My colleague Peter Reilly CPA has promulgated a series of laws of tax under his name. I forget which one gives me my text for today, but the purport is that filings should not be put off to the last minute. The consequences of last-minute filings are often disastrous.

Today’s victim is Connect Ya Communications, Inc., Docket No. 7661-18, filed 9/28/18, and Ch J Maurice B (“Mighty Mo”) Foley has the bad news. Connect Ya failed to connect.

“The record reflects that respondent sent a notice of deficiency to petitioner… on January 17, 2018. The 90-day period under I.R.C. section 6213(a) for filing a timely Tax Court petition as to that deficiency notice expired on April 17, 2018. The petition, filed April 20, 2018, arrived at the Court in an envelope bearing a U.S. Postal Service Click-N-Ship Priority Mail 2-day label day label dated “04/18/2018″—one day after the statutory 90-day period expired. Tracking information from the USPS Tracking Webpage (attached as Exhibit B to respondent’s August 30, 2018, motion to dismiss) shows that petition was accepted at the USPS origin facility on April 18, 2018.” Order, at pp. 1-2.

Connect Ya claims “…it attempted to mail the petition to the Court timely on April 17, 2018, but that the U.S Postal Service affixed an untimely April 18, 2018, postmark, to the mailing envelope.” Order, at p. 2.

My longer-suffering readers may remember the tale of Julie M. T. Walker, member of the Judges’ Club, and her postal mix-up, more particularly bounded and described in my blogpost “Going Postal,” 2/4/13. But at least Julie M. T.’s wrong papers got into the mail on the right day, and had the legible USPS datestamps to prove it.

Connect Ya’s attempt to prove USPS got it wrong cuts them no slack from Ch J Mighty Mo.

“Although extrinsic evidence is sometimes allowed to prove the date of mailing where an envelope containing a Tax Court petition lacks a postmark or the postmark is illegible, such evidence is irrelevant where the envelope bears a legible U.S. Postal Service postmark after the 90th day prescribed for filing a timely petition. I.R.C. sec. 7502(a); see also Shipley v. Commissioner, 572 F.2d 212, 214 (9th Cir. 1977); Kahle v. Commissioner, 88 T.C. 1063, 1068-1069 (1987); and Wiese v. Commissioner, 70 T.C. 712, 715 (1978).” Order, at p. 3.

Maybe the Connect Yas got to the post office after 5 p.m., when all the postmarking machines tick over to the next day’s date.

Takeaway- Don’t wait. If you get a SNOD or NOD, blast in a downloaded form petition claiming everything in the SNOD or NOD is wrong, and throw in the sixty buck check. You can amend later.

To take or not to take a proffered remand is a decision that requires careful analysis. I’ve argued before that an offeree may not wish to give Appeals a chance to remedy an abuse of discretion that could derail IRS’ case. Even more is this the case where Tax Court has given Appeals a blueprint how to remedy all their faults in the order to remand.

But the remand might help where the offeree has the blueprint of what evidence to proffer and what arguments to make, from the same source.

Today that Obliging Jurist, Judge David Gustafson, revisits Lauri Denise Johnson & David Michael Roberson, Docket No. 22224-17L, filed 9/27/18.

Back on 9/10/18, Judge Gustafson, finding serious question whether Lauri & David got the SNOD upon which this case is based, asked parties to show cause why he shouldn’t remand for Appeals to review the nonreceipt issue and whether David & Lauri can dispute the underlying liability.

Judge Gustafson held a phoneathon with IRS and Lauri (who spoke both for herself and David).

“The Court observed that, where IRS Appeals has abused its discretion in the CDP process, the Commissioner does not have a right to a remand. But the Court explained for Ms. Johnson’s benefit: that many petitioners benefit from a remand (since, for example, it gives them another opportunity to seeks remedies from Appeals at a supplemental hearing); that the remand does not deprive the taxpayer of ultimate judicial review of Appeals’ supplemental determination; and that if there is no remand and the Court simply decides that Appeals’ determination cannot be sustained, that decision, without more, does not bar the IRS from future collection activity, for which activity section 6330(b)(2) (“One Hearing Per Period”) may preclude judicial review. Ms. Johnson nonetheless stated that petitioners do not want a remand and will be ready to proceed to trial.” Order, at pp. 1-2.

