I’m going all the way back to my blogpost “The Check’s The Thing,” 6/1/11, to make the point here.

His Honor Big Julie, better known as His Honor Judge Julian I Jacobs, hereinafter HHBJJJIJ finds that the check outweighs whatever the bank thought, especially when the right evidence never gets in. Here’s the story of William H. Tinsley and Amaryllis E. Tinsley, 2017 T. C. Sum. Op. 9, filed 2/28/17.

It’s Bill’s story. Bill liquidated his S Corp computer operation while the S Corp owed the local lender $110K, which Bill guaranteed and which he claimed on his personal return as an ordinary loss even though he had no cash or debt basis in his S Corp stock.

Bill kept the business going under the same name as the S Corp, even though legally there no longer was an S corp. And the bank renewed the original loan in a reduced principal balance with the same named S Corp as obligor, attaching the old note to the renewal note with a handwritten notation “Sec by—Inv & Equipment.”

Bill made all the payments on the renewed note, but the checks wherewith he did so never got into the record.

HHBJJJIJ: “We acknowledge that the stipulation of facts in this case states that ‘[t]he petitioner continues to make payments on the loan’, but there is no indication that the loan payments were made from Mr. Tinsley’s personal funds rather than [S Corp’s] funds with Mr. Tinsley signing payment checks as president.  Moreover, we are mindful that under the terms of the renewal note, the renewed loan was to [S Corp] and that Mr. Tinsley’s obligation was that of a guarantor, not the maker of the loan.  Further, we are mindful that the promissory note for the [old] loan, which was appended to the… renewal note, included a notation that the loan was secured by [S Corp’s] inventory and agreement [sic: I think you meant “equipment,” Judge]. Thus, we believe that (1) even after its liquidation [Sub S] continued to operate, and (2) the Bank continued to look to [Sub S] as the primary obligor on the loan and expected it to make the loan repayments.” 2017 T. C. Sum. Op. 9, at pp. 9-10.

Bill and Amaryllis are Golsenized to 11 Cir., even though they can’t appeal this Sum. Op. 11 Cir. seems to say that, where a Sub S stockholder becomes primary obligor in substance, even though only guarantor in form and even without an economic outlay, the stockholder gets basis thereby in the Sub S stock.

OK, but without more proof (and Bill has the burden of proof), Bill is out.

Note that Bill claims the IRS examiner received a letter from the lending bank stating they looked to Bill and not the Sub S, and the AO also got a letter from lending bank to the same effect. But the claims don’t work when the documents, and especially the checks, don’t get into the record.

“Despite their importance, none of these documents was entered into the record.  We therefore do not consider them in deciding this case.” 2017 T. C. Sum. Op. 9, at p. 9, footnote 4 (cont’d).

Bill and Amaryllis were self-represented. Maybe time to reopen the record, even though this was a Rule 122 all-in? Or have a Lew post-trial conference?

I haven’t any current statistics, but I can’t but think that the greatest number of Tax Court cases are brought by self-representeds. Even though Ch J L Paige (“Iron Fist”) Marvel seems to let CPAs into the Tax Court Bar (see my blogpost “CPA = USTCP? – This Is Getting Boring,” 12/27/16), there is still a shortage of representatives for the ordinary petitioner.

Judge Wherry wants to help. Although Tax Court’s website plainly states that “(T)he Tax Court does not endorse or recommend any particular tax clinic or Bar-related calendar call program,” Elizabeth Wiley, Docket No. 1679-16S, filed 2/28/17, has two (count ‘em, two) helping hands offered.

Elizabeth doesn’t show at calendar call, but IRS goes along with the continuance Elizabeth asked for, and Judge Wherry gives Elizabeth names and phone numbers for LITCs.

But he won’t give any more continuances.

Even more helpful is STJ Lewis (“The Name”) Carluzzo, when he avoids reopening the record but suggests IRS have a parley with Andrew Christopher Sanek, Docket No. 4700-14S, filed 2/28/17.

