A result dear to my heart is unfortunately not dear to Terrence Edward Aragoni, 2023 T. C. Sum. Op. 3, filed 1/25/23, despite artful drafting of the temporary spousal support order when Terry shed his loved-once.

I’ll let STJ Peter (“HB”) Panuthos tell the story.

“A court order (order), dated January 30, 2017, was issued by the Superior Court of California. Petitioner was ordered to pay $9,146 in monthly alimony. Under section 2 of the order, ‘temporary spousal support pursuant to this order shall continue until the death of either party.’ Per section 7 of the order, petitioner was also ordered to pay $15,000 on account of his ex-spouse’s attorney’s fees and costs. Payments were directed to be made to his ex-spouse’s attorney ‘in monthly installments…until paid in full.” 2023 T. C. Sum. Op. 3, at p. 2.

Note the date: this is a pre-TCJA order, so Sections 71 and 215 alimony deduction is still in play. The landmine that blows up most of the old alimony deductions is the Section 71(b)(1)(D) death-of-spouse cut-off.

And despite the artful language in Section 2, Terry’s loved-once’s attorney was no slouch.

Even though there’s plenty of argy-bargy about CA divorce law (and CA practitioners might find STJ Panuthos’ exegesis useful even in post-TCJA deals, because attorneys’ fees for divorce seem to survive death regardless), the document itself sinks Terry’s deduction.

“Even if we were to conclude that California law is unclear in regard to postdeath liability, a reasonable reading of the divorce instrument ‘based on the language of the document’ would support a finding that the liability would continue after the death of petitioner’s ex-spouse. Section 7 of the Order clearly states that payments were to continue until ‘paid in full.’” 2023 T. C. Sum. Op. 3, at p. 5. (Citation omitted).

When Congress shunts the duty to make legislation definite and certain off to administrative agencies charged with enforcing the latest legislation coruscation, the result is usually notices or other forms of off-the-cuff hints and hacks, notwithstanding the legislative invocation of the regulatory function. So it falls to Judge Nega to parse IRS Notice 2008-40, 2008-1 C.B. 72 that tries to paper over the gaps, in Michael Johnson and Cynthia Johnson, et al., 160 T. C. 2, filed 1/25/23. The als each get their own T. C. in idem verba.

IRS claims Mike’s and Cindy’s (and the als’) Sub S fails to get any Section 179D energy efficient commercial building property deduction for the HVAC upgrade of a VA hospital. If you’re claiming any EECBP deductions, read this. Judge Nega blows off each and every IRS quibble about the plain language of Notice 2008-40.

Mike and Cindy and their six (count ’em, six) trusty attorneys are finally brought down with victory in sight, as their claimed $1.073 million deduction shrinks to $304,640, Judge Nega running Mike’s and Cindy’s numbers through the Glasshouse laundromat.

“…VA allocated to [Sub S] the full amount of the section 179D deduction with respect to the EECBP installed in Building 200.  Edwards claimed a section 179D deduction of $1,073,237… which is equal to the product of $1.80 and 596,243, the square footage of Building 200. There is no indication in the record that any section 179D deductions have been taken with respect to Building 200 for any prior taxable years.

“Respondent contends that Edwards overstated the amount of the section 179D deduction because the cost of property does not exceed $304,640, the total amount [Sub S] billed to Hines VA for Building 200.” 160 T. C. 2, at p. 30.

Mike and Cindy and trusty attorneys claim Sub S stands in the shoes of VA and can claim the cost of any qualifying work Sub S did on the VA hospital, whenever done, if no deduction therefor was previously taken; and they did a bunch before year at issue. That qualifies them for a Taishoff “Good Try, Chutzpahdik Class.”

“We need not decide what the term ‘cost’ means generally for purposes of section 179D. Whatever the meaning of that term more broadly, under section 179D(a), the amount of the deduction allowed for a given taxable year is equal to the ‘cost of [EECBP] placed in service during the taxable year.’ Petitioners do not allege, and the record does not indicate, that any of the property installed in Building 200 as part of the original HVAC upgrade work was placed in service during [year at issue].” 160 T. C. 2, at p. 31.

