Personally, it was only bad because a signal fire really fouled up the subway system, making the trip to the office, the Bloomberg BNA Tax Advisory Committee meeting and a client’s holiday party a sardine-packed series of jolts and jars and halts, followed by quarterback sneaks through mobs of furious riders.

But it was substantially worse for Larry J. Austin, 2014 T. C. Memo. 249, filed 12/11/14.

Larry wanted legal fees and admins after IRS admitted that all the cash in his various Korean bank accounts, though titled in Larry’s own name, wasn’t unreported income (only some of it was).

Judge Nega briefly chronicles Larry’s career. “Petitioner received his law degree from Harvard Law School in 1980. From the late 1990s through mid-2005 petitioner participated in and/or facilitated various listed transactions subject to disclosure under section 1.6011-4(b)(2), Income Tax Regs., including intermediary transaction tax shelters, tax avoidance using artificially high basis transactions, partnership straddle tax shelters, and distressed asset debt transactions.” 2014 T. C. Memo. 249, at p. 2.

As we used to say, “Harvard–because not everybody can go to Cornell.” NB- I was accepted for admission to Harvard Law School, but they didn’t give me a scholarship, unlike the Gang on The Hill Far Above. Thanks yet again, guys.

Larry joined the Dark Side, as managing director of Chenery Associates, Inc., peddler of dubious (to put it charitably) tax strategies. Larry was a distressed asset/distressed debt specialist. For more about Chenery, see my blogpost “House of CARDS”, 3/8/11.

Larry and IRS settle, with Larry giving up on most of what IRS claims were his delictions. But IRS gives Larry a lot of his Korean stash because IRS gets information from the crew in The Land of the Morning Quiet that they wouldn’t let Larry open up trust or escrow accounts. And Larry did use the money therein to buy Korean junk for his buddies at Chenery.

Larry claims his affidavit showed IRS they were wrong.

No, says Judge Nega, Larry’s word isn’t good enough. For admins, the question is how reasonable IRS was at the time the SNOD went out. For litigation (legals), was IRS reasonable when they answered Larry’s petition.

“Bank deposits are prima facie evidence of income, and the Commissioner does not need to prove a likely source of such income. The use of the bank deposits method has long been sanctioned by the courts. The bank deposits method assumes that all money deposited into a taxpayer’s account during a given period constitutes taxable income. When the bank deposits method is used, ‘the Government must take into account any non-taxable source or deductible expense of which it has knowledge.’ The taxpayer bears the burden of proving that bank deposits come from nontaxable sources.” 2014 T. C. Memo. 249, at p. 10. (Citations omitted).

Much cash went in and out of Larry’s Korean accounts. He reported the interest as income.

That Larry said “trust me and my partner”, and provided no Korean corroboration, doesn’t make IRS’ position unreasonable.

Larry loses.

And it doesn’t get any better for Spencer Hosie and Diane Rice Hosie, 2014 T. C. Memo. 246, filed 12/11/14, and Judge Lauber isn’t especially sympathetic to Spence’s and Di’s claim that IRS should have allowed their installment agreement.

“The SO rejected petitioners’ proposed installment agreement after determining that their tax liabilities could be fully or partially satisfied by liquidating or borrowing against their assets ($9.3 million of equity in their residence and vacation home). See Internal Revenue Manual (IRM) pt. 5.14.1.4 (5) and (6) (June 1, 2010) (‘Taxpayers do not qualify for installment agreements if balance due accounts can be fully or partially satisfied by liquidating assets[.]’); Boulware v. Commissioner, T.C. Memo. 2014-80 (finding that settlement officer’s reliance on this IRM provision was not an abuse of discretion). Petitioners made no showing of ill health, economic hardship, or other circumstance warranting an exception from this general rule. See Eichler v. Commissioner, 143 T.C. __, __ (slip op. at 16-17) (July 23, 2014); IRM pt. 5.19.1.6.3(2) (Apr. 1, 2011); id. pt. 5.14.1.4(5) and (6). Between 2009 and 2013 petitioners had defaulted on four previous installment agreements, one of which involved lower monthly payments than the $15,000 they now promised to make. The SO did not abuse his discretion in rejecting this offer.” 2014 T. C. Memo. 246, at p. 9.