Andy wants a vacation. A vacation, that is, of STJ Lew’s decision, which nailed Andy for a deficiency after trial.

Surely you remember the decision. What, no? Then see my blogpost “A No-Account Employer,” 9/22/16. OK, ready now?

“Towards the end of trial the Court noted that consideration should be given to petitioner’s entitlement to deduct certain away from home business expenses under the circumstances described in Rev. Procs. 2009-47 and/or 2010-39. Respondent’s objection points out that insufficient evidence was introduced at trial to allow for deductions as contemplated by the above-referenced revenue procedures. The Court agrees with respondent’s observation, but that observation misses the point of the Court’s suggestion that the parties confer post-trial on the matter.” Order, at p. 1.

But why talk? No evidence means no evidence, right?

Well, STJ Lew thinks they should talk, and here’s why.

“As of the date of trial, petitioner, who represented himself, was unaware of the above-referenced revenue procedures, the application of which might very well allow for some of the deductions now disallowed. Sufficient evidence to support the application of the revenue procedures was not introduced at trial, but that is not to say that petitioner, now aware of what information required to support the application of the revenue procedures, could not demonstrate to respondent that he is entitled to deductions they allow.” Order, at p. 1.

Not even that obliging jurist, Judge David Gustafson, could do better.

Again, this is a non-political blog; what axes I have to grind, I grind elsewhere.

But an open internet, with no favorites, is necessary for us all, regardless of party or agenda.

I have no problem with profits. It is my intention to make every year profitable, both for myself and my clients, and I devote substantial efforts to that end.

However, my profession has a Rule against excessive fees, and I adhere to that as well.

So I urge my readers in the United States to contact the Federal Communications Commission and their elected representatives, and urge them to keep the internet open to all, without favorites or special deals for special friends.

And my readers in other countries should do likewise.

No, not the 1948 Disney feel-good movie; rather, today’s off-the-bencher from STJ Lewis (“Oh, that Spelling!”) Carluzzo concerns two subjects dear to my heart… legal fees and deductible business expenses.

John M. Majcher, Docket No. 1903-16S, filed 2/27/17 is one-for-two in that ballgame. He pays legal fees that amount to most of his income for the year at issue, but they aren’t deductible business expenses.

John and his loved-once have a child. John had liberal visitation rights, and used them. Child resided with loved-once in IL, where John lived. But loved-once lost her job and moved to AZ, allegedly on a temporary basis.

John was fearful.

“Concerned that his child’s temporary living arrangements in Arizona might become permanent, and if that happened, what impact that might have on his visitation rights, child support obligations and his relationship with his child, Petitioner hired a lawyer to protect and/or enforce his parental rights. During [year at issue] he paid more than $24,000 in legal fees in this regard, which amount represents a substantial portion of his entire income for that year. He deducted those legal fees on a Schedule A, Itemized deductions, included with his return, which he prepared and filed late.” Order at pp. 6-7.

Well, I’m all for family values, glad when lawyers get paid, and love deductions, but how is this deductible?

“According to Petitioner, the legal expenses are deductible because .they were incurred so that he would not have to move to Arizona to ensure or enforce his parental rights. Petitioner goes on to argue that if he had to move to Arizona, he would have had to give up his employment in Illinois and probably could not have secured similar employment in Arizona. So, as he views the matter, the legal expenses were incurred and paid, in effect, to maintain his employment. According to Petitioner the fees should be deductible as unreimbursed employee business expenses.” Order, at p. 7.

IRS suggests these legal fees are to do with John’s domestic arrangements, not his employment, and STJ Lew agrees.

“Like Respondent, however, we connect the legal expenses here in dispute to petitioner’s relationship with his child, not to his employment in Illinois. That being so, we find that Petitioner’s personal, family and living circumstances are the origin of the claim for legal fees, the deduction of which is precluded by section 262, and reject Petitioner’s claim that the legal fees represent ordinary and necessary employee business expenses otherwise deductible under section 162. It follows that Petitioner is not entitled to the deduction here in dispute and we so hold.” Order, at p. 8.

