No, Not British Army Taps

Don’t panic, faithful readers, I ain’t done yet. Just letting all y’all know I’m taking off for a couple weeks (bye bye, Judge Holmes) to paddle through that magnificent feat of the US Army Engineers (of which august body I am an humble alumnus), the Panama Canal.

I expect to be back and blogging around February 6.

No, not the engraftment of words by Jerry Livingston and Paul Francis Webster onto an old English folk tune. This is a designated hitter from the wordprocessor of Judge James S. (“Big Jim”) Halpern, retailing the plight of James L. (“Poor Jim”) McCarthy, Docket 21940-15L, filed 1/18/17.

Poor Jim was nailed for criminal restitution to the extent of about $1.2 million in USDC, and an order entered. Pursuant to the terms of said order, Poor Jim has to repay the whole thing in installments… of $1000 per month. While I am no Dr. Stephen Hawking, my mathematical skills tell me it will take poor Jim about 100 years to pay off the $1.2 mil.

IRS claims Poor Jim has assets held in trust, so bounces a proposed OIC and a proposed IA.

“As part of his CDP hearing, petitioner proposed an offer-in-compromise (OIC) under which he would pay $2,500 per month for 96 months in addition to the $1,000 monthly payments he was already required to make in satisfaction of his restitution obligation. Respondent’s Appeals office rejected petitioner’s OIC on the ground that it did not provide for full payment of petitioner’s court-ordered restitution within the 24-month period that respondent allows for periodic payment OICs. After the rejection of his OIC, petitioner proposed as a collection alternative an installment agreement under which he would make monthly payments of $3,000. Respondent’s Appeals office rejected that proposal as well, on the ground that it did not account for assets that, respondent alleges, are held by a trust as nominee for petitioner.” Order, at p. 2.

Both IRS and Poor Jim want partial summary J on abuse of discretion as regards the OIC.

Judge Big Jim has two problems wit’ that, as we say on my Lesser Outlying US Island. The lesser is the assets-in-trust, which is a question of fact.

The greater is whether it is an abuse of discretion when, having discretion, one can never exercise it. See my blogpost “Who Would These Burdens Bear,” 12/6/15, specifically the second part dealing with Quality Software Systems, discussed by Judge Big Jim.

“As we understand respondent’s position, no OIC that petitioner could have made would have been acceptable under the Internal Revenue Manual guidelines on which respondent relies. Petitioner could not have fully satisfied his restitution obligation within 24 months without substantially modifying the terms of the District Court’s restitution order. It thus seems that, under respondent’s position, no taxpayer who is obligated to pay tax-related criminal restitution over a period of more than 24 months can submit an acceptable offer to comprise that taxpayer’s non-restitution liability for the tax periods to which the restitution relates. We question how a policy allowing for the exercise of discretion that, as a practical matter, will never be exercised, regardless of the surrounding circumstances, can be other than arbitrary.” Order, at p. 2.

But neither IRS nor Poor Jim had read either Judge Big Jim’s explication of the conundrum aforesaid in the Quality Software case, nor my sermonette thereon. So they didn’t brief the issue.

Wherefore no summary J on that point.

And the fact question about assets-in-trust may moot the whole thing.

No, not Mary McCarthy’s 1963 succès de scandale. This is the prosaic story of Stephen P. Hardy and Angela M. Hardy, 2017 T.C. Memo. 16, filed 1/17/17, told by Judge Buch.

Steve (that’s Doc Steve) is a plastic surgeon who needs a quiet place to operate, so he buys a 12% interest an LLC that operates a facility wherein Doc Steve can surge when he needs to and can’t get time and space from a local hospital. Doc Steve also surges in his own office, which is off-campus from the facility. Doc Steve has a separate PLLC, which Angie runs, for his surgical practice.

Doc Steve has no say-so over hire-fire or operations of facility LLC.

Originally Doc Steve reported his earnings from both his practice PLLC and the facility LLC as active, because his trusty CPA with 40+ years of experience, believed the K-1, and Doc Steve paid SE.

But after quizzing Doc Steve, trusty CPA reports the next year as PLLC active, facility LLC passive, and deducts passive losses, including a passive loss carryforward from the years Doc Steve reported everything as active.

