No, not insurance. In this case Ch J Michael B (“Iron Mike”) Thornton has no time for IRS’ underwriting in W. A. Payne, Jr., Docket No. 1070-09, filed 10/7/15, today’s designated hitter.

W. A. was a Virgin Islander. When he settled with IRS six years ago, and the stipulated decision was signed by Ch J. Iron Mike (a decision in Tax Court is what we State-courtiers would call a judgment), a paragraph or two was written into the decision below Ch J Iron Mike’s signature, a practice that does not sit well with Ch J Iron Mike.

In the stipulated decision above Ch J Iron Mike’s signature, W. A. and IRS stipulated that W. A. had a $91K overpayment of tax.

In the underwriting, the parties agree W. A. got a $91K refund from the USVI even though his US withholding of $131K was never transferred from IRS to the USVI BIR. But nevertheless IRS will credit W. A. with the $131K withholding, and W. A. is entitled to nothing else for that year.

IRS never refunded the $91K, but first credited the $91K to W. A., and later moved it to an Excess Collection Account. So W. A. never got a break on his taxes or a refund.

But the underwriting is IRS’ ace in the hole.

IRS claims W. A. got paid by USVI, and so US owes W. A. nothing.

Ch J Iron Mike: “In the first place, the stipulations appearing below the undersigned’s signature on the decision document are not part of the Court’s decision and do not alter the Court’s determination that petitioner has a $91,995 overpayment….” Order, at p. 2.

The takeaway is so obvious that I will not mention it. This blogpost’s title says it all.

But Ch J Iron Mike isn’t finished. Here’s why the underwriting is defective, no matter where it shows up.

“In any event, the stipulations do not compel the result respondent seeks. In arguing that this transfer was made pursuant to the authority granted to respondent by section 6402, respondent speculates that the United States Virgin Islands could, hypothetically, request that the funds be remitted as ‘cover over’ under section 6402(e), in which event this Court would have no jurisdiction to restrain or review any such credit or reduction. See sec. 6512(b)(4). But respondent concedes that there has in fact been no credit or reduction of petitioner’s overpayment pursuant to section 6402. Accordingly, respondent’s speculations do not affect this Court’s jurisdiction over this matter pursuant to section 6512(b)(1), nor do they affect our determination in the stipulated decision that petitioner has a $91,995 overpayment….” Order, at pp. 2-3.

And IRS’ reliance on the “nothing else” language in the underwriting must be read with IRS’ agreeing that W. A. had the $131K withholding but never got credit for $91K.

So, IRS: “Respondent has offered no meaningful reason for now refusing to give petitioner credit for the $91,995 balance of his …withholding, consistent with the Court’s decision and the parties’ stipulation. Pursuant to section 6512(b)(2) this Court has jurisdiction to order the refund of such overpayment and interest.” Order, at p. 3.

So, notwithstanding Judge Gustafson’s statement in my blogpost “We Don’t Need No Stinkin’ Badges,” 4/2/14, that “the undersigned judge is unaware of any grant to the Tax Court of jurisdiction to compel any agency to cut a check or to give it directions in doing so”, not only does Ch J Iron Mike have jurisdiction, but he orders IRS to process the refund “immediately.” With interest.

That’s the lesson Judge Goeke has for William J. Kardash, Sr., Transferee, 2015 T. C. Memo. 197, filed 10/6/15. Bill and his pal Chas. Robb are fighting old battles o’er again, on a Rule 161.

Will and Chas. lost back on March 18 this year on a Section 6091, to do with a deferred (or maybe not deferred) compensation plan, so they’re trying reconsideration.

And they get reconsideration, but all that gives them is a Rule 155 beancount, because even though they’re right to an extent, all that does is massage the numbers.

Judge Goeke: “Petitioners contend that the Court erred in valuing FECP’s [the corporate vehicle] solvency by relying on petitioners’ expert’s high estimates of FECP’s tax liabilities instead of the Federal income tax liabilities as stipulated by the parties. Although petitioners did not initially agree to and stipulate the liabilities that respondent’s expert determined, we agree with petitioners that respondent’s estimates should have been used. Moreover, petitioners point out that the Court erred when stating Dr. Shaked’s business enterprise value for the valuation date December 28, 2005.” 2015 T. C. Memo. 197, at pp. 7-8.

