US Tax Court shuts down, I shut up.

Enjoy the holiday.

But That’s No Reason To Go To Tax Court

Ordinarily, I wouldn’t even bother blogging Mark Pilyavsky, 2020 T. C. Sum. Op. 20, filed 7/2/20. Judge Gerber is remarkably douce, given how quickly and thoroughly Mark’s case craters.

But we’re coming up on a three-day weekend. I can’t spend it with one of my nearest and dearest in her Berkshire retreat; the Bayou City is under siege; and my local museums and concert halls are locked down, as am I. Note well, I am not complaining; so many have it so much worse, and I fear worse is yet to come. But if I have to shut down (or, as I’m sure some would say, shut up), I’ll take one more time at bat.

Mark claims IC, except his employment contract with PIMCO as senior database engineer says he can’t work for anyone else as a consultant, which he claimed on his return he was, and anything he invents or creates is work for hire.

Mark testifies truthfully and candidly.

“At trial, however, petitioner disavowed his statement that he was an independent contractor with PIMCO. Instead he testified that he was an employee. In addition, evidence in the record shows that he had agreed with PIMCO that he would not perform the same type of work with outside clients or use his experience in such pursuits. The presentation and explanation attached to the Schedule C was accordingly a fabrication intended to establish the appearance of a Schedule C business activity in order to report losses that could be claimed to be deductible from ordinary income.

“Further diluting petitioner’s position is that he does not have any original records of the alleged activity other than his bank statements from which his return preparer developed summaries in an attempt to support the more than $50,000 in claimed deductions. Petitioner’s testimony was vague, and he did not go into any details of his alleged business activity. On cross-examination it was shown that the summaries had numerous inaccuracies and contradictions. Under the circumstances, we find that petitioner’s testimony and other evidence lack credibility.” 2020 T. C. Sum. Op. 20, at pp. 6-7.

Mark was pro se, of course. I lament the recent death of Henry G. Miller, Esq., a remarkable trial lawyer from whose lectures I learned much. He said that when one’s client’s testimony sent the client’s entire case down the drain, one should brighten up, as if that testimony was just what you wanted the jury to hear, and smile one’s sweetest smile.

Then, when the judge nonsuited your client and dismissed the jury without having given them the case (as there was no case to give them), go out, find a quiet corner, and cry your eyes out.

IRS has them, when they try to fraud-chop John Thomas Minemeyer, 2020 T. C. Memo. 99, filed 7/1/20. John Thomas is no angel; he went down for Section 7201 tax evasion for two (count ’em, two) different years in USDCDCO. IRS was looking for $100K in 75% chops for both years.

Judge Kerrigan tells the story of one of those years.

“… a revenue agent visited petitioner in prison and provided him a Form 4549, Income Tax Examination Changes, for [years at issue]. No letter from respondent was attached to the report. Petitioner signed the Form 4549 agreeing to deficiencies and penalties but later requested that the agreement be withdrawn.” 2020 T. C. Memo. 99, at p. 3.

” Upon petitioner’s request, respondent withdrew and disregarded the Form 4549 that petitioner signed…. a Letter 950, commonly referred to as a 30-day letter, was sent to petitioner. L, the immediate supervisor of the revenue agent, signed the 30-day letter as group manager. A Form 4549-A, in which respondent asserted that petitioner was liable for a section 6663 fraud penalty of $42,708 for [one year at issue], was included with the 30- day letter. The Form 4549-A included the words ‘corrected report’ at the top of both pages of the form. The revenue agent signed the Form 4549-A. Above the revenue agent’s signature the following statement was included: ‘This Report supersedes the report issued….'” 2020 T. C. Memo. 99, at p. 4. (Name omitted).

There followed a SNOD, of course, countersigned by L.

I can almost hear my readers shouting “Boss Hoss! Jailhouse 4549 not Boss Hossed! Clay!”

Of course, Judge Kerrigan is on this one like cliché on rice.

