Readers with exceptional memories will recall that Judge Paris gave a further supplemental CDP to Merrick Rayle, 2019 T. C. Memo. 119, filed 9/12/19, closer to his Indiana home, namely, in The Windy City. If you don’t remember, see my blogpost “Chicago, Chicago,” 9/30/16.

Well, at the second remand, Merrick, though seeking an IA,  never submitted a Form 433-A, but kindly SO2 gave him a bunch of unsubstantiated expenses. The trouble was, Merrick was over the $50K cutoff for an IA streamliner. Merrick’s original deficiencies were below the $50K cutoff, but interest had raised them above. SO2 offered to do a streamliner if Merrick coughed up the $5543 to get below the bar.

Merrick said no, because five years back, when this roundy-round began, he was under the bar.

Judge Lauber isn’t having it.

“Petitioner is mistaken. He bases his argument on the fact that the notice of deficiency issued to him in January 2013 determined deficiencies and penalties totaling $43,939, so that his case qualified as a ‘small tax case’ under section 7463(a)(1). During the ensuing five years, however, a great deal of interest accrued on those assessed amounts, as well as additions to tax under section 6651(a)(2) for failure to pay. The IRS duly assessed that interest and those additions to tax. Those assessments–which are properly includible in his aggregate assessed balance–brought his total unpaid assessed liability to $55,433 by February 2018. See IRM pt. 5.14.5.2.” 2019 T. C. Memo. 119, at p. 14.

And Merrick’s dilatory tactics earn him no favor from Judge Lauber.

“SO2 carefully considered every issue petitioner raised during the lengthy CDP proceeding. Although petitioner continually missed deadlines, SO2 gave him every opportunity to supply verification of additional expenses. She offered him a regular IA with terms more generous than those his own Form 433-A would have warranted. And she offered him a streamlined IA conditioned on his making an upfront payment of $5,433 to reduce his balance as the IRM required. Petitioner refused all of her offers.” 2019 T. C. Memo. 119, at pp. 15-16.

Charles E. Bercy, Deceased, Elaine Bercy, Successor In Interest, And Elaine Bercy, 2019 T. C. Memo. 118, filed 9/11/19, tells the story of the late Charles E. Bercy, before he became the late Charles E. Bercy.

Chas was a hard money lender. This is one who does asset-based lending, free from the strictures of banks and financial institutions. It is the Wild West of lending, where the formalities of applications, loan committees, loan-to-value ratios, priorities of lien, and bushelbaskets of documentation take a second place to rate of return, quick-sale value of assets (whatever they may be), and character and capacity of the borrower.

I represented the heir-apparent to a hard-money dynasty, long ago in a galaxy far away. They’d lend on works of art, real estate, accounts receivable, jewelry, whatever. Paperwork was minimal, but their bankruptcy counsel was the best. And they never, ever took any prisoners.

While Chas wasn’t in their league, he did lend often, individually and through some grantor trusts and S Corps. He syndicated the loan he made individually, which is at issue here. He has a note with all the proper indicia of debt, although the copy proffered at trial was unsigned. Nevertheless, the debtor and Chas’s lawyer testified on the trial, enough to convince Judge Lauber that there was a note. But nobody could produce a UCC-1 for the custom furniture that was the collateral for the loan.

I’ll let you delve into the facts, the loan restructuring and the failed attempt to establish a greater business bad debt loss when the loan went south in the Black ’08, via a discounted present value analysis that showed great ingenuity but no proof. It isn’t enough to plan a structure; you have to build it.

I focus on IRS’ attempt to defeat the business aspect by harping on Chas’ real estate lending, and claiming the furniture lending was a one-off.

Judge Lauber rightly didn’t buy it.

“Respondent concedes that ‘Mr. Bercy was admittedly engaged in the business of real estate lending.’ But respondent contends that making personal property loans was outside the scope of that business. And in respondent’s view, the scale of Mr. Bercy’s non-real-estate lending activity was insufficiently robust to constitute a ‘trade or business’ distinct from his business of real estate lending.

