Section 1402(a)(13) entered the IRC before LLCs were more than an oddity, and PLLCs were undreamt of. The PC (or professional corporation) was the newest gimmick way back then.

So even battle-hardened 40-year CPAs could think that everything after guaranteed payments were exempt from SE by dint of said statute, which exempted from SE limited partners’ distributions above guaranteed payments.

Except.

Vincent J. Castigliola and Marie Castigliola, 2017 T. C. Memo. 62, filed 4/12/17, teaches us that, though you may be a member of a Professional Limited Liability Company, you are not limited if you exercise command and control.

Vince and his fellow members John and Harry have command and control over their law practice, which switched from a partnership to a PLLC. Of course, there was no written operating agreement. Not that Mississippi law requires a written, or even an oral, operating agreement. I hasten to add I am not licensed to practice law in MS, so this observation is strictly casual and is under no circumstances to be taken as legal advice. But my experience is that relations at partner level are most often on a handshake.

I joined one law firm as a partner on a six-page, one-year agreement that we never looked at the whole time I was there. If you need an overlawyered, hundred-page deal with those to whom you entrust your professional life, fortune and sacred honor, don’t do the deal.

Well, Vince and fellow members run the whole show.

So Judge Paris, scampering as usual to ordinary language when a statutory term is undefined, finds Vince and fellow members aren’t limited partners.

“The PLLC had no written operating agreement, nor is there any evidence to show that any member’s management power was limited in any way.  Furthermore, all members participated in control of the PLLC:  For example, they all participated in collectively making decisions regarding their distributive shares, borrowing money, hiring, firing, and rate of pay for employees.  They each supervised associate attorneys and signed checks for the PLLC.  On the basis of the foregoing facts, the respective interests held by [Vince, John and Harry] could not have been limited partnership interests under any of the limited partnership acts.  Therefore, they were not limited partners under section 1402(a)(13).” 2017 T. C. Memo. 62, at p. 12.

But the deficiencies for SE are under the five-and-ten, and they relied on their trusty 40-year CPA, so no chops.

IRS claims that $15K sitting in their escrow account was undistributed income. That’s a total nonstarter, as Vince, John and Harry collected payments from uninsured tortfeasors for the benefit of a major insurer, and twice yearly sent what they collected to said insurer. But they didn’t know to whom the $15K belonged.

Judge Paris: “[John testifies credibly] that the funds in the trust account were not PLLC funds and could not be withdrawn as fees by the members.  He was not sure to which clients the funds belonged but was certain that it would be a violation of professional ethics to withdraw the money as fees (the consequences of which might have included disbarment).  He was not sure how the discrepancy arose but stated that it may have been attributable to losing the PLLC’s office in Hurricane Katrina.  He also stated that at some point the money might be deposited into Mississippi’s fund for unclaimed moneys.  [John’s] testimony was corroborated by the credible testimony of [Vince].

“The members testified credibly that the funds respondent identified do not belong to the members.  Rule 1.15 of the Mississippi Rules of Professional Conduct requires that a lawyer keep client funds–and funds the ownership of which is disputed–separate from the lawyer’s own property.  Petitioners argue that, because the members know they do not own these funds, the funds must be kept separate in the trust account.  Respondent has offered no evidence or arguments to support his contention that the members are entitled to withdraw these funds as fees.  The Court therefore finds that the funds in the trust account do not belong to them.  Consequently, the funds remaining in the PLLC’s trust account are not income to petitioners for 2010.” 2017 T. C. Memo. 62, at pp. 14-15.

Before too readily scoffing at IRS’ counsel (“they obviously never practiced law outside the government”), I am told (but do not know of my own knowledge) that malefactors in our profession played games with escrow accounts. And my unfamiliarity with MS escheat law forbids my asking why unclaimed funds were not deposited with the appropriate governmental authority.

Ch J L. Paige (“Iron Fist”) Marvel is truly modest. While her order in Crystal N. Hardiman, Docket No. 298-17, filed 4/11/17, may be just a rehash for Tax Court admitted attorneys and USTCPs, it’s a useful introduction to Tax Court jurisdiction.

