Please Pardon High School French

We old-time beaten-up, beaten-down, single-shingle, “general practitioner(s) of limited experience and mediocre qualifications” have seen clients play the games people play, and then some. Games undreamt-of by the late Eric Berne and unknown to anyone’s philosophy frequently swim into our bleary-eyed ken.

But today we have a new one on me so again I quote the taxi dispatcher of the Marne, General Joseph Simon Galieni. It’s sort of son-of-The-Scarlet-Letter; see my blogpost thus entitled 10/13/15, but this one is even more adventurous.

Ryan M. Richardson & Kathryn M. Richardson, Docket No. 15436-18, filed 10/11/18, seem to have timely petitioned a SNOD arising from alleged involvement in something called Clean Energy Systems, LLC. And said SNOD, dated 5/9/18, is properly attached to their petition.

So why does IRS move to dismiss?

Ch J Maurice B (“Mighty Mo”) Foley will tell us what IRS is telling him.

“…Among other things, attached to respondent’s motion to dismiss are: (1) as Exhibit A, a postmarked Substitute PS Form 3877, reflecting that January 31, 2018, deficiency notices for 2015 was sent by certified mail to petitioners at their last known address…on January 31, 2018; (2) as Exhibit B, tracking information obtained from the U.S. Postal Service showing those deficiency notices were delivered…on February 7, 2018, and (3) as Exhibit C, copies of those January 31, 2018, deficiency notices issued to petitioner for 2015, showing the last day for filing a timely Tax Court petition as to those notices would expire on May 1, 2018.” Order, at p. 1.

Except Ryan & Kathryn didn’t file their petition until 8/7/18.

Wait a minute, were there two SNODs for the same year?

IRS says “no way.” Here’s what IRS “reasonably believes.” Note that’s IRS talking, not Ch J Mighty Mo.

“…Respondent notes that the notice of deficiency attached [as Exhibit A] to the petition contains different dates on its first page. That notice of deficiency states that it was issued on May 9, 2018, and that the last day to file a petition with the Court is August 7, 2018. Respondent has determined that this page has been altered, presumably in a bid to secure the jurisdiction of this Court. * * *

“…Respondent reasonably believes that the dates used in the alteration were copied from a notice of deficiency issued to different taxpayers. That notice of deficiency is the basis for the Court’s jurisdiction in Leto v. Commissioner, Docket No. 15167-18, a case that was timely filed. Like petitioners, the taxpayers in the Leto case are purported investors in Clean Energy Systems, LLC.” Order, at p. 2.

Both the Leto petitioners and Ryan & Kathryn are self-representeds. And the same IRS counsel is assigned to both Leto and Ryan & Kathryn. I haven’t yet blogged Leto because IRS filed its answer in that case last week, and nothing has happened.

But Ch J Mighty Mo wants something to happen here.

Let Ryan & Kathryn tell him whether they ever got a SNOD back in February, and how come they got the May SNOD.

If they can’t tell a good story, they’ll get tossed. Although Ch J Mighty Mo is not prejudging anything, this might go beyond their getting tossed, maybe so.

Edited 12/2/18: Guess Ryan & Kathryn didn’t have much of a story.

https://ustaxcourt.gov/UstcDockInq/DocumentViewer.aspx?IndexID=7480587

Wayne R. Felton and Deondra J. Felton, 2018 T. C. Memo. 168, filed 10/10/18, has Judge Mark V Holmes quoting Holy Writ, a commendable departure from his sometimes picturesque style. Alas, at the end of the day, the blue envelopes stuffed with cash are income to the Rev. Wayne, founder and beloved pastor of the Holy Christian Church of Minneapolis, MN.

Rev. Wayne’s church had three envelopes: white, gold and blue. White envelopes were for  operational offerings – keeping the lights on, paying Rev. Wayne a salary (although for years he didn’t take one), and operating costs. These were readily available, and the contents thereof made their way into the church’s books of account. Gold envelopes contained cash and checks for special programs and retreats, and these likewise were booked.

The blue envelopes were special gifts to Rev. Wayne, and weren’t booked. Rev. Wayne disliked the “shake-hand” money pressed into the pastoral hand as the worshipers filed out of the church, so the blue envelopes were made available upon request, but not generally handed out. Judge Holmes obliges us with copies of the blue envelope and white envelope, and tables differentiating between the two and the proceeds of each.

For each of the years at issue, the blue envelopes contained better than $200K. Nisht azay gefaylach, as they say around the Holy Christian Church never. These sums never made it into the church’s books, onto Rev. Wayne’s Sched C or 1040, but they appeared on the SNOD.

Well, gifts aren’t taxable per Section 102(a), right?

Well, no, they aren’t, if they are gifts and not disguised salary and wages.

