I really could not let Richard J. O’Neill Trust, Anthony R. Moiso, Trustee, T. C.  Memo. 2022-108, filed 10/27/22, pass without a further shot into dead TEFRA. The late O’Neill put his assets into the trust before he became the late O’Neill. Key asset was his 86.12% membership interest in RMV, an LLC.

In year of death and next succeeding year, RMV realized healthy capital gains, which flowed through RMV to the trust. In year of death, O’Neill’s estate borrowed from RMV at 9% (which IRS challenged, and the parties settled at 6%; they also agreed that the worth of the trust’s investment in RMV was increased by $10 million). Of course, the 9% interest the trust paid RMV flowed right back to the trust, and the note for the borrowing was adjusted to drop the interest rate to 6%.

The trust got a refund four (count ’em, four) years after they paid the taxes on the flowthrough capital gain. IRS gave the trust a SNOD, claiming the trust had no right to the refund.

Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan finds the trust’s and RMV’s paperwork defective, and that sinks the refund.

“RMV did not file an amended partnership income tax return for 2009, 2010, 2014, or 2015. The trust did not file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), with respect to RMV for 2009, 2010, 2014, or 2015.” T. C. Memo. 2022-108, at p. 3.

First, the trust says claim of right.

“Section 1341 addresses instances in which a taxpayer includes an item in gross income for a prior taxable year because it appeared that the taxpayer had an unrestricted right to the item of income. A deduction is allowed after the close of the prior taxable year if it is established that the taxpayer did not have an unrestricted right to that item. § 1341(a). Pursuant to section 1341 a taxpayer may be eligible for a refund.” T. C. Memo. 2022-108, at p. 4.

Problem here is right goods, wrong customer. RMV treated the items (capital gain and interest) as income in the amount of $X. The trust wants to treat them differently. But these are partnership items, and must be determined if disputed at partnership level; RMV never amended its returns for the years at issue. Neither did the trust file the inconsistency paperwork.

The trust’s bœuf with RMV is that RMV understated its basis in the capital assets sold, so the trust’s gain was overstated. But the proceeds RMV distributed to the trust were never questioned or disputed; the trust’s right to the proceeds was never restricted.

And the renegotiation of the interest rate on the note was voluntary. Neither RMV nor the trust was under any challenge as to the payment, only what IRS allowed the estate to deduct.

The trust claims mitigation, but Section 1314 requires a mitigation claim to be filed for the years in which the challenged determination was made. The trust is filing in the wrong year.

How about equitable recoupment?

“As with its claim of right and mitigation provision arguments, the trust’s reliance on the doctrine of equitable recoupment fails in part because the trust is not the appropriate party to seek a refund in this case. The deficiency upon which the trust bases its claim for recoupment arises from deficiencies directly related to the estate’s taxes, not the trust’s.

“Furthermore, the requirements of equitable recoupment are not met. Respondent’s determination is based on the disallowance of the trust’s claimed reduction of tax liability pursuant to section 1341. This determination is not inconsistent with the trust’s time-barred income tax liabilities for tax years 2009 and 2010. The liabilities for 2009 and 2010 have no transactional connection with respondent’s denial under the claim of right.” T. C. Memo. 2022-108, at p. 7.

Now TEFRA is history, and I didn’t mourn its passing. I’m sure the trustee and his trusty attorneys (who get a deserved Taishoff “Good Try”) are even less unhappy at the demise of TEFRA.

But before we rejoice too loudly, are we so sure that the Bipartisan Budget Act solved the problem of partnership-partner inconsistency any better? Are we so sure that the partnership representative under the new régime, who may not even be a fiduciary, much less a partner, is any better than the old TMP?

Here’s a new one for the CLE merchants, from an off-the-bencher by Judge Mark V. Holmes. When it comes sending a statute sideways, Judge Holmes has few equals, although “a decent respect for the opinion of mankind” compels me to credit Judge Emin (“Eminent”) Toro for his role in my blogpost “Eminently Evidentiary,” 4/26/22.

Pia O. Bacigalupi, Docket No. 20480-21, filed 10/27/22, wants innocent spousery, after deadbeat loved-once divorced her and left her with $300K of unpaid self-reporteds.

Well, Pia is post-Taxpayer First, so Section 6015(e)(7) says that all Tax Court review must be de novo, but all Tax Court can consider is the administrative record. How one can have a trial de novo when all the evidence has been admitted and all facts found is beyond me. Of course, there are the exceptions for newly-discovered evidence or previously unavailable evidence.

