I end my blogposting trifecta today with an account of an accumulation trust that deftly uses the annual gift tax exclusion (then $12K per donor per donee) for sixty (count ‘em, sixty) of the trustors’ nearest and dearest to dodge both GST and gift tax, in Israel Mikel, 2015 T. C. Memo. 64, filed 4/6/15.

Is and Mrs Is gifted $3,262,000 of property in trust, filed the Form 709 late (after IRS was on their trail), but claimed they were under the unified credit because each of Is and Mrs Is gave $12K to each of the sixty.

This they did by virtue of a 30-day grab clause in the trust instrument. Each of the sixty, adult or minor, gets an annual notice, saying the trustees must turn loose, in cash or property, the lesser of a mathematical formula or the annual exclusion then in effect upon mere request, if given within thirty days of the notice. And everybody gets the annual notice.

Otherwise, the trustees, in their sole, complete, exclusive, unfettered and unreviewable discretion, can pay principal, interest and whatever to any beneficiary for education, to start a trade or business, or to have a nice wedding.

There’s an in terrorem clause. Although not favored in Our Fair State, this one passes muster. Whosoever challenges the trustees’ largesse, brings lawsuits or otherwise behaves like a grubbe yung (an arcane technical term which I need not translate) will get nothing, nichts, nada, rien.

Anyone with a gripe must go to a Beit Din. This is a Jewish rabbinical court, which, at least in the Empire State, is recognized as an arbitral entity, whose awards may be entered as judgments and enforced under our Civil Practice Law and Rules.

IRS engages in some argy-bargy about whether New York State will enforce an arbitration provision on one who does not explicitly agree thereto, but backs off, and raises a valuation question that Judge Lauber blows off as beside the point in a partial summary judgment motion.

While the trust instrument isn’t a “paragon of draftsmanship” (2015 T. C. Memo. 64, at p. 18), Judge Lauber says the in terrorem clause doesn’t render the demand rights of the beneficiaries illusory.

The thrust of the opinion is the reaffirmance of Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), rev’g in part T.C. Memo. 1966-144.

This masterpiece of tax planning is “an ingenious device to obtain an [annual gift tax] exclusion for a discretionary accumulation trust by giving beneficiaries the right to demand immediate distribution of particular amounts.” Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates, and Gifts, para. 124.3.3, at 124-13 (2d ed. 1993), quoted in 2015 T. C. Memo. 64, at p. 12.

IRS has acquiesced in Crummey for years, but now claims the in terrorem frustrates any demanding beneficiary from pursing their rights, so the demand right is illusory. No, says Judge Lauber, the Beit Din remains and isn’t covered by the in terrorem. Anyway, reading the in terrorem, it applies only when someone challenges the trustees when they give away, not when they refuse.

So the demand right is real, and Is and Mrs Is get partial summary judgment.

It’s only a small-claimer, so you can’t cite it as authority, but there’s good stuff for the family lawyer’s formbook in Joshua Henry Wish, 2015 T. C. Sum. Op. 25, filed 4/6/15. Although schoolteacher Josh gets nailed for a math error, it’s one of those rare cases where the taxpayer wins an alimony deficiency.

Josh and loved-once had one learning-disabled child, whom loved-once quit her job to homeschool. When their marriage expired, loved-once continued to homeschool, and wanted money to compensate her for lost earnings.

Without benefit of counsel, Josh and loved-once drafted their own stipulation, separately stating child support and spousal support, which stipulated provisions were incorporated in the divorce decree.

Child support had a phase-out provision, as did spousal support, both tied to a date certain. The spousal support also was cut if loved-once stopped homeschooling, and ceased altogether if loved-once remarried.

Judge Gerber: “The superior court ordered that the support payments be withheld from petitioner’s earnings. Under Federal law, generally, no more than a percentage of an employee’s disposable income may be withheld for support. Because of that limitation, petitioner made the remainder of the support payments by check or in cash.” 2015 T. C. Sum. Op. 25, at p. 4. Josh was able to substantiate what he claimed he paid.

Josh claims alimony (deductible), IRS claims child support (not), and Josh petitions.

The usual cases are clearly child-contingent (leaves school, reaches age 18, etc.). But here the issue is diminution of loved-once’s earning capacity.

