Judge Lauber offers us a post-Christmas treat in Estate of Whitney E. Houston, Deceased, Marion P. Houston, Executor, Docket No. 12098-16, filed 12/13/17.

The late Pop Queen’s ex’r’s team and IRS are apparently agreed on the valuation of the IP that survived the much-lamented death of Ms. Houston. And the perjurious expert’s tale has apparently been resolved as well. See my blogpost “I’m Shocked…Shocked,” 4/28/17.

To the extent their lucubrations, coruscations, calculations, computations, pictures, descriptions and accounts in reaching “yes” are not privileged or protected, it would be of general interest to practitioners confronting valuation issues of decedents’ IP, even in contexts other than Federal estate taxation (which may not exist in its present form as early as the end of this week).

And that master redacteur Judge Lauber is just the one to present the maximum of information. See my blogpost “Order of Protection,” 11/22/17.

The decision documents are supposed to hit The Glasshouse at 400 Second Street, NW, in The City whither all tax practitioners’ eyes are turned, on January 4, 2018.

I regret I cannot go there to requisition the redacted and extracted file and blog thereon as soon  as said file becomes publicly available..

It would be nice if the redacted and extracted were available on PACER.

I promised y’all the second part of today’s hidden matters, and here’s CSTJ Lewis (“His Name is His Fame”) Carluzzo with the story of Kenneth E. Levinson, Docket No. 2003-17S, filed 12/12/17, a designated hitter off-the-bench.

Ken’s tale is simple. He didn’t bother including his IRA distribution, his Social Security, or a taxable dividend as income, although he listed his IRA distribution and his Social Security in the appropriate boxes on his return.

Ken claims he thought he rolled his IRA, and so neither his IRA draw nor his Social Security was taxable, except he didn’t and they were.

Apparently Ken was over 59-1/2 but under 70-1/2 during the year at issue, so MRD was off the table.

Ken doesn’t fight over the taxable dividend, but IRS had enough evidence to sustain that part of the deficiency, so that CSTJ Lew doesn’t need to go to “abandoned” to sustain it.

CSTJ Lew gives IRS the deficiency, as there’s no defense. Ken doesn’t show for the trial, but claims purity of heart to avoid the substantial understatement chop.

But IRS is missing the Boss Hoss signoff therefor.

“Respondent, of course, bears the burden of production with respect to the imposition of the penalty, see sec. 7491(c), and that burden includes not only establishing the amount of the underpayment but satisfying a procedural requirement that the imposition of the penalty was approved in writing by the direct supervisor of the Internal Revenue Service employee who first ‘determined’ to assess it. See sec. 6751(b)(1). No such writing has been introduced into evidence in this case. Nevertheless, relying upon an exception to the general requirement of written approval, respondent argues that the requirement is not applicable because the penalty was ‘automatically calculated through electronic means’. Sec. 6751(b)(2)(B). We’re not so sure that respondent is correctly construing that exception, however, we need not reach the point. Assuming without finding that respondent has met his burden of production pursuant to section 7491(c), we find that petitioner had reasonable cause and acted in good faith with respect to the underpayment of tax as claimed in his statement, which is the only evidence in the record on the point. He is therefore not liable for the penalty. See sec. 6664(c).” Order, transcript, at pp. 8-9.

The hidden calculator? I’ll give IRS counsel a Taishoff “good try, second class.”

It was Baserunning 101: when the runner beats the pick-off throw, make sure the fielder actually throws the ball back to the pitcher before stepping off the bag. If the fielder merely makes the gesture and you step off the bag, he will tag you out.

It’s title closer lore from long ago: the couple refinancing the mortgage. The husband is definitely the husband, but the “wife” is his girlfriend, with whom he decamps with the proceeds, leaving the title insurer to pay the lender when the true wife shows that she never signed the note or mortgage.

Well, now we have the attorney who maybe isn’t. Here’s STJ Diana L. (“Sidewalks of New York”) Leyden to tell you why IRS can’t get summary J tossing her maybe-not-client’s petition from a CDP.

It’s Adrian Dicker, Docket No. 12007-16L, filed 12/12/17. Adrian goes down for tax evasion and gets hit for criminal restitution. IRS gives Adrian a NFTL. Adrian sends in a Letter 12153 timely, says he can’t pay but will pay per the USDCSDNY’s order, and therein hangs the tale.