OK, so Judge Gustafson will try receipt or nonreceipt. And then either toss the NOD for abuse (in which event Lauri & David get to try their underlying liability, if any), or sustain it, with no challenge to underlying liability.

“Ms. Johnson seemed to state that the petitioners intend to prove 16 ‘due process’ violations committed by the IRS. We will not prejudge this issue before hearing it. But we advise petitioner that defects behind the IRS’s issuance of an SNOD are usually out of bounds in a de novo consideration of a taxpayer’s liability; rather, the case simply begins with the IRS’s (arguably defective) determination and then effectively cures any such defects by allowing the taxpayer to demonstrate her actual tax liability. A taxpayer could not avoid her actual liability by proving that the IRS did a bad job in its examination of her tax return. On the other hand, it is true that defects committed by Appeals in the CDP process can indeed be reviewed in a CDP case like this one; but if, in a case like this one, the Court makes such a review and determines that Appeals abused its discretion by failing to follow correct procedure in considering a challenge to underlying liability, then the remedies are either (1) a remand to Appeals so that it can engage in a proper hearing (which remedy petitioners decline) or, if there is no remand, then (2) a de novo trial before the Tax Court on the issue of underlying liability. Again, the taxpayer could not avoid her tax liability simply by showing that Appeals did a bad job in the CDP hearing.” Order, at p. 2.

Since the SNOD dealt with medicals, charitables and “miscellaneous” deductions, let Lauri & David gather up their papers and show them to IRS, so they can stipulate them into evidence, rather than do a one-at-a-time introduction.

Takeaway- Be ready to go to trial on all issues if you reject a remand.

The words of the Sweet Swan of Avon will serve to describe the appraisal in Marc Chrem and Esther Chrem, et al., 2018 T. C. Memo. 164, filed 9/26/18, but only if IRS prevails on the trial. No summary J either to Marc and Esther (and their sisters, cousins, aunts and other family who comprise the als), or to IRS, which claims assignment of income based on the give-and-go from Marc and Esther and the als of 13% their stock in the Hong Kong C Corp the family owned to a certain 501(c)(3) and over to the ESOP of a US Sub S they also owned.

The Hong Kong C Corp did testing and quality control for the US Sub S and got paid commissions. The Sub S’ ESOP wanted to buy 100% of Hong Kong’s stock to cut out the commissions, achieve vertical integration, get Hong Kong’s intangibles (trademarks), and of course get $27 million out of the ESOP at capital gains rates.

The family agreed to sell 87% of Hong Kong to the ESOP for cash and notes, and certain members donated an aggregate of 13% to the 501(c)(3).

But the ESOP buyout was all-or-nothing, so the 501(c)(3) had to come in or the US S Corp would have to reverse merge or squeeze out the 501(c)(3) at the same price per share as the family were getting for their Hong Kong shares, within 60 days, or all bets were off.

But since both Hong Kong and the US Sub S were under common command and control, ERISA required a FMV appraisal of the shares. The family got this from an admittedly competent appraiser, and the numbers worked.

Except.

The family members whose contributions to the 501(c)(3) exceeded the $5K cutoff didn’t attach the appraisal to their 8283s, the appraisal expressly stated it was for ERISA purposes and not income tax, and the 13% the 501(c)(3) was donated was valued as if the 501(c)(3)’s shares were already part of the deal. In the last-named, the IRS claims the valuation was wrong because the 13% shares were worth much less if valued separately (minority discount, y’know). IRS argues the appraiser valued the deal as one deal, when there were two.

The family argues reasonable cause and substantial compliance on the appraisal.

Judge Albert G (“Scholar Al”) Lauber has this one.

“This Court has previously considered the assignment of income doctrine as applied to charitable contributions. In the typical scenario, the taxpayer donates to a charity stock that is about to be acquired by the issuing corporation via redemption, or by another corporation via merger or acquisition. In determining whether the taxpayer has assigned income in these circumstances, one relevant question is whether the prospective acquisition is a mere expectation or a virtual certainty. “More than expectation or anticipation of income is required before the assignment of income doctrine applies.” Greene v. United States, 13 F.3d 577, 582 (2d Cir. 1994).

