No, not a Dash Riprock “Liars’ Poker” ploy from Michael Lewis’classic.

Today we look at Silver Medical, Inc., 148 T. C. 18, filed 12/19/16. Silver wanted a triple-dip on some unguided Congressional largesse to inventors of therapeutic devices from Section 48D, a section added by  Affordable Care Act of 2010 (which itself needs some therapeutic devices, but this is a non-political blog).

If the device made the cut with Treasury and HHS, one got either cash or credit to the extent of 50% of allowable expenditures in each of 2009 and 2010. There were clawbacks if too many applicants asked for the goodies, or if there were disallowances of goodies previously granted because applications were due and had to be processed before end of 2010, so no one knew final numbers. The clawbacks were treated as tax.

Silver was cute. They took a short year in 2010, so that they had three tax years in 2009 and 2010; 2009 was one year; 2010 short and 2010 long were the others, and the magic language in Section 48D(b)(5) talks of tax years beginning in 2009 and 2010. Thus, by shorting 2010, Silver had two years beginning in 2010, so they could use almost all of 2011 to grab more.

Aside from being a case of first impression as to a statute that has timed out, this is an example of gameplaying that doesn’t get it with Judge Vasquez.

Silver got certified for its expenditures before choosing to go short. When it got its short approved, it tried to get recertified. IRS didn’t certify. Instead, it hit Silver with a SNOD.

Silver claims “tax years beginning” means “tax years beginning.” Plain language, giving effect to every word, and all that jazz.

Judge Vasquez cuts to the chase. “We need not and will not address petitioner’s argument in resolving the instant case.  We focus on respondent’s alternative argument and recognize that even if Congress did intend to allow taxpayers like petitioner to make qualified investments over three tax years (an issue we decline to decide), petitioner did not actually receive certification to do so.” 147 T. C. 18, at p. 10.

Administrative nullification? IRS can thwart what seems to be someone taking advantage of sloppy language in the famous 3200-page enactment by doing nothing.

Judge Vasquez is down with that.

Now as for when the clawback of overpaid largesse happens, that happens immediately after the grant was made, as if it had never been made.

OK, says Silver, the grant was made in 2010, therefore the clawback applies to that year.

No, says Judge Vasquez.

“In determining that the grants were made on separate dates, we focus primarily on the fact that the grant funds attributable to each year were paid on separate dates.  The terms of the QTDP program provide that grants for tax years beginning in 2009 will generally be paid no later than October 29, 2010, and that grants for tax years beginning in 2010 will generally be paid within 30 days of the last day of the 2010 taxable year.  See Notice 2010-45, sec. 8.02(6) and (7), 2010 23 I.R.B. at 738.  We believe that the payments for each tax year are sufficiently distinct to warrant a finding that the underlying grants are separately ‘made’ in each year when paid.” 147 T. C. 18, at p.13.

The letter granting certification mentioned the clawback, so nothing was final until after year-end. Applications were due in July, 2010 and IRS had to accept or reject by October. Approving the grant did not result in an unrestricted right to a fixed grant amount. So the final grant became effective at the beginning of 2010, and the 2011 items are off the table.

I give Silver a Taishoff “Good try, First Class.”

Howard Feinberg & Gail Feinberg are in Tax Court today, having been tossed for failing to cough up the sixty bucks but now having raised the cash.

A quick docket search reveals that Howard & Gail are pro se. OK, most TC petitioners go pro se. There’s no requirement for them to retain counsel, and Tax Court certainly can’t appoint counsel (except sometimes; see my blogposts “Assigned Counsel?” 1/6/16 and “Assigned Counsel? – Part Deux,” 1/28/16).

But here’s the twist. Having reached a “no change” deal with IRS, having the sixty bucks ready to send in to Ch J L Paige (“Iron Fist”) Marvel, and wanting to submit a stipulated decision, they need a vacation…of Ch J Iron Fist’s earlier order tossing them for nonpayment. And they do it in this wise: “…a Letter… by Terry R. Fyffe on Behalf of Petitioners. In that letter, petitioners (1) state that they and the IRS have reached a “no change” agreement and (2) request that this case be reopened so that the parties’ stipulated decision may be submitted for the Court’s consideration. The letter was accompanied by payment of the Court’s filing fee.” Order, at p. 1.

Sound like a motion per Rule 162 to you? Well, it sure did to me. And Ch J Iron Fist agrees, and recharacterizes the Letter as a 162 motion.