It really should have been a designated hitter, rather than requiring me to go fishing through a plethora of orders, some of which came close to Crystal N.’s, but none of which covered as much ground.

I respectfully suggest that designating an order is not an act of self-aggrandizement. We’ve seen a lot of that within less than fifty miles from the Glasshouse at 400 Second Street, NW (I remind myself that this is a non-political blog). Designating this order would not be one such.

I’m not going to copy or paraphrase Ch J Iron Fist’s prose extensively. I must assume perforce that all who read this far have at least a nodding acquaintance with written American English, legal subdivision.

That said, there are two excerpts worth repeating.

“…the record at this juncture suggests that petitioner may have sought the assistance of the Court after having become frustrated with attempts to work administratively with the IRS but that the petition here was not based upon or instigated by a specific IRS notice expressly providing petitioner with the right to contest a particular IRS determination in this Court. Suffice it to say that none of the IRS communications supplied by petitioner to date constitute, or can substitute for, a notice of deficiency issued pursuant to 6212, I.R.C., or a notice of determination issued pursuant to sections 6320 and/or 6330, I.R.C, regarding 2014 and 2015, or any other of the narrow class of specified determinations by the IRS that can open the door to the Tax Court. Further, even if a notice of determination had been issued…as suggested by petitioner, this case would be premature with respect to any dispute of such a notice. A petition cannot precede notice issuance.” Order, at p. 3.

And once again, Congress has created a court that does everything but provide cheap and expeditious relief.

“In summary then, the Court on the present record lacks jurisdiction in this case to review any action (or inaction) by respondent in regard to petitioner’s…taxes. Congress has granted the Tax Court no authority to afford any remedy in the circumstances evidenced by this proceeding, regardless of the merits of petitioner’s complaints.” Order, at p. 3.

In the world of Sub S Corp stock basis-building, taking on corporate debt builds a stockholder’s basis. But the stockholder must prove s/he is truly the primary obligor, to whom the lender looked at inception of the debt.

Of course, actually paying the lender, even when a mere guarantor, elevates the stockholder’s basis.

Briefly, you have to pay the buy-in, or be truly the first one on the hook.

I just discussed this in my blogpost “The Check’s the Thing – Part Deux,” 2/28/17, but since it was a paltry Sum. Op. small-claimer, it didn’t get the citation it deserves in Rupert E. Phillips and Sandra K. Phillips, 2017 T. C. Memo. 61, filed 4/10/17.

And the reason my blogpost is delayed is the overwhelming hospitality of my brother and his wife. Many thanks again; what a great family I got.

Anyway, Judge Lauber is dealing with Sandy. Rupe was a bit player, an employee in the developer Sub S of which Sandy owned 50%. But Sandy’s castlebuilding enterprise turned into sand castles in the Great Meltdown of 2006-2007.

Sandy and fellow stockholders personally guaranteed loans, but most of those were collateralized by land and buildings, that initially looked good. Sandy couldn’t get any bank witnesses to swear they were really lending to her.

The banks foreclosed, but the properties brought way less than the debt, so they sued Sandy. The banks got judgments, but Sandy never paid.

Sandy nevertheless got a law firm (apparently a respected one, as the penalties gets scrubbed) to opine she could build basis on that basis. She did, took losses, got audited, and claimed her guarantees were proper basis builders.

We all know that actual economic outlay is “coin of the realm” when it comes to building basis in Sub S stock. The phrase is erroneous, of course. Put simply and more accurately, “no pain, no gain.”

The leading case for personal guarantees without actual payment, blessed by 11 Cir., to which Sandy is Golsenized, involves the stockholder pledging personal assets, borrowing in stockholder’s own name, with a novation at lender’s request resulting in the note being recast in the name of the Sub S but guaranteed by stockholder because Sub S was an undercapitalized start-up. And stockholder’s personal assets remain pledged for the indebtedness.

That’s not the case here.