Taishoff says if IRS tries to put out a new Notice raising the bar, might be worth trying the APA gambit; when is a Notice a regulation is disguise, with no public comment?

Post-Reusch, we all thought passport grab challenges barred litigating liability. And we’re still right, sort of. A review of SNODs or self-reporteds is still precluded, despite 2 Cir’s reversal of Reusch as moot (because IRS withdrew the delinquency cert and State restored the passport; see my blogpost “Ruesch to Judgment,” 6/25/20). Judge Emin (“Eminent”) Toro has much to say about the persuasive effect of Ruesch post-reversal in Blake M. Adams, 160 T. C. 1, filed 1/24/23.

Blake ran up $1.2 million in delinquents, that he wants to litigate although the time to do so is long gone. Threshold questions are scope and standard of review, but result would be the same either way, so Van Bemmelen remains a footnote.

Here IRS has the proofs that assessment was made and NFTLs filed for each year, and are still enforceable. Blake never filed for a CDP. I’ll discuss infra, as my expensive colleagues say, what happens when IRS hasn’t got the proofs, whereby hangs the title of today’s sermonette.

So IRS satisfied Section 7345(b)(1)(A) and (B) and (f). And when it comes to Ruesch‘s holding on the limits of Tax Court’s jurisdiction in passport grabs, Judge Eminent employs “somber reasoning and copious citation of precedent” to establish that he should follow the Ruesch reasoning, 160 T. C. 1, at pp. 10-12.

Blake’s Constitutional right to travel argument fails because it’s State, not Treasury or IRS, who lifts Blake’s passport. All pore l’il ol’ Tax Court can do is review IRS’ certification; as the famous underwear ad used to say, “What goes on after that is up to you,” “you” being State.

Looks like passport lifts are slam dunks for IRS, right? Not when their computer glitches don’t show compliance with Section 6323 at to NFTLs, and Section 6330 with respect to actual levies (NITLs aren’t enough per Section 7345 (b)(1)(C)(ii)), and that the delinquencies are enforceable.

IRS computer print-outs for Willard J. Belton and Martha-Alexander Belton,  T. C. Memo. 2023-13, filed 1/24/23, show dubious entries about years where SOL on collections ran (no longer enforceable), possible OICs or maybe IAs pending when a levy issued (a no-no per Section 6331(k)(1) and (2)). You can read Judge Eminent’s exhaustive (and exhausting) canvass of IRS’ TXMODA transcripts and the dilections therein for yourselves, T. C. Memo. 2023-13, at pp. 19-24, but be prepared to do likewise when your clients are under the cliché for grabbed passports.

Bottom-line, IRS is about $4K short for Will, and $6K short for Martha-A, in the serious delinquency stakes, on this record. But they can try again, if they can straighten their records out.

“We note in closing that our holding today does not preclude the Commissioner from filing another motion for summary judgment to demonstrate, through the record currently before the Court or through the introduction of other evidence, that levy was properly made with respect to the taxable year [X]…. But, given the important consequences that may follow from the Commissioner’s certification that an individual has a seriously delinquent tax debt—namely, the potential revocation (or denial) of a passport and the concomitant loss of the ability to travel outside the country—it is important for this Court to ensure that the Commissioner has strictly complied with the conditions Congress established in the statute.” T. C. Memo. 2023-13, at p. 26.

Has Judge Eminent created a backdoor CDP? This beats equitable tolling.

Stand by for silt.

I’ve blogged a lot of cases where spouses were represented by the same counsel at Appeals or in Tax Court, and where the conflict-of-interest toss was routinely applied. But not every joint representation is inherently conflicted, as Judge David Gustafson obligingly informs us in Joanne Gilmore, Docket 189-21L, filed 1/24/23.