You remember Dr. Israel (“Bring Home the Bacon”) Shaked, the star of my blogpost “The Scottish Play,” 6/19./12.

If Dr. Israel Shaked’s too high valuation is scrapped, the corporate vehicle wasn’t insolvent in the year at issue.

But that’s not the point, says Judge Goeke, although it’s the point of this blogpost.

Turning to State law (FL), “(A)lthough we now find that FECP was solvent during 2005, the transfers were still constructively fraudulent because they were part of a series of transactions that led to the insolvency of FECP. Therefore, we find that the transfers beginning in 2005 were fraudulent because the transfers were not for reasonably equivalent value and FECP became insolvent as a result of the series of transfers.” 2015 T. C. Memo. 197, at p. 10.

Will argues he paid income tax on some of what he got, so it’s unfair to hit him for the full liability. Maybe so, says, Judge Goeke, but that’s your problem, not mine.

“Mr. Kardash alleges that he is entitled to credits against his transferee liability for taxes paid on transfers as reported dividends. Mr. Kardash argues that the Government would receive an inequitable windfall if we refused to credit him with the amounts of tax he paid on the transferred amounts in 2005, 2006, and 2007. Reconsideration under Rule 161 is not the proper avenue; section 1341 is the appropriate remedy for Mr. Kardash in this situation.” 2015 T. C. Memo. 197, at p. 11.

Bottom line: Insolvency goes step by step.

I chose a small-claimer, Richard Irwin Wideman and Kristina Novak, 2015 T. C. Sum. Op. 61, filed 10/5/15, over a T.C. Memo of even date therewith, because of the way STJ Lewis (“Spell It Right”) Carluzzo deals with the Section 6662(a) accuracy penalty.

Here, both sides made substantial concessions post-deficiency and pre-trial, but IRS wanted the 20% chop computed using the entire deficiency (pre-concession).

“In his pretrial memorandum respondent [IRS] argues that petitioners ‘have failed to present respondent with sufficient information or documentation to substantiate reasonable cause or show that the understatement of tax… was not the result of negligence or disregard of rules of regulations.’ Respondent’s pretrial memorandum goes on to acknowledge his burden of production under section 7491(c) and argues that his burden has been satisfied because petitioners ‘have not complied with all substantiation requirements or maintained all records under the Code’.” 2015 T. C. Sum. Op. 61, at p. 14.

And Richard Irwin’s records were scanty at best on the points in dispute, and maybe even not so great on the conceded ones.

But IRS did concede a lot, so on those points how bad could Richard Irwin’s records be? True, Richard Irwin’s telephone deduction is not greater than IRS allowed because of the one-line-for-home-office rule, his miscellaneous expense deduction is shot down as entirely unexplained, and his casualty loss (or as mutated by Richard Irwin, a lawyer not admitted in Tax Court, into a loss of property used in a trade or business) is rejected on the law.

Shouldn’t the items Richard Irwin conceded be the only ones in the base for computing his accuracy (negligence) chop?

STJ Lew agrees.

“We are mindful that the failure to keep adequate records to substantiate expenses underlying claimed deductions can support the imposition of the section 6662(a) accuracy-related penalty on the ground of negligence, see sec. 1.6662- 3(b)(1), Income Tax Regs., but, for the most part, we agree with respondent only with respect to those adjustments petitioners conceded. With the exception of the deduction for miscellaneous expenses, the disallowances of the deductions addressed in this opinion are based upon technical reasons rather than lack of substantiation. We can envision a case where the mere disallowance of a deduction on a technical ground, in and of itself, could give rise to the taxpayer’s liability for a negligence penalty, but this is not that case. Petitioners are liable for a section 6662(a) penalty, but only with respect to the underpayment of tax attributable to: (1) the adjustments they otherwise conceded and (2) the disallowance of the deduction for miscellaneous expenses.” 2015 T. C. Sum. Op. 671, at pp. 14-15.

