If You Want to be Taxed Thereon

 No, this is not The Weavers’ classic injunction to the union miners; au contraire, this is the story of a Harvard-Stanford trained venture-capitalist who sought to keep his hand upon the dollars locked up in his super-successful start-ups. And gets taxed therefor.

Come along with me, if you will (in the words of the late W. David Curtiss, Esq., from long ago and Far Above), as we follow the trail of Jeffrey T. Webber, 144 T. C. 17, filed 6/30/15, with Judge Lauber as our guide.

JT got a Cayman Island insurer to write two variable life policies on elderly relatives. Variable life means no fixed premium and no fixed benefit; the policyholder puts up cash or securities. These are investments, whose success or failure fund the policies. If the investments make money, the benefit goes up. If they lose, the policyholder stumps up enough cash to cover the mortality risk (actuarially-derived) of the insured life departing this vale of tears, and the benefit is whatever is left.

JT had a bushelbasketful of startups, a messy divorce, a couple kids (hi, Judge Holmes) and an allergy to income taxes.

His trusty lawyer puts him into these deals, warning him of the risks of “investor control.”

If JT lets the independent investment advisors furnished by the Cayman Islanders choose the investments and keeps his hands off same, all the accretion on the accounts is tax-free to JT, and when the old folks head to the last round-up, death benefits are tax-free to JT.

JT follows the paths of many clients: his lawyer can say what he likes, and JT does what he likes.

Though a set of trusts, from Alaska to the Bahamas to Delaware, and investment managers and banks, create an illusion of independent management, JT, via trusty lawyer, pays the piper and calls the tune.

Every investment is in one of the startups wherein JT already has a substantial stake. The advisers do whatever trusty lawyer tells them to do (of course with JT’s blessing on each and every act or forbearance), exchanging e-mails in which they call the biggest trust, fetchingly named “Boiler Riffle,” “Jeff’s Wallet.” Oh, those cutesy names. And, oh those e-mails, more than 70,000 discoverable ones.

Judge Lauber decides that Skidmore deference is due Rev. Rul. 77-85, 1977-1 C.B. 12.

You remember that “Skidmore deference…is the lowest. If Mayo deference is the equivalent of ‘Aye aye, sir’ and salute the quarterdeck, then Skidmore is the equivalent of ‘yeah, ok’, ranking just above ‘meh’.” This is from my blogpost “The Junk Mailer Gets Trashed,” 10/24/13.

And even though Rev. Rul. 77-85 had to do with annuities, and even though a USDCDC case threw it out, the Circuit Court of Appeals reversed the case for want of jurisdiction. And IRS has been telling the same story time out of mind.

If your hand is on the dollar, or the means whereby the dollar is realized, it’s your money for income tax purposes.

So JT gets nailed.

But trusty lawyer wasn’t an enabler; he didn’t get more than his usual hourly rate. And relayed JT’s orders to the Caymans. But he did do some due diligence, had credentials, knew the whole story, and JT didn’t understand variable life insurance and its anfractuousities.

JT beats the 20% chop.

Once again we visit Form 2848, to see what it cannot do. That Steven N. Levi and Cristina Levi learn the hard way; thereby hangs the tale of 2015 T. C. Memo. 118, filed 6/29/15.

And it is a cautionary tale, both for preparers and their clients. The form doesn’t solve all your problems. In fact, it can be a landmine. Read the instructions, then the Regs therein cited, and govern yourselves accordingly.

Judge Dawson: “…petitioners hired Florida attorney S to prepare their Form 1040, U.S. Individual Income Tax Return…. …petitioners executed Form 2848, Power of Attorney and Declaration of Representative, appointing Ms. M and her assistant, Misty…, as their representatives. Ms. M prepared, signed, and timely submitted petitioners’ … return on their behalf, attaching thereto Form 2848, which states in relevant part: ‘Acts authorized. * * * the authority does not include * * * the power to sign certain returns’.” 2015 T. C. Memo. 118, at p. 2. (Names omitted).

In fact, an agent (not a power of attorney; a power of attorney is a piece of paper. An agent is one who acts by virtue of a POA) cannot sign a 1040 or other return except as set forth in Reg. 1.6012-1(a)(5).