Joanne is still married to George, whose story I told in my blogpost “Argue Your Own Credibility,” 4/12/22. Her latest beef is that, at her CDP,  no one from Appeals or her representative mentioned innocent spousery. But her rep did mention Joanne was seeking independent advice, and in fact she did file Form 8857, litigate the shootdown of her plea at Appeals, and stiped out with IRS.

Judge Gustafson: “… it is by no means true that a conflict exists every time one spouse seeks relief under section 6015. Where the two spouses remain married and have a shared financial situation, the grant of relief may have little practical effect on the non-requesting spouse, or might even have an advantageous effect on the household as a whole. In some innocent spouse cases, the non-requesting spouse does not intervene to oppose relief, and sometimes a non-requesting spouse affirmatively concurs in the granting of the relief. Therefore, a conflict cannot be presumed.” Order, at p. 11.

Joanne had an interest in the properties George didn’t sell, so Judge Gustafson isn’t remanding her to Appeals to get the CNC she desired. She still might have assets that would yield cash. And as for reallocating the overpayments of tax she made, which were credited to the earliest of the still-collectible years, IRS always wants to get the most for years where SOL on collection is running out, and anyway, Joanne stiped that away.

Judge Gustafson says remand here would be futile. Partial summary J for IRS.

Taishoff still says “Stipulate, don’t capitulate.”

But It Helps To Get The Paper Right

Michael L. Meyer, now or formerly an attorney, should’a heeded the abovestated. Even though he managed to get Calvin A. Lim and Helen K. Chu, T. C. Memo. 2023-11, filed 1/23/23, tossed when they sued him in Orange County Superior Court for reasons unclearly stated (T. C. Memo. 2023-11, at p. 8), Cal’s and Helen’s $1.6 million charitable deduction in Year One, and the Year Two carryover of $415K, bite the dust, despite Mike’s claim of “The Ultimate Plan: the Ultimate Tax, Estate and Charitable Plan.”

Mike creates an LLC, whose only assets are some promissory notes from Helen, payable to Helen and Cal. The LLC’s sole member is Cal’s and Helen’s Sub S, apparently operating a valid business; Cal and Helen are managers. Cal and Helen donate “units” (apparently membership interests in the LLC) to a 501(c)(3) charitable foundation created and run by Mike. Mike does all the paperwork, appraises the units (or maybe the notes; his paperwork isn’t of the best), issues the 170(f)(8)(A) contemporaneous written acknowledgment.

Except there is no documentation for the transfer of anything. And Mike gets paid a piece of the action (the tax savings).

Of course IRS enjoins Mike and grabs his client list, so Cal and Helen get an invitation to the party via a SNOD.

First, was there a transfer of something to Mike’s charity? Cal and Helen have only Mike’s form unsigned acknowledgment letter. But IRS wants summary J, Cal and Helen get every favorable inference. And Judge Albert G (“Scholar Al”) Lauber is lavish therewith.

“… we conclude that petitioners would face a decidedly uphill task in attempting to prove that [Sub S] actually transferred [LLC] units to [Mike’s charity] during [Year One]. However, viewing all facts in the light most favorable to petitioners, as we must at the summary judgment stage, we conclude that respondent is not entitled to judgment as a matter of law on this ground.” T. C. Memo. 2023-11, at p. 11.

Next, Mike’s “appraisal.” I use the quote marks advisedly.

“The regulations provide that ‘no part of the fee arrangement for a qualified appraisal can be based, in effect, on a percentage (or set of percentages) of the appraised value of the property.’ Treas. Reg. § 1.170A-13(c)(6)(i); see Alli v. Commissioner, T.C. Memo. 2014-15, 107 T.C.M. (CCH) 1082, 1087 n.14. We agree that Mr. Meyer’s fee was a prohibited appraisal fee within the meaning of this regulation.” T. C. Memo. 2023-11, at p. 12.

Cal’s and Helen’s trusty attorney plays the only card left. He argues Mike appraised the notes, not the LLC “units,” so he wasn’t appraising the “property transferred.” He gets a Taishoff “Good Try, Desperation Class.”

But Judge Scholar Al boots that one into touch.