Pia has a sad tale to tell. Loved-once concealed his stockbrokering income, Pia only made money designing jewelry and a part-time salesclerk job. She testifies to some equity splitting in the marital domicile with loved-once, wherein she still lives; Judge Holmes appears to discount the value thereof with no very extensive evidence.

Son’s $50K per year college bill, which got paid from marital assets, likewise gets de novo treatment, as Judge Holmes discards the other cases as decided under abuse-of-discretion standard. “I’m not sure that paying college tuition is this day and age is a lavish lifestyle.” Transcript, at p. 15.

Anyway, the bottom line is that Pia tells her sad tale on the trial in Tax Court, on the stand, under oath. And maybe that’s newly-discovered evidence.

“However, in this particular case, I will assume the testimony given under oath and subject to cross-examination, like the testimony given by Mrs. Bacigalupi, is this newly-discovered evidence, because when she applied for innocent spouse relief, she wasn’t able to give sworn testimony and was not subject to cross-examination.” Transcript, at p. 5.

Taishoff says, so now every Appeals hearing from a denial of innocent spousery means a full-dress trial at Appeals, with counsel for IRS, sworn direct testimony, rebuttal testimony, cross-examination of witnesses, and evidentiary rulings? And all that must be part of the administrative record? Btw, since when did AOs get the right to swear witnesses and make evidentiary rulings? And where will the court reporters come from? Do innocent spouse hearings now get Administrative Law Judges?

Not so fast.

“As I said, I’m not deciding this for all cases in the future.” Transcript, at p. 5.

It’s been a wee while since Judge Holmes last slid a spanner into a Congressional gearjammer. See my blogpost “Judge, He Didn’t Mean It,” 5/17/12.

Even though this is a small-claimer don’t-quote-me, I can see some of my colleagues giving this gambit a try.

Stipulations are the bedrock of Tax Court practice. So stated the late (now electronically-immortalized) Judge Dawson in Branerton v. Com’r, 61 T. C. 691 (1974), at p. 692.

Excelsior Aggregates, LLC, Big Escambia Ventures, LLC, Tax Matters Partner, et al., Docket No. 20608-18, filed 10/27/22, are true exemplars of that sacred pronouncement. They were working with IRS on Stipulation of Agreed Facts No. 5 (count ’em, five), when IRS moved for an OSC to deem same admitted per Rule 91(f).

Before my sophisticated readers place hands on hips and call for an off-side whistle, Judge Albert G (“Scholar Al”) Lauber has it covered.

“Respondent appears to have filed his Motion protectively because of an impending deadline of October 7, 2022, set forth in the Pretrial Order (docket entry #97), for filing Rule 91(f) Motions.” Order, at p. 1.

Well, after the Big Scambies respond, Judge Scholar Al holds a phoneathon, and it looks like the Big Scambies and IRS can sort out Stip Five, so motion for OSC denied without prejudice. And Judge Scholar Al amends the Pretrial Order to allow more time for filing stips, even up to the morning of trial.

Because during the phoneathon, the parties said they were negotiating yet another Stip of Agreed Facts.

Takeaway- If you need more time, ask. Stipulate, don’t anticipate.

I’ve often proclaimed the death of Section 7623 since DC Cir sent off Mandy Mobley Li. There have been so few whistleblower cases showing up on the Tax Court website that I’d thought the species had gone extinct.

But today we have the resurrection of an antique, Jason Douglas Strader & Taunya Sylvia Strader, Docket No. 13069-14W, filed 10/26/22. Back eight (count ’em, eight) years ago, the Ogden Sunseteers bounced the Straders’ Form 211, but the bounce only went to JD; no record of a bounce to Taunya. JD & Taunya petitioned the bounce, but the OS withdrew the bounce, stating it was a mistake.

There followed sixteen (count ’em, sixteen) status reports over the last eight years. Finally IRS moves to bounce Taunya, but the parties tell Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan that they want a remand to Ogden. Ch J TBS is down with that, providing she doesn’t retain jurisdiction.

“In Whistleblower 769-16W v. Commissioner of Internal Revenue, 159 T.C. No. 2, 2022 WL 3106645 (Aug. 4, 2022), the Court held that we have discretion to remand a petitioner’s claims to the Whistleblower Office for further consideration without retaining jurisdiction.” Order, at p. 1.

So Ch J TBS sends all hands back to Ogden. Maybe IRS actually collected money off the Straders’ tip.

Oh, and for the story on 769-16W, see my blogpost “Remand and Retreat,” 8/4/22.

I do not wish anyone to suppose that I am seeking to supplant The Great Chieftain of The Jersey Boys, whose prep course for The Biennial Slaughter of the Innocents, a/k/a The United States Tax Court Admission Examination, is justifiably celebrated by those who took the course and studied diligently, and who made it.