“Petitioner and his former wife entered into the agreement that she would homeschool their child with the explicit understanding that their decision would cause financial hardship for her because she would not be able to work while performing the schooling. Under the terms of the written agreement and their understanding, it was solely within his former wife’s discretion as to whether she would go back to work or continue homeschooling their child. During the seventh month of the agreement under the divorce order, the former wife requested increased spousal support payments from petitioner, but he was unable or unwilling to pay more. Hence, petitioner’s former wife decided to return to work, and therefore the child was no longer homeschooled. That did not mean that the child was not schooled, because the child continued to be schooled, albeit at a different location, i.e., public school. Accordingly, the contingency was not whether the child discontinued school, but whether petitioner’s former wife was willing to make financial sacrifices by not working so as to provide the schooling.” 2015 T. C. Sum. Op. 25, at pp. 8-9.

Now, family lawyers, as Judge Holmes would say, pay attention.

“There is a clear and direct relationship between the amount of spousal support payments and his former wife’s choice to work. There was no contingency that depended on the child, who continued to go to school, albeit a different school. Under these circumstances the reduction in payments to his former wife was a reduction in alimony. We note that the child support remained at $1,200 both before and after the situs of the child’s school changed. We also note that the spousal support went from $3,800 to $1,900 after petitioners’ former wife went back to work. Finally, we note that respondent agrees that the $1,900 paid to petitioner’s former wife, both before and after the child changed schools was ‘alimony’”. 2015 T. C. Sum. Op. 25, at pp. 9-10.

Judge Gerber goes on to correct Josh’s arithmetic, as he took too many months’ worth of alimony in his numbers. But the one extra month he gets hit with is less than the five-and-ten chop IRS wants to hit him with, and much less than IRS’s somewhat idiosyncratic deficiency numbers. And Josh acted in good faith.

I might also add, Josh did better than a lot of lawyers.

No, not J. W. Howe’s seldom-sung fourth verse, from that November morning in 1861, when Julia sprang out of bed to write those famous words, lest she fall back asleep and forget them.

Rather, today we have an echo of my blogpost “Advance and Retreat”, 6/26/13. And it brings back Eaton Corporation and Subsidiaries, Docket No. 5576-12, filed 4/6/15, before STJ Daniel A. (“Yuda”) Guy, who is “sifting out the hearts of men before his judgment seat”, as Julia put it.

The sifting here involves whether Eaton and the gang relied reasonably and in good faith on the advice its platoon of tax advisers bestowed upon them. But in order to sift, it is necessary to know what such advice might have been.

Eaton and the gang claims it’s all client-attorney privileged, per Section 7525.

IRS, of course, demands discovery. STJ Yuda requires an in camera read-through, and demands of Eaton and the gang, in Julia’s words “Oh, be swift, my soul, to answer him! be jubilant, my feet.”

Eaton does, but how jubilant any portion of Eaton and the gang will be after reading Judge Yuda’s order remains to be seen.

STJ Yuda notes that the “material prepared in contemplation of litigation” privilege is a tent big enough to shelter Eaton, the gang and the advisers from “the morning dews and damps” the IRS seeks to inflict upon them.

“Considering all of the circumstances, we conclude that petitioner subjectively believed that litigation with the IRS regarding the appropriate TPM [Transfer Pricing Methodology] for its Puerto Rico operations was a real possibility at the time it requested and negotiated the APA [Advance Pricing Agreement; see Order, at pp. 2-3, and my blogpost abovecited for more]. Simply put, by early 2002 the parties had only recently settled a fairly long-running dispute regarding petitioner’s TPM for the taxable years 1994 to 1997. In that environment, although petitioner likely hoped that the APA process would prove effective and produce a lasting agreement, we understand how petitioner and its legal advisors remained concerned that the APA process could fail and that litigation with the IRS was likely to follow. As outlined above, the APA process is complex, it presents many pitfalls, and even an executed APA is subject to cancelation or revocation on various grounds. Although the APA process requires and is dependent upon the parties’ candor and cooperation, we believe that it would have been objectively reasonable for both parties to engage in the APA process while at the same time honing their arguments and strengthening their respective positions should litigation occur. On this record, we conclude that the documents under review that petitioner identified as work product were prepared because of the prospect of litigation and are otherwise protected from discovery.” Order, at p. 5.

And of course Section 7525(a)(3)(A) covers all us Circular 230 types as if we were attorneys.

