As Congress ponders whatever Congress ponders, there wafts through the Capitol the Ogden Sunseteers’ latest hotflash, setting before the elected representatives of the people the lives and miracles of the Mighty Forty-Three who staff the Whistling Squad.

Our course, the Ogden Sunseteers once again justify their membership in the Charles Dickens Alumni Association, G. B. Shaw Division, by “demonstrations that the administrative departments were consuming miles of red tape in the correctest forms of activity, and that everything was for the best in the best of all possible worlds.”

There are some legislative proposals, the usual concern for the rights of the taxpayer and the protection of whistleblowers from retaliation, and the lament that the sequester cut down on the payoffs to those who negotiated the giant slaloms and moguls on the trail to the payout windows.

Here’s the story. http://www.irs.gov/pub/whistleblower/WB_Annual_Report_FY_14_Final_Signature_June_11-signed%20corrected.pdf

Petition

No, not the 1929 Billy Rose, Vincent Youmans and Edward Eliscu hit “Great Day,” which begins thus, although Charles M. Haden, Jr. & Shelley W. Haden, et al., Docket No. 18974-12L, filed 7/10/15, might cause them to shout “there’s gonna be a great day.”

IRS hit Chas & Shel with both a NFTL and a NITL.

While the NFTL sticks, because Chas & Shel never made a proposal as regards the equity in their home, which was the sticking point in the CDP regarding the NFTL, and Judge Goeke agrees, there’s something to be said for dropping the NITL.

Lifting the lien would leave IRS hanging for mucho diñero, as they say in Houston, TX, where this off-the-bencher was tried. Chas & Shel never contested liability, or dealt with the equity issue except to talk about it. And the SO was aware that Chas has Parkinson’s Disease.

NFTL stands.

But NITL is another story.

“Petitioners sought compromise of those liabilities but provided no concrete basis on which that compromise would have protected Respondent ‘ s interest in the equity in Petitioners’ home.

“However, we also note that a levy for the full amount of the tax liabilities and additions to tax would have left the Petitioners without any resources at a time when Mr. Haden was very ill.

“We also note that there was confusion as to the last conversation between the settlement officer and Petitioners’ representative regarding the…liabilities…. The settlement officer seemed confused about whether the Petitioners were seeking to obtain a loan on their property or needed more time to put the home for sale.

“The testimony is not consistent upon this, and the settlement officer himself admitted that his statement in the notice of determination was incorrect regarding the basis on which he decided to issue the notice of determination….” Order, at p. 10.

Now I’m sure, astute reader, you will say “Mein! Was ist das? Trial testimony on a CDP abuse-of-discretion review? What happened to the record rule?”

Well, Judge Goeke has some ‘splainin’ to do, and he does it.

“The evidence in this case consists of stipulations, exhibits, and testimony of the Petitioners, Petitioners’ representative at the time of the hearings before the settlement officers, and the settlement officers of the Internal Revenue Service.

“Respondent objected to the additional testimony, asserting that the Court should rely simply upon the administrative record in the case. However, the Court determined that the administrative record was insufficient to fully describe the circumstances of the interaction between Petitioners’ representative and the settlement officers.” Order, at pp. 2-3.

Anyway, at close of play Chas & Shel can keep their house for the moment, albeit with lien in place, as Judge Goeke decides that’s the least intrusive approach, balancing the interests of the US taxpayer (and I’m a big-time fan of the US taxpayer for personal reasons) and Chas & Shel.

Now the second part of today’s installment of Taishoff on Tax Court.

Peggy Moore Knoelke, et al., Docket No. 5422-12, filed 7/10/15, has real problems, which even that Obliging Jurist Judge David Gustafson can’t solve.

Peg’s cases had been closed by stipulated decisions last year. But now CDP notices rain down on Peg and hubby Mike.

Judge Gustafson: “Mrs. Knoelke stated that her husband recently had a stroke and lives in an assisted living facility and that she has power of attorney and guardianship over his affairs. Upon receiving the CDP Notices Mrs. Knoelke stated that she completed the appropriate Form 12153, Request for a Collection Due Process or Equivalent Hearing, and timely mailed them with the appropriate power of attorney forms to the IRS on behalf of her husband.

