Bohdan (“Bo”) Senyszin, a RA who went to the Dark Side, ripped off his partner Hook extensively. Bo copped to a Section 7201 fraud count in consequence thereof, possibly to shield spouse Kelly L. from going down with him.

Bo even filed a 1040X, which IRS didn’t process, supposedly correcting the phony return that sent him down, and, IRS claims, thereby admitting that he had unreported income. Bo claims the judge on the criminal case made him do it.

But Bo now claims he paid back Hook more than he stole in the same year that gave rise to the deficiency IRS claimed, and there should be neither deficiency nor penalty. Bo claims the IRS agent who computed the deficiency goofed on the numbers.

Judge Halpern agrees.

But isn’t Bo collaterally estopped (claim preclusion) from fighting over the deficiency from tax fraud conviction?

Judge Halpern says no.

I blogged Bo’s misadventures as a would-be whistleblower before now, but in the meantime Tax Court decided that, while Bo’s conviction provided “strong evidence” of a deficiency, the exact amount didn’t need to be determined and this was up for grabs. To the same effect, see my blogpost “Orders in the Court,” 3/9/12, where former RA Al Bront, likewise a Dark Sider, gets to fight over a penalty even though he copped to a fraud count or two.

IRS claims there has to be a deficiency, because you can’t be guilty of Section 7201 skullduggery unless there’s a deficiency. Of course, Bo prepared a phony tax return for the corporation he was using to rob Hook. One can commit tax fraud by concealing or creating someone else’s deficiency; cf the rogue preparers.

So Bo gets a full-dress T.C., Bohdan Senyszyn and Kelly L. Senyszyn, 146 T. C. 9, filed 3/31/16.

Bo did rip off Hook, but the RA who took down Bo after Bo’s whistleblowing blew up left out some repayments and journal entry transfers that show that, for the one year at issue, Bo gave back more than he took from Hook.

Hook claims Bo stole more, but only one year is at issue. And if embezzled funds are income, then paying them back in the same year is a deduction.

Bo does earn a Taishoff “good try, third class” by asking for a refund since he paid back more than he stole, but the SOL has run on that one.

Judge Halpern: “We previously determined that, because the exact amount of petitioners’ underpayment of tax was not a necessary element of tax evasion under section 7201, ‘Mr. Senyszyn’s stipulation in his criminal tax proceeding does not collaterally estop him from challenging respondent’s adjustment for unreported income in this civil proceeding.’ Nonetheless, the existence of some underpayment was a necessary element of the offense for which Mr. Senyszyn was convicted.” 146 T. C. 9, at p. 23.

So Bo had to have had some underpayment. There’s a split between circuits as to whether the amount need be “substantial,” but that’s not the point here.

“…we conclude that the purposes of the doctrine [collateral estoppel] would not be served by upholding a deficiency unsupported by the evidence presented. Upholding a minimum deficiency would not promote judicial economy: Even after Mr. Senyszyn’s conviction under section 7201, we were required to hear this case to determine the amount of petitioners’ deficiency. And any inconsistency between Mr. Senyszyn’s prior criminal conviction and a decision that petitioners are not liable for any deficiency would not undermine ‘reliance on judicial action’, because the inconsistency would result not from conflicting findings by different courts but instead from Mr. Senyszyn’s entry of a guilty plea to a charge that the evidence–at least as presented to us–would not support. Therefore, we decline to apply the doctrine of collateral estoppel to uphold whatever minimum deficiency would be consistent with Mr. Senyszyn’s conviction under section 7201.” 146 T. C. 9, at pp. 27-28. (Citations and footnotes omitted).

Bo is off the hook for the year at issue, and Kelly L. doesn’t need innocent spousery, as there’s no deficiency.

Will IRS appeal? Stay tuned.

A favored CLE topic proves the undoing of Estate of Victoria E. Dieringer, Deceased, Eugene Dieringer, Executor, 146 T. C. 8, filed 3/30/16.

Judge Kerrigan has this case study.

Old Vic had the majority of the voting and non-voting shares in the family real estate management C Corp. Old Vic set up an inter vivos trust, which got all Old Vic’s property poured over when Old Vic bowed out. In addition, Old Vic set up a charitable foundation, which was supposed to get the C Corp stock when Ex’r Gene doled out the goodies.