The order doesn’t state whether Howard & Gail signed the letter. If they did, why mention who wrote it?

But if they didn’t, how do non-USTCPs or admitted attorneys go making motions?

Has Rule 200 been superseded? Or is Terry R. Fyffe an unusually modest USTCP or admitted attorney, who hides his light under a cliché? A quick on-line search turns up a website for a firm of CPAs, in which one Terry R. Fyffe is stated to be a founding member. But the site doesn’t state that Terry R. is a USTCP or an admitted attorney.

Ch J Iron Fist sidesteps the issue, holds the letter-cum-motion in abeyance until she sees the stipulated decision, and then will “take appropriate action.”

So people pay a fee, undergo a brutal examination, with an infinitesimal passing rate, and get sponsors, to become USTCPs. And the rest of us lawyers send in the thirty bucks, and take no exam. But if we appear without having filed Entry of Appearance, we get a smart right-about-face and get told to file one.

However, CPAs apparently need do none of the above. Section 7452 provides that “(N)o qualified person shall be denied admission to practice before the Tax Court because of his failure to be a member of any profession or calling.” But the immediately preceding sentence in Section 7452 says Tax Court can make rules about representation of petitioners.

I must have missed that one.

In my young day, traveling on Canadian Pacific Rail, I heard a no-doubt-apocryphal tale of a traveler who encountered a bedbug in a CP sleeper. In response to his furious letter to the high command, he received an abject apology, in the most fulsome terms. But the typist (I told you this was in my young day) left in the envelope the High Commander’s note: “Send this dope the bedbug letter.”

I bear the admonition in mind like the famous “torch in flame.” The form file is not infallible. Read the document carefully before you sign it, send it, file it, mail it or deliver it.

Today we see what happens when one doesn’t.

Jeffrey S. Monaghan is apparently deceased, and Martha J. Monaghan, co-petitioner, is asked to provide letters testamentary, letters of administration, or some kind of judicial decree appointing an executor, personal representative or fiduciary to represent the late Jeffrey’s interests.

Ch J L. Paige (“Iron Fist”) Marvel warns what will happen if Martha doesn’t do so.

“Failure to comply with this Order may result in the granting of respondent’s motion and dismissal of the instant case in part as to X [sic], Deceased, or other appropriate action by this Court.” Jeffrey S. Monaghan & Martha J. Monaghan, Docket No. 22063-15, filed 12/16/16, at p. 1.

And STJ Daniel A. (“Yuda”) Guy has another one for us. Morris Gaines and Madeline Gaines, Deceased, Docket No. 5597-16S, filed 12/16/16. And this time IRS’ counsel goes astray. “… respondent filed a document titled ‘Motion to Appoint Tax Matters Partner’. This motion is incorrectly titled and is in the nature of a motion to substitute parties and change caption.” Order, at p. 1.

While Morris and the late Madeline may have been partners in life, TEFRA has nothing to do with it.

Takeaway—There but for the grace of you-know-Whom goes any of us.

But It Does Save the Chop

Unlike that lizard of the television advertisements, Form 5329 doesn’t save Bilal Ahmed, Docket No. 23807-15, filed 12/15/16, 15% or even 10%. The latter is the Section 72(t) tax or addition to tax or whatever it is, when what he claims is a QDRO (Qualified Domestic Relations Order) permitting him a tax-free takeaway from his IRA fails to convince IRS or Judge Goeke.

But it does save Bilal the 20% substantial understatement chop on the 10% early withdrawal thingy, in this off-the-bencher, which Judge Goeke, modest as always, doesn’t bother to designate.

Bilal is ordered by CA Sup Ct to draw down his IRA to pay off the credit card debt that burden Bilal and his community-property soon-to-be-ex. Of course, they’re supposed to split the taxes, but neither IRS nor Tax Court enforces State Court decrees.

Judge Goeke notes that Bilal filed the Form 5329 discussing the claimed exemption from tax based on a claimed QDRO. But Bilal’s decree utterly crashes on Section 414(p)(2), none of whose tests the decree satisfied. And Bilal never tipped off the plan administrator, thus falling foul of Section 414(p)(6).

Judge Goeke: “It’s undisputed that the Petitioner did not provide the order in question to the administrator of his IRA and it is also clear from the order, itself, that it does not meet the requirements of Subsection 414(p)(2) as described above.