So Eaton and the gang don’t have to tell IRS nuttin’, right?

Wrong!

Now comes the sifting.

“The documents under review show that petitioner relied heavily on its outside attorneys and tax practitioners in preparing its APA request and in the negotiations that led to the execution of the APA in April 2004. Recognizing that a reasonable cause/good faith defense under section 6664(c) is dependent upon a review of all the pertinent facts and circumstances, petitioner’s reliance on the reasonable cause/good faith defense in this case, and the averments in the petition related thereto, call into question a number of factual issues including (but not limited to) petitioner’s knowledge and understanding of the pertinent legal authorities governing APAs and the application of those legal authorities to the relevant facts, whether petitioner provided its attorneys and tax practitioners with accurate information and all of the facts material to its APA request and the negotiations related thereto, and whether petitioner abided by the advice that it received from its attorneys and tax practitioners. Petitioner’s communications with its attorneys and tax practitioners may be the only probative evidence of the state of mind or knowledge of the persons who acted on its behalf and those communications may tend to show, among other material facts, whether those persons in fact considered the APAs to be binding and valid in accordance with the provisions of Rev. Proc. 96-53, supra.

“In sum, petitioner’s reasonable cause/good faith defense puts into contention the subjective intent and state of mind of those who acted for petitioner and petitioner’s good-faith efforts to comply with the tax law. Assuming as we do at this time that petitioner persists in this defense, it would be unfair to deprive respondent of knowledge of the legal and tax advice that petitioner received in the course of requesting and negotiating the APA, and petitioner will forfeit the privilege to withhold the documents under review.” Order, at p. 10.

Hand it over, gang. Or take the risk on the penalties.

A reprise of my blogpost “Where Art Thou”, 5/21/12, but Marianne Pretscher-Johnson, Docket No. 14632-14L, filed 4/3/15, isn’t as lucky as Sean Devlin, the star of my 5/21/12 blogpost abovecited.

CSTJ Panuthos notes MPJ hasn’t filed returns for years, although she never claims she isn’t required to do so, and has left behind her a trail of SFRs.

This time, she admits she got an NFTL for one year at issue, and that went to the right address, but she never petitioned, so no NOD and no jurisdiction. So IRS has its lien perfected.

But MPJ claims as to the other two years at issue that she never got NFTLs, as whatever IRS sent went somewhere other than her last-known address.

Now on what ground a petition is dismissed for want of jurisdiction, as I’ve blogged before, matters. If petitioner never got the NFTL because it was misdirected, then no lien; but if mailed to last known address and petitioner missed the thirty-day cutoff to petition, the lien stands.

CSTJ Panuthos: “Respondent provided the Court with a certified copy of the Integrated Data Retrieval System, Command Code FINDS (Name Search Facility For An Individual, names and address information, using the Social Security Number) printout dated October 6, 2014 (FINDS report). The document reflects addresses used for petitioner by respondent during various periods from 1998 through 2013. Counsel for respondent explained that, since petitioner had not filed a tax return since 2001, the various addresses reflected for petitioner in this document after 2001 come from either the United States Postal Service National Change of Address database or from notice of a change of address provided to respondent by the taxpayer. The… address was petitioner’s address in the FINDS report from the third week of 2008 until the 37th week of 2013.

“Petitioner received a Letter No. 2797… requesting that petitioner update her address with respondent. Counsel for respondent explained that when respondent receives Forms 1099 or other third-party documents indicating an address different from the address in respondent’s database, respondent will send Letter No. 2797, because only direct notification to respondent or notification to the United States Postal Service is sufficient to cause respondent to change a taxpayer’s last known address in his database. When petitioner received Letter No. 2797, she did not provide a written change of address as requested in the letter. Petitioner asserts that…she called respondent at the toll-free number on the letter and confirmed that her address was X. Respondent has no record of this telephone call.” Order, at p. 2. (Address omitted).

Now comes facts and circumstances, and burden of proof is on petitioner to establish that she notified IRS of her change of address. Telephone calls don’t cut it. No proof of written notice knocks MPJ out of the box.

Takeaway–If you get a Letter 2797, reply by certified mail at once.

It makes a difference for Bernadette M. Greenwood, Docket No. 3731-15, filed 4/2/15, which I wish Ch J Michael B. (“Iron Mike”) Thornton had designated, as plowing through the 122 pages of Judge Wells’ exhaustive analysis of a VA tax credit disguised sale today nearly drained whatever little I have left in the tank. Don’t worry, I’ll spare you.