“We are not persuaded to construe the term ‘trade or business’ so narrowly in this context. When previously considering the status of loans as ‘business debts’ under section 166, we have not segmented the taxpayer’s lending business according to the nature of the loan or type of customer. Rather, we have simply asked whether the taxpayer was in the business of lending money, separate and distinct from any other gainful employment he or she may have had.” 2019 T. C. Memo. 118, at pp. 13-14. (Citations and footnote omitted).

Now I never knew of a hard money lender who didn’t file UCC-1s or mortgages or negative pledge agreements. But maybe Judge Lauber gave the late Chas a bye.

Aristotle Meets Section 7430

Among the other disjecta membra of the late and wholly unlamented Tax Equity and Fiscal Responsibility Act (known to those unlucky enough to have to deal with same as “TEFRA”) is Section 7430 admins-and-legals, which Tax Court has always stoutly maintained can never be awarded because TEFRA proceedings don’t determine anyone’s tax liability.

Ya see, when a FPAA is decided, there remains one of two things: either the arithmetic of each partner’s individual liability for the year(s) at issue (no SNOD necessary, as it’s only arithmetic, but must be done) or a SNOD (because arithmetic won’t entirely determine said liability). But the FPAA decision can’t determine either, so no Section 7430(g) qualified offer. The offer can’t dispose of any individual’s liability entirely.

That’s how Judge Mark V Holmes knocks out Hurford Investments No. 2, Ltd., Hurford Management No. 2, LLC, Tax Matters Partner, Index No. 23017-11, filed 9/11/19.

All y’all (I’m in Texas again) will doubtless remember Hurford No. 2. No? Then dig my blogpost “Ah, That Silt,” 2/4/19, and the blogposts therein cited.

Well, Fed. Cir. did deal with the Section 7430(g) qualifieds, and echoing a former Chief Magistrate of The Land of the Free, said “yes we can” in BASR Partnership v. United States, 915 F.3d. 771 (Fed. Cir. 2019). So Hurford No. 2 wants a Rule 162 reconsideration, and argues BASR was a change in controlling law.

But Judge Holmes is ever The Great Dissenter.

First, “Appellate venue in this case would seem to lie in the Fifth Circuit, see IRC§7482(b)(1)(E), so we’ll follow that circuit’s precedent, see Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971). No Tax Court decision can ever be appealed to the Federal Circuit, so the proper pigeonhole for us to look into is whether we committed a ‘manifest error of law,’ not whether there has been a change in ‘controlling law.’” Order, at p. 2, footnote 4.

You sure, Judge? What about Section 7482(b)(2)? Isn’t Fed Cir one of “any United States Court of Appeals which may be designated by the Secretary and the taxpayer by stipulation in writing?” Never say never. Unlikely, but could happen.

Back to the specifics, “The offer that petitioner later made not only fails to settle the ‘liability’ of HI-2 — which, as a partnership, doesn’t have a tax liability at all — but also is not limited only to the adjustment in the FPAA and tries to settle the effect of this partnership-level proceeding on the liability of petitioner’s individual partners.

“Even if some party could make a qualified offer in some TEFRA case, HI-2’s offer to settle here was not a ‘qualified offer’ as the Code and regulation define that term.” Order, at p. 4.

Besides, Fed Cir got it wrong. Or so says Judge Holmes.

The magic words are “at issue.” IRC doesn’t define the term. Fed Cir says that means “in dispute.” OK, says Judge Holmes, but that’s only half the story. Whatever Court is deciding the issue, the Court has to be able to do so for all hands, in that case, at that time.

Sort of like Aristotle at the theatre: unity of itime, place and action. And, like Aristotle said, pity and fear, the usual outcomes of litigation, for at least one party thereto.