“Respondent [IRS] correctly points out that Petitioner was required to submit the order to the plan administrator in order to be subject to the statutory exception under Section 72(t)(2)(C). Given this and other inadequacies of the order in question, there’s no question that the Petitioner’s position that he was exempt from the application of Section 72(t) is incorrect.

“The order was not a qualified domestic relations order and the inadequacies of the order are not mere technical failures. The order is intended to ensure the credit card debt of the marital community of Petitioner and his former spouse is satisfied and he was ordered to receive the money initially himself, not to transfer the money to his spouse.

“He testified that remaining amounts after the satisfaction of the credit card debt, which was to his benefit as well as to his former spouse, were used to pay obligations of himself as well as his former spouse in legal fees [sic]. Use of the funds in this manner is not consistent with a statutory exception as a policy matter in addition to the technical inadequacies of the order and Petitioner’s failure to provide the order to the plan administrator.” Order, at p. 9-10.

So Bilal’s IRA draw is taxable all the way, he’s under 59-1/2 on the draw date so the 10% thingy applies, and he’s in the zone for the five-and-ten ($5K or 10%) chop. IRS has burden of production, and has satisfied it.

But here comes the Magic Paper to save whatever is left of the day for Bilal.

“In this regard, we believe it is important that the Petitioner filed the appropriate form with respect to the early withdrawal from the IRA. While the Petitioner incorrectly claimed that the withdrawal was exempt, his assertion that the withdrawal was exempt we believe was in good faith given the rather complex nature of the law regarding the treatment of qualified domestic relations orders.” Order, at pp. 11-12.

Takeaway—When in doubt on an IRA draw, at least on a QDRO, send in the Form 5329. Yes, I know, it’s an invitation to Examination, but the 1099-R will set off bells anyway if it doesn’t show up on the 1040. And if the petitioner looks honest but bewildered, it might save the chop.

Second takeaway—Family lawyers, beware. Watch out for the QDRO trap when detaching IRAs from spouses. Re-read Section 414(p)(2) and the regs.

No, this is neither political commentary, nor a retelling of what the ancient Greeks told much better. Rather, Jerald L. Carmody, 2016 T. C. Memo. 226, filed 12/14/16, fails to convince Ch J L. Paige (“Iron Fist”) Marvel that his Hercules imitation sufficiently transmutes his horseracing hobby into a business. He stumbles at the usual Section 183 fence.

“During the years at issue petitioner spent time every day on his horse racing activity.  In addition to entering horses in races, he researched on the Internet horses that would be racing during the current week, researched the performances of horses in which he had previously owned an interest, and also searched for other horses in which to purchase interests.  On the weekends petitioner cleaned stalls and pastures, attended races at the racetracks, helped Mr. P care for the horses during the evenings, and watched videos of the races during the nights.  Because the racing seasons at the racetracks span most of the year, petitioner engaged in these activities throughout the entire year.” 2016 T. C. Memo. 226, at pp. 7-8. (Name omitted).

But no business plan, sketchy books and records, continuous losses over twenty years, no consultations with experts or successful operators, avid horseracing enjoyment, and lots of other income from flogging parts and services for helicopters, causes Jerald to become unhorsed taxwise.

Jerald should check out my blogpost “I’ve Got The Horse Right Here,” 4/9/14, for how Stefan A. Tolin beat IRS in a photo finish.

A defective resume causes Judge James S. (“Big Jim”) Halpern to revisit AD Investment 2000 Fund LLC, Community Media, Inc., A Partner Other Than the Tax Matters Partner, 2016 T. C. Memo. 226, filed 12/14/16.

The visit and its results can be found in my blogpost “Harmless Error,” 11/19/15. Turns out Murph had fibbed a wee bit on his curriculum vitæ. Enough to get his expert witness testimony tossed.

And the Community Mediators have told enough of a tale to convince Judge Big Jim to allow a late Rule 162 vacation, to reconsider the case without Murph’s contributions thereto.

Murph had been tossed once before from a different case on the same grounds.

In any event, decision affirmed.

It was worth a try, however feeble, but the one salient fact is not rejected, even minus Murph’s exegesis thereupon. And IRS consents, which should have given the movants pause.

Lehman Brothers was the sole arbiter on the deal, owed nobody any duty to look out for their interests, and could guarantee the currency Bialystok that threw off the recognized loss but unrecognized offsetting gain by picking a price outside the sweet spot.

Not a reprise of Erik McBride Thompson’s voyage of discovery, for which see my blogpost “Can Tax Court Be Habit-Forming?” 12/20/11.