To begin with, there is no bright-line test. While a gift must be made from motives of disinterested love and benevolence, subjective intent does not decide. Ultimately, the tribunal’s experience with the mainsprings of human conduct must be applied to the facts and circumstances of the individual case.

But judicial precedent is a restraint on judicial vagaries. And while gifts to religious leaders are commonplace, Fifth Circuit has a pattern jury instruction that sums up the tax angle. “The federal income tax is levied on income received by ministers. When an individual provides ministerial services as his trade or business, controls the money he receives in that business, and receives no separate salary, the income of that business is taxable to the minister. Voluntary contributions, when received by the minister, are income to him. Payments made to a minister as compensation for his services also constitute income to him. If money is given to a minister for religious purposes, any money used instead for the personal benefit of the minister becomes taxable income to him.” 2018 T. C. Memo. 168, at p. 20. The case from which this is taken is United States v. Terrell, 754 F.2d 1139, at p. 1148-49 (5th Cir. 1985).

Per contra, as my high-priced colleagues would say, there are a couple cases (this is Judge Holmes, after all) where ministers got substantial payouts, but they were either ill or retiring, and weren’t expect to continue ministering to the payor flocks.

But payments substantially in excess of salary, made routinely, on behalf of the congregation generally and not individually, are income.

“From personal observation at trial we think it highly likely that Reverend Felton would follow his vocation whether he and his church got envelopes of any color. But we also think that the exhortation by the Supreme Court…to focus on objective evidence of a donor’s intent means we have to ask whether the donations are of the magnitude and type that would make us doubt that what is called a gift amounts to one in reality.” 2018 T. C. Memo. 168, at p. 29 (Citation omitted).

Now the blue envelope payments were made by individuals, not by the congregation generally, and weren’t solicited. But the amount and regularity of the blue envelope money (varying only 10% in the two years at issue), amounting to almost double Rev. Wayne’s handsome parsonage allowance plus his stated salary, speak louder than testimony.

“As another former seminarian is widely thought (though unlikely actually) to have said: ‘Quantity has a quality all its own.’ When comparatively so much money flows to a person from people for whom he provides services (even intangible ones), and to whom he expects to provide services in the future, we find it to be income and not gifts.” 2018 T. C. Memo. 168, at p. 34.

And Rev. Wayne, who prepared his own tax returns and filed them late (and only after the IRS came calling), never showed he made any effort to ascertain his liability. Late-filing plus substantial understatement (five-and-ten) chops for Rev. Wayne.

The method (accounting type) seems to be a non-factor, as Walter J. Antonyshyn and Georgiana L. Antonyshyn, 2018 T. C. Memo. 169, filed 10/10/18, reprise Georgina’s real estate professionalism, and do no better than they did in my blogpost “Madness In His Method?” 4/6/16.

Judge Ashford has this one.

Back two years ago, Georgina was fighting a lien after her professionalism claim collapsed.

Now she tries again, but fails. She hired professional management firms to do the day-to-day, so what hours she can substantiate were investor type, and thus fall foul of Reg. Section 1.469-5T(f)(2)(ii)(B).

And her records are internally contradictory and thus unreliable.

Enrollment can be lengthy, and you need to enroll well in advance of any payment being due (allow at least three weeks, because PIN comes by snail-mail), and you need password, PIN, your previous year’s AGI, and your bank account routing number and account number to use it. And you have to change your password every six months or so. Check out Publication 966.

But if you want a good reason to enroll in, and pay via, the Electronic Federal Tax Payment System, take a look at David H Malasky and Audrey Malasky, 151 T. C. 9, filed 10/10/18 and glance at 151 T. C. 8, filed same date with same parties.

Tax Court burns through one hundred fourteen (count ’em, 114) pages to conclude that, when Dave’s and Audrey’s check (which was written on an account with sufficient funds when written) bounced because IRS had levied on their account before cashing their check, IRS could apply the proceeds how IRS wanted.

The scope of review in this CDP is abuse of discretion. Judge Holmes needs six (count ’em) six pages to get there in 151 T. C. 8, largely because IRS and Dave and Audrey agree it is, and there’s no dispute about the liability in question, hence de novo review is off the table.

On to 151 T. C. 9.

Ex-ch J Michael B (“Iron Mike”) Thornton relies on the voluntary-vs-involuntary payment rules, and basic negotiable instruments law. Payment from a levy is involuntary; a check is conditional payment until final payment from the drawee bank; and there’s no frustration of performance absent a contract, and taxes aren’t a contract between sovereign and taxpayer. So voluntary payment becomes involuntary when the check bounces, even if IRS caused the bounce.

There’s much argy-bargy about Audrey’s daddy’s trust, of which Audrey was both trustee and beneficiary, which I leave to the T&E specialists to unscramble. That’s to do with whether the SO was wrong about the RCP in bouncing Dave’s and Audrey’s PPIA. But as I’ve said before, any attorney who can’t find an ambiguity in any document should find another line of work.

