When It Comes to NFTLs

It’s true, maybe, that Taxpayer Advocate Service sent a letter to IRS stating that the NFTL filed on Michael Gordon Banks, 2019 T. C. Memo. 166, filed 12/19/19, should be withdrawn. Judge Kerrigan says the SO reviewing Mike’s CDP request “…followed up with the TAS regarding the status of the NFTL withdrawal.  She attempted to contact the appropriate person with the TAS and left a message regarding the NFTL.  The settlement officer concluded that there was no new financial information in support of petitioner’s appeal of the rejection of his offer-in-compromise.  The settlement officer verified that all legal and procedural requirements had been met and the collection action taken was appropriate under the circumstances.” 2019 T. C. Memo. 166, at p. 5.

Mike never proved he had less equity than $110K, or that he owed less than $23K to IRS.

“Petitioner contends that respondent falsified information, but he never produced evidence of any criminal activity.  He asserted that his ability to pay should be considered even though he did not dispute the asset valuation, which is sufficient grounds for rejecting his $12,000 offer.  Nevertheless, the settlement officer provided petitioner with an opportunity to produce additional information to show that the COIC’s rejection was inappropriate in accordance with the procedures laid out in IRM pt. 8.23.3.3(5).  The settlement officer also provided petitioner additional time to prepare for the CDP hearing when petitioner requested an extension.

“Petitioner did not provide any new information to support his dispute of the COIC’s rejection.  The settlement officer’s offer to place petitioner’s account in CNC status and suspend collection activities demonstrates respondent’s willingness to assess reasonably and fairly petitioner’s ability to pay his tax liabilities.  Accordingly, we find that the settlement officer did not abuse her discretion in sustaining the COIC’s rejection of petitioner’s offer-in-compromise.” 2019 T. C. Memo. 166, at pp. 11-12.

Anyway, while TAS protects each taxpayer, IRS protects the rest of us.

“Section 6323(j)(1)(D) provides that an NFTL may be withdrawn if the Secretary determines that withdrawal would be in the best interests of both the taxpayer and the United States.  While the statute requires the TAS to determine whether withdrawal would be in the best interest of the taxpayer, it also explicitly requires a determination by the Secretary or his designee that withdrawal is in the best interest of the United States.  IRM pt. 5.12.9.3.4(1) (Oct. 14, 2013).  Neither the Secretary nor his designee determined that the withdrawal of the NFTL was in the best interest of the United States.” 2019 T. C. Memo. 166, at p. 14.

James J. Lillie & Donna Lillie, Docket No. 17056-19, filed 12/18/19, raise an interesting question: Does Section 7502 apply if USPS returns the timely filed Priority Mail envelope (paid with basic postage)?

Here’s the story, Jim & Donna sent in the petition with the $7.35 basic postage prepaid, but didn’t pay for certified mail service. USPS bounced the envelope back to Jim & Donna, and they volleyed it back to 400 Second Street with the additional postage paid.

By the time it reached the Glasshouse, the ninety days had run. IRS moves to toss for late filing.

Jim & Donna cite the Reg.

“26 C.F.R. 301.7502-1(c)(1) dictates the petition must be contained in an envelope, be properly addressed to the Court, and be deposited within the prescribed time in the mail in the United States with sufficient postage prepaid. Here, the envelope was properly addressed to the Court and deposited with the USPS with sufficient postage to get the envelope to its destination in the flat rate Priority Mail envelope.” Order, at p. 2.

What means “sufficient postage”?

Ch J Maurice B (“Mighty Mo”) Foley also wants to know.

He orders Jim & Donna to file a supplement to their response to IRS, wherein  “petitioners shall set forth and discuss fully: (1) whether petitioners requested the petition deposited … be sent to the Tax Court by both priority mail and certified mail; and (2) whether the USPS properly returned the envelope bearing that petition for lack of proper postage to petitioners.” Order, at p. 2.

Again I quote Harvard’s mathematical funnyman Dr. Tom Lehrer. Today Vitaly Nikolaevich Baturin, 135 T. C. 10, filed 12/18/19, takes the stage in place of the celebrated mathematician whom Lehrer apostrophized.

