When IRS tries this Scriptural gambit, it doesn’t fly with The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Incomparable, Incontrovertible, Irrefragable, Indomitable, Ineluctable, Ineffable, Illustrious and Indefatigable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes, in his second designated hitter of the day, Michael V. Shannon & Hope W. Shannon, Docket No. 16441-12, filed 9/2/16.

I’m ready for a dark rum and cola with a big chunk of lime just about now, but Judge Holmes has “a couple pretrial motions pending”, Order, p. 1 [sic], before sending IRS and Mike & Hope off to try their troubles in Birmingham.

Mike’s & Hope’s trusty lawyer, whom I’ll call Chris, hits IRS with some discovery demands, which Judge Holmes doesn’t even itemize as he grants them.

Then Chris throws a couple requests (hi, Judge Holmes) for admissions (RFAs) at IRS, which here in NY State we call notices to admit, and I love them. Very useful tool, cheap and easy.

IRS ripostes with the title of this blogpost.

“For RFAs 1, 6, and 7 respondent objected on the basis that the burden of proof is on petitioners. The Court agrees with petitioners that this is not a good ground for objection. These RFAs seek to show that respondent doesn’t know of facts to justify its litigating position on the issues described. Petitioners are not, by seeking this information, trying to shift the burden of proof; they are trying to find out if respondent has relevant information. We’ve said for forty years that this sort of simplification of pretrial preparation is one of the aims of the request-for-admissions tool. See Estate of Allensworth, 66 T.C. 33, 39 (1976).” Order, at p. 1.

But IRS may have a save. “In his answers to RFAs 9 and 10 respondent made the same objection but coupled it with a cross-reference to earlier denials that were sufficient. The Court will overrule the objection and require a better response to these, but recognizes that a denial-with-cross-reference might well suffice.” Order, at p. 2.

Chris wasn’t wrong to try those RFAs. The previous answers might not fly, when explicated.

Next, maybe Chris and Judge Holmes both read my blogpost “Stipulated but Irrelevant,” 8/30/16.

“Respondent also objected to RFA 11 on the additional ground that it concerned how respondent made a determination that was reflected in the notice of deficiency. This is generally a good objection…, but it is an objection as to relevance. Our Rule 90(c) is clear that such an objection should be noted but ‘is not to be regarded as just cause for refusal to admit or deny.’” Order, at p. 2.

It’s the old “past isn’t even prologue, never look behind the SNOD” defense, but that’s only relevance, not fact.

Chris gets a Taishoff “Good Job, First Class.”

The highly exalted source from which the title is taken once again proves how apposite that source can be.

This time the story proving the point is told by The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Incomparable, Incontrovertible, Irrefragable, Indomitable, Ineluctable, Ineffable, Illustrious and Indefatigable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes.

Sir W. S. Gilbert to the contrary notwithstanding,  the Merriman is the maid, Merriman R. Mathewson, Docket No. 12087-10, filed 9/2/16.

As the old wedding ceremony had it, Merri’s husband endowed Merri with his worldly goods, but they included a pre-marital thwacking great deficiency from a listed transaction that he carried over onto their MFJ return, plus, at no extra charge, a 40% valuation chop.

Merri wants innocent spousery, but her problem is what she knew.

She tries the Lennon-McCartney 1966 gambit: “I said, even though you know what you know, I know that I’m ready to leave.”

That doesn’t get it with Judge Holmes. “Mathewson argues that whether she knew or had reason to know of her husband’s understatement is irrelevant because the loss carryforward was attributable to the …tax year, before they were married. We can assume that’s true — but the standard in section 6015(b) is whether the spouse requesting relief knew or had reason to know of an understatement of tax. I.R.C. § 6015(b)(1)(C).” Order, at p. 2 (Footnote omitted, but it says it doesn’t matter that Merri didn’t know about the chop; all she needed to know was the understatement of tax.)

Now generally (I love that word), innocent spousery is a question of facts and factors, with much marching and counter-marching around the Section 6015 prickly pear.

But Merri lets the feline poke its wee nose out of the cliché, and that’s the point of this blogpost (and I can hear my readers say, “There is one?”).

“Mathewson has not provided any facts necessary for a determination of her knowledge. Indeed, she concedes that she ‘might not be able to establish that she had no reason to know that Respondent might not assert a deficiency in tax . . . against [her husband]… based on the carryforward … of unused capital loss of[his] from his participation in… the…Tax Shelter.’” Order, at p. 2.