That last he can’t do, because had he reported those previous years as passive, the losses he would now carry forward would have absorbed his taxable income from that source. And it’s too late for equitable recoupment, because Doc Steve only raised it post-trial.

Steve does get credit for the SE he paid, because he was only a passive investor in the LLC.

IRS claimed Doc Steve grouped both PLLC and LLC, and therefore it’s all active. Except trusty accountant claimed he never grouped, and IRS needs an inference to dispel this, which they don’t get.

IRS says it can regroup, where grouping or non grouping does not reflect an reasonable economic situation or to correct a grouping or nongrouping is a tax dodge.

But nongrouping is reasonable here.

“While some facts support treating Dr. Hardy’s ownership interest in [LLC] and his medical practice as a single economic unit, the weight of the evidence supports treating them as separate economic units. Dr. Hardy is the sole owner of his medical practice and only a minority owner of [LLC]. Although he actively manages his medical practice, Dr. Hardy does not have any management responsibilities in [LLC]. His medical practice and [LLC] do not share any building space, employees, billing functions, or accounting services. Dr. Hardy performs services different from [LLC]’s: Dr. Hardy is a surgeon providing care, and [LLC] is a surgical center providing space and associated services. Dr. Hardy is limited in the care he can provide at his office. His office is equipped for procedures requiring local anesthesia whereas [LLC] is equipped for procedures requiring local or general anesthesia. When patients decide to have procedures performed at [LLC], they separately pay a surgical fee to Dr. Hardy and a facility fee to [LLC]. [LLC] then distributes earnings from those facility fees, but the distribution is unrelated to whether Dr. Hardy performs surgeries at [LLC]. In contrast, Dr. Hardy will receive income from his medical practice only if he performs procedures. Thus, the income Dr. Hardy receives from [LLC] is not linked to his medical practice. Accordingly, Dr. Hardy’s ownership interest in [LLC] and his medical practice may be treated as separate economic units.

“Additionally, the Hardys did not have a principal purpose of circumventing the underlying purposes of section 469 when they treated the activities as separate.” 2017 T. C. Memo. 17, at pp. 23-24. (Footnote omitted).

Doc Steve wins. His two deals aren’t a group.

The United States Tax Court is closed for the Dr Martin Luther King, Jr., holiday.

So, in the words of Jerry Keller and David Blume, from which 1966 Cyrkle’s hit the title of this blogpost is taken, “Things that are waitin’ to mess my mind, will just have to wait ’til tomorrow.”

To a Peaceful Evening

Faithful readers are great; faithful readers who bring to my attention new developments are even greater.

But occasionally I need a break.

Nevertheless, this faithful reader gets a Taishoff “Well Done!” for bringing another slamjam from Seventh Circuit, directed at The Judge With a Heart, STJ Armen.

Here’s Robert H. Tilden v. Com’r, 15-3838, decided 1/13/17.

Y’all remember Robert H. Tilden, of course. What, no? Then see my blogposts “Stamp Out Stamps.com – Part Deux,” 7/20/15; “Yes, We Have No Jurisdiction – Part Deux,” 12/3/15; and “Yes, We Have No Jurisdiction – Maybe,” 6/17/16.

Rob’t’s lawyer used Stamps.com, online postageflogger, but STJ Armen, notwithstanding IRS and Rob’t stipulated that Rob’t petition was timely mailed, bounced Rob’t based on IRS track-and-confirm and the long delay between the alleged date of posting and date of arrival at The Glasshouse at 400 Second Street, NW.

Judge Easterbrook agrees that the explicit language of Section 6213(a) strips Tax Court of jurisdiction when a petition from a SNOD is untimely. Only Congress can change that, and all thine and thine adversary’s piety and wit, and all thy tears, can’t confer jurisdiction upon courts by agreement.

There’s much discussion about how the Supremes dealt with filing deadlines in other statutes, but Section 6213(a) is clear in language and strong in precedent, and Seventh Circuit won’t rewrite both language and history.

