In Uncategorized on 06/03/2020 at 16:36

Thomas M. McCarthy, 2020 T. C. Memo. 74, filed 6/3/20, receives a lecture from ex-Ch J Michael B (“Iron Mike”) Thornton in the above-entitled course. Only the tuition isn’t cheap; Tom gets a $7K deficiency confirmed.

Tom is a CPA with an MBA. His chum JQ is also a CPA, plus an attorney and tax preparer. Tom claims he bought a stake in JQ’s CA MacMansion, which he paid for with a note and deed of trust (unrecorded). Instead of paying cash, he claims JQ owed him money, so he forgave the debt. He also claims he lived there some time during year at issue. Except both his return for year at issue and his petition show a MN address, which he says is a rental where he lived with his parents.

It gets better. Tom owned a NYC co-op apartment, which he rented to an unrelated for the entire year at issue, yet took his mortgage interest deduction on Sched A, not Sched E. My ultra-sophisticated readers will no doubt exclaim “rental real estate equals passive deduction against passive income, not ordinary deduction against ordinary income!”

Tom tries the Section 163(h)(4)(A)(i) two residence gambit. “On his [year at issue] Federal income tax return petitioner did not ‘select’ either the New York City property or the [CA] property as his second residence, nor did he indicate on his return which of these properties he regarded as his principal residence. Neither the Code nor the regulations fix the time or manner by which a taxpayer makes a selection of the ‘1 other residence’ under section 163(h)(4)(A)(i)(II). Accordingly, making the selection in litigation is acceptable.” 2020 T. C. Memo. 74, at p. 7. (Citations omitted).

So Tom is cool when he claims NYC coop as principal residence on trial, right?

Wrong. Tom filed MFS. “Pursuant to section 163(h)(4)(A)(ii)(II), if a married couple does not file a joint return for the taxable year, each of them ‘shall be entitled to take into account 1 residence unless both individuals consent in writing to 1 individual taking into account the principal residence and 1 other residence.’ The record does not reflect that petitioner and his wife both consented in writing to petitioner’s taking mortgage interest deductions with respect to more than one residence. Consequently, petitioner is precluded from claiming mortgage interest deductions with respect to both the New York City property and the [CA] property. The Code does not make clear, however, in these circumstances which of these properties, if either, should be considered the ‘1 residence’ that petitioner may take into account pursuant to section 163(h)(4)(A)(iii). “ 2020 T. C. Memo. 74, at p.8. As Ben Franklin put it, “He that would thrive, must ask his wife.”

Anyway, Tom is out because he can’t prove he ever lived in the NYC coop during year at issue. While Tom claims there is a saver per Section 121 (using a carryover from old Section 1034, which it replaced), he can’t show that he moved and rented because he couldn’t sell.

“The lack of a ready market for selling a property may be taken into account in determining whether the property remained the taxpayer’s principal residence after he moved out; if the taxpayer’s efforts to sell the property demonstrate that his dominant motive was to sell the property at the earliest possible date instead of holding it for rental income, the property would not necessarily cease to qualify as the taxpayer’s principal residence.

“Petitioner asserts that renting his New York City property was a financial necessity for him in [year at issue] because a downturn in the real estate market during the 2008 financial crisis had caused the New York City property to be worth significantly less than he had paid for it. He asserts that he sold the property in [year at issue plus one]. Petitioner has offered no evidence, however, as to what he paid for the New York City property (or exactly when he bought it), what he sold it for, what efforts he made to sell the property after he moved out…, or to what extent market conditions might have created a bar to his selling the New York City property when he moved out of it….” 2020 T. C. Memo. 74, at pp. 10-11. (Citations omitted).

And Tom flunks the driver’s license, employment, mailing address, voter registration, motor vehicle registration, religious institution and civic activities tests for residence. It’s MN all the way.

The CA MacMansion fares no better.

Tom has a note and a deed of trust (that’s a CA mortgage), and a document supposedly tying them together, that he says shows the debt for which he claims his CA interest deduction. “The aforementioned deed of trust includes an acknowledgment form indicating that the document was notarized on December 16, 2004, and that the notary’s commission expired January 28, 2007. At trial neither petitioner nor Mr. Rodgers, who testified as petitioner’s witness, was able to explain why the purported deed of trust shows that they both signed it January 13, 2010, but that it was notarized in 2004 by a notary whose commission expired in 2007. Furthermore, neither petitioner nor Mr. Rodgers was able to explain adequately the provenance of any of these documents. The unexplained inclusion of an obviously fictitious acknowledgment form as part of the deed of trust, as well as the lack of a clear explanation as to where these photocopied documents even came from, calls into question the genuineness and trustworthiness of these three interrelated documents.” 2020 T. C. Memo. 74, at p. 15-16. Anyway, even if this stuff got into evidence, which it didn’t of course, no showing the deed of trust was recorded, so the debt is unsecured under CA law. See Reg. Section 1.163-10T(o)(1)(ii).

Ex-Ch J Iron Mike says JQ was an attorney. If I saw a client trying to put this stuff in evidence, I’d ask for an in-chambers and wouldn’t even keep the ripcord.

There’s more, but we can stop here, unless you enjoy watching a case go down in flames.

But IRS has their own problems. Note the dates, because they’re relevant.

“…respondent relies exclusively on a notation in a one-page stipulated exhibit captioned ‘Correspondence Examination Automation Support’, dated April 25, 2018. On this document in a single line entry dated September 6, 2017, with an indication that it was ‘Submitted by’ an otherwise unidentified ‘Brodnax Felicia L’ and with an indication that the ‘Action Type’ is (mysteriously) ‘Non Action’, the ‘Note’ states in its entirety: ‘6662 penalty approved’. Without any other supporting evidence or explanation or elaboration, on brief respondent argues that this document “reflects the timely managerial approval of the accuracy-related penalty.’ Respondent’s position is problematic for a variety of reasons.” 2020 T. C. Memo. 73, at p. 28.

I’ll leave it to my ultra-sophisticates to enumerate the reasons. Or they can read for themselves, to check their answers.

This blogpost is long enough.








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