Tell it not in Gath.

See my blogpost “Take the Hint,” 11/25/15. I don’t know if Harjit Bhambra, Docket No. 1395-16L, filed 9/2/16, read it when it came out (or thereafter), but Judge James S. (“Big Jim”) Halpern echoes the words he spoke back then in this latest designated hitter.

IRS wants a remand, Harj objects, so Judge Big Jim runs a phone-a-thon.

He adjures Harj: “The Court pointed out to petitioner that, in general, the taxpayer bears the burden of proof, see Rule 142(a), Tax Court Rules of Practice and Procedure, and that he might benefit by a remand to clarify facts. We also pointed out that if defects in respondent’s determination procedures are proved at trial, the Court might at that time remand the case.” Order, at p. 1. (Emphasis by the Court).

Harj continues to object. So Judge Big Jim ships him and IRS off to trial, with a savings clause: “We believe that the case can proceed to trial without a remand.” Order, at p. 1.

So I’ll echo my words from last November:  “But when a Judge suggests you might think about a remand, do think, and think twice. You might reject the suggestion if you don’t want to give Appeals a second chance to sink your client. But you might take the hint if you think you have enough good stuff to win at Appeals.” Blogpost op. cit.

Bruce W. Peterson thought he was in good hands as a flogger of insurance and financial products for the aforesaid good-handers, until Allstate Insurance dropped him as an EE but engaged him as an IC. He took no part in the class action brought by the disgruntled ex-EEs, but he did take his Allstate pension payout and put it in a SEP-IRA.

He thereupon bought a single-payment annuity with the funds from said payout, which got properly placed in his SEP-IRA.

OK, you’ll say, so why are you blogging Bruce W. Peterson and Lisa A. Peterson, 2016 T. C. Sum. Op. 52, filed 9/1/16?

It’s not the variance between the 1099-R Bruce got when he cashed in the annuity and pocketed the proceeds and the letter he got from the issuer that stated a lesser amount, when Bruce put the greater amount on line 15a of his 1040 but left it out of line 15b. That set off bells for IRS, but not for me.

It’s about the Section 72 medical out.

Bruce claims he had heavy medical expenses. He drew down the entire annuity because, although the first medical bill was a lot less, he was told he might have further complications, as to which the trial record speaketh not.

Bruce trots out Publication 590, the IRA bible. Everyone agrees he was sick to the tune of a little less than 10% of what he took.

Judge Paris says Bruce got it wrong, and didn’t ask his accountant. Moreover, he got his authority from the wrong place.

“The flaw in petitioner’s argument is that the section on early distributions on which he relies concerns the 10% additional tax assessed on early distributions under section 72(t).  Petitioner was 60 years old when he received the [SEP-IRA] distribution; therefore, the additional tax under section 72(t) does not apply.

“Petitioner has confused an exception to the additional tax for an early distribution for unreimbursed medical expenses with the general rule that any distribution from an annuity contract will be includible in gross income.  The fact that petitioner used a portion of the distribution to pay medical expenses does not shield the distribution from taxation.” 2016 T. C. Memo. 52, at pp. 9-10. (Footnote omitted).

And he’s in for the full boat, because he paid for the annuity with pre-tax dollars from the good-handers, and put in no post-tax cash; therefore zero basis.

Finally, Bruce is in the accuracy-chop stakes. “Petitioner testified that he gave all of the pertinent documents to his accountant and that ‘it takes about 15 minutes to do his taxes’.  Petitioner did not review the return after his accountant prepared it and did not ask his accountant about the discrepancy between the amount on the Form 1099-R, which was attached to his return, and the amount in the [issuer’s] letter.  Taxpayers have a duty to review their tax returns before signing and filing them.” 2016 T. C. Sum. Op. 52, at p. 12.

Bruce also never asked his accountant about basis in his SEP-IRA annuity.

This doesn’t help Bruce. “Because of petitioner’s experience as a financial and retirement investment adviser, his failure to seek his accountant’s advice about his annuity contract and the cancellation of the contract and the distribution…, and his failure to review his…return, the Court finds that he failed to prove that he acted with reasonable cause and in good faith in his effort to assess his proper tax liability.  Therefore the Court will sustain respondent’s determination of an accuracy-related penalty for an underpayment due to a substantial understatement of income tax.” 2016 T. C. Sum. Op. 52, at p. 12-13.

It may take 15 minutes to do your taxes, but give it a few more minutes to review them once you’re done.