“In common legal English, for a question to be “at issue” means both that it is in dispute and that the Court may determine it in making its decision. Look, for example, at our own Rule 34(a)(1), which says ‘[t]he petition shall be complete, so as to enable ascertainment of the issues intended to be presented.” When pleadings are complete, we say that a case is”at issue.” Rule 38. In our recent case of Vento v. Commissioner, 152 T.C. No. 1 (2019), we held that we would not include in the computations leading to entry of a decision a matter that ‘was neither placed in issue by the pleadings, addressed as an issue at trial, nor discussed by this Court in its prior opinion.’ Id., slip op. at 13 (emphasis added).” Order, at p. 5.

For more about la famille Vento, see my blogpost “Non-Virgin and Non-Deductble,” 2/4/19.

And ultimately, the qualified offer can’t work with partnerships, even when the fallout from the FPAA decision is only arithmetic for each partner.

“The qualified-offer rules are also, in the run-of-the-mill deficiency cases, easy to administer even by almost innumerate judges — he has only to compare two numbers and ask which is the larger. But it would not be administrable in the typical partnership-level case where there might be a sea of partner-specific numbers for him to wade through them all before he reached the shore of simple comparison.” Order, at p. 6 (thoroughly misnumbered in the original, thereby proving Judge Holmes’ point about “almost innumerate judges.”). (Footnote omitted.)

Eric W. Johnson, the attorney who furnishes “honest representation at reasonable rates,” as starring in my blogpost thus entitled, is furnishing the same to Jason Stewart and Kristy Stewart, 2019 T. C. Memo. 116, filed 9/10/19.

But he did get testy with a RO, who dropped in on him to discuss an initial collection investigation after Jason and Kristy dropped a Letter 12153 for a CDP for a NFTL, claiming they were unable to pay and asking for an IA. Turns out Jason and Kristy self-reported more than a million in income over a couple years (hi, Judge Holmes), but paid nothing.

The RO’s notes of the meeting showed the meeting was something less than jolly.

“RO W’s notes state that Mr. Johnson was ‘uncooperative’ and ‘unwilling to provide financial information’ on petitioners’ behalf. RO W.’s notes also state that Mr. Johnson concluded the visit by informing him ‘we’re done’ and that Mr. Johnson directed RO W. out of his office.

“Also…RO W. sent Mr. Johnson a followup letter containing statements consistent with R. Wagner’s ICS history notes of the meeting from earlier that day. This letter stated: ‘You refused to provide any collection information and stated it would be provided directly to the office appeals. You then brusquely directed me to leave your office.’” 2019 T. C. Memo. 116, at p. 3. (Name omitted).

IRS followed up with a NITL, and Jason and Kristy asked for a CDP for that. The ICS was conducted by SO W., with whom Mr. Johnson got on a lot better.

“SO W. requested from Mr. Johnson the financial information from petitioners needed for IRS Collections to investigate and verify that financial information before CNC status could be granted. Mr. Johnson provided the requested financial information, a Collection Information Statement (CIS), to SO W. Mr. Johnson requested that petitioners be placed in CNC status for six months, as they were pursuing potential litigation, had fluctuating income, and could not currently pay their back taxes.” 2019 T. C. Memo. 116, at p. 4.

The CIS went from SO W to RO W, the latter reviewed same, and recommended monthly payments and no CNC. RO W.’s notes went into the administrative file.

“SO W. relied on the information and documents in respondent’s administrative file regarding petitioners to make his determinations. The ICS history, containing RO W’s comments regarding his visit with Mr. Johnson…, was a part of this administrative file.” 2019 T. C. Memo. 116, at p. 5. (Names omitted).

NOD issues, confirming collection actions.

