Timothy Todd Fisher and Christina Fisher, 2019 T. C. Memo. 44, filed 4/30/19, grappling with the Premium Tax Credit of the Affordable Care Act, without doubt an enigma within a conundrum within a puzzle, brought to mind the words of Harvard scholar Thomas Andrew Lehrer above captioned. Commenting upon The New Math, Lehrer wrote (and later sang) “It’s so simple, so very simple, that only a child can do it!”

But Prof. Lehrer never met Judge Juan F. Vasquez or the three (count ‘em, three) attorneys IRS sent to unpack the alternative computation of the PTC for those who marry during the tax year wherein one spouse qualified “for honest poverty, and a’ that,” but upon wedding the other, rose above the 400% of Federal poverty (I suppose as distinguished from honest poverty) line.

Chris had a dependent child and qualified for FL exchange insurance, and concomitant PTC, for ten-and-a-half months. Then she married TT, and her fortunes brightened.

Until Reg. 1.36B-4(b)(2)(i) intervened.

“Taxpayers’ additional tax liability using the alternative computation is equal to the excess of the taxpayers’ advance PTC payments for the taxable year over the amount of the ‘alternative marriage-year credit.’  Id. subdiv. (ii)(A).  The alternative marriage-year credit is the sum of both taxpayers’ ‘alternative premium assistance amounts for the premarriage months’ and the ‘premium assistance amounts for the marriage months.’  Id.

“Taxpayers compute the alternative premium assistance amounts for premarriage months for each taxpayer and for each full or partial month the taxpayers are unmarried.  Id. subdiv. (ii)(B).  The alternative premium assistance amount for premarriage months is equal to the excess of the taxpayer’s benchmark qualified health plan premium amount over the taxpayer’s required contribution amount.  Id.; see sec. 1.36B-4(b)(5), Example (2), Income Tax Regs.  When calculating the taxpayer’s contribution amount for premarriage months, each taxpayer uses ‘one-half of the actual household income for the taxable year and treats family size as the number of individuals in the taxpayer’s family prior to the marriage.’  Sec. 1.36B-4(b)(2)(ii)(B), Income Tax Regs.; see also 1.36B-4(a)(2), Income Tax Regs.” 2019 T. C. Memo. 44, at pp. 8-9. (Footnotes omitted.)

They then do the post-marriage months, but throw in the whole family income and family size.

There’s more, but I am no math whiz. Howbeit,  Cris and TT miss the cut, and have to pay $4K that they gave to the insurer.

Judge Vasquez sympathizes, agrees it’s unfair, but that’s the law.

As this is a resolutely nonpolitical blog, I withhold comment.

A brief refresher might be in season here. The scope of this my blog is limited; I cover US Tax Court. Unless there’s a seismic shifter like Loving, I leave USDC to the trade press and the blogosphere, which includes but in no way is limited to the commercial services and the universities. Likewise the USCFC is off limits as an area of practice with which I am insufficiently familiar. Lastly, USCCAs are sufficiently covered by the aforesaid sources, and their opinions/decisions feature here only when brought to my attention by a remittur (mandate) of a case I’ve previously blogged. And maybe not always even then.

I make no undertaking to update what I write.

Therefore, if anyone wants to cite an opinion (T. C. or T. C. Memo.) they read here first, let them do as we did in my youth, and “Shepardize” the case. For those too young to remember the maroon volumes and the flimsy paper updates through which we combed in the last millennium, there are online resources to ascertain if the limb on which you hang your client’s “life, fortune, and sacred honor” is solid, dubious, or just plain rotten.

Use them.

Most Tax Court petitioners are self-represented; most of them have only the vaguest idea of how the process works.

It therefore falls to the Tax Court bench to discern, where possible, exactly what can be done for the sometimes-hapless pro se. Here’s Jared Simper, Docket No. 22306-18S, filed 4/29/19. And STJ Diana L (“The Taxpayer’s Friend”) Leyden is here to help, even though she is from the government.