Mrs. Knoelke says she attempted to contact the IRS regarding the CDP Notices and Forms 12153, but that she was informed by the IRS that they did not receive either Form 12153 requesting a CDP hearing and that they could not speak to her regarding her husband’s tax matters because there was no power of attorney on file. Mrs. Knoelke stated that she has attempted to contact the IRS on several occasions with the same result. Mrs. Knoelke states that the IRS has begun levying payment from Mr. Knoelke’s social security benefits, despite the submission of CDP requests on his behalf. She contacted the Court to seek assistance.” Order, at pp.1-2.

The one thing Peg doesn’t have is a petition.

Judge Gustafson: “We do not have pending before us in this Court any petition for Mr. or Mrs. Knoelke. We therefore lack jurisdiction over any administrative dispute between Mrs. Knoelke (as power of attorney for Mr. Knoelke) and the IRS. Section 6330(e)(1) allows a taxpayer to file a petition in this Court to enjoin a levy action under certain circumstances, but no such petition has been filed by the Knoelkes.” Order, at p. 2

And he orders Peg to make note of this.

Judge Gustafson is such a good guy I’ll even forgive his characterization of Peg as “power of attorney for Mr. Knoelke.” No, she’s a “Representative,” according to Form 2848. The Form 2848 is a Power of Attorney.

So here’s a couple takeaways (hi, Judge Holmes).

Takeaway No 1. – Practitioner, don’t be buffaloed by the record rule. If the record doesn’t have everything it should have, move to permit testimony. But have a good reason why.

Takeaway No. 2 – The petition is the key to the Tax Court door. If you want the Tax Court door to swing open, remember the Orpheus of 106th Street, Edward Kennedy Ellington and Irving Mills in their 1931 classic: “It don’t mean a thing if it ain’t got that swing.”

No, this is not the Section 642 remotely-possible gambit; this is the Section 6751(b)(1) personally-signed-by-Boss-Hoss gambit, played by Larry and Lorna Graev.

That Obliging Jurist, Judge David Gustafson, saw merit to Larry’s and Lorna’s maneuver, and I, even I, applauded it. See my blogpost “Penalty Kick,” 7/17/14.

Well, though the “evil men do lives after them,” maybe so, the gambits live on.

And who better to plumb the depths of the 6751(b)(1) penalty dodge than The Great Dissenter, a/k/a The Judge Who Writes Like A Human Being, s/a/k/a The Indomitable, Illustrious, Irrefragable, Indefatigable, Incontrovertible Foe of the Partitive Genitive, His Honor Judge Mark V. Holmes?

In fact, so taken is His Honor with the clever stratagem of Larry’s and Lorna’s astute counsel, The Pride of Hackensack (good job, gang!), that in no fewer than three (count ‘em, three) designated hitters, he hands the open mike to counsel and petitioners in all therein, to mimic Fred and Ginger, and face the music and dance. And sing.

“Since one of the aims of Tax Court is the uniform interpretation of the Code, the parties should also note that in at least one similar case the taxpayers have raised an issue under IRC § 6751(b) when respondent asserts this penalty. See Graev v. Commissioner, Dkt. No. 30638-08. The issue has been extensively briefed in Graev, and may also be lurking in this case as well. If it is, the Court invites the parties to develop any relevant facts at trial and address the issue in posttrial briefs.” Anthony M. Kissling & Suzanne R. Kissling, Docket No. 19857-10, filed 7/9/15, at p. 2.

Getting the same invite are our old friends Kumar Rajagopalan & Susamma Kumar, et al., Docket No. 21394-11, filed 7/9/15. Kum and Sus starred in my blogpost “Old-Time Head-Banging,” 6/5/15.

Of course, exactly how counsel are to lay paws upon the extensive briefs of this issue buried in the Graev case (sorry, guys) is nowhere stated. Perhaps the Graevs’ counsel might let the fellow-sufferers take a wee gander.

No opinions from the Glasshouse at 400 Second Street, NW, today, but there’s a designated hitter from The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Imperturbable, Indefatigable, Illustrious, Irrefragable and Incomparable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes.

And this one comes from the same protester whose exhumation of the U. S. Court for China set up my final sobriquet for Judge Holmes.

The continuing saga of Robert A. Morgan, Docket No. 21778-14, filed 7/8/15, gives me my text for today.