“But   it   does   not   follow   that   the   Tax   Court   may   disregard   the   parties’   agreement   that  a   particular   petition   has   been   timely   filed.   True,   litigants   cannot   stipulate   to  jurisdiction.   But   they   may   agree   on   the   facts   that   determine   jurisdiction.   For  example,  if  in  a   suit  under  the  diversity  jurisdiction, 28  U.S.C.  §1332,  the  parties   agree   that   the   plaintiff   is   domiciled   in   Illinois   and   that   the   defendant   is   incorporated   in   Delaware   and   has   its   principal place  of  business  in  Texas,  a  district  court  need  not,  indeed   must   not,   look   behind   that   agreement   unless   the   judge   suspects   that   the   allegations   are   collusive.   See   28   U.S.C.   §1359.   The   Tax   Court   did   not   suspect   that   Tilden and the Commissioner  are  colluding  to  expand  its  jurisdiction;  to  the  contrary, the Commissioner  initially  denied  that  Tilden’s  petition   was   timely.   So   the   judge   did   not   have   a   sound   reason   to   doubt   that   the   envelope   was   indeed   handed   to   the   Postal   Service… as the Commissioner  has  conceded throughout.   And   now   that   the   Commissioner has acknowledged that  all  requirements  of  (B)(1) have  been  met—not  only  deposit  on  [Day 90]  but  also  that  certified  mail  often takes   eight  days  to  reach  the  Tax  Court  from  Utah—the  only  basis for   dismissing Tilden’s   petition   would   be   a   legal   conclusion   that  (B)(3)  is  the  sole subsection entitled  to  a  controlling  role.

“On   that   subject   we   agree   with   the   parties   that   the   Tax   Court   was   mistaken.   Part   (B)(3)   of   the   regulation   specifies   what   happens   if   an   envelope   has   both   a   private   postmark   and   a   postmark   from   the   U.S.   Postal Service.   Tilden’s   envelope   had   only   one  postmark.   The   regulation   does   not   ask   whether   a   date   that   is   not   a   ‘postmark’ is as good as a postmark.  It asks whether  there  are  competing  postmarks.

“To  say  ‘A is as good as B”  is not remotely to show that A is B. ‘Vanilla ice cream is as good as chocolate’ does not mean that a customer who orders  chocolate must accept vanilla, just because the  customer  likes both. They  are  still different. Subsection (B)(3) does not make anything turn on a date as reliable as an official postmark. It makes the outcome turn on the date of an official postmark.” 15-3838, at pp. 6-7 (Emphasis by the Court; Citations omitted).

USPS never claimed track-and-confirm was the same as a postmark.

OK, so Section 6213(a) is jurisdictional, but maybe the parties can stipulate timely mailing absent contrary proof of collusion, at least in Seventh Circuit.

But there’s a takeaway for the practitioner here, and Judge Easterbrook nails it.

“Although the taxpayer thus prevails on this appeal, we have to express astonishment   that a law firm… would wait until the last possible day and then mail an envelope   without an official postmark. A petition for review is not a complicated document; it could have been mailed with time to spare. And if the last day turned out to be the only possible  day  (perhaps the firm was not engaged by the client until the time had almost   run), why use a private postmark when an official one would have prevented any controversy? A member of the firm’s staff could have walked the  envelope to a post office and asked for hand cancellation. The regulation gives taxpayers another foolproof option by providing that the time stamp of a private delivery service, such as FedEx or UPS, is conclusive. 26 C.F.R. §301.7502–1(c)(3).  [Law firm] was taking an unnecessary risk with Tilden’s money (and   its   own, in the malpractice claim sure to follow if we had agreed with the  Tax  Court) by waiting until the last day and then not getting an official postmark or using a delivery service.” 15-3838, at p. 8.

Judge, “Foolproof?” Wanna bet? It’s not every service UPS or FedEx offers that qualifies for Section 7502 largesse. I can’t count the number of petitions thrown out because the petitioner did not use one of the blessed communion, fellowship divine.

But I’ve got a word or two for [Law Firm] and others similarly situated, from an earlier blog I’m too lazy to cite just now, for when those last-minute clients come storming through your door.

