Back on 11/17/20, I pointed out that a petitioner couldn’t settle while Dawson’s Creek was in flood. See my blogpost “Ya Can’t Even Settle,” of even date therewith, as my expensive colleagues would say.

Turns out petitioner and IRS did settle right after the New Year. But nobody knows what they settled, because their stipulated decision is not available on the new, improved (come on, guys), jim-handy DAWSON website.

It’s Section 7461 time again.

And don’t tell us to surry down to the stoned soul picnic on Second Street in The Wannabe State, as the doors are still locked thereat.

If Ch J Maurice B (“Mighty Mo”) Foley can spare a minute from ordering petitioners to pony up the sixty George big blind (or seek waiver therefrom), and send in wet-ink original amended petitions that state something like a claim based upon which relief might be granted, I suggest he adopt our New York Rule 216.1.

Here’s the text: “(a) Except where otherwise provided by statute or rule, a court shall not enter an order in any action or proceeding sealing the court records, whether in whole or in part, except upon a written finding of good cause, which shall specify the grounds thereof. In determining whether good cause has been shown, the court shall consider the interests of the public as well as of the parties. Where it appears necessary or desirable, the court may prescribe appropriate notice and opportunity to be heard.

“(b) For purposes of this rule, ‘court records’ shall include all documents and records of any nature filed with the clerk in connection with the action. Documents obtained through disclosure and not filed with the clerk shall remain subject to protective orders as set forth in Rule 103.”

CSTJ Lewis (“Spells It Right”) Carluzzo can but sigh as he laments that another innocent taxpayer has been taken advantage of by the less-than-scrupulous Federally-unregulated preparer. And in this case, both taxpayers and preparer are located in CA; I am informed that CA is one of the very few States that seriously regulates tax preparers.

Vilma Hernandez & Rene A. Hernandez, Docket No. 3373-20S, filed 4/15/21 (don’t panic, filing date for individual returns extended to 5/17/21, but payment is not), an off-the-bencher, furnish the text both for CSTJ Lew and me.

“During the relevant period Mr. Hernandez was employed as a mechanic with the Los Angeles County Metropolitan Transportation Authority and Mrs. Hernandez was employed as a help desk coordinator, also with the Los Angeles County Metropolitan Transportation Authority.” Transcript, at p. 4.

It seems that the paid preparer was a wee bit inventive (not so say fictionist) in toting up the Hernandez’s deductions.

“Mrs. Hernandez, who is unsophisticated in Federal tax matters, relied on her return preparer to accurately prepare petitioners’ … joint Federal income tax returns. At trial, Mrs. Hernandez agreed that the determinations in the notice are proper. She explained that the overstatement of deductions resulted from her return preparer arbitrarily showing deductions unsupported by actual expenses. She was remorseful that she did not discover her return preparer’s errors at the time she signed the return and suggested that return preparers should in some manner or other be regulated.” Transcript, at p. 5.

Well, it isn’t for CSTJ Lew to give Mrs. Hernandez legal advice. And I’m not admitted to practice in CA, so I certainly can’t suggest she consult the CA Business and Professions Code, Division 8, Chapter 14, and contact the CA Tax Education Council, which regulates tax preparers in The Bear Republic, and requires them to be bonded.

But I can join with CSTJ Lew: “Many of us who repeatedly see the ultimate consequences of unscrupulous return prepares [sic; I think you meant “preparers,” Judge] might very well agree with her suggestion.” At least as to the States where tax prep is a free-fire zone.

And maybe so even lobby for Federal regulation as well.

Folding more years into an IA at Appeals reappears, with no better results. And it doesn’t matter whether Einstein said it or not, doing the same thing again and expecting a different result doesn’t work.

We saw how Kennith Lee and Cathy Lee tried folding-in, in my blogpost “Unstealth,” 4/5/21. Well, STJ Daniel A (“Yuda”) Guy is no more willing to allow fold-ins than Judge Nega was, in Ivan T. Clover and Esther O. Clover, 2021 T.C. Sum. Op. 8, filed 4/14/21.