So going through five (count ‘em, five) pages of orders was tough duty.

Bernadette petitioned Bankruptcy Court and then petitioned Tax Court. We all know that’s a 11USC§362(a)(8) no-no, first class.

Bernadette wants Section 6015 innocent spousery. But she wants it for a year after the years covered by her Bankruptcy Court petition.

IRS isn’t buying. “…respondent [IRS] takes the position the automatic stay bars petitioner from filing her Tax Court case petition in this case, notwithstanding the amendment made to l1 U.S.C. section 362(a)(8) by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, effective for bankruptcy petitions filed on or after October 17, 2005. Respondent asserts that a notice of determination concerning relief from joint and several liability under I.R.C. section 6015 should be treated the same as a notice of deficiency or notice of determination concerning collection action.” Order, at p. 1.

Not since 2005, says Ch J Iron Mike. “…pursuant to 11 U.S.C. section 362(a)(8), a bankruptcy petition ‘operates as a stay applicable to all entities, of * * * the commencement or continuation of a proceeding before the United States Tax Court * * * concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief under this title’.”  Order, at p. 1. (Citation omitted).

Bernadette wants to deal with a post-petition tax liability. So she stays in.

IRS, see my blogpost “Read The Law”, 9/12/11. A lot changed in 2005.

Henrik Ibsen’s words from An Enemy of the People apply to Lana Joan Davidson, who stars in 144 T. C. 13, filed 4/2/15, with Judge Ruwe finding Ibsen’s words apply to the woman who stands alone.

Lana brought a petition for Section 6015 liability, but she wasn’t petitioning from a SNOD or a NOD. No deficiency or determination sustaining a NITL or NFTL was involved. Lana just wanted innocent spousery.

This is what is called a “stand-alone” Section 6015.

Judge Ruwe explains: “Section 6015(e) allows a spouse who has requested relief to petition the Commissioner’s denial of relief. Such cases are referred to as ‘stand alone’ cases, in that they are independent of any deficiency proceeding.” 144 T. C. 13, at p. 3.

OK, Lana’s in, but now she wants out. And IRS will let her out, even without prejudice (although her time to re-petition is gone).

But can Tax Court echo the immortal words of the St. James Infirmary Blues (“let her go, let her go, God bless her”), without sticking Lana with some kind of decision?

Section 6213, the deficiency definer, when coupled with Section 7459(d), prevents a petitioner from doing a dump-and-run, withdrawing their petition from a SNOD without suffering the consequences of a decision giving IRS whatever it asked for in the SNOD. This prevents a give-and-go delaying tactic.

Here, though, no deficiency in sight, so the Wagner rule, which permits a free bailout from a petition of a NOD sustaining a NFTL or NITL, should apply.

And after a canter through FRCP 41(a), Judge Ruwe lets Lana out. Here, answer was filed, but the parties agree Lana can bail. And there is no issue-preclusion here, either, because the petition here, if dismissed, is not a “prior proceeding” as defined in Section 6015(g)(2).

“Petitioner invoked the Court’s jurisdiction under section 6015(e)(1) to review respondent’s final determination denying her section 6015 relief. That was the only issue in this ‘stand alone’ section 6015 case. Congress has not required the Court to enter a decision upon the dismissal of a case such as this. Dismissal of this case through withdrawal of the petition has the same result as if the case was never brought. This also means that section 6015(g)(2) will not apply in any later case that petitioner may commence as to section 6015 relief. Section 6015(g)(2) is operative only if there is a ‘prior proceeding’. Dismissal of this case pursuant to the principles of FRCP 41(a)(2) will serve to treat this case as never having been a ‘proceeding’.” 144 T. C. 13, at p.10 (Citations and footnote omitted).

Remember, the Section 6015(g)(2) stick-‘em applies where the party sought innocent spousery in the prior proceeding and “meaningfully participated” therein. Section 6015(g)(2) won’t hurt Lana, but as aforesaid, her time to re-petition is gone.

So Tax Court has jurisdiction and, in exercise of its discretion, will dismiss Lana’s petition.

She also stands strongest who stands alone.