The 706, of course, reported the FMV of the stock, voting and non-voting, and took a charitable deduction for payment to the foundation, based on a DoD appraisal.

Simple so far, right?

But the post-mortem estate planners stepped in, and here’s where it gets interesting. I’ll let Judge Kerrigan summarize.

“Numerous events occurred after [Old Vic’s] death but before …bequeathed property was transferred to [foundation].  Seven months after [Old Vic’s] death [C Corp] elected S corporation status.  [C Corp] also agreed to redeem all of [Old Vic’s] bequeathed shares from [trust].  [C Corp, now S Corp] and [trust] amended and modified the redemption agreement, with [C Corp, now S Corp] agreeing to redeem all… of the voting shares but only 5,600.5 of the nonvoting shares.  In exchange for the redemption, [trust] received a short-term promissory note for $2,250,000 and a long-term promissory note for $2,968,462 (as amended).  At the same time as the redemption, pursuant to subscription agreements, three of [Old Vic’s] sons, including Ex’r Gene, purchased additional shares in [C Corp, now S Corp].  [Foundation] later reported that it had received three noncash contributions consisting of the short-term and long-term promissory notes (as amended) plus nonvoting [C Corp, now S Corp] shares.” 146 T. C. 8, at p. 3.

Now we all know that valuation of estates are deemed settled, so far as can be, at DoD or DoD+6. And Ex’r Gene never elected DoD+6.  So Ex’r Gene claims the worth of the charitable deduction of the stock that went to foundation is determined at DoD. And this notwithstanding that Ex’r Gene got a new appraisal at redemption time, that valued the stock way less and gave foundation the aforementioned promissory notes instead of the stock it was supposed to get.

But IRS claims the abovedescribed post-mortem finagling (to use a technical term) reduced the worth of what foundation actually got.

OK, says Judge Kerrigan. “Normally, absent a section 2032 election, the date-of-death value determines the amount of the charitable contribution deduction, which is based on the value of property transferred to the charitable organization.  See generally sec. 2055(d) (the amount of the charitable contribution deduction ‘shall not exceed the value of the transferred property required to be included in the gross estate’); sec. 2055(g)(1).  There are circumstances, however, where the appropriate amount of a charitable contribution deduction does not equal the contributed property’s date-of-death value.  See, e.g., Ahmanson Found., 674 F.2d at 772 (‘The statute does not [necessarily] ordain equal valuation as between an item in the gross estate and the same item under the charitable deduction.’).’ 146 T. C. 8, at p. 23.

Moreover, Ex’r Gene had valid nontax business reasons for the finagling aforesaid. Ex’r Gene claims he wanted to avoid Section 1374 BIG, and could freeze the value of the stock via the promissory notes, so as to avoid future declines in value. Likewise, redeeming the stock made foundation a preferred creditor of trust, giving it priority over Ex’r Gene and Bros.

Not good enough, guys.

“Even though there were valid business reasons for the redemption and subscription transactions, the record does not support a substantial decline in [Corp’s] per share value.  Ex’r Gene testified that the precipitous drop in the value of the … shares was the result of a poor business climate.  The evidence does not support a significant decline in the economy that resulted in a large decrease in value in only seven months.” 146 T. C. 8, at p. 26.

The real reason was that the post-mortem appraisal downgraded the worth of the stock as a minority interest, notwithstanding it was truly a majority interest per the DoD appraisal.

When an intrafamily is on the screen, it gets a really close look. Ex’r Gene was all hats and all cattle. He was all over the deal on every which side.

Ex’r Gene stood Old Vic’s estate plan on its head, shortchanging foundation to enrich himself and Bros. Judge Kerrigan is not amused.

“We do not believe that Congress intended to allow as great a charitable contribution deduction where persons divert a decedent’s charitable contribution, ultimately reducing the value of property transferred to a charitable organization.  This conclusion comports with the principle that if a trustee ‘is empowered to divert the property * * * to a use or purpose which would have rendered it, to the extent that it is subject to such power, not deductible had it been directly so bequeathed * * * the deduction will be limited to that portion, if any, of the property, or fund which is exempt from an exercise of the power.”  Sec. 20.20552(b)(1), Estate Tax Regs.  Eugene and his brothers thwarted decedent’s testamentary plan by altering the date-of-death value of decedent’s intended donation through the redemption of a majority interest as a minority interest.” 146 T. C. 8, at p. 27.