“Another relevant question is whether the charity is obligated, or can be compelled by one of the parties to the transaction, to surrender the donated shares to the acquirer. Rev. Rul. 78-197, 1978-1 C.B. 83 (1978); see Rauenhorst v. Commissioner, 119 T.C. 157, 166 (2002) (finding ‘the donee’s control to be * * * an important factor’). The existence of an ‘understanding’ among the parties, or the fact that transactions occur simultaneously or according to prearranged steps, may be relevant in answering that question. See, e.g., Blake v. Commissioner, 697 F.2d 473, 480 (2d Cir. 1982) (stating that an ‘understanding’ among the parties need not be ‘legally enforceable under state law’), aff’g T.C. Memo. 1981-579; Ferguson v. Commissioner, 108 T.C. 244 (1997) (finding assignment of income with respect to proceeds of merger that occurred contemporaneously with charitable contribution), aff’d, 174 F.3d 997 (9th Cir. 1999).” 2018 T. C. Memo. 164, at pp. 12-13.

But questions of fact obtrude. Was the Hong Kong – US Sub S deal a lead-pipe cinch? Second, when did the family give the stock to the 501(c)(3), before or after the 501(c)(3) agreed to go with the deal?

“The parties also dispute the dates on which relevant events occurred. Petitioners assert that they transferred their shares to [501(c)(3)] on December 5 and there appears to be documentary evidence arguably supporting that assertion. Respondent contends that [501(c)(3)] did not acquire ownership of its 900 shares until (at the earliest) December 10, allegedly after [501(c)(3)] unconditionally agreed to sell the 900 shares to [US Sub S]. That contention derives arguable support from other documentary evidence, as well as from [appraiser]’s description of the proposed transaction, which recited that petitioners would transfer 900 shares to [501(c)(3)] ‘[s]imultaneously with [US Sub S]’s acquisition of the 6,100 shares.’”  2018 T. C. Memo. 164, at p. 14.

Also in doubt is the extent to which 501(c)(3) was obligated to go ahead and sell the shares it just got for $4.05 million. The only evidence in the record is that the family told the 501(c)(3) to do it. Of course, as Judge Scholar Al points out with his usual perspicacity, if 501(c)(3) doesn’t go along, the deal collapses and 501(c)(3) is left with “a 13% minority interest in a closely held Hong Kong corporation, the market value of which might be questionable.” 2018 T. C. Memo. 164, at p. 15.

If I had been advising 501(c)(3), I might suggest agreeing to go along for another half-million or so deductible cash contribution. But they didn’t ask me.

Howbeit, there be fact questions.

As for substantial compliance and reasonable reliance, although the appraisal was both unattached and not directed to income taxes, the family claims the appraiser signed the 8283s, there was no need for a minority discount for the 501(c)(3) shares as those shares weren’t being sold separately, and the family relied on their trusty CPA.

“The record as it stands now is silent concerning the advice (if any) that the CPA provided petitioners regarding the Empire report and whether they relied in good faith on whatever advice she may have supplied. For these reasons, we conclude that petitioners’ ability to rely on the “reasonable cause” defense of section 170(f)(11)(A)(ii)(II) presents genuine disputes of material fact that are not susceptible to resolution by summary judgment.” 2018 T. C. Memo. 164, at p. 25.

So try the assignment of income and the reasonable reliance issues.

Or, Appeals Hits the Trifecta

The “elevator pitch” may be the chance to change your career path, but a chat with a Collection Officer during an OIC is not a proceeding for “prior proceeding” CDP purposes.

This from Judge Buch writing for a unanimous Court in James Loveland, Jr., and Tina C. Loveland, 151 T. C. 7, filed 9/25/18.

IRS gets three (count ’em, three) strikes from Judge Buch: they abused their discretion by failing to consider Jim’s and Tina’s OIC, IA, and economic hardship.

Jim is a disabled ex-boilermaker and Tina just survived breast cancer. They lost their home in the ’08 Great Meltdown. They stopped paying their taxes. IRS gave them a NITL.

