STJ Lewis (Oh, the grandeur of that name!) Carluzzo echoes the words of The Man From Bombay from the latter’s Boer War epic, as he regretfully dispatches Lowell William Fryman, Jr. & Elizabeth A. Fryman, Docket No. 15085-10S, an off-the-bencher filed 5/5/15, an unhappy Cinco de Mayo for Low Will and Elizabeth.

Low Will and Elizabeth, relying on legal advice, didn’t bother to put in evidence concerning the SNOD that got them before STJ Lewis. That’s because they expect their bankruptcy discharge makes whatever debt they owe IRS go away.

IRS says no, but that’s not the point.

“We find that petitioners maintained their bankruptcy argument in good faith, but they are mistaken with respect to their expectation that this Court in this proceeding would decide whether any tax liabilities assessed as a result of the decision to be entered in this case are subject to the relevant bankruptcy discharge order. See Neilson v. Commissioner, 94 T.C. 1 (1990). Our role in this proceeding is to redetermine the deficiencies determined in the notice. See Section 6213(a). We cannot in this case consider what effect, if any, the relevant bankruptcy discharge order has on those deficiencies or subsequent tax liabilities.” Order, at pp. 5-6.

Maybe a CDP might yield a different result (doubt as to collectibility?), assuming IRS’s doubts as to discharge can be dispelled. But that’s not the case here.

Low Will and Elizabeth have the burden of proof in a redetermination of deficiency case. They need evidence, whether or not they got “a discharge in this war.”

“That did not happen in this case. Instead, confident that their … federal income tax liabilities were, or would be discharged as a result of the bankruptcy proceeding, petitioners ‘put all of their eggs in one basket’, so to speak.” Order, at p. 7.

Even though Low Will and Elizabeth acted in good faith, that avails them not.

Deficiencies sustained.

Takeaway– Practitioners, beware. There is no discharge in this war. Tax Court has not the broad jurisdiction of Article III Courts.

Judge Nega has a quick refresher today on what is an equipment purchase (payments not deductible but capitalized) and what is an equipment lease (rent deductible if qualified under Section 162).

Here the equipment is a high-tech (but short-lived) CT scanner, acquired by Dr. Anil V. Shah and passed around to various entities under his control. Judge Nega sorts out the purchase-vs-lease issue (among others, principally the active-passive Section 469 miasma, with a constructive dividend thrown in), in Coastal Heart Medical Group, Inc., et al., 2015 T. C. Memo. 84, filed 5/4/15.

The CT scanner came from Siemens and had a five-year useful life (technology advancing at warp speed rendering old devices obsolete). The lease had a coequal term, and provided for purchase by the “lessee” at a price below FMV. One of Doc Shah’s entities deducted rent for the CT scanner, and the other deducted depreciation. And of course both flowed through to Doc Shah.

I give Doc Shah a Taishoff “good try.”

Judge Nega, on the other hand, gives Doc Shah a heart-stopping result (sorry, guys).

“Although there are no specific provisions in the U.S. tax laws governing the differentiation of true leases and conditional purchases, the substance of the transactions, not the form, will govern the nature of the lease. With respect to the transfer of equipment, courts have stated that factors indicating that a conditional purchase more likely exists include: (1) the lease term extends throughout the equipment’s entire useful life; (2) the sum of the rental payments approximately equals the cost of the equipment; and (3) the lessee has an option at the end of the agreement to purchase the equipment at a nominal or below-market price.” 2015 T. C. Memo. 84, at p. 14. (Citations omitted).

The Siemens lease is a purchase, guys, and there’s no deduction. 20% five-and-ten chop for Doc Shah.

Doesn’t work in Tax Court, especially if you sent the fax to the IRS and not to the Glasshouse at 400 Second Street, NW. And even if you did send a fax Glasshouse-ward, that’s no good. Only manually-signed “hard copy” need apply.

So Ch J Michael B. (“Iron Mike”) Thornton sends off Veronica Marcardo, Docket No. 26295-14, filed 5/4/15. And Ch J Iron Mike doesn’t even bother with the “pay the tax and sue” language.

Veronica sent a fax from the public library on day 90, and IRS graciously sent her a Letter 4313C, acknowledging receipt thereof.

That doesn’t get it. “She points out that she received a notice (Letter 4313C) … from the Internal Revenue Service thanking her for correspondence…. The Tax Court is separate and independent from the Internal Revenue Service. Thus, the fact that the IRS received correspondence from petitioner… does not establish that petitioner timely mailed her petition to the Tax Court. Also, petitioner’s motion for continuance is in fact a copy of a ‘successful fax transmission’ … purporting to show that 6 pages were sent by fax transmission to 1-877-477-9599…. Consistent with petitioner’s representations, the record reflects that the petition was initially faxed, although the number on the ‘successful fax transmission’ is a fax number for the IRS, not the Tax Court.” Order, at p. 2.

And of course there’s this: “The Court does not accept for filing petitions submitted by fax or other electronic means. Rather, a petition must be filed with the Court in paper form. See Rule 26(b)(1), Tax Court Rules of Practice and Procedure. Moreover, the petition was apparently faxed to the IRS, not the Tax Court.” Order, at p. 2.

It’s a many-times-told tale, and of course it’s usually told too late to those who need it, and uselessly to those who don’t.

As the old “tombstone” ads in the Wall Street Journal used to say, “This announcement appears as a matter of record.”

Isn’t good enough for Judge Marvel, not even if the IRS says so. That’s good news for James Durant Melton, Docket No. 30236-13L, filed 5/1/15.

Why good news? Because IRS isn’t getting summary J so fast to collect from James D.

James D. claims he only has Social Security, and that doesn’t cover half his living expenses.

Appeals said James D. never gave them evidence of his actual living expenses, but waited until James D. petitioned the NOD they gave him before saying so.

Sounds like a Chenery revisitation? See my blogpost “Chen-Chenery”, 8/21/14.

And Judge Marvel thinks so, too.

“Although the notice of determination does not explain why respondent’s Appeals Office sustained the proposed levy, see SEC v. Chenery Corp., 318 U.S. 80, 93-95 (1943); Antioco v. Commissioner, T.C. Memo. 2013-35, at *24-*25; Jones v. Commissioner, T.C. Memo. 2012-274, at *22-*23, respondent contends, in part, that it did so because petitioner failed to provide documentary evidence to support his claimed monthly housing and utility expenses. Respondent acknowledges that the Appeals Office did not allow any allowance for housing and utility expenses and contends that petitioner’s allowable monthly expenses total only $1,096. However, we are not limited to the administrative record in reviewing the Appeals Office’s determinations, see Robinette v. Commissioner, 123 T.C. 85, 101 (2004), rev’d, 439 F.3d 455 (8th Cir. 2006), and we are unwilling to accept without a trial respondent’s assertion that petitioner is not entitled to any monthly housing and utility expense allowance. In short, respondent has failed to convince us that there is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law.” Order, at p. 2.

OK, Chenery binds the administrative agency to the record it made and not the one it wishes it made, but doesn’t limit the Courts to that record.

But why not a remand to fill out the record? Wouldn’t that make more sense than leaving the case for trial? I doubt James D. will make such a motion, and I’m not betting on IRS’s counsel either, so maybe Judge Marvel might consider it.