To begin with, “…Mr. Simper filed his petition in this case, checked the box labeled ‘Notice of Determination Concerning Collection Action’, and listed 2014 as the year for which such notice was issued. Mr. Simper attached several documents to his petition including a Notice of Intent to seize (levy) your property or rights to property. Mr. Simper did not attach a notice of determination for 2014.” Order, at p. 1.

So maybe there should be an “L” in the caption, except IRS moves to toss Jared for want of jurisdiction, as no NOD. Moreover, Jared apparently revoked or waived his timely-filed Letter 12153 with a Form 12256. IRS attaches copy of same to its motion to toss. So mayhap there never was a NOD.

STJ Di judge’splains: “The Form 12256 states, ‘I give up my right to seek judicial review in the Tax Court of the Notice of Determination that Appeals would have issued as a result of the * * * [Collection Due Process] hearing, as Appeals will not issue a Notice of Determination.’ In the motion respondent states a written acknowledgment was mailed to Mr. Simper and his representative…, and stated that Appeals would not issue a determination in Mr. Simper’s case.” Order, at pp. 1-2.

Jared is pro se, according to the Docket Search function on the Tax Court website, but he is not alone. He has a “representative.” I want to give a shout-out to IRS counsel A. J. Davis in the Denver OCC, who calls said representative (if I am not in error, a CPA located in Sandy, UT) to ask if Jared really meant to pull a Wagner and waive a CDP.

“[Representative] told Mr. Davis that Mr. Simper wanted to ‘seek counsel’ before indicating whether he objected to the granting of this motion.” Order, at p. 2.

STJ Di tells Jared to respond, pointing out any “any errors, omissions, or distortions” in Mr. Davis’ motion. Editorial comment- I doubt he’ll find any. Jared should also send in a copy of any NOD for 2014 in his possession. Finally, if Jared wants to bail and let IRS grab, he should tell STJ Di.

And if he still seeks counsel, STJ Di gives him three (count ‘em, three) LITCs, two of which are in his home State of UT.

The Taxpayer’s Friend, indeed.

I see my colleague Peter Blessing, Esq., has been appointed Associate Chief Counsel, International, thereby taking up the  task of coordinating and directing all activities of the international organizational component of the Office of Chief Counsel. That organization provides legal advisory services on all international and foreign tax matters, including all matters relating to the activities of non-U.S. persons or entities within the United States and the activities of U.S. or U.S.-related persons or entities outside the United States.

Best of luck.

Judge David Gustafson’s obliging nature has furnished me with much blogfodder, but today he designates an order dismissing the feelings of being alone, fearful and defeated at the thought of having to appear before him, of Paul L. Bennett & Daryl A. Bennett, Docket No. 9655-18S, fled 4/26/19.

I appreciate the Bennetts’ trepidation, and so does Judge Gustafson.

“We understand that the self-represented petitioner who is not a lawyer may feel uneasy about appearing in court. This is why Congress made provision in section 7463 for special rules to be promulgated for so-called ‘small tax cases’ (see Tax Court Rules 170-174). Such cases are ‘conducted as informally as possible’. Rule 174(b). The Bennetts elected ‘small tax case’ procedures, and we were ready to operate in accordance with them… but the Bennetts did not appear.” Order, at p. 3.

Nevertheless, the Bennetts were warned about five (count ‘em, five) months before trial of trial date, and given a reminder five (ditto) weeks before, to offer whatever evidence, documentary, testimonial or both, that supported their claim that the unreported income, which formed the basis of the SNOD at issue, was in fact greater, but offset by deductions to create a loss.

They didn’t show for the trial.

Unhappily for the lonely and fearful, “…the filing of a petition essentially halts the IRS’s collection activity in order to let the Tax Court trial occur. But if the taxpayer fails to appear for that trial, it would make little sense to empower her thereby to squelch the IRS indefinitely–and she does not have that power.” Order, at p. 3.

And to make it even clearer, “(N)on-appearance at trial is the quintessential ‘failure . . . to prosecute’ a case. The reason for the Bennett’s non-appearance was not sickness or accident or ignorance but rather how the Bennetts ‘felt’. This was not a valid excuse for their failure to appear.” Order, at p. 3.