Ivan and Esther were short some self-reported $16K over four (count ’em, four) years. They claimed they’d paid, but IRS had allocated their payments to taxes and additions for years before the years at issue.

“Petitioners sent numerous checks to the IRS without designating the specific taxable period to which the payments were to be applied. Under the circumstances, the IRS was free to ‘apply the payment to periods in the order of priority that the Service determines will serve its best interest.” See Rev. Proc. 2002-26, sec. 3.02, 2002-1C.B. 746, 746. The record reflects that the IRS properly applied petitioners’ payments to offset their unpaid tax, additions to tax, and interest duly assessed for the taxable year [Year One], with the balance of the payments applied to the years in issue and taxable years thereafter.” 2021 T. C. Sum. Op. 8, at p. 7.

See my blogpost “Tell ‘Em,” 2/22/21.

Then Ivan and Esther tried the fold-in, with predictable result.

“As a final matter, petitioners assert that they accepted the Appeals Office’s offer to enter into a streamlined installment payment plan. The record shows that the Appeals Office offered petitioners a streamlined installment plan for the years in issue, whereas petitioners countered with an offer to enter into an installment plan for the years in issue as well as the taxable years 2015 and 2017. The Appeals Office did not accept petitioners’ proposed installment agreement.” 2021 T. C. Sum. Op. 8, at p. 7. And STJ Yuda finds no abuse of discretion.

Takeaway- Unless you have a squeaky-clean client, with only a couple years (hi, Judge Holmes) at issue, and a good story to go with it, don’t try a fold-in.

Unhappily for Erinn Theresa Doyle & David Devon Doyle, 6532-20S, filed 4/14/21, even with CSTJ Lewis (“A Most Delightful Name”) Carluzzo on the case in this off-the-bencher, the law is the sole consideration.

Dave wants “…the Court to allow for an exception to the 39-week rule under the circumstances of their case. They are looking for ‘leniency’, as they put it. Whether it’s called leniency, or equity, or fairness, or sympathy, in effect they are asking that the Court rule in a manner inconsistent with the results demanded by the application of a clear statutory scheme, in this case section 217, to an undisputed set of facts. This the Court cannot do.” Transcript, at p. 8.

To save you the online Google or the dive into your bookshelf, Section 217 governs moving expense deduction, and requires a 39-week stay in the new job unless involuntarily terminated (except for willful misconduct) or moved by the employer although reasonably expecting to stay in new job for the 39 weeks.

Dave’s story is that he moved from CA to HI. to take a job with the State. He quit after less than four (count ’em, four) months on the job.

“He resigned from the job and decided to move back to California for a number of personal reasons, including (1) his belief that certain atmospheric conditions and the frequency of earthquakes presented an unfit environment for his family (as it turned out the area suffered a natural disaster after he left), (2) petitioners’ attempt to sell their California house failed, and (3) Mrs. Doyle’s decision to remain in California in order to care for her father. When Mr. Doyle returned to California…he did not have a job waiting for him.” Transcript, at pp. 4-5.

“Returning to Califnoria [sic] to start a new job was not among his reasons. Consequently the portion of moving expenses allocable to Mr. Doyle’s return to California cannot be deducted, because he did not return there “in connection with the commencement of work at a new principal place of work”. Section 217(a).” Transcript, at p. 7.

Dave realized on the trial that he needs a break, with the law completely against him, but 400 Second Street, NW, in The City on the Potomac, is not the place to look for one.

“While we appreciate and commend petitioners for the decisions, they made in order to ensure and protect the security and health of the members of their family, we are bound in this case, more appropriately constrained, at least with request [sic; should be “respect”] to some of the expenses involved in the moving expense deduction to apply the law as written. Consequently, respondent’s disallowance of the moving expense deduction here in dispute is sustained.” Transcript, at p. 8.

