I note the IRS announcement earlier this week that, due to lack of resources, their so-far-unimpeached IRS boss John (”Kosy”) Koskinen has contracted out collection of “older, overdue tax accounts” among others.

The collectors must follow the Federal Fair Debt Collection Practices Act, and be courteous and respect taxpayer rights, unlike the strip-miners and bottom-fishers of distressed debt who try strong-arm tactics to collect their own debts.

IRS is aware that, having trumpeted to the skies warnings of phony scammer phonecalls pretending to be from the IRS, they will have a lot of ‘splainin’ to do.

The new tax collectors, I fear, will be about as popular as their predecessors, who appear in far more exalted documents than IRS press releases. And markedly less effective.

Here’s the story: https://www.irs.gov/uac/newsroom/new-private-debt-collection-program-to-begin-next-spring-irs-to-contract-with-four-agencies-taxpayer-rights-protected

Merrick Rayle, Docket No. 26253-14L, filed 9/30/16, is belting out the 1922 classic from the pen of Alfred Breitenbach. a/k/a Fred Fisher.

Merrick got a remand back to Appeals from Judge Paris, who told Appeals to give Merrick a supplemental hearing, after she bounced IRS’ summary J motion. The hearing was to take place at the Appeals office closest to Merrick’s abode, or such other place as agreed upon.

Merrick asked for Chicago. The assigned SO worked out of Holtsville, ignored Merrick’s written request, claimed he’d asked for a face-to-face (he didn’t), claimed he failed to send in a 433-A (not required for the supplemental CDP Judge Paris ordered) and sustained the collection action.

Judge Paris finds this less than amusing. “Petitioner requested, as the Court so ordered, that the supplemental CDP hearing be conducted at the Appeals Office located closest to his residence. SO S’s requirement that petitioner complete Form 433-A for a face-to-face hearing was premature, as he did not request a face-to-face hearing in his… letter, and her lack of acknowledging petitioner’s request for the location of the supplemental CDP hearing was a blatant disregard of the Court’s… Order. Additionally, SO S failed to follow the Court’s Order because she did not clarify for petitioner how she determined that his account for 2009 was not correctly in currently noncollectible (CNC) status.” Order, at pp. 2-3. (Name omitted).

This sounds bad, but Merrick (an attorney with a Big Firm background) is not necessarily faultless here. Take a look at the 6/16/16 order, referred to in Judge Paris’ order.

Anyway, Judge Paris orders a supplement to the supplement. “The Court finds that respondent failed to follow the Court’s… Order and, therefore, will again remand this case for a second supplemental CDP hearing. Upon remand an Appeals officer from respondent’s Chicago Appeals Office shall verify that all applicable laws and administrative procedures have been met—specifically as they pertain to the CNC status of petitioner’s account for 2009–and consider petitioner’s collection alternatives.” Order, at p. 3.

And Merrick, send in the 433-A this time.

BTW, Holtsville is a long way from Chicago. Holtsville is a hamlet in Suffolk  County, New York. Suffolk County is situated on the outlying island off the coast of North America, known as “Long Island.” The name thereof is pronounced hereabouts by anyone not wishing the oppobrious designation of “tourist” as “Lawn Guyland.”

Not If It Hasn’t Filed Form 8832

More of the blind-men-describe-elephant excursus around the limited liability company, the outfit with the invisible shield, is found in Heber E. Costello, LLC, Scott D. Costello, Single Member, 2016 T. C. Memo. 184, filed 9/29/16.

Leaving aside the puzzling joinder of member with LLC, more particularly bounded and described in my blogpost “An Answer You’ve All Been Waiting For,” 10/30/15, here we have unpaid FICA/FUTA.

The late Heber formed a C Corp, of which he was sole stockholder, and filed 1120s consistently. Scott D. inherited the stock, formed the LLC, merged the C Corp with the LLC, whereupon the C Corp disappeared.

This gives rise to some Section 368(a)(1)(F) reorg learning, whereby Scott D. claims the LLC is a C Corp, and therefore the LLC should pay the self-assessed but unpaid FICA/FUTA. And Scott D. kept on filing 1120s, with C Corp’s TIN, which IRS accepted every year, and never bounced. So Scott D. claims equitable estoppel.

OK, but all that misses the point.

Here’s Judge Nega to set Scott D. on the right path to liability.

“Regardless of whether the merger of [C Corp] and LLC qualified as a valid reorganization under section 368(a)(1)(F), LLC never filed Form 8832 electing its classification for Federal tax purposes as an association and thus is not a corporation but rather is disregarded as an entity separate from its owner.

