Ruby Chico isn’t stacked, despite the unreported income in the deficiency, and fraud chops visited upon her husband Raymond, and ex-Ch J Michael B (“Iron Mike”) Thornton will tell you why in Raymond Chico and Ruby Chico, 2019 T. C. Memo. 123, filed 9/16/19.

Ray was a tax preparer who went to pot, selling marijuana cigarette holders of his own design (fetchingly called “doobtubes”) and running a pottery. The problem was he wasn’t declaring income from these operations, and wasn’t keeping good records.

Ray gets the Section 6663 fraud chops.

“Respondent has not asserted fraud penalties against Ms. Chico but alleges that she is liable for the section 6662(a) accuracy-related penalty for each year at issue.

“The accuracy-related penalty cannot be imposed on one spouse where the other spouse is liable for the fraud penalty, as this would lead to impermissible stacking of penalties. See sec. 6662(b); Said v. Commissioner, T.C. Memo. 2003-148. Because Mr. Chico is liable for the fraud penalty for each underpayment, Ms. Chico is not liable for the accuracy-related penalties.” 2019 T. C. Memo. 123, at p. 49.

My colleague Peter Reilly, CPA, has strongly urged that Section 183 cases can be won. I was skeptical, but there are exceptions.

Here’s one, WP Realty, LP, Olympia Realty, Inc., Tax Matters Partner, 2019 T. C. Memo. 120, filed 9/16/19. It’s the story of Corbin Robertson, Texas high-roller, who decided to provide golfing for inner-city kids via a 501(c)(3), and wound up with a world-class golf course, with seven figure losses to offset his nine-figure income.

He skates through the “goofy regulation,” because Corb had good recordkeeping, got his golf course designed by a “brand name” (Judge Kerrigan’s words, at p. 40) designer, turned his out-of-the-way golf course into a destination, hosted high-profile golf tournaments, kept the kids’ golf charity well-shielded from the business, at least well enough to beat IRS’ “only a hobby” argument, and did make a profit once.

The bottom line? Have enough money to hire a strong staff, use “brand name” contractors, keep the children away, and keep those records current.

Michael D. Brown, 2019 T. C. Memo. 121, filed 9/16/19, was formerly a high-flying insurance salesman, peddling SDLIAs and engaging in various tax dodges. See my blogpost “Not Ready for Prime Time,” 12/3/13, and “Inventive,” 4/28/16.

Now Mike wants an OIC, because he can’t pay not only the levy on his house, but all the rest of his open years. He offers $400K for the whole shootin’ match, with an $80K Tax Increase Prevention and Reconciliation Act (TIPRA) payment he sends in with his Form 656.\

Well, Mike is still in some partnerships that have open TEFRA FPAA cases, as well as an Abusive Tax Avoidance Transaction (ATAT) investigation.

Judge Kerrigan spends 18 (count ‘em, 18) pages approving COIC’s kicking of Mike’s OIC.

But Mike wants his $80K back.

“Section 7122(c)(1)(A)(i) requires that the submission of any lump-sum OIC be accompanied by a payment of 20% of the offer amount. Any OIC paid in five or fewer payments is considered a lump-sum OIC. Sec. 7122(c)(1)(A)(ii). The legislative history of section 7122(c) refers to the 20% payment as a “partial payment” or “down payment” of the taxpayer’s liability. H.R. Conf. Rept. No. 109-455, at 234 (2006), 2006 U.S.C.C.A.N. 234, 420-421. The 20% payment of the offer amount is treated as a payment of tax rather than a refundable deposit under section 7809(b) or section 301.7122-1(h), Proced. & Admin. Regs. See Notice 2006-68, sec. 1.02, 2006-2 C.B. 105, 105.

“Under section 7122(c)(2)(A) the taxpayer may specify how he or she wants their TIPRA payment applied by making the request in writing when he or she submits the OIC. Notice 2006-68, sec. 1.04, 2006-2 C.B. at 105. If no such specification is made, the IRS will apply the TIPRA payment in the best interest of the Government. Id.” 2019 T. C. Memo. 122, at pp. 18-19.

Mike didn’t specify.

Read the bottom of Form 656: it says that the TIPRA payment is nonrefundable.