“Suggestion (or rather, practice hint): Have a form of Tax Court petition, with your contact info, name, rank and serial number filled in, on your desktop (and in your smartphone, if you use one of those contraptions). Have a couple preaddressed envelopes (hi, Judge Holmes) handy. Then when the fleet-footed clients come charging in as curfew strikes, you’ll be ready for them.”

It’s Friday the thirteenth, I had a long drive from the airport at Fort Lauderdale after coming in on the Dawn Patrol from LaGuardia, and I had a great lunch at my favorite French bistro on Espinola Way.

I want to relax, but duty calls.

No opinions, of course, and the only designated hitter (from Judge James S. (“Big Jim”) Halpern) merely repeats the usual mantra about leave to amend being freely granted where opposing party fails to show substantial prejudice.

But once, long ago, Judge Holmes suggested the IRS sue itself. See my blogpost “IRS, Go Sue Yourself,” 3/11/14. So today Judge Big Jim appears to be telling IRS to respond to their own motion.

IRS moves to amend its answer out of time. Petitioners object.

Judge Big Jim: “… we filed respondent’s motion for leave to file first amendment to answer (motion) and lodged his first amendment to answer. … we ordered respondent to respond to the motion….” Order, at p. 1.

How does one respond to one’s own motion, Judge? With sustained, thunderous applause? Loud cheers?

No, this is neither a medical alert nor the latest computer alert that your e-mail has been hacked. This is the computer code IRS puts on your dossier when you file bankruptcy.

I’m going on the road again tomorrow, so I’m late with the sad tale of Silvia Santana, 2017 T. C. Memo. 14, filed 1/12/17, as told by His Honor Big Julie, a/k/a His Honor Judge Julian I. Jacobs, hereinafter HHBJJJIJ.

While Silvia and her trusty attorney were dukeing it out about Silvia’s deficiency, and reaching a negotiated decision, nobody told IRS that Silvia had filed a bankruptcy petition. I wonder if she told her trusty counsel; surely he would know about 11USC§362(a)(8) and the automatic stay therein.

Howbeit, IRS wakes up and agrees the decision must go. But IRS and Silvia agreed as to the deficiencies, waived SNOD and told IRS to go and collect.

Silvia’s petition is thereupon tossed. But some clerk forgot to clear Code TC 520 out of the computer thereat.

Because Silvia remained frozen, her returns for the next four (count ‘em, four) years never got applied to the old deficiency, neither did a previous overpayment just shy of the three-year SOL for claiming.

Notwithstanding the foregoing, IRS sent Silvia a NFTL promptly after Silvia exited bankruptcy. Silvia did nothing.

IRS applied all the refunds to the earlier year as of April 15 of the year for which the refund was due, even though the TC 520 wasn’t pulled until years later.

But interest was running.

When IRS hit Silvia with a NITL, she petitioned, claiming IRS charged her too much interest and contested the failure to pay additions to tax.

Appeals cut some of the additions, and 50% of the interest.

Silvia did get cash refunds for some EICs that were part of the deficiency, and that interest stands. She had the money.

Silvia claims reasonable cause for nonpayment.

HHBJJJIJ: “With respect to reasonable cause, we observe that petitioners have not provided the Court with their financial information. Thus, we cannot determine whether they exercised the ordinary care and prudence that they must to demonstrate reasonable cause. See, e.g., Taylor v. Commissioner, T.C. Memo. 2009-27 (where taxpayer failed to introduce evidence regarding her investment in a club or how the club’s failure affected her ability to pay her taxes, finding that ‘[b]ecause of the lack of evidence regarding petitioner’s investment in the club, we cannot conclude that the investment constituted reasonable cause for her failure to pay her 1998, 2000, and 2001 tax liabilities by their respective due dates’). Despite petitioners’ failure to provide Settlement Officer Andrews with the necessary information, she reduced, but did not eliminate, the section 6651(a)(3) addition to tax imposed on them. We will not disturb her determination.” 2017 T.C. Memo. 14, at pp. 16-17. (Footnote omitted).

Since Silvia could prove no reasonable cause, willful neglect is not discussed.

And since the NFTL should have awakened Silvia, she has no beef that she would have paid sooner had she known.