“Second, an eligible entity may not elect its entity classification by filing any particular tax return it wishes; it must do so by filing Form 8832 and following the instructions within section 301.7701-3(c)(1)(i), Proced. & Admin. Regs. Thus, LLC could not elect to be treated as a corporation merely by filing corporate income tax returns.” 2016 T. C. Memo. 184, at p. 11.

Equitable estoppel against IRS is used with “utmost restraint.” And IRS needs to make a false statement of fact.

“Respondent [IRS] made no false statement to petitioner, and we do not agree that his lack of rejection of LLC’s filed Forms 1120 is a wrongful misleading silence. Moreover, Mr. Costello knew that LLC has never filed a Form 8832 to elect to be treated as anything other than a disregarded entity.” 2016 T. C. Memo. 184, at p. 12.

Now lest my ultra-sophisticated readers rise as one to shout that TFRPs are assessed and collected against LLCs as if they were corporations, Judge Nega points out that the TFRPs here involved are for tax years prior to 2009, when the current rules went into effect.

But the requirement to file Form 8832 didn’t change. And unless statute or reg otherwise provide, you don’t elect your form of business by your form of tax return.

The Section 2036(a) boobytrap (“you kept it when you claim you gave it away”) blows up on Estate of Edward G. Beyer, Deceased, Craig E. Plassmeyer, Executor, 2016 T. C. Memo. 182, filed 9/29/16.

I will not attempt to digest 157 pages of Judge Chiechi’s biographical essay. The internet was down at my office yesterday, stuff didn’t get done that needed to get done, and after I got home and did it, I fell asleep at 3:00 a.m. local time while reading the opinion. Monumental quotations from formbook trust agreements with enough boilerplate to power a 120,000-ton cruise ship do not get it for me.

OK, so the late Edward G., former CFO of Abbott Labs, played fast and loose with more than a couple trusts (hi, Judge Holmes) his legal team provided for him. There were at least three plus a FLP. And Craig E., his agent (that’s someone who acts pursuant to a power of attorney, which is a piece of paper) and later ex’r, is swapping stock, promissory notes and money among various trusts and brokerage accounts. In the end, it really needed a diagram.

Craig E. is unfortunate that there are no jury trials in Tax Court. He’d get off, because no jury in this solar system could possibly have the slightest ideas of what was going on here. As it is, Judge Chiechi nails him on all counts.

The point is (and I can hear the cheers of those who have read so far, hope springing eternal in their bosoms) Craig’s lament. “In an email … from Craig Plassmeyer to Monique T, an attorney…, Craig Plassmeyer stated in pertinent part: ‘[A]ll these trusts are getting confusing. Explain to me how to record this interest payment. Which specific accounts * * * [should] show the movement of cash[?]’” 2016 T. C. Memo. 182, at p. 84. (Name omitted).

Barely halfway through this morass, and Craig E. (himself with a bachelor’s in math and chem, and later an MBA in finance, running a healthcare operation) finds his head spinning.

These labyrinthine shuck-and-jive estate plans require the ex’r to have a back office staff employed full-time to make this stuff work. Even a sophisticated ex’r with enough education and background to begin to comprehend this stuff can’t cope, if s/he must at the same time run their own business.

True, the late Edward G. left an estate north of $20 million. So it needed astute planning. But planning isn’t enough. It’s really about execution. And here the plethora of moving parts drowns poor Craig E.

I lost count of how many lawyers and brokers were involved in this case, even before trial, after I reached five. No prize for whomever finally comes up with the total.

It matters when a late-filing chop is asserted. We all know the Supremes refused to let the late filer off the hook because reliance on accountant, attorney or other preparer to file timely is no excuse. See my blogpost “Wait Just a Minute, Mr Postman – Part Deux,” 9/11/12.

But what about an adviser getting a date wrong? Or giving erroneous legal advice?

Third Circuit says that’s two different stories, and that’s enough to stymie IRS’ shot at summary J in MW 2 INC., Docket No. 8646-16SL, filed 9/28/16, a designated hitter by The Judge With a Heart, STJ Armen.

No question the 1120S was late. But MW 2 is Golsenized to Third Circuit, and Third Circuit reads the Supremes’ exegesis in US v Boyle, 469 US 241 (1985), to say strictly “my accountant mailed it late” doesn’t get it.

