Only Pay Your Taxes First

IRS gets summary J sustaining NITLs for two years at issue, although Judge Albert G (“Scholar Al”) Lauber tells Ronald Sylvester Sullivan, 2019 T. C. Memo. 153, filed 11/19/19, that he’s free at any time to file an OIC, or propose an IA, if he files his nine (count ‘em, nine) missing tax returns and proffers the requisite financial information. See 2019 T. C. Memo. 153, at p. 12.

Ron S.S. did none of the above in support of his CDP. He came to IRS’ attention only because of third-party reporting for two of said years, leading to unpetitioned SNODs.

To explain both why I posted this routine Memo., and why I have given such a mundane post this headline, let me quote only the following.

“Petitioner is a clinical professor of law at Harvard Law School and the faculty director of the Harvard Trial Advocacy Workshop and the Harvard Criminal Justice Institute.” 2019 T. C. Memo. 153, at p. 2.

Leciel L. Lowery, Jr., is a pilot on the Chesapeake, boarding incoming vessels on the bay and steering them to the harbor they were bound for. Leciel works in all weathers, clambering from the pilot boat (today’s version of the Baltimore clipper) to tanker and container carrier. At age 60, Leciel is wore out and plans to retire in eight years.

But Leciel L. Lowery, Jr. and Charlene A. Lowery, 2019 T. C. Memo. 151, filed 11/18/19,  also didn’t bother to pay nine (count ‘em, nine) years’ worth of income tax, which, with interest and chops, comes to $639,100.

IRS hits LLL with a couple NITLs (hi, Judge Holmes), LLL petitions the lot, and Senior Judge John Colvin gets to review the AOs work-up. It doesn’t cut it for Senior Judge John, so he remands, with a few hints to Appeals to steer a straight course.

LLL gets paid through the Pilots’ Association, which takes a bunch of stuff out of LLL’s pay, but the AO only allows some of the take-out. So Senior Judge John would like to know how LLL can pay with money he doesn’t get. “The AO did not treat amounts required to be withheld from petitioner husband’s distribution as reducing the amount of income available to petitioners because those expenses ‘were not allowed as expenses per the IRM.’ The AO did not cite an IRM provision to support that position…. On remand, the Appeals Office will have an opportunity to articulate the basis on which it determined that amounts subtracted from petitioner husband’s distribution should be treated as available to pay petitioners’ unpaid tax liabilities.” 2019 T. C. Memo. 151, at p. 11.

Likewise, the AO wants LLL to liquidate his IRA, but how is LLL to retire in his planned eight years? IRS claims he can make it back. Senior Judge John ain’t so sure. “We are unsure on what basis respondent concluded that eight years is long enough for petitioners to accumulate retirement savings in addition to fulfilling their other financial obligations.” 2019 T. C. Memo. 151, at p. 16.

And while you’re at it, Appeals, check out LLL’s age and physical condition and see if special circumstances don’t warrant not requiring LLL to liquidate his IRA.

LLL claims he had unreimbursed business expenses (overnight stays, special gear) and proffers credit card receipts to show same, but AO claims he never showed them. Well, Senior Judge John gives Appeals a chance to make it up, since there’s a letter in the record that shows LLL offering to provide same. Appeals shall “…review records previously made available by petitioners and consider whether or to what extent those records substantiate the amounts of petitioners’ reported unreimbursed expenses, and, to the extent respondent concludes that petitioners had unreimbursed employee expenses, why funds so expended should be considered available to petitioners to pay their back tax….” 2019 T. C. Memo. 151, at p. 18.

And Charlene is trustee under a trust created by her dad for her benefit and that of her two siblings. The only asset of the trust is a house in AZ that is rented but shows no income. Charlene has broad power to sell, so the AO wants Charlene to sell and hand over her share of the proceeds. But Senior Judge John reads AZ law to require trustees to act for benefit of all beneficiaries. So Appeals should check out AZ law to see if Charlene can sell to benefit herself, without regard to the other beneficiaries.

I want to give a Taishoff “good job” to Stephen P. Kauffman, Esq., and Terry L. Goddard, Jr., who represented LLL and Charlene. As they say in Gleesca, they are “verra thorough.”

That’s IRS’ response to Lior Blas, 2019 T. C. Memo. 152, filed 11/18/19. Lior was unemployed and uninsured, but, fearing the penalty (or is it a tax? Ask Chief Justice Roberts) mulcted upon the uninsured, Lior joined the Marketplace and got Affordable Care Act insurance.