No, I just want to drop the odd hint of the wrinkled corners of FRE, where might lurk a question that wends its way to that exam.

We have Judge Albert G (“Scholar Al”) Lauber distinguishing between paper and electrons in Oconee Landing Property, LLC, Oconee Landing Investors, LLC, Tax Matters Partner, Docket No. 11814-19, filed 10/25/22.

The Oconees want to preclude some business records that IRS wants to put in. There are four (count ’em, four) batches, all of which are asserted to be business records, but the last is a printout of e-mail threads.

Judge Scholar Al gives FRE §803(6) a thorough workout, and I can do no better than quote him.

“A statement is hearsay if the declarant made the statement outside of the current trial or hearing and a party offers the statement to prove the truth of a matter asserted. FRE 801(c).

“One exception to the rule against hearsay is the business records exception. FRE 803(6). To qualify for this exception, the record at issue must have been made at or near the time by (or from information transmitted by) someone with knowledge; must be kept in the course of a regularly conducted activity of a business or organization; and must have been made as part of the regular practice of that activity. FRE 803(6)(A)-(C). These conditions may be established by testimony from the custodian of records or other qualified witness, or by a certification that complies with FRE 902(11). See FRE 803(6)(D). The business records exception will not apply if the opponent shows that the source of the information or the method or circumstances of its preparation are untrustworthy. FRE 803(6)(E).” Order, at p. 1.

The Oconees object that the batches are hearsay, and so they are, but the certification accompanying each complies with FRE§§803(6) and 902(11). And the objection that the certfications themselves are hearsay fares no better.

“Although petitioner does not dispute that the attesting person is a custodian of records of the organization that created or maintained the records, petitioner insists that each custodian must be called as a witness at trial and cross-examined to determine whether he or she has personal knowledge of the records’ contents and the manner in which they were maintained. Petitioner’s argument is wholly unpersuasive. The whole point of securing a declaration under penalties of perjury is to eliminate the need to call the custodian as a witness at trial. FRE 803(6)(D) would be meaningless if the custodian, having executed a proper declaration, had to be called as a witness at trial with respect to each business record he or she had already certified.” Order, at p. 3.

The certifier needn’t be familiar with each piece of paper in the batch. “In the Tax Court, taxpayers and the IRS routinely subpoena relevant business records from banks, insurance companies, brokerage houses, and other organizations. These entities may have a vast number of responsive documents in their files. An insurance company, for example, may produce its entire claim file for the taxpayer’s account; that file may contain insurance contracts, financial records, correspondence, internal memoranda, records of receipts and payments, and canceled checks. The custodian of records for the insurance company could not possibly have personal knowledge of the creation and maintenance of each and every item.” Order, at p. 3.

All the certifier attests is that these are what’s in the files, and that they were prepared in the ordinary course of business and relied upon.

The rest of the Oconees’ objections are tossed without much comment, but the cumulative evidence draws the following: “… while cumulative testimony may waste trial time, we can discern no harm or prejudice from assertedly cumulative documents appearing as attachments to a stipulation of facts.” Order, at p. 3.

But e-mail threads require the human touch.

“We will accord slightly different treatment to the exhibits consisting of emails or email chains…. We will admit these exhibits as the authentic business records of M, but only for the fact that the statements shown therein were made by the authoring persons at the times and dates shown. If a party wishes to have any email admitted for the truth of the statements appearing therein, the party will need to show it to an appropriate witness at trial.” Order, at pp. 3-4. (Name omitted, but it will be familiar to my long-term readers).

Interesting distinction. Are e-mails somehow less credible than paper letters? And how about those online business records: see my blogpost “The Forty Million,” 4/29/15.

.

This argument avails George P. Manzolillo and Lucy P. Manzolillo, T. C. Memo. 2022-107, filed 10/24/22 nought.

George and Lucy got caught in the toils of the newlywed APTC.

I’ve avoided any comment that savors in any way of politics in this my blog. But the temptation that arises when the Affordable Care Act swims into my ken is nearly overwhelming. I’ll resist yet again, making my views known elsewhere.

George and Lucy got married during year at issue. They bought health insurance via the FL marketplace and got the Advance Premium Tax Credit. But when they filed their MFJ, their Form 8962 reconciler misstated the APTC they actually received, and George and Lucy never filled out Part V.

