Those magic words either open or close the door to a fight over liability for a tax, addition, or chop, or all of the above. Thus, when Joseph Thomas Lander and Kimberly W. Lander, 154 T. C. 7, filed 3/12/20, who admittedly did not receive the SNOD that the IRS mailed both to their last known residence and JT’s temporary abode in a Federal slammer, the question arises.

Was a meeting with Appeals, whereat JT & Kim disputed their liability to the extent that Appeals abated some of it, such an opportunity? Prior caselaw says that in an assessable, where no SNOD required, a trip to Appeals where the party assessed gets a chance to bukh about how IRS did them wrong, is sufficient. But what about where an unreceived SNOD is involved?

STJ Daniel A. (“Yuda”) Guy had this one, but since it’s a first-impression job, the generalities get a whack at it, and Judge Goeke, writing for a unanimous bench, hands down the full-dress T. C., saying, yes the trip to Appeals was a chance to contest.

“The record shows that petitioners were afforded a postassessment conference with the Appeals Office.  After the IRS sent petitioners a notice and demand for payment of the tax due…, they requested a reexamination of their tax liability.  The audit reconsideration process that followed began with a review of the matter by the Examination Division.  When the Examination Division reaffirmed the adjustments to petitioners’ tax liability as determined in the notice of deficiency, they requested and were granted an independent review in the Appeals Office.  AO B engaged with petitioners, took a fresh look at the record, conceded certain issues, and abated a significant portion of the tax previously assessed against them.  Only then did the IRS file the tax lien that led to the additional collection review proceedings in the Appeals Office and this action.” 154 T. C. 7, at pp. 31-32. (Name omitted).

It seems JT & Kim also asked for CNC, which Appeals never considered, and Kim wanted innocent spousery, which Appeals apparently also overlooked. So Judge Goeke remands for a hash-out for those.

Takeaway- If offered a trip to Appeals, take it, but lay everything on the table.

What You Never Got

After once again lamenting the constricted jurisdiction of pore l’il ole Tax Court, Judge Elizabeth A. (“Tex”) Copeland imparts the above lesson to Mark Alan Staples, 2020 T. C. Memo. 34, filed 3/11/20. Mark Alan is a disabled retiree from the US Patent Office. When he sought his pension from FERS (Federal Employees Retirement System), the Federal Retirers sent him off to get SSDI, which he did. Whereupon the Federal Retirers mulcted Mark Alan for the amount he got from SSDI against his FERS pension payments.

FERS did a couple re-sets (hi, Judge Holmes) over a couple years (hi again), chopping and changing the cut-outs, which Mark Alan protested, but when told to try it with Merit Systems Protection Board (apparently the appeals crowd for such cases), Judge Tex can’t find that Mark Alan did pursue his administrative remedies.

Howbeit, Mark Alan took a loss on his income tax return for the mulcts aforesaid.

Judge Tex says no can do.

“Petitioner contends that the reduction of his FERS annuity was a loss which he should be able to account for by deducting it from his income.  He claims the loss is akin to a gambling loss, casualty loss, disaster loss, theft loss, or business loss.  However, petitioner did not experience a gambling, casualty, disaster, theft, or business loss….  Instead, he did not receive additional anticipated income which, if received, would have been subject to tax.  There was no receipt of that income and thus no tax and likewise no applicable deduction.  We disagree with petitioner’s contention because he cannot deduct a loss for unrealized income.” 2020 T. C. Memo. 34, at pp. 8-9.

Then, having canvassed the FERS cut-outs of SSDI through judicial interpretation, legislative history and statutory construction, Judge Tex returns to the plight of pore l’il ole Tax Court.

“…we lack jurisdiction to decide employee benefit entitlement issues that fall within the purview of the various Federal agencies. However, we have jurisdiction under sections 6213 and 6512(b)(1) to redetermine an income tax deficiency or to determine an overpayment by petitioner.  The sole issue before us is whether the reduction to petitioner’s FERS annuity was a loss for which he is entitled to a deduction in the amount of the reduction.  In other words, petitioner seeks a deduction for an amount of income which he expected to realize but did not.