He never got any bills, but he did get an insurance card. He also got a job, which paid him $83K, but provided no health insurance. Lior claims he never knew he was getting coverage and that our tax dollars were picking up his tab. But IRS knew, and hit Lior with a SNOD for the $8K of premiums his insurer got.

Lior claims “phantom income” and “never got a bill but IRS has burden of proof to show I got anything.”

Judge Vasquez don’t need no stinkin’ bills either, because preponderance of evidence.

“Despite the lack of billing statements for petitioner’s [year at issue] insurance coverage, the preponderance of the evidence establishes that petitioner was the beneficiary of APTC [advancxe premium tax credits] payments….  At trial respondent submitted business records from [insurer] and the Marketplace.  The Marketplace’s records establish that…petitioner applied for insurance coverage on the Marketplace website.  On his application petitioner reported household income of $15,000, which qualified him for monthly APTC payments of up to $765.  At trial petitioner acknowledged completing this application.

“[Insurer]’s business records establish that petitioner was enrolled in its … plan with a coverage start date of January 1 [year at issue].  In [year at issue] the monthly premium for this plan was $694, which is the same monthly amount reported on the Form 1095-A.

“We understand petitioner’s concerns about the lack of billing statements, which in different circumstances might support a finding that no APTC payments were made.  In this case, however, petitioner admitted applying for insurance through the Marketplace, and respondent provided evidence that he received insurance coverage for which APTC payments were made.  Thus, we find it more likely than not that petitioner was the beneficiary of the APTC payments. Although we are sympathetic to petitioner’s situation, we are not a court of equity, and we cannot ignore the law to achieve an equitable end.” 2019 T. C. Memo. 152, at pp. 9-10. (Citations omitted).

Lior also claims a casualty loss for the first time at trial. No evidence.

We have a designated hitter from Judge Gale, reversing an order from Ch J Maurice B (“Mighty Mo”) Foley, a rarity in the extreme. With the abundance of routine “OK to amend” orders, I can understand how this happens, and am glad it happens so rarely. I can easily see how any Ch J would get snowblind going through the daily barrage of routine.

Here’s William M. Hefley & Aimee J. Hefley, Docket No. 17455-16, filed 11/15/19. A quick internet search shows both Bill & Aimee are lawyers in the same firm. But not tax partners, apparently, as Aimee wants innocent spousery. But they both timely petitioned the same SNOD, and Aimee timely petitioned the NOD that bounced her innocent spousery, in the same petition.

Bill is listed as a criminal defense lawyer. So is Aimee. Bill may be a hot ticket in the Orange County, FL, criminal courts (the Aimee Hefley firm website says it specializes in DUI and domestic violence…cases, that is), but he needs to brush up his Tax Court skills. And send in the thirty Georges and a good standing cert to get on board.

Judge Gale: Bill “…electronically filed a Motion for Leave to File Amended Petition in which he sought leave to amend the petition to withdraw the challenge to the Notice of Determination. He purported to do so as ‘Counsel for Petitioner’. Attached to the Motion for Leave was an Amended Petition bearing the signatures of each petitioner. …the Court granted the Motion for Leave and filed the Amended Petition. The Amended Petition is identical to the Petition except that the references to the Notice of Determination are eliminated and an additional ground for contesting the Notice of Deficiency is added.” Order, at p. 1 (Footnote omitted, but it says “Objection to method of selection for audit as communicated by agent.” Greenberg’s Express, anyone?).

Judge Gale voids the motion to amend ab initio (that’s “from the getgo,” for you who went to reasonably-priced law schools).

“First, Mr. Hefley lacks authority to act on behalf of Mrs. Hefley with respect to review of the Notice of Determination. Although Mr. Hefley purported to act on behalf of Mrs. Hefley as her ‘counsel’ in the Motion for Leave, he has not entered an appearance in this case and in any event would be ineligible to do so because he is not a member of the Tax Court bar. More importantly, his purported representation of her is in direct conflict with the Model Rules of Professional Conduct in that Mrs. Hefley’s interests are adverse to his interests with respect to I.R.C. section 6015 relief. See Model Rule 1.7 Cmt. [1] (‘Loyalty and independent judgment are essential elements in the lawyer’s relationship to a client.’); see also Gebman v. Commissioner, T.C. Memo. 2017-184. Consequently, Mr. Hefley does not represent Mrs. Hefley and may not act on her behalf with respect to this Court’s review of the Notice of Determination. Second, although the Amended Petition contains what purports to be Mrs. Hefley’s signature, she stated in a telephone conference call between the Court and the parties on November 6, 2019, that she did not sign the Amended Petition.” Order, at pp. 1-2.