Vitaly is a physicist, who left Mother Russia on a research visa to UCLA, but got shifted to Thomas Jefferson National Accelerator Facility (JSA), doing public interest research.

“Jefferson Lab researches the structure of matter in the universe.  It uses a particle accelerator to accelerate, or heat up, particles.  Complex equipment called detectors record the event and use computers to analyze and construct models.  The goal is to try to find new particles which establish the universe.  Petitioner’s role was to help construct the detectors for their upgrade from the 6 GeV accelerator to the 12 GeV accelerator.  Petitioner understood that JSA characterized him as an employee because he used very complex equipment requiring a lot of training, security tests, security exams, and insurance.” 153 T. C. 10, at p. 4.

IRS claims his $75K stipend is wages, and thus taxable, but Vitaly interposes Art. 18 of the  Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, Russ.-U.S., June 17, 1992, S. Treaty Doc. No. 102-39 (1992) (U.S.-Russia Treaty).

If this sounds familiar, check out my blogpost “Only Be Sure Always to Call It Please ‘Research,’” 1/10/18.

But Vitaly joins Evgeny Kiselev, the star of the aforesaid blogpost. His work is not for profit. Although there is some argy-bargy about whether what Vitaly got was a grant, the “grant” language in the US-Russia Treaty is broader than Code Section 117. That Vitaly got W-2s from JSA is nothing to the point.

“The special relief of Article 18 exists within the context of a treaty intended to foster greater exchange of scientific knowledge in the public sector.  The U.S Russia Treaty preamble states that the United States and the Russian Federation desired ‘to develop and strengthen the economic, scientific, technical and cultural cooperation between both States’.” 153 T. C. 10, at p. 12.

Now the old treaty with the USSR was even broader, but the present treaty is still better than the US Model Treaty or the OECD Model Treaty.

“Respondent contends that wages are categorically excluded from Article 18. We disagree.  Article 18 has no requirements for how the ‘grant, allowance, or other similar payments’ must be characterized.  Considering the intent to foster greater scientific research, we hold that Article 18 should be treated consistently as an exception to both Articles 13 and 14.  Article 18 exempts from taxation payments made in exchange for the service of “doing research”, whether the individual is paid as an independent contractor or an employee, so long as the payment is similar to a grant or an allowance.  Whether an individual who otherwise meets the U.S.-Russia Treaty requirements receives a Form 1099 or a Form W-2, the question should be the same:  whether he or she is the recipient of a grant, allowance, or similar payment.” 153 T. C. 10, at p. 14.

Like Evgeny, Vitaly gets a grant via JSA, but the application named him and was not transferable. This is different from an institution getting a grant, and hiring whomever they like to do the work.

Vitaly wins.

Again I echo Holmes’ (Sherlock, not His Honor Judge Mark V) remarks “here lie the glory and the wonder of it!” I’m referring to Judge Morrison, who, in Kroeschell, Inc., Docket No. 15748-18, filed 12/17/18, “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.”

I do wish Judge Morrison had designated this order.

Kroeschell wants to derive a sampler of its qualified research expenditures, the majority of which consists of wages to its employees. There are allegedly 95 (count ‘em, 95) “truncated” projects for the years at issue; there might be as many as 670 full-boat. Judge Morrison’s math gyrations generate a three-year-trial, if each project has to be separately stated and numbered.

“Limiting discovery and trial in this case could potentially save trial time. If trial were limited to only 10 projects, Kroeschell estimates that the trial would take 2.5 weeks. It is unclear how many projects would be the subject of a full trial. Kroeschell has indicate that even a truncated trial might involve 95 projects. Such a trial might last for perhaps 23.75 weeks, equal to 95 projects × (2.5 weeks ÷ 10 projects). Kroeschell has indicated that a fuller-scale trial might involve 670 projects. Such a trial might last 107.5 weeks, equal to 670 projects × (2.5 weeks ÷ 10 projects). That would be a trial lasting over 3 years. The Court is amenable to the proposition that discovery and trial be limited to a sample of projects.” Order, at p. 3.