“Petitioner is a cash basis taxpayer.  It is well established that no deduction is allowed under any Code section for the loss of unrealized income by a cash basis taxpayer.” 2020 T. C. Memo. 34, at p. 11. (Copious citation of precedent and somber reasoning omitted).

Although claiming rent for a house in a residential community is a business expense for your picture framing business seems a wee bit of a stretch, Edwin D. Benton and Sheila E. Benton, 2020 T. C. Sum. Op.12, filed 3/11/20, manage to pull it off.

First, IRS blows an essential part of the play.

“The parties stipulated that petitioners did not reside in the house where Mr. Benton conducted his business.” 2020 T. C. Sum. Op. 12, at p. 8. Thus Section 280A(d), the residence smackdown, is off the table. IRS forgot Taishoff’s well-settled maxim: “Stipulate, Don’t Capitulate.”

Second, Ed has testimony that helps STJ Daniel A (“Yuda”) Guy put away IRS’s shootdown of Ed’s $38K rent deduction.

“Mr. Benton testified that he used the house exclusively for business purposes and offered photos to show that he displayed framed pictures and various types of artwork in some of the rooms.  In addition one of Mr. Benton’s customers appeared at trial and testified that she visited the house two or three times during the year in issue to pick up photos that Mr. Benton had framed for her and it was her impression that he used the house to conduct the framing business.  We conclude that petitioners did not use the house in question as a residence, see sec. 280A(d), and that section 280A is not applicable.” 2020 T. C. Sum Op. 12, at pp. 8-9.

Ed has trouble with his auto deduction (Section 274 roadblock), and Sheila doesn’t establish she had the 12 straight weeks of unemployment compensation she needs to duck the 10%  additional tax-early withdrawal penalty per Section 72(t)(2)(D) on her IRA drawdown.

So a Taishoff “Good Job” goes to Steven H. Hornstein, Esq., Ed’s and Sheila’s trusty attorney, who got IRS to stip away the Section 280A(d) defense.

From Hartford CT to Salt Lake City UT; from Philadelphia PA to San Francisco CA; from Los Angeles CA to Boston MA; from Milwaukee WI to Provo, UT; from The Glasshouse at 400 Second Street, NW, “to every living heart and hearthstone, all over this broad land,” (as a much better writer than I put it) the word has gone out.

“Due to concerns relating to coronavirus (COVID-19), the trial session scheduled to begin…is canceled and the parties do not need to appear at Court…. The Court expects that the parties will continue to work together to exchange information and work towards a resolution of the issue(s) in this case. If necessary, this case will be rescheduled for trial in due course.”

So play nice, every one: wash your hands, don’t touch your faces, avoid crowds and public spaces.

From the USTC website, 3/10/20:

Considering recent announcements and media coverage regarding the COVID-19/Coronavirus, the U.S. Tax Court would like to assure the public that the Court is following recommended guidelines provided by the Centers for Disease Control and Prevention.

• Effective March 9, 2020, and until further notice, out of an abundance of caution, the Court is encouraging social distancing and will therefore limit the number of people in the courtroom at any one time.
• If you are required to appear in Court and are experiencing any flu like symptoms, have a fever, or are coughing or sneezing, please contact the Court before appearing. The Court will make reasonable accommodations and reschedule appearances, hearings, and trials as needed.
• If you have recently traveled from an area with widespread or ongoing community spread of COVID-19 and you have symptoms of the disease (fever, cough, shortness of breath) reach out to your healthcare provider for details on how to proceed with proper medical care.

Stay informed by:

• Visiting the CDC website: https://www.cdc.gov
• Visiting the WHO website: https://www.who.int/health-topics/coronavirus

Thank you for your attention, and please monitor the Court’s website for updates regarding Court operations.

