Attorney-at-Law

“THE SILT WE STIR”

In Uncategorized on 02/13/2015 at 17:31

Three years ago I quoted The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a the Irrepressible, Irrefragable, Illustrious, Indefatigable, Irreplaceable, Indomitable and Implacable Foe of the Partitive Genitive, Judge Mark V. Holmes. The blogpost was “The Great Dissenter”, 12/28/11, and Judge Holmes, in dissent of course, was making a simple, rational (and therefore never-to-be-realized) suggestion.

Quoting me quoting Judge Holmes, “Once again, Judge Holmes says it in a footnote: IRS could clear this up in the abusive shelter area by creating a single-track deficiency procedure, where both partnership and partners are in it together. 137, T.C. 17, at p. 44, footnote 3.”

The problem, of course, is the two-track TEFRA partnership-item vis-à-vis affected-item. And as Judge Holmes said way back when, ““(T)he silt we stir today will cloud the cases we plunge into tomorrow.” 137 T. C. 17, at p. 61.

This was the Randall J. and Karen G. Thompson case, various permutations and anfractuosities of which I have blogged elsewhere.

But Judge Cohen is now swimming in the silt in a designated hitter, Jason Chai, Docket No. 18330-09, filed 2/13/15. And this Friday the Thirteenth is an unlucky day for IRS.

IRS wants Tax Court to hold Jason in, when Jason wants out. Judge Cohen lets Jason out.

The original SNOD nailed Jason for $63K in tax and $12K in penalty. Jason petitions that, IRS answers, then amends its answer to increase deficiency and penalty ten-fold. It’s OK for IRS to amend: once a petitioner puts a year in play, it’s a free-fire zone.

Here, however, the amendment comes before a TEFRA is completed, which TEFRA when completed blows up Jason’s phony partnership. No need to cite US v. Woods, 571 US___ (2013). Tax Court has jurisdiction to apply penalties, but IRS waives the ten-fold penalty.

IRS then amends its amendment with a First Amendment to Amendment, claiming it won the TEFRA, so go ahead and let’s try Jason’s case with the ten-fold tax bash in.

But does Tax Court have jurisdiction over the amended TEFRA ten-fold tax bash? Jason says “no”, IRS says “yes.

IRS claimed they could ignore the then-undecided TEFRA issues and just disallow any partnership items. Yes, says Judge Cohen, they can disregard the partnership losses Jason claimed, but then Tax Court only has jurisdiction over whatever tax issues are completely unrelated to the TEFRA issues. Any items related to TEFRA must await the TEFRA results.

And even though, after the answer and amended answer had been filed and served, IRS won the TEFRA joust and amended yet again, that doesn’t empower Tax Court.

Remember, there are arithmetic issues and fact-determination issues impacting a partner after the TEFRA jumpball is finished. Fact-determination issues can he hashed out in the deficiency proceedings; mere arithmetic need not be.

Judge Cohen: “For purposes of the Motion to Dismiss, the critical inquiry then is whether the increased deficiency is an affected item that requires a partner-level determination before it can be assessed….. If the increased deficiency is an affected item that requires a partner-level determination before it can be assessed then the results of the … TEFRA partnership-level proceeding are properly applied to petitioner through the subchapter B deficiency procedures and the Motion to Dismiss should be denied. However, if the increased deficiency is not an affected item that requires a partner-level determination then the results of the … TEFRA partnership-level proceeding can only be applied to petitioner through a Notice of Computational Adjustment.

“The increased deficiency is not an affected item that requires a partner-level determination. There is no factual determination that must occur in the petitioner’s deficiency proceeding before respondent can apply the results of the TEFRA partnership-level proceeding. The disallowed losses from the TEFRA partnership level proceeding can be applied to petitioner’s 2003 income taxes regardless of the outcome of this deficiency proceeding (whether the $2 million at issue in this case is taxable non-employee compensation or a return of capital). Therefore, because the increased deficiency is not an affected item requiring a partner-level determination, section 6230(a)(1) requires that the results of the TEFRA partnership-level proceeding be applied to petitioner through a Notice of Computational Adjustment. As a result, the First Amendment to Answer did not cure the Court’s lack of jurisdiction over the increased deficiency, and the Court will grant petitioner’s Motion to Dismiss for Lack of Subject Matter Jurisdiction as to the increased deficiency.” Order, at pp. 4-5.

So now we’re back to what court Jason goes to hear the bad news. And will Jason get a whack at the whole story in a CDP? Whatever the result here, the word of Judge Holmes is justified.

 

 

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