Have I really been doing this for more than six years?

No, today’s seeker after wisdom and truth is Andrew Lee Stinson, 2016 T. C. Sum. Op. 82, filed 12/13/16.

Andrew Lee has a master’s degree in information science. But apparently in his part of North Carolina all he could find during the year at issue was indoor and outdoor odd jobs for an old acquaintance, ranging from dumping compost to editing Photoshop. This got him a big $13K, on which he paid tax but no SE.

IRS goes for the SE.

Judge Cohen tells it all in one paragraph.

“The petition alleged only petitioner’s dire financial circumstances and cited no error in respondent’s determination.  At trial petitioner stated that he was present ‘because I spent the $60 [filing fee] and for that amount of money I’d like to see how things work.’  Petitioner’s candor and credible testimony are appreciated but do not change the legal effect of the facts.”

It’s a shame Andrew Lee didn’t show up for a calendar call and maybe a trial. A trial in what the late lamented Professor Siegel called “S.E.C.” Someone Else’s Case. It’s a lot cheaper.

Well, not actually. It’s just that Tax Court again deals with farmers and the Section 263A capitalization rules, in Wasco Real Properties I, LLC, Gardiner Family Trust, Tax Matters Partner, et al., 2016 T. C. Memo. 224, filed 12/13/16.

I don’t know Judge Buch’s background for dealing with nuts, but in this case it’s an almond farm or two or three, that the Wasco gang picked up from the rose growers who were there before. Saying “nuts” to flowers, they borrowed the money to buy the parcels, planted almond trees, and wanted to deduct currently loan interest payments and real estate taxes.

Now trees aren’t row crops, like carrots, roses, corn and wheat. “Row crops are nonpermanent crops that have a specific growing season.” 2016 T. C. Memo. 224, at p. 11. And Judge Buch has a great deal to say about why trees are one with the land whereon they grow, and thus expenses of the land must be capitalized, and recovered accordingly, against income when the nuts are sold.

There’s no question the taxes and interest are deductible, even the interest for some intrafamily loans. The only question is when to deduct these.

And what would a T. C. Memo. be, without a quick flip through the digital dictionary?

“The entities’ growing of the almond trees is a production of those trees within the reach of section 263A.  The uniform capitalization rules apply to ‘[r]eal * * * property produced by the taxpayer’ for the taxpayer’s use in a trade or business or in an activity conducted for profit.  Sec. 263A(b)(1), (c)(1).  While the statute does not define the term “real property” for purposes of section 263A, section 1.263A-8(c)(1) and (2), Income Tax Regs., defines the term to include ‘land’ and ‘unsevered natural products of land’ and states further that ‘unsevered natural products of land’ generally include ‘[g]rowing crops and plants’ where the preproductive period of the crop or plant exceeds two years.  That definition, although included in the regulations explicitly made applicable to the capitalization of interest but not included in the regulations explicitly made applicable to the capitalization of other costs, is consistent with the term’s ‘ordinary meaning.’  See Nw. Forest Res. Council v. Glickman, 82 F.3d 825, 833 (9th Cir. 1996) (observing that a statutory term that the statute does not define may be construed in accordance with its ‘ordinary meaning’).  The ordinary meaning of the term ‘real property’ includes ‘property consisting of land, buildings, crops, or other resources still attached to or within the land’.  Merriam-Webster’s Online Dictionary, http://www.merriam-webster.com/dictionary/property (last visited Nov. 15, 2016); see also Black’s Law Dictionary 1412 (10th ed. 2014) (defining the term ‘real property’ to include ‘[l]and and anything growing on, attached to, or erected on it, excluding anything that may be severed without injury to the land’).  In that the almond trees grow on the land and otherwise fit within the ordinary meaning of the term ‘real property’, we conclude that the almond trees are “real property” for all purposes of section 263A.” 2016 T. C. Memo. 224, at pp. 25-26. (Footnote omitted).

See my blogpost “Raspberries, Strawberries,” 2/22/13. Almonds didn’t make the Notice 2013-18 cut.

Joyce Kilmer may be right that “only God can make a tree,” but IRS can sure capitalize it.

So the Wasco gang gets a Section 481 adjustment, and must capitalize the taxes and interest.

No, not the TV cops-‘n’-robbers. Today it finally became clear to me why there cannot be refunds of the sixty buck filing fee.

It’s probably been clear to y’all from the getgo, so I’m waiting for the choir to sing the “Amen” from Messiah.