Mr Johnson claims improper ex parte communication between RO W and SO W. “Petitioners contend that the ICS history transmitted to SO W. as part of the administrative file was an ex parte communication. They contend that they were not aware that RO W’s ‘gratuitous characterization’ of petitioner’s counsel was part of the administrative record. Petitioners request that their case be remanded to the Appeals Office and assigned to a different settlement officer who has not been exposed to the alleged ex parte communication. Respondent contends that the alleged ex parte communication was a permissible transmittal of petitioners’ administrative file between the revenue officer and the settlement officer during the CDP process.” 2019 T. C. Memo. 2019 T. C. Memo. 116, at p. 8.

Judge Kerrigan has this one.

“Generally, the administrative file transmitted to the Appeals Office by the revenue officer is not considered to be an ex parte communication. See id. sec. 2.03(4), 2012-10 I.R.B. at 459. Rev. Proc. 2012-18, sec. 2.03(4)(d), 2012-10 I.R.B. at 460, further states:

“The originating function, however, shall refrain from placing in the administrative file any notes, memoranda, or other documents that normally would not be included in the administrative file in the ordinary course of developing the case if the reason for including this material in the administrative file is to attempt to influence Appeals’ decision-making process. For example, the originating function should not include gratuitous comments in the case history, a memo to the file, or a transmittal document * * * if the substance of the comments would be prohibited if they were communicated to Appeals separate and apart from the administrative file. In contrast, it is permissible to contemporaneously include statements or documents that are pertinent to the originating function’s consideration of the case in the administrative file even if the substance of those comments, statements, or documents would be prohibited if they were communicated to Appeals separate and apart from the administrative file.” 2019 T. C. Memo. 116, at p. 9.

They key is whether the inter-agency communication was made to the substance of the case or an attempt to influence the outcome.

“Petitioners’ administrative file, which included RO W’s notes, was transmitted and reviewed by SO W. However, RO W’s notes did not address the substance of the issues or suggest any positions to be taken in petitioners’ CDP proceedings.” 2019 T. C. Memo. 116, at p. 10.

“Ex parte communications are allowed when the communications involve matters that are ministerial, administrative, or procedural and do not address the substance of the issues or positions taken in the case. See Rev. Proc. 2012-18, sec. 2.02(6), 2012-10 I.R.B. at 458. RO W’s notes in petitioners’ administrative file were procedural. While RO W did make comments regarding Mr. Johnson’s generally ‘uncooperative’ nature, these comments were made contemporaneously as a part of his job function as a revenue officer. See id. sec. 2.03(4)(d), 2012-10 I.R.B. at 460.” 2019 T. C. Memo. 116, at pp. 10-11.

No remand, NOD sustained.

C’mon, Judge, RO W’s remarks had nothing to do with his “job function as a revenue officer.” He was steamed at Mr. Johnson, whether justifiably or not I certainly cannot say, as I wasn’t there when Mr. Johnson showed RO W the door. But it’s clear that RO W and SO W are on the same team (Appeals’ statutory independence notwithstanding), and it’s as old as baseball that the pitcher who throws at a teammate starts a bench-clearing that every member of the team must join. And they don’t quickly forgive or forget.

STJ Robert N Armen, “The Judge With a Heart,” retired as of last Wednesday.

This blogger will miss him.

My readers will remember the Fairey Fireflying Edward G. Kurdziel, Jr., Docket No. 21186-12, filed 9/9/19. If you don’t, see my blogpost “The Excuse Sweepstakes,” 3/21/19.

Well, after the pretrial discovery and briefing, after the trial, and after the posttrial briefing, IRS finds they messed up the numbers and wants to amend their pleadings.

For one of the years at issue, Ed owes less post-amendment, so he’s cool with that. But there’s two more years.

“Commissioner now wants to make — after discovery, after the trial, after even the posttrial briefing — would mean that Kurdziel owes more to the IRS for two of the years at issue. The Commissioner has moved to amend his answer to increase the deficiencies he now wants.

“Kurdziel objects.” Order, at p. 3. Surprise, surprise.

Judge Holmes has this one.