20% chop? You betcha. Although Corp’s lawyer had represented Old Vic and the Corp for 30 years and had plenty of credentials, the appraisal of the stock was finagled at the behest of Ex’r Gene and Bros.

“The date-of-death appraisal and the redemption appraisal–performed only seven months apart–differed substantially in value. The estate knew that a significant percentage of the value of decedent’s  bequeathed shares was not passing to the foundation and that Eugene and his brothers were acquiring a majority interest in DPI at a discount.

“The estate’s position is also not amply supported by caselaw.  None of the cases the estate cites in its briefs stand for the principle that an estate may deduct as a charitable contribution the date-of-death value of assets that are not actually transferred to the charitable organization.  The estate has not shown that it had reasonable cause or acted in good faith.” 146 T. C. 8, at pp. 30-31.

Ex’r Gene and Bros get the 20% chop, but they also get a Taishoff “good try, third class.”

Stone cold second-generation Trekkies (a/k/a The Next Generation) may remember Episode 44, “Up The Long Ladder,” originally titled as the headline hereof. It aired, I am told, on St Patrick’s Day, 1989.

Well, guess who is back among the clones?

It’s The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Irrefragable, Indubitable, Industrious, Illustrious, Incontrovertible, Ineffable, Ineluctable, and Indefatigable (but never Imperious or Inscrutable) Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes.

This is gonna be a fun case, troops.

Desert Organic Solutions, Docket No. 18114-14, filed 3/30/16.

“It is one of a number of cases at the intersection of marijuana sales and the federal tax system, and we continued it to enable the parties to develop what may be a couple issues new to this field. They recently reported exchanging some ideas on whether cloned marijuana plants are controlled substances under section 280E and continue to work on informal discovery.” Order, at p. 1.

Send in the clones, indeed.

So Judge Holmes, in the interest of developing the “couple new” issues (while again dissing the PG, and peeving this hard-laboring blogger in the process), continues the case.

I’ll follow this one and its fellows, and bring you the straight dope as soon as I get it. (Sorry guys, the Devil made me do it).

That’s Judge Marvel’s advice to James E. Thiessen and Judith T. Thiessen in 146 T. C. 7, filed 3/29/16, but why this case needs a full-dress T.C. is not immediately apparent.

See my blogpost “Any Which Way You Slice It,” 5/9/13, and you will discern a certain confluence of issue and relevant law.

Briefly, Jim and Judi personally guaranty the note given as part of the purchase price of the metal-fabricating corporation Jim and Judi buy in their Trad IRAs. But the cash came from their pension plans with former employer Kroger, the supermarket people. Jim and Judi claim rollover, but of course the prohibited personal guaranty puts paid to that, so their Trad IRAs are DOA. Wherefore, the distribution from the Kroger should have been reported in full, and no rollover claimed.

Judge Marvel makes it short: “A ‘prohibited transaction’ generally includes ‘any direct or indirect * * * lending of money or other extension of credit between a plan and a disqualified person’.  Sec. 4975(c)(1)(B).  A “plan” includes an IRA described in section 408(a).  See sec. 4975(e)(1)(B).  A ‘disqualified person’ includes a ‘fiduciary’.  Sec. 4975(e)(2)(A); see also sec. 4975(e)(2)(F), (6) (providing that a spouse of a disqualified person also is a ‘disqualified person’).  A ‘fiduciary’ includes any person who ‘exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets’.  Sec. 4975(e)(3)(A).