IRS, probably just as confused as George and Lucy (and maybe as confused as you and I), first froze and then unfroze their refund. Thereafter IRS audited their return, and issued a SNOD which ignored the newlywed calculation. George and Lucy petitioned timely, but didn’t mention the newlywed calculation for a year thereafter. When they did so, IRS recalculated the deficiency. And put four (count ’em, four) IRS attorneys on this case.

George and Lucy claim the unfrozen refund bars the SNOD, even in the reduced amount.

Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan rejects.

“Petitioners assert that respondent is precluded from increasing their tax liability because they received a refund for [year at issue]. Their position is inconsistent with our caselaw.” T. C. Memo. 2022-107, at p. 4.

“Somber reasoning and copious citation of precedent” follow. You can read all of it at T. C. Memo. 2022-107, at pp. 4-5.

Whatever your views on the wisdom or otherwise of dealing thus with payment for healthcare, so long as it remains it will furnish a fertile field for errors.

Please spare my comments section from philippics one way or the other.

Off-Topic

This post is not about Section 6751(b). I had intended it to be music criticism, but reality left criticism gasping miles behind.

I saw this afternoon the final performance of Luigi Cherubini’s opera “Medea” at the Metropolitan Opera. Live, not HD.

In 45 years of opera-going, I never saw anything like this. It was more than a one-woman show: it was a feat for the ages.

The audience approved. Photo below (taken post-performance).

The Real Boss Hoss is Sondra Radvanovsky.

Ya gotta admire Judge Emin (“Eminent”) Toro’s patience. When a frivolite who has already lost some Section 6702 frivolity chops years ago comes back, claiming gross income twice the US GDP, and alleging a bunch specious jive (hi, Judge Holmes) like non-existent withholdings and gross income he probably never got (but never disavowed at trial despite Judge Eminent’s repeated attempts to bail him out), it takes a patient judge to give him a 36 (count ’em, 36) page off-the-bencher to try to show him the need to mend his ways.

Here’s an example.

“For Mr. Umoren’s 2018 tax year, the Commissioner assessed tax of $363,644,242. This amount is rather striking in the circumstances here, and we would have been receptive to an argument from Mr. Umoren that his actual income in 2018 was insufficient to support such a large assessment.

“But Mr. Umoren refused, after repeated invitations, to make that argument. Notwithstanding efforts by IRS collections, IRS Appeals, the Commissioner’s counsel, and this Court to solicit information regarding his true liability for 2018, Mr.  Umoren stands by his original return. As a reminder, that return reported wages of nearly $7 billion and business income of almost $40 trillion (or about twice as much as the gross domestic product of the United States for 2018). And so, in the face of an assessment derived from adjusted gross income of $982,981,109, Mr. Umoren persists in arguing that his actual adjusted gross income was higher than the amount used by the Commissioner. He eventually testified that he actually received only about $25,000 of that income. But the Commissioner pointed out that an excerpt of a bank statement for 2015 that Mr. Umoren provided at trial showed two debits (that is, increases in
Mr. Umoren’s balance) totaling around $20,000 in one month, casting doubt on the reliability of the $25,000 figure.” Transcript, at pp. 26-27.

There’s more, but it’s painful. Judge Eminent suggests Umoren may be delusional.

“We do not doubt the sincerity with which Mr. Umoren advances his positions. ‘Some people believe with great fervor preposterous things that just happen to coincide with their self-interest.’ Coleman v. Commissioner, 791 F.2d at 69. As the Court said in a similar case, such sincerity is but ‘a manifestation of a sad fact about human nature; [that is,] that we can talk ourselves into things that we know, on some other level of our consciousness, cannot be true. Therefore, whatever sincerity [Mr. Umoren] has will not exempt him completely from liability, though we do take it into account.’ Transcript of Bench Opinion at 10, Wnuck v. Commissioner  (No. 26068-09) (Jan. 12, 2011).” Transcript, at p. 34.

Of course, Scott Wnuck went on to a higher level. See my blogpost “One’ll Get You Five,” 5/31/11.

Decide for yourselves. Isang E. Umoren, Docket No. 10226-21L, filed 10/21/22.

I would have thought that, in the eight (count ’em, eight) years since The Great Chieftain of the Jersey Boys first tossed the Section 6751(b) Boss Hoss spanner in the Tax Court chopsworks (see my blogpost “Penalty Kick,” 7/17/14), IRS’ grunts would have gotten the message to reach for a CPAF at every exam, before they breathed a word of chops or first set finger to keyboard to write up the delictions discovered thereat; and that IRS’ counsel would first seek after said fully-executed CPAF the moment they got the admin record.

