Who Cares?

Whether she’s a partner (direct or indirect), or not, Judge Holmes is on the case. And so Ann S. Carrino, et al., Docket No. 27376-09, filed 12/18/18, doesn’t get a new SNOD, and IRS doesn’t get to fight over whether Ann is a direct or indirect partner in her ex’s LLC.

Even before doing the Rule 155 beancount, both Ann and IRS filed Rule 161 reconsideration. And Judge Holmes shoots them both down.

IRS wants Judge Holmes to make clear that all he decided was that Ann S. wasn’t a direct partner; IRS wants to fight about Ann being an indirect partner. But Tax Court has no jurisdiction under TEFRA to decide which partner is direct or indirect. Based on her ex’s late filed amended return, all Ann is, is a holder of a community-property interest under CA law. She won, and so the FPAA that conferred jurisdiction on Tax Court is wrong when it claims she was a partner.

Ann says, OK, that means that the SNOD I got was invalid, so I get a new one (and maybe SOL has run).

Not quite, says Judge Holmes.

“Ms. Carrino argues in her individual case that, because we have jurisdiction in the partnership case, respondent had no right to issue her a notice of deficiency that asserted she had failed to report her share of community-property income. She asserts that ‘Whether the Court’s determination that [she] was not a partner in CR LP makes it an affected item or an item which has become a nonpartnership item . . . [she] is entitled to a superseding deficiency notice from the Commissioner if the taxability of her community property interest in 2003 in CR LLC remains an issue with [her ex].” This assertion, in turn, seems to flow from her view that her community-property interest in her ex’s partnership interest becomes an ‘affected item’ under TEFRA with her victory in the partnership case.

“But this is not true. The central holding in the individual case was that none of this mattered — under California’s community-property rules, she is treated as receiving income in 2003 regardless of whether she was a partner in her husband’s partnership. This means that the notice of deficiency was determining an adjustment to a nonpartnership item. Once she filed a timely petition challenging that valid notice of deficiency we had jurisdiction to redetermine that determination.” Order, at p. 2.

Vintage Holmes.

We think of the Section 6663 75% chop in the singular, the famous ten (count ‘em, ten) badges of fraud, applied to a phony return. But as the insomniac telehucksters like to yell to jolt us awake, “But wait! There’s more!”

And more is the Section 6651(f) 75% add-on “if any failure to file a return is fraudulent.” Or maybe it’s a chop of a different color.

IRS misses the boat and gets its motion to amend its answer to conform to the proof shot down, because they never previously mentioned Section 6651(f) to Roger H. Durand II, Docket No. 16273-17, filed 12/18/18.

That’s the Rev. Durand to you, but the Rev. is apparently a non-filer for nine (count ‘em, nine) years, and has run up a half-million bucks of deficiencies the while. So IRS wants the 75% Section 6663 chop, or at least the 20% understatement chop, for each. The Rev. Durand did file for the nine years in two tranches, the first for the four oldest years and the second for the balance, long after they were due.

The Rev. Durand and IRS went to trial, but nobody said palabra una about Section 6651(f).

Two weeks after both sides rested, the record was closed, and Judge David Gustafson had settled down to thirteen hundred pages or so of light reading, IRS awoke and moved to amend its answer to conform with Section 6651(f). The Rev. Durand revved up and opposed.

Hence today’s designated hitter.

“These are two distinct 75% penalties–one for filing a fraudulent return, sec. 6663, and the other for fraudulently failing to file a return, sec. 6651(f). The Commissioner minimizes this distinction when he complains that Rev. Durand’s opposition ‘opaquely mentions “different time frames that are relevant to § 6651(f) compared to § 6663” without explaining what “different time frames” he means. (Doc. 61 at 2.) However, we think Rev. Durand is correct in noting these “different time frames”.” Order, at pp. 2-3.

Remember, Section 6663(a) covers a filed return that intentionally and willfully misstates material facts. So the fraud is committed at the filing date of the return. But Section 6651(f) covers the non-filing of a return with intent to conceal material facts (that the concealer has taxable income and that tax is due thereon) at the date when a return disclosing same would be due.

So if IRS wants to hang Rev. Durand, the magic date is when each of the non-filed years’ returns were due, but not filed. But those years are long before the years when the belated returns were filed, and whatever were the Rev. Durand’s motivations when he filed, that’s nothing to the point of what they were years before.