Takeaway- Don’t ignore IRS correspondence; it could be expensive.

You Know the Rest

When an SO, hearing that the taxpayer can’t pay after the taxpayer stalls sending in a completed 433-A, suggests he try for CNC by sending in some financial records, that shouldn’t bounce the NOD.

At least not in Judge Lauber’s court.

Thus he instructs Tyree Phillips, 2017 T. C. Memo 13, filed 1/11/17.

“This argument calls to mind the adage that no good deed goes unpunished. As petitioner acknowledges, SO X offered the suggestion of CNC status only after petitioner had represented that he could not afford the cost of having the missing tax returns professionally prepared. SO X mentioned this option as a possible solution to petitioner’s problem; this suggestion was clearly not the cause of petitioner’s problem. SO X’s suggestion would not have halted petitioner in his tracks if he were actually making progress in assembling the documents required for consideration of an OIC or an installment agreement. Petitioner found this suggestion attractive because he was not making such progress.

“The documentation that SO X requested in order to consider petitioner for CNC status was quite basic–copies of his bank account statements and pay- stubs and evidence of his monthly rent expense. SO X ultimately gave petitioner five weeks to submit these documents, a period that we find reasonable. Petitioner tries to lay at SO X’s door the blame for his failure to submit the required documents, urging that the SO erred by not ‘following up.’ But petitioner waited until two weeks after the initial deadline had passed before contacting SO X, citing ‘printer problems’ and promising to fax the documents within the next two days. He failed to deliver them within the next four weeks.

“We reject petitioner’s suggestion that an IRS settlement officer has an affirmative duty to check up on a taxpayer who fails to make good on his own promise to submit documentation required to consider a collection alternative.” 2017 T. C. Memo. 13, at pp. 10-11. (Name omitted).

I give Ty’s counsel from a well-known white shoe firm a Taishoff “Oh Please.”

STJ Lewis (“Our Name is Our Fame”) Carluzzo has a provision that should be enshrined in the Tax Court Rules of Practice and Procedure, rather like FRCP 11 light.

Here’s the language, to be signed by attorney, USTCP, or the party him/herself.

“I certify that I have read the applicable Rule(s) of the Tax Court Rules of Practice and Procedure with respect to the submission of this document, and the document in all respects conforms to those Rules.”

The order is Chastity Kirven, Docket No. 30393-15W, filed 1/10/17. The language appears at p. 2 thereof.

Ms Kirven is enamored of FRCP, but Tax Court has its own rules. Having been heretofore admonished to steer by that constellation, Ms Kirven again goes off on a frolic of her own.

STJ Lew will receive her papers, but will neither file nor act thereon.

“The failure to include the above language in any future submission by petitioner, or the submission of a document that shows that petitioner has failed to proceed in accordance with such language, will result in the document being retained by the Court, but not filed. Otherwise, no action will be taken by the Court, and no action need be taken by respondent in response to any document so treated.” Order, at p. 2.

“We understand that petitioner is a self-represented litigant, and a review of the record in this case demonstrates that we have afforded her wide latitude in dealing with her many submissions. Enough, however, is enough.” Order, at p. 1.

No, I’m not suggesting how you should comport yourself “if you ever go to Houston.” I just did, and neither staggered nor fought. I would not want to incur the obloquy of my nearest and dearest, among whom, I have discovered, is a ukulele virtuoso.

Rather, this is about the special tax lien that attaches to all property of a decedent eo instante she or he becomes a decedent, more particularly bounded and described in Section 6324(a)(1).

In Estate of Ruben A. Myers, Deceased, Ken Norton, Executor, 2017 T. C. Memo. 11, filed 1/10/17, ex’r complains that IRS slugged the estate with a NFTL and a NITL, after he urged IRS to go after nonprobate assets in the hands of persons beyond his control, and the SO at Appeals agreed.

The RO on the case apparently was guilty of certain missteps, but that doesn’t affect the outcome.

Ex’r said he’d have to sell the farm at a loss, he didn’t have money, and he couldn’t touch the nonprobate assets. So IRS should’ve hit the nonprobate assets with a NFTL. And since the SOL (10 years) ran before IRS did anything, IRS abused its discretion.