Judge Holmes gave Robert A the Section 91(f) deemed-stipulated treatment and the Section 6673 yellow card. See my blogpost “Good Luck, and Sorry ‘Bout That,” 4/24/15.

Was Robert A downhearted? No!

“He nevertheless appeared at calendar call, and moved to dismiss his own case for lack of jurisdiction. His reason, as best we could tell, was that he didn’t recognize the jurisdiction of the United States over him. He did not explain why he brought a case in a court that he alleged had no jurisdiction.” Order, at p. 1.

Well, Judge Holmes, do you expect logic?

Whatever Robert A’s rationale, there was a SNOD and a timely petition, and Section 7459(d) says once that happens, a dismissal means entry of decision in favor of IRS.

When thus advised, Robert A asked for dismissal so he could appeal to Eighth Circuit.

Taking a leaf from Judge David Gustafson’s obliging jurisprudence, Judge Holmes hands Robert A a decision.

Of course, if Robert A is consistent, Eighth Circuit doesn’t have jurisdiction either.

I have a feeling Robert A is entered in the latest running of the Section 6673 Derby. I make him 8-to-5.

 Or, “Prejudge Not, Lest Ye Be Prejudged”

 Live and learn, I always say. In my blogpost “Deep in the Heart of Texas,” 4/10/15, I asked what State law has to do with prejudgment interest on transferee tax liability.

Judge Laro answered my question in Richard H. Cullifer, Transferee, Docket No. 20177-11, filed 5/13/15, which I just picked up. Sorry for the delay.

“In a transferee liability case the Commissioner is entitled to recover prejudgment interest to the extent that such interest is authorized under the applicable State law. See, e.g., Rubenstein v. Commissioner, T.C. Memo. 2010-274, 2010 WL 5071596, at *l-2.” Order, at pp. 1-2.

Though Judge Laro takes a look at Texas law, it really doesn’t matter. Texas law allows prejudgment interest from written notice of claim.

“Texas courts define a claim as ‘a demand for compensation or an assertion of a right to be paid.’ Respondent asserts that he notified petitioner of the claim in writing in the form of a letter… informing petitioner that a transferee liability investigation of petitioner was being conducted. On the basis of respondent’s characterization of this letter as a notification that respondent was conducting an investigation, we cannot conclude that it constituted a written notice of claim under Texas law. If respondent were to be entitled to prejudgment interest under Texas law, the prejudgment interest would therefore begin to accrue from the earlier of 180 days from respondent’s issuance of the notice of liability… or petitioner’s petition filing…. We need not examine whether respondent may be entitled to prejudgment interest post-dating the notice of liability. Respondent concedes that he is not entitled to collect prejudgment interest after the issuance of the notice of liability because section 6601 allows for interest to accrue as of that date. Respondent therefore concedes his entitlement to any prejudgment interest.” Order, at p. 2.

And anyway, IRS’s numbers for whatever interest IRS is entitled to don’t add up, and Cullifer’s do.

Always glad to learn, and pass learning along.

Or, This Hog Don’t Git Et

No, today’s installment doesn’t involve transfer pricing agreements, Section 482 minutiae, or multi-million-dollar deficiencies, like Eaton. Nor yet ammonia-scented Texan Midco deals, like Cullifer.

We’re down on the line with George Lawrence Starke, 2015 T. C. Sum. Op. 40, filed 7/7/15. George is no stranger to Our Nation’s Capital, having been a star lineman for the Washington National Football League team (the Team That Dare Not Speak Its Politically Incorrect Name), and is better known as “Head Hog” to a generation of football fans.

After his playing days, Head Hog started a training school for inner-city youths, a not-for-profit that taught automotive repair skills, using Head Hog’s Ford dealership as a base.

Head Hog shifted from running the show to fundraising, and eventually left.

Before he did, he ran up some impressive numbers on the company AmEx. Management decided to treat all the non-business items as advances to Head Hog, and docked his pay for some years. Head Hog thought the docking had to do with taxes or health insurance. IRS has a letter from the not-for-profit stating the policy of treating the personal plasticity as advances. Head Hog says he never saw that letter.