I give John a Taishoff “Good try, Second Class.”

Ascribing his late filing to his familial woes doesn’t cut it, either. STJ Lew is sympathetic, but John gets the late-filing chop anyway.

Seems like practitioners are picking up on Rob’t H. Tilden, as delineated by Seventh Circuit and my blogpost “Just As I Was Settling Down,” 1/13/17.

Here’s Doreen DiToro, Docket No. 12571-16, filed 2/24/17, where ex-Ch J Michael B (“Iron Mike”) Thornton must grapple with another agreed mailing date.

Doreen claims innocent spousery for nine years at issue, but IRS claims no NOD on two of those years, and Doreen’s Section 6015 petition from the NOD that was issued for the rest is late, so Doreen is out all the way.

There’s also a question whether Doreen filed a duplicative petition, but that’s disposed of elsewhere.

So there’s the usual motion ping-ponging. Finally, IRS responds to Doreen’s motion to permit a late-filed petition to vacate an earlier order tossing Doreen for late filing by stating no objection.

And here ex-Ch J Iron Mike finds himself bemused by the contrapunctal motions.

“In the notice of no objection respondent states:

‘[I]n light of petitioner’s counsel’s sworn statement that a copy of the petition was timely placed in the U.S. postal system, respondent does not oppose petitioner’s Motion For Leave To File Motion Out Of Time Motion To Vacate Order Dated September 6, 2016, Embodying Motion To Vacate Order Dated September 6, 2016, Filed November 15, 2016, At Docket No. 12571-16.’

“The Court is left uncertain from this statement as to whether respondent disagrees with petitioner’s counsel’s sworn statement that he mailed the petition on May 17, 2016.” Order, at p. 2.

So let IRS make a jurisdictional motion, if appropriate, and in any case report on jurisdiction and provide copies of all innocent spousery NODs.

And yes, the order tossing Doreen’s earlier petition is vacated.

Clear? Thought not.

Judge Wherry, less modest than Judge Nega, designates his Sub S employee case, even though he’s just dropping a petitioner and amending a caption, in Patricia Arroyo DDS, Corp., Alex Mansilla, and Mercedes P. Arroyo, Docket No. 5874-15, filed 2/23/17.

The facts are almost foursquare with my blogpost “You Said It,” 7/21/17.

IRS hit Alex and Mercedes with passthrough employment taxes for the wage shortfalls from their sub S.

“During the examination of DDS Corp.’s returns, respondent determined that the salaries paid to petitioners as employees were artificially low and proposed new salaries based on nationwide market information. Based on these increased salaries, respondent determined that DDS Corp. had a deficiency in employment taxes….” Order, at pp. 2-3.

So my surmise in my abovecaptioned blogpost looks good. IRS is hunting the low-wage high-profit sub S dodge, when professional services are in the mix.

Alex and Mercedes want Tax Court to decide the correct payscales for their sub S.

“In the petition, petitioners assert that the salaries paid by DDS Corp. during the years at issue were appropriate given the company’s circumstances, and they contend that the Court has jurisdiction over their dispute as to the amount of employment tax owed by DDS Corp….” Order, at p. 3.

Nope, says Judge Wherry.

The Section 7436 is for reclassification, but there was nobody to reclassify. DDS Corp always treated Alex and Mercedes as employees.

Obviously, if they were ICs, whatever they got would be subject to SE, so there’d be no point to creating a sub S. For the dodge to work, the sub S shareholders would have to be paid wages (subject to FICA-FUTA) and profits (not subject to FICA-FUTA), and fiddle the mix.

So DDS Corp is out as petitioner, as the employment tax hit is a passthrough, and the caption is amended accordingly. As Mercedes listed herself as an officer in State filings, Judge Wherry judicially notices her sua sponte as a statutory employee.

Of course, to the extent there are deficiencies for Alex and Mercedes, they’re still in.

