14.

It’s really Eladi’s story. He’s a roofer with a somewhat peripatetic career and sporadic income, who got behind on his filings. He tries to buy a house, discovers he hasn’t filed some years, and sends in his returns. But he still owes money, and IRS hits him with a NITL.

Enter EW, sending in a timely Form 12153. As seems to befall EW’s clients, Appeals makes a hash of the CDP, twice. Of course IRS levies while the CDP is pending, and doesn’t release all levied funds despite EW’s protestations.

Then EW asks for an OIC, sends in the money per Form 656, which get applied to another open year, and the AO says she can process the OIC, as Eladi appears compliant.

Nothing happens, an SO gets assigned and schedules a face-to-face a year later. EW asks for more time and a face-to-face because his client has language problems and has some ‘splainin’ to do.

You’re gonna love this: “Mr. Diamantopoulos stated that no extension or face-to-face hearing would be provided because Mr. Duarte had previously had a face-to-face hearing and because Mr. Diamantopoulos did not speak Spanish. Mr. Diamantopoulos summarily stated that the offer-in-compromise would be rejected based on his calculation that Mr. Duarte could fully pay the liabilities. Further, and despite having apparently reached the conclusion that he did not have up-to- date financial information, Mr. Diamantopoulos offered Mr. Duarte an installment agreement for $3,000 per month.

“On the day after the phone call, Mr. Diamantopoulos sent a letter to Mr. Duarte stating that, according to his calculation of the financial information Mr. Duarte had provided at the previous face-to-face hearing more than a year before, he could fully pay the liabilities and that Mr. Diamantopoulos was recommending that the offer-in-compromise be rejected. He included his worksheets with that letter and stated that a notice of determination would be issued.” 2014 T. C. Memo. 176, at pp. 7-8 (Footnote omitted).

Contrary to my usual policy of not naming names, I do so here. Judge Buch names names in this case.

And on this record Judge Buch sends Eladi back to Appeals, because he can’t conclude whether IRS abused its discretion.

Read the whole opinion. Then I leave it up to you whether IRS abused its discretion.

I hope EW gets paid his fee at his usual reasonable rates. He earned them.

Home Concrete, that is, the Supremes’ reiteration of Colony Corp. In the argot of my Outlying Island Off the Coast of North America, “Know what I’m sayin’?” No? Then see my blogpost “Colony Lives”, 4/26/12.

But Home Concrete isn’t set in concrete for G. Douglas Barkett and Rita M. Barkett, 143 T. C. 6, filed 8/28/14. IRS claims G. Doug and Rita understated their income from their toothsome C Corp, Barkett Dental Enterprises, to the extent of more than 25% of what should have been reported, thus triggering Section 6501(e)(1) 6SOL.

G. Doug and Rita aren’t fighting about the dental business. They’re claiming they reported the gross income they realized from their investment passthroughs, and that was enough to get them under the 25% limbo stick, even though their net gain was way less.

IRS says it’s the net, and Home Concrete’s overstatement-of-basis rationale doesn’t help.

Tax Court, per Judge Goeke, buys IRS’ argument. True, the Supremes in Home Concrete torpedoed so much of Reg. Sec. section 301.6501(e)-1 as dealt with overstated basis. But the issue for the Supremes was whether to include or exclude gross income, not how to figure it.

But if we’re not dealing with a trade or business (and here this is investing, not a trade or business), then gross income is amount realized less basis. And Judge Goeke says the Supremes recognized this. “(T)he general statutory definition of ‘gross income’ requires subtracting the cost from the sales price. Under such a definition of ‘gross income,’ the calculation would take (1) total revenue from sales, $40,000, minus (2) “the cost of such sales,” say, $25,000. The $10,000 of revenue would thus amount to 67% of the ‘gross income’ of $15,000. * * * Home Concrete & Supply, LLC, 566 U.S. at ___, 132 S. Ct. at 1842.” 142 T. C. 6, at p. 12.

Of course, whenever you see the word “general” or “generally”, you know what’s coming next.

