If your preparer fails or refuses to give back your records or show up for trial, you may have your deductions scuppered, but still avoid the negligence chop.

That’s the story for Johnnie C. Walker, 2016 T. C. Memo. 159, filed 8/23/16.

Johnnie folded her single-member LLC ambulance company, and stored her records in a storage unit that got opened and dumped for nonpayment of rent. She had given her accountant copies, from which said accountant prepared Johnnie’s timely returns for two years, and late return for a third year.

When IRS socks Johnnie with heavy-duty deficiencies, Johnnie asks for her records back. Getting nothing, her attorney tries, and Judge Pugh even holds up trial for a month to await the outcome of the tug-of-war. Alas for Johnnie, at close of play she is relegated to the Michael Corleone gambit.

The deficiencies arose when IRS disallowed Johnnie’s vehicle expenses and legal and accounting fees. You’re right, Section 274 doesn’t apply to ambulances or to legal and accounting fees.

Judge Pugh: “Ambulances used in a trade or business are excluded from ‘listed property’ as defined in section 280F(d)(5)(B)(i) and thus not subject to the strict substantiation rules.  Similarly, legal and professional services expenses are not subject to the strict substantiation rules.  See sec. 274(d).” 2016 T. C. Memo. 159, at p. 6.

Johnnie loses the vehicle stuff anyway. She has zero records and no reconstruction, so Cohan doesn’t help, and IRS claims whatever it allowed Johnnie for contract help (drivers who drove her ambulances or their own) covers all that and the $400 per week gas money she gave them. Judge Pugh agrees.

Johnnie did OK on the witness stand as to legal and accounting. “Petitioner credibly testified that the deduction for legal and professional services expenses…incurred to hire a consultant and a bookkeeper….  On the basis of her testimony, and considering the nature of these expenses in the context of her business, we hold that her testimony is sufficient to satisfy the requirements of section 162 and to support the claimed deduction.” 2016 T. C. Memo. 159, at p. 8.

IRS wants the chop for the one late year, and Johnnie has nothing except that she thought the missing accountant got an extension, which s/he didn’t, so IRS gets that chop.

But Johnnie escapes the negligence and substantial understatement chops.

“Petitioner credibly testified that she gave [her LLC’s] receipts and other records to her accountant and relied upon her accountant to calculate and report her [years at issue] Federal income tax liabilities properly.  Considering the nature of her business and our observations as to her ‘experience, knowledge, and education’, we conclude that her reliance was reasonable.  Therefore, we hold that petitioner is not liable for the section 6662(a) accuracy-related penalties for the years in issue.” 2016 T. C. Memo. 159, at pp. 11-12 (Citations omitted).

Takeaway- Backup doesn’t only apply to vehicles. It goes double for business records.

No, this is not about legal ethics, law practice management or continuing legal education. This is how to draft an employment discrimination complaint so as to get the most bang for the buck, taxwise.

The lawyer who drafted the employment discrimination complaint for Abraham J. George, 2016 T. C. Memo. 156, filed 8/22/16, got it right.

AJ complained he was harassed by his fellow car salespeople on account of national origin. He got another job, claimed he had no economic injury, and so his $45K from his previous employer’s insurer must have been for physical injury. Except he never pled that with specificity. And mental suffering is a Section 104 nonstarter.

He tried arguing State law, and IRS and AJ disagree about what State law says, but Judge Lauber says “mox nix.” We all know that when it comes to tax treatment, Federal law governs. “Although State law determines what rights a person has vis-a-vis a particular item of property, the proper characterization of those rights for Federal income tax purposes is governed by the Internal Revenue Code. See United States v. Nat’l Bank of Commerce, 472 U.S. 713, 722-723 (1985).” 2016 T. C. Memo. 156, at p. 10.

Of course the stip AJ signed when he got the payout was the usual broad-spectrum, kitchen-sink release of and for all that is, seen and unseen.

IRS hits AJ for the $45K, and Judge Lauber is down with that.

But AJ forked over $15K to his trusty attorney. IRS says ”OK, Section 212 expense for production of income, therefore Sched A, 2% AGI floor.”

Negatory, says Judge Lauber (only a lot more formally). It’s above the line, and goes to reduce AGI. Check out Section 62(a)(20).