Now the SNOD here includes a couple years (hi, Judge Holmes) before the letter. And the SNOD is based on a 1099-MISC the not-for-profit sent Head Hog the year he left, which Head Hog never reported. And the year Head Hog left is the year at issue.

Judge Buch dives on the loose ball, and Head Hog is saved.

“Section 61 defines gross income as ‘all income from whatever source derived’. Income can include the forgiveness of indebtedness or compensation for services. In some instances, compensation can be advanced with services to be performed later. The distinction is an important one. An advance on services to be performed in the future is taxed at the time of the advance. In contrast, income from the discharge of indebtedness is taxed at the time ‘it becomes clear that a debt will never have to be paid’.

“Whether an amount is an advance or a loan turns on the question of whether a debtor-creditor relationship was established at the time the funds were disbursed. In the case of a loan, which is not included in income at the time the funds are disbursed, the parties agree that the amount will be repaid and the debtor-creditor relationship is established at the outset. However, an advance that is considered compensation for services, albeit services to be rendered in the future, constitutes taxable income in the year it is received.” 2015 T. C. Sum. Op. 40, at pp. 6-7. (Footnotes, and there are many, omitted).

Even though the not-for-profit docked Head Hog’s pay for the personal plastic, Head Hog claimed he didn’t know why. In any event, there’s no sign a debtor-creditor relationship was intended.

OK, so the plastics are advances?

Judge Buch doesn’t care: “Because we agree that the payments were not loans, we would ordinarily look to whether the payments are considered advances; however, whether the payments are advances is irrelevant in this case because all of the items recorded by [not-for-profit] as advances or prepaid expenses were recorded for years that are not before the Court. According to [not-for-profit’s] general ledgers, all of the payments were made before [year at issue]. Because advances are taxable for the year in which they are paid, any advance would have been taxable for years that are not before us.” Order, at p. 9.

Therefore, the adjustments in the SNOD are out (wrong year), and Head Hog owes no penalty.

And if the SOL has run on the years when advances were made, Head Hog is in the end zone.

The confusion concerning the role of State law in the Section 6901 transferee liability extravaganza goes on unabated.

Judge Lauber denies a two-week-old summary J motion from Red River Ventures I, L.P., Docket No., 3030-14 filed 7/6/15. And he does it without even waiting for a reply from IRS.

A real quick-kick, this.

And Judge Lauber’s reasoning?

After the usual bow to “movant has burden and non-movant gets all the breaks,” here’s the punchline.

“This case appears to involve an ‘intermediary company’ (or ‘Midco’) transaction that may be substantially similar to transactions described in IRS Notice 2001-16. Upon careful review of the parties’ filings to date, and viewing the facts and the inferences drawn from them in the light most favorable to respondent as the nonmoving party, we conclude that there are genuine disputes of material fact that preclude summary judgment. Important factual issues in this case may include the actual or constructive knowledge of petitioner, its principals, and its advisors; such issues are rarely, if ever, susceptible to resolution by summary judgment.” Order, at p. 1.

Now, does the subjective intent, or actual or constructive knowledge, of the transferee, against whom liability is asserted under State law, have anything to do with liability? It seems Wisconsin says no (see my blogpost “Gude Faith, He Maun Fa’ That,” 6/22/15, as Sandy Shockley comes unglued under Badger State law), but I don’t know that Texas really answers the question, and the Red River boys are in the Lone Star State.

Y’all recollect Richard H. Cullifer, the star of my blogpost “Cullifer’s Travails,” 10/8/14? Judge Laro found that Cullifer knowingly made the deal to defeat, delay and hinder IRS, especially since his trusty lawyer, Board-certified tax guru Robert Thomas, Esq., sent a bunch of warning shots in Richard’s direction.

But what if he hadn’t? What if Cullifer was a true innocent, unwarned by diligent and honest counsel, and inveigled into a scheme from a wily but superficially aboveboard fraud merchant?

More to the point, why is transferee’s state of mind relevant? Doesn’t the Uniform Voidable Transactions Act (or Uniform Fraudulent Transfers Act, although “fraudulent” may well be a misnomer) look to protect the creditor?

The ostensible taxpayer was stripped of assets, leaving the IRS to whistle for the taxes properly due on account of the strip. The stripper fled; and the Red River boys were sitting with some of the loot from the strip.