Adrian says he has an attorney, the same one who represented him in the criminal case, but also names another one in a 2848 POA that his attorney, whom I’ll call Ms. G, as her name gets mangled by IRS and even STJ Di drops the “Ms.”, shoots in to Appeals.

Well, the SO can’t contact Ms. G., calls Adrian who says he will, but then the SO tries Ms G again, can’t get through, never calls the second attorney (who is never heard from again), never calls Adrian, but sustains the NFTL. Adrian never sent in the Form 433-A tell-all.

OK, is there a question of fact? Yes, says STJ Di.

“On the one hand, in his letter accompanying the 12153 petitioner referred to Ms. G as his attorney and directed the Appeals Office to copy her on all correspondence. Moreover, Ms. G faxed the Form 2848 to the SO…with a letter, wherein she also refers to petitioner as ‘my client’. The Form 2848 does not appear limit the scope of Ms. G’s representation of petitioner with respect to “civil and criminal restitution” tax matters. Further, the Form 2848 also named [Attorney 2] as petitioner’s representative. Respondent has not provided any information as to whether the SO tried to contact [Attorney 2] with respect to the CDP hearing.

“On the other hand, Ms. G represented petitioner in his criminal proceedings, and it is possible that the references in petitioner’s letter to ‘my attorney’ and Ms. G’s letter to ‘my client’ is in the context of that representation. In his letter petitioner also indicated that he had discussed his case with his probation officer and authorized the Appeals Office to contact his probation officer, who would not be considered his representative for purposes of the CDP hearing. Furthermore, the Form 12153 accompanying that letter is signed by petitioner. There is no name, telephone number, or signature for an authorized representative on the Form 12153.

“Additionally, in her affidavit Ms. G states that she was brought in only as to a limited factual issue and that she was not petitioner’s counsel for purposes of the CDP hearing. Ms. G states that she represented petitioner in his criminal proceedings and during his federal sentencing, at which the District Court set a schedule for restitution payments on the basis of petitioner’s extremely limited ability to pay. According to Ms. G, while petitioner’s CDP hearing request was pending, petitioner asked her to contact the SO regarding the conditions of his restitution and the findings of the District Court and of the probation officer regarding petitioner’s ability to pay the criminal restitution. Ms. G further states that she spoke briefly with the SO…to coordinate schedules with petitioner’s probation officer so that the probation officer could contribute to petitioner’s CDP hearing. This corresponds to the information Ms. G included in her letter, accompanying the Form 2848, to the SO….Furthermore, although the SO acknowledged receipt of the faxed Form 2848, the SO does not have any notes that address the substance of the phone call with Ms. G….” Order, at pp.7-8.

So did Adrian get a CDP? While the POA gave Ms. G apparent authority, and Adrian referred to Ms. G. as “my attorney,” he may have conflated her representation in his criminal trial with representation at the CDP, and maybe the SO did likewise. Adrian signed the Letter 12153 himself, and listed no representative thereon. Adrian never sent in a Form 433-A, but the SO never contacted Attorney 2 or called back Adrian to tell him to get Ms. G on the horn.

Ms. G claims she was incommunicado for three weeks because of an illness and a death in her family. Order, at p. 4, footnote 2. Maybe the SO should have called Attorney 2 in Ms. G’s absence.

So there’s enough for STJ Di to deny summary J. Since Adrian now seeks to remand for a CDSP, let IRS respond thereto.

This blogpost is long enough, so I’ll leave the story of the hidden Boss Hoss signoff for my next.

“A Tough Way to Make a Living”

Erika Denise Edwards, Docket No. 17386-16S, filed 12/11/17, is an attorney and an entertainer, a combination I have personally found impossible to effect. Erika needs, and gets, a small tax break and some kind words from CSTJ Lewis (“The Designated Name”) Carluzzo.

The issue in this off-the-bench designated hitter is Erika’s travel to the places where she entertains.

“Following concessions, and as relevant here on that Schedule C petitioner claimed an $11,300 deduction for ‘car and truck” expenses and a $6,708 deduction for ‘car rental’ payments. Both deductions relate to the use of the same rented automobile that petitioner used for self employment, commuting, and personal purposes. Neither deduction, although of a type allowable as a trade or business expense deduction under section 162 if properly substantiated, has been supported by the contemporaneous records required for deduction pursuant to section 274(d). Consequently both deductions were disallowed in the notice.” Order, transcript, at pp. 4-5.

Erika had no contemporaneous records, so her car rental expense numbers get tossed. But Erika told a good story on the stand.