Check out that Reg. And make sure you remember it. If you want the “good cause” exception, spell it out and file it in the right place (and attach it to the POA as well, for good measure), and get clearance as stated in the Reg, before you file the return. Ms. M may be getting The Phone Call; don’t y’all get it.

Steve’s and Cris’ attorney appears, disappears and asked to be restored. This is done, but none of Steve nor Cris nor attorney reply to IRS’s request for admissions. These track Reg. 6012-1(a)(5).

“The return of income may be made by an agent if, by reason of disease or injury, the person liable for the making of the return is unable to make it. The return may also be made by an agent if the taxpayer is unable to make the return by reason of continuous absence from the United States (including Puerto Rico as if a part of the United States) for a period of at least 60 days prior to the date prescribed by law for making the return. In addition, a return may be made by an agent if the taxpayer requests permission, in writing, of the district director for the internal revenue district in which is located the legal residence or principal place of business of the person liable for the making of the return, and such district director determines that good cause exists for permitting the return to be so made.” Re. 1-6012-1(a)(5).

That’s it, guys.

So the return Ms. M filed is no return at all. Even if IRS processed it, that doesn’t make it a return. So nonfiling chop follows, and if underpayment of withholding or ES, that follows too.

The ongoing love affair between Tax Court and Chenery I and Chenery II (see my blogposts “Chen-Chenery,” 8/21/14, “He Loves Chenery,” 12/17/14, and “Chenery on the Roof,” 2/4/15) hits a snag when STJ Lewis (“Oh What a Name”) Carluzzo confronts Chenery meeting a SNOD.

All the cited blogposts and cases referred to therein involved abuse-of-discretion challenges to NODs after CDPs.

Today, it’s a SNOD (claimed to be invalid) in Jeremy Edwin Porter & Ruth Ann Porter, Docket No. 16966-14, filed 6/29/5.

Jer & Ruth claim the SNOD is invalid, so toss their petition.

One asserted ground for invalidity is that the SNOD they got doesn’t have all the pages that were found in the administrative record. So what, says STJ Lew. It says you owe $X for Year A. A SNOD need not take a prescribed form, or list every reason for assertion thereof. If it has the amount and the tax year, that’s enough.

And a SNOD may be factually erroneous, but that doesn’t invalidate it.

Besides, Chenery applies to abuse-of-discretion.

“While this Court has applied Chenery in reviewing notices of determination concerning collection action in collection proceedings brought under section 6330(d), we have never applied Chenery in the context of a deficiency case. It is well established that deficiency cases are reviewed de novo, and, except in limited circumstances, the Court does not look behind the notice of deficiency. In a deficiency case, the Court’s ‘determination as to a petitioner’s tax liability must be based on the merits of the case and not any previous record developed at the administrative level.’ Consequently, Chenery is inapplicable here.” Order, at p. 3. (Citations omitted).

Jer & Ruth try the Administrative Procedures Act, but STJ Lew blows that one off. “To the contrary, this Court has held that the APA does not modify provisions of the Internal Revenue Code. (‘[T]he APA does not limit or repeal our de novo review procedures.’)….In this respect, the specific procedures that Congress has prescribed for this Court in the Internal Revenue Code may differ from the more general rules embodied in the APA.” Order, at p 4. (Citations omitted).

And the IRM doesn’t help Jer & Ruth, because IRS needn’t follow it, and anyway it gives no rights to taxpayers.

https://search.yahoo.com/yhs/search?p=clip+art+rainbow&ei=UTF-8&hspart=mozilla&hsimp=yhs-001

No, I am not going to discuss recent decisions from the Supremes, that is to say, not on this blog. My personal political views are well-expressed elsewhere, so no philippics, polemics or preaching here.

It’s bad so far today, and getting worse, for Mark T. Obermeyer, Docket No. 2626-15, filed 6/26/15, as STJ Lewis (“The Name That Sings in My Heart”) Carluzzo bounces Mark’s petition for a Rule 34(b) failure to state a claim.

Mark’s upset about the 10% youth chop on his retirement fund drawdown, and his disallowed student loan interest deduction.

OK, but why should either thereof be overturned?

Well, Mark has a rant, but no reasons: “…he disagrees with the IRS determination because of: (1) in light of the Economic Stabilization Act of 2008, he needs a bailout himself; (2) alleged discrimination against conservatives and others who regularly pay their taxes; and (3) alleged IRS misconduct (a) in paying bonuses to IRS employees who failed to pay their taxes, (b) in not properly administering tax credit programs used by others, and (c) wasting money in making certain Obama Care payments.” Order, at p. 1.