Pore ‘il ole Tax Court has only sympathy, not equity.

Judge Elizabeth Crewson Paris spends 41 (count ’em, 41) pages, and IRS details two (count ’em, two) attorneys, to deal with William E. Flynn, 2021 T. C. Memo. 43, filed 4/13/21.

The said Flynn went down for 108 months plus 3 years’ supervised probation in USDCWDMI (affirmed 6 Cir) for a little scheme called Access.

“Petitioner and his fellow conspirators at Access represented that Access was a successful investment organization with a history of returning large profits to clients. They promoted Access’ connections to little-known, high-yield investment opportunities in world markets that were not available to the general public. Petitioner and his co-conspirators further represented to investors that their principal would be kept in guaranteed accounts in a major world bank and would not be at risk. Access claimed to operate as a tax-free church despite having had no churchlike organization, no building, no worship services, and no activities of a religious nature. Petitioner and his co-conspirators told investors that their returns on their investments would be nontaxable if they purchased a ‘church sub-chapter’ package from Access. Many of the investors Access attracted were retirees who transferred their entire retirement accounts to Access on the representation that Access was eligible to receive the funds in those accounts as nontaxable rollovers and that the investors’ profits would be tax free.” 2021 T. C. Memo. 43, at p. 4.

Billy and his buddies swindled people to the tune of $20 million. Billy himself “… used the funds he received from Marcusse [another crook] and the Access scheme to purchase his personal residence, two bars, and three airplanes as well as to pay for construction of new Billy’s [a bar he ran] and to generally support his lifestyle. In addition, the razzle-dazzle of Billy Flynn’s loan applications enticed the lenders to approve multiple loans to him and his various entities in amounts exceeding $550,000, and the payments on the loans were made from his previously described bank accounts.” 2021 T. C. Memo. 43, at p. 34.

Billy goes down for fraudulent nonfiling.

We can stop here.

Where The Magic Paper Saves the Day

While infrequent, Tax Court cases, even small claimers, involving New Jersey divorces furnish good blogfodder. Remember Tim Micek? No? I know, it’s been ten years, so see my blogpost “The Magic Paper Saves the Deduction,” 4/7/11.

Today, we have the magic paper again, but it saves the exclusion for Leah J. Regan, Docket No. 16251-17S, filed 4/13/21, an off-the-bencher from Judge Buch.

Leah and her ex Mike divorced in 2003, and Judge Herr in NJ Chancery awarded Leah $6K per month net of tax. Leah and Mike were supposed to agree upon the amount of a tax reserve to be set up so Leah paid no tax on the $6K.

Except of course they didn’t. So Judge Herr twice amended her order, always referring to the monthly payment to Leah as “net of taxes.” Judge Herr sent the parties the last revised order with a transmittal letter.

“In that letter, Judge Herr explained how the modifications she made in her order affected the decision she had previously rendered. Concerning the tax consequences, she noted that she ‘anticipated that counsel would be able to calculate the income taxes [Ms. Ragan] would pay on this unallocated support and her imputed income and be able to supply that “taxable” alimony figure.’ She then explained that ‘[s]ince you have not calculated the amount [Ms. Ragan] needs to receive as alimony to net $6,279 per month * * * I am simply advising Probation to continue to collect the unallocated nontaxable support for [Ms. Ragan] of $6,279.'” Transcript, at pp. 6-7.

IRS hits Leah for year at issue, apparently because Mike took the Section 215 alimony deduction, and claiming Judge Herr’s allocation of tax doesn’t make Leah’s monthly payments nontaxable. Back to the Section 71(b) foursome that TCJA put on hold through 2026.