The Hombres’ one-hit wonder from 1967 furnished me with titles galore, so I revert yet again, to tell the story of a designated hitter from the wordprocessor of Judge Elizabeth A. (“Tex”) Copeland, Ryan Foster, Docket No. 7073-19, filed 3/10/20.

Ryan is apparently a potter who wants Section 280E ruled unconstitutional on Fifth, Eighth, and Sixteenth Amendment grounds, among others. Ryan is apparently a principal of High Mountain Medz LLC, a retailer of herbal medicaments legal in his home State, but proscribed by the Federales.

But before IRS can respond to Ryan’s summary J motion, Judge Tex needs Ryan to do as the headline hereof directs.

“A more detailed review of petitioner’s motion by this Court has illuminated issues with his summary judgment motion that must be addressed before respondent should be obligated to respond. Importantly, the factual assertions in petitioner’s summary judgment motion were not supported by affidavits or declarations made on personal knowledge or by documents.

“As a general rule, documents that are not part of the record must be introduced to the Court, in support of a motion for summary judgment, by way of an authenticating affidavit or declaration made on personal knowledge. See Rule 121(d); see also 11 James Wm. Moore, Moore’s Federal Practice, para. 56.92[3], at 56-209 (3d ed.2014). Statements in briefs do not constitute evidence. See Rule 143(c). In addition, documents referred to in a motion for summary judgment should be attached thereto and properly authenticated. See Fed.R.Evid. 901 and 902.2 Without documents identified by a proper affidavit or otherwise made admissible in evidence, factual assertions in a summary judgment motion are not admissible evidence, and they cannot be properly relied on by this Court in considering petitioner’s motion.” Order, at pp. 2-3 (Footnote omitted, but it says see FRE 901 for what needs authenticating, and FRE 902 for what is self-authenticating.).

All Ryan says is that he and his co-principals were never convicted of a crime. OK, but “(T)he factual inquiry key to all seven of petitioner’s above delineated legal and Constitutional challenges to respondent’s notice of deficiency is whether petitioner was trafficking in a controlled substance through an entity known as High Mountain Medz LLC (HMM), in which he was a principal. However, petitioner has put forth no evidence via affidavit or otherwise regarding HMM’s line of business.” Order, at p. 3.

Summary J denied, without prejudice.

Once again, in USTC, let it all hang out.

When a substantive Constitutional right or freedom is not involved (and it rarely is when taxation is concerned), the only test for the constitutionality of a statute is the rational basis test: could the legislature conclude that the enactment would promote a legitimate governmental purpose.

Of course, the enactment must not involve a hostile and oppressive discrimination against a suspect class.

In such cases, it doesn’t matter if the courts could formulate a better approach.

Thus, Judge Emin (“Eminent”) Toro, newest ornament on the Tax Court bench, disposes of the Constitutional challenge to Section 72(t) mounted by Sandra M. Conard, 154 T. C. 6, filed 3/10/20, while your blogger was busy with a real estate closing that turned into a sitcom, with one-liners flying all over the place.

Sandra claims the 10% additional tax, s/a/k/a the “early withdrawal penalty,” for those who grab their IRA or other pension-like monies before becoming either disabled or 59-1/2 years old violates the equal protection component of her Fifth Amendment right to due process of law.

Judge Eminent finds that the Supremes have found that neither age nor disability is a suspect class where taxes are concerned. And most importantly, there is an eminently rational basis (sorry, guys) for the age and disability carve-outs in Section 72(t).

“In proposing the enactment of section 72(t) as part of what became the Tax Reform Act of 1986 (TRA), Pub. L. No. 99-514, sec. 1123(a), 100 Stat. at 2472, the Senate Finance Committee reasoned that ‘[t]he absence of withdrawal restrictions in the case of some tax-favored arrangements allows participants in those arrangements to treat them as general savings accounts with favorable tax features rather than as retirement savings arrangements.’ S. Rept. No. 99-313, at 612 (1985), 1986-3 C.B. (Vol. 3) 612 (1985).” 154 T. C. 6, at pp.10-11 (Footnote omitted).

