In Uncategorized on 04/11/2016 at 16:29

No, not Wm. S. Porter’s 1903 classic that stormed the New York stage in 1910 as Alias Jimmy Valentine. Rather, this is the story of IRS retrieving what petitioner claims is a grievously deficient Statutory Notice of Deficiency, with that Obliging Jurist, Judge David Gustafson, obliging IRS for a change with a full-dress T.C.

It’s the story of Peter L. Ax and Beverly B. Ax, 146 T. C. 10, filed 4/11/16, and their best little insurance company in captivity.

Pete was an on-line legend drug peddler, according to his pleadings. I think he meant “legacy drugs,” that is, good stuff off-patent or where the expiring patent could be bought up cheap. But flogging on-line with a new business model meant regulatory risk, political risk, terrorism risk, and computer mishaps. No regular insurer would touch Pete’s alleged timebomb, so he formed a captive subsidiary, onto which he unloaded buckets of deductible cash against the evil days to come.

IRS hit Pete with a SNOD, but all they said was this wasn’t an insurance expense and therefore not deductible.

Pete says “oh yes, It is,” and timely petitions the SNOD.

“The answer generally denied the allegations in the petition, but it did not make any affirmative allegations as to the disallowed insurance expense deductions.  Petitioners’ counsel provided respondent’s counsel with substantial information about the case….” 146 T. C. 10, at p. 6.

As the aroma of coffee wafts into IRS’ counsel’s nostrils, counsel moves “…pursuant to Tax Court Rule 41(a), for leave to file an Amendment to Answer to affirmatively allege facts in support of new issues. Specifically, in the Amendment to Answer, lodged with the Court at the same time as the filing of this motion, respondent raises the issue of whether petitioners’ use of the micro-captive insurance arrangement lacked economic substance. Additionally, out of an abundance of caution, respondent affirmatively alleges that premiums that funded the micro-captive arrangement were neither ordinary nor necessary expenses, even though this issue is implicit in the notice of deficiency.” 146 T. C. 10, at p. 7.

IRS agrees it has burden of proof, as this is new matter, but Pete ripostes that IRS is dodging dear old Chenery, the blogger’s delight, by introducing new grounds for the SNOD, that weren’t relied upon by IRS to begin with. Now I’ve blogged Chenery extensively, so I won’t cite to all of them. Just read my blogpost “He Loves Chenery,” 12/17/14, and you’ll be up to speed.

Looks like Pete has some good ammo.

But Judge Gustafson says Pete has taken Chenery one step too far.

“…where Congress has committed an action solely to agency discretion, a reviewing court can only review the decision that the agency made; a court cannot perform a pseudo-review of a hypothetical decision that was not made by the agency but that the court might have made if it were the agency.  Chenery I says nothing about circumstances in which Congress has authorized a court to make its own determinations–which is precisely the circumstance of the Tax Court’s jurisdiction over deficiency cases, as we now show.” 146 T. C. 10, at p. 11. (Footnote omitted).

Section 6212 says Tax Court redetermines the deficiency; Tax Court can find a greater amount than the SNOD stated (see Section 6214(a)) or determine petitioner is due a refund (Section 6215).

Section 7522 doesn’t help Pete either. An inadequate description of the basis for the SNOD doesn’t invalidate the SNOD.

“The Internal Revenue Code thus reflects Congress’s intention that the Tax Court will decide deficiency cases not by reviewing the agency’s determinations for abuses of discretion but by deciding issues according to the evidence.” 146 T. C. 10, at p. 13.

And the Administrative Procedures Act doesn’t help either. Going back to 1939, Judge Gustafson finds that Tax Court is the place established by Congress for redetermination, and trial de novo is available to Pete, thus satisfying 5USC§703. Besides, Fourth Circuit held Tax Court isn’t subject to APA.

Pete has plenty of time to prepare for trial, so no prejudice here.

And the argument that the language of the SNOD only requires proof of payment to a self-styled insurance company doesn’t answer whether the arrangement is insurance, that is, a shifting of risk. That’s not “new matter.”

IRS can amend.

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