And no, I never heard of it either, but obviously AJ’s crafty lawyer did.

“Section 62(a)(20) allows an above-the-line deduction for attorney’s fees and court costs paid by a taxpayer in connection with any action involving a claim of  unlawful discrimination.  Section 62(e) defines ‘unlawful discrimination’ to include (among other things) acts that are unlawful under ‘Section 703, 704, or 717 of the Civil Rights Act of 1964 (42 U.S.C. 2000e-2, 2000e-3, or 2000e-16).’  These sections refer to unlawful employment discrimination on account of race, color, religion, sex, or national origin.  The amount of the deduction cannot exceed the amount includible in the taxpayer’s gross income for the taxable year on account of a judgment or settlement resulting from such claim.  Sec. 62(a)(20) (last sentence).” 2016 T. C. Memo. 156, at pp. 10-11.

And here’s the takeaway for you tort types to plug into your checklists and adjust your forms.

“Petitioner’s complaint alleged discrimination on account of national origin and referenced the relevant provisions of the 1964 Civil Rights Act.  The settlement agreement specifically stated that it applied to claims for compensation ‘with respect to the employment relationship and termination thereof.’  We conclude that petitioner paid legal fees to secure a settlement of his claim for unlawful employment discrimination, and section 62(a)(20) thus entitles him to an above-the-line deduction of $15,000 for his legal fees.” 2016 T.C. Memo. 156, at p. 11.

“Compare and contrast,” as the old college essay questions used to read, the various forms of frivolity encountered here in United States Tax Court. Well, here are Judge Pugh and The Judge With a Heart, STJ Armen, each with a possible frivoller on hand, and the approach taken by each may be instructive.

First up, Judge Pugh, and Kenton R. Fleming, Docket No. 26391-14. Filed 8/19/16, undesignated. If something here rings a bell, check out my blogpost “Is There a Doctor in the House,” 10/16/14. Kenton R. had some physical ailment and Judge Morrison granted him a continuance.

But Kenton R. still had lost a Rule 91(f)(2) motion back then. And his batting average in the Rule 91 department hadn’t been great before then, either. “In Dkt. nos. 8814-10, 27608-10, and 14386-11, petitioner failed to respond to an Order to Show Cause under Rule 91(f), dated December 18, 2012. By Order date January 15, 2013, the Order to Show Cause was made absolute and the facts and evidence set forth in respondent’s proposed stipulation of facts, including stipulations regarding petitioner’s employment with SPSU, were deemed to be established for purposes of those cases.” Order, at p. 2, footnote 2.

SPSU is Southern Polytechnic State University, which my sources tell me is now part of Kennesaw State University, in Marietta, GA.

Kenton R.’s current Rule 91 problems are dealt with seriatim (as my already-on-their-way-to-the-ballgame colleagues would say). “Petitioner’s objections do not raise any reasonable factual disputes for purposes of Rule 91. His primary objections are based on his arguments that he has zero tax liability and no filing obligation. While he may dispute whether respondent’s [IRS’] actions were legally correct, he may not fairly dispute whether respondent took those actions. It is understood that he does not agree with the actions represented by those documents; and we do not consider stipulation to be a concession that the actions were proper.” Order, at pp. 1-2.

And objecting to IRS transcripts as hearsay does not mean that they are not actual records. Admissibility is a question for trial…if it gets that far. And Judge Pugh gives Kenton R. a reservation on that point, so he can duke it out with IRS.

Likewise, he doesn’t need to stip that he was an employee of SPSU, but if he can’t show facts different than the three (count ‘em, three) times a Rule 91 order said he was, he’s looking at a Section 6673 red card.

Kenton R. does get a bye. “For certain stipulations, petitioner proposed different wording. That negotiation should have occurred before respondent’s motion to compel was filed. We infer from the record that petitioner did not provide a working telephone number to respondent despite our order to do so. Nonetheless we will not require petitioner to stipulate that assessments were ‘in error’ in stipulations 11 and 12. Respondent’s proposed stipulation 15 that ‘Respondent maintains his position’ as to the deficiencies owed is not a fact to be established at trial; therefore we will not compel stipulation of that statement.” Order, at p. 2.