But Judge Morrison and IRS say that Judge Morrison’s carefully calculated sampling equation won’t work, because “(O)ne problem is that Kroeschell did not record the amount of qualified research expenses that it reported on a project-by-project basis. Thus, if we determined the qualified research expenses for 10 projects, we would be unable to compare our determination against the comparable amounts that Kroeschell reported.” Order, at p. 5 (Footnote omitted, but it says Kroeschell didn’t allocate employee research time per project).

Likewise, to calculate what flies under Section 41(c)(5)(A), Judge Morrison needs the qualified research expenses for each of the three years immediately preceding the year at issue, and Kroeschell has no way of calculating those.

And if that wasn’t enough, “(T)he remaining issue to consider is whether the Court should limit the first phase of the trial to 10 test projects without adopting a method of extrapolating the results of the test projects to the projects for which Kroeschell reported qualified research expenses on its returns. The advantage of this bifurcation approach, according to Kroeschell, is that the results of the test projects could be used by the parties to settle the remaining portions of the case.

“We reject the idea that the case should be bifurcated in this way. Bifurcation under Kroeschell’s proposal would result in yes/no determinations rather than dollar amounts. But a deficiency proceeding must ultimately determine dollar amounts. And, even if the Court were to make determinations as to dollar amounts after the first phase of a trial, it is unlikely that the parties would agree on how to extrapolate these dollar amounts to the total population of projects. The Court would then be faced with the question of how to conclude the case without an agreed-upon method for extrapolation.” Order, at p. 6.

So no sampling. But why not Cohan? Try the batch of ten, and then do what the late great Learned Hand said: “Absolute certainty in such matters is usually impossible and is not necessary; the [Court] should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making.” Cohan v. Com’r, 39 F. 2d 540, at pp. 543-544 (2 Cir., 1930).

More than once before now have I repeated the remark of the late Justice Antonin Scalia, which he made at the last but one Tax Court Judicial Conference dinner. Justice Scalia likened U. S. Tax Court to a town traffic court. I thought the remark a bit rich at the time, as he had just finished eating USTC’s food, but with time comes reflection, and I can’t say he was wrong.

Now Ch J Maurice B (“Mighty Mo”) Foley is not conspicuously douce when it comes to wits, wags and wiseacres. Neither is he overly coy when confronted by any thereof, or wannabes.

So perhaps he was unaware of the track record of Barbara A. Kupersmit & Harold R. Kupersmit, Docket No. 17568-19, filed 12/16/19. If my readers are similarly situated, please to see my blogpost “They Also Serve,” 8/7/15, which encapsulates Barb’s previous jousts with IRS at The Glasshouse on Second Street, NW.

Howbeit, Ch J Mighty Mo is in his characteristic tossing mode, granting IRS’ motion to dismiss for want of jurisdiction. So he begins with a two-page catalogue of bases for Tax Court jurisdiction. Then comes Barb’s story.

“Petitioners were served with copy of respondent’s motion, and…filed what would appear to be a largely inscrutable collection of random documents referring to various tax years. As such, petitioners did not deny the jurisdictional allegations set forth in respondent’s motion, i.e., petitioners did not claim or show that the IRS had sent a notice of deficiency or determination or any other relevant notice for [year at issue].

“Thus, the record at this juncture suggests that petitioners may have sought the assistance of the Court after having become frustrated with attempts to work administratively with the IRS but that the petition here was not based upon or instigated by a specific IRS notice expressly providing petitioners with the right to contest a particular IRS determination in this Court. Suffice it to say that no IRS communication supplied or referenced by petitioners to date constitutes, or can substitute for, a notice of deficiency issued pursuant to 6212, I.R.C., a notice of determination issued pursuant to sections 6320 and/or 6330, I.R.C., or any other of the narrow class of specified determinations by the IRS that can open the door to the Tax Court, as of the date the petition herein was filed. Instead, petitioners’ apparently expansive view of the Court’s authority fails to comport with the limited nature of the jurisdiction set forth in the statutory parameters set forth above.