“If taxpayers face no disincentive for withdrawing amounts from qualified retirement plans long before their retirement years and without suffering any disability, it is easy to imagine that such amounts might be ‘diverted to nonretirement uses,’ thereby frustrating Congress’ objective of encouraging taxpayers to save for periods of their lives when they might not be able, or wish, to work. By the same token, allowing a disabled person–defined by the statute as a person who ‘is 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,’ sec. 72(t)(2)(A)(iii), (m)(7)–to receive distributions from a qualified retirement plan without paying the additional tax would be fully consistent with Congress’ objective of encouraging taxpayers to provide for times when they might not be able to work.” 154 T. C. 6, at pp. 12-13 (Footnote omitted, but it says even if judges might draw the lines elsewhere, that does not rise to a Constitutional impairment).

Be it tax or penalty, the 10% early withdrawal hit has a rational basis.

Sharon falls down under “her heavy burden of ‘negat[ing] every conceivable basis which might support’ the legislative arrangement under section 72(t).” 154 T. C. 6, at p. 13 (Citations omitted).

No T.C.s, Memos., or Sum Ops, or designated hitters today, but there are some appearances from old cases. So in case anybody cares, here they are.

Suzanne Jean McCrory, Docket No. 17861-18W, filed 3/9/20, folds a trio of whistleblowings, but Judge Patrick J. (“Scholar Pat”) Urda wants IRS to weigh in. Y’all will remember Suzanne Jean, the petitioner whom Judge Vasquez thought could never get a remand. But ex-Ch J Michael B (“Iron Mike”) Thornton thought she could, and gave her a full-dress T. C. See my blogpost “Anyone Can Whistle – And Get Remanded,” 4/11/19.

Next is an even older relic, Estate of Jeanette Ottovich, Deceased, Randy Ottovich, Harvey Ottovich, and Karen Rayl, Executors, Docket No. 25781-12L, filed 3/9/20. Unfortunately, today Judge Mark V Holmes has no more glorious old historical tidbits, such as the gem to be found in my blogpost “Trust Judge Holmes,” 4/20/18. Today it’s only a holding pattern until CA probate sorts out who administers what the late Jeanette owned, and substantiates the estate tax deductions.

Finally, Good Fortune Shipping, S. A., Docket No. 25327-12, filed 3/9/20. This is the follow-up to my follow-up to my blogpost “The Secret Sharer – Part Deux,” 11/1/18, as updated 2/21/20. The Good Fortunates’ attorney, having won in DC Cir, thereby tossing IRS’ blanket-toss of bearer stock in the Section 883 maritime largesse stakes, wants to bail: “…petitioner’s assets had been sold after the year in issue, that the corporate petitioner is defunct, and that his putative clients did not wish to spend any more money on the case.” Order, at p. 2.

My kind of clients; having grabbed the boodle, they scarpered.

Judge Mary Ann (“S.E.C. = She Eschews Cognomens”) Cohen tells us the rest of the story.

“Respondent filed a Motion to Dismiss for Failure to Properly Prosecute on the ground that petitioner had abandoned the case. Petitioner’s counsel declined an opportunity to respond to the motion.” Order, at p. 2. So would I have done, if my client had hied themselves off and told me they weren’t paying me.

The sole issue is whether the secret sharers were US persons, and they had the burden of proof thereon. Having not brought forth anything but hearsay declarations and presented no witnesses, Judge Cohen tosses the Good Fortunates and hits them with the $143K deficiency.

Note to IRS- Best of luck finding them. I’ll wager that, in the immortal words of the late great Charles Edward Anderson Berry, they’re “gone like the cool breeze.”

Only today it’s a filing that cannot be made electronically. I mean the Limited Entry of Appearance, as more particularly bounded and described in Administrative Order 2019-1, May 10, 2019.