Mike then claims Section 7122(f) deemed-acceptance. But IRS met the 24-month cutoff by bouncing Mike’s OIC in less than seven months.

Mike gets shot down.

More SOL – But Not for Dummies

Turns out that even when Seaview Trading, LLC, AGK Investments, LLC, Tax Matters Partner, 2019 T. C. Memo. 122, filed 9/16/19, sorted out its tax matterer issue (see my blogpost “Tax Smatterer,” 3/12/15), they never managed to get their Form 1065 for the year at issue filed when due, and two (count ’em, two) attempts to get the return to IRS, so as to trigger SOL, failed.

First, after the FPAA was issued, Seaview’s accountant “…faxed to Agent J a purported copy of Seaview’s [year at issue] Form 1065 and a certified mail receipt purporting to show that the return was initially sent to the Commissioner….” 2019 T. C. Memo. 122, at p. 4. (Name omitted).

Then, two years later, Seaview’s attorney sent IRS’ counsel a copy of said Form 1065.

Seaview argues Dingman. Remember Marty Dingman? No? Then see my blogpost “The Check’s the Thing,” 6/1/11.

The issue, of course, is SOL. If the return was filed (IRS claims it wasn’t), then the FPAA, which came more than three years after both the accountant’s fax and the attorney’s letter, is barred.

Well, neither faxing to a RA nor mailing a letter to IRS’ attorney is filing in the proper place.

“Section 1.6031(a)-1(e)(1), Income Tax Regs., designates the proper place to file a Federal partnership income tax return. The designated place for filing is the ‘service center prescribed in the relevant IRS revenue procedure, publication, form, or instructions to the form.’ The instructions for Form 1065 for [year at issue] state that the proper service center for filing was the Ogden, Utah, service center. Thus, Seaview did not submit a return to the proper place for filing when it faxed a copy to Agent J… or when it sent a copy to respondent’s counsel…. Neither of the purported returns was forwarded to the Ogden service center. Additionally, there is a plethora of caselaw holding that a revenue agent is not a designated filing place.” 2019 T. C. Memo. 122, at p. 8 (name, citations, and footnote omitted, but the footnote says Seaview could have filed by magnetic media).

But Marty Dingman’s attorney gave the returns and the check to the CID, right? Yes, but.

Judge Ruwe: “Dingman is inapplicable to the present case. In Dingman, we held, in a unique factual situation, that a taxpayer filed his returns when his counsel provided delinquent returns to the IRS Criminal Investigation Division (CID). In sum, we held that in the precise situation in Dingman, the CID was an appropriate place to hand-deliver a return. Dingman is applicable only to hand-delivery of returns arising under the facts present in that case. In Dingman the taxpayer clearly intended that the returns submitted to the CID be delinquent returns with payments, and the IRS processed them as such and assessed the taxpayer’s payments. Those facts are not present in the instant case. Indeed, petitioner continues to maintain that Seaview timely filed its [year at issue] return. Dingman did not create a blanket rule that a taxpayer can file a return by whatever method he chooses; nor did it create an additional place for taxpayers to file returns beyond the places specifically designated in the Code or the regulations.” 2019, T. C. Memo. 122, at p. 9. (Citations omitted).

And Seaview never said they were filing a return. Seaview never said this was a new filing, only that they had already filed.

Dubious, Judge, dubious. IRS has what purported to be the returns. If they were slow on the uptake, that’s not Seaview’s problem. Of course, IRS cashed Marty Dingman’s check.

I’d like to see what 9 Cir. does with this.

Edited to add, 5/12/22 (an important date even without my discovery that I was right): 9 Cir tossed IRS, with a dissent. Here’s Seaview Trading, LLC v. Com’r, No. 20-72416, filed 5/11/22. And no, my colleague Peter Reilly, CPA, didn’t bring this one to my attention. I found this one all by my own self.

Further edited to add, 3/20/23: This one I did get from my esteemed colleague Peter Reilly, CPA. 9 Cir vacated the 5/11/22 opinion 11/10/22, reversed itself, and gave the win to IRS, 3/10/23. I’d like to see what the Supremes do with this.

Ch J Maurice B (“Mighty Mo”) Foley is positively parsimonious with designated orders. True, most of his orders deal with assigning places of trial to those who can’t figure out a simple form, warning various and nefarious wits, wags and wiseacres about Section 6673 frivolity chops, telling wannabe forma pauperi they’re too rich for a freebie, and retitling ill-drawn pleadings and papers.