Read those stipulations, practitioner. IRS, like every litigant, will try to steal a base.

But Kenton R. already got a Section 6673 chop in a prior case. So he’d best watch his legal arguments.

STJ Armen is a lot tougher on Joshua Wade Bettar, 19633-15S, filed 8/19/16. He socks JW with a $500 Section 6673 chop over a $1540 deficiency, and tosses his case for failure to state a claim (Rule 40).

STJ Armen: “There is neither assignment of error nor allegation of fact in support of any justiciable claim. Rather, the petition appears to be merely an expression of protest and contains nothing but frivolous and groundless arguments. Under the circumstances, there is no need to catalog petitioner’s arguments and painstakingly address them.” Order, at p. 2.

And STJ Armen throws in the Crain “somber reasoning and copious citation of precedent” line, of course.

Notwithstanding the instances wherein I have blogged STJ Armen’s benevolence to the deserving, JW must have really gotten to him.

“Petitioner’s position, as set forth in the petition, consists of tax protestor rhetoric. Based on well-established law, petitioner’s position is frivolous and groundless.

“We are also convinced that petitioner instituted and maintained this proceeding primarily, if not exclusively, for purposes of delay. Having to deal with this matter wasted the Court’s time, as well as respondent’s. Moreover, taxpayers with genuine controversies may have been delayed.” Order, at p. 3.

I don’t know what JW put in his petition, but whatever it was, I suggest one would do well to avoid repeating it. At least in STJ Armen’s division.

There are a couple these on the Tax Court bench, one of whom is The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Irrefragable, Incontestable, Incontrovertible, Ineluctable, Indefatigable and Imperturbable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes.

In UK courts-martial, the “prisoner’s friend” is the defending officer. Here, it’s Judge Holmes trying to help Eugenio Espinoza Martinez, Docket No. 29472-12, filed 8/18/16.

Remember Eugenio? I almost forgot him as well, until I scoped out my blogpost “Hitting the Superfecta – Part Deux,” 3/16/16.

Facts are same as before. Eugenio still guest of TX, he’s not going anywhere soon, and he hasn’t got any documents for his Sched C and Sched A deductions.

IRS wants summary J, but there are fact questions.

“Prisoners routinely exercise their right to petition Tax Court to challenge notices of deficiency. And, despite the undoubted problems of conducting litigation from behind bars, we do try to develop and resolve cases instead of continuing them until the end of an inmate’s sentence — which of course may never come. See, e.g., Rader v. Commissioner, Docket No. 7952-12S (serial killer serving 10 consecutive life sentences); “BTK Sentenced to 10 Life Terms,” CNN (Aug. 18, 2005), http://www.cnn.com/2005/LAW/08/l8/btk.killings/.” Order, at p. 2 (Footnote omitted).

Because moving State prisoners to Federal Court is expensive, and the deficiency here is $5K, Judge Holmes wants IRS and Eugenio to do a Branerton stipulation and agree as far as they can. Eugenio complains about his hard life behind Texas bars, so IRS’ facts are deemed.

It takes Eugenio a couple years (we’re in Judge Holmes’ courtroom), but finally “(H)e filed a supplemental response that did go through the respondent’s motion point by point. He also stressed again he had pleaded and argued that he had not even filed a return for [second year at issue].” Order, at p. 7 (misnumbered as page 2).

Income is no contest. Eugenio doesn’t deny he received what IRS claims in either of the years at issue. So summary J to IRS on that point.

As to the deductions for the first year at issue, IRS moved Eugenio’s Sched C items to Sched A, but that doesn’t change the numbers. However, Eugenio claims under penalty of perjury he had unreimbursed employee expenses. That’s a fact question, so no summary J to IRS.

