Archive for September, 2018|Monthly archive page


In Uncategorized on 09/21/2018 at 17:18

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 NOW.”




In Uncategorized on 09/20/2018 at 18:20

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.


In Uncategorized on 09/20/2018 at 17:06

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 election 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.


In Uncategorized on 09/20/2018 at 09:24

Today, there joins my blogpost the Caribbean Netherlands, known as BES, for Bonaire, Sint Eustatius (a/k/a Statia, where the US flag was first recognized by a foreign nation) and Saba. I actually sailed past Statia and Saba a couple years ago (hi, Judge Holmes).

Welcome, ye inhabitants of the isles.

Now Bolivia, where are you?


In Uncategorized on 09/19/2018 at 17:38

“Don’t Ask” Variation

Mario Puzo’s classic has given rise to a by-word that has served me well in numerous blogposts. Today Mr Puzo’s literary gift keeps on giving, as we have the “Don’t Ask” variation. All y’all will doubtless remember Michael’s injunction to Kay, which Michael received from his father’s hand: “Don’t ask me about my business.”

Well, today Annette Faye Neitzer, disabled and ill, fighting the $21K IRS levied from her separate checking account to pay the tax debt arising from her husband’s two businesses, which had separate checking accounts and of which Annette knows nothing, wants Section 6015(f) equity, and Judge Paris is sympathetic.

Here’s Annette Faye Neitzer, Petitioner, and Richard J. Arnoldussen Intervenor, 2018 T. C. Memo. 156, filed 9/19/18.

Annette “… has undergone numerous spine and hip surgeries.  She expects her condition to deteriorate over time and expects to require further medical treatment in the future.  Her condition has limited her ability to work.” 2018 T. C. Memo. 156, at p. 3. (Footnote omitted).

While Annette was divorcing Richard (which included the year at issue), “(I)ntervenor owned interests in two businesses, which were the primary sources of his income.  During the pendency of the divorce petitioner maintained her own finances and paid her own expenses.  Her income consisted of payments from Social Security disability, veteran’s disability, long-term disability, and temporary spousal maintenance payments from intervenor.  Petitioner did not have access to the couple’s joint checking account at Johnson Bank (Johnson Bank account) during the pendency of the divorce.  Instead, she maintained her own account at Associated Bank (Associated Bank account) from which she paid her expenses.” 2108 T. C. Memo. 156, at p. 3. (Footnote omitted, but it says Annette’s bank account had proceeds from sale of the marital residence and a PI settlement Annette got).

Annette had to travel two hours to get to Richard’s accountant (who handled all of Richard’s business) to sign the 1040 for the year at issue.

And Richard played the Michael Corleone Gambit, “Don’t Ask” variation.

“Petitioner signed an authorization permitting the accountant to file the [year at issue] return but did not review or ask for additional time to review the … return.  Petitioner did not request or receive a copy of the … return at the time she signed the authorization.  Even if petitioner had requested a copy, it is not certain that she would have been given one because intervenor instructed his business accountant not to disclose to petitioner any information about his businesses or personal finances.” 2018 T. C. Memo. 156, at p. 5-6.

Richard sent IRS a bum check when Annette asked about a letter she got from IRS asking where the tax due payment was. To forestall further meddling, “…intervenor changed the mailing address on file with respondent so that future correspondence would be mailed to his business address.  Intervenor also instructed his office staff to mark ‘return to sender’ on any notices or other correspondence that was addressed to petitioner at his business address.  …respondent issued petitioner Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing.  The letter was addressed to petitioner but mailed to intervenor’s business address.  … the letter was returned to respondent as refused or unclaimed.” 2018 T. C. Memo. 156, at p. 6.

Only after IRS grabbed the $21K from Annette’s separate bank account to pay what Richard hadn’t, did Annette change her address.

Annette satisfied the three thresholds, but flunks the seven streamliners, so it’s facts-and-circumstances for equitable relief.

Richard’s withholding of information scores big, and so does Annette’s undoubted disability.

Annette gets a Section 6015(f) bye, and IRS has to hand her back the $21K, even though IRS claimed it was a windfall. Judge Paris specifically doesn’t find that the money would be a windfall, just that Annette didn’t have an economic hardship, as her divorce settlement from Richard was six figures. But that only figures as “neutral” in the mix-and-match.

If you want your intervenor client to beat a Section 6015(f), maybe the Michael Corleone gambit, “Don’t Ask” variation, isn’t a winner.


In Uncategorized on 09/19/2018 at 16:54

Ask the Judge With a Heart

Defeat rankles me. Even more so when I get pilloried by the illustrious American Bar Association Tax Section while I’m at it.

If the foregoing befuddles you, constant reader, dig my blogpost “Maybe the ABA Tax Section Was Right,” 12/15/17.