Every day the Tax Court is open, even when there are no opinions or designated hitters, there are dozens of orders telling petitioners to cough or cop.

Either cough up the sixty bucks or cop a waiver.  I don’t have the statistics on how many do neither, but intuition seasoned with plowing through this stuff says better than 90% do neither.

I wish the hard-laboring intake clerks and flailing datestampers would provide valid statistics.  I know it’s tangential to TAS’ mission at best, but the numbers could be part of Nina E. (“The Big O”) Olson’s annual weep to Congress.

Howbeit, each of those nonstarters takes the same amount of work to log in and create a file as a multi-billion-dollar deficiency filed by a trillion-dollar multinational, featuring white shoes in divisional strength, which takes ten years to get to trial with no time off for good behavior.  And the trillion-dollar multinational pays the same sixty bucks.

So the relatively few who cough or cop subsidize the rest.

No, don’t draw any political analogies. Not here.

Hit it, choir!

The Judge With a Heart, STJ Armen, has before him the revocation of the 501(c)(3) of Community Education Foundation, 2016 T. C. Memo. 223, filed 12/12/16.

CEF was formerly known as “ABF Educational Foundation, Inc., but since its incorporation has operated under the names Congressional Education Foundation, Congressional Education Foundation for Public Policy, and most recently Community Education Foundation.” 2016 T. C. Memo. 223, at p.  2.

The sole officer, director and representative of CEF timely petitioned, but did not engage fully thereafter, and did not file a brief when directed by STJ Armen.

Judges do get peeved when ignored, but STJ Armen, exercising his hearty discretion, elects not to toss CEF on that ground.

CEF did nothing for the first seven years of its life, but then tried to run a Veterans’ Inaugural Ball, which fizzled.

There’s a jumpball over why the fizzle. CEF’s sole officer, director and representative stiped to the administrative record.

The record contains an “…article in the Army Times stating that ‘sponsors, entertainers and ticketholders [were left] in the lurch when the Veterans’ Inaugural Ball was not held.  The article further stated that the Baltimore, Maryland, Department of Recreation and Parks did not have a permit request regarding petitioner’s promotion of a ‘star studded benefit concert’ at Carroll Park in Baltimore, nor were the featured entertainers officially scheduled to perform at any such concert. According to petitioner’s version of the events, the Veterans’ Inaugural Ball fell through because Mr. H found his cosponsor to be misleading and other unnamed cosponsors ‘could not get past the fact that’ (1) ‘we were all Republicans, supported President George W. Bush, and the war in Afghanistan and Iraqi [sic]” and (2) the ‘CEF [Community Education Foundation] former President * * * was indicted in Colorado on issues relating to money and the Kuwaiti Government’.  With respect to petitioner’s contemplated events for [the next year] it contends that it was not able to find corporate sponsors for those events because of an unflattering article in the Washington Post, as well as the… article in the Army Times.” 2016 T. C. Memo. 223, at p. 6, footnote 3.(Name omitted).

As this is a nonpolitical blog, I can only reiterate: Stipulate, don’t capitulate. Especially don’t stipulate to hearsay.

Howbeit, STJ Armen sees no need to figure out why CEF didn’t bring off the Veterans’ Inaugural Ball.

“Instead, the Court focuses on petitioner’s exempt purpose and the activities that it engaged in, or, more to the point, failed to engage in, with respect to that purpose.

“According to its application petitioner intended to further its exempt purpose by organizing monthly town hall meetings, 20 national workshops yearly, and quarterly congressional forums in addition to a nationwide media campaign.  The application allocates petitioner’s time and resources as follows:  (1) 25% to town hall meetings…; (2) 55% to national workshops…; (3) 10% to congressional forums…; and (4) 10% to its nationwide media campaign.  Notably, petitioner did not over time meaningfully organize or allocate resources to any of the aforementioned activities.  Accordingly, on the basis of the record before us, the Court concludes that petitioner failed to satisfy the operational test because it did not engage in any activity that accomplished one or more of the exempt purposes in section 501(c)(3).  The Court therefore holds that regardless of the applicable standard of review, see supra note 5, respondent properly revoked petitioner’s tax-exempt status… because it was not operated exclusively for an exempt purpose.” 2016 T. C. Memo. 223, at pp. 11-12.

Remember, in the 501(c)3 context, “operated exclusively” means operated primarily, with only an insubstantial noncharitable activity. STJ Armen has lots of cases cited for your brief file.