We all know that Woods v. Com’r, 571 U. S.___, 134 S. Ct. 557 (2013) settled the silt from Tiger Eye and Petaluma about zero outside basis in sham partnerships and immediate computational assessment of the 40% understatement chop.

Well, today John K. Luke & Maureen O. Luke, Docket No. 32208-15, filed 2/23/17, are trying to duck the deficiency and the chop arising from their participation in LVI Investors, LLC, which cratered back in 2014. A stipulated decision was entered by then-Ch J Michael B (“Iron Mike”) Thornton nailing LVI.

I didn’t blog it because it didn’t say much. The original blowup dates back to my pre-blog days of 2009.

Howbeit, LVI was a sham, son-of-BOSS variation.

John & Maureen want to fight the deficiency, and IRS has nothing to say about that. So John & Maureen get a stay of assessment on the deficiency.

The fight about whether a deficiency arising from a blow-up sham partnership is assessable or requires a SNOD may be settled, but apparently in John’s & Maureen’s case, IRS went for belt-and-suspenders-and-Crazy-Glue and slipped them a SNOD just to be safe.

But IRS says Tax Court has no jurisdiction over the penalty.

Judge Goeke agrees. The penalty is another story.

“The following quotation from Thompson v. Commissioner, T.C. Memo. 2014-154, at *3, aptly describes the law as it applies to this case:

‘Our final decision in the partnership-level proceeding applied the gross valuation misstatement penalty. The penalty may be directly assessed as a computational adjustment, notwithstanding any need for [*9] partner-level determinations. Petitioners may raise partner-level defenses, if any, only in a postpayment refund suit. See sec. 6230(c)(1)(C); sec. 301.6221-1(c), Proced. & Admin. Regs.’

“Any question as to the validity of this analysis has been settled by United States v. Woods, 571 U.S. __, 134 S.Ct. 557 (2013).” Order, at pp. 1-2.

So now all the silt is settled.

Whassup Wit’ That?

I can understand Mongolia, Kyrgyzstan and Yemen. This my blog has never been read in any of them, not even once. I’m sure there are good reasons for these lacunæ, like civil war, poverty, different time zones, and utter indifference to the goings-on in US Tax Court.

However, moving to the Western Hemisphere, to use the old ham radio phrase, I’ve worked every country save one…Bolivia.

Oh, I know, French Guiana ignores me as well. But I can quibble that French Guiana isn’t a country; it’s the last foreign-owned mainland real estate in the hemisphere, so it’s really part of France.

Back to Bolivia.

I’m apparently persona non grata there,  and I don’t know why.

Hey Bolivia, whassup wit’ that?

That ancient cry rings no bells with Judge Gale, as he discusses the cleaning of Old Master paintings in Estate of Eva Franzen Kollsman, Deceased, Jeffrey Hyland, Executor, 2017 T. C. Memo. 40, filed 2/22/17.

The late Eva was another art collector with a collection to die for, and she did. She was a heavy smoker, and her Breughels were unclean.

And it is uncertain if Jan Elder or Jan Younger did one of them, and to what extent the studio was involved.

It’s the usual estate valuation mix-and-match.

The estate’s lead witness is a co-chair of Sotheby’s Old Masters squad. He downgrades the paintings’ values, because they are extremely dirty, and the dirt may hide a multitude of sins. But ex’r Jeff goes to a leading cleaner of such works, who makes them come alive with mild cleaning stuff at a cost less than $9K.

Turns out the Sotheby’s squad leader was angling for auction rights, and got them. Art auction commissions make stockbrokers and real estate brokers look charitable.

This is a heavy conflict-of-interest, and makes Judge Gale regard the squad leader as unclean. He wants the auction rights, so he’ll low-ball the valuation.

Insurance policies rarely reflect FMV, unless supported by appraisals, and neither the late Eva’s, nor ex’r Jeff’s, gives any basis for a valuation decision.

IRS’ expert has got comparables, which ex’r Jeff’s squad leader does not. So although IRS’ expert doesn’t ding for dirt, Judge Gale cuts 5% because the major painting (Peter the Elder) was dirty, but the cleaning risk was low. The painting cleaned up real nice.