There’s some jousting about a SNOD sent post-petition, and how Tax Court deals with that, but this blogpost is long enough.

Spence and Di are both lawyers, with a long history of noncompliance with tax laws.

For more about the Eichler case abovecited, see my blogpost “It’s Only A Notice”, 7/23/14.

Finally, and in these cases it really isn’t the lawyer’s fault, there’s the sad tale of Jeanne D. Bonney, who stopped practicing when she was disabled back in 2010. Her employer told her that they’d get another attorney in the firm to take over her cases, except they didn’t.

What they did do is go bankrupt back in March 2014.

And they left some eighty-six (count ‘em, 86) cases hanging fire, with trial dates coming up.

Nice book of business, if you can service it.

Jeanne fires off letters to Tax Court, asking to be let off. And various Judges issue orders to show cause to IRS and the taxpayers, asking them to show cause why Jeanne should not be turned loose, and suggesting the taxpayers find new counsel or try the cases themselves.

This is scandalous. I don’t know how disabled Jeanne was, so I can’t say she should have contacted the clients. And maybe she was unaware that her firm filed bankruptcy in March. I can well understand that she relied on what her firm told her. I would have done. Certainly, the clients can’t be faulted; they may not have been named as creditors in the bankruptcy. And I don’t know what the firm told them, if anything.

But what the clients should do now (some of these cases have 2008 docket numbers) needs something more than a “sort it out yourselves” from Tax Court.

Some heads should roll.

Flames Out

Back on October 21, when Judge Lauber imposed a gag-and-seal order on testimony in Amazon.com, Inc., & Subsidiaries, Docket No. 31197-12, I was moved to comment as follows: “I can just see Jeff Bezos standing, with flaming sword in hand, at the door of Centre Court, 400 Second Street, NW, driving away eavesdroppers and the idly curious from the sacred precincts.” See my blogpost “The Man Of Mystery – Revealed”, 10/21/14.

Well, today I am disappointed that The Great Jeff will be neither sitting nor standing at 400 Second Street, NW, nor anywhere else within the purlieus of Tax Court, much less with a flaming sword. Today, Judge Lauber favors us with 2014 T. C. Memo. 245, filed 12/10/14.

Therein, it is explained why corporate bigwigs need not testify if (a) to testify would impose an “undue burden” (which means the same thing as “burdensome and oppressive”, according to Advisory Committee Note to the 1991 Amendment to Rule 45, 134 F.R.D. at 668, but why you need different words to say the same thing eludes me) on the Boss Hoss, and (b) when various lord lieutenants, who hover round Hisself and are intimately familiar with the decision-making process, have already testified, or will testify, to the same stuff.

IRS gives The Great Jeff a trial subpoena ad testificandum (as opposed to a subpoena duces tecum, for which we had a ribald nickname in my days On The Hill Far Above). And of course The Great Jeff’s legal bomber wing moves to quash.

IRS seems at a loss to explain why they need The Great Jeff on the stand. “Respondent informed the Court that, if Mr. Bezos is called, his testimony ‘is likely to be less than a day.’ Counsel for respondent stated that, because Mr. Bezos had not been deposed, respondent might not call him as a witness even if the motion to quash is denied.” 2014 T. C. Memo. 245, at p. 6.

Besides, it’s the Christmas Rush, don’tcha know? The Great Jeff takes time from his busy day to sign an affidavit in support of the motion to quash in which he states that “…appearing at trial would require a significant commitment of time by Mr. Bezos and would cause a substantial disruption of his management responsibilities during Amazon’s peak holiday season.” 2104 T. C. Memo. 245, at pp. 4-5.

Too right! Jeff, get Herself’s presents here prontito! And don’t forget my children’s and grandchildren’s presents either.

Judge Lauber gets all judicial, however.