“Although petitioner did not keep a contemporaneous record of the use of the rental car for business purposes, through a recently prepared mileage log (mileage log) she did corroborate her testimony regarding the use of the rental car to travel to various entertainment venues during 2013. According to her return, she drove 20,000 miles for business purposes.” Order, transcript, at p. 5.

“Her mileage log is more or less consistent with respondent’s regulation that allows it to be used for the purpose of section 274(d), see section 1.247-5T(c)(3), Temporary Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985), but the ’less’ part does not show where each trip originated. Only mileage between her place of employment as an attorney and the entertainment venues would qualify for deduction. Mileage driven between her residence and the entertainment venues would constitute nondeductible commuting expenses. Having no better basis to make that distinction, we’ll allow her half of the mileage shown on the mileage log. The standard mileage rate…can be used to compute her allowable deduction.” Order, transcript, at p. 6.

That Erika gets docked the half mileage is of her own making by not keeping better records.

Thus the small tax break. Now for the kind words.

“We are not unsympathetic to petitioner’s situation, however, as the modest amount of income reported on the Schedule C compared to the many performances conducted during 2013 as shown on the mileage log suggests that her self-employment is a tough way to make a living.” Order, at p. 6.

Or Improbable

Judge Morrison holding as set forth at the head hereof costs Salt Point Timber, LLC, John B. Hood, Tax Matters Partner, 2017 T. C. Memo. 245, filed 12/11/17, a $2,130,000 charitable deduction. And the problem is that a “comparable” guardian of a conservation easement isn’t necessarily a “qualified organization.”

“The term ‘qualified organization’, as the term is used in section 170(h)(1)(B), is defined by section 170(h)(3).” 2017 T. C. Memo. 245, at p. 7. Illuminating, isn’t it?

Well, the Lord Berkeley Conservation Trust is definitely a qualified organization, and they’re the outfit named in the easement the Salties gave over the 1,000 acres of South Carolina timberland.

But the Salties’ easement had a substitution clause. If the Salties and any next-door neighbor whose land was subject to a conservation easement did a swap, the easement in favor of Lord Berkeley Land Trust vanished.

All that was required was that the conservation easement be “comparable.”  But did the donee/grantee guardian under the comparable easement have to be a “qualified organization”?

No, says Judge Morrison.

Likewise, the chances of a swap meet were not “so remote as to be negligible.” Remember Larry and Lorna Graev? See my blogpost “Money-Back Guarantee,” 6/24/13.

“Hood has failed to adduce persuasive evidence that the three conditions for replacing the easement…  are so highly improbable or remote that they would be ignored.  Nothing in the record indicates that Salt Point Timber would be averse to transferring the 1,000 acres.  Although the record does not reveal whether any land adjacent to the 1,000 acres is encumbered by conservation easements, several properties close to (but not adjacent to) the 1,000 acres are encumbered by conservation easements.  These include properties that, like the 1,000 acres, are large landholdings in Berkeley County with river frontage and wetland habitats.  When the Trust for Public Land originally applied for a federal grant under the North American Wetlands Conservation Act, 16 U.S.C. secs. 4401-4414 (Supp. II 2002), that would have funded its acquisition of the conservation easement, the trust stated that it expected that the donation of the conservation easement would ‘encourage neighboring landowners to commit their properties to conservation in a domino-effect fashion’.  State and local entities still encourage and subsidize the donation of conservation easements in this particular geographic area.  It is also significant that Salt Point Timber and the Lord Berkeley trust bothered to put [the swap meet clause] in the easement.” 2017 T. C. Memo. 245, at pp. 20-21.

If the swap meet was so thoroughly improbable, why mention it?

Takeaway- Drafters of conservation easements, take it slowly and carefully. Eschew boilerplate. Keep Section 170 ever before you. And profit from the example of those that crashed.

Without a Withdrawal

I’ve talked before about lawyers being substituted in Tax Court. See my blogpost “He’s Not Your Lawyer,” 10/20/15.

As I wrote back then, at the desk in our hotel room in the Eden Wolff in Munich, “No biggie, right? We’ve all been subbed in, or subbed in others, and it’s usually handing over, or receiving, the file, and filing and serving the sub notice….”

Well, there’s more to it than that in Tax Court. And here’s Ch J L Paige (“Iron Fist”) Marvel to tell you how much more, in Mildred Barrett, Donor, Docket No. 22051-17, filed 12/8/17.