But the tactic of picking a remote location for trial to stall proceedings is alive and well, and today The Judge with a Heart, STJ Robert N Armen, will have no truck with such a maneuver.

Here’s Olga Marie Dultz, Docket No. 11846-17S, filed 9/19/18, who wants to try her small-claimer in Peoria. Except Olga lives in “That Toddlin’ Town” Fred Fisher apostrophized in 1922.

Olga picked Peoria, and it is a small-claimer venue, but she wants a continuance from the trial that is scheduled to start there next week. IRS wants to schedule the trial for The Windy City.

“However, petitioner objected to a change of place of trial from Peoria to Chicago ‘due to the congested court system in a much larger City of Chicago’, but suggested that place of trial may not be too important because she is relying on a ‘summary judgement [sic] request’.” Order, at p. 1.

STJ Armen is unimpressed.

“Petitioner is a resident of the City of Chicago, and this case has no apparent connection to the City of Peoria. Moreover, the Tax Court’s docket in Chicago is not ‘congested’. Further, the Court conducts many more trial sessions in Chicago than in Peoria, where there is generally no more than one trial session per year. Finally, petitioner is advised that there is no motion for summary judgment pending in this case and that, for such reason, the case is on track for disposition by trial, unless sooner settled by the parties on a mutually agreeable basis.” Order, at p. 2.

Take that, ABA Tax Section.


In Uncategorized on 09/19/2018 at 15:45

No, this is not about a certain examination known to those of us of a certain age. This is the story of a Personal Services Agreement between the US Dep’t of State and Sidney O’Kagu, 151 T. C. 6, filed 9/29/18.

Sid O was in Germany, had a German work permit, kept a bank account there in an onshore local bank into which our tax dollars (first being converted into Euros) were directly deposited to pay Sid O for his labors as a security equipment tech in the Frankfurt consulate. And he didn’t get a lot of US employee benefits.

Sid O claims Section 911(a)(1) foreign earned income exclusion.

Nope, says ex-Ch J Michael B (“Iron Mike”) Thornton, and his colleagues respond: “so say we all.”

Sid O says 22 USC §2269 means he’s not an employee of the US gov’t, because he’s got a positive PSA.

Ex-Ch J Iron Mike ripostes with the last clause of said statute: “…for purposes of any law administered by the Office of Personnel Management.” 151 T. C. 6, at p. 6.

Well, dear ol’ Title 26 of the USC is not administered by DOS OPM. And Ex-Ch J Iron Mike has caselaw to prove it.

But more elegantly: “Petitioner has cited, and we are aware of, no other clause of the Basic Authorities Act or any other provision of law that would suggest any other construction or effect of the Basic Authorities Act as applied to this case.

“Clearly, section 911 is not a ‘law administered by’ the Office of Personnel Management.  Rather, it is part of the Internal Revenue Code, which (with exceptions not relevant here) is administered ‘by or under the supervision of the Secretary of the Treasury.’  Sec. 7801(a).  Accordingly, pursuant to 22 U.S.C. sec. 2669(c) petitioner is considered an employee of the U.S. Government for income tax purposes, notwithstanding his assertions about the nature of his employment perquisites and conditions.  Consequently, the wages that he received from the U.S. Department of State do not constitute foreign earned income within the meaning of section 911(b)(1).  He is therefore not entitled to the foreign earned income exclusion for the years in issue.” 151 T. C. 6, at p. 7-8.

Partial summary J for IRS.

Partial? What’s missing from this picture?

My sophisticated readers will rise as one and yell “The 20% accuracy chops!”

Ex Ch-J Iron Mike is on the case: “Respondent has not sought summary judgment with respect to the sec. 6662(a) accuracy-related penalties.  We leave that issue for further proceedings.” 151 T. C. 6, at p. 8, footnote 3.

No Section 6751(b) Boss Hoss sign-off? Stay tuned.


In Uncategorized on 09/18/2018 at 16:58

Judge Albert G (“Scholar Al”) Lauber gets to leap from Hong Kong to Cyprus without leaving the Glasshouse at 400 Second Street, NW, today, as IRS gets summary J in Hong Kong, but Cyprus is a question of fact.

Barry M. Smith and Rochelle Smith, 151 T. C.5, filed 9/18/19, had a couple wannabe CFCs (hi Judge Holmes) under their umbrella of grantor trusts and a Sub S. They were winding down the Hong Kong one, and hoped the big payout that the Hong Kong sub collected would be taxed at the preferential rate.

Judge Lauber takes upon the story: “Petitioners hoped that the contemplated distribution could be treated as ‘qualified dividend income’ (QDI) under section 1(h)(11)(B), which would allow the dividend to be taxed at a rate of 15% or lower. See sec. 1(h)(1), (11)(B). This would be possible only if [HK] were a ‘qualified foreign corporation’.” 151 T. C. 5, at p. 6.