Judge Gale gives us a designated hitter to man’splain the process to counsel for Betty A. Jenkins & Lincoln C. Jenkins, III, Docket No. 722-19L, filed 3/6/20.

Counsel, whom I’ll hereinafter designate as M, wants to enter a limited appearance so as to move to dismiss this petition from a CDP.

But M cannot file a Limited Entry of Appearance electronically or sooner than the commencement of the trial session wherein she seeks to appear. And that session doesn’t begin until Monday.

So, not being recognized as counsel for Betty & Linc, Judge Gale tosses M’s motion to dismiss along with her Limited Entry of Appearance.

May I suggest that M, or Betty & Linc, go find some CPA or EA and have them electronically file a motion to dismiss? See the list of e-fileable documents by pro ses at p. 83 of the Petitioners’ Guide.  It seems that CPAs and EAs get their documents accepted in Tax Court faster than attorneys.

Most wits, wags and wiseacres in the Section 6702 frivolous returns league follow the well-trodden paths of all-zeros 1040s, Form 4852 substitutes, and protester jive cribbed from the internet.

But when a 6702 type tries a new gambit, there’s a joy in novelty that overtakes my usual sense of “here we go again.” So today, Sun River Financial Trust, Jay A. Greek, Trustee, 2020 T. C. Memo. 30, filed 3/5/20, brings a smile to my battered visage. And even makes me forswear all the obvious puns I could have used as a headline for this blogpost or to designate the dodger in the text hereof, sending me back to Charlie Dickens’ memorable pal of Ollie Twist.

Jay gets hauled for a quartet of 1040s, showing taxable income that IRS concedes is correct. The all-zeros only comes up with the 1099s, A, B, and OID, which Jay uses to yield no tax due, and all of which IRS claims are bogus.

The 1099-OID dodge isn’t new. See my blogpost “Fact-OID? No, Fraud-OID,” 2/2/15. But in this variation lies the novelty.

Jay says IRS is wrong, because the Government Accountability Office (GAO) says IRS’ computers are “…’unreliable, inaccurate, untrustworthy and lack proper security.’  Contending that the IRS’ computers are ‘unable to produce a believable result’, petitioner stated that it was ‘reluctant’ to pay the penalties assessed against it without ‘proof that the mathematical calculations * * * [were] correct.’  Petitioner did not advance any additional arguments or request any collection alternatives.” 2020 T. C. Memo. 30, at p. 4.

While I am no fan of dodgers, however artful (or high-priced, or politically connected, or whatever), I gotta give Jay a Taishoff “well-played.”

But Judge Vasquez is not similarly inclined.

“Although petitioner was entitled to challenge the section 6702 penalties during the CDP hearing, petitioner did not present evidence or arguments addressing the merits of its liability for the section 6702 penalties.  During the hearing petitioner’s sole contention was that it was not liable for the section 6702 penalties because the IRS’ computers are not reliable.  On the basis of this contention petitioner demanded proof that the assessments of the section 6702 penalties were mathematically correct.

“Petitioner’s demand of proof does not equate to a meaningful challenge to its liability for the section 6702 penalties.  Petitioner did not alert SO D to any specific errors on its account.  Nor did it contend that its returns contained sufficient information or lacked frivolous positions.  Instead, petitioner made general allegations about the unreliability of the IRS’ computer system without connecting the GAO reports to the assessments at issue.  Accordingly, we find that petitioner did not properly raise its underlying liability for its section 6702 penalties during its CDP hearing.” 2020 T. C. Memo. 30, at pp. 11-12  (Name and footnote omitted, but see infra, as my high-priced colleagues would say).

“In addition we deem petitioner to have conceded the issue of whether it is liable for the sec. 6702 penalties because its petition contains no specific allegations or supporting facts regarding them.  See Rules 34(b)(4), 331(b)(4). Petitioner’s arguments at trial also do not raise any legitimate issue regarding these penalties.” 2020 T. C. Memo. 30, at p. 12, footnote 9).

I haven’t the slightest idea why I should, but I love this stuff.