“The Court indicated that it would postpone ruling on the motion to quash until after petitioner had completed presentation of its case in chief, which would enable the Court better to assess respondent’s need for Mr. Bezos’ testimony. To date, the Court has heard 17 days of trial testimony, including the testimony of 21 Amazon fact witnesses. Of these 21 fact witnesses, six are or were members of Amazon’s senior leadership team, known at Amazon as the ‘S-Team.’ Members of the S-Team reported directly to Mr. Bezos, regularly attended meetings with him (including certain board of directors meetings), and were thoroughly familiar with his decisionmaking process and his customer-centric philosophy for running the company.” 2014 T. C. Memo. 245, at p. 5.

Moreover, “The Court has heard testimony from all relevant departments at Amazon, including technology, operations, finance, and tax. This testimony has spanned all periods of Amazon’s life as a public company, from 1997 to the present. The vast majority of the subjects listed by respondent have been covered by testimony of three or more Amazon fact witnesses, including senior level managers, middle managers, and junior staffers (who actually prepared the documents that are the subject of respondent’s interest).” 2014 T. C. Memo. 245, at p. 6.

Note that while the wigs may shuck and jive (and IRS’s wigs are good at it; see my blogpost “Walk Right In, Set Right Down”, 10/15/14), the PBI (that’s Poor Bloody Infantry, mate) will generally roll and tell all.

Worst of all, “Respondent [IRS] has not identified any relevant topic not covered by prior testimony or any subject about which Mr. Bezos is alleged to possess unique knowledge. Respondent did not seek to depose Mr. Bezos and indicated that Mr. Bezos might not be called even if the motion to quash were denied. Collectively, these facts demonstrate that respondent’s need for Mr. Bezos’ testimony is minimal and weigh heavily in favor of granting the motion to quash.” 2014 T. C. Memo. 245, at pp. 10-11. (Footnote omitted).

I wonder what would happen if a petitioner’s counsel did something like this. Sanctions, maybe?

WordPress.com tells me this is the fourth anniversary of my registration of this site. I congratulate myself.

No, not the Lloyd Bridges 1958 TV series; rather, this is the story of Adams Offshore Services, Ltd., Docket No. 5541-14, filed 12/9/14.

Adams was a drilling-baby in the Gulf of Mexico, sufficiently shelved on the North American Continent to fall foul of Industry Director’s Directive #1 – United States Outer Continental Shelf Activity, LMSB-4-0909-037 (October 28, 2009). And no, I didn’t know about it, either, but Section 638(1) places that part of the GOM, where Adams was drill-babying, within IRS’s grasp.

Apparently IRS searched some on-line nautical databases, and found Adams’ whereabouts. When IRS sent letters to Adams’ UK HQ, they were told that the person with the information wanted was dead. Further epistolary dealings revealed Adams had fled the fogs of Aberdeen, and finally revealed Adams fetched up in the warmth of Bahrain (and who would blame them, except that Aberdeen has 15-yr old Talisker whilst Bahrain is dry).

IRS’ crack Revenue Agent Tan Vuong had sussed out Adams’ whereabouts in the Emirate aforesaid and posted off a thirty-day letter to all three of the addresses found, and placed these addresses in the file. None of the letters came back.

But when crack Revenue Agent Tan Vuong forwarded his file to IRS Technical Services Office in Houston, TX (where one can both be warm and obtain whiskey), all the Texan Techies did was mail a SNOD to Aberdeen.

You can guess the rest, but I’ll tell you anyway.

Judge Dawson gets this one, and spends eleven (undesignated) pages on IRS’ losing motion to dismiss for want of jurisdiction.

First, Adams’ high-priced counsel argues IRS’ counsel violated international law. No, not torture, although some who deal with IRS might claim that. In this case, it’s the Convention on Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters, November 15, 1965, 20 U.S.T. 361 (The Hague Service Convention).

That doesn’t cut it, says Judge Dawson. ”In short, the Hague Service Convention is limited to the transmission of judicial and extrajudicial documents for service of process abroad. It does not apply to a notice of deficiency, which is only a determination of a deficiency before an administrative assessment is made by the Internal Revenue Service. Section 6213(c). A notice of deficiency is not a judicial or extrajudicial document contemplated by the Hague Service Convention.” Order, at p. 7, footnote 5.