Apparently not, so far as STJ Diana L. (“Sidewalks of New York”) Leyden is concerned. Today she has five (count ’em, five) orders of like tenor to Maria Reilly &. James Reilly, Docket No. 29523-21S, filed 10/21/22. I picked Maria & Jim at random. All the orders are also small-claimers, and although I haven’t checked, I’ll wager all the petitioners are pro seses.

After a review of Section 6751(b), STJ Di admonishes IRS’ counsel.

“If respondent wishes to continue to assert the accuracy-related penalty under section 6662(a) in this case, he shall file a status report and attach thereto a Case History Transcript and any other relevant documents to demonstrate compliance with section 6751(b)(1). Alternatively, if respondent concludes that he did not comply with the requirement under section 6751(b)(1) with respect to the accuracy-related penalty under section 6662(a), he should consider conceding that penalty and notify the Court by filing a status report.” Order, at p. 2.

I suspect that if any petitioner is represented by one of the illustrious members of the ABA Tax Section, to which august body I do not belong, or even one of the ultrasophisticated readers of this my blog, such astute counsel would have raised want of Boss Hossery in the petition.

Word to IRS: Next July we celebrate the 25th anniversary of the enactment of The Internal Revenue Service Restructuring and Reform Act of 1998, whose Section 3306(a) first set forth the  Section 6751(b) we all know and love. Might it not be well to move from the last decade of the Twentieth Century into the second decade of the Twenty-First?

STJ Peter (“HB”) Panuthos tells the sad tale of Joshua M. Yaguda and Joeli Yaguda, T. C. Sum. Op. 2022-21, filed 10/20/22. Josh and Jo have 10% of EFI (a Sub S Corp), while daughter (under age 18 in year at issue) has 5%. EFI comes unglued in the Black ’08, and files Ch 11, but the year before Josh goes down for State securities fraud.

EFI gets run by a Court-appointed bankruptcy trustee, who runs the business and liquidates the assets, leaving Josh, Jo, and daughter with a $97K deficiency plus five-and-ten substantial understatement chop. Meantime, the local DA in the securities fraud case gets a receiver appointed to hold the Sub S stock for the benefit of the defrauded, but said receiver does nothing. Josh and Jo get the K-1s showing gains, but don’t report same, although they file timely and report everything else. The bankruptcy trustee told Josh and Jo that the State receiver effectively abandoned the Sub S stock.

Josh and Jo claim the State receiver should get the gain and pay the taxes, as the State court ordered the receiver to get the stock. In the case of a bankrupt S Corp, the S Corp is not a separate estate, and its shareholders still get the pass-through tax incidents even if they get no benefit therefrom; see Sections 1398 and 1399.

“Petitioners submitted the record in the criminal proceedings in support of the receivership’s notice purportedly assuming ownership of the EFI interest. The Lis Pendens notice includes the EFI interest, and the sentencing transcript notes that petitioner’s interest in EFI, subject to the bankruptcy proceedings, is assigned to the District Attorney’s Office…. Nevertheless, the record does not support a finding that the receivership exercised control or ownership of the EFI interest. Rather, the sentencing hearing transcripts reflect the [State] court’s intention to defer to the bankruptcy trustee, requesting information about the proceedings and any distributions. Even if the receivership had authority to claim the EFI interest, in the letter… the bankruptcy trustee informed petitioners that the receivership trustee had abandoned the EFI interest, leaving the shares in the ownership of petitioners.” T. C. Sum. Op. 2022-21, at p. 5.

Alternatively, Josh and Jo claim they abandoned the EFI stock. But the caselaw says abandonment must be manifested by an affirmative act, and there’s none in the record. Intention is insufficient.

Any 468B Qualified Settlement Fund argument fails, as the State receiver never took ownership of the stock.

IRS stuck Josh and Jo with daughter’s EFI phantom gain, which they try to foist onto daughter. But the Kiddie Tax (Section 1(g)) puts paid to that move.

STJ Panuthos tempers the wind to the shorn lamb. Josh and Jo avoid the chop.

“Petitioners made a reasonable, good faith effort to correctly assess their tax liability. Petitioners timely filed their tax return, reported other passive income, and provided documentation in support. Further, they relied on the assistance of a CPA in preparing their return. It was not entirely clear from the proceedings in the [State] Court and the bankruptcy court the tax treatment of the shares in EFI.

“Given the complexity of the interplay between the bankruptcy proceedings and the receivership, and further noting that petitioners did not actually receive any funds as a distribution from EFI, we conclude that petitioners’ failure to include the distributive share of income of EFI in the year in issue does not subject them to the penalty that respondent determined.” T. C. Sum. Op. 2022-21, at p. 9.