As for the attribution risk on painting number two, Jan Younger is a poor bet; Jan Elder is the real deal. So Judge Gale cuts IRS’ expert by 25%, 10% for attribution, 5% for dirt, and 10% because the Jan, older or younger, painting was “bowed.”

I’ve stated before that Tax Court gets more valuation cases than almost any other court. This case gives a look at how the process works.

Takeaway- If your expert wants any piece of the action, walk away.

It’s not enough to disqualify a whistleblower if the info provided may be inadmissible on a trial. And if IRS keeps getting info from whistleblower after rejecting earlier info as “tainted”, does that let IRS off the Section 7623 hook?

No, says Judge Lauber. Here’s Whistleblower 23711-15W, filed 2/22/17.

Notwithstanding an initial “extensive and rigorous” grilling by CID after the Ogden Sunseteers scanned and sent them the info he gave, the whistleblower gets bounced, the Sunseteers producing a document from CID that claimed the info was “tainted,” but didn’t say how.

Answering IRS’ summary J motion, whistleblower claims “…’at various dates…, [he] supplied a substantial amount of updated information.’ Petitioners avers, without contradiction by respondent, that the IRS commenced ‘criminal and civil investigations of Target that resulted, ultimately, in the IRS collecting substantial revenue.’” Order, at p. 2.

“For a variety of reasons, we conclude that respondent’s motion for summary judgment must be denied. Respondent does not dispute petitioner’s averment that the IRS proceeded against Target with an administrative or judicial action described in section 7623(a). Assuming satisfaction of the statute’s other requirements, petitioner would thus be entitled to an award if the IRS action against Target was ‘based on information brought to the Secretary’s attention’ by petitioner. Sec. 7623(b)(1). We find that there exist material disputes of fact on this point.

“Respondent asserts that… the IRS did not use petitioner’s information to ‘further develop’ its investigation of Target because it determined that his information was ‘tainted.’ This assertion raises a number of questions, both legal and factual. Petitioner avers that his information was not in fact ‘tainted’; he presents two distinct arguments in support of that averment, neither of which respondent has addressed. Petitioner also avers that he continued to supply the IRS with updated information ‘at various dates…’; this appears to create a factual dispute in light of respondent’s assertion that the IRS did not use petitioner’s information…. And even if the IRS did not use petitioner’s information to ‘further develop’ its investigation…, there is a material dispute of fact as to whether any IRS action against Target was nevertheless ‘based on information’ that petitioner ‘brought to the Secretary’s attention’….” Order, at pp. 2-3.

And Section 7623 says nothing about whether the information was admissible on a trial, privileged or illegally obtained.

“Section 7623(b)(3) provides that the Secretary may reduce or deny an award in certain circumstances, i.e., if the whistleblower ‘planned or initiated the actions’ that led to the tax underpayment or ‘is convicted of criminal conduct arising from’ such activity. The statute does not list the provision of privileged or ‘tainted’ information as a basis for denying an award, and respondent has cited no other authority for denying an award on this basis. It is entirely possible that information which would not constitute admissible evidence at trial–hearsay, for example—may nevertheless be ‘used’ by the Secretary in the course of conducting an investigation. Without a clearer understanding of the legal theory upon which respondent is relying, and the authority for and scope of that theory, we could not find that respondent is entitled to judgment ‘as a matter of law.’ Rule 121(b).” Order, at p. 3.

And the whistleblower gets a break.

“The IRS has not disputed that it took action against and collected proceeds from Target, and we find that there exist material disputes of fact as to whether such action was ‘based on information brought to the Secretary’s attention’ by petitioner. Sec. 7623(b)(1). Given that the very facts that petitioner may need to prove his case are in the sole possession of respondent, petitioner will be entitled to discovery that will aid in resolving these factual disputes. See W.L. Gore & Associates, Inc. v. Commissioner, T.C. Memo. 1995-96; Rule 121(e).” Order, at p. 3.