“This argument does not pass the straight-face test. First, Mr. Meyer did not appraise the promissory notes. His appraisal contains no discussion of the factors that would affect the FMV of the notes, e.g., the seven-year term, the specified interest rate, prevailing market interest rates, and petitioners’ creditworthiness. His appraisal is explicitly captioned, ‘Appraisal of the Fair Market Value of the [LLC] Interests….” That he was appraising [LLC] units, not promissory notes, is plain from his methodology (if it can be called that). He reached his valuation conclusion by applying discounts for lack of control and lack of marketability, which he derived from closed-end investment funds. This is not how one would value promissory notes.” T. C. Memo. 2023-11, at p. 13.

And in any case, all the LLC had was the notes. Whatever the LLC was worth depended solely upon the worth of the notes.

Cal and Helen claim reasonable cause, based on advice from a different attorney and a different CPA. That’s all fact questions, and maybe these two can rescue Cal and Helen from the Section 6662 chops on the trial.

But read Judge Scholar Al deconstructing Mike’s paperwork. If you’re trying to pull a fast one, go slow with the paper.

Kari Jane Freman, Petitioner, T.C. Memo. 2023-10, filed 1/23/23, went down to then-spouse Rodney C. Freman (Intervenor)’s employer to take the Retirement Account drawdown from Rod’s account. She says she knew about the $90K piece, but not the entire $173K piece. And while she can’t establish spousal abuse, economic hardship, her forged signature on returns (although Judge Courtney D (“CD”) Jones does bail Kari out of admitting thereby that she has no standing for innocent spousery, by using the stipulation Kari signed that says she did sign the returns, T. C. Memo. 2023-10, at p. 12), or that she had lived separate from Rod for the requisite 12 months, Judge CD Jones manages to get Kari innocence to the extent of the overage above the $90K.

But Kari only has a high school education, and was taking care of the couple’s child. Rod was a currency trader and controlled the family’s finances.  There are two pieces here, understatement of tax in Year One and underpayments in Years Two and Three.

“Regarding the understatement of tax for [Year One], we find that this factor weighs against relief for the $90,000 Amount because Mr. Freman’s financial control does not negate Ms. Freman’s actual knowledge and clear awareness of that portion of the Retirement Account distribution. However, we find that this factor weighs in favor of relief for the amount of the distribution above the $90,000 Amount and negates Ms. Freman’s reason to know of that portion of the understatement for [Year One] because Mr. Freman assumed and sustained sole control of the finances; excluded Ms. Freman from involvement; rebuffed her attempts to be involved except when he was obligated to involve her; and misled Ms. Freman about the full extent of the distribution transaction.

“Regarding the underpayments of tax for [Years Two and Three], we find that this factor weighs in favor of relief and negates Ms.  Freman’s knowledge of Mr. Freman’s inability to pay the amounts due because Mr. Freman assumed and sustained control over all financial matters; Mr. Freman did not give Ms. Freman an opportunity to review the returns at issue and she did not know the amounts due; Mr. Freman was not forthcoming and ‘got angry’ when Ms. Freman tried to inquire about financial matters; and Mr. Freman otherwise excluded Ms. Freman from the finances, saying that he ‘had it handled’.” T. C. Memo. 2023-10, at p. 30. (Footnote omitted, but it says that even though Kari and Rod had joint accounts, Rod’s economic control outweighs any negative effect).

No lavish lifestyle helps Kari, and her spotty tax reporting and paying compliance shows good faith.

Takeaway- Financial control and superior education and employment by nonrequesting spouse tops sketchy proofs of requesting spouse.

Last March I chronicled the pretrial and trial behavior of Michael Zorn, Docket No. 25974-17, under the title “Don’t Raise Your Blood Pressure,” 3/30/22.

Today Judge Courtney D (“CD”) Jones has the outcome of the trial, and if this tale of Mike’s ripping off an old woman with terminal cancer and early dementia to support his tax-dodging, high-hog lifestyle does not raise your blood pressure, you might wish to stop reading this blogpost now.