Mark, I feel your pain, as a certain ex-President remarked. Maybe you should run for Congress. But Tax Court is not the place to start.

And see my blogpost “Add A Zero,” 6/26/15. An $8800 hit may be a lot worse for you than for some of my readers.

Judge Holmes made it clear to me at last month’s US Tax Court Judicial Conference that all judges’ remarks were strictly off the record.

As a responsible journalist (and even more as an attorney), I am bound by that directive. It is disappointing, as I hoped for really good blogfodder.

But there is one comment, made at a public meeting, which I believe I can quote here, without attribution of course, as it sends us all a message.

“Add a zero,” said the judge.

The judge was speaking of the small-claimer, the Section 7463 Sum. Op. or the Section 7459 off-the-bencher, not precedential and certainly not headed for Circuit Court review.

This case means as much to the taxpayer-petitioner-pro se litigant as the full-dress T. C. with the last six digits omitted means to the multinational publicly-traded behemoth. If not more to the little guy or gal.

No compensation committee of the Board of Directors meets to determine their bonus, if any. And the little guy or gal, though they may be bought and sold, are not publicly-traded.

Now I’ll get off the soapbox, although I’ve been on it before. By way of illustration of the foregoing, as my already-out-on-the-golf-course colleagues would say, see my blogpost “A Rant,” 3/7/13.

So while we may wonder at the multi-year fight over a four-figure deficiency where even the pennies are not omitted, the judge got it right.

To the litigants it matters. It matters very much.

So add a zero to such as Stephanie Lynn Christie a.k.a. Stephanie Lynn Foran, Petitioner and Arthur J. Maurello f.k.a. John Foran, Intervenor, Docket No. 24515-12S, which took up four (count ‘em, four) blogposts over two years, and only ended yesterday (see my blogpost “Dénouement,” 6/25/15).

Not only were the legal points of intervention and summary judgment of interest to practitioners, but the two-grand-vs-four-grand deficiency tussle becomes much more real to us if we deem this dispute to be a fight over twenty grand.

So add a zero.

I feature an ending to each of two blogposts today.

Let’s take the older first, the ongoing Section 6015(b) saga of Stephanie Lynn Christie a.k.a. Stephanie Lynn Foran, Petitioner and Arthur J. Maurello f.k.a. John Foran, Intervenor, Docket No. 24515-12S, filed 6/25/15.

Steph and Arthur a.k.a John led poor Scholar John Schmittdiel, Esq., IRS’ doughty trial counsel, a merry chase through intervention and apportioned intraspousal liability, but the end is that Steph gets off the hook for $4K of tax.

To reprise the tale, see my blogposts “Tax Court Admission Exam,” 9/6/13, “He Passed the Exam,”1/9/14, and “Go To the Head of the Class,” 3/26/14.

Now Judge Buch delivers an off-the-bencher that wraps up the whole shootin’ match that took three years’ time and four orders, plus Scholar John’s post-graduate education.

“If a spouse has petitioned the Court for section 6015 relief, the non-requesting spouse has a right to intervene in the case under section 6015(e) (4). Corson v. Commissioner, 114 T.C. 354 (2000); Rule 325. By doing so, the Intervenor becomes a party. Tipton v. Commissioner, 127, T.C. 214, 217 (2006).” Order, at p. 3.

OK, Scholar John, you’re vindicated.

But via discovery, it turns out that Steph and Arthur a.k.a John had a joint brokerage account with TD Ameritrade, whence flowed Steph’s tears.

Arthur a.k.a John made a mistake when toting up the income from said account. And it was one of those finger-fehler that torpedoes the whole shebang.

Judge Buch explains: “When totaling the income from the TD Ameritrade account, Mr. Maurello made what the parties have characterized as mere mistake, understating the income by $121. Under the operation of the earned income tax credit rules, that $121 error resulted in a deficiency of over $4,000. The reason is that additional $121 of income resulted in the former couple’s having ‘excessive investment income’ as that phrase is used in section 32(i). And the result of that is the denial of their earned income tax credit.” Order, at p. 4.