“There is no evidence that [Sub S]’s lenders had a prior relationship with petitioners or that petitioners previously had been obligors on these loans. Petitioners did not pledge any of their personal assets as collateral for the loans; all the collateral (consisting primarily of real estate) was supplied by the [Sub S’ wholly-owned special purpose entities] or their subsidiaries. [Sub S] was a well- established company with a good reputation, and petitioners conceded that the loans when made were ‘clearly supported by the collateral that was pledged.’ Most importantly perhaps, petitioners produced no testimony or other evidence from any of the lending banks that any bank ‘look[ed] to the shareholder as the primary obligor’ on any loan. It is hard to see how a taxpayer could establish a bank’s intentions or expectations on this point without producing testimony from someone at the bank.” 2017 T. C. Memo. 61, at p.18 (Citation omitted).

And Sandy’s argument that the deficiency judgments obtained by the lenders injured her credit so as to create and economic outlay is about as useful as those judgments.

“A court’s entry of a deficiency judgment against a guarantor many years later, after the corporation has defaulted and the corporation’s collateral has proven insufficient, is simply not relevant in determining whether the lender, when initially extending credit, looked to the shareholder as the primary source of repayment.” 2017 T. C. Memo. 61, at p. 20.

Besides, there were co-guarantors with Sandy. Sandy’s allocation of deficiencies among the co-guarantors makes assumptions not sustained by the record. It’s not the Court’s job to make favorable guesses where the record is empty.

But Judge Lauber gets to the point thus: “Had Mrs. Phillips made an actual payment toward these judgments, of course, the basis increase to which she would be entitled would be obvious. The speculative and conjectural nature of the computational exercise in which petitioners must engage absent any payment underscores the wisdom of the rule that no basis increase is allowed without an actual economic outlay.” 2017 T. C. Memo. 61, at pp. 23-24.

Sandy, to repeat myself, the check’s the thing.

Judge Halpern has a designated hitter for us today, as Tax Court invariably issues no opinions on a Friday.

And he again stresses that, no matter how thinly an issue was raised at a CDP, provided that it was not frivolous, it will receive de novo review, rather than the usual abuse of discretion for everything else.

Kevin Scott Bjornson, Docket No. 3615-16L, filed 4/7/17 gets CNC (Currently Not Collectible) from Appeals for seven (count ‘em, seven) tax years. The NITL IRS wanted got knocked out.

Kevin Scott claimed on his Form 12153 that he was not responsible for some or all of the taxes. But he put in no information at all as to three of the years at the CDP. As for the rest, he put in what the SO called illegible checks for one year, and information relating to employment taxes and not income taxes as to the other years. However, his financial information was enough to put Kevin Scott in CNC status.

So why is Kevin Scott on for trial next month in Seattle?

Kevin Scott says he owes less than IRS claims he owes, whether currently collectible or not.

“Thus, as we understand petitioner, he is not challenging his underlying liabilities for the years in issue by claiming that the amounts reported on his returns overstated his actual liabilities. Instead, petitioner challenges only the extent to which the taxes remain ’unpaid’. Compare sec.6330(c)(2)(A) (allowing a taxpayer to raise at a CDP hearing ‘any relevant issue relating to the unpaid tax or the proposed levy’), with sec. 6330(c)(2)(B) (allowing a taxpayer to challenge ‘the existence or amount of the underlying tax liability for any tax period if the * * * [taxpayer] did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability’). As we wrote in Freije v. Commissioner, 125 T.C. 14, 26 (2005): ‘Since an ‘unpaid tax’ is the sine qua non of the Commissioner’s authority to levy, * * * a claim directed at the status of the tax as “unpaid” is a “relevant issue relating to the unpaid tax or the proposed levy”.” Order, at p. 2.

But whether Kevin Scott owes the exact amount IRS says or not, if he didn’t raise the issue at the CDP, he’s out at Tax Court.

Except he did. IRS concedes Kevin Scott proffered some stuff for some years.