“The payments must be received by a spouse under a divorce or separation instrument; that instrument must not designate the payment as not includible in gross income and not allowable as a deduction under section 215; the payee spouse and the payor spouse must not be members of the same household; and the liability to make the payments must terminate after the death of the payee spouse. There is no dispute as to three of those elements. The Commissioner and Ms. Ragan, however, disagree as to whether the divorce instrument designates the payment as not includible in the gross income of Ms. Ragan.” Transcript, at pp. 8-9.

IRS wants to forget about Judge Herr’s letter. Judge Buch won’t let them.

While there’s no magic language to effectuate the not-includible-not-deductible piece of the equation, here the transmittal letter shows “… Judge Herr intended for the $6,279 support payments to be net of taxes to Ms. Ragan and excluded from her income. She initially intended to accomplish this by requiring the parties to calculate the amount of a tax reserve, which would have enabled the court to establish a gross alimony amount. When the parties failed to reach agreement as to that tax reserve, Judge Herr altered her initial decision in a … order. In that order, she specified that the support payments would remain at the net amount. In the cover letter accompanying that order, she explained that because the parties could not agree on the tax issues, the support payments were to be treated as nontaxable. Judge Herr even changed her terminology, referring to the monthly payments as “support” in both the…order and the transmittal letter.” Transcript, at p. 10.

IRS claims the letter isn’t part of the divorce instrument.

Judge Buch does a quick dictionary chaw. After all, even a small claimer off-the-bencher needs a dictionary chaw.

“To do so would require that we disregard the clause ‘written instrument incident to such a decree.’ That clause requires that we take into account any instrument that supplements a decree. And the term ‘instrument’ is broader than how the Commissioner would have us define it. Black’s Law Dictionary defines a written instrument as ‘[a] written legal document that defines rights, duties, entitlements, or liabilities.’ It goes on to cite Edward Beal’s Cardinal Rules of Legal Interpretation, for the proposition that ‘[a]n ‘instrument’ seems to embrace * * * any written or printed document that may have to be interpreted by the Courts.’ We are confident that Judge Herr would consider her letter transmitting and explaining her order as a written legal document that defines rights and liabilities. So do we. A letter transmitting an accompanying order written by the same judge who wrote the order that explains the rights and obligations of the parties who are subject to that order fits neatly within the definition of a written instrument incident to a decree.” Transcript, at p. 12.

Once again, in NJ, when people divorce, the magic paper saves the day.

Transfer pricing geeks and Section 482 reallocators will no doubt be eagerly awaiting the stiped out decision forecasted in Altera Corporation and Subsidiaries, Docket No. 6352-12, filed 4/13/21.

For the rest of the civilized world, the Altera fight was over stock-based compensation with offshores. You’ll find the backstory in my blogposts “Sixteen Lawyers – Part Deux,” 7/27/15, “Aspirational Goals,” 7/24/16, “Cut Uncut,” 8/17/18, and “Cut Out,” 12/2/19.

That is, we’ll know the upshot unless the Genius Baristas seal the whole shebang.

I find it a wee bit unfortunate that the results of major litigations, based upon which we advisers must advise clients in big ticket matters, are kept from public view. I understand not revealing Section 6103 lockouts, discovery manœuvers, trial tactics, negotiating strategies and ploys, trade secrets, and privileged information. But stipulated decisions reveal none thereof.

Decisions are how we can judge how the whole system is working. The whole aim of tax advising is discovering if the lion will bite otherwise than by sticking one’s head in its mouth.

There’s a full-dress T. C. today about corporate welfare, but it’s not political. Ruben De Los Santos and Martha De Los Santos, 156 T. C. 9, filed 4/12/21, had an employee welfare benefit plan for themselves and four (count  ’em, four) other employees of their Sub S. Judge Albert G (“Scholar Al”) Lauber reminds us that Ruben’s welfare plan was a SDLIA, and got his tax benefits taxed back to him as ordinary income per Reg. Section 1.61-22(b), as more particularly bounded and described in 2018 T. C. Memo. 155, filed 9/18/18.

I didn’t blog Ruben’s loss, as I had a full-dress T. C. to deal with that day, and Ruben’s deal was much of a muchness.