STJ Lewis (“A World-Class Name”) Carluzzo is a man of many talents, a true latter-day Solomon. Today he shows us his skill at rarefied mathematics in Bara v. Commissioner, Docket No. 17107-17SL, filed 4/25/19, a designated hitter that is truly worthy of designation.

It’s the 15% qualified dividends calculation.

If STJ Lew worked all this out with a stub of a pencil on the back of today’s take-out menu in the Judges’ cafeteria at The Glasshouse on Second Street, NW, I wouldn’t be a bit surprised. I gave up after Section 1(h)(1)(F).

I leave to my readers the head-swimming task of reading through the two-and-one-half (count ‘em, two-and-one-half) pages of STJ Lew’s mathematical masterpiece.

STJ Lew’s mathematical prowess well-deserves Sir A. C. Doyle’s encomium: It “ascends to such rarefied heights of pure mathematics that it is said that there was no man in the scientific press capable of criticizing it.”

All y’all will recall Judge Mark V (“The Great Dissenter”) Holmes’ warning of Graev consequences, more particularly bounded and described in my blogpost “Stir, Baby, Stir – That Silt,” 12/20/17.

It’s the gift that just keeps on giving.

Now we have the Indians and the White Sox.  Maybe it’s a game, but it’s not a baseball game. See Tribune Media Company f.k.a. Tribune Company & Affiliates, et al., Docket No. 20940-16, filed 4/25/19. The Tribunes are now, or formerly were, owners of the Chicago White Sox, and are facing some chops, so Section 6751(b) Boss Hossery is on the menu.

Now where better to stir silt? Especially if the issue is when the  “determination” to go for the chops was first made.

Now enter the Indians, specifically not the Clevelanders but rather the Miccosukee Tribe of Florida. The Miccosukees lost the unreported income but won the chops. See my blogpost “Indians Not Taxed – NOT!” 4/24/19.

And bright and early today Tax Court judges were jumping all over the Revenue Agent’s Report and the 30-day letter resulting therefrom as the fount of all chopping.

Judge Buch wants IRS and the Tribunes to address “…the effect of Clay on the section 6751(b) issues presented in their respective motions for summary judgment. The parties’ responses shall identify whether any notice conferring the opportunity for administrative appeal was issued to either petitioner and direct the Court’s attention to any such notice.” Order, at p. 1.

They probably met in the Judges’ cafeteria at the Glasshouse this morning, and over a piece pie and a cup coffee (hi, Judge Holmes) decided to stir up a whirlpool.

Judge James S (“Big Jim”) Halpern must have been in on the breakfast discussion, because he’s tipping off Hisham N. Ashkouri & Ann C. Draper, Docket No. 17514-15, filed 4/25/19. Hish & Ann petitioned from NY, wherefore I doubt they’re members of the Miccosukee tribe, and maybe their trusty attorney doesn’t read this my blog, so Judge Big Jim needs to put them wise.

IRS wants a reopener, obviously to wild-card in the Section 6751(b) Boss Hoss sign-off. Hish & Ann sent in an affidavit as a reply to the motion, which doesn’t cut it. Judge Big Jim told them so in a phoneathon. So here’s the gen, Hish & Ann and trusty attorney.

“We wish petitioners to file a supplemental response to the motion. In doing so, petitioners should consult our recent report, Clay & Osceola v. Commissioner, 152 T.C. No. 13 (April 24, 2019) with respect to its discussion of when respondent must obtain written supervisory approval in order to meet his burden of production for penalties under I.R.C. section 7491(c).” Order, at p. 1.

Here comes the silt.

But Not Chopped

All of my readers (few in number but strong in willpower) will recall Judge Pugh sending off IRS and the Miccosukee Tribe of Indians of Florida to try their case, concerning what part, if any of the distributions from said tribe were taxable to James Clay and Audrey Osceola, 152 T. C. 13, filed 4/24/19.