Judge James S. (“Big Jim”) Halpern is on the case, and he puts the ex’r right.

“We first observe that petitioner misunderstands section 6324. Unlike the general tax lien provided for in section 6321, which was the subject of the NFTL and which attaches to all property belonging to a taxpayer after assessment, demand, and nonpayment of the tax and which secures the payment of all types of Federal taxes, including estate taxes, the special estate tax lien comes into being without assessment or notice and demand automatically on the date of death, and it attaches to all of the property the value of which is included in the gross estate whether or not the property comes into the possession of the executor or administrator. It continues for 10 years unless, before the end of the 10-year period, the estate tax is paid in full or becomes unenforceable by expiration of the period of limitations on collection. See sec. 6324(a)(1). Petitioner’s claim that respondent abused his discretion by failing to file a special estate tax lien against the nonprobate assets the value of which was included in decedent’s gross estate is without merit, since that lien came into existence upon decedent’s death without the necessity of respondent’s doing anything.” 2017 T. C. Memo. 11, at pp. 13-14.

So? For nine years plus IRS did nothing as regards the nonprobate assets. Then, when the estate coffers were bare, IRS woke up and hit the estate as aforesaid. Ex’r petitions, staying collection, with three (count ‘em, three) months to go before the SOL clock runs out.

Of course, with collection stayed and the SOL clock running all the while, the special lien, in the words of American National Treasure Charles Edward Anderson (“Chuck”) Berry, is “gone like the cool breeze.”

 Judge Big Jim cares not.  “We are left only to consider that, as the parties have stipulated, the section 6324 special estate tax lien encumbering the nonprobate assets included in the gross estate expired on November 15, 2015, and respondent has not taken any action to attach or otherwise pursue collection of the estate tax liability with respect to nonprobate assets. Those are events occurring after Appeals issued the determination on July 1, 2015. And while pursuant to our authority under section 6330(d) to review CDP determinations we may take into account changed circumstances, see Churchill v. Commissioner, T.C. Memo. 2011-182, 2011 WL 3300235, at *6 (‘[W]e do have authority to remand a CDP case for consideration of changed circumstances when remand would be helpful, necessary, or productive.’), petitioner has not convinced us that a remand would be helpful, necessary, or productive. Respondent explains that, pursuant to his collection procedures, he froze collection actions three months before the special estate tax lien lapsed when, on August 17, 2015, petitioner filed the petition. See Internal Revenue Manual (IRM) pt. 5.1.9.3.5.1 (June 24, 2014) (stating that levy actions are suspended on filing of timely CDP notice). ‘In other words,’ argues respondent, ‘[he] agreed to petitioner’s request to pursue non-probate assets, but petitioner’s actions prevented the collection action from going forward.’” 2017 T. C. Memo. 11, at pp. 16-17.

Sure, like IRS was going to start to grab the nonprobate assets after nine years and nine months of doing nothing, but the nasty ex’r, with only thirty days to petition the NOD, interfered?

Give me a break.

Well, of course Tax Court can’t start a wide-ranging excursus into what IRS could’a would’a should’a done. No abuse of discretion. IRS wins.

But Judge Big Jim has a hint for IRS, which has hardly covered itself with glory here.

“Before we close, we point out that there may still be ways for respondent to collect the estate tax liability from third parties. For example, the period of limitations applicable to the personal liability imposed on transferees and others by section 6324(a)(2) is not the 10-year period from the date of death provided in section 6324(a)(1). It is the 10-year collection period provided in section 6502(a) running from the date of assessment. See United States v. Bevan, No. 2:07-cv- 1944 MCE JFM PS, 2008 WL 5179099, at *6 (E.D. Cal. Dec. 10, 2008); United States v. Degroft, 539 F. Supp. 42, 44 (D. Md. 1981). We do not know the date the estate tax was assessed, but the parties have stipulated that the estate tax return was filed February 15, 2007, a date that almost certainly was before the date the estate tax was assessed. The 10-year period for imposing personal liability is probably still open.” 2017 T. C. Memo. 11, at p. 18.

As we said in my young day, get with the program.