“The section 6651(f) penalty that the Commissioner now seeks to plead is different from the section 6663 penalty that the Commissioner did plead, and some of the facts that would be critical under section 6651(f) are different from the facts that would be relevant under section 6663. Rev. Durand did not have occasion to prepare and present proof as to those facts critical to the section 6651(f) penalty that the Commissioner now seeks to add after the trial has been concluded.” Order, at pp. 3-4.

Nothing like the transparency of the Internal Revenue Code.

No, not a variant on the Adler-Ross 1954 musical comedy tune, rather this is the story of the divorce case between now-or-former attorney Bruce Scholes and Mary Fernando, which ended with Mary splitting some AZ property with Mary Louise Sholes, 2018 T. C. Memo. 203, filed 12/17/18, and Mary Louise’s late husband (who invested therein at Bruce’s behest), and Mary Fernando getting all the NM property.

Mary Fernando claimed Bruce did a fraudulent conveyance to Mary Louise and Mary Louise’s late spouse. The idea was to oust Fernando of her community property interests in the foregoing. In the course of the jurisprudential fracas, there was also a criminal money-laundering case. Mary Louise claims ran up some $1.2 million in legal and professional fees over three (count ‘em, three) years. And collected no rents from any of the properties involved, as son Bruce was living there rent-free.

Note this is a petition from a CDP. Mary Louise never got the SNODs, so she got de novo treatment on liability.

Bruce carries the ball for Mary Louise on the trial, as she is infirm.

Judge Cohen: “Notwithstanding multiple opportunities to provide specific descriptions of the services rendered by various lawyers and firms involved in the various legal battles, petitioner and [Bruce] failed to do so.  Instead, to support their contentions that all of the amounts were properly deducted, they have relied on canceled checks, summaries of those checks, and vague explanations of what particular lawyers did.  The inclusion of payments to caregivers for [Bruce’s] children, by checks clearly marked as for child care, undermines the reliability of their generalizations.  Petitioner belatedly offered to concede those clearly personal amounts, but that concession does not cure the misrepresentation of the nature of the payments in the summary of legal and professional fees petitioner prepared to support the deductions claimed on her tax returns.” 2018 T. C. Memo. 203, at p. 8.

And here’s the kicker.

“Deductibility of legal fees depends on the origin and character of the claim and not on its potential consequences to the taxpayer.  United States v. Gilmore, 372 U.S. 39, 49-52 (1963).  If the origin of the claim is a marital relationship, the legal expenses are nondeductible even if the outcome affects income-producing property of the taxpayer.  Fleischman v. Commissioner, 45 T.C. 439, 446 (1966); Lucas v. Commissioner, T.C. Memo. 2018-80; Barry v. Commissioner, T.C. Memo. 2017-237.” 2018 T. C. Memo. 203, at p. 11.

Even assuming the properties were held for production of income, the paucity of evidence precludes even a Cohan approximation of deductible expenses.

So if “all you see are silhouettes,” it isn’t enough.

Maybe Not, But You Have To Prove It

Judge David Gustafson is down with Scotland’s Greatest. He won’t fault good faith, but he needs to see facts that manifest the good faith of Palmolive Building Investors, LLC, DK Palmolive Building Investors Participants, LLC, Tax Matters Partner, Docket No. 23444-14, filed 12/14/18, a special day at our house.

The Palmolives want partial summary J that they took the $33 million façade deduction that got blown away back in October of 2017 (see my blogpost “No Joy Forever – Because Golsen,” 10/10/17, a/k/a Palmolive I) in good faith and with reasonable cause, per Section 6664, to prevent substantial overvaluation chops. Judge Gustafson, smarting from 1 Cir’s shootdown of Tax Court in Gordo and Lorna Kaufman, refused to apply 1 Cir to the Palmolives, who are 7 Cir domiciliaries. But there was no other appellate learning.

Tax Court generally doesn’t hand out chops on first-impression cases, but good faith and reasonable cause are matters of fact. True, since 1 Cir reversed Tax Court, there is room for good-faith dispute, but what did the Palmolives do besides cite 1 Cir?

“Palmolive contends that it has a reasonable cause and good faith defense for the portion of underpayment attributable to its failure to comply with this regulation. Though this contention is insufficient to entitle Palmolive to partial summary judgment on ‘reasonable cause’, we do accept Palmolive’s argument that our analysis of its non-compliance with section 1.170A-14(g)(2) was an issue of first impression in Palmolive I. However, that alone does not result in our holding that Palmolive had reasonable cause and acted in good faith. See sec. 1.6664-4(b)(1), Income Tax Regs. Deciding whether Palmolive had reasonable cause and good faith for its understatement based, in part, on an alleged honest misunderstanding of law, will require the Court to determine whether that misunderstanding was ‘reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer.’ Some of those facts and circumstances are disputed by the parties.” Order, at p. 6. (Citations omitted).