Jim and Tina proffered an OIC with all the info. They were negotiating with a CO, who bounced their OIC. Jim and Tina went to Appeals to contest the bounce, with an IA as a back-up, but Appeals told them they couldn’t raise IA if they wanted to appeal the OIC.

So Jim and Tina dropped the IA and went back to negotiating.

As they were trying to mortgage another piece of property they owned so as to pay their taxes down below $50K to do a small-claimer, IRTS dropped a NFTL, thereby blowing up the mortgage process.

Jim and Tina timely appealed. The AO asked for the usual financials. Jim and Tina said they gave them with the OIC. The AO refused to consider anything except proposing an $853 per month IA, when Jim and Tina proposed $800. Apparently the back-and-forth with the CO on the OIC was a “prior opportunity.” But, as we shall see, that’s not enough.

IRS wanted summary J, but didn’t furnish the AO’s declaration until Jim and Tina had already responded to the motion, so they got a second chance.

“We are faced with a unique question here: whether negotiations with a collections officer constitute a previous administrative proceeding under section 6330(c)(4)(A)(i) and section 301.6320-1(e)(1), Proced. & Admin. Regs. The Lovelands made an offer-in-compromise in a separate collection proceeding that is not before us. Then, in the CDP hearing underlying this case, they renewed their offer-in-compromise. In response to a January 23, 2017, letter from the Commissioner, the Lovelands resubmitted their previously rejected offer-in-compromise along with their financial information.” 151 T.C. 7, at p. 14 (Footnote omitted, but it says IRS claimed Jim and Tina never gave financial information, except Judge Buch says they did).

” Section 301.6320-1(e)(1), Proced. & Admin. Regs., states that ‘the taxpayer may not raise an issue that was raised and considered at a previous CDP hearing under section 6330 or in any other previous administrative or judicial proceeding if the taxpayer participated meaningfully in such hearing or proceeding.’ Whether a previously rejected collection alternative can be raised at a CDP hearing does not hinge on whether the taxpayer had a prior opportunity to challenge the rejection; it hinges on whether the rejected collection alternative was actually considered at a previous administrative or judicial proceeding. In other words it is not a question of whether there was a prior opportunity, but whether there was a prior proceeding.” 151 T. C. 7, at pp. 14-15. (Emphasis by the Court).

Jim and Tina could have gone to Appeals on the OIC, but that meant dumping their IA, so they didn’t. Thus, no prior proceeding, thus the OIC and the IA are still in play.

And the Section 6320 levy regs only talk about prior opportunity to contest amounts, not spousals, appropriateness (like maybe hardship, ETA, etc.) and OICs.

Of course Appeals is entitled to updated financials where circumstances have changed. See my blogpost “Back to the Future,” 8/1/11. But the AO never looked at the old and never asked for any new.

And the AO never considered Jim’s and Tina’s ailments or hardships.

IRS hits the trifecta. Abuse of discretion three ways.

This one goes back to Appeals.

More than two (count ’em, two) years ago, I had suggested myself as candidate for the post of proofreader (unpaid) to the United States Tax Court. See my blogpost “I Volunteer,” 4/6/16. My offer was not taken up, for reasons that seem obscure to me.

So I remember today Harold Ross, legendary editor of the New Yorker magazine, which, in my college days, I dreamed of editing.

It was said of Ross that he believed only two persons were universally known by only one name, Houdini and Holmes (sorry, Judge; Ross meant Sherlock). Wherefore, Ross was wont to blue-pencil every piece wherein a person was referred to for the first time by only one name, no matter how prominent the person or unique the name, with his famous phrase “who he?”.

The joke was that he once blue-penciled a drama criticism wherein the name “Euripides” appeared with a “who he?”

Well, at last I can ape my salad-days’ hero.

Here’s Estate of Eunice Sherwood, Deceased, Anthony Sherwood, Independent Administrator,  Docket No. 25111-17, filed 9/25/18. It seems the late Eunice became the late Eunice post-petition, so Judge Gale amends the caption appropriately. Then he approves the late Eunice’s attorney’s (whom I’ll call Mr. W) exit, as none of Mr. Sherwood the Indie Adm’r, his counsel, or IRS, objects thereto.

But there remains the question what happens now.