Judge Gale and I may be too harsh on Bill as regards the conflict of interest issue. In Gebman, supra, even the Great Chieftain of The Jersey Boys came unstuck on that score. See my blogpost “No Good Deed – Redux,” 9/18/17. I wish I knew all that Frantic Frank knows. For the rest, draw your own conclusions.

So what to do now?

When on a collision course, bifurcate.

IRS relied on the defective amendment and didn’t do any discovery on Aimee’s innocent spousery. Bill & Aimee disputed some of IRS’ initial discovery requests on Aimee’s innocent spousery, but IRS dropped taking that up with Judge Gale when Bill took innocent spousery off the table.

Judge Gale doesn’t say it, but post-Taxpayer First, which would apply here, IRS definitely needs all the discovery it can get, and then some. Judge Ashford, at least, will let everything in, new or old. See my blogpost “Taxpayer First – Maybe,” 10/16/19.

So try the SNOD issues first. Like on Monday, 11/18/19, as scheduled. But no evidence regarding Aimee’s alleged innocent spousery may be submitted thereat. And Judge Gale will schedule the innocent spousery trial later.

Don’t Count On It

It isn’t clear whether TAS issued a Section 7811 TAO telling IRS to withdraw the SNOD it handed Darline Augustine, Docket No. 12248-18L, filed 11/14/19. In any event, IRS didn’t.

All Judge David Gustafson tells us is that “Ms. Augustine had correspondence with personnel in the office of the National Taxpayer Advocate (‘NTA’) about a request that the IRS rescind the SNOD. The NTA stated that a rescission should be made, but no action was taken before Ms. Augustine’s deadline for filing a Tax Court petition; and it appears the SNOD was never rescinded.” Order, at p. 2.

Darline never engaged a LITC, although she said she was going to, and didn’t provide a completed Form 433-A. Notwithstanding same, the SO offered an IA, but Darline refused. Darline wanted to fight about liability, but it was too late. IRS gets summary J.

Questions arise. Was there a TAO? What happens if there is a TAO and IRS doesn’t comply? Tax Court clearly hasn’t jurisdiction to enforce the TAO, and hasn’t jurisdiction to review the SNOD once the magic 90 days is gone. Does TAS go to USDC for an injunction? Can the taxpayer?

Judge David Gustafson, once a purveyor of conundra to puzzle, bewilder, instruct and (dare I say it?) amuse practitioners, is not in the vein.

“Whatever else transpired among Ms. Augustine, SBSE, the NTA, and Appeals, it remains true that she received the SNOD and could have litigated her … liabilities in this Court if she had filed a timely petition seeking that relief. Moreover, even if her receipt of the SNOD were not determinative, she was also given an opportunity…to be heard by IRS Appeals on the issue of her underlying liabilities. This, too, was a prior ‘opportunity to dispute such tax liability’.

“We note that, if Ms. Augustine were to pay the tax in dispute, section 6330(c)(2)(B) would not bar her from filing a timely administrative claimed for refund and, if it were denied, timely litigating that refund claim in the district court or the Court of Federal Claims. See 26 U.S.C. secs. 6511(a), 6532(a), 7422(a); 28 U.S.C. secs. 1346(a)(1), 1491(a)(1). “ Order, at p. 7.

Takeaway—Get a TAO from TAS. Make it as broad as the TAS will allow. But petition anyway.

Edited to add, 11/16/19: I don’t see how TAS or the taxpayer can use the Courts to stop assessment or collection if TAS issues a Section 7811(b) TAO, and IRS assesses or collects anyway. Section 7421 (Anti-Injunction Act) makes no exception for Section 7811 TAOs. Did Congress overlook something, or is this another example of The Taxpayer Bill of Goods?

Woods v Com’r and Home Concrete taught us that building basis, even with a son-of-BOSS or similar give-and-go, doesn’t trigger 6SOL, because non-omission. Well, see my blogpost “Woods, Concrete & Sham,” 3/23/15. But whatever Judge Wherry teased out to help IRS in CNT, doesn’t work for Judge Pugh in Beverly Clark Collection, LLC, Nelson Clark, Tax Matters Partner, 2019 T. C. Memo. 150, filed 11/14/19.