Even though Mike Ehrmann’s appraisal was stipulated in as a qualified appraisal for Reg. § 1.170A-13(c)(3) purposes, there remains the fact question whether it was too good to be true, and what the Palmolives did to confirm it. They didn’t claim to have consulted other authorities; did they do anything else?

Lest we think Judge Gustafson is whistling past the Graevyard, he notes that the cross-motions regarding the Section 6751(b) Boss Hoss sign-offs for the chops remain pending.

But Palmolives, don’t get your hopes up. The Boss Hosses won’t be the subject of a trial.

A much more exalted personage even than Ch J Maurice B (“Mighty Mo”) Foley gives me the title for this blogpost, Michael T. Sestak, Docket No. 17286-18, filed 12/14/18, a special day in our house.

Mike claims IRS failed to send the SNOD to his last-known address.

IRS points to a handwritten letter from Mike that sets forth his address and directs that all correspondence be sent to him at Pine Knot, TN. Mike sent this two (count ‘em, two) years before the SNOD was mailed.

Mike claims he gave the IRS his complete address. IRS says no, Mike didn’t include Mike’s prison registration number.

Despite this season of goodwill, Ch J Mighty Mo isn’t letting IRS get by.

“… I.R.M. 4.8.9.8.2.8 (07-09-2013) states, in pertinent part: Incarcerated Taxpayers *******

“2. The address in the Letter 531, Notice of Deficiency, should be where the taxpayer is incarcerated and should reference the prisoner locator number if available.

“3. For federal prison inmates, the prisoner locator number and address can be obtained from the Bureau of Prisons web site.” Order, at p. 2.

DC Cir has held that IRS should make a reasonably diligent effort to find out a party’s address if there’s doubt that the address they have won’t reach that party.

So let IRS explain why they didn’t check out Mike’s prisoner locator number.

When a newly-minted colleague announces gleefully that s/he has “passed the bar,” my invariable reply is “My condolences.” I’m speaking only partially tongue-in-cheek (although how one can speak at all with tongue in cheek is a good question).

This can be an exhilarating profession, an intriguing life’s work, a ringside seat on the Human Comedy; it can also be stress-inducing, relationship-destroying and dehumanizing.

All that to one side, it can also destroy one’s business tuition deduction. I’ve blogged this before (see my blogpost “Moaning of the Bar,” 11/5/18).

Today’s candidate is another bright, hardworking voyager who comes from away to our shores to learn and earn, Serge Raymond Banini, Docket No. 6699-18S, filed 12/13/18. Serge earns a designated hitter from STJ Diana L Leyden, but IRS gets partial summary J tossing Serge’s deductions.

Serge added to his Cameroon BA in chemistry with a Ph.D. at West Virginia University, and signed up as a Patent Technical Adviser (Life Sciences) with a white-shoe. Serge claims the white-shoe wanted him to get admitted to MA Bar to get his job, but when show-and-tell comes around, his acceptance letter from the white-shoe doesn’t mention lawyering, only helping lawyers understand the life sciences.

The white-shoe did lend him the money for his law school tuition at no interest, but that isn’t enough. Neither is it that having his MA admission helped Serge do his work better.

“…petitioner asserts that the deduction of his legal education expenses should be allowed at least in part because some of the law school courses were only taken to maintain and improve his skills as a patent advisor. However, the regulation provides that expenditures for education which qualify a taxpayer for a new trade or business are not deductible even though the education may maintain or improve skills required for his employment. Sec. 1.162-5(b)(1), Income Tax Regs.; see Bodley v. Commissioner, 56 T.C. 1357, 1361 (1971). The undisputed material facts indicate that attending law school qualified petitioner for the new trade or business of a practicing attorney. Therefore, no partial deduction is allowed even if the education may have maintained or improved petitioner’s skills required for his employment as a patent advisor.” Order, at p. 5.

So summary J for IRS knocking off Serge’s tuition deductions.

Another reason why I express my condolences to those newly-admitted to this crazy profession.

That’s Ch J Maurice B (“Mighty Mo”) Foley, when he spots a petitioner who hasn’t thrown the sixty coins in the Tax Court fountain when s/he posted the petition. He bounces the petitioner for want of jurisdiction, with no warnings or second chances.