“Where the disqualified person is also the IRA owner or his or her beneficiary, the IRA ceases to be an IRA as of the first day of the IRA owner’s taxable year in which the prohibited transaction occurs.  See sec. 408(e)(2)(A).  In addition, the IRA owner is deemed to have received a distribution on that first day of an amount equal to the fair market value (on the first day) of the assets in the IRA as of that first day.  See sec. 408(e)(2)(B); Bunney v. Commissioner, 114 T.C. 259, 262 (2000).  The deemed distribution is generally included in the IRA owner’s gross income in accordance with the principles of section 72, see sec. 408(d)(1); see also sec. 408(d)(3) (providing that a rollover contribution is excepted from the general rule of section 408(d)(1)), and the IRA owner also is subject to an additional 10% tax if the IRA owner was not yet 59-1/2 years of age on the date of the distribution and no other exception to the additional tax applies, see sec. 72(t).” 146 T. C. 7, at pp. 11-12. (Footnotes omitted).

Jim and Judi claim that Department of Labor must interpret the prohibited transaction provisions, and Jimmy Carter said so. But John Marshall said in Marbury v. Madison in 1803 that the courts decide what the law is. And anyway Tax Court’s interpretation doesn’t contradict DOL’s.

The Section 4975(d)(23) out for publicly-traded securities and commodities don’t help Jim and Judi, as they were buying the assets of a business, not the stock of the corporation they set up themselves to acquire the assets. The note they gave was secured by the assets, not their stock, and that’s what they guaranteed.

Now Jim and Judi argue 3SOL bars IRS, but they never said anything on the return they filed for the year at issue about buying assets and guaranteeing a note in furtherance thereof. So 6SOL applies, per Colony and Home Concrete. If you want 3SOL, tell the whole story, or at least enough to let IRS know, in the immortal words of Dave “Curlee” Williams, “whole lotta shakin’ goin’ on.” And of course the deemed distribution was way over 25% of Jim’s and Judi’s gross income for the year at issue. Finally, even though the corporation Jim and Judi set up disclosed something on its return for the year at issue, Jim and Judi are the taxpayers, and they have to spill.

No mention of penalties or reliance on experts, even though Jim and Judi had counsel and a CPA on the deal.

Sounds like a good line for your next advertisement, but it doesn’t fly in Tax Court.

We learn this from James L. Wilson & Vivien Wilson, et al., Docket No. 26547-13, filed 3/29/16. But Jim and Viv are just incidental to the story.

Please don’t get on my case just because this is another order from The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Illustrious, Industrious, Indomitable, Indefatigable, Incontrovertible, Implacable, Ineffable, Ineluctable (but never Impossible or Indefensible) Foe of the Partitive Genitive, Judge Mark V. Holmes.

He gets the interesting orders, unlike poor Ch J Michael B (“Iron Mike”) Thornton, who must soldier on until June 1, redesignating misdesignated pleadings, turning billets doux into petitions, and putting various erring parties, taxpayers and IRS counsel alike, back on the straight-and-narrow.

And no, I get no compensation from The Great Dissenter for putting his name in my blog, not even a cup coffee or a slice pizza.

In this episode, we have a New York lawyer, to whom I shall hereinafter refer as “CC”, who zealously defends the privilege of her client to maintain the secrecy of client confidences.

CC apparently was involved in, or maybe the brains behind, the Phoenix deals. If you’re scratching your head over this, it was a captive insurance deal that caused IRS to call “Scam!” And the Self-Insurance Institute of America, whatever that is, was in on the play. See my blogpost “The Front – Part Deux,” 12/18/15.

Howbeit, IRS wants CC to dish and tell all, notwithstanding her claim that the lentils she spills include client confidences.

Judge Homes: “We had this precise issue in a very similar Phoenix case, Avrahami v. Commissioner, that was tried by the same lawyers as this case. In the phone call, petitioners’ counsel said (as they had in Avrahami) that [CC] feels that she is under an ethical obligation imposed by Rule 1.6 of the New York Bar’s Rules of Professional Conduct to guard against disclosure of ‘confidential information.’ Since the material that the Commissioner seeks either contains, or is likely to lead to, information relevant to the characterization of [CC’s] arrangement as ‘insurance’ or ‘not really insurance,’ the Court finds it discoverable and nonprivileged. In Avrahami, we solved this problem by agreeing with the parties that a lawyer is under no obligation to fight production of such nonprivileged information if ordered to do so by a Court. We’ll do so again in this case.” Order, at pp. 2-3.