“In conclusion then, the Court on the present record lacks jurisdiction in this case to review any action (or inaction) by respondent in regard to petitioners’ [year at issue] taxes (or any other year). Congress has granted the Tax Court no authority to afford any remedy in the circumstances evidenced by this proceeding, regardless of the merits of petitioners’ complaints.” Order, at p. 3.

OK on the law. Except.

For the tenth time (or am I off in my count?), there is no statutorily mandated form of SNOD. It’s only type of tax (income, gift, estate, excise), year, and amount, plus “a notice to the taxpayer of the taxpayer’s right to contact a local office of the taxpayer advocate and the location and phone number of the appropriate office.” Of course, if the notice is missing, does that invalidate the SNOD? Or is that just “a mere procedural irregularity”?

As the late great Professor Siegel of Albany Law School often remarked, “I’d love to know the answer…in S. E. C….Someone Else’s Case.”

Lest I be misunderstood, I’m not saying that Barb and Hal are, or are not, injured innocents, nor that they are, or are not, gameplaying rounders. Without seeing all the papers, there’s no way I can say.

But their expansive view of Tax Court jurisdiction is not theirs alone; there are plenty of really injured innocents who have shared that view and come to grief. So maybe Justice Scalia was not decrying Tax Court, but the Congressional straitjacket that so confines it.

A gambit played by frivoliters confronted by SFRs is to duck the resulting SNODs, and save the protester jive for the timely filed CDP for the ensuing NFTL and timely filed petition therefrom. Then, as trial approaches and the “light at the end of the tunnel” is the oncoming IRS express, pull a Wagner and move to dismiss. Whereby the frivoliter has bought a couple years’ time (hi, Judge Holmes) via a temporary stay on collection that no judge would grant in Federal or State court.

Wagner, you’ll recall, says a petitioner can successfully move to dismiss his/her own petition in a Section 6320 or 6330 CDP, because Section 7459 doesn’t mandate decision for IRS, unlike a petition from a SNOD.

But William J. Jaxtheimer, 2019 T. C. Memo.164, filed 12/16/19, also contests the three (count ‘em, three) Section 6702 frivolous return chops he got for a year other than the years for which he received SFRs and SNODs and, unlike the usual Wagnerian, can’t get away from Judge Pugh like that.

At his CDP, Bill Jax never contested the liabilities for the three SNOD years, only claiming the income tax doesn’t apply to him. Judge Pugh blows that off.

But he does contest the Section 6702 chops, for the three (count ‘em, three) returns he filed for the same non-SNOD year. As we know, those are assessables, so no SNOD necessary, wherefore no chance to contest. Bill Jax responds to those with more frivolity.

But IRS drops the ball. At trial, they haven’t got Bill Jax’s actual all-zeros returns for that year, only the three Forms 8278, Assessment and Abatement of Miscellaneous Civil Penalties, all dated the same date and prepared by the same person and countersigned by the same manager, with different signature dates, and “Argument Code” for all-zeros returns. This gets by the Section 6751(b)( Boss Hoss hurdle.

So Judge Pugh can’t tell if there were three original returns or if one or more was a photocopy. Remember Gwen Kestin? What, no? Then see my blogpost “From the Serious to the Frivolous,” 8/29/19.

So Bill Jax gets only one Section 6702 chop, with a yellow card for a Section 6673 chop if he tries this again. And the NFTL for the three SNOD years is sustained.

Judge David Gustafson again takes on the role of the ghost in Hamlet, Act I Scene V, as he addresses Johannes Lamprecht & Linda Lamprecht, Docket No. 14410-15, filed 12/13/19. See my blogpost “Swear!” 7/18/13.

I’ve blogged Johannes & Linda five (count ‘em, five) times before now, and this is a continuation of the discovery throw-down from the last such blogpost “Judge On a Tear,” 6/7/19.

Only this time there’s something to put out here.

The latest responses to Judge David Gustafson’s order to show cause were required to be supported by affidavits.