This is as contrasted with “my accountant told me Tuesday would be OK” or “you can always get another extension under 6081” (you can’t; see my blogpost “The Phone Call,” 4/15/14).

BTW, Second Circuit apparently agrees; see my blogpost first above cited.

In any case, here there’s a question whether MW2 relied on advice of expert as to filing date.

STJ Armen: “Among other things, questions exist in the instant case whether petitioner had reasonable cause for failing to file timely its income tax returns (Forms 1120S, U.S. Income Tax Return for an S Corporation), sp sec. 6699, and thus as to petitioner’s entitlement to abatement of applicable penalties. Drawing all factual inferences against respondent as the moving party in the motion for summary judgment, respondent has failed to establish that there are no genuine issues of material fact in dispute nor that he is entitled to judgment as a matter of law.” Order, at p. 3.

Football is back, so the metaphors turn toward the gridiron, as an attorney I’ll call Steve, a Tax Court regular, throws what is sometimes known as a “Hail Mary.” But Judge Cohen, playing at the Section 72(p) yardline, bats it down. The case is Dora Marie Martinez and Carlos Garcia, 2016 T. C. Memo. 182, filed 9/28/16, but it’s all about Dona Marie.

Facing foreclosure, Dora Marie borrows from her 401(b). After a couple payments (hi, Judge Holmes) she stops, overwhelmed by family problems. She gets a 1099-R, but never reports it.

Looking at a SNOD plus substantial underpayment chop, Steve argues that because the Plan kept billing Dora Marie for payments, the loan wasn’t in default. Therefore, says Steve, as the statute is clear, IRS’s regs about deemed distributions are out under Mayo.

No, says Judge Cohen: “Petitioners’ brief ignores the first five words of the text of section 72(p)(2)(C): ‘[e]xcept as provided in regulations’. These words plainly express Congress’ intent to have subparagraph (C) clarified through appropriate regulations, and petitioners offer no alternative explanation for that choice of words. See Mayo Found, 562 U.S. at 45 (‘Filling gaps in the Internal Revenue Code plainly requires the Treasury Department to make interpretive choices for statutory implementation[.]’). The regulations under section 72(p) establish the timing and amount of a deemed distribution, and this Court has heeded the final regulations for those determinations.” 2016 T. C. Memo. 182, at pp. 9-10.

But Steve is not daunted. He argues that, since Dora Marie used the money she drew to save her home from foreclosure, she gets the principal residence exception in Section 72(p)(2)(B)(ii). But all that says is that a loan to buy a principal residence need not be paid back within five years. Level payments of principal and interest are still required, and default triggers a deemed distribution. And Dora Marie wasn’t buying a principal residence.

The rationale for all this is that, since the borrower is borrowing their own money from a 401(b) (or any qualified plan), the plan administrator can’t sue them. But since the money is tax-deferred, if taken prematurely it becomes taxable.

I’d like to give Steve a Taishoff “good try,” I really would. But no; all I can do is wish him better luck next time.

Miner switch isn’t minor. And an IRS agent’s oral instruction to change your accounting method isn’t Commissioner’s consent. And that holds true even when you’re mining in the Alaskan wilderness.

Hear now the tale of Carey Clayton Mills, 2016 T. C. Memo. 180, filed 9/27/16, as told by Judge Goeke. IRS had three (count ‘em, three) attorneys on this case, which seems to savor of overlawyering.

IRS dropped the accuracy chops. “After concessions, the issue for decision is whether the allowable deduction for legal and professional services (legal fees) for [year at issue] should be $12,007 or $77,823.” 2016 T. C. Memo. 180, at p. 2.

Carey Clayton had legal and professionals, and they did match those amounts. The only question is, when were they incurred for tax purposes?

Carey Clayton was running his digging and delving via a disregarded LLC, so he used the cash method for the first five years of his operations. In year six, he first filed cash, showing $12,007, but then amended to show $77,823.

IRS pounced, but got the categories mixed up, claiming the $77,823 was for repairs and maintenance. When this got straightened out, it didn’t change the bottom line, so Carey Clayton petitions.

Basics. Section 446 says you pay taxes how you compute income. Once you pick it, you’re stuck, unless IRS lets you change. This you do by filing Form 3115 for year at issue, and awaiting the blessing from above.

There is a shortcut, Commissioner’s automatic (Rev. Proc. 2011-14, 2011-4 I.R.B. 330), and nonautomatic (Rev. Proc. 92-27, 1997-1 C.B. 680 97).