Of course, knowledge may go to mitigate or abate penalties. I doubt, however, that the penalty issue is what Judge Lauber is dealing with here.

Any Texas lawyers want to weigh in here?

That’s the sad plight of Steven N. Levi & Cristina Levi, Docket No. 10903-13, filed 7/6/15. Now I’ll bet you thought their troubles were over after you read my blogpost “Utterly Powerless,” 6/29/15, wherein Judge Dawson wiped out the MFJ 1040 filed by Ms. S., the attorney for Steve & Cris, which neither Steve nor Chris signed.

But wait, there’s more! Judge Dawson isn’t finished with Steve and Cris, because IRS isn’t finished with them either.

IRS asked for info on Steve’s health insurance and dog-breeding business, not one word of which appeared in the SNOD, or in the Answer or Amended answer.

So what is left to decide? A lot, says Judge Dawson. Even though the return isn’t valid, there is still a deficiency. A deficiency, remember, is the difference between what the taxpayer owes and what the taxpayer paid, not the difference between what’s on the return and what the taxpayer owes; that’s another issue, which can encompass, inter alia, as my white-shoe-wearing colleagues would say, fraud, underwithholding, and self-assessed-but-unpaid chops.

Judge Dawson goes back to 1956 to find that Fourth Circuit said Tax Court can determine a deficiency even where the return is invalid, and even when Tax Court thought it couldn’t. And Judge Dawson marches down the sands of time to the present, strewing “copious citations of precedent” over two pages to establish that Tax Court has jurisdiction to inflict other and further pain on Steve & Cris.

But the only deficiency before the Court is what IRS put in the SNOD, before the health insurance and dog-and-pony show.

So IRS should file a motion to amend the amended answer, and lodge (that is, submit) their proposed amendment to the amendment to the answer.

And remember, IRS, “Rule 41, Tax Court Rules of Practice and Procedure, governs amended and supplemental pleadings. Rule 41(a) covers amendments generally and provides in effect that after a responsive pleading is served or after 30 days if no responsive pleading is permitted, ‘a party may amend a pleading only by leave of the Court or by written consent of the adverse party’. Whether to grant leave to file an amendment to answer is a matter within the sound discretion of the Court, and the disposition of such a motion turns largely on whether the matter is raised timely so as not to unfairly surprise, disadvantage, or unduly prejudice the taxpayer.” Order, at p. 3.

So, IRS, if you want to do it, get on your bike, and Steve & Cris, have your opposition ready.

Of course, Judge Dawson did not designate this order. Heaven forfend that valuable practical information should ever find its way to the in-the-trenches preparer and adviser.

But have no fear, gang: Taishoff is here!

No, Everybody Not Named Kisha.

Before heading home for the day off, there’s a designated hitter from the Obliging Judge David Gustafson.

Judge Gustafson gets a lot of badly-prepared motions, it would seem. Here’s Kisha C. Rose-Wiley, Docket No. 27562-14L, filed 7/2/15.

Kisha got a SNOD, didn’t petition, got a NITL, and did petition.

“Ms. Rose-Wiley alleged, ‘I am not liable for taxes. I have not had income’, thus challenging the underlying liability, pursuant to section 6330(c)(2)(B). She did not check the box requesting ‘innocent spouse’ relief. The Commissioner alleges that, during the CDP hearing, IRS Appeals solicited from her an innocent spouse claim on Form 8857, but that she did not submit such a claim. Appeals therefore sustained the proposed collection.

“Ms. Rose-Wiley then filed a petition with this Court, in which she again alleges that ‘I have no earned income’ and that ‘I … have not been employed in the last 10 years.’ Perhaps as a result of Appeals’ characterization of her claim, she also asserts “Innocent spouse” status, but her assertion is ‘Innocent spouse due to non employment’. Order, at p. 1 (Emphasis in original).

Well, that’s a nonstarter for Section 6015 relief.

But IRS’s counsel missed something.

Filing for summary J, IRS claims Kisha and hubby Mario filed jointly for the year at issue. Now what do you need to attach to your motion papers?

“However, the Commissioner’s submission does not include a copy of the income tax return showing Ms. Rose-Wiley’s signature, and his motion does not cite any other evidence to support the proposition that Ms. Rose-Wiley joined in the filing of this return.” Order, at p. 2.