Mike was an insurance peddler who had his MD license suspended, but peddled on regardless. He didn’t bother filing a return from 1997 onward. IRS hits Mike for eleven (count ’em, eleven) years’ worth of unfiled, unpaid, unestimated and fraudulently nonfiled.

Judge CD Jones tells the story of Mike’s raid on Mrs. Jewett’s money at pp. 12-15 of the transcript of this off-the-bencher, Michael Zorn, Docket No. 25974-17, filed 1/23/23.

She then marches through the factors for loans (Mike loses) and Section 6651(f) fraudulent nonfiling (Mike loses).

I can only say again what I said some five years ago: “I am reminded of Rudy Kipling’s story of an India long ago, where the hero handed the victim of an equally despicable fraud a horsewhip, and left the scene.”

The single most dangerous keystroke is that which sends the document to tribunal or adversary (or both). We may speak of clawbacks per FRE 502 and corrective resubmissions, but the ancient Japanese proverb remains true: “The word once spoken, not even the Emperor’s horsemen can return.”

However great the time pressure, read it again, slowly.

Judge Alina I. (“AIM”) Marshall provides an example that reinforces the aforesaid. To save embarrassment, I’ll call the attorney Jimmy.

Jimmy, “…filed a document titled ‘entry of appearance for respondent’. Upon review of that filing, the Court concludes that [Jimmy] is entering an appearance on behalf of petitioner. Accordingly, the Court will recharacterize counsel’s filing appropriately.”

Form 7 makes it easy. Just drag and drop your client’s name.

The order is Airreyon S. Lowe Docket No. 4629-20, filed 1/20/23.

DC Cir put paid to the dream of wealth of many Section 7623 hopefuls when they torpedoed Mandy Mobley Li, whose judicial defenestration I chronicled last year in extenso. I fully expected Tax Court’s hardlaboring clerks to delete every claimant, based solely upon the Ogden Sunseteers’ solemnly intoning “we didn’t get nuthin’.”

Of course, though Fighting Joe Insinga, Docket No. 9011-13W, passed from this vale of tears, his redoubtable successor, Ms. Amanda Gilmore, stepped into the fray and was greeted by a successful IRS motion to stay proceedings last November, after nine (count ’em, nine) years.

But there’s an even older case that today meets the same fate, Albert G. Hill, III, Docket No. 25539-10W, filed 1/18/23. I can’t help but wonder whether this Albert G. Hill, III, is the same Al III who starred in my blogpost “Three Point Play,” 10/25/21.

Howbeit, the OS claim they didn’t get nuthin’, but this Al III claims they did. For the last eleven years, there’s been some discovery jousting with the almost-obligatory sanctions motion, and an IRS motion for summary J that got bounced back in November, 2018. Then status reports.

Is now the time for the Li toss? As subjects worthy of blogging become fewer, I’m sorry to lose the whistleblowing crowd. Given the current political climate concerning IRS’ headcount (as to which I’ll say no more on this nonpolitical blog), the Ogden Sunseteers might want to take a more active role.

Robert B. Lucas, T. C. Memo. 2023-9, filed 1/17/23, had diabetes, which he treated with insulin in the year at issue. He also lost his job and took a draw from his retirement plan, which netted him a SNOD and the 10% whatever-it-is.

Robert conflates the taxability of the draw itself with the 10% whatever-it-is. The draw is taxable; health has nothing to do with it.

As regards the 10%, Judge Patrick J (“Scholar Pat”) Urda checks out the Section 72(t)(2)(A)(iii) exception, and finds the drawer must be “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.” T. C. Memo. 2023-9, at p. 4. And even though Reg. 1.72-17A(f)(2) includes diabetes as a condition preventing gainful employment, the question remains: did the condition prevent Robert from working?

Judge Scholar Pat: ” Mr. Lucas was diagnosed with diabetes… but was able to work as a software engineer for two years, including the year that he received the distribution from his 401(k) plan account, effectively treating his diabetes with a mix of insulin shots and other medications.” T. C. Memo. 2023-9, at p. 5.

No break for Robert.