But even though Judge Mark V Holmes plays again his signature role as The Great Dissenter (his real argument is it isn’t fair, even though Dave and Audrey tendered in Houston and the levy came from Philly), ex-Ch J Iron Mike carries the day without even a dictionary chaw.

Judges Buch and Pugh suggest paying by certified check, showing how the law lags technology.

I’ll spare all y’all a systematic dissertation of this unfortunate tale, except to say that had Dave and Audrey used EFTPS, they’d have beaten the levy, paid (or almost paid) the recent year’s liability, and had a shot at an SOL blow-off of the earliest year, to which IRS applied the levied sum.

With neither opinion nor designated hitter today, I turn to an oldie-but-goody, the two-advisor rule. For backstory, see my blogpost thus entitled, 6/23/16.

Again I acknowledge the advisor, whose name I have forgotten, from whom I stole this mantra: “Every taxpayer needs two advisors: one to tell her what the law is, and the other to tell her what she wishes the law was. Then she can choose whose advice to follow.”

Today we have Jessie Daniel McDonald, Docket No. 24295-16, filed 10/9/18. No advisor is stated for Jessie, but her case sounds like one of the kind exemplified by the aforesaid.

Judge Albert G (“Scholar Al”) Lauber states Jessie’s case simply.

“The sole issue in this case is whether petitioner had unreported Social Security income…. After the IRS issued the notice of deficiency, petitioner filed an amended return…admitting receipt of taxable Social Security benefits. On the amended return she reported taxable Social Security benefits of $8,764 and additional tax owed of $1,313.” Order, at p. 1.

When IRS moved to toss Jessie for want of prosecution, and Judge Scholar Al ordered Jessie to respond, she responded thus: “… petitioner submitted a letter that we filed as Petitioner’s Response to Order…. She offered no explanation as to why she failed to appear for trial…. She asserts that she objects to the entering of a decision because she is over the age of 70 and thus ‘exempt’ from taxation of Social Security income.” Order, at p.1.

I caution my readers against relying on Jessie’s litigating position, however much I wish it were the law. Being on the downslope of the age of 70, it would brighten my declining years.

Judge Scholar Al, however, is not buying.

“There is no legal basis for petitioner’s assertion that her age entitles her to an exemption from taxation of Social Security income. See I.R.C.§§61(a),86(a). She admitted that she received taxable Social Security income by filing an amended return reporting it. And she admitted that she had a deficiency of $1,313… by showing on her amended return additional tax due in that amount.” Order, at p. 2.

He enters decision (minus chops) for IRS.

Inasmuch as United States Tax Court is closed today, 10/8/18, for a public holiday in the District of Columbia, the nomenclature of which has become politically controversial and therefore outside the scope of this avowedly nonpolitical blog, I am taking the day off. Barbecue, Blue Bell and bourbon will suffice, in the absence of full-dress T. C.s, learned Memos, Balzacian Sum. Op.s., and pithy designated hitters.

Enjoy the day off.

Giuseppe Verdi’s 1840 flop serves as the backdrop for a further look into the unsettling case of the unsettling partner. For reference, see my blogpost “Settle Order on Notice – To The Nonparticipant,” 10/26/17.

But here we have multiple nonsettlers, or maybe potential nonsettlers, because no one can find them. They were the TMP, each for a one-year term long since over, of the settling partnership some of whose eighteen (count ’em, 18) members are Capitol BC Restaurants, LLC, Banyan Equity Investors, Inc., Banyan Equity Investors II, Inc., Banyan Mezzanine Fund, LP, Banyan Mezzanine Fund II, LP, et al, Docket No.9281-17, filed 10/5/18.

Fortunately for the MIA TMPs, Judge David Gustafson, obliging as ever, is on the case, which is set for trial a week from Monday. IRS and the partners move to enter the decision document embodying the settlement.

Here’s the problem.

“To the motion is attached a certificate of service, alleging service on ‘petitioners and the following partners, including the Tax Matters Partner’, with a list of 18 names and addresses following. One of the names on the certificate of service is ‘Greg Morris / Tax Matters Partner’ (who the petition alleges is TMP for 2014) and another is ‘Richard Pawlowski’ (who the petition alleges is TMP for 2013).” Order, at p. 1.

But the trial reminders mailed by to Greg and Richard by the hardlaboring clerks at 400 Second Street, NW, came back “unable to forward.”

This troubles Judge Gustafson.

“Generally speaking, it is the duty of the TMP to apprise partners of events affecting their interests. The return of our mail to the TMPs suggests that the TMPs may similarly have not received the motion for entry of decision and may not be functioning in their capacity as TMPs.” Order, at p. 1.

So the trial is off, and IRS is directed to tell Judge Gustafson whether the Tax Matterers got served, and, if not, what to do.