But today, Ruben’s trusty attorney earns a Taishoff “Good Try,” claiming that the benefits are a corporate distribution, entitled to Section 301 treatment. Tight-fisted ol’ IRS says no, the SDLIA was a “‘compensatory arrangement’ that afforded benefits to petitioner husband in his capacity as an employee.” 156 T. C. 9, at p. 3.

Ruben (that’s Doc Ruben, MD) incorporated his medical practice as a Sub S, and took all the flow-throughs on the MFJ 1040s for the years at issue. He set up one of the Legacy plans. Legacy was a lead hawker of split-dollar life insurance plans; for the backstory on SDLIAs, see my blogpost “The Split,” 8/27/12.

For Ruben and Martha to be eligible for plan benefits, they had to be employees of the Sub S.

“Under the Legacy Plan as adopted by the S Corp., petitioners were entitled to a $12.5 million death benefit, and the four rank-and-file employees were entitled to a $10,000 death benefit and certain flexible benefits. To fund the promised death benefits the Legacy Plan required the purchase of life insurance. The Trust accordingly purchased a life insurance policy (Policy) insuring petitioners’ lives. The Policy was a ‘flexible premium variable universal life’ policy with accumulation values based on the investment experience of a separate fund. The Policy provided base insurance coverage of $12.5 million, equal to the death benefit that the S Corp. had selected for petitioners. The Policy was a ‘survivor policy,’ under which the insurer would pay $12.5 million to the Trust when the second of petitioners died. The Trust in turn was required to pay $12.5 million to whatever beneficiaries petitioners had designated.” 156 T. C. 9, at p. 5.

So Doc Ruben deducted the $1.862 million the policy cost him as a business expense, while in a couple following years (hi, Judge Holmes) the policy accumulated about $800K in cash surrender value. IRS bounced the deal. Ruben and Martha lost summary J on split-dollarism. So why am I writing this?

Because IRS, Ruben and Martha, and Judge Scholar Al left figuring out what part of the cash surrender build-up gets taxed for what years. Ruben and Martha and trusty attorney claim the benefits are corporate distributions of property, notwithstanding that they agree that the benefits were employee compensation.

Ya see, back in 2018, 6 Cir overturned Machacek, to which I had given short shrift when it was a T. C. Memo. (see my blogpost “A Scrap About Scrap,” 3/28/16). I had cavalierly dismissed Machacek: “And as these SDLIA deals have been blown sky-high so many times, it’s not likely any of my readers will encounter any new ones.” Boy, was I wrong!

6 Cir went off on Reg. Section 1.301-1(q)(1)(i), which says all SDLIA distributions are corporate distributions, and that provision overrides Reg. Section 1.61-22(b).

Judge Lauber isn’t buying.

Golsen to the rescue. Machacek was 6 Cir, but Ruben and Martha are Texians, hence 5 Cir. “To adopt the Sixth Circuit’s construction of section 1.301-1(q)(1)(i), Income Tax Regs., would require us to ignore the plain language of section 301(a), the statute under which the regulation was promulgated. We are not permitted to construe a regulation in a manner that ignores its governing statute or that adds to the statute ‘something which is not there.’” 156 T. C. 9, at p. 16. (Citation omitted).

Section 301(a) says a distribution to a shareholder is only a distribution if it is made in the shareholder’s capacity as such.

“These general rules, unambiguously stated at the outset of the section 301 regulations, necessarily apply to (and limit) the subsequent, more granular provisions. Those subsequent provisions often refer to “distributions to shareholders” or “property transferred by a corporation to a shareholder,” without explicitly saying–each and every time–that the distribution or transfer is being made to the shareholder “in his capacity as such.” But there was no need for Treasury to include that verbiage in these more granular provisions because the general rules stated at the outset limit the scope of the regulations to distributions by a corporation with respect to its stock.” 156 T. C. 9, at pp. 18-19. (Footnote omitted).