And Judge Goeke doesn’t disappoint. “An exception to the general statutory definition appears in section 6501(e)(1)(B)(i), which provides that ‘[i]n the case of a trade or business, the term “gross income” means the total of the amounts received or accrued from the sale of goods or services * * * prior to diminution by the cost of such sales or services.” 143 T. C. 6, at p. 12.

But everyone agrees that the investment operation wasn’t a trade or business, so the exception doesn’t fly. So non-trade-or-business gross income is gain realized less basis. Those numbers push G. Doug and Rita into 6SOL.

And that’s set in concrete.

This is another installment in my “Win Your Case” series. There has been a bushelbasketful of these orders arising out of listed transactions lately, principally a dodge known as the Sterling Benefit Plan. This particular shenanigan is rewarded with the Section 6707A chop.

These are nonassessables, that is, there’s no SNOD, but a trip to Appeals gives the alleged miscreant a chance to chip away the chop.

The exemplar I’m picking today is a designated hitter from Judge Kerrigan, Medi-Save Pharmacy, Inc., Docket No. 30058-13L, filed 8/27/14. And Judge Kerrigan seems to have gotten a bunch of these.

Medi got the chop, Medi’s counsel went to Appeals, Appeals sustained the chop ($10K), and Medi got a NITL. Medi filed a CDP, but didn’t take the phone conference offered or submit an alternative, so Medi got a NOD.

Medi petitions, saying “…that it is entitled to abatement of the penalty based on ‘an unexplained determination that related transaction and a provision of the Internal Revenue Code that is unconstitutional as a deprivation of due process’.” Order, at p. 2.

IRS moves for summary judgment and gets it, especially since Medi’s counsel doesn’t oppose.

The issue is whether Medi had a prior opportunity to dispute the chop.

“A prior opportunity to dispute a liability includes an opportunity for a conference with the Appeals Office offered either before or after assessment of the liability. Secs. 301.6320-1(e)(3), Q&A-E2, 301.6330-1(e)(3), Q&A-E2, Proc. & Admin. Regs. This Court has upheld the validity of these regulations. Lewis v. Commissioner, 128 T.C. 48 (2007). An opportunity to dispute tax liability under section 6330(c)(2)(B) includes an opportunity to dispute taxes to which deficiency procedures do not apply with the Appeals Office. See Mason v. Commissioner, 132 T.C. 301 (2009).” Order, at p. 3.

Win your case at Appeals. Or be prepared to go to the Court of Appeals.

At Least Until He Goes

That’s the moral Judge Cohen has for Zhengnan Shi in 2014 T. C. Memo. 173, filed 8/26/14.

Zhengnan, a Chinese (PRC) national, is fighting over the interest on his tax refund. I’ll spare you all but one of his losing arguments, but the one I want may be of use to the battle-weary practitioner.

Zhengnan claims the US-PRC tax treaty taxes Chinese resident nationals at 10% of their US-source income, and IRS wants 30%. And he claims he gets the treaty rate. Except he doesn’t.

OK, says Judge Cohen. But “Article 4 indicates that to be a resident of China for purposes of the China treaty, petitioner must show that under Chinese tax statutes and laws he was liable for taxation in [the year at issue] because he resided (or was domiciled or something to that effect) in China.” 2014 T. C. Memo. 173, at p. 11.

Zhengnan didn’t introduce any Chinese law or proof he was back in the PRC.

Anyway, five years before the year at issue, Zhengnan stated he was substantially present in the US, both in his return and his amended return, which he filed as resident alien.

And Reg. Section 1.871-5 says “Loss of residence by an alien.–An alien who has acquired residence in the United States retains his status as a resident until he abandons the same and actually departs from the United States. An intention to change his residence does not change his status as a resident alien to that of a nonresident alien. Thus, an alien who has acquired a residence in the United States is taxable as a resident for the remainder of his stay in the United States.” 2014 T. C. Memo. 173, at p. 16.

Zhengnan admittedly didn’t leave the US for another three years after the year at issue.

So he’s here because he’s here. And taxable accordingly.

And It’s Constitutional

While Parimal H. Shankar and Malti S. Trivedi make a to-do about the Constitutionality of the Section 219(a) IRA AGI adjustment (improperly called a deduction in the opinion) and limitation when applied to the self-employed spouse of an actively-participating employee spouse in 143 T. C. 5, filed 8/26/14, that’s not  what I’m aiming at in this blogpost.