As to Eugenio’s Sched A deductions and the dependent exemption for the second year at issue, “He completely disavows the return that the IRS received as having been prepared and filed without his consent. He does not contest in pleadings or on this motion the income reported by his employer, but he does, in the end, contest the disallowance of the reported Schedule A deductions. And on the issue of his entitlement to a dependency exemption for his aged mother for the [second year at issue]. The Commissioner points to Mr. Martinez’s letter to the Commissioner where he stated that ‘I cannot support my contentions that I am entitled to these deductions.’ We agree that this is an admission that Mr. Martinez cannot support his claim; his response to the summary-judgment motion raises no genuine dispute to the contrary. If Mr. Martinez is to be believed, and on a motion for summary judgment we have to assume he would be, he filed no return for that year. But if he filed no return, it means that he himself did not claim any exemption for his mother or any Schedule A deductions. Even though he says that his mother was a dependent that year, he concluded that ‘whomever made such decision to include her as a dependent was done in the process of fraud.’ Respondent prevails on both these issues as well.” Order, at p. 8.

So IRS can talk to Eugenio about the first year at issue (I’m sure they know where to find him), try once more to stip their way out, but if they can’t, let IRS tell Judge Holmes whether they want to keep fighting, and how to do so.

This case affords the practitioner who represents the incarcerated a good checklist for doing so. Read all the orders.

This is a week for non-adjustments. First came Mark L. Nebeker; see my blogpost “I Don’t Want To Get Adjusted,” 8/16/16, Now comes Judge Tamara Ashford to wave off Allied Adjustment Services, Inc., Docket No. 23849-14L, filed 8/17/16, with a designated hitter.

Allied is fighting liens and a levy involving income and employment tax liabilities, which fight began four years ago. After successive NODs blowing off Allied’s CDPs and a remand with a Supplemental NOD, Allied, seeing the interest snowballing and cascading, pays up.

IRS says, “OK, dismiss as moot, we’ve got nothing to collect.”

Allied says, “we wuz robbed, and we want to fight, and we only paid up to save on the interest.”

Judge Ashford: “Given the limitations on our jurisdiction in lien and levy actions under section 6230(c) and 6330(d), the relief that we can provide to a petitioner in adjudicating such actions is limited, amounting to giving a ‘thumbs-up or thumbs-down’ on whether respondent may proceed with the collection action in question. If we find that the existence and amount of the underlying tax liability is correct and Appeals’ determination did not constitute an abuse of discretion, we may uphold the determination and sustain the collection action. If we find that the existence and amount of the underlying tax liability is incorrect or that Appeals’ determination constituted an abuse of discretion because of Appeals’ failure to consider relevant information or for some other reason, we may, as the Court did earlier in Docket No. 12037-13L, remand the case for further consideration by Appeals, or reject Appeals’ determination and overrule the collection action.

“As a result, if subsequent to the filing of a petition in this Court commencing a lien and levy action under section 6230(c) and 6330(d), respondent no longer intends to pursue collection of the outstanding tax liability by levy and has released the applicable lien, then there is no further relief that we are able to grant under sections 6320 and 6330 and the case must be dismissed as moot, even if the petitioner maintains some dispute regarding the propriety of the liability.” Order, at pp. 5-6.

So after four years. Allied can file for a refund and sue in USDC or USCFC. If they can afford it.

Great result…yeah, right.

Well, maybe counsel sneakier than I could, or even better, a top-fuel unmodified Class-A rounder. And get a full-dress T. C. out of it. Take a quick peek at Charles J. Weiss, 147 T. C. 6, filed 8/17/16.

For Chas’ rounderhood qualifications, see 147 T. C. 6, at p. 4, footnote 2.

Chas got a NITL for his six-year dodging, aggregating better than $550K.

Chas plays a stormer. “R [IRS] attempted to hand-deliver the levy notice during a field call on February 11 but was deterred by P’s [Chas’] dog.  Two days later R initiated the mailing of the levy notice by certified mail to P’s last known address.  R did not generate a new levy notice dated February 13; he enclosed in the envelope the original levy notice dated February 11.  P received the levy notice on February 17.  P completed Form 12153 requesting a collection due process (CDP) hearing for the tax years at issue and mailed it to R on either March 13 or 14.  R received it on March 16, which was a Monday.” 147 T. C. 6, at p. 1.

Note the dates. They are critical.

Chas claims he intentionally mailed the Form 12153 requesting a CDP one day late, viz., beyond the thirty-day cutoff, so he only should get an equivalent hearing, not a CDP. And that doesn’t stay collection while he’s being equivalented, nor does equivalenting stay the SOL on collections, so IRS is SOL.