And since it’s compensation, it’s subject to FICA/FUTA. Adopting 6 Cir would mean an employer could give each employee a couple shares stock (hi again, Judge Holmes) and dodge withholding on the benefits.

Finally, Ruben and Martha elected to have their Sub S taxed as a partnership, and there are no Section 301 “distributions” to partnerships.

Ch J Foley, and Judges Gale, Gustafson, Paris, Morrison, Kerrigan, Buch, Nega, Pugh, Ashford, Urda, Copeland, Jones, Toro, Greaves, Marshall, and Weiler all agree.

I bet IRS is hoping Ruben’s trusty attorney appeals.

For those coming late to the party, and therefore puzzled by the title first set forth at the head hereof (as my expensive colleagues would say), dig my blogpost “More TEFRA Tohubohu,” 9/12/17. Judge Mark V Holmes will explain.

Today Judge Patrick J (“Scholar Pat”) Urda eschews Genesis 1:2 in the original, but brings order to the random walk that is pretrial document discovery in Janet R. Braen, et al., Docket No. 24929-17, filed 4/9/21.

As is not uncommon, the joust is about what the Braens did or didn’t produce.

Seems this is a conservation easement case, and the original cost of the land is at issue. IRS asked for some documents on the very last permissible day before the pretrial discovery cutoff hit. This was preceded by two (count ’em, two) years’ worth of demands and productions.

The Braens claim that they don’t have, or can’t find, some stuff, and Judge Scholar Pat is down with that.

For the rest, Judge Scholar Pat tosses the problem back to the parties.

“We note that trial is less than a month away and that the Commissioner did not file the motion to compel discovery until the last day of the discovery period. In this circumstance, we will give the Braens a slight reprieve. If documents responsive to request number 2 have already been produced in response to other formal or informal discovery requests, they do not need to produce the documents again (unless they so choose) and may instead identify those documents and the date of previous production in a written response to the Commissioner. Should the Braens fail to comply with this order, the Commissioner may file an appropriate motion.” Order, at p. 2. And Scholar Pat gives the Braens just over a week to do it.

IRS’ counsel is unhappy with the organization of the documents they did get. The Braens claim that’s how they keep records in the ordinary course of their business.

“The Commissioner also takes issue with the organization of the Braens’ document production, faulting them for failing to correlate the response with a request. Our rules do not impose such an obligation. Rule 72(b)(3) provides that ‘[a] party shall produce documents as they are kept in the usual course of business or shall organize and label them to correspond to the categories in the request.’ Here, the Braens have produced the documents as they are kept in the usual course of business, which is a permissible method of production.” Order, at p. 4.

Maybe there should be an embargo on those “win your case at discovery” CLEs. Too much tohubohu, too little progress in resolving the case.

Edit to add, 4/26/21: No, not a conservation easement. Listening in on the trial today (wretched voice quality), looks like a bargain sale to a municipality. But a valuation case, nevertheless.

Combing through the Tax Court orders for blogfodder today, with nary an opinion or press release in sight, I came upon a motion and a name that brought back memories.

Ryszard Sala, Docket No. 3423-21, filed 4/8/21, has an attorney. We all know that attorneys must e-file in Tax Court.

Except.

Old Bill Wise is still in there pitching. Having once again moved for such relief, Ch J Maurice B (“Mighty Mo”) Foley graciously allows that “William J. Wise is exempted from efiling requirements for purposes of this proceeding.” Order, at p. 1.

All y’all must surely remember Old Bill, eh what? No? Old Bill has been around practicing law in Tax Court for sixty-two (count ’em, sixty-two) years. See my blogpost “(Old) Technophobes, Rejoice!” 12/18/13.

On a day when my internet crashed and I shot three hours trying to get minimal service restored, I needed something to make me feel so young. Old Bill, thanks. Joe Myrow and Mack Gordon got it right.