Judge Halpern blows away the argument that Section 219(a) discriminates unconstitutionally against self-employeds by pointing out that self-employeds are not a suspect category (although I sure know a lot of self-employed types who are pretty suspect), and the IRA tax deduction isn’t a fundamental right. And Congress had a rational reason for precluding certain high-income joint filers from taking IRA deductions if one of them actively participated in a plan. See 143 T. C. 5, at p. 9, if you’re interested.

No, I find more juice in the “Thank You” points.

Parimal cashed in 50K “Thank You” points he got from Citibank, wherein he stashed his cash, apparently in exchange for his patronage. With the cashed points, he got an airline ticket to anywhere in the lower 48, Alaska and Canada. This is set forth in an affidavit from a duly authorized records custodian at Citibank. “Attached to the affidavit are documents and computer transcripts from Citibank showing that Mr. Shankar redeemed 50,000 thank you points…to purchase a restricted coach class airline ticket for travel in the lower 48 United States, Alaska, and Canada. Also attached to the affidavit is a letter… in which… the custodian of records for Citibank, represents that the fair market value of the airline ticket was $668.” 143 T. C. 5, at pp. 4-5.

The affidavit and attachments go in as business records (see FRE 803(6) and 902(11), and yes, Parimal and Malti got the 902(11) notice and the right of inspection).

Now Judge Halpern nails Parimal for unreported income for the airline ticket, despite Parimal claiming he never got it. Parimal has the burden, and his unsupported testimony doesn’t beat Citibank’s records. And Malti doesn’t show up for trial, so no testimony from her.

But why are the redeemed points income? “We are not here dealing with the taxability of frequent flyer miles attributable to business or official travel, with respect to which the Commissioner stated in Announcement 2002-18, 2002-1 C.B. 621, he would not assert that a taxpayer has gross income because he received or used frequent flyer miles attributable to business travel. Petitioners have provided us with no information concerning the reason Citibank awarded Mr. Shankar thank you points.” 143 T. C. 5, at p. 13.

And Parimal’s counsel didn’t object when IRS’ counsel said that unreported interest income was at issue here. Note the word “interest”; Judge Halpern does.

“We proceed on the assumption that we are dealing here with a premium for making a deposit into, or maintaining a balance in, a bank account. In other words, something given in exchange for the use (deposit) of Mr. Shankar’s money; i.e., something in the nature of interest. In general, the receipt of interest constitutes the receipt of an item of gross income.” 143 T. C. 5, at pp. 13-14.

And Parimal didn’t argue that the FMV of the airline ticket he said he never got was less than the $668 Citibank claimed it was worth.

But the best part is in the footnotes. And that’s my takeaway.

“Neither party has addressed, nor do we consider, whether award of the thank you points, itself, may have been the taxable event.” 143 T. C. 5, at p. 14, footnote 2.  The award, note well, not the redemption.

Aye, there’s the rub.

Practitioners, if you’re hit with a thanks-but-no-thanks, if the points were awarded and accumulated over years, especially years before the year at issue and now outside the SOL, make the argument.

And recipients of bank-issued largesse, remember: “Timeo Danaos et dona ferentes”. I need not, of course, translate.

No, not another child-of-Rand zeroing-out of the child credit, but we have got a child issue here. This is the story of Michael Swiggart, 2014 T. C. Memo. 172, filed 8/25/14, but it’s really about his hard-charging lawyer Eric William (“EW”) Johnson, Esq.

For the Rand story, see my blogpost “The Rebate Debate – Part Deux”, 11/18/13.

Mike files his return timely, claiming HOH but not stating the name, rank and serial number of the dependent who qualifies him for that status. Mike ducks, because he let the dependent’s mama claim the exemption for that year, which he doesn’t claim. Also Mike’s tax due is more than his withholding, and he doesn’t stump up the differential.

Mike is out on the differential, of course. But all is not lost, as IRS really loses the ball in the sun on this one.