Such a booboo gives rise to a thunderous exclamation, the first word of which is “Oh.” The second I cannot print in a blog meant for family reading.

So while the record is unclear, everyone seems to admit the account was a joint account, meaning the item isn’t Arthur a.k.a John’s alone, but Steph is right in there with him.

But all is not lost for Steph. Though the Section 6015(b) separation is lost, Section 6015(c) comes to the rescue.

“Ms. Christie is eligible for relief under section 6015(c). Under section 6015(c), a divorced or separated spouse may elect to limit liability for a deficiency on a joint return to the portion of the deficiency that is allocable to her under subsection (d). The election may be filed at any time after the deficiency is asserted but not later than two years after the Secretary has begun collection activities. Sec. 6015 (c) (3) (B).

“Additionally, the electing individual: (1) must no longer be married to or must be legally separated from the individual with whom the joint return was filed; or (2) must not have been a member of the same household with the individual with whom the joint return was filed during the 12-month period before the election was filed. Sec. 6015(c) (3) (A).” Order, at pp. 5-6.

Steph and Arthur a.k.a John met the 12-month cutoff, and, while Steph knew there was a joint account, she didn’t have actual knowledge (and Judge Buch stresses actual knowledge) that Arthur a.k.a John’s arithmetic was dodgy.

So Judge Buch cuts the deficiency in half, giving Steph gets half and Arthur a.k.a John the rest.

Now I don’t know what the famous divorce decree, which Arthur a.k.a John claims apportioned income tax liability but which Judge Halpern disregarded, said, but if the result is the same either way I wouldn’t be a bit surprised.

Next is my blogpost “The Right Stough?” 6/4/15. My colleague Joel E. Miller, Esq., unconfused me this morning as a New York State Bar Association Committee meeting.

What Judge Ruwe said was “cumulative” rent, in other words rent from inception of lease to end of tax year wherein the lump-sum tax payment was made. That amount is contrasted with the “cumulative” rent for the next tax year. If next year exceeds previous year, no prepaid rent. And next year must exceed previous year if even one dollar of rent was paid next year (and clearly more was paid).

Thanks, friend Joel. I am unconfused.

See my blogpost “Even More Impressive,” 1/5/15, wherein I expressed my admiration for the cursus honorum of Judge Tamara W. Ashford, when the 400 Second Street, NW, webmeister got around to posting the same.

Mighty impressive.

As I said at the time, “I look forward to posting many scintillating opinions from Judge Ashford.”

Well, this is what a talented jurist encounters amidst the sixty-buck seekers of justice.

“Upon due consideration of the record herein and for cause, it is hereby

ORDERED that respondent’s Motion to Dismiss for Lack of Prosecution, filed June 1, 2015, is granted, and this case is dismissed for lack of prosecution. It is further

ORDERED and DECIDED that there is due from petitioners a deficiency in income tax for the taxable year 2011 in the reduced amount of $8.00.”

Robert S. Heronimus & Tracy Heronimus, Docket No. 15245-14S, filed 6/24/15.

The immortal words of Robert Allan Zimmerman echo once again: “Twenty years of schooling and they put you on the day shift.”

No, not the Doc Pomus-Mort Shuman classic immortalized by Ben E. King and the Drifters (still going strong a year ago February on the Legend of the Seas).

Alas, this is the sad story of Charles D. Trainito, 2015 T.C. Sum Op. 37, filed 6/23/15.

Charlie had Type 2 diabetes, which ratted him out of the Boston Department of Environmental Health (DEH), where his job was to lift heavy manhole covers to deposit rat bait thereunder.

Charlie took a draw out of his City of Boston Retirement Account, claiming he was disabled. Six weeks thereafter, Charlie went into a diabetic coma, spent nine days in the hospital, and filed for disability.

But on the day he took the draw, was Charlie disabled?

Judge Nega says Charlie didn’t prove he was. Though Charlie and his two lawyers had 300 pages of medical records describing his coma and post-coma treatment (I’ll spare you the details, but Judge Nega goes through the whole list), on the day he drew, Charlie had nothing but his own testimony.

True, Section 72(t)(2)(A)(iii) gets you off the hook from the 10% youth chop if you take a draw from your retirement account while disabled, but Charlie needs more than his say-so.