“Respondent [IRS] contends that petitioner’s request for a CDP hearing was in fact timely because it was filed within 30 days of the date on which the IRS mailed him the notice of levy.  See sec. 6330(a)(3)(B).  Respondent acknowledges that the date appearing on the levy notice was at least two days earlier than the mailing date but argues that the mailing date dictates the start of the 30-day period where (as here) it is the later of the two dates.  Cf. Bongam v. Commissioner, 146 T.C. __, __ (slip op. at 11-12) (Feb. 11, 2016).  On this point we agree with respondent. Because petitioner has raised no other meaningful challenge to the settlement officer’s determination, we will sustain the proposed collection action.” 147 T. C. 6, at pp. 3-4.

Chas never did anything on the CDP, nor did his attorney (whom I’ll refer to hereinafter as “DP”), so the SO gave Chas the NOD.

For the story of Isaiah Bongam above-cited, see my blogpost “Getting the Nod,” 2/11/16.

If the SOL did run, then review for abuse or de novo doesn’t matter.

Asking for a CDP is enough to stay both SOL and collection, even if CDP is denied.

“’A taxpayer who fails to make a timely request for a CDP hearing is not entitled to a CDP hearing,’ but he may be afforded an ‘equivalent hearing.’  Sec. 301.6330-1(i)(1), Proced. & Admin. Regs.  Any relief afforded in an equivalent hearing is discretionary with the IRS; the ‘decision letter’ issued after such a hearing is not subject to judicial review.  Id. para. (i)(2), Q&A-16.  The collection period of limitations is not suspended during an equivalent hearing, and the IRS may thus proceed to collect the taxpayer’s liabilities.” 147 T. C. 6, at p. 16 (Citations omitted).

But no one has yet raised the question of the intentionally late Form 12153. I want to give Chas and DP (both of them attorneys, BTW) a Taishoff “Good Try, Hors Classe.”

“Although we have found no precedent that addresses the precise question involved here, a modest body of case law has developed on closely analogous questions.  When considering the timeliness of notices of deficiency under section 6213, we have encountered situations where the date on the notice did not match the date on which the notice was successfully mailed to the taxpayer.  Where the date on the notice was earlier than the date of mailing, we have held that ‘[t]he critical date is the date the deficiency notice was ‘mailed.’” 147 T. C. 6, at pp. 18-19 (Citations omitted).

But Judge Lauber leans heavily on Bongam above-cited. And that means the date of mailing, not the date of the NITL, controls.

“In so ruling, we are guided by the proposition that, in determining whether we have jurisdiction over a given matter, this Court and the Courts of Appeals have given our jurisdictional provisions a broad, practical construction rather than a narrow, technical one.  Acceptance of petitioner’s submission would disserve the interests of most taxpayers by converting the CDP hearing, in the scenario presented here, into an ‘equivalent hearing’ immune from judicial review.  When a statutory provision is capable of two interpretations, ‘we are inclined to adopt a construction which will permit us to retain jurisdiction without doing violence to the statutory language.’  Traxler v. Commissioner, 61 T.C. 97, 100 (1973).” 147 T. C. 6, at p. 21. (Footnote omitted).

Finally, DP tries to claim that the date of the notice is the same thing as the date on the notice, but Judge Lauber decries that as the Regs speak of mailing, whatever the date may be on whatever is in the letter.

IRS can’t prove the exact mailing date of the NITL, but here it doesn’t matter, because “the second month alone” had only 28 days that year, and the Form 12153 was stamped in by the flailing date-stampers at 400 Second Street, NW, on the morning of Day Thirty. So whenever the NITL was mailed, the Form 12153 got there on time.

DP and Chas don’t quit. They claim the NITL flunked the “simple and nontechnical language” provision of Section 6330(a)(3). But even if it does (a) there’s no statutory penalty for that, (b) the SO isn’t required to determine if the NITL is simple and nontechnical, and (c) even if the SO didn’t so find, Chas still sent in a Form 12153 and got his CDP. No hurt, no foul.

Though the IRM states the NITL must be mailed the same day as dated, that hasn’t the force of law or regulation.

Chas claims he was misled by IRS. Chas is an attorney. Estoppel against IRS is applied very sparingly.