Those of us who sat through Pennoyer v. Neff and Mullane v. Hanover Bank in a previous millennium vaguely remember that notice must be given with some reasonable chance of reaching the party entitled to same.

I guess Judge Dawson remembered that too.

“When, as here, the IRS is faced with choosing more than one possible last known address and is in doubt as to the correct one, the exercise of due care and diligence is necessary so that the notice of deficiency will be received by the taxpayer in time to file a petition in this Court for a redetermination of the deficiency. Confronted with three different addresses for petitioner and in doubt as to which one was correct, we think respondent did not use due care and diligence in sending the notice of deficiency only to petitioner’s Aberdeen Address. Although we recognize that the Internal Revenue Manual (IRM) does not have the force of law and is not binding on the IRS, respondent should have followed its own directive that ‘[i]f there is any doubt as to what the last known address is, additional duplicate original notices should be sent to each known address.’ IRM pt. 4.8.9.8.2.l(2) (July 9, 2013).” Order, at pp. 9-10 (citations omitted)

I understand IRS is short of money, but hopefully they can afford postage stamps.

From the Idiots’ Guide to Sports website: “One of the most common offensive penalties, holding is also one of the most costly: 10 yards. The official holds one arm with a closed fist against his body with the arm grasping the wrist. They say offensive blockers are guilty of holding on every play, but what the game officials are looking for is to see if the defender is unable to break free from the blocker’s grasp.”

Well, Judge Kerrigan won’t call offensive holding against IRS, because the players doing the holding are wearing the uniform of the United States Marshal Service (and it is undisputed the defender cannot break free, as he was sentenced to 45 years in the slammer).

That’s the story of Marvel Thompson, Docket No. 6536-13L, filed 12/8/14, a designated hitter from Judge Kerrigan.

Marv never bothered filing a return for the year at issue, but ever-obliging, IRS gave him a Section 6020(b) SFR, and threw in a SNOD, both at no extra charge. Marv petitioned the SNOD, and he and IRS settled, with the settlement agreement specifically providing “…interest will be assessed as provided by law on the deficiency and additions to tax due from petitioner.” Order, at p. 1.

Well, when Marv signed the agreement, the US Marshal’s guys had had his records, his funds, and of course Marv his own self, tucked well away for about eight years.

And the Marshal’s guys weren’t about to turn any of Marv’s funds loose, to the IRS or anybody else.

IRS sends a Notice of Jeopardy Levy (what the urgency is I can’t tell, as the US Marshal is not, so far as it known, about to flee the jurisdiction or secrete any funds) to Marv, and he sends off a Form 12153, claiming IRS delay attributable to the US Marshal, holding his money and not letting him pay.

Judge Kerrigan: “Petitioner does not point to any specific IRS employee or any specific ministerial or managerial act that would meet the criteria for abatement of interest pursuant to section 6404(e). He simply states that IRS employees helped with the criminal investigation that led to, and were present at, his arrest. And respondent agrees that ‘[t]he Government, including IRS agents, was involved in investigating and arresting [petitioner] on criminal charges that lead to a 45 year conviction.” However, the record reflects that it was the U.S. Marshals Service that held his funds, not the IRS. Even if the IRS did assist with the criminal investigation, such assistance does not qualify as a ‘ministerial or managerial act which caused an unreasonable delay’ such that an abatement of interest would be warranted.” Order, at p. 3.

Excuse me, Judge, but remember my blogpost “Getting Shifty”, 9/20/13? No? Well, take a peek.

If the US Attorney and IRS are on the same team, and the acts of one are attributable to the other, why is it that the US Marshal and IRS aren’t on the same team?

And besides, Judge, now that you’ve allowed IRS to levy, upon what will IRS levy? Marv’s funds in the hands of the US Marshal’s office?

Maybe I’m slow, but this don’t make a lot of sense to me.

Accord and Satisfaction

 Jeffrey A. Prussin and Judith M. Prussin echo the immortal words of Mick Jagger’s and Keith Richards’ 1965 hit in a small-claimer from Judge Kerrigan, 2014 T. C. Sum. Op. 107, filed 12/8/14.