IRS first argued built-up basis equals understatement, thus 6SOL, but abandoned that on the appeal post-Home Concrete, and argued sham. As the appeal was from summary J in favor of Bev and Nelson, no new facts, so only theory involved. 9 Cir sent Bev and Nelson and IRS back to Tax Court to sort out.

So is a sham transaction different from a basis-builder when it comes to 6SOL substantial understatement?

Negatory, good buddy, says Judge Pugh.

In the first place, omission means saying nothing. IRS is at a disadvantage, because they don’t even know the income was there. But if what you do state is the right type of income, but too low in amount, then IRS does know it was there.

Bev and Nelson reported 19.9%, and didn’t state the remaining 80.1%. The reason they didn’t state 100% and did state 19.9%, was the sham, not the built-up basis. So, says IRS, Home Concrete shouldn’t apply.

So what, says Judge Pugh.

“The question before us is a little different, as respondent’s theory here is that a sham sale, not an overstatement of basis, gave rise to the omission. So we must decide whether that distinction makes any difference. We conclude that it does not; we are bound to the Supreme Court’s analysis. That is, even if we assume that the basis was not wrong but the sale of [Bev’s LLC] to [stooge] was a sham, the Clarks did not omit an item of gain entirely; they just reported an incorrect amount of gain….. We therefore reject respondent’s assertion that the test in section 6501(e)(1)(A) is computational. And we find no support for respondent’s claim that Colony, Inc. should not apply here because that case involved gross proceeds of a business unlike here.” 2019 T. C. Memo. 150, at p. 12.

And while more of a clue is required to avoid 6SOL than “one that would intrigue Sherlock Holmes,” 2019 T. C. Memo. 150, at p. 13, Judge Pugh says that what the Supremes said is good enough for pore l’il ole Tax Court.

No 6SOL, Bev and Nelson win.

The ongoing Oakbrook joust has ensnared yet another multifaceted conservation Section 170 in Kevin A. Sells, et al., Docket No. 6762-12, filed 11/13/19. All y’all will recollect the Reg. 1.170A-14(g)(6)(ii) validity kerfuffle, featuring 2500 (count ‘em, 2500) pages of comments when said reg was first promulgated.

What, no? Then see my blogpost “Technologically Challenged – Part Deux, 5/15/19. In fact, the conservation easement deduction is a hot topic with IRS; the online megablog Accounting Today had a piece on it yesterday.

Kev and the als may well have the Oakbrook issues, so Judge Mark V Holmes ordered supplemental briefing, lest these points be precluded from appellate review.

“Respondent duly filed a supplemental brief… in which he argued about the validity and application of the regulation that is being contested in Oakbrook. Petitioners have done likewise. …respondent moved for leave to file a first supplement to his reply brief. It shows the coordination of arguments across the spectrum of conservation-easement cases that the Court was encouraging. We will accordingly allow it to be filed. Respondent likewise moved to reopen the record to add the administrative record of the rulemaking. We don’t think this is quite the right pigeonhole—the record of an administrative rulemaking is a legal resource, and the Court’s request for its production in Oakbrook was analogous to asking a party to produce an unpublished opinion that couldn’t be found online. (In an ideal world, the administrative record would be on a website somewhere for all to access and cite, but it is so bulky that it has defeated our Court’s efforts to make it available online.).” Order, at pp. 1-2.

But the record does get reopened. So maybe, just maybe, we will get the whole saga.

Gene Autry’s signature tune heralds both the return of the Orders Search feature on Tax Court’s website, and my Three Thousandth (count ‘em, three thousandth) post.

But today’s feature isn’t about horsey hobbyists. It’s about who is the in-crowd when it comes to client-attorney privilege. And STJ Peter Panuthos will tell us all about it, belatedly.

Here’s Estate of Ethel Bell Wright, Deceased, Susan Armistead, Executor, et al., Docket No. 5291-16, filed 11/8/19, just now back up on the website.

The late Ethel Bell and Susan A were surrounded by lawyers. The white shoes filled the floor. So when IRS hit Susan’s son Bill, who was in on the family’s trusts and business, with a subpoena DT, motions to quash (denied) and privilege logs went flying.