Judge Gale deals with that. “In the circumstances, we conclude that Mr. W lacks authority to act on behalf of decedent’s estate and must withdraw from the case. In view of Mr. Sherwood’s appointment as administrator of decedent’s estate, we will order that he be substituted as a party. In the event Mr. Sherwood does not wish to prosecute this case, he should consent to a motion by the Commissioner (respondent) to dismiss for failure to properly prosecute. Mr. Sherman is advised, however, that– barring any concession by respondent–a dismissal of the case for failure to properly prosecute will result in a decision in respondent’s favor for the entire amount of the deficiency.” Order, at p. 2.

“Mr. Sherman”? Who he?

Tax Court, notwithstanding that it has neither press office nor press officer, conjures up a document entitled “press release” announcing that “…effective as of October 19, 2018, Senior Judge Carolyn P. Chiechi has fully retired and is no longer recalled for judicial service.”

The press release states the thanks the Court offers “…Judge Chiechi for her excellent service and contributions to the Court’s jurisprudence.”

All Judge Chiechi’s open cases will be reassigned.

I said it years ago: “The old Chinese adage is true: “The worst scrap of paper is better than best human memory.” See my blogpost “Sloppiness Is Its Own Reward,” 1/26/11. And it’s still true.

Just ask Jin Man Park, 2018 T. C. Sum. Op. 48, filed 9/24/18, while I was off on what tort lawyers call “a frolic of my own.”

Jin Man got some money from Bank of America. He first got money by way of a couple mortgages on his house (hi Judge Holmes), which he was paying back, but when Ms. Park and the kids left and divorced him, he stopped paying.

Then, however, he deployed to Africa as an Army reservist, and started paying again.

During the year at issue, Jin Man”…received and cashed a $13,508.38 check from BOA’s customer service. Included with the check was a letter stating that, ‘[b]ased on a recent review of your account, we may not have provided you with the level of service you deserve, and are providing you with this check.’ The letter further stated that petitioner might wish to consult with someone about any possible tax consequences of receiving the funds, included a number for petitioner to call if he had any questions, and concluded by thanking him for his military service. Petitioner called the phone number provided on several occasions, but he was unable to obtain any further information. Considering all the information available, petitioner concluded that he had overpaid his mortgages during the time of his overseas military deployment. Accordingly, he did not report any portion of the $13,508.38 on his … Federal income tax return.” 2018 T. C. Sum. Op. 48, at p. 3.

But BOA sent Jin Man a Form 1099-MISC anyway, and IRS, whenever its computers detect a wayward 1099 and a presumptively wayward taxpayer, marries the two with a SNOD.

Jin Man petitions timely and subpoenas BOA for their records relating to the check. BOA responds with “…[t]he bank is unable to locate any accounts or records requested with the information provided.” 2018 T.C. Sum. Op. 48, at p. 4.

IRS trots out the usual presumptions. Jin Man did have income from his service pay (income-producing activity) and 1099 from BOA. Must be taxable.

Jin Man takes the stand on the trial, and testifies he thought the payment he got wasn’t taxable, as he was getting a refund of an overpayment.

Judge Gerber believes Jin Man’s story. IRS played the Michael Corleone gambit, presumption variation.

“Supporting petitioner’s position, the record includes the letter that accompanied the check from BOA, which indicates that BOA had made a mistake regarding petitioner’s accounts. BOA’s letter admits it was correcting a wrong it had committed regarding petitioner’s accounts and was returning his money and the interest that had accrued on it. Respondent does not offer any argument to the contrary and appears instead to rely on the presumption of correctness which attaches to a notice of deficiency to support the proposition that petitioner’s receipt of the BOA check was a taxable event.” 2018 T. C. Sum. Op. 48, at p. 6.

BOA paid Jin Man interest on his overpayment and gave him a 1099-INT. On that he has to pay tax.

This is an old gripe of mine, but it needs to be refreshed and rebooted. Today, Alfred P. Ray & Hazel Carla Ray, Docket No. 13535-18, filed 9/21/18, provide me with my launchpad.