So it’s not a question of innocence, but liability in the first place.

“If in fact Ms. Rose-Wiley did not join with her husband in filing the return, then she would apparently prevail in her challenge to underlying liability—not pursuant to section 6015 as an ‘innocent spouse’, but because a return filed solely by her husband would apparently not support an assessment of tax against Ms. Rose-Wiley.” Order, at p. 2.

But obliging as always, Judge Gustafson sends IRS’s counsel on a paper chase—find the return or something that looks like evidence that Kisha signed a joint return.

Comment is superfluous.

It’s not a parlor game for Qinetiq U.S. Holdings, Inc. & Subsidiaries, as they lose a heavy-duty salary-and-wages deduction but gain a $13 million deficiency thereby, in 2015 T. C. Memo. 123, filed 7/2/15.

The case is also notable for Judge Goeke’s retirement from the partitive genitive war, as he apparently has abandoned his former alliance with Judge Mark V. Holmes; see my blogpost “Tax Court’s War on the Partitive Genitive,” 1/3/14, where Judge Goeke, dealing with the same case, enlisted in that war.

Back to taxes. Qineteq bought out a sub S started by two consultants. The outfit started with Consultant 1 and spouse, but spouse dropped out in favor of Consultant 2, and Consultants 1 and 2 renamed the sub S. The Consultants threw $1000 into a bank account and got all the stock in the renamed sub S.

Throughout the subsequent sub S’s career, the Consultants took distributions from the sub S but paid no SE. Though the stock was restricted, they never transferred any, or entered into employment agreements with the sub S.

They did have employment agreements with employees, to whom they issued restricted non-voting stock. This ordinarily would have torpedoed the S election, but Consultants got a Section 1362(f) whoops PLR, which put them back on the straight-and-narrow.

Qineteq buys out the Consultants for $123 million. Qineteq claims the stock was issued for continuous services, was subject to substantial forfeiture, and therefore was payment for services per Section 83. Thus ordinary income to Consultants and deductible by Qineteq.

No, says IRS, capital gains to Consultants, no substantial risk of forfeiture, and no deduction to Qineteq.

Judge Goeke: “We acknowledge there are cases suggesting that a broad reading of the applicability of section 83 is appropriate. See, e.g., Alves v. Commissioner, 79 T.C. at 876 (‘Congress * * * has clearly expressed the intention that section 83 is to have the broadest application’); Montelepre Systemed, Inc. v. Commissioner, T.C. Memo. 1991-46, 1991 Tax Ct. Memo LEXIS 65, at *19 (‘[T]he statute only envisions some sort of relationship between the services performed and the property transferred.’). However, on the facts and circumstances of this case, we conclude that petitioner has failed to prove the … stock was transferred in connection with the performance of services pursuant to section 83. Nonetheless, in this matter we believe the crux of our section 83 analysis is whether the… stock was subject to a substantial risk of forfeiture.” 2015 T. C. Memo. 123, at pp. 23-24.

It’s OK if you were somehow working there when you got the stock; but were you at serious risk of losing the stock?

There’s a five-way test for holders of substantial portions of voting stock, and Consultants 1 and 2 certainly did.

“Those factors are: (i) the employee’s relationship to other stockholders and the extent of their control, potential control and possible loss of control of the corporation; (ii) the employee’s position in the corporation and the extent to which he is subordinate to other employees; (iii) the employee’s relationship to the officers and directors of the corporation; (iv) the person who must approve the employee’s discharge; and (v) the employer’s prior actions in enforcing the provisions of the restrictions.” 2015 T. C. Memo. 123, at p. 25.

Nobody but the Consultants ran the shop, and their class of stock was only issued to them and no one else. Their stock was never transferred. But the decision seems to go off on the fact that the sub S ran very well, and neither Consultant wanted to oust the other.

And the Consultants stipulated that they always told the same story for tax purposes. They did; they never said they were getting stock for services, and whatever they got was dividends and not salary and wages.

I see an appeal coming. It’s not so clear-cut as Judge Goeke makes it out. We’ve all seen partners who really got on a treat taking up the battleaxes and using every move in the book when things turn sour. And that forfeiture never happened before doesn’t mean it’s so remote as to be negligible.

Stay tuned.