And today Ch J Mighty Mo is so fast he outruns IRS’ counsel to toss Edward Thomas Kennedy, Docket No. 21004-18, filed 12/13/18.

Edward Thomas sent in an application for waiver of the filing fee with his petition in October, so this isn’t the usual one-week-or-less trademark toss from Ch J Mighty Mo.

But in November, Ch J Mighty Mo denied Edward Thomas’ poverty pitch, and told him to stump up or stand down. Edward Thomas moved for Ch J Mighty Mo to recuse himself. As the papers aren’t available online, I cannot tell on what grounds Edward Thomas relied.

In any case, if there’s no jurisdiction there’s no reason for anyone to recuse himself, so on Monday last Ch J Mighty Mo tossed Edward Thomas for failure to ante up.

IRS’ counsel didn’t catch the Monday bounce, so yesterday he banged in a motion to dismiss for failure to state a claim.

Too late, so that motion gets bounced.

But the irrepressible Edward Thomas, yesterday, throws in a motion “for a new trial,” in a case that (a) has been dismissed, and (b) where there never was a trial to begin with.

Neither Edward Thomas nor IRS’ counsel can outrun Ch J Mighty Mo when there’s money at stake.

As Judge Goeke points out in Raghunathan Sarma and Gaile Sarma, 2018 T. C. Memo. 201, filed 12/12/18, at p. 44, footnote 11: “Congress repealed the TEFRA procedures in the Bipartisan Budget Act of 2015, Pub. L. No. 114-74, sec. 1101(a), 129 Stat. at 625.”

And I, for one, am glad.

If you are still interested in this labyrinthian concoction, you can read all 48 pages of Judge Goeke’s dissection of Rag’s mix-and-match, three-ring LLC circus, which marries the usual recognized loss with unrecognized gain to bury recognized gain.

IRS goofed when they handed out NBAPs to small-partnership LLCs, but Section 6231(g)(1) bails out IRS, as they had a reasonable basis for issuing same, and bailed when they found their mistake.

And even if a couple of the three-ring LLPs weren’t TEFRA-bait, it turns out that one of them was big enough to warrant TEFRA, and that brings in Section 6229 to save the SOL.

Taishoff comment: I see an appeal on this one.

Finally, the famous Woods dictum: “In dicta, responding to a point raised in an amicus brief, the Supreme Court in Woods observed that where a partnership is a sham and disregarded for tax purposes, the determination of the partner’s outside basis may not require a partner-level determination to adjust outside basis and thus the adjustment may be computational.  Woods, 571 U.S. at 42 n.2.  The Court stated that the amici’s argument ‘assumes that the underpayment would not be exempt from deficiency proceedings because it would rest on outside basis.’  Id.  The Court further observed: ‘Even an underpayment attributable to an affected item is exempt so long as the affected item does not ‘require partner-level determinations,’ * * * and it is not readily apparent why additional partner level determinations would be required before adjusting outside basis in a sham partnership.’  Id. (citations omitted).

“Woods did not, however, answer the question of whether the partner-level adjustment of outside basis incident to a deficiency determination is computational and the Commissioner may directly assess the resulting tax against the purported partners or whether the adjustment requires a partner-level determination and the issuance of a notice of deficiency.” 2018 T. C. Memo. 201, at pp. 41-42.

If you are not stunned by the foregoing, try this: “While the Supreme Court’s dicta in Woods gives us pause, we conclude that the adjustment of outside basis in a sham partnership requires a partner-level determination.  No Court of Appeals has discussed the question of whether the adjustment of outside basis could be computational.  At this late date in the life of the TEFRA partnership provisions, it would be unwise for us to introduce uncertainty in the application of this well-worn law.  It is logical, as the Supreme Court suggests, to conclude Lincoln’s outside basis in its Kearney partnership interest was zero.” 2018 T. C. Memo. 201, at p. 44. (Footnote omitted, but I set it forth at the head hereof).

So I again quote Tommy Hobbes: ““When men write whole volumes of such stuffe, are they not Mad, or intend to make others so?” Leviathan, Book VIII (1651).

Edited to add, 11/13/20: No appeal so far, but a Rule 161 goes nowhere.

Is Another Man’s Restitution

Jason Bontrager, 151 T. C. 12, filed 12/12/18, wanted to patch up his relationship with his Dad. Dad offered to help Jason in his real estate business. With help like this, Jason got convicted for aiding and abetting Dad in