Alf & Hazel had separately petitioned two other years, with cases pending. They want to consolidate the year at issue with these, so they argue against IRS’ motion to dismiss for want of jurisdiction “…that because they have received a multitude of notices from the Internal Revenue service, presumably the including the CP2000 they provided to respondent, the Court should impute a notice of deficiency, invoke jurisdiction, and consolidate this case with their above-mentioned cases….” Order, at pp. 1-2.

Here’s Ch J Maurice B (“Mighty Mo”) Foley to tell Alf & Hazel the bad news.

“Petitioners have not established their burden with respect to [year at issue]. A Notice CP 2000 is a notice to taxpayers that the IRS intends to make changes to the return and invites the taxpayers to either agree or disagree. It is not a notice of deficiency. See I.R.C. sec 6313(b)(1)[sic; I think you meant 6213(b)(1), Judge]. Moreover, the taxpayer has no right to file a petition with the Tax Court based on such a notice, and the IRS is not prohibited under I.R.C. sec. 6213 (a) from collection activity. Id. Likewise, if a letter notice is not a notice of deficiency, then the Court lacks jurisdiction.” Order, at p. 2.

OK, Ch J, if it’s simply a numbers mistake, then Section 6213(b) rules. Likewise if it were a criminal restitution or claim-of-right carryback.

I’ve already ranted about IRS’ doublewide definition of “clerical” mistakes. See my blogpost “Manifest Injustice,” 5/4/18. I hope the taxpayer filed for a refund and won. Or that Nina E (“The Big O”) Olson laid a class-A whuppin’ on IRS.

And what about the Letter 4313C game, where the letter says there was a SNOD already issued, but IRS later says “Haha and hoho, fake out, no there wasn’t”?

There’s no mandatory form the SNOD must take. And the statute doesn’t mandate any.

“The notice [SNOD] ‘is only to advise the person who is to pay the deficiency that the Commissioner means to assess him; anything that does this unequivocally is good enough…. [M]istakes in the notice which do not frustrate its purpose, are negligible.’ O’Rourke v. United States, 587 F.3d 537 (2nd Cir. 2009), quoting Olsen v. Helvering, 88 F.2d 650, 651 (2d Cir. 1937).

So how is a civilian, unlearned in tax law, to know what is and what is not a SNOD, and whether or not s/he is in peril if s/he doesn’t blast in the sixty bucks and a petition to The Glasshouse?

Can IRS play cutesy with Alf & Hazel, litigate the other years separately to see how they come out, and leave Alf & Hazel hanging until IRS decides to drop a SNOD for the year at issue (assuming no SOL issue)? And claim issue/claim preclusion when Alf & Hazel petition the belated SNOD?

Apparently IRS can.

So everyone should petition everything except that which says in plainest English “two plus two is four, not three, dodohead.”

Or maybe IRS can decompose some brain tissue and do what I suggested a year ago in my blogpost “Should You Petition Everything?” 8/15/17.

“IRS can solve this simply. Atop everything they want to assert is a SNOD, put these words in bold-faced capital letters: STATUTORY NOTICE OF DEFICIENCY: PETITION TAX COURT, NOT IRS, IN 90 DAYS FROM DATE BELOW. SEE www.ustaxcourt.gov NOW.”

It’s been nearly a year since I last animadverted to Herman Melville’s classic tragedy, but Belair Woods, LLC, Effingham Managers, LLC, Tax Matters Partner, 2018 T. C. Memo. 159, filed 9/20/18, brings to mind the melancholy refrain of the immortal scrivener.

It’s yet another scenic easement. My colleague Mr Peter Reilly CPA was blogging about the recent Champion Retreat opinion (see my blogpost “Not Endangered – Except the Benderdinker,” 9/10/18). There’s lots of these scenic easement dodges, but political considerations raise their heads, so I’ll forbear to comment further.

The Belairs sent in the Form 8283 with appraisal attached. So far, so good. But one number is missing, and thereby hangs the cliché.

“In particular, Belair did not disclose on that form, as was required, the ‘cost or adjusted basis’ of the property that was the subject of the contribution. Petitioner contends that Belair strictly or substantially complied with that requirement or, alternatively, had reasonable cause for failing to meet it.” 2018 T. C. 159, at p. 2.