Give IRS credit, they’ll keep trying. They’re still pushing the two-step transferee liability theory for Section 6901 cases, even after being repeatedly rebuffed; see my blogposts “A Good Day For Taxpayers”, 3/15/11 and “The Rappers’ Tale”, 5/29/14.

Judge James S. (“Big Jim”) Halpern has even more reasons why the two-step doesn’t work in William Scott Stuart, Jr., Transferee, et al, 144 T. C. 12, filed 4/1/15. It’s no April Fools’ joke, either for IRS or for W. Scott and the als, his fellow shareholders in Little Salt Development Corp.

The Little Salties were unloading their saline ponds, basis of naught and FMV of $472K. The buyer sent them a letter from (drumroll) Mid-Coast Financial. You know the rest. Mid-Coast bought the stock, resold it, put money in a Little Salt account overnight (but not in escrow as they claimed), took it out and gave Little Salt a note for the money, which Little Salt took as a bad debt, wiping out the gain. Then Mid-Coast deactivated Little Salt. Of course there was a promise to pay the tax, but the promise was that Mid-Coast “would cause Little Salt to pay the tax”, but Mid-Coast didn’t guarantee payment.

The Little Salties argue statute of limitations, but State law said Little Salt remained alive while its affairs were wound up. IRS claimed substance-over-form based on Federal tax cases, but that didn’t fly.

“While the definition of persons considered transferees for purposes of section 6901 is extensive, the section does not independently impose tax liability upon a transferee but provides a procedure through which the Commissioner may collect unpaid taxes owed by the transferor of the property from a transferee if an independent basis exists under applicable State law or State equity principles or, in some cases, Federal law for holding the transferee liable for the transferor’s debts.” 144 T. C. 12, at p. 20.

So the Starnes case and the Swords case, each cited in my respective blogposts hereinabove aforementioned, control.

However, as they say on late-night infomercials, wait, there’s more.

“Before the enactment of the original predecessor provision to section 6901, the rights of the Federal Government as creditor of a tax debt were enforceable against someone other than the taxpayer only through procedures cumbersome in comparison to the summary administrative remedy allowed against the taxpayer himself.  The purpose of the change in the law was to provide for the enforcement of such third-party liability to the Government by the procedures already in existence for the enforcement of tax deficiencies. H.R. Conf. Rept. No. 69-356, at 43 (1926), 1939-1 C.B. (Part 2) 361, 371. The procedures were to be effective against a transferee of property of the taxpayer, but ‘[w]ithout in any way changing the extent of such liability of the transferee under existing law’. Id. at 43, 1939-1 C.B. (Part 2) at 371. Moreover, notwithstanding Congress’ enactment of a summary method for collecting a transferee’s liability, section 6901 is not the exclusive method for the Commissioner to collect a transferee’s liability. For example, the section does not replace the older judicial remedies of instituting proceedings to collect a corporate tax from its shareholders or to set aside a fraudulent conveyance.” 144 T. C. 12, at pp. 33-34. (Footnote omitted).

Judge Big Jim goes on: “Nothing in section 6901 accords the Commissioner any right not enjoyed by other creditors seeking to use the judicial enforcement mechanisms if the Commissioner proceeds outside of section 6901 to set aside a fraudulent transfer or to enforce against a transferee of property the transferor’s liability for tax. And if the Commissioner so proceeds, the question of whether the person against whom the Commissioner proceeds is a transferee within the meaning of section 6901 is moot. Section 6901 merely identifies those persons (transferees of property) against whom the Commissioner may employ the summary collection authority afforded to him by section 6901(a) once, independent of that section, he has fixed the person’s substantive liability under State or Federal law as a transferee of the taxpayer’s property. If without invoking section 6901 he could not fix that liability, then he cannot resort to his summary collection authority to obtain a different result.” 144 T. C. 12, at pp. 34-35.

But The Little Salties aren’t off the hook.

Judge Big Jim cruises through the Nebraska fraudulent transfer statutes, with a side trip to Bankruptcy Court, and decides The Little Salties are on the hook, but not for the entire unpaid tax. Under State law, they are liable for any benefit they received or that inured to them arising out of the fraudulent transfer.

That’s the difference between what they got once Mid-Coast got its cut for facilitating the charade, and what they would have had had they played the game straight. That’s less than the entire amount IRS wanted.

See 144 T. C. 12 at pp. 56-57, as Judge Big Jim does the numbers.