If my readers may have been distracted, they can see my blogpost “Indians Not Taxed – Redivivus,” 11/28/16.

Well, they had their trial. But the money that the tribe handed out is taxable, because not derived from their land. The next-door casino bought land adjacent to the tribe’s, and placed it in trust for the tribe. The distributions came from casino income, denominated as a tax. The tax wasn’t rent for tribal land, and gambling isn’t a land-based activity, like farming or wood-cutting.

If taxation of Indians is what you do, this is required reading, especially as Judge Pugh relies heavily on an 11 Cir. case (United States v. Jim, 891 F.3d 1242 (11th Cir. 2018)) that deals with all these issues.

I’ll spare those of my readers who don’t practice in this specialized field a trudge through details.

But the takeaway is the 30-day letter, the statement of proposed changes to the returns for the years at issue. I talked about the 30-day letter in my blogpost of even date herewith (as my high-priced colleagues say), “Exhaustion.”

Now it’s not about exhaustion, but rather it’s about Section 6751(b) Boss Hossery.

Reliance on the tribe’s Chairman, who was also the Bureau of Indian Affairs’ superintendent, is not justifiable for chops purposes. No evidence was offered as to any delegation from the Bureau as to tax, and even if there was, the Chairman’s conclusion that the distributions were tax-free is manifestly contrary to law.

IRS tries to wild-card in Civil Penalty Approval forms for the years at issue. But those were preceded by 30-day letters based on the Revenue Agent Reports (RAR) proposing the changes set forth in the 30-day letter.

“The determinations made in a notice of deficiency typically are based on the adjustments proposed in an RAR.  (‘[R]espondent sent to petitioner by registered mail a notice of deficiency determining deficiencies in income tax for the taxable years….  * * * Said determination by respondent was based on the adjustments contained in the revenue agent’s report[.]’); (‘[I]t is obvious that petitioner * * * is relying upon the revenue agent’s report of examination upon which respondent based his determination of deficiency.”). And when those proposed adjustments are communicated to the taxpayer formally as part of a communication that advises the taxpayer that penalties will be proposed and giving the taxpayer the right to appeal them with Appeals (via a 30 day letter), the issue of penalties is officially on the table.  Therefore, we conclude that the initial determination for purposes of section 6751(b) was made no later than…when respondent issued the RAR to petitioners proposing adjustments including penalties and gave them the right to protest those proposed adjustments.” 152 T. C. 13, at p. 44. (Citations omitted, but get them for your trial briefs).

The Civil Penalty Approval forms were issued two months after the 30-day letters. Too late. No chops.

The title of this blogpost more aptly describes the feelings of Judge Morrison, after grappling with Pamela E. Veal-Hill, Docket No. 1517-17, filed 4/24/19.

But the impediment to Pam E.’s quest for Section 7430 admins & legals is Section 7430(b)(1). Did Pam E. exhaust her administrative remedies before filing her timely petition?

No doubt Pam E. substantially prevailed. She got two years’ worth of tax and chops down from $84K aggregate to less than $600. Judge Morrison doesn’t address whether or not IRS was substantially justified.

Pam E.’s problem is that, although the 30-day letters with the proposed changes to tax due said she could go to Appeals if she disagreed, she waited for the SNODs and then petitioned.

Judge Morrison asked Pam E. to clarify. She filed a reply, attaching a letter she sent to IRS asking for an Appeals conference, after she had stiped out her Tax Court case.

“The IRS argued that Veal-Hill’s failure to file a written protest with the IRS in response to the…30-day letters meant that Veal-Hill had failed to exhaust her administrative remedies. Veal-Hill’s…court paper does not address argument directly. Instead it suggests that Veal-Hill’s…”Protest and Request for Appeals Conference” is an attempt to seek her administrative remedies for the adjustments proposed in the 30-day letter. Such a suggestion is wrong. There are no longer any administrative remedies available to Veal-Hill. Her case before this Court involved the issues of the correct amount of deficiencies and penalties for [years at issue]. These issues have been resolved by the…stipulation of settled issues. There is nothing further for the administrative agency to remedy. We therefore hold that Veal-Hill did not exhaust the administrative remedies available to her within the IRS. This precludes her from any recovery of litigation costs. See sec. 7430(b)(1). Therefore, we will deny Veal-Hill’s…motion, which seeks litigation costs under section 7430(a)(2).” Order, at p. 4.