As for prejudice, Mrs Chas threw away the envelope in which the NITL came. We attorneys know you never throw away envelopes; they can be invaluable evidence. Anyway, “Petitioner is an attorney; he studied the IRS publications he received; and he understood the difference between a CDP hearing and an ‘equivalent hearing.’  His testimony that he actually sought an ‘equivalent hearing’ was implausible for at least four reasons: (1) he did not check the box for ‘Equivalent Hearing’ despite two opportunities to do so; (2) the IRS during the pendency of an ‘equivalent hearing’ could begin immediate collection action, which was the last thing petitioner wanted; (3) any relief afforded by the IRS in an ‘equivalent hearing’ would be purely discretionary and not subject to judicial review; and (4) the CDP hearing that he requested would entitle him to judicial review and defer IRS collection action indefinitely, thus achieving the goals he expressed in his hearing request.  For all these reasons, we find no credible evidence to support his claim of prejudice.” 2016 T. C. 6, at p. 30.

Chas and DP go down swinging for the fences.

Ya really can’t make this stuff up.

No, says Judge Buch, IRS didn’t violate Section 7605 when they asked to reopen the audit of foreign withholding tax in the context of an income tax audit, in Dynamo Holdings Limited Partnership, Dynamo, GP, Inc., Tax Matters Partner, et al., Docket No. 8393-12, filed 8/16/16.

This case has provided much material for the discovery junkies. I’ve blogged a few orders, but I’m sure the “win your case at discovery” dudes will find a lot more.

I only wish Judge Buch would designate these orders. It’s ridiculous that I should have to be digging for this stuff at 8:30 p.m. on an August evening in a rainstorm. Oh well, that’s the price of leading the internet league, Tax Court division.

“Section 7605(b) provides that a taxpayer must not be ‘subjected to unnecessary examination or investigations, and only one inspection of a taxpayer’s books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.’ The purpose of section 7605(b) is to require revenue ‘agents to clear any repetitive examination with a superior’ to ensure that the agents ‘exercise prudent judgment in wielding the extensive powers granted to them by the [Code].’ United States v. Powell, 379 U.S. 48, 56 (1964).” Order, at p. 4.

IRS had closed the withholding audit and were working on the income tax audit when they dropped two IDRs on Dynamo, who told IRS to chase themselves.

“We have explained that the Commissioner does not conduct a second examination when he does not obtain any new information. Indeed, we have held that section 7605(b) ‘has no relationship to a redetermination of a taxpayer’s tax liability from the information procured by an agent of respondent on his initial inspection of a taxpayer’s books.’” Order, at pp. 12-13 (Citations omitted, but read them; essentially Section 7605(b) is meaningless).

So there was no second (or “secret”) examination, because Dynamo refused the IDRs. And IRS had whatever they needed anyway (or so they say). And IRS can make requests do double, or even triple, duty. So the IDRs can serve both withholding and income tax examinations.

Dynamo complained that the two RAs, the withholder and the income taxer, were consulting, but that’s not illegal.

The point apparently is that when Dynamo told IRS to take a hike, IRS got no new information, so there was no new examination. So exactly what purpose does Section 7605(b) serve?

Dynamo claims IRS didn’t follow Revenue Procedure 2005-32, sec. 5.01, 2005-1 C.B. 1206 and that the Territory Manager (who signed off on the IDRs) was biased. That cuts zero ice with Judge Buch. “Because we find that the Commissioner did not conduct a second examination, we do not need to reach these arguments. However, we note the well established rule that Revenue Procedures are directory and not mandatary [sic].” Order, at p. 7, footnote 4 (and I think you meant “mandatory,” Judge, not “mandatary”).

Dynamo wants the whole deficiency dropped because of the alleged IRS blooper, and there’s Seventh Circuit learning that says OK, but Dynamo is Golsenized elsewhere and Tax Court doesn’t like that Seventh Circuit case anyhow.

Summary J to IRS tossing Dynamo’s motions to produce documents and take testimony.

Maybe my old memory is slipping, but didn’t somebody in Philly on a hot July day comment that “he hath erected a multitude of new offices, and hath sent hither swarms of officers, to harass our people and eat out their substance”?