But if you use none of the foregoing, just saying “an IRS guy told me to do it” doesn’t cut it. Carey Clayton never got the go-ahead, neither automatic or nonautomatic.

No go-ahead means you go back to your previous method.

So it isn’t a minor switch, even if a miner did it.

Ch J L. Paige (“Iron Fist”) Marvel is at one and the same time grabbing the sixty buck filing fee with her signature Iron Fist, as in Harold B. Rhoney, Docket No. 30518-15S, filed 9/27/16, and handing it back with Iron Fist wide open in Ethel M. Stewart, Docket No. 9223-16, filed 9/27/16.

Ethel timely sent in one page of a SNOD, which served to get her a docket number and an order to file a proper petition and pay the filing fee. She didn’t, and got another chance. She then sent in the sixty bucks, and Ch J Iron Fist gave her an order, at no extra charge, telling her to file a proper petition.

She didn’t. So Ch J Iron Fist orders the Clerk of the Court to send Ethel her money back.

Now Harold also filed an imperfect petition, with no filing fee.

Ch J Iron Fist “…directed petitioner to file an Amended Petition and to pay the Court’s $60.00 filing fee or submit an application for waiver thereof. Subsequently, petitioner paid the filing fee. However, because no Amended Petition was received, the Court by Order dated August 16, 2016, afforded petitioner a final opportunity to file an Amended Petition and thereby to avoid dismissal of this case. Petitioner has failed to do so.” Order, at p. 1.

So does Harold get his money back, like Ethel?

No, the order only states his case is dismissed.

Now see my blogpost “New Sheriff In Town,” 6/7/16.

When does a petitioner get back a filing fee? When is a filing fee waived if no request for waiver is made? Where are the rules governing these matters to be found?

Look It Up In The Dictionary

IRS says no, but Judge Foley is prepared to give an estate a deduction for a loss suffered by the LLC, 99% of whose membership interests were held by the decedent.

Tax Court has grappled with this Protean creation of statute before. See my blogpost “Is An LLC A Person?” 9/11/15, where The Judge With a Heart, STJ Armen, fought that one out to a no-decision.

But now Judge Foley is writing for a unanimous Court in a full-dress T. C., Estate of James Heller, Deceased, Barbara H. Freitag, Harry H. Falk, and Steven P. Heller, Co-Executors, 147 T. C. 11, filed 9/26/16.

And if this post is a trifle late, I occasionally have to practice law.

Facts are stipped. The late James placed much wealth in a family LLC (his gross estate was $26 million, un bello spendere). But $16 million thereof was invested by co-ex’r Falk, who ran the LLC, in a well-known securities firm.

Falk and the co-ex’rs took out $11 million to pay estate taxes and divvied up the rest to the late James’ children, each of whom had an 0.5% membership interest.

Lucky Falk.

The well-known securities firm, which had paid such generous returns to the LLC, was run by Wall Street wizard, and more recently long-term guest of us taxpayers, Bernie Madoff.

The LLC’s holdings in the Madoff account went rapidly to zero. The estate claimed a $5 million loss, being whatever was left after they pulled the $11 million.

Of course, we don’t know what, if anything, Irving (“Captain”) Picard, Esq., and his next-generation co-voyagers, might have clawed back on behalf of others similarly swindled. Falk fired off a protective refund claim, just in case. See 147 T. C. 11, at p. 4, footnote 4.

As aforesaid, IRS said no. There was theft all right, but it was theft from the LLC. The LLC was not the estate.

But no one’s legal argument is safe in Tax Court when there’s a dictionary lying around at 400 Second Street, NW. See my blogpost “Revenez, Enfants de la Patrie,” 9/21/15.

The theft loss section, Section 2054, speaks of losses during estate administration “arising from theft.”

Going to the dictionary in this case of first impression, since the statute and regs don’t deal with this, here’s Judge Foley.

“The estate tax is imposed on the value of property transferred to beneficiaries. See secs. 2001, 2031(a), 2051. In that context, a loss refers to a reduction of the value of property held by an estate. See Black’s Law Dictionary 1087 (10th ed. 2014) (defining a loss as ‘the disappearance or diminution of value’). While [LLC] lost its sole asset as a result of the Ponzi scheme, the estate, during its settlement, also incurred a loss because the value of its interest in [LLC] decreased from $5,175,990 to zero.” 147 T. C. 11, at p. 5.

And if one dictionary isn’t enough, here’s another.