Takeaway– Concessions can reduce penalties. So can disallowances based upon the law alone.

And Then There Are Motions

IRS can dream up some good motions, but here’s one that really sets a high bar. It involves an old acquaintance, Marvel Thompson.

Remember Marv? Well, if not, check out my blogpost “Holding?”, 12/8/14. Now you remember Marv was fighting a levy for interest IRS claims he owed, but he claims he couldn’t pay the underlying tax timely because the US Marshals Service grabbed all his cash.

Marv was serving a 45-year stretch in the Fed pen. And he’s still there, and likely to be going no place soon.

Well, IRS, denying that the US Marshals’ grab in any way causes an abatement of interest, has a new twist, and it’s a beauty. The case is on for trial later this month.

I’ll let that Obliging Jurist, Judge David Gustafson, tell the story.

“…respondent (the IRS) filed a pretrial memorandum that states, ‘Respondent plans to file a Motion to Dismiss for Lack of Prosecution in the event that petitioner or his representative fail to appear at the trial calendar’, but that also states, ‘Petitioner is currently incarcerated in Federal Prison and is carrying out a 45 year sentence.’ The Court assumes that Mr. Thompson will not appear…; but without prejudging a motion not yet filed and explained, the Court considers it unlikely that it would dismiss this case on a motion filed by the Federal Government complaining that petitioner failed to appear before the Tax Court because the Federal Government is holding him in prison. It is therefore

“ORDERED that respondent consider using the available time to prepare not a motion to dismiss for failure to prosecute but rather a motion for summary judgment, since it may be that some or all of the issues in this case involve no genuine disputes of material fact and could be addressed by the parties filings, without requiring Mr. Thompson’s appearance in person.” Order, at p. 1.

Judge Gustafson is clearly a gentle human being. If I were the Judge…but no, that’s why I could never be a judge.

I almost forgot, because it’s nearly 2 a.m. here in Berlin. The order is Marvel Thompson, Docket No. 29498-12, filed 10/2/15.

The exclusions from taxable income of IRA distributions are few and narrow. There are no hardship exceptions, or medical expense exceptions except for expenses paid by taxpayer, for self, spouse or dependent, and then only to extent exceeds the 7.5% or 10% AGI limitation. And while reliance on expert may save taxpayer the penalties, it will not save the tax.

Here’s another example on a dull day, Cheryl Lynn Ireland, 2015 T. C. Sum. Op. 60, filed 10/1/15.

STJ Daniel A. (“Yuda”) Guy tells the story.

Cheryl Lynn is under the 59-1/2 plateau. Thus the Section 72(t) additional tax on her IRA distribution she used to pay her son’s medical expenses.

The problem is her son isn’t a dependent. “Likewise, section 72(t)(2)(B) limits the imposition of additional tax to the extent that retirement plan distributions do not exceed the amount allowable as a deduction under section 213 (i.e., ‘the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152 * * *)’). The record reflects that petitioner did not claim her son as a dependent for the year in issue and fails to demonstrate that her son met the definition of a dependent provided in section 152.” 2015 T.C. Sum. Op. 60, at p. 6.

Cheryl Lyn said her accountant told her it was OK to leave out the IRA distribution. That’s definitely a “no go.”

“Petitioner’s alleged reliance on the mistaken advice of her accountant does not excuse her from the obligation to include the IRA distribution in her taxable income for the year in issue or to pay the appropriate amount of Federal income tax and additional tax related thereto. See United States v. Boyle, 469 U.S. 241, 252 (1985); De Aycardi v. Commissioner, T.C. Memo. 1997-308, slip op. at 7-8 (‘Reasonable reliance on an agent may constitute a possible defense to penalties but not to the underlying tax [liability].’).

“Petitioner maintains that it would be inequitable to hold her liable for the additional tax due. We have considered similar claims in the past and have observed that there is no authority in the Code, the legislative history, or caselaw for a general financial hardship exception to the imposition of the 10% additional tax on early distributions.” 2015 T.C. Sum. Op. 60, at p. 7.

Tax Court doesn’t rewrite the law, Cheryl Lynn.