Among my other tasks on this blog is to try, in my own humble way, to make a wee bit of sense out of what comes from the judicial gristmill; speaking of gristmills, I’ll spare you W. H. Auden’s classic limerick.

However, when it comes to innocent spousery, I must throw up my hands.

Between threshold, streamline and the Big Seven Factors, falls a shadow. Here we go ‘round the lot, and come up guessing. The cases seem to be all over the lot.

But every so often the light of reason breaks through.

Case in point. Melissa A. Sermonetta, 2016 T. C. Sum. Op. 43, filed 8/16/16.

Mel and loved-once Chris are divorced. Mel was always salaried when she worked at all, and Chris ran a business close to his vest. Chris never let Mel see the real numbers, but she wasn’t forced into signing the MFJs for the years at issue.

And more than once Judge Chiechi notes that Mel would suffer no economic hardship if she didn’t get 6015(f) equity.

No abuse, no illness. Although their kids were sick “at least” during the years at issue, that doesn’t seem to enter into the calculus.

And though Mel’s parents had to bail out Chris and Mel twice when facing foreclosure, Judge Chiechi finds that Mel could have reasonably believed that Chris would stump up the $33K or so that they owed IRS.

And Mel had satisfied her tax obligations thereafter. Judge Chiechi points out that Mel was earning $64K per year after the trial at a Big Four accounting firm.

Mel gets innocent spousery.

I was looking at the facts and trying to figure out how that could happen. Joint return, no abuse, no duress, no hardship, no health issues for Mel, kids’ health issues apparently not that bad…but then I found the answer.

Judge Chiechi: “It is respondent’s position that Ms. Simonetta is not entitled to the relief under section 6015(f) that she is seeking.  In support of that position, respondent called Mr. Simonetta as respondent’s witness at the trial in this case.  We did not find Mr. Simonetta to be credible.  We shall not rely on his testimony in order to establish respondent’s position (and his) that Ms. Simonetta is not entitled to relief under section 6015(f) with respect to each of the Simonettas’ taxable years….” 2016 T. C. Sum. Op. 43, at p. 12.

Forget factors. If IRS puts on the ex, and the ex doesn’t wow the judge, fuggedaboutit.

Mark L. Nebeker, 2016 T. C. Memo. 155, filed 8/16/16, is singing that old gospel song Pete Seeger and the Weavers sang sixty years ago at Carnegie Hall (and no, I wasn’t there, but I had rich friends who had the record).

Relying on his trusty CPA, Marty de K (name disguised), Mark tried to match his income with expenses, but as he reported it all on the Sched C as “cash basis,” that doesn’t fly.

Mark was a consultant; I’ll spare you the joke about the cat in the nighttime. Mark was a successful consultant, helping out some very heavy-hitting aerospace outfits. Mark had a bunch of subcontractors he had to pay whether or not the customers forked over. And sometimes the customers held off paying for 90 days or more. Or even into the next tax year.

Tell me about it.

Mark had to code his receipts and expenses very carefully, to match same with clients, because he might get a heavy-duty audit at any time from the Big Four beancounters who service the heavy hitters aforesaid.

So Marty de K, seeing Mark way behind in Year One of his one-man show, asked why Mark was sticking with the big cash loser. Mark showed what the heavies owed him.

Marty de K, who had credentials, set up the matching game for Mark.

So Mark deducted expenses in the tax year when he got paid, even though he’d paid those expenses in a previous tax year.

IRS says no. Mark and Marty de K say “any method that accurately states income.”

Judge Goeke has little to guide him, but goes with IRS.

“The parties give us little in the way of authority to address their disagreement, but section 1.446-1(c)(1)(iv)(a), Income Tax Regs., convinces us that respondent was correct to adjust the method the [Mark] used.  The more difficult question is whether respondent’s change requires the application of section 481.” 2016 T. C. Memo. 155, at p. 12 (Footnote omitted, but it’s coming).

Section 481 is the you-gotta-adjust-when-you-change-method-without-IRS-blessing.