“Petitioner testified at trial that, following his diagnosis with diabetes in 2005, he saw a primary care doctor twice per month until his resignation from his job with DEH in October 2010. However, despite receiving frequent treatment, petitioner did not produce any medical records relating to these visits, nor did his primary care doctor testify on his behalf. Nor did he produce any records that would corroborate his claims that he suffered from depression at any point before the distribution….

“Petitioner argues that he was disabled within the meaning of section 72(m)(7) because he suffered from diabetes, or alternatively, that he suffered from depression. However, notwithstanding the severe medical event petitioner experienced…, the relevant date we must consider is [date of distribution], because section 72(t)(2)(A)(iii) requires that the distribution be attributable to the taxpayer’s being disabled. A taxpayer may not escape the 10% early withdrawal penalty by suffering a disability at just any point during the tax year; rather the disability must be present at the time the distribution is made.” 2015 T. C. Sum. Op. 37, at pp. 7-8.

It’s this magic moment, when you’re both disabled and taking the draw, that counts.

No good, Charlie, 10% chop.

Or, Petition Early, Petition Often

See my blogpost, “Fake Out,” 12/16/14. IRS is at it again with another specimen from its cubby of happy tricks, feints and ruses.

Here’s the story of Bernard Hope, Docket No. 7198-15S, filed 6/23/15, told by Ch J Michael B. (“Iron Mike”) Thornton.

Bernie’s petition was postmarked 3/2/15 (dates are important here, although I usually omit them).

Annexed thereto were “(1) a Letter 525, dated April 22, 2014, proposing changes to petitioner’s 2012 return and attaching a Form 4549, Income Tax Examination Changes, and a Form 886-A, Explanation of Items, detailing those changes; (2) a Letter 692, dated October 6, 2014, affirming the prior proposals for 2012; (3) a Letter 525, dated October 6, 2014, proposing changes to petitioner’s 2013 return and attaching a Form 4549 and a Form 886-A detailing those changes; (4) a Letter 3501, dated January 20, 2015, advising that the IRS was still reviewing information sent by petitioner regarding 2013; and (5) a Letter 692, dated February 17, 2015, affirming the prior proposals for 2013.” Order, at p. 1.

What’s wrong with this picture? No prize for the correct answer, but we all shouted “No SNOD!”

So IRS plays the fake-out gambit, moving to dismiss because no SNOD. OK so far.

But wait, there’s more!

“Respondent [IRS] further explained that notices of deficiency for 2012 and 2013, copies of which were attached to the motion, had been issued to petitioner on March 10 and March 30, 2015, respectively.” Order, at p. 1.

Well-played, IRS, drop the bomb after Bernie filed.

Responding to the motion to dismiss, Bernie claims “…that reliance had been placed on a statement in the Form 886-A accompanying the Letter 525 dated October 6, 2014, and reading as follows: ‘Your time to petition the United States Tax Court will end on 03/02/2015. However you may continue to work with us to resolve your tax matter, but we cannot extend your time to petition the United States Tax Court beyond 03/02/2015.’ Petitioner additionally emphasized, and attached supporting documentation corroborating, that the petition had been mailed via the United States Postal Service on March 2, 2015. Given those circumstances, petitioner maintained that respondent’s attempts now to characterize the just-quoted statement as erroneous were irrelevant and disingenuous.” Order, at p. 2.

Yes, Bernie, but Tax Court has limited jurisdiction, and no SNOD, no jurisdiction, no matter what misinformation, disinformation or other claptrap IRS may have fed you.

So Bernie is out?

Not so fast.

Bernie is a counter-puncher, and nails IRS with a quick left hook.

“However, review of Court records reveals that an available remedy for petitioner has been preserved. Specifically, the Court on June 15, 2015, received from petitioner a new petition for 2012 and 2013, bearing a postmark dated June 8, 2015, and thereby timely within the period prescribed by section 6213(a) or 7502, I.R.C., as to the notices of deficiency for both years. That petition was filed to commence a new case at Docket No. 15321-15S.” Order, at p. 3.

Takeaway—File early, file often. If IRS gives you the wrong advice, file anyway. When they get around to sending the SNOD, file again and apply for a filing fee waiver based on earlier filing provoked by IRS misinformation. Maybe misleading info can’t confer jurisdiction, but it could save you sixty bucks, maybe. I can’t tell if Bernie asked for a waiver for Petition No. 2, but it’s worth a shot.