Sorry, Barry and Rochelle. To be a CFC and get the Section 1(h)(11)(B) (author’s note: if the 11B means nothing to you, consider yourself lucky), the corp must either be incorporated in the US or in a country with a tax treaty with country of incorporation permitting same.

Problem: although China and the US have such a treaty, Hong Kong is expressly excluded from the terms thereof.

So Barry and Rochelle go shopping for a friendly country. And Cyprus is just the place. So they incorporate a Cypriot sub (hereinafter sometimes referred to as Cs), all of whose shares are owned by the US Sub S, transfer all their shares in HK to Cs, and do a Section 368(a)(1)(F) tax-free reorg.

Cs filed with IRS as a wholly-owned sub of a US Sub S.

Earlier, however, Barry and Rochelle took advantage of Section 951 on assets held by HK and paid tax. But Section 962 required inclusion of the net-after-tax amount of the remainder, and that Barry and Rochelle never did. Clear? Thought not.

Meanwhile, Cs held a big receivable owing from US Sub S, that Cs wrote off.

Barry and Rochelle get $57 million from Cs as a dividend, and claim qualified dividend (15% style) from Cs as a CFC.

“Petitioners alleged in their petition that [Cs] had ‘obtained a tax residency certificate from the Cyprus tax authorities confirming its Cyprus tax residence’ during 2009.
Petitioners subsequently amended their petition to allege that [Cs] had ‘obtained a confirmation letter of Amicorp (Cyprus) Ltd., administrators of [Cs], confirming that [Cs] was a tax resident of Cyprus during all relevant times.” 151 T. C. 5, at p. 11.

IRS, ever the spoiler, invokes the Competent Authority, the spokesperson at the highest level of International taxation. The Cypriot CA dished in extenso, and this made it into the record.

First, the light lifting. Whatever Barry and Rochelle got from HK before the Cyprus shift is ordinary; HK wasn’t incorporated in the US, and there wasn’t and isn’t a tax treaty with Hong Kong.

As for Barry’s and Rochelle’s claim that Section 962 “moved up” HK to a “notional US C Corp,” via the Section 962 taxed-as-if-US-C-Corp,  “(W)e discern no support for this theory in the statute, the legislative history, the regulations, or judicial precedent.” 151 T. C. 5, at p. 20.

The language of Section 962 is in the subjunctive mood, says Judge “Scholar Al” Lauber, and therefore counterfactual. Remember Hans Vaihinger and the “philosophy of ‘as if’.” If not, see my blogpost “As If,” 11/22/16.

HK is not a CFC, and the HK money is taxed at ordinary rates.

But Cs is another story.

Cs was Cyprus registered, but didn’t bother filing four (count ‘em, four) years’ worth of tax returns, got struck off the Cyprus corporation roster, but got quickly restored on an unsigned certificate of a director of Cs, who claims everything is just fine. But the key is actual management and control being vested in Cyprus, and there’s only the director’s filled-in form for that.

Barry and Rochelle claim restoring Cs to corporate status by Cyprus is an act of state, not to be interfered with by US Courts, lest they damage our foreign relations. But where there’s a treaty, it’s different. Here there is one, and the Cyprus CA says effective management and control onshore is the key.

“For several reasons we find that petitioners have not satisfied their burden to show that the act of state doctrine applies. To begin with, we question whether the issuance of the residency certificates rises to the level of an ‘act of state.’ The certificates were issued five days after the application was filed. The application consisted of unsubstantiated representations by a [Cs} director, who checked ‘yes’ boxes on the application form. Apart from confirming the filing of tax returns—[Cs]’s returns for [missing years] were submitted the day before the application, they were at least four years late, and two of them were unsigned– there is no evidence that the Ministry verified any of the applicant’s factual representations.” 151 T. C. 5, at p. 37.

This is more a clerical act than a sovereign act. So question of fact if Cs was really commanded and controlled from Cyprus.

The written-off receivable? Taxed as ordinary income. That there were tax payments in prior years don’t limit IRS.



In Uncategorized on 09/17/2018 at 20:37

I understand that James E. Lawson and Christiane D. Lawson, 2018 T. C. Sum. Op. 44, filed 9/17/18 were self-represented. I understand that the deficiency, with chops, was less than $20K.

Of course, an attorney was out of the question.

But somebody called their preparer (status not stated, so maybe not cloaked by Section 7525 privilege) as a witness.

This is not the testimony you want to hear.