But today he has a one-paragraph summation of Statute of Limitations that is worth keeping in mind, even for the battle-hardened pro.

Here’s George J. Costello & Maureen H. Costello, Docket No. 6435-19, filed 9/13/19.

Based on the following, you’d ha’ thought Ch J Mighty Mo would have tossed Geo and Mo on the spot.

“…petitioners state that they are both in their eighties and considered disabled. Petitioners did not attach a notice of deficiency to their petition, nor did they pay the Court’s $60.00 filing fee.

“By Order…the Court directed petitioners to pay the Court’s filing fee. To date, petitioners have not complied with the Court’s Order.” Order, at p. 1.

But IRS hasn’t helped its case.

IRS “…filed an Answer therein making affirmative allegations in response to petitioners’ claim that the Internal Revenue Service’s determination ‘is border-line Statute of Limitation’s’ [sic]. Respondent attached to the Answer a notice of deficiency… for petitioners’ 2016 taxable year. The notice of deficiency proposed a change to petitioners’ taxable income for 2016 in the amount of $8,597 and a deficiency of $853.” Order, at p. 1.

Two months later, “…respondent filed a Motion For Entry of Order that Undenied Allegations Be Deemed Admitted Pursuant to Rule37(c). Respondent states therein that: ‘Petitioners do not object to this motion.’” Order, at p. 1.

Now pay attention, as Judge Holmes would say.

“We note that when a party pleading the affirmative defense of the statute of limitations has established a prima facie case, the burden of going forward with the evidence shifts to the other side. Adler v. Commissioner, 85 T.C. 535, 540 (1985). However, the Court has held that the burden of proof does not shift from the party who pleads the bar of the statute of limitations. Given that respondent does not have the burden of proof with respect to the affirmative allegations made in the answer, it would appear that respondent’s motion is unnecessary. Furthermore, although respondent asserts that petitioners do not object to the motion, respondent has not asserted that petitioners do not object to the granting of the motion. Accordingly, we will deny respondent’s motion.” Order, at pp. 1-2.

But Ch J Mighty Mo does give Geo and Mo dispensation from the filing fee, and a list of local LITCs.

And gives IRS’ counsel the time-honored right-about-face.

Readers with exceptional memories will recall that Judge Paris gave a further supplemental CDP to Merrick Rayle, 2019 T. C. Memo. 119, filed 9/12/19, closer to his Indiana home, namely, in The Windy City. If you don’t remember, see my blogpost “Chicago, Chicago,” 9/30/16.

Well, at the second remand, Merrick, though seeking an IA,  never submitted a Form 433-A, but kindly SO2 gave him a bunch of unsubstantiated expenses. The trouble was, Merrick was over the $50K cutoff for an IA streamliner. Merrick’s original deficiencies were below the $50K cutoff, but interest had raised them above. SO2 offered to do a streamliner if Merrick coughed up the $5543 to get below the bar.

Merrick said no, because five years back, when this roundy-round began, he was under the bar.

Judge Lauber isn’t having it.

“Petitioner is mistaken. He bases his argument on the fact that the notice of deficiency issued to him in January 2013 determined deficiencies and penalties totaling $43,939, so that his case qualified as a ‘small tax case’ under section 7463(a)(1). During the ensuing five years, however, a great deal of interest accrued on those assessed amounts, as well as additions to tax under section 6651(a)(2) for failure to pay. The IRS duly assessed that interest and those additions to tax. Those assessments–which are properly includible in his aggregate assessed balance–brought his total unpaid assessed liability to $55,433 by February 2018. See IRM pt. 5.14.5.2.” 2019 T. C. Memo. 119, at p. 14.

And Merrick’s dilatory tactics earn him no favor from Judge Lauber.

“SO2 carefully considered every issue petitioner raised during the lengthy CDP proceeding. Although petitioner continually missed deadlines, SO2 gave him every opportunity to supply verification of additional expenses. She offered him a regular IA with terms more generous than those his own Form 433-A would have warranted. And she offered him a streamlined IA conditioned on his making an upfront payment of $5,433 to reduce his balance as the IRM required. Petitioner refused all of her offers.” 2019 T. C. Memo. 119, at pp. 15-16.