STJ Panuthos: “Respondent claims these documents are not protected by attorney-client privilege because there is insufficient evidence that petitioner or her son were clients of Mr. N. We examined the documents in camera and conclude that the attorney-client privilege does apply. However, we further conclude that the privilege has been waived with respect to these documents as an attorney-client communication “’concerning LeRoy and Ethel’s lifetime joint estate and business planning’, as referenced in paragraphs 23 through 26 of petitioner’s memorandum. While the extent of the waiver is not entirely clear, it is petitioner’s burden to establish that waiver has not occurred with respect to each document for which she is claiming privilege. She has not done so with respect to documents B-90 through B-99. Accordingly, these documents are required to be disclosed in the present proceeding.” Order, at p. 4. (Name omitted).

LeRoy was Ethel Bell’s husband, and he was Susan’s dad and sons Bill’s and Jim’s grand-dad.

Communications between lawyers, Susan and son Jim were privileged, because agency. Jim acted for mom Susan in a confidential relationship.

“We have examined the documents in question in camera and have concluded that an agency relationship does exist between petitioner and her son James with regard to the estate and the present litigation. The documents support petitioner’s contention that James actively acted on behalf of his mother in her role as executor to gather documentary evidence, obtain expert reports, and help select witnesses. Accordingly, communications between James Armistead and the estate’s attorneys are not required to be disclosed in the present proceeding as we do not conclude there was a waiver of the attorney client privilege under these circumstances.” Order, at p. 6.

Bro Bill had little to do with the estate; all he was, was a witness. No privilege, third-party communication.

Work product fares little better. Whatever was privileged because of client-attorney is privileged here, and IRS didn’t make out a case for “compelling need” to get the stuff, as it could be gotten elsewhere.

Takeaway for lawyers—Be careful who you talk to. Warn clients about waiver of privilege: it’s not absolute, and getting to be less so every day.

And to Blackstone and the Glasshouse Gang: Thanks, it’s great to be back.

Got the callback. Walked the person through the problem. Was told that Blackstone the contractor has to rebuild the database. They are working on it, but a firm time for restart is not available at this time (3:08 pm EST). I am told there will be a red letter notice put up on the website while the rebuild-refresh goes on.

Further details when available.

This is a developing story.

11:10 p.m, EDT: The following appears on the Orders Search page: :

The Court‘s “Orders Search” function is not working properly for orders served on or after November 8, 2019. We are working to restore search capability as quickly as possible. We apologize for the inconvenience.

More to follow when available.

Generally, (don’tcha just love that word?), “…all reports of the Tax Court and all evidence received by the Tax Court and its divisions, including a transcript of the stenographic report of the hearings, shall be public records open to the inspection of the public.”

Except it isn’t. Even generally, it isn’t. Tax Court orders search is still down. More than 500 (count ’em, five hundred) orders, from the last two-and-one-half days, can’t be found, whether through orders search or even docket search.

So how does the public know?

I e-mailed and telephoned the Tax Court webmeister. The results of those are to be found in my blogpost “Updating Mark Twain,” 11/12/19.

But since today, 11/13/19, the orders search and the docket search are both of them broken, I telephoned to the chambers of Ch J Maurice B (“Mighty Mo’) Foley. I clearly identified myself as a journalist, and referred to this my blog.

Lest anyone be confused, I report all this.

I expressed my concerns. I was promised a callback. When I get it, I will report it.

In the meantime, may I explain (my readers will say I do nothing else) why this matters. Aside from any snail-mail pro ses who don’t have e-access and want to see what’s going on with their cases, Tax Court orders are where it’s at. It took me some time, but when I stated early on in this bloging life I lead that I would ignore small claimers and orders, I was utterly wrong.

If anyone wants to see the gears meshing (or grinding), the wheels turning (or screeching to a halt), and which way the smoke is blowing, the orders are essential. The Stealth Subpoena is just one example; all the discovery moves, all the variances between Tax Court Rules and FRCP, all the gambits, are in the orders.

If you’re trying to figure out Tax Court law and practice by reading between the lines of published opinions and designated orders, all you will see is white paper. Many orders that should be designated aren’t. Most opinions feature tax law; Tax Court procedure is definitely a long way behind, if it gets there at all.

Shut down the orders search function, and I might as well pick up this electronic soapbox and go home.

So what price Section 7461?