Pam E. also wanted $896K in damages for intentional infliction of emotional harm. No jurisdiction in Tax Court.

Takeaway- Exhaust your remedies or exhaust your wallet.

STJ Lewis (“Oh What a Name!”) Carluzzo started something in Tax Court last week, when he split the liability 50-50; see my blogpost “STJ Lew as King Solomon,” 4/18/19.

Nowise loath to pick up on the latest gambit, Judge Vasquez does the Solomonic split in Rick B. Ferguson and Deanna Ferguson, 2019 T. C. Memo. 40, filed 4/23/19. It’s Rick’s homebuilding business that’s the cause of the problem. Rick has a medley of C Corp, S Corp and he himself, but they all were targets of the first stone when some custom stonework that Rick’s S Corp produced, supplied and installed in a MacMansion, which the C Corp built as general contractor, was alleged to crack and threaten to collapse.

The vendee sued all and sundry. They settled, of course. Rick claims he lent his S Corp enough to pay the cash part of the settlement, and himself conveyed three parcels of land.

The land gets capital loss treatment, as Rick can’t prove inventory.

Rick wanted to deduct the settlement his own self, claiming damage to reputation. He did have a separate remodeling business that could have been hurt by an adverse verdict, but the C Corp and the S Corp were the real actors. Rick was only sued because he was the “face” of both Corps, and he did nothing that an officer or director of a Corp wouldn’t do. Source of claim knocks out Rick himself.

Rick’s loan gets treated as a capital contribution to the S Corp, because Rick flunks the usual tests, especially no note, no terms of payment, no interest or principal paid. And even though the C Corp was the general contractor, the S Corp was in it with the C Corp, so IRS’ attempt at sticking the whole contribution on the C Corp doesn’t fly.

So what part of the capital contribution belongs to the S Corp?

“This Court has examined lawsuit allegations to determine who, among associated businesses and individuals, may deduct legal fees incurred as joint defendants in a lawsuit.  See Hauge v. Commissioner, T.C. Memo. 2005-276, slip op. at 13, 16-18; Graphic Bus. Sys., Inc. v. Commissioner, T.C. Memo. 1982-167, 1982 Tax Ct. Memo LEXIS 583, at *14-*17.  We have also allocated deductible and nondeductible litigation expenses where appropriate.  See, e.g., Bledsoe v. Commissioner, T.C. Memo. 1995-521, slip op. at 12 (allocating business and personal expenses).

“We believe an allocation of the deduction for the settlement payment is appropriate in this case.  It is clear from the record that the lawsuit that gave rise to the settlement was partially attributable to [C Corp] and partially attributable to [S Corp].  Furthermore, the settlement was paid by Mr. Ferguson, the controlling shareholder of both corporations.  Accordingly, after a thorough review of the record, including the lawsuit pleadings and the settlement agreement, we allocate 50% of the settlement payment to [C Corp] and 50% to [S Corp].” 2019 T. C. Memo. 40, at pp. 22-23. (Footnote omitted).

So S Corp gets to deduct 50% of the settlement. What about C Corp?

“Because the remaining 50% was an expense of [C Corp], we would normally hold that this portion of the payment is not a deductible expense to petitioners but rather a capital contribution to the C corporation.  See Rink v. Commissioner, 51 T.C. at 751-752; Koree v. Commissioner, 40 T.C. at 966.  However, respondent has conceded that petitioners can deduct amounts paid on behalf of [C Corp] as unreimbursed employee business expenses.  On the basis of this concession, petitioners may deduct the remaining 50% of the settlement payment as an unreimbursed employee business expense.” 2019 T. C. Memo. 40, at p. 24.