“The SO’s determination that those documents were not credible evidence does not necessarily mean that petitioner did not ‘properly raise’ the issue. Therefore, section 301.6330-1(f)(2), Q&A-F3, Proced. & Admin. Regs., may not have prevented us from considering the amount of petitioner’s unpaid taxes for [three of the years]. In his response to respondent’s motion, however, petitioner says nothing about any year [except one}. Therefore, petitioner has not identified any genuine dispute as to material fact in regard [four of the years]. We thus treat petitioner as having conceded the amounts of his unpaid taxes for those years.” Order, at p. 3.

So, Kevin Scott has nothing for three years out of seven. And he didn’t object when IRS sought summary J as to three of the rest.

IRS gets summary J on six years. Nothing to try next month on those.

But as to the seventh, it’s another story.

“Petitioner’s response does, however, raise a genuine dispute as to material fact in regard to [the last of the seven]–that is, the amount of the tax he owes for that year that remains unpaid. Again, the SO’s determination that the documentation petitioner submitted to her did not demonstrate uncredited payments does not prevent petitioner from bringing before us any evidence he may have in regard to his unpaid tax….” That issue is the only one remaining for consideration at the scheduled trial.” Order, at p. 3.

It’s an old story…raise every nonfrivolous issue. Raise them at the CDP. Raise them in opposition to the summary J motion.

Or as a much finer writer than I put it, “A lawyer is not to tell what he knows to be a lie: he is not to produce what he knows to be a false deed; but he is not to usurp the province of the jury and of the judge, and determine what shall be the effect of evidence—what shall be the result of legal argument.” James Boswell, A Journal of a Tour to the Hebrides with Dr. Samuel Johnson, LL.D., London, 1785.

No, not the recent television show; I’m showing my age, remembering the days, pre-Betty Friedan, when Otis Wiese devised a brilliant advertising slogan: “Togetherness, inspired by McCall’s, of course.”

If you remember McCall’s magazine in that iteration, you probably are eligible for Medicare, but the “togetherness” can be costly at any age if you amend your tax returns.

To tell you how, here’s Bradley A. Ballard and Poncella Ballard, 2017 T. C. Memo. 57, filed 4/6/17. Brad and Poncella have other problems than the one I will discuss, but hopefully your clients don’t have those. Judge Nega nails Brad for tax fraud. Poncella escapes the fraud chop, but the deficiencies are there.

For the year I wish to discuss, Brad and Poncella filed separately.

“Ms. Ballard filed timely, reporting herself as a head of household, independently supporting her three children. Mr. Ballard filed as single with no dependents. Mr. Ballard, however, filed his return nearly five months past due….” 2017 T. C. Memo. 57, at p. 4. Brad apparently never got an extension.

OK, and it was Brad who was the heavy, violating copyright by copying CDs and DVDs and hiding the loot through cash dealings and multiple bank accounts.

But the problem comes up when IRS’ auditor turns up Brad’s delicitons.

Brad and Poncella go to a professional preparer, who files amended returns as MFJ, including one for the year when they’d filed separately.

All of a sudden Poncella finds she filed late, even when she didn’t.

Judge Nega explains. “For purposes of sec. 6651, the Code assigns ‘deemed filed’ dates to the amended joint returns of couples who had previously filed separately. Sec. 6013(b)(3). By virtue of the filing of their amended … return Mr. and Ms. Ballard are deemed to have filed untimely on … the date of Mr. Ballard’s initial individual return. See sec. 6013(b)(3)(i).” 2017 T. C. Memo. 57, at pp. 8-9, footnote 2.

And neither Brad nor Poncella has reasonable cause for why Brad filed late.

Thus the professional preparer who prepared the amended MFJ return (which also understated Brad’s income, but less than Brad had done) landed Poncella with a late filing chop for Brad’s deficiency.

I know, I know…there but for the grace of you-know-Whom go any of us.

But the takeaway: When amending, if changing filing status, have a really good reason, and see if any past late filings could blow up your client. Where togetherness is, there be dragons.

A blogpost that evoked 104 views comes to an anticlimactic end, in David M. Sweetman & Laura L. Sweetman, Deceased, Docket No. 20268-12, filed 4/6/17*.

Check out my blogpost “Wow,” 7/1/16, for the backstory.

Now new counsel is in for the Sweetmans, Judge Holmes had bailed back in June last year and Judge Nega takes up the nonstory.