“On November 30, 2017, CTSJ filed an Entry of Appearance as counsel for petitioner in this case. On November 30, 2017, JLG electronically filed a Substitution of Counsel JLG for CTSJ. That Substitution of Counsel is not a proper substitution of counsel.” Order, at p. 1.

So what does JLG need to do to get out of this case?

JLG “…is advised that if he wishes to withdraw as counsel for petitioner in this case, he must file an appropriate motion to withdraw as counsel. See Tax Court Rule 24(c).” Order, at p. 1.

May I suggest that the wording of Rule 24(d) is not crystal clear. Maybe Rule 24(d) should state that a motion for withdrawal per Rule 24(c) is a prerequisite to filing substitution. Or maybe Form 8 should be amended to include manual signoff by petitioner, with current address and telephone number.

My colleague, the ace blogger at Forbes.com, Peter Reilly, CPA, has a blogpost wherein he worthily laments Tax Court’s absence from the ubiquitous PACER system. How useful it would be to read briefs and motion papers from cases, so that we peasants, in the (relative) comfort of our hovels,  might read, learn, mark and inwardly digest clearer insights into IRS’ thinking, Tax Court’s judicial reasoning, and the lucubrations of the best and brightest of the Tax Court Bar.

But no. We must bend our not-so-joyful footsteps toward 400 Second Street, NW, and beseech the clerks to let us sit at whatever device is not in use and read. Until they knock off and eject us, of course.

The excuse, I’m told, is the impenetrable shield of Section 6103, because unlearned and unrepresented petitioners let it all hang out in their papers, disgorging tax return info in all directions. OK, so lock up the pro se stuff until the redaction orders are filed. I’m quite sure Coca Cola, Amazon.com, Altera, et hoc genus omne, represented by the whitest shoes around, only submit redacted materials with their Rule 27 blockbuster motions.

So why all this wind-up on a Friday?

Well, I’d like to know what Jerrel C. Barto & Janice D. Barto, Docket No. 27570-15, filed 12/8/17, told that Obliging Jurist Judge David Gustafson besides that their case “remains under active consideration by IRS Appeals.” Order, at p. 1.

Apparently there was something else, because Judge Gustafson refers to “reasons stated in the parties’ joint motion.” Order, at p.1.

There are eight, count ‘em, eight other cases, scrupulously scheduled by Judge Gustafson, all asking Judge Gustafson to drop them from the January Atlanta trial docket and retain jurisdiction, reporting while they wait.

He does.

But what about poor Hailey Property Holdings, LLC? Judge Gustafson dropped them from the Atlanta roster, but sent them off to find another judge. See my blogpost “He Can’t Oblige You,” 11/6/17.

What’s the difference? Active Appeals consideration? Eight similar cases? Longer history with Judge Gustafson? Anything else?

If we can’t read the motion papers, we’re back to playing with daisy petals.

I criticized the Judge with a Heart, STJ Armen, for sending off poor Amy L. Goline with a “figure it out yourself,” when there’s a boilerplate paragraph invoking McCormick that has to be on the order clerks’ server. See my blogpost “Ya Gotta Have Heart,” 11/9/17.

Well today, it’s ex-CSTJ Panuthos’ turn. Here’s Kenneth W. Hope & Martha S. Hope, Docket No. 211-16S, filed 12/7/17.

All Ken & Martha want to do is pay the man. There’s a faxed decision document lodged, and IRS has moved for entry of decision.

“Petitioners appear to be in agreement that they will pay the amount of the deficiency set forth in the lodged decision document but ask that the Court not enter ‘a judgment against us’.” Order, at p. 1.

No can do, says ex-CSTJ Panuthos.

“Petitioners are advised that the Court must at some point enter a decision in this matter in order to close the case and permit an assessment of the deficiency to proceed. Thus the only choices at this juncture are for the Court to (1) enter a decision as lodged with the Court, (2) disregard the lodged decision and permit petitioners to proceed to trial and attempt to establish that the deficiency should be something less than that reflected in the lodged decision document.” Order, at p. 1.

And ex-CSTJ Panuthos is willing to wait until after New Year’s Day for their response.

But how about suggesting Ken & Martha just give IRS a check for the full amount, if able, and enter decision that nothing is owed?

When it comes to TFRPs, Section 6672 echoes the famous Three Musketeers’ motto. IRS can go after all, some or any responsible person. If more than one responsible type is kicking in, the others get credit. And they can fight about who overpaid in a separate lawsuit.