“When the revenue agent visited petitioner in prison, he provided petitioner a Form 4549, which petitioner signed. Petitioner contends that he was under duress to sign the Form 4549 and for that reason he withdrew his consent. During respondent’s counsel’s opening statement at trial he contended that petitioner received a preliminary form before the formal communication in the 30-day letter and that petitioner signed it, agreeing to the fraud penalty for [one of the years at issue]. This statement is an acknowledgment that the Form 4549 communicated an intention to impose a penalty.

“Respondent did not offer this Form 4549 into evidence. Therefore, we cannot determine whether the Form 4549 or the 30-day letter was the initial determination for the purpose of section 6751(b). Without the Form 4549 we cannot determine whether that form clearly reflected the revenue agent’s conclusion that petitioner should be subject to a penalty. If the Form 4549 was the initial determination of the fraud penalty for [one of the years at issue], there is no evidence of its timely written approval.” 2020 T. C. Memo. 99, at pp. 7-8. (Citation omitted).

IRS has burden of production to establish Section 6751(b) sign-off. No earlier 4549, so IRS dropped the burden.

Note that hitting John Thomas with a 4549 while he was sitting in the slammer was less than a brilliant move; if SOL was an issue, the 30-day letter, duly Boss Hossed, would have served. And not saving the 4549 was even less brilliant.

STJ Panuthos sends off Gary M. Dennis and Sharon D. Dennis, 2020 T. C. Memo. 98, filed 7/1/20, without admins or legals.

It’s true that the amount stated in both the NFTL and NITL was overstated, as the number didn’t include a $7500 payment Gary and Shannon made. They weren’t in default of their IA, but they had to petition the NITL and NFTL, and go to remand, before the numbers worked out.

Gary and Sharon want Section 7430 legals and admins.

No, IRS wasn’t justified, and admits it.

But Gary and Sharon get nothing.

“Petitioners…question the application of a payment. They do not claim they are due a refund or other tax credit that would change the amount of their underlying tax liability. Their challenge is to the amount of tax liability that remained unpaid at the time the NFTL was filed, not the total tax liability as imposed by the Code. Accordingly, the CDP hearing was a proceeding in connection with a collection action and was not an administrative proceeding pursuant to section 7430. We therefore hold that petitioners are barred from recovering compensation for administrative costs.” 2020 T. C. Memo. 98, at p. 11. (Citation omitted).

CDPs aren’t compensable, unless the amount of tax due at inception changes. Here, the amount of tax didn’t change, just how much thereof was unpaid.

As for legals, Gary and Sharon were pro se. But Gary has an interesting argument.

“Petitioners argue that although they are ‘aware of precedent relating to reimbursement of [p]ro [s]e petitioners’, this Court’s holdings ignore ‘the possibility that responsibility for [p]ro [s]e representation of two [p]etitioners may be disproportionately shared between the individuals.’ Petitioners claim that petitioner Gary Dennis produced all documents and performed all other legal services related to the case, while petitioner Sharon Dennis did not participate in the case in any way. Petitioners assert that the number of hours of requested compensation has been reduced by 50% to reflect the lost income-producing capacity of one spouse in defending the other during litigation.” 2020 T. C. Memo. 98, at pp. 12-13.

STJ Panuthos can’t give Gary a Taishoff “good try, second class,” but I can.

Gary, ya gotta be out-of-pocket to a lawyer or USTCP, and pay disbursements, to get legals.

It’s another reprise of Sam’s Club. That’s Sam’l T. Coleridge, and his “greybeard loon,” the one with the albatross. But today Judge Wells has this small-claimer, Dorothea E. Beckett, 2020 T. C. Sum. Op. 19, filed 7/1/20, that’s a natural for Sam.

Dorothea’s pro se in this fight over the $19K IRS claims she didn’t report but should have, after she settled her ADA claim. But though now pro se, on the litigation with her employer she was well-served by her trusty attorney Thomas B. Corbin, Esq.