“Respondent concedes that Madoff Securities defrauded [LLC] but contends that the estate is not entitled to a section 2054 deduction because [LLC] incurred the loss. In support of this contention, respondent emphasizes that pursuant to New York law, [LLC], not the estate, was the theft victim. Section 2054, however, allows for a broader nexus (i.e., between the theft and the incurred loss) than does respondent’s narrow interpretation. ‘Arise’ is generally defined as ‘to originate from a source’. See Merriam-Webster’s Collegiate Dictionary 62 (10th ed. 2001). Pursuant to the phrase ‘arising from’ in section 2054, the estate is entitled to a deduction if there is a sufficient nexus between the theft and the estate’s loss. See White v. Commissioner, 48 T.C. 430, 435 (1967) (finding a similarity between losses caused by direct and proximate damage of a section 165(c)(3) ‘other casualty’ and those arising from the specifically enumerated section 165(c)(3) causes). It is sufficient indeed. The nexus between the theft and the value of the estate’s [LLC] interest is direct and indisputable. The loss suffered by the estate relates directly to its [LLC] interest, the worthlessness of which arose from the theft.” 147 T. C. 11, at p. 6. (Emphasis by the Court). (Footnote omitted).

The aim of the estate tax is to tax whatever the legatees and distributes get. Here, what they got was $5 million less than what the late James had.

I got bounced from a tax review blog recently for suggesting an IRS appeal. So, with nothing to lose, I’ll suggest another.

This seems to be the newest CLE flavor-du-jour, and both sides are playing it for all it’s worth today.

The idea is to knock out your opponent’s expert on a motion in limine. But all it’s worth in Judge Holmes’ courtroom is a direction to go try the case.

So the designated hitter (thanks, Judge) is Oakbrook Land Holdings, LLC, William Duane Horton, Tax Matters Partner, Docket No. 5444-13, filed 9/23/16.

It’s a conservation easement case, so there’s the usual joy-forever motion to knock out the easement on the ground that the donor reserves the right to build some structures on the property post-donation, and get credit for them if the easement is extinguished.

IRS also claims the easement is void because indefinite, because where these structures are supposed to go is unclear.

But the property itself is set forth clearly enough, and the structures should only impinge on the value ascribed to the easement.

IRS wants to rely on “a couple conservation-easement cases in which we held that a reserved right to amend made the easements nonperpetual.” Order, at p. 2.

Judge, I had confidence in you; I was sure you’d exclude the partitive genitive at least once. And I’ve blogged both those cases, of course.

Howbeit, these objections are matters to be elaborated and expatiated upon at trial.

IRS wants an amendment to its answer, raising a 20% undervaluation chop. It’s past the thirty-day freebie, and IRS has no good reason for delay, but there’s no prejudice to Oakbrook. The value is whatever it is (or whatever can be proven that it is), and that’s the whole point of the trial. So The Great Dissenter gives IRS its amendment, with the burden of proof thrown in at no extra charge.

Oakbrook wants to toss an IRS expert for too much hindsight in valuing the easement. “Oakbrook is right that hindsight shouldn’t affect an appraisal, with the important caveat that an expert may consider reasonably foreseeable events as of the date of valuation. But its objection is based on suppositions that Barber did so — for example, that in a table of ‘outcomes’ the outcomes must have occurred after the date of valuation or that building-permit data from 2008 wouldn’t have affected values during 2008 because they would have been unknown at the time.” Order, at p. 3.

But this is a matter for cross-examination and argument, not exclusion.

Ditto IRS’s attempt to toss Oakbrook’s expert. He got the acreage wrong, so IRS claims he didn’t appraise the right parcel. Sloppy proofreading hurts credibility, says Judge Holmes, but let IRS sweat the appraiser on cross-examination.

Even less useful is IRS’ claim that the appraiser isn’t licensed to appraise in the State where the property is located. But there’s only one Tax Court opinion remotely on point, and IRS doesn’t cite it. Judge Holmes does, and it not only lets in the unlicensed appraiser’s report, but it accepts most of it.

So put it all in, and The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Inveterate, Implacable, Indefatigable, Ineffable, Ineluctable, Irrefragable, Incontrovertible and Indispensable Foe of the Partitive Genitive, and Old China Hand, will sort it out.

And don’t forget: “The parties should also be aware that, although the Court’s rules presume that an expert’s report is his direct testimony, this division of the Court has had success with allowing 20 minutes or so of direct testimony to allow minor amendments to a report and to enable counsel to highlight the most important parts of the report in some concise way. It is very probable the Court will do that in this case as well.” Order, at p. 3.

Go try the case, guys.