Charles E. Bercy, Deceased, Elaine Bercy, Successor In Interest, And Elaine Bercy, 2019 T. C. Memo. 118, filed 9/11/19, tells the story of the late Charles E. Bercy, before he became the late Charles E. Bercy.

Chas was a hard money lender. This is one who does asset-based lending, free from the strictures of banks and financial institutions. It is the Wild West of lending, where the formalities of applications, loan committees, loan-to-value ratios, priorities of lien, and bushelbaskets of documentation take a second place to rate of return, quick-sale value of assets (whatever they may be), and character and capacity of the borrower.

I represented the heir-apparent to a hard-money dynasty, long ago in a galaxy far away. They’d lend on works of art, real estate, accounts receivable, jewelry, whatever. Paperwork was minimal, but their bankruptcy counsel was the best. And they never, ever took any prisoners.

While Chas wasn’t in their league, he did lend often, individually and through some grantor trusts and S Corps. He syndicated the loan he made individually, which is at issue here. He has a note with all the proper indicia of debt, although the copy proffered at trial was unsigned. Nevertheless, the debtor and Chas’s lawyer testified on the trial, enough to convince Judge Lauber that there was a note. But nobody could produce a UCC-1 for the custom furniture that was the collateral for the loan.

I’ll let you delve into the facts, the loan restructuring and the failed attempt to establish a greater business bad debt loss when the loan went south in the Black ’08, via a discounted present value analysis that showed great ingenuity but no proof. It isn’t enough to plan a structure; you have to build it.

I focus on IRS’ attempt to defeat the business aspect by harping on Chas’ real estate lending, and claiming the furniture lending was a one-off.

Judge Lauber rightly didn’t buy it.

“Respondent concedes that ‘Mr. Bercy was admittedly engaged in the business of real estate lending.’ But respondent contends that making personal property loans was outside the scope of that business. And in respondent’s view, the scale of Mr. Bercy’s non-real-estate lending activity was insufficiently robust to constitute a ‘trade or business’ distinct from his business of real estate lending.

“We are not persuaded to construe the term ‘trade or business’ so narrowly in this context. When previously considering the status of loans as ‘business debts’ under section 166, we have not segmented the taxpayer’s lending business according to the nature of the loan or type of customer. Rather, we have simply asked whether the taxpayer was in the business of lending money, separate and distinct from any other gainful employment he or she may have had.” 2019 T. C. Memo. 118, at pp. 13-14. (Citations and footnote omitted).

Now I never knew of a hard money lender who didn’t file UCC-1s or mortgages or negative pledge agreements. But maybe Judge Lauber gave the late Chas a bye.

Aristotle Meets Section 7430

Among the other disjecta membra of the late and wholly unlamented Tax Equity and Fiscal Responsibility Act (known to those unlucky enough to have to deal with same as “TEFRA”) is Section 7430 admins-and-legals, which Tax Court has always stoutly maintained can never be awarded because TEFRA proceedings don’t determine anyone’s tax liability.

Ya see, when a FPAA is decided, there remains one of two things: either the arithmetic of each partner’s individual liability for the year(s) at issue (no SNOD necessary, as it’s only arithmetic, but must be done) or a SNOD (because arithmetic won’t entirely determine said liability). But the FPAA decision can’t determine either, so no Section 7430(g) qualified offer. The offer can’t dispose of any individual’s liability entirely.

That’s how Judge Mark V Holmes knocks out Hurford Investments No. 2, Ltd., Hurford Management No. 2, LLC, Tax Matters Partner, Index No. 23017-11, filed 9/11/19.

All y’all (I’m in Texas again) will doubtless remember Hurford No. 2. No? Then dig my blogpost “Ah, That Silt,” 2/4/19, and the blogposts therein cited.

Well, Fed. Cir. did deal with the Section 7430(g) qualifieds, and echoing a former Chief Magistrate of The Land of the Free, said “yes we can” in BASR Partnership v. United States, 915 F.3d. 771 (Fed. Cir. 2019). So Hurford No. 2 wants a Rule 162 reconsideration, and argues BASR was a change in controlling law.

But Judge Holmes is ever The Great Dissenter.