“Although their returns were prepared by a paid income tax return preparer, the return preparer used income and expense amounts petitioners provided. Apparently, no source documents underlying the deductions were provided to the return preparer; according to the return preparer, petitioners had “horrible books and records”. 2018 T. C. Sum. Op. 44, at p. 16.

Further comment is superfluous.


In Uncategorized on 09/17/2018 at 17:16

Judge Paris is singing that Toby Keith 1993 hit for Jeff M. Potter and Marsha R. Potter, 2018 T. C. Memo. 153, filed 9/17/18.

It’s Jeff’s story. He was working as the employee of his wholly-owned C Corp as an IC salesman for his baby bro’s business of “bagging and potting and top soils, manures, peat, mulches, and rocks.” 2018 T. C. Memo. 153, at p. 4, footnote 3.

Baby bro and Jeff get bought out. Jeff wants to claim goodwill on account of his customer base, but that belonged to baby bro’s business. That business had the name and repute, unlike the King of Insurance in Harvey, ND, Harold Schmeets, star of my blogpost “His Name Is His Fame,” 10/15/12. Jeff signed onto the buy-out, when a competitor bought them out, but Jeff threw in the office furniture, equipment and vehicles and he got no separate money for that.

His salary as salesman is subject to SE, of course, and his buy-out from his deal with baby bro’s business is ordinary income because it was based on Jeff’s C Corp’s previous year’s commissions (quantity and quality of work), and Jeff had no goodwill to sell.

Now to the reason for today’s title. After Jeff sold out to baby bro’s business, Judge Paris puts it best.

“Want to be a Cowboy?” 2018 T. C. Memo. 153, at p. 6.

“With a bit of free time on his hands, a history of working long hours, and the desire to continue working, Mr. Potter began looking for something to fill his days.  Several years before the [potting earth] sale he had been introduced to the activity, which is a timed event where an individual rides a horse through a designated course while shooting a firearm at targets.  The activity is governed by two organizations–the Cowboy Mounted Shooting Association (CMSA), formed in the mid-1990s, and the Mounted Shooters of America (MSA), formed in 2000.” 2018 T. C. Memo. 153, at pp. 6-7. (Footnote omitted, but ya can’t make this stuff up.).

“The rider’s firearm is loaded with primer and black powder that will shoot approximately 20 feet and make contact with the targets, i.e., balloons.  The embers of the powder burst the balloons.” 2018 T. C. Memo. 153, at p. 7, footnote 8.
Only in America.

Jeff and his trusty old paint Dakota, campaigning under Jeff’s C Corp, which paid the entry fees, collected the prizes, and took all the expense deductions (which everyone agreed were correct), were championship grade. “By 2014 Mr. Potter was a successful competitor and had won several national titles in the activity, including the MSA nonpro world title and the amateur American Paint Horse Association world title, and finished second in the CMSA world competition.” 2018 T. C. Memo. 153, at p. 8, footnote 9.

The C Corp move was the idea of Jeff’s trusty CPA, who for 35 years did the Potters’ taxes.

Why the C Corp? Well, remember dear old Section 183, home of the “goofy regulation?” See my blogpost “Amen, Judge Posner,” 12/22/16.

“Respondent disallowed all of the claimed deductions associated with the activity and included the prize money won for each year as income to the Potters.  The parties then stipulated that all of the deductions had been properly substantiated and that if the Court found that the activity was for profit then Potter Sales properly claimed the deductions.  Through their stipulation the parties have recrafted the question to be who performed the activity–Mr. Potter in his individual capacity or Potter Sales as a corporation-because section 183 does not apply to C corporations.  See sec. 183(a) (“In the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.” (Emphasis added.)); sec. 1.183-1(a), Income Tax Regs. (stating that no inference may be drawn from section 183 and its regulations as to whether a C corporation is engaged in an activity for profit)….” 2018 T. C. Memo. 153, at pp. 17-18. (Citations omitted).

‘No evidence was entered into the record questioning [C Corp]’s corporate validity.  Indeed, respondent has conceded that the deductions related to the activity belong to [C Corp].  There is nothing to preclude [C Corp] from operating multiple trades or businesses or changing from one trade or business to another.  That is exactly what happened here; [C Corp] stopped selling potting soil and began operating the activity as its trade or business.  The fact that Mr. Potter was the named rider in the competitions does not preclude the activity from being that of [C Corp].  The Court finds that Mr. Potter received any prize winnings as [C Corp]’s nominee.  [C Corp] performed the activity as a trade or business; section 183 does not apply.” 2018 T. C. Memo. 18.

IRS wants a Graev reopener, but that fails because Jeff leveled with their trusty CPA, their trusty CPA was indubitably qualified with 35 years-plus, got all the info from Jeff and Jeff reasonably relied.

Jeff’s CPA is not named, but s/he gets a Taishoff “Good Job! First Class.”