J&J had a push-and-shove with IRS over excise tax for a couple years (as Judge Holmes would put it, but I wouldn’t) on a pension plan, which they and their attorney settled.

They signed off on the Forms 5330 and 4549-E for those years.

Jeff also had a problem on his personal return for another year, but paid up.

IRS came after J&J for interest. J&J claim IRS implicitly renounced interest when they settled.

No, says Judge Kerrigan: “The settlement of disputed tax liabilities is governed by sections 7121 and 7122, which authorize the Secretary or an authorized delegate to settle any tax disputes and compromise any civil or criminal case arising under the internal revenue laws. The procedures under these provisions and the applicable regulations are the exclusive means by which a compromise or settlement will be binding on both the taxpayer and the Government. Accordingly, ‘no theory founded upon general concepts of accord and satisfaction can be used to impute a compromise settlement’.” 2014 T. C. Sum. Op. 107, at pp 8-9. (Citations omitted).

And the Section 7122 regs require an OIC, with the tender of properly-completed Form 656, the payment and the fee and the supporting documents and all that jazz.

J&J didn’t.

Judge Kerrigan repeats herself: “However, petitioner husband testified that petitioners did not actually sign any agreement with the IRS. The record also does not contain any evidence of a signed Form 656. Since the regulations dictate the exclusive means by which a binding agreement can be reached, and those regulations require the signing of a Form 656, the fact that neither form was signed is fatal to petitioners’ claim. Petitioners and respondent did not enter into a binding agreement as required by the statute.” 2014 T. C. Sum. Op. 107, at p. 10.

Takeaway–when you settle, send in a Form 656 with all the necessary doodads, or get an explicit stipulation signed by someone at IRS with authority, stating you don’t owe anything else, whether interest, penalties or additions.

No, this one doesn’t run on Amtrak; this is the celebrated “streamlined” Section 6015 innocency streamlined procedure first enunciated back on January 5, 2012, in IRS Notice 2012-8, and later enshrined in Rev Proc 2013-34, 2013-43 RB 397.

Of course, the Sriram jumpball followed; see my blogpost “Diehl or No Diehl”, 6/21/12. But now that the Rev Proc is final, and Tax Court can no longer shuck and jive around it with the “blended approach” (which means whatever Tax Court says it means at any given moment), where are all the streamlined cases?

Well, since Christmas has apparently come early at 400 Second Street, NW, where there was neither opinion nor designated order yesterday or today, The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Inveterate, Implacable, Illustrious and Indefatigable Enemy of the Partitive Genitive, Judge Mark V. Holmes, leaps into the breach and shows us how a streamliner works.

It’s an off-the-bencher, which means it’s not precedent, can’t be cited, can’t be relied on and is first cousin to Lord Voldemort (“He Who Must Not Be Named”), but anyway, take a dekko at Catherine R. McDougall, Petitioner, and Thomas McDougall, Intervenor, Docket No. 2986-13, filed 12/4/14.

They’re community propertarians in sunny AZ, but the problem arises when Tom’s partnership, which was pre-marital, unloads some IA real estate in a condemnation, elects the three-year Section 1033 rollover, but blows the deadline because Catherine’s suing him for divorce.

IRS liens both Tom and Catherine, and when they unload the marital domicile pursuant to the divorce decree, the escrow agent (this is the Far West, where they don’t sit down at closings) hands IRS two checks, His and Hers.

Judge Holmes parses Rev Proc 2013-34, and finds Catherine innocent and streamlined, just like IRS did. Tom is apparently a shady character, although Judge Holmes doesn’t tell us how he reaches this conclusion.

Since it’s fact-driven and community-propertarian, I’ll leave off the analysis, but read Judge Holmes’ marked-up transcript (even though he missed an inappropriate apostrophe, he got most of them).

We now have some idea of how Tax Court might deal with a streamliner.

But Not Too Bold

George H. Patton & Felomina F. Patton should heed the words of the old English nursery tale of Mr Fox and Lady Mary.

Judge Lauber, the boy from Bronxville who got an MA from Clare College, Cambridge, where he doubtless heard a lot of English tales before gracing the Tax Court bench, has a sterner admonition for George and Fel today, in Docket No. 16365-12L, filed 12/3/14.

