Whipsaw and Reverse Whipsaw

No, not a pun on the 1958 William Gibson play about a seesaw (which I saw on Broadway with the second-string cast, Fonda and Bancroft having departed), nor yet the 1962 Mitchum-MacLaine variation (which I did not see, then or now), but rather two opinions out of Tax Court today, showing how the law tilts, sometimes.

A whipsaw is when two (or maybe more) people might owe tax, and IRS wants to grab them all, but IRS can only collect once.

First up, the reverse whipsaw, which will be explained infra, as my Hanger-Ten-Gibson-drinking colleagues would say.

Esther B. Crabtree, 2015 T. C. Memo. 163, filed 8/17/15. Esther cast off all lines from Dr. Anthony Girard, effectuating same by means of an “informally drafted” (Judge Lauber’s words) divorce agreement, wherein appears the following: ““Dr. Girard will continue to tender unallocated alimony/child support in the monthly sum of $5,232.00 for a continued 8 year period with the provision as long as Mrs. Girard should not remarry or cohabitate.” 2015 T. C. Memo. 163, at p. 3.

“Informally” is right. Start with unallocated, although Judge Lauber doesn’t have to go there. Child support isn’t deductible and isn’t income to recipient, but alimony is and is. So which is it? State law supplies the answer, and State law is all over the place. Your answer and mileage may well vary.

Eschewing that particular sandtrap, Judge Lauber goes off on dear old Section 71(b)(1)(D). What happens if Dr Anthony or Esther B. checks out before the continued 8 year period runs out?

You know the drill. Check State law, but Tax Court doesn’t get Talmudic or Thomistical; if it isn’t plain, read the agreement and decide.

Well, the Delaware divorce decree is unhelpful. Although the Delaware Court stamped the agreement, “(T)he Divorce Agreement was a voluntary alimony agreement without a judicial determination. Although it was stamped as an ‘order’ of the Family Court, that order explicitly states that it was entered ‘[w]ithout a hearing, without passing upon the substance, form, and/or fairness of the agreement, and without knowledge by the Court of the facts and circumstances concerning the negotiations of the parties.’” 2015 T. C. Memo. 163, at p. 7.

Delaware does have a provision for these informal agreements that says “(U)nless otherwise agreed by the parties in writing and expressly provided in the decree, the obligation to pay future alimony is terminated upon the death of either party or the remarriage of the party receiving alimony.” 2015 T. C. Memo. 163, at p. 8.

Delaware doesn’t say how two splitters must “otherwise agree,” but Judge Lauber finds a California case (and where would we be without LaLa Land law?) that requires “specific and express” agreement in writing.

So finding Delaware ambiguous (and any lawyer who can’t find an ambiguity in anything should turn in her/his license and consider a career at Amazon), Judge Lauber reverts to good old-time contract law, dusts off contra proferentem, and finds that, assuming without saying so that Dr Anthony did the informal drafting, if Dr Anthony or Esther B meant his death or Esther B’s to terminate the payments, they could have said so, but didn’t.

So the payments to Esther B aren’t alimony, and therefore not income to her.

“OK,” you’ll say, “you blogged the Section 71(b)(1)(D) death knell at least five (count ‘em, five) times before. We got the message. So whassup wit’ dis?”

Well, the year at issue is 2010, and if Dr Anthony filed timely and took the alimony deduction (and as we’re talking about $62K, I’ll bet he did), unless IRS hit Dr Anthony with a timely SNOD, it’s a closed year now.

So IRS can’t hit up Dr Anthony or Esther B. Reverse whipsaw.

Next, forward whipsaw.

Ethel Miriam Putnam, 2015 T. C. Memo. 160, filed 8/17/15, never bothered filing 1040s since 1989. She was also good at protester/defier stuff, but Judge Ruwe, patient to the last, finally wearied of Ethel Miriam’s disregard of his orders and threatened sanctions, and nails her for the whole enchilada. Plus nonfiling, non-estimateds, and the 75% fraud chops.

However, Ethel Miriam and hubby Mr. Putnam (nameless here forevermore) played put-and-take with bank accounts and dummy entities. IRS hit Mr. Putnam with a SNOD for the same amounts, but he didn’t petition.

Notwithstanding anything to the contrary elsewhere set forth herein, or at variance with the foregoing, IRS can’t figure out whether to nail Ethel Miriam or Nameless Putnam for all or part.

This is the forward whipsaw. Judge Ruwe expatiates: “Although Mr. Putnam did not file a petition in this Court, he is not precluded from paying the determined amounts and filing an administrative claim for refund with the IRS. Once the IRS acts upon the administrative refund claim (or after six months pass from the date of filing) Mr. Putnam can file a refund suit in the appropriate District Court or in the U.S. Court of Federal Claims. Thus, respondent’s [IRS] whipsaw position protects the public fisc in the event that Mr. Putnam prevails in a refund suit by establishing that the income at issue belongs to petitioner. In situations such as this the Commissioner is entitled to defend against inconsistent results by determining in separate notices of deficiency that two parties are liable for the same deficiency.” 2015 T. C. Memo. 160, at pp. 25-26. (Citations omitted).

IRS hastens to add, in the style of the late great Conrad Veidt, “we haf vays of protecting against dupple collection.”

“Internal Revenue Manual pt. 5.20.6.1.3(1) (Sept. 21, 2005) provides that ‘related case(s) should be controlled by a single revenue officer to monitor payments and prevent over-collection of the liability.’ If more than one revenue officer is assigned to the cases because of the localities of the taxpayers, the revenue officers are to closely coordinate their collection efforts to ensure that the liability is collected only once. Id. Therefore, the IRS has safeguards in place to ensure that a whipsaw assessment against both petitioner and Mr. Putnam will not ultimately result in collecting tax from two separate individual taxpayers on the same income.” 2015 T. C. Memo. 160, at pp. 26-27.

I’m sure Ethel Miriam is just thrilled to bits.