“Section 6214(a) of the Code does give us jurisdiction ‘to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency* * * if claim therefor is asserted by the Secretary at or before the hearing or a rehearing.’ (emphases added). The italicized language is no bar to the Commissioner’s motion — though it might surprise a nonspecialist, that phrase doesn’t mean ‘at or before the trial,’ but means any time before our Court enters a final decision.” Order, at p. 3. (Citations omitted).

Now some of the changes result from the Section 469(i)(3)(a) phaseout of Ed’s rental real estate losses, and maybe Judge Holmes might let that go, as Ed wasn’t ambushed. “The revenue agent should have noticed this, but by the time of trial the Commissioner had. At the very start of trial, the Court raised it with the parties and Kurdziel’s lawyer specifically acknowledged that the phase out would apply to any posttrial computations and would be entirely mathematical.

“There’s no surprise and no unreasonable delay here. As the Commissioner rightly points out, there is much case law that allows amendments to conform to things that happen at trial.” Order, at p. 4. (Citations omitted).

But there’s a hitch. There’s usually a hitch.

“There’s a difference, however, in the somewhat more complicated changes that the Commissioner proposes for the treatment of the gross receipts from Mr. Kurdziel’s plane project. These were not brought up at trial. And the only excuse for delay that the Commissioner suggests for their late arrival is that he didn’t notice them until it came time to do the computations.” Order, at p. 4.

Judges have discretion when it comes to out-of-time amendments to pleadings, and Judge Holmes uses his.

“Justice doesn’t require letting him fix mistakes in his own notice of deficiency that he should have noticed a long time ago and that now come as a surprise to his adversary.” Order, at p. 5.

Ed wins that one. But I still wish he’d named his plane “Rufus T.”

Two-and-a-half years ago I addressed the august Tax Section of the American Bar Association, an exalted assemblage to which I do not belong (probably being too dusky of shoe), when I suggested that choice of trial should have some nexus to parties, witnesses, physical evidence or something.

The ABA Taxers thought any further requirement of filling in forms would further befog the hapless pro ses. Perhaps they were right, but I suggest that it wasn’t only the innocents who were in the trial venue game.

See my blogpost “Same Time, Next Year,” 3/3/17. It featured none other than Al Benavides and Louise A. Benavides, 2019 T.C. Memo. 115, filed 9/9/19, now back for some heavy deficiencies and Section 6663 fraud chops ( the 6663s are only on Al because IRS can’t prove Louise had guilty knowledge). Al and Louise had a boatload of unreported income via constructive dividends from the C Corp, which housed Al’s accounting and tax practice.

It’s the usual game, running money between entities, claiming business expenses when personal expenditures were involved. My older readers may recall the late Leona Helmsley, who played a similar game, albeit on a larger scale. Al also went down on a count of Section 7206(2) false returning in USDCDMT.

Al’s testimony doesn’t help. A sloppy bookkeeping claim from a forty-year CPA earns a Judge Pugh classic: “To suggest that taxpayers who made a living handling the tax and accounting matters of others should escape the fraud penalty because of sloppy bookkeeping–itself a badge of fraud–is risible. The ‘reasonable compensation’ argument advanced by Mr. Benavides is a dog that will not hunt. He did not report the diverted gross receipts on his personal returns as compensation from BCO or pay applicable self-employment taxes. He cannot ignore reality or rewrite history now that he has been caught out. Mr. Benavides’ intentioned steps to lower BCO’s taxable income (as well as his own) are clear and convincing evidence of the requisite fraudulent intent for BCO and Mr. Benavides alike.” 2019 T. C. Memo. 115, at p. 39.

Judge Pugh allows a reopener to show IRS satisfied the Section 6751(b) Boss Hoss requirement.

But it doesn’t matter for Louise. She isn’t getting the fraud chops.

As I said in my blogpost (Part Un), “No, not the one-hit wonder The Hombres campaigned in 1967. It’s the general view manifested in Tax Court when taxpayers request protective order, or make motions in limine, or motions to strike pleadings.” See my blogpost “Let It All Hang Out,” 9/17/13.