Sheila Woodley, 2017 T. C. Memo. 242, filed 12/6/17 thinks because two other responsible types are paying, she doesn’t have to pay.

Sorry, says Judge Lauber, IRS can mix and match until the trust funds are replenished for the years at issue.

“The IRS has also assessed TFRPs against [Ernie], another former owner of [Sheila’s sandwich shop], for the same trust fund tax liabilities.  During the pendency of petitioner’s CDP case, the IRS has received periodic payments toward [Sheila’s sandwich shop]’s tax liabilities from [Ernie] and/or from [Sheila’s sandwich shop’s purchaser].  For each payment it has received, the IRS has abated a corresponding portion of petitioner’s assessed TFRPs for the relevant tax period.” 2017 T. C. Memo. 242, at p. 6.

Sheila never contested the TFRPs until the CDP, but it was too late.  The Letter 1153 opens the door to Appeals and a dispute as to liability and amount. Sheila didn’t walk in.

Sheila claims the CDP was defective because her case was referred from FL to the USVI, where she resided.

“By virtue of this referral petitioner was able to present her financial information in a face-to-face meeting with a local IRS officer in the USVI. Because petitioner had not previously submitted financial documentation for consideration of a collection alternative, we find that the SO acted properly in making this referral.  Although petitioner asserts that the RO was somehow biased against her, there is no credible evidence to support that assertion.  Indeed, the RO recommended that petitioner be considered for an IA with monthly payments as low as $350.  In any event, there is no evidence that referral of the case to the RO in any way impeded the SO’s impartiality.  The SO, who conducted the actual CDP hearing, had no previous involvement with petitioner’s case.” 2017 T. C. Memo. 242, at pp. 9-10.

And whether the other responsible types paid less than they should is for another day and another court.

“Where multiple individuals have TFRP liability for the same underlying tax, the Code affords a responsible person a claim for contribution against other responsible persons if he or she has paid the IRS more than his or her ‘proportionate share of the penalty.’  Sec. 6672(d).  However, a claim for recovery against other responsible persons cannot be made in ‘an action for collection of such penalty brought by the United States.’  Sec. 6672(d)(1).  Rather, the taxpayer must seek contribution in an action ‘separate and apart from proceedings to collect the penalty brought by the United States.’ Thus, petitioner in this CDP case cannot seek to reduce her liability on the theory that she is being asked to pay more than her proportionate share of … delinquent taxes.” 2017 T. C. Memo. 242, at p. 12, footnote 3. (Citations omitted).

Takeaway- When selling (or buying) a business, sales taxes, franchise taxes, and withholding taxes require close examination of sellers’ records and returns, and careful drafting of instruments. And maybe even holdbacks of purchase price.

We all know Section 7605(b) limits IRS to one go-through of a taxpayer’s books of account per tax year. But IRS changed the numbers four (count ‘em, four) times on Donald J. Planty and Miriam Alvarez, 2017 T. C. Memo. 240, filed 12/5/17 before assessing a fifth number, all in the $2K range.

Then Don and Mim filed a 1040X, which IRS processed, and said they were making no further changes. But, reversing course, IRS decided to treat the 1040X as an audit reconsideration and slugged Don & Mim with a $64K deficiency, up from $2K.

Turns out IRS bounced Don’s & Mim’s $147K real estate losses.

Don & Mim yell it’s a double audit for same year.

Nope, says Judge Halpern.

“Indeed, petitioners have presented no evidence that, in reconsidering his prior examination, respondent inspected petitioners’ books and records.  Nor can petitioners plausibly claim that an examination of the items reported on the Form 1040X was not necessary to evaluate their overpayment claim.  Respondent’s examination undertaken in response to the Form 1040X did not run afoul of section 7605(b).  See Jackson v. Commissioner, T.C. Memo. 1982-556, 44 T.C.M. (CCH) 1213, 1218-1219 (1982).” 2017 T. C. Memo. 240, at pp. 5-6.

And the increased tax shown on the 1040X Don & Mim sent in after the audit started isn’t a “qualified amended return,” per Reg. 1.6664-2(c)(3), so it doesn’t count to reduce the five-and-ten understatement chop.

Don’s & Mim’s tax attorney doesn’t testify, so her advice doesn’t mitigate the chop. And Don’s & Mim’s reliance on their tax preparer for deducting the real estate loss doesn’t help, as they don’t show what their preparer told them.

No second time around.

Takeaway- Sometimes it’s better just to pay the first time.