May I suggest “last known address” mailing?

My colleague, correspondent and all-round good guy Peter Reilly, CPA, once again provides me with a heads-up, as Judge Urda’s mentor Judge Manion joins with Judge Barrett and District Judge Gettleman in affirming the late Judge David Laro’s thrashing of Exelon Corporation v. Com’r. The whole story is found as No. 17-2964, filed 10/3/18.

All y’all (I’m back in the Bayou City with nearest & dearest) will recall my blogpost “1031 and All That,” 9/19/16.

The deal was a much-slammed phony from the getgo, and Seventh Circuit goes 100% with the 175 pages of Tax Court’s exegesis after the 13-day trial.

Nice to see the 400 Second Street, NW, crew catch a break from Seventh Circuit. And again my thanks to Mr. Reilly.

Letitia Burns O’Connor and the late Dana Levy (before he became the late Dana Levy) properly reported the capital gain on the sale of “…family heirlooms, including art prints, wood bowls, and a handcrafted wooden rocking chair that Mr. Levy had purchased as a wedding present for his wife.” 2018 T. C. Sum. Op. 48, at p. 4.

Mr. Levy had Medicare and supplemental health insurance. Ms. O’Connor had not, so she availed herself of the much-contemned Affordable Care Act to the extent of $8K of advanced premium credit. Ms. O’Connor based her eligibility on the couple’s previous year’s tax posture.

Mr. Levy had terminal cancer and died during the year at issue. But between his Social Security payments (both the taxed and untaxed portions) and the capital gains (which Ms. O’Connor used to support herself and her son, as Mr. Levy clearly could not work), Ms. O’Connor blew past the 400% poverty lid for ACA advance premium credits.

Judge Goeke: “Petitioners’ [year-at-issue] return was prepared by their longtime return preparer. The return preparer did not prepare Form 8962, Premium Tax Credit (PTC), and petitioners did not attach Form 8962 to their return. Petitioners did not understand that they were required to determine the allowable premium assistance credit (allowable credit) on the basis of their income as reported on their [year at issue] return. They did not understand that they would have to increase their [year-at issue] tax liability if the advance payments of the credit exceeded the allowable credit as determined by their [year-at-issue] income. Petitioners qualified for the premium assistance credit for [the next two years].” 2018 T. C. Sum. Op. 48, at p. 5.

Ms. O’Connor claims she overstated the rocking chair by $3K. IRS says even if she did, she’d still be over the MAGI limit because of her late husband’s untaxed Social Security.

“Petitioners argue that we should exclude the capital gain from the one-time sale of the rocking chair from their modified AGI. They sold their family heirlooms to assist their son in paying his college tuition. The gain from that sale unfortunately made them ineligible for the premium assistance credit. However, section 36B(d)(2) does not provide an exclusion for a sale of a capital asset. Petitioners also argue for equitable relief from repayment of the credit. We are sympathetic to petitioners’ case. However, the Code provides no equitable relief in this instance.” 2018 T. C. Sum. Op. 48, at p. 8.

The ACA has received any amount of obloquy. It’s also received praise. In this place I won’t add more of either, except to say we have to do better than this.

Today’s installment of my “Don’t Ambush” series comes from Judge Cohen. Here’s Shane V. Robison & Robin S. Robison, Docket No. 25120-16, filed 10/3/18.

And as I’m about to go off to visit my nearest and dearest in the Bayou City, I wish Judge Cohen had designated this one, on a day when neither opinion nor designated hitter appears.

All y’all (I’m warming up) will remember Shane & Robin, of course. Well, if you don’t, see my blogpost “The ‘Goofy’ Regulation,” 6/19/18. Shane & Robin got tagged for passivity, so their heavy-duty ranching losses get suspended. Wherefore the deficiencies originally asserted by IRS get sustained.

But IRS claims they proved more on the trial, and want to conform pleadings to proof. IRS claims that Judge Cohen bought IRS’ alternative passivity (Section 469) argument, but not their hobby loss (Section 183), which was “unforeseeable.” Order, at p. 1.

No, says Judge Cohen, I did warn y’all that passivity was in play.

“That opinion was consistent with the Court’s comments and directions regarding briefing made at the conclusion of the trial on September 20, 2017, page 290 of the transcript of proceedings. Although the Court is not suggesting bad faith on the part of respondent, justice in this instance favors petitioners in that increasing the deficiency and the associated penalties unfairly and belatedly raises the stakes of the litigation.” Order, at p. 1.

So Shane’s & Robin’s numbers are what the decision says. And those numbers aren’t small, around $480K, without interest, even though IRS conceded the chops.

I can’t see why it’s “unforeseeable” that a court will buy any of your arguments, unless the argument is totally unsupportable. In which case you may have more problems than conforming your pleadings to the proof.