“…where the petitioners’ response to our order makes factual assertions not within petitioners’ counsel’s personal knowledge, that response should show the basis for those assertions, presumably by means of an affidavit or declaration from the petitioners. As to some of their assertions the Lamprechts did not do so, arguing that, unlike Rule 71 requiring sworn responses to interrogatories, Rule 72 does not require sworn statements in response to document requests.” Order, at pp. 1-2.

Except.

“The Lamprechts’ argument is correct as far as it goes; but at issue here is not responses to document requests but instead responses to the Commissioner’s motion and to our Order to Show Cause. Under Rule 50(b)(1), responses to motions in the Tax Court are made pursuant to the Court’s direction (not pursuant to a standing rule). And in this case an order of the Court directed the petitioners to file a response that includes substantiation of their assertions.

“To so order is clearly within our discretion. Under the Federal Rules of Civil Procedure–not applicable here–a requesting party dissatisfied with or skeptical about the responding party’s production of documents could take the responding party’s deposition and cross-examine him about his discovery responses. However, except in extraordinary circumstances, the rules of the Tax Court do not permit the taking of a party’s deposition without his consent–a limitation that requires this Court and its litigants to employ other means to assure compliance with the discovery rules. For example, the Court could have ordered an evidentiary hearing for the purpose of doing so, but this would have involved expense and inconvenience to the parties. Consequently, we ordered instead an alternative mechanism that involves only modest expense and trouble to the responding party (and that allows no cross-examination by the requesting party)-an affidavit (or an unsworn declaration under penalty of perjury pursuant to 28 U.S.C. section 1746).” Order, at p. 2.

So do the Horatio number, guys.

No, not another cannabis case. This is Alcohol and Tobacco Tax and Trade Bureau’s new whistleblower gambit. Here’s the skinny:

https://www.irs.gov/newsroom/irs-and-ttb-formalize-process-to-support-processing-of-claims-made-to-the-irs-whistleblower-office

I see from the press release that that delightful luncheon companion and avid fisherman, Chief Whistler Lee D. Martin, is on the right track.

“The IRS Whistleblower Office is always looking to do more for whistleblowers.”

Just tell the Ogden Sunset crowd to go and do likewise.

I’m not using the above in its arcane technical sense, although Judge David Gustafson’s off-the-bencher shows that the petitioner wasn’t speaking thus, in TOT Property Holdings, LLC, TOT Land Manager, LLC, Tax Matters Partner, Docket No. 5600-17, filed 12/13/19. By way of illumination, Judge Gustafson tells us that “(‘TOT’ is the initials of ‘Trail of Tears’, the route of a 19th Century forced relocation of Native Americans, which route passed through or near the property at issue in this case.)” Transcript, at p. 3.

My use thereof has to do with placement on the table and speaking candidly.

This is another syndicated conservation easement case, like the Coalholders (see my blogposts “Diamonds Are Forever,” 10/28/19, and “Out On Parol,” 12/6/19). Like them, the owner of the property held it for some time, then transferred title into a couple LLCs (hi, Judge Holmes), ending up with 99% in one (whose membership interests he sold for FMV of the land, around $1.1 million). The buyers of the LLC interests took a $6.9 million conservation easement write-off on their 1065, but were down to claiming $3.7 million in Tax Court. No go, anyway.

The TOTs claimed the land should be valued as a housing development, although the three nearest developments could not be proven to be other than flops. Their comparables were properties with mountain views and lakes, but this property had neither.

“This subject property was at least 32 miles from the nearest interstate highway. It contained no mountains, and none was nearby. It contained two small streams (which were frequently dry) and no lakes. The utilities available on the subject property in [year at issue] included telephone and electricity, but no access to public water. There is no hospital in the County.  The subject property was situated on a larger tract that had formerly been an artillery range. The surrounding area was hardwood forests (containing mostly oaks and hickory),  but at some point in the past it had been clear cut and re-planted with row upon row of loblolly pine, a softwood common to the Cumberland Plateau that grows the fastest and is the easiest to manage compared to other softwoods. (Ex. 36-R, p. 12).” Transcript, at p. 5.