First, “Appellate venue in this case would seem to lie in the Fifth Circuit, see IRC§7482(b)(1)(E), so we’ll follow that circuit’s precedent, see Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971). No Tax Court decision can ever be appealed to the Federal Circuit, so the proper pigeonhole for us to look into is whether we committed a ‘manifest error of law,’ not whether there has been a change in ‘controlling law.’” Order, at p. 2, footnote 4.

You sure, Judge? What about Section 7482(b)(2)? Isn’t Fed Cir one of “any United States Court of Appeals which may be designated by the Secretary and the taxpayer by stipulation in writing?” Never say never. Unlikely, but could happen.

Back to the specifics, “The offer that petitioner later made not only fails to settle the ‘liability’ of HI-2 — which, as a partnership, doesn’t have a tax liability at all — but also is not limited only to the adjustment in the FPAA and tries to settle the effect of this partnership-level proceeding on the liability of petitioner’s individual partners.

“Even if some party could make a qualified offer in some TEFRA case, HI-2’s offer to settle here was not a ‘qualified offer’ as the Code and regulation define that term.” Order, at p. 4.

Besides, Fed Cir got it wrong. Or so says Judge Holmes.

The magic words are “at issue.” IRC doesn’t define the term. Fed Cir says that means “in dispute.” OK, says Judge Holmes, but that’s only half the story. Whatever Court is deciding the issue, the Court has to be able to do so for all hands, in that case, at that time.

Sort of like Aristotle at the theatre: unity of itime, place and action. And, like Aristotle said, pity and fear, the usual outcomes of litigation, for at least one party thereto.

“In common legal English, for a question to be “at issue” means both that it is in dispute and that the Court may determine it in making its decision. Look, for example, at our own Rule 34(a)(1), which says ‘[t]he petition shall be complete, so as to enable ascertainment of the issues intended to be presented.” When pleadings are complete, we say that a case is”at issue.” Rule 38. In our recent case of Vento v. Commissioner, 152 T.C. No. 1 (2019), we held that we would not include in the computations leading to entry of a decision a matter that ‘was neither placed in issue by the pleadings, addressed as an issue at trial, nor discussed by this Court in its prior opinion.’ Id., slip op. at 13 (emphasis added).” Order, at p. 5.

For more about la famille Vento, see my blogpost “Non-Virgin and Non-Deductble,” 2/4/19.

And ultimately, the qualified offer can’t work with partnerships, even when the fallout from the FPAA decision is only arithmetic for each partner.

“The qualified-offer rules are also, in the run-of-the-mill deficiency cases, easy to administer even by almost innumerate judges — he has only to compare two numbers and ask which is the larger. But it would not be administrable in the typical partnership-level case where there might be a sea of partner-specific numbers for him to wade through them all before he reached the shore of simple comparison.” Order, at p. 6 (thoroughly misnumbered in the original, thereby proving Judge Holmes’ point about “almost innumerate judges.”). (Footnote omitted.)

Eric W. Johnson, the attorney who furnishes “honest representation at reasonable rates,” as starring in my blogpost thus entitled, is furnishing the same to Jason Stewart and Kristy Stewart, 2019 T. C. Memo. 116, filed 9/10/19.

But he did get testy with a RO, who dropped in on him to discuss an initial collection investigation after Jason and Kristy dropped a Letter 12153 for a CDP for a NFTL, claiming they were unable to pay and asking for an IA. Turns out Jason and Kristy self-reported more than a million in income over a couple years (hi, Judge Holmes), but paid nothing.

The RO’s notes of the meeting showed the meeting was something less than jolly.

“RO W’s notes state that Mr. Johnson was ‘uncooperative’ and ‘unwilling to provide financial information’ on petitioners’ behalf. RO W.’s notes also state that Mr. Johnson concluded the visit by informing him ‘we’re done’ and that Mr. Johnson directed RO W. out of his office.

“Also…RO W. sent Mr. Johnson a followup letter containing statements consistent with R. Wagner’s ICS history notes of the meeting from earlier that day. This letter stated: ‘You refused to provide any collection information and stated it would be provided directly to the office appeals. You then brusquely directed me to leave your office.’” 2019 T. C. Memo. 116, at p. 3. (Name omitted).