David Sweetman and IRS stip out the case, case dismissed as to the late Dr Laura (no probate, innocent spousery has vanished, and the minor kids apparently have nothing to say) and decision entered for deficiency and penalties amounting to $137K.

I am unstunned. It was a great story while it lasted.

*Sweetman 20268-12 4:6:17

The Mescalero Apache Tribe is back in Tax Court, fighting about discovery of third-party information. The Mescaleros made what Judge Holmes (honorifics to follow) called an “unusual discovery motion that would benefit from some more research.”

Now when was that? Well, see my blogpost “Informal,” 4/29/16.

And exactly what did the Mescaleros want? Well, see 148 T. C. 11, filed 4/5/17, written, after no doubt “some more research,” by The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Inveterate, Illustrious, Ineluctable, Ineffable, Irrefragable, Incontrovertible, Indefatigable, and Insuperable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes.

The Mescaleros employed people. IRS says every one of them was an employee; the Mescaleros said “Nope, some are contractors.” IRS stuck to the “all are employees” line, and reclassified them.

“The Tribe still contests the Commissioner’s reclassification of those it called contractors, but it’s really fighting the major consequence of that reclassification–a large tax bill.  Reclassification would make the Tribe liable for taxes for its workers whom it improperly labeled as contractors.  But it sees a way out:  Section 3402 lets an employer in this situation escape tax liability if it can show the workers whom it labeled independent contractors paid income tax on their earnings.  See also sec. 31.3402(d)-1, Employment Tax Regs.  One way to do this would be for the Tribe to ask each worker to complete Form 4669, Statement of Payments Received.  Internal Revenue Manual pt. 4.23.8.4 (Oct. 26, 2015).  The Tribe tried to do just that, but it was only partly successful because many of the Tribe’s former workers have moved, and some live in hard-to-reach areas where they lack cell-phone service and even basic utilities.  The Tribe was in the end unable to find 70 of these workers and thus could not secure executed Forms 4669 from them.” 148 T. C. 11, at pp. 3-4. (Footnote omitted, but it says Tax Court can decide what tax is due, if any, per Section 7436(a)).

Well, the Mescaleros want IRS to disclose the tax returns of the 70 to show whether or not they paid SE on their Mescalero payments. If any did, the Mescaleros are off the hook for withholding on that taxpayer for each such tax year.

Permitted tax disclosure under the terms of Section 6103 is a tangled web. Fifth Cir. seems to permit disclosure only to government officials in a tax proceeding, but Tenth Cir., where the Mescaleros roam, lets parties to a common transaction (and employer-employee is a common transaction) take a peek.

After much legal flubdubbery, Judge Holmes cuts cleanly to the cliché: “We also shouldn’t overlook the big issue here:  If the Tribe’s workers did indeed pay their tax liabilities, then the Tribe’s section 3402(d) defense would be proved and would be entirely resolved.” 148 T. C. 11, at p. 14. (Emphasis by the Court).

IRS claims the Tribe is trying an under-the-table burden-shift. The Tribe has the burden of proof; they’re trying to make the IRS prove their case.

Burden of proof has nothing to do with discovery. Rule 70(b) says so. All the information sought has to be is relevant, and there’s no doubt this is.

IRS claims that the burden placed upon them to produce the information is “tremendous,” but Judge Holmes says IRS doesn’t fully explain why, and anyhow, “(T)he Tribe has already exhausted its own ability to find its workers, and a request for return information about only 70 payees is not particularly voluminous.” 148 T. C. 11, at p. 15, footnote 7.

Rule 70(c) shields parties from discovery where it is unreasonably cumulative or unduly burdensome or if the information is more easily obtained from another source. But the Mescaleros’ request is none of the above.

I’ll say it again, coming up with the information disposes of the case. Whether or not the reclassified EEs paid SE while they were treated as ICs, in either case it’s game over.

And in support of the Taishoff “Oh please!” I hereby award to IRS, Judge Holmes has a bit of encouragement to IRS to stop playing games.