There’s a scrimmage about the savings clause (if anything violates the Regs, it’s out), TOT claiming it’s interpretive and doesn’t modify the original intent to preserve the 501(c)(3)’s proportional divvy-up of proceeds on judicial extinguishment. But it’s the same language the Coalholders used, and the testimony of the attorney-drafter is out on parol.

Judge Gustafson takes IRS’ appraiser’s number of the worth of the easement ($500K), and tags the TOTs with the 40% chop on everything over that, holding that the Letter 1807 (the preliminary notice to the TOTs on the FPAA) satisfied the Section 6751(b) Boss Hoss sign-off.

“TOT’s position is essentially that the Letter 1807 signed by the supervisor and transmitting summary report could simultaneously embody the agent’s initial determination of the penalty and lack written supervisory approval of it– even though the written signature of the supervisor appears on the face of the document. The supervisor was the sole signatory of the letter that advised of ‘all proposed adjustments’ and transmitted the report that detailed the penalties (which were later asserted in the FPAA). These facts establish that the supervisor gave written approval of the initial determination of the penalties. Accordingly, the Court holds that the Commissioner has established compliance with section 6751(b) as to the penalties asserted in this case.” Transcript, at pp. 32-33.

Edited to add, 6/23/21: My colleague Peter Reilly CPA informs me that 11 Cir  has affirmed Judge David Gustafson. Now we have to wait on 6 Cir.

No, this is not the chronicle of a yuppie romance. Rather, this is how Judge Albert G (“Scholar Al”) Lauber describes Randy McRae’s low-income housing operation. Randy wound up paying $25K each to HUD and to Kenneth Brewer as restitution for criminal violations of the Prince George’s County, MD, housing code. He wanted to deduct these payments as Section 162 ordinaries and necessaries.

You’ll find the whole story in Randy McRae and Shelby McRae, 2019 T. C. Memo. 163, filed 12/12/19. Shelby did PR and Randy did accounting and tax, according to their Sched Cs, but their bookkeeping was a wee bit casual, their record keeping more than sparse, and their trial evidence was more than a trifle scanty.

There’s argy-bargy about their Form 872 SOL extension, but the bottom line is that, had they not signed, they’d have been hit with a big deficiency forthwith.

And here’s the story behind the headline. Although Randy wanted to deduct the aforesaid restitution, note that for the years at issue, Section 162(f) barred deduction for “any fine or similar penalty paid to a government for the violation of any law.”  The term “government” was defined to include “a State” or any “political subdivision” thereof.  Sec. 1.162-21(a)(1), (3).

But Judge Scholar Al doesn’t need to go there.

“Regardless of whether section 162(f) would bar the claimed deduction and whether petitioners previously included in income the funds of which they made restitution, they have failed to establish that the restitution payments of $50,000 were ordinary and necessary expenses of Mr. McRae’s Schedule C2 business.

“Mr. McRae’s Schedule C2 business involved general accounting work and tax return preparation.  He supplied no testimony or documentary evidence to establish any link between these activities and his restitution payments.  He testified that he was ‘accused of having improperly taken some money from Mr. Brewer and from HUD’ in connection with a project to develop low-income housing in Prince George’s County.  For all that appears, this project involved an investment activity on Mr. McRae’s part, not an activity having any relationship to his Schedule C2 business.” 2019 T. C. Memo. 163, at p. 21.

Quoting Wang v. Commissioner, T.C. Memo. 1998-389, 76 T.C.M. (CCH) 753, 757, Judge Scholar Al finds Randy’s housing gig was “sporadic activity arising from “a limited opportunistic transactional relationship”). 2019 T. C. Memo. 163, at pp. 21-22.

More to the point, Randy “… submitted no evidence to show that Mr. McRae’s payment of restitution to HUD and Mr. Brewer was necessary to preserve the client base of his Schedule C2 business or otherwise to benefit that business.  For all that appears, Mr. McRae paid the restitution, as the court ordered him to do, for purely personal reasons, viz., to satisfy the conditions of his probation and thus avoid jail time.” 2019 T. C. Memo. 163, at p. 22.

Sure, it was necessary, but hardly ordinary, and definitely not deductible.