Here’s the footnote: “Any combination of the methods of accounting set out in sec. 446 is permitted in connection with a trade or business if the combination clearly reflects income and is consistently used.  Sec. 1.446-1(c)(1)(iv)(a), Income Tax Regs. Here, use of the cash method in computing gross income from a trade or business necessitates use of the cash method in computing expenses of the trade or business.  Petitioner failed to clearly reflect income because he applied a method of deducting subcontractor expenses that was inconsistent with the cash method of accounting.  See, e.g., Grider v. Commissioner, T.C. Memo. 1999-417 (holding that a taxpayer’s method of accounting that is plainly contrary to the regulations does not clearly reflect income).” 2016 T. C. Memo. 155, at p. 12, footnote 3.

So it looks like Mark will have to get adjusted.

“Section 446(e) provides authority for respondent’s adjustment of [Mark’s]  method of accounting.  Section 446(e) provides that a taxpayer who changes the method of accounting on the basis of which he regularly computes his income in keeping his books shall, before computing his taxable income under the new method, secure the consent of the Secretary.  Petitioner never filed an application to change the method of accounting, nor did he follow the procedure for automatic consent laid out in Rev. Proc. 97-27, 1997-1 C.B. 680.  Under section 446(e) respondent can require [Mark] to abandon the new method of accounting and to report taxable income using the old method of accounting.” 2016 T. C. Memo. 155, at p. 13.

Section 446(e) precludes Mark from changing even if he asked for permission.

So Mark has to get adjusted, and IRS will help with a Section 155 beancount.

Mark also had a problem with advertising expenses he tried to take for some bike tours in Europe.

But Marty de K has enough credentials, and Mark enough innocence and straightforwardness, for Judge Goeke to give Mark a free ride on the chops.

I expect the trade press and blogosphere will pick up today’s opinion on the remands from Second and Ninth Circuits to Tax Court of Diebold and Salus Mundi, two of the early trans-fat cats in the Section 6901 transferee liability herd. It was another roundy-rounder liquidating distribution, with the only argument being the short-year as a cutoff for liability. Tax Court didn’t buy it, as it was all of a piece with the main dodge.

I was more interested in twice-burned Carolyn Rogers, 2016 T. C. Memo. 152, filed 8/15/16, a real hard-luck story.

Carolyn got burned out of her New York City coop apartment twice, had to flee the “dehumanizing” YWCA to go couch-surfing, and finally fell off a subway platform and fractured her skull.

She’d always filed timely and paid up before. In the year at issue, when all these various calamities had peaked, she thought that she could take the casualty loss from the second burn-out in the year she got the short payment from her long-suffering insurer.

Liberty Mutual, you did good.

But IRS wants to nail Carolyn for Section 6651(a)(1) late filing and Section 6651(a)(2) late paying.

And who better to bring justice to poor Carolyn but that eminent law firm, to which I refer as The Jersey Boys? They settle out the unpaid tax, leaving only the two additions aforesaid.

Judge Colvin is persuaded.

“Petitioner correctly handled her tax filings and payments before [the year at issue]. Petitioner testified that her losses from the [second] fire exceeded $150,000. She also testified that she believed her loss was deductible for the year she settled the insurance claim and that her casualty loss (to the extent not compensated by insurance) more than offset her [year at issue] income, obviating the requirement that she file a…return.” 2016 T. C. Memo. 152, at p. 8.

The usual late-filer, late-payers targets are high-level business types or chronic non-filer, non-payers. Carolyn was neither.

Carolyn was mistaken, but honestly mistaken. She got hit because there was no reasonable chance of recovery for the greatest part of the second-fire loss. Therefore that loss had to be recognized in the year of the fire, not year of settlement with insurer, hence the deficiency. Trying that issue was dicey at best, so settling was wise.

Carolyn’s conditions, catalogued by Judge Colvin, give ample facts and circumstances to conclude that nonfiling wasn’t a result of “conscious, intentional failure or reckless indifference to her tax filing obligations.” 2016 T. C. Memo. 152, at p. 11.

And the language of Section 6651(a)(2) late-payment is identical to the Section 6651(a)(1) nonfiling, so Carolyn is off the hook on that one, too.

I can’t think the deficiency here warranted a big fee, and the petitioner certainly wasn’t a last-three-digits highroller.

So a Taishoff “good job, first class” to The Jersey Boys.