IRS followed up with a NITL, and Jason and Kristy asked for a CDP for that. The ICS was conducted by SO W., with whom Mr. Johnson got on a lot better.

“SO W. requested from Mr. Johnson the financial information from petitioners needed for IRS Collections to investigate and verify that financial information before CNC status could be granted. Mr. Johnson provided the requested financial information, a Collection Information Statement (CIS), to SO W. Mr. Johnson requested that petitioners be placed in CNC status for six months, as they were pursuing potential litigation, had fluctuating income, and could not currently pay their back taxes.” 2019 T. C. Memo. 116, at p. 4.

The CIS went from SO W to RO W, the latter reviewed same, and recommended monthly payments and no CNC. RO W.’s notes went into the administrative file.

“SO W. relied on the information and documents in respondent’s administrative file regarding petitioners to make his determinations. The ICS history, containing RO W’s comments regarding his visit with Mr. Johnson…, was a part of this administrative file.” 2019 T. C. Memo. 116, at p. 5. (Names omitted).

NOD issues, confirming collection actions.

Mr Johnson claims improper ex parte communication between RO W and SO W. “Petitioners contend that the ICS history transmitted to SO W. as part of the administrative file was an ex parte communication. They contend that they were not aware that RO W’s ‘gratuitous characterization’ of petitioner’s counsel was part of the administrative record. Petitioners request that their case be remanded to the Appeals Office and assigned to a different settlement officer who has not been exposed to the alleged ex parte communication. Respondent contends that the alleged ex parte communication was a permissible transmittal of petitioners’ administrative file between the revenue officer and the settlement officer during the CDP process.” 2019 T. C. Memo. 2019 T. C. Memo. 116, at p. 8.

Judge Kerrigan has this one.

“Generally, the administrative file transmitted to the Appeals Office by the revenue officer is not considered to be an ex parte communication. See id. sec. 2.03(4), 2012-10 I.R.B. at 459. Rev. Proc. 2012-18, sec. 2.03(4)(d), 2012-10 I.R.B. at 460, further states:

“The originating function, however, shall refrain from placing in the administrative file any notes, memoranda, or other documents that normally would not be included in the administrative file in the ordinary course of developing the case if the reason for including this material in the administrative file is to attempt to influence Appeals’ decision-making process. For example, the originating function should not include gratuitous comments in the case history, a memo to the file, or a transmittal document * * * if the substance of the comments would be prohibited if they were communicated to Appeals separate and apart from the administrative file. In contrast, it is permissible to contemporaneously include statements or documents that are pertinent to the originating function’s consideration of the case in the administrative file even if the substance of those comments, statements, or documents would be prohibited if they were communicated to Appeals separate and apart from the administrative file.” 2019 T. C. Memo. 116, at p. 9.

They key is whether the inter-agency communication was made to the substance of the case or an attempt to influence the outcome.

“Petitioners’ administrative file, which included RO W’s notes, was transmitted and reviewed by SO W. However, RO W’s notes did not address the substance of the issues or suggest any positions to be taken in petitioners’ CDP proceedings.” 2019 T. C. Memo. 116, at p. 10.

“Ex parte communications are allowed when the communications involve matters that are ministerial, administrative, or procedural and do not address the substance of the issues or positions taken in the case. See Rev. Proc. 2012-18, sec. 2.02(6), 2012-10 I.R.B. at 458. RO W’s notes in petitioners’ administrative file were procedural. While RO W did make comments regarding Mr. Johnson’s generally ‘uncooperative’ nature, these comments were made contemporaneously as a part of his job function as a revenue officer. See id. sec. 2.03(4)(d), 2012-10 I.R.B. at 460.” 2019 T. C. Memo. 116, at pp. 10-11.

No remand, NOD sustained.

C’mon, Judge, RO W’s remarks had nothing to do with his “job function as a revenue officer.” He was steamed at Mr. Johnson, whether justifiably or not I certainly cannot say, as I wasn’t there when Mr. Johnson showed RO W the door. But it’s clear that RO W and SO W are on the same team (Appeals’ statutory independence notwithstanding), and it’s as old as baseball that the pitcher who throws at a teammate starts a bench-clearing that every member of the team must join. And they don’t quickly forgive or forget.

STJ Robert N Armen, “The Judge With a Heart,” retired as of last Wednesday.

This blogger will miss him.