Dorothea has seizures. “She would hit her head hard enough to require stitches or would bite her tongue, and at least once she was sent to the emergency room.” 2020 T. C. Memo. 19, at p. 2. I cite these physical details to show that, when trusty attorney Tom sued her employer for failing to make reasonable accommodation, he made sure the stip of settlement included “pain and suffering, physical distress,” as well as emotional injury, in what was settled. 2020 T. C. Sum. Op. 19, at p. 3.

Dorothea was less well-served by the trial judge (whether State courtier or Federale not stated; concurrent jurisdiction, y’know). “Petitioner asked the judge presiding over her lawsuit whether the $19,000 was taxable and was told that it was not taxable because the lawsuit was based on her seizures.” 2020 T. C. Memo. 19, at p. 4. Well, Judge, the right answer is the one Judge Wells gives: yes and no.

The problem is that most trial judges have to deal with a plethora of issues in any but the simplest cases. And taxes impinge on the vast majority of even the simple ones. A fender-bender in Village Court, that settles over the Judge’s coffeetable in her livingroom, has tax implications.

Beware, litigant, of free advice from the bench. The learned judge may know a lot; none I’ve ever encountered knows everything.

Now of course there’s the calculus of what the parties actually settled, not what they said they settled. If I’m counsel for a settling defendant, I want to make sure my client can write off the costs of the settlement; the plaintiff is on his, her, its or their own.

Here, Dorothea’s real physical injuries carry the day. At least part of the day.

“The $19,000 payment in issue was made ‘for claims of emotional distress, pain and suffering, physical distress and damages’. Petitioner’s complaint alleged violations of the ADA, which is not a worker’s compensation statute. We find that the $19,000 settlement payment clearly meets the definition for damages because petitioner received an amount through a settlement agreement entered into in lieu of a legal suit or action.” 2020 T. C. Sum. Op. 19, at pp. 7-8. (Citation omitted).

OK, but is “physical distress” enough?

It is in Judge Wells’ court…sort of.

“Petitioner’s suit began as a discrimination suit. Damages received as the result of a wrongful termination of employment claim are generally not received on account of personal physical injuries or physical sickness. There was, however, a physical component to petitioner’s complaint. The settlement agreement explicitly states that the compensatory damages were paid in part for ‘physical distress and damages’. These terms are evidence that the payor, petitioner’s former employer, intended a portion of the $19,000 to compensate petitioner for her physical injuries. This is supported by the observation of the judge presiding over petitioner’s ADA claim, that petitioner’s seizures were an actual basis for the settlement. Petitioner credibly testified that she suffered head and other physical injuries directly caused by her employer’s refusal to make reasonable accommodations. This sets petitioner’s case apart from the myriad of cases in which we have held that taxpayers’ settlement payments for wrongful termination claims are not excludable from income under section 104(a)(2).” 2020 T. C. Sum. Op. 9, at p. 9. (Citations omitted).

OK, but other claims were settled as well. And here Judge Wells gives a useful hint for drafting settlement agreements.

“The agreement in the instant case explicitly allocates the settlement amount among backpay, attorney’s fees, and compensatory damages. Petitioner’s settlement agreement further identifies three bases for the $19,000 settlement payment: ’emotional distress’, ‘pain and suffering’, and ‘physical distress and damages’. We have no reason to believe that this express allocation was not the result of adversarial, arm’s-length, and good-faith negotiations, or that it is incongruous with the ‘economic realities’ of petitioner’s underlying claims. Accordingly, we conclude that one third of petitioner’s $19,000 settlement payment is excluded from income under section 104(a)(2).” 2020 T. C. Sum. Op. 19, at p. 11.

So Judge Wells “stoppeth one of three.”

I understand plaintiffs’ counsel will want to go for a better allocation to physicals if at all possible. But watch out for “incongruous with the economic realities” landmine, and have your local jury verdict comparables handy.

Likewise, this is, after all, a small-claimer. Maybe Judge Wells was a little more generous than he might be in a T. C. Memo., with bigger bucks on the table and IRS’ appeals counsel heading for the USCCA website to set up the appeal.

But it’s your case and your call. Me, I’d go for it.