Since when can counsel agree about another attorney’s ethical responsibilities? And doesn’t a judge have an obligation to do an in camera on what is being spilled, to make sure it is nonprivileged? The privilege is the client’s, not the attorneys’, and not the court’s. And opposing counsel agreeing that something is nonprivileged doesn’t make it so.

Reminds me of an old joke: The only thing two members of a certain ethnicity can agree upon is how much a third person should give to charity.

No, not a reprise of the Céline Dion show I saw at Caesar’s years ago; this is the latest go-round of new and improved US Tax Court Rules of Practice and Procedure.

Some of the interim changes, effective without prior comment because of the need to conform to the 2015 Congressional cliffhanger, involve petitions for abatement of interest, and the obliteration of TEFRA.

It’s brand-new day for partnerships, with “partnership representatives” replacing tax matterers and notice partners, per the Bipartisan Budget Act of 2015, more properly entitled the Revenue Act of 2015, replacing the notion of an Internal Revenue Code that doesn’t change every year with Congressional cliffhanging and posturing. But this is a non-political blog, isn’t it?

Go check it out, practitioners, and delete the old boilerplate petitions from your hard drives. Here’s a link to the New Day.

http://www.ustaxcourt.gov/press/032816.pdf

So start drafting. And best of luck to you.

Today’s offering, taken, if not ripped, from the Tax Court headlines, concerns Thomas L. Ryther, 2016 T. C. Memo. 56, filed 3/28/16.

And if you’re wondering why I’m not dealing with the 47 pages of Judge Laro’s deconstruction of John J. Machacek, Jr. and Marianne Machacek, 2016 T. C. 55, filed 3/28/16, it’s just a variation on Our Country Home Enterprises, Inc., 145 T. C. 1, and I dealt with that in my blogpost “Splitsville,” 7/13/15. If there’s anything new today, it’s Judge Laro marrying the SDLIA with deferred compensation (Section 83). And as these SDLIA deals have been blown sky-high so many times, it’s not likely any of my readers will encounter any new ones.

I know, I know…I’m a big fan of The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Impenetrable, Implacable, Illustrious, Industrious, Indefatigable, Ineffable, Ineluctable, Incontrovertible and Indomitable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes. Honest, I didn’t choose Tom ahead of the Machaceks because of Judge Holmes’ prose…well, not entirely.

But you should read this one, because it’s got a lot of good stuff on trade or business vs. liquidation of investment. Plenty of stuff for your trial briefs and summary J motions.

And of course we have Judge Holmes up to his old tricks: “In winding up Knight Steel’s operations, the trustee focused on the company’s cash and accounts receivable and chose to abandon the company’s few items of tangible property–a couple run-down trailers, some well-used fabrication equipment, and a large pile of scrap steel–because they appeared to be worthless.” 2016 T. C. Memo. 56, at pp. 2-3.

Hey Judge, here in the Apple it’s almost 4:30 p.m. as I write this: time for a cup tea and a piece cake?

Back to business. Tom was honcho of the aforementioned Knight Steel, and the post-Chapter owner of the aforementioned “couple run-down trailers” and the large pile of scrap steel.

Tom, needing cash and having apparently worthless stuff the Ch 7 trustee had scorned, discovered there was gold in that thar large pile. So he unloaded the scrap steel over seven years, never selling more than enough to raise cash to live on. And Tom dealt only in what certain former clients of mine, distinguishable by their distinctive dress, called “blätter.”  Incidentally, Tom also didn’t bother to file income tax returns for the seven (count ‘em, seven) years he was unloading, but came clean thereafter. Whereupon IRS hit him with a SNOD for SE tax, claiming he was in the scrap selling business.

No he wasn’t said Judge Holmes. And Judge Holmes, like a master cat herder, pores through a bushelbasketful of cases, which go in all directions.

While the scrap might have been stock-in-trade for the defunct Knight Steel, some caselaw from the estate tax side says that it might be a capital asset when it gets to Tom. And the day-trader and gambler cases say that even a lot of activity might not put you into a trade or business. True, you don’t have to advertise to sell scrap; there are apparently published pricelists and wide-ranging buyers who solicit sellers of scrap. But there’s no processing involved on the seller’s side, unlike the photo operation that scavenged waste silver from its developing vats, turned around and sold it.