Remember the tale of George and Fel, the uncredited withholdings, uncredited payments, and the Great Flood that destroyed their records? No? Then see my blogpost “Raising Liability”, 7/1/13.

And George’s and Fel’s adventures continued, as more particularly bounded and described in my blogpost “Falling Behind”, 1/24/14.

As my fellow-blogger Peter Reilly, CPA, has remarked, I’m nothing if not thorough.

But George and Fel have come to the precipice, and Judge Lauber is about out of patience.

“On May 20, 2013, the Court warned petitioners against presenting frivolous arguments, or those that lack basis in law or fact. On February 20, 2014, the Court determined that certain of petitioners’ arguments were in fact frivolous.” Order, at p. 1.

Judge Lauber warned George and Fel again in May, showing them the Section 6673 frivolity yellow card.

Now IRS wants summary J. George and Fel must reply. I suggest they read the title of this blogpost before doing so.

Judge Lauber: “Petitioners are again advised that persistence with groundless and frivolous positions will result in the imposition of a penalty in an amount that will be no less than $15,000 and may be as high as $25,000.” Order, at p. 2.

And Judge Gerber Says It Ain’t Even Close

 Teresa Palomares a.k.a. Teresa Garcia has had a tough time of it, as 2014 T. C. Memo. 243, filed 12/2/14 makes clear.

Her refunds and credits were all being applied to the liabilities of her nogoodnik former spouse, who “…physically abused petitioner and threatened her with a gun. Petitioner sought assistance from Northwest Justice [a legal clinic] in connection with these events. From 2008 to 2010 Northwest Justice also assisted petitioner with her child custody battle, which lasted for two years, and her divorce proceeding. During the same period petitioner’s father, who lived in Mexico, was extremely ill, and her wages were garnished because of Mr. Palomares’ outstanding business obligations. These events and other stresses in petitioner’s life caused her to become depressed. The symptoms of petitioner’s depression included hopelessness, confusion, and forgetfulness. She was actively treated and took medication for her depression until sometime in 2010.” 2014 T. C. Memo. 243, at p. 5.

During her unhappy wedlock, Teresa filed jointly with Mr. P. When her refunds and credits were grabbed by IRS to satisfy Mr. P.’s delictions, Teresa turned to her friends at Northwest Justice.

Teresa spoke little English, of course.

The Northwesterners had her file Form 8379, Injured Spouse, to get back her misapplied moneys.

Of course, we battle-hardened tax veterans know the right form is Form 8857, Innocent Spouse, and the SOL is two years, but however expert the Northwesterners might be at Family Law, Tax Law isn’t their strongest suit.

Teresa can’t deal with IRS’s letter trying to suggest she file the right form (IRS uses English, and Teresa doesn’t, very much).

Finally, IRS agrees to allow a late-filed Form 8857 for whatever was collected in the past two years, but the rest is, as they used to say in the days of the Northwest fur trappers, “gone beaver”.

The Northwesterners want to claim “informal notice”.

Judge Gerber explains: “The informal claim doctrine is an equitable doctrine established by Federal courts that permits an informal claim for refund to suffice if it provides the Government with sufficient notice that a taxpayer is making a claim. A timely informal claim that meets the judicial standard can be subsequently amended and keep open an otherwise expiring period of limitation on making a claim. The sufficiency or adequacy of an informal refund claim is largely a question of fact.” 2014 T. C. Memo. 243, at p. 9. (Citations omitted, but add them to your briefs files).

But Teresa’s 8379 fails the test.

The IRS has to know what you want. The Form 8379 Teresa filed didn’t talk about all the years involved, only about one of them.

“Upon receipt of petitioner’s Form 8379, respondent was unaware of the details of petitioner’s personal life, her separation from her husband, or her belief that she should not be held liable for the 1996 tax liability. Though respondent’s September 24 letter notes that petitioner may have intended to file a Form 8857 and a copy of that form was included with the letter, this courtesy cannot be construed as reflecting Respondent’s awareness that petitioner was seeking a refund based on a request for relief from joint and several liability for the 1996 year.