Some things never change.

Leon Max, Docket No. 20237-16, filed 9/6/19, has two in limines to IRS’ one, with trial less than two weeks off, and Judge Buch kicks all three to the cliché.

Maybe Max’s expert’s background doesn’t impress IRS, but “(H)is report is helpful to the Court in that it discusses industry practices and provides useful background information.” Order, at p. 2.

As for IRS’ experts, while one expresses conclusions and Max claims exceeds the expert’s area of expertise, Judge Buch doesn’t think so.

As for the other, Max’s concerns about old Rule 41 issues go away as the Rule was changed, and IRS claims they won’t introduce evidence of the sampling discussions between counsel.

Anyway, “(A)lthough we fully expect that Mr. Max may make any objections at trial he feels necessary, including relevance objections, we do not share his concerns about confusion of the witnesses or the Court. Witnesses testify to relevant facts, not legal standards. If questions relate to topics that are not relevant, the Court will address objections made at that time. We are not concerned that the Court will become confused as to the correct legal standard.” Order, at p. 3.

Melinda Jean Welwood, 2019 T.C. 113, filed 9/4/19, claims she was abused by her late husband, Mike, flogger of the low-income housing tax credits that gave a quick write-off but heavy recapture in later years.

The famous 1986 Internal Revenue Code put paid to this, among many other tax savers (to be charitable). So as part of a divorce that never happened, Mike conveyed half-interests in his write-off partnerships to Mel. What did happen, of course, was that the old write-offs came back as phantom income.

Mel and her trusty CPA filed, showing the income, but paying no tax, because Mel commendably spent the money taking care of Mike, who, after four (count ‘em, four) strokes, was massively disabled.

Mel claimed Mike abused her, but also stated on her CDP that Mike didn’t have “…the cognitive ability to peel an orange. The RS [Requesting Spouse] didn’t provide any dates of abuse or explain how the abuse is related to the tax matter.” Order, at p. 9.

And she stayed married to him, lived for a time in the same house, and paid his bills instead of IRS.

Judge Cohen: “We next examine whether the requesting spouse knew or had reason to know that there was an understatement or deficiency on the joint income tax return, or knew or had reason to know that the nonrequesting spouse would not or could not pay a reported but unpaid tax liability. We believe the evidence compels the conclusion that petitioner knew that M. [Mike] Welwood would not and could not pay the reported liabilities. Petitioner contends that her knowledge was obviated by a pattern of abuse throughout the marriage, but we are unpersuaded that any perceived abuse was material to the issues before us. She testified that she was fearful because her husband had guns, but the only incident she specifically described occurred…while he was in a nursing and rehabilitative care facility. During the incident M. Welwood stated that he wanted a gun in order to commit suicide. There is no evidence that he threatened petitioner with a gun or that he had access to a gun at the time.” 2019 T. C. Memo. 113, at pp. 21-22.

It doesn’t get better for Mel.

Mel knew about the tax deals’ back-end hits from her trusty CPA. She took them and the money they threw off, and paid Mike’s bills and hers. Yes, she had major health problems. But.

“Certain of petitioner’s health problems have been with her from birth. With respect to petitioner’s age-related health issues, they have not prevented her gainful employment and are not unusual. They may be a consideration in future collection efforts by the IRS. We agree with respondent that as of now this factor is neutral.

“By our estimation, petitioner’s knowledge weighs heavily against relief and all of the other relevant factors are neutral. Although petitioner’s situation is difficult and unfortunate, the circumstances are not compelling and do not justify relief from the joint liabilities. She offered no reasonable alternatives to the proposed collection actions and has suggested no abuse of discretion with respect to that determination. She chose only to pursue total relief under section 6015(f). We are not persuaded that she is entitled to such relief.” 2019 T. C. Memo. 113, at pp. 23-24.