IRS gives Mike a math error notice, with the usual “tell us in 60 days and we’ll abate the assessment”, thus setting Mike up for a SNOD if they don’t like his story. Sixteen (count ‘em, sixteen) days after the math error, IRS sends Mike a NITL.

Enter EW. He timely files the request to abate to the right address by certified mail. He timely files Form 12153, likewise certified and likewise to the address specified in the NITL. IRS replies to the math error letter with a letter with a number of inconsistencies, like EW isn’t authorized to represent Mike, but mails the letter to EW. Then Appeals rejects EW’s CDP with a NOD that looks pretty sloppy.

Judge Buch is not a fan of sloppy: “The notice of determination states that Mr. Swiggart raised and disputed the head of household filing status but also states that he made no challenges to the existence or the amount of the underlying liability. The notice of determination states both that the hearing occurred on January 11, 2012, with Mr. Johnson and that it occurred on January 17, 2012, with a representative named Nicole McGuire. It is clear portions of the notice of determination relate to another taxpayer’s hearing with a different representative.” 2014 T. C. Memo. 172, at p. 5, footnote 4

Mike timely petitions the NOD, and after IRS claims Mike had full opportunity to contest at the CDP, EW moves for summary judgment, conceding the underpayment of tax at HOH level, but contesting the rest. IRS caves on the classification, because you don’t need to claim dependency credit for the dependent that puts you into HOH status, just the magic days, and abates the excess to the extent thereof.

Mike wants administrative and litigation costs and fees. IRS, of course, says he didn’t prevail.

Oh yes he did, says Judge Buch. IRS argues Mike’s agreed shortfall was $7 more than the reclassification increase, but that’s not the issue. The issue was whether IRS wrongfully denied abatement of the math error notice and failed to recognize the law about abatement at the CDP. And here Section 6213(b)(2)(a) is mandatory; if the taxpayer disputes the math error, the assessment “shall” be abated, and deficiency procedures must be followed. IRS, to its credit, never claims that position was justified, because caselaw says that a CDP can’t cure an unabated disputed assessment on a math error notice.

And that’s the test. For the admins, what the IRS knew as of the date of the NOD is what counts.

Mike and EW can split $3100 in fees and costs. Of course, EW’s hourly rate is cut by at least one-third. But he can console himself with a Taishoff “Good job, first class”.

Oh yes, and Mike gets his $60 petition fee back.

IRS Com’r John (“Kosi”) Koskinen’s ringing endorsement of the Whistleblower Program, dated 8/20/14:

Click to access Koskinen%20whistleblower%20statement%20-%20version%20082014%20(2).pdf

With an “amen” from Deputy Dalrymple:

Click to access IRS%20Whistleblower%20Program%20Memorandum%20(signed%20by%20DCSE).pdf

Comment is superfluous.

Note, you may have to cut and paste the URL for Dalrymple and add the “f” after “pd”, as the wordprocessor for this blog doesn’t seem to assimilate the URL.

I read Tax Court orders the way sane people eat peanuts. And such reading can produce a mental equivalent to the physical result of having eaten too many peanuts.

But there are gems. And this one reminds me of the late John Florence Sullivan, better known as Fred Allen, master humorist, who invented the Vice-President in Charge of Leaky Dixie Cups.

From Judge Marvel: “The parties state in the report, among other things, that the parties have negotiated a comprehensive settlement proposal for the instant cases….The Office of the Assistant Attorney General for the Tax Division, U.S. Department of Justice, reviewed the settlement proposal and forwarded the proposal to the Joint Committee on Taxation (JCT)…. JCT completed its review of the proposal … and has forwarded the settlement proposal to the Associate Attorney General, U.S. Department of Justice, who approved the proposal. (R)espondent [IRS] made a referral to the Complex Interest Team, IRS Office of Appeals, for interest computations for the instant cases and the related refund suit. Upon completion of the interest computations, respondent will forward them to petitioner for review, and if agreed to by petitioner, a formal acceptance of the computations under the terms of the settlement will be issued to petitioner by the Assistant Attorney General for the Tax Division, U.S. Department of Justice.” Vail Resorts, Inc., Docket No. 894-10, filed 8/22/14.