“We hold that petitioner’s Form 8379 was insufficient to put respondent on notice that petitioner was seeking a refund on the basis of a request for section 6015 relief from joint and several liability for the 1996 tax year.” 2014 T. C. Memo. 243, at p. 13.

While Judge Gerber sympathizes with Teresa, he won’t stretch informal notice to include years not mentioned, or require IRS to research a taxpayer’s history to figure out what she wants or is entitled to.

If you want more on this depressing topic, see my blogpost “Lookback in Anger”, 12/12/11.

We all know that once you petition Tax Court for a given year, everything is on the table. In case anyone tuned in late, see my blogpost “Agree With Thine Adversary Whilst Thou Art In The Way”, 8/24/13.

Well, Illinois Tool Works, Inc., and Subsidiaries, Docket No. 10418-14, filed 12/2/14, tried to get around the principles CTSJ Panuthos enunciated in my blogpost abovecited, and doesn’t succeed; Judge Lauber, that distinguished alum of Clare College Cambridge U., lets IRS up the ante by a whopping $14 million.

The Illini were fighting over a payment from one of The Illini’s offshore subsidiaries to The Illini. The Illini claimed it was return of capital; IRS claimed it was a dividend and handed The Illini a $70 million deficiency.

IRS never mentioned a Section 6662 penalty, neither accuracy nor substantial understatement, in the SNOD, but sought to raise it in their answer. The Illini claim they’re being hit with understatement (Section 6662(d)), but IRS’s answer says accuracy (Section 6662(a)).

Whichever, The Illini claim that the Administrative Procedures Act, Chenery and Mayo Clinic don’t permit this.

Quick recap- For Chenery, see my blogpost “Chen-Chenery”, 8/21/14. For Mayo Clinic, see my blogpost “Carpenter, Colony, Chevron and Mayo”, 4/26/11.

The Illini want Judge Lauber to strike the penalty portion of the answer, claiming “…such assertion would be inconsistent with what petitioner describes as a prior ‘determination’ by respondent [IRS] not to assert that penalty. As such, the delayed assertion of the penalty would supposedly be analogous to a disfavored ‘post hoc rationalization’ by the agency.” Order, at pp. 2-3 (Citation omitted).

The Illini get a Taishoff “Good Try, Second Class”, but get a Judge Lauber “fuggedaboutit”, and he’s the decider.

In the first place, Tax Court won’t strike if the allegation has any cognizable legal basis. And this one has plenty.

Judge Lauber: “This argument clearly proves too much. Our Rules explicitly permit respondent to assert an increased deficiency or ‘new matter’ in his answer, Tax Court Rule 142(a), and Congress has specifically granted this Court jurisdiction to hear such claims. Section 6214(a) provides the Court with jurisdiction to redetermine a deficiency greater than that set forth in the notice of deficiency, ‘and to determine whether any additional amount, or any addition to the tax should be assessed, if claim therefor is asserted by the Secretary at or before the hearing or rehearing.’ On petitioner’s theory, such a determination would be impermissible because it would be inconsistent with a supposed prior ‘determination’ by respondent–embodied in the notice of deficiency–that a smaller deficiency was correct or that the new matter should not be asserted. That is clearly not the law. In this and in other respects, the specific procedures that Congress has ordained for this Court in the Internal Revenue Code may differ from the more general rules embodied in the APA.” Order, at p.3.

Lest IRS’s team slap themselves a premature “high five” at this point, Judge Lauber has a caution for them.

“This is not to say that respondent can delay with impunity in asserting a new matter or an increased deficiency. When respondent does so, our Rules require that the burden of proof be shifted from petitioner to respondent concerning the increased deficiency or new matter. Tax Court Rule 142(a)(1). That, rather than striking respondent’s pleading, is the ‘sanction’ imposed by our Rules. To the extent that petitioner’s motion advances other arguments, the thrust of which is that the penalty should not be imposed, petitioner is free to advance those contentions at trial and on brief.” Order, at p. 4 (Footnote omitted, but it says that IRS’s answer is clear enough, so IRS need not provide a more definite statement).

Takeaway–See my first-cited blogpost; if you can settle, settle.