So while a lot of the seven factors, and the three subsidiary factors, are neutral, on the facts Tom was liquidating an investment.

And size doesn’t matter. Big-ticket sales don’t put the seller into a trade or business. An art dealer selling off his personal collection got capital gains in one case.

And the number of years engaged in selling isn’t always dispositive. It was in the case of a seller of classic cars, but those are often held because their value appreciates with time, and such cars often need lengthy and extensive restoration. So the classic car dude was in a trade or business. But Tom’s scrap remained scrap and just sat there. Rusting, probably.

And my coop and condo converter clients might find solace in this tidbit: “We find this factor favors Ryther–that he decided to sell the scrap slowly over time instead of in one lump doesn’t make the sales a business, any more than liquidating a block of duplexes in a string of sales instead of all at once makes it a business.  See Heller Trust v. Commissioner, 382 F.2d 675 (9th Cir. 1967), rev’g T.C. Memo. 1965-302.).” 2016 T. C. Memo. 56, at p. 15.

Good stuff here, despite the “couple run down trailers.”

I don’t, but that’s not news.

And even though it isn’t a hot flash, Friday, April 15, 2016 is Emancipation Day in Our Nation’s Capital, thus bestowing its holiday largesse upon individual income tax filers and giving them until Monday, April 18, 2016 to file and pay, or seek extension and pay, their 2015 personal income taxes. And the extended ones have until October 17, 2016, to file their belated returns.

No extensions for payment, of course; penalties apply.

Today, March 27, 2016, marks the forty-ninth anniversary of my admission to the New York State Bar. It’s been a trip! Roll on the next forty-nine!

Back on June 30, 2015, I quoted The Weavers’ classic injunction to the union miner in part, in my blogpost “Keep Your Hand Upon the Dollar,” of even date therewith, as my high-priced colleagues would say.

Today the next line is in focus, as Ch J Michael B (“Iron Mike”) Thornton tells the story of Jonathan A. McCarroll & Rashelle McCarroll, Docket No. 23102-15S, filed 3/25/16.

But it’s not really the story of Jon & Rash. Unhappily for them, it’s the story of their trusty EA, hereinafter named, styled and denominated (again as my high-priced chums would say) as “BJ.”

BJ mailed in Jon’s & Rash’s petition, and used Stamps.com for postage. I’ll not comment further on Stamps.com, as I’ve discomposed enough electrons in the past thereupon.

Though BJ claims same was timely posted, the only USPS notation thereon was “Returned to sender. Returned for add’l postage $1.10″. Order, at p. 1.

Upon receipt, BJ fired the petition back (29 days late) with a note stating: “The enclosed paper work (sic) was placed in the mail and postmarked 8/13/15. Unfortunately it was returned to our office by the USPS indicating the package required additional postage.” Order, at p. 1.

I hate to see a fellow EA get the worst of it, but BJ is out, and so are Jon & Rash.

BJ’s original postmark was obliterated by Tax Court’s irradiation process, but enough was left to show that it was a dollar and ten cents short. Ch J Iron Mike, though about to leave the Chieftainship, still is a stickler.

“Although section 7502, I.R.C., allows a timely mailed petition to be treated as timely filed, that section mandates that the envelope bearing the petition be ‘postage prepaid, properly addressed to the agency, officer, or office with which the document is required to be filed.’. Sec.7502(a)(2)(B),I.R.C. The ‘postage prepaid’ element is thus an explicit statutory condition precedent for reliance on section 7502, I.R.C.” Order, at pp. 2-3.

And no sad tale, however tragic or lugubrious, cuts any of the Section 7502 ice in Tax Court.

“While the Court is sympathetic to petitioners’ situation and understands the unintentional character of the inadvertence here, the fundamental nature of the filing deadline precludes the case from going forward. As a Court of limited jurisdiction, the Court is unable to offer any remedy when a petition is filed late. Governing law recognizes no reasonable cause or other applicable exception to the statutory deadline.” Order, at p. 3.

Which brings me back to today’s headline. Not only must you keep your hand upon the dollar (or dollar and ten cents), you must also keep your eye upon the scale. The postage scale.