“The Fifth Circuit has gone so far as to grant a taxpayer attorney’s fees where proof that the taxpayer did not owe FICA and withholding taxes was in the IRS’s own records.  Jones v. United States, 613 F.2d 1311 (5th Cir. 1980).  We don’t need to go that far here.” 148 T. C. 11, at p. 15, footnote 6.

Or, Does Anybody Read These Orders?

I merely quote a sentence from Evgenia Gitkis Vainstein, 6785-16s, filed 4/4/17.

“On March 30, 2017, respondent filed a Response To Order Dated March 27, 2017, wherein respondent states an Answer was filed in this case on May 12, 2017.” Order, at p. 1.

Back to the future, anyone?

Once again, we find on the broken-linked Orders page at The Glasshouse at 400 Second Street, NW, an order that echoes C. L. Edson’s celebrated parody: “Made he mittens, Mudjekewis/ He, to keep the warm side inside/ Put the skin side inside/ He, to keep the cold side outside/ Put the stout side outside/ Then he turned them inside outside.”

But even in death the poor taxpayer is not out of the Woods.

Read now the sad tale of Estate of James P. Keeter, Deceased, Garry L. Holton, Jr., and Thomas W.  Schaefer, Co-Executors and Julie L. Keeter, Docket No. 6771-16, filed 4/3/17.

The co-ex’rs want to restrain or refund. That is, restrain IRS from assessing and collecting, or returning what they assessed and collected. This is yet another TEFRA silt-stirrer.

Ch J L Paige (“Iron Fist”) Marvel gives us cites to all the cases.

“Outside basis may be an affected item required to be properly determined in a partner level deficiency proceeding. Thompson v. Commissioner, 729 F.3d 869, 873 (8th Cir. 2013); Jade Trading, LLC ex rel. Ervin v. United States, 598 F.3d 1372, 1380 (Fed. Cir. 2010); Petaluma FX Partners, LLC v. Commissioner, 591 F.3d 649, 655 (D.C. Cir. 2010); Greenwald v. Commissioner, 142 T.C. 308, 314-317 (2014); see I.R.C. secs. 6213(a), 6230(a)(2) (A)(I). Cf. United States v. Woods, 571 U.S. __ , 134 S.Ct. 557 (2013); see also Thompson v. Commissioner, T.C. Memo. 2014-154, at *2 n. 4, affd 821 F.3d 1008 (8th Cir. 2016).” Order, at p. 1.

I’ve blogged all of these save Jade Trading, but I doubt that case adds much.

This case really echoes that of Hubert Oxford, III & Cynthia Oxford, whom you doubtless remember. What, you don’t? Then check out my blogpost “Inside, Outside – Part Deux,” 6/21/16.

Everybody knows that Woods v. US settled the penalty issue when a phony partnership gets blown up. Outside basis zero, penalty merely computational, no SNOD needed or partner-level proceeding necessary.

But what about the deficiency?

Ch J Iron Fist copies from Hube & Cyn’s case.

“As to whether partner-level adjustment of outside basis incident to a deficiency determination should also be merely computational, Woods provides no direct answer. In dicta, however, the Court addresses the amici’s suggestion that its decision will permit the Internal Revenue Service to directly assess a penalty on a tax underpayment that cannot itself be assessed without deficiency procedures. See id. Noting that ‘an underpayment attributable to an affected item [such as outside basis] is exempt’ from deficiency procedures where partner-level determinations are unnecessary, the Court observes that ‘it is not readily apparent why additional partner-level determinations would be required before adjusting outside basis in a sham partnership.” Id.

“In the sham partnership at issue here, the Court of Appeals concluded that such additional determinations were required, and we proceed in accordance with that mandate.” Order, at p. 2.

So, co-ex’rs and IRS, “…set forth and discuss fully their/his position as to (1) whether additional partner-level determinations of outside basis are required in this case, (2) if so, what specifically are those additional partner-level determinations of outside basis, and (3) to what extent, if any, this Court has jurisdiction in this partner-level proceeding over petitioner’s income tax deficiencies….”Order, at p. 2.

Then they turned them inside outside.