The deal was originally going to be a housing development, but the 2008 Meltdown put paid to that. So to set up the big tax break and put it in play, the Belairs went to “Forever Forests, LLC (Forever Forests), a consulting firm specializing in structuring conservation easements to maximize tax benefits for donors.” 2018 T. C. Memo. 159, at p. 4.

The Forever Foresters so massaged the deal that what the Belairs bought at $2.7K per acre in 2007 was suddenly worth $33.7K per acre by 12/30/09.

But the cost or adjusted basis never made it into the appraisal or the Form 8283.

“Belair contacted Forever Forests about preparing the Form 8283, specifically with reference to reporting its ‘cost or adjusted basis.’  Forever Forests relayed advice that it had received in 2008 from Baker Donelson, a law firm.  At Forever Forest’s request, an attorney at that firm had reviewed the instructions to Form 8283 and concluded that ‘[i]t should not be necessary to include the basis in formation * * * if you attach an explanation to Form 8283 providing a reasonable cause for why it is not included.’  He further stated that ‘a reasonable cause for not including basis information should be that the basis of the property is not taken into consideration when computing the amount of the deduction’.” 2018 T. C. Memo. 159, at p. 7.

So that’s what the Belairs tell IRS, plus they have a 12-month holding period, so it’s a capital gain.

Well, Judge Albert G (“Scholar Al”) Lauber is not amused.

“Belair did not report its cost basis as the regulation requires and as Form 8283 directs.  And the explanation Belair attached to that form, far from showing that it was unable to provide this information, simply asserted that the information was not necessary.  In effect, Belair asserted that taxpayers are free to ignore the requirement that they report cost basis.  Asserting that one may ignore a requirement does not constitute strict compliance with it.” 2018 T. C. Memo. 159, at pp. 11-12.

Belair isn’t doing so great, but now they put in their entry for the Taishoff “Best Excuse” no-prize sweepstakes.

“Petitioner contends Belair had reasonable cause for omitting basis information because it did not know what basis to report.  On the facts here, petitioner says, the term ‘basis’ might refer to any of the following: (1) the cost of the parent tract, (2) the cost of the conserved portion of the parent tract, (3) the adjusted basis of the conserved portion minus the homesite parcels, or (4) the basis of the easement itself, which petitioner says is zero.  Because the term ‘basis’ in the context of a conservation easement is supposedly ambiguous, petitioner contends that Belair had reasonable cause for not supplying basis information.” 2018 T. C. Memo. 159, at p. 12.

But the Belairs didn’t mention this in the attachment to the Form 8283. The Belairs counter that Reg. 1.170A-13(c)(4)(iv)(H) says they don’t lose the deduction if they furnish the information to IRS on request, and they did. Three years later, at the audit.

Judge Lauber is definitely not amused.

“Belair supplied the required information three years after its return was filed and only upon learning the outcome of the IRS examination.  The regulations create a prophylactic rule designed to provide the IRS with information to help it decide whether to commence an examination.  This requirement would be meaningless if a taxpayer could cure noncompliance after the examination was completed.” 2018 T. C. Memo. 159, at p. 14.

Sort’a like getting the Boss Hoss sign-off after the tax has been assessed on the trial, Judge?

“When a taxpayer claims a charitable contribution deduction for recently purchased property, a wide gap between cost basis and claimed value raises a red flag suggesting that the return merits examination. Unless the taxpayer complies with the regulatory requirement that he disclose his cost basis and the date and manner of acquiring the property, the Commissioner will be deprived of an essential tool that Congress intended him to have.” 2018 T. C. Memo. 159, at p. 17.

The Belairs says IRS could wade through their return to find the basis. Another nonstarter.

“Specifically, petitioner contends that Belair supplied information from which its cost basis could be derived in one or more of the following attachments to its Form 1065:  (1) Schedule L, Balance Sheets per Books, (2) Schedule M-1, Reconciliation of Income (Loss) Per Books With Income (Loss) Per Return, (3) a section 743(b) election and calculation sheet, and (4) the attached appraisal, which included a history of the parent tract.

“We are not persuaded.  The regulations require that ‘an appraisal summary shall include’ information concerning basis.  Sec. 1.170A-13(c)(4)(ii)(E), Income Tax Regs.  The explicit disclosure of basis on Form 8283 is essential in alerting the Commissioner as to whether (and to what extent) further investigation is needed.” 2018 T. C. Memo. 159, at pp. 19-20.

“The IRS reviews millions of returns each year for audit potential, and the disclosure of cost basis on the Form 8283 itself is necessary to make this process manageable.  Revenue agents cannot be required to sift through dozens or hundreds of pages of complex returns looking for clues about what the taxpayer’s cost basis might be.” 2018 T. C. Memo. 159, at p. 20.

The Belairs claim they relied on the Forever Foresters and their lawyer. But it’s a fact question how expert the Forever Foresters were, what the Belairs told them and whether the Belairs relied in good faith.

Takeaway- “I would prefer not to” works only in literature.

Jonathan Zuhovitzky and Esther Zuhovitzky, 2018 T. C. Memo. 158, filed 9/20/18 are with us again, but it’s neither reality tv nor the Hague Convention on Evidence.

For the story on the tv show, see my blogpost “Come From Away – Part Deux,” 11/17/17.

This time, the question is Esther.

Esther is a citizen both of Israel and Austria, but not the US. Jonathan is a citizen both of Israel and the US. Esther never resided in the US. Esther and Jonathan both reside in Germany, you’ll remember.

Esther and Jonathan filed MFJ for the eight (count ‘em, eight) years at issue, and plenty more years before. But Esther failed or forgot to mention her Swiss bank account to the extent of $2.2 million, with 75% fraud chops to match.

The only question is whether Esther is to be treated as a US taxpayer. The NRA spouse (no, that’s not a pistol-packin’ momma, that’s a Non-Resident Alien) of a US person cannot file MFJ unless election is made per Section 6013(g). And everyone agrees she never made such election.

Judge Vasquez: “As the election treats the nonresident spouse as a U.S. resident for purposes of chapters 1 and 24 of the Code, it also subjects that spouse’s foreign-source income to U.S. taxation.  See secs. 1, 61; sec. 1.6013-(6(a), Income Tax Regs.” 2018 T. C. Memo. 158, at pp. 4-5.

IRS wants summary J nailing Esther’s Swiss hoard on two grounds: substantial compliance and duty of consistency (quasi-estoppel).

IRS says “Y’all filed MFJ for years, thereby manifesting intent to elect 6013(g) treatment.” Esther and Jonathan say “No, we didn’t intend nothing.” Judge Vasquez says that’s an issue of fact.

The duty of consistency means a taxpayer can’t take a position in a closed year, and once IRS has gone along with that position based on incomplete information, take another in an open year.

IRS claims that Esther could have satisfied the substantial presence test unbeknownst to IRS, and therefore didn’t need to make the election, because a NRA who is “substantially present” in the US don’t need no stinkin’ Section 6013(g) election. And Esther and Jonathan had been filing MFJ for years before the eight years in question, but those returns were accepted and the SOL has run.

IRS surmises that the reason they filed MFJ was to give them favorable treatment on their US taxes and Jonathan’s world-wides, while Esther concealed the Swiss hoard and taxes thereon. I’ve been tough on judicial surmises before now (see my blogpost “Deal(er) or No Deal(er)?” 8/28/12), but IRS’s surmise looks pretty good to me.

Esther and Jonathan’s legal team say IRS well knew Esther never filed a Section 6013(g) election, and that she needed to do so, before processing the returns. So Esther didn’t draw IRS offside.

But something never made it into the summary J motion papers.

Like Jonathan’s and Esther’s tax returns for the years at issue.

“Like the substantial compliance analysis, the duty of consistency analysis requires factual determinations.  Without access to petitioners’ returns for the years at issue, we cannot discern what facts petitioners provided to respondent about Esther’s residency.  Accordingly, we are not able to determine the nature of petitioners’ representation or whether respondent had actual or constructive knowledge that petitioners erroneously filed joint returns.  Therefore, matters of material fact are in dispute, and this issue is inappropriate for summary judgment.  As we cannot proceed with our analysis under either the duty of consistency or substantial compliance, we will deny respondent’s motion for partial summary judgment as a whole.” 2018 T. C. Memo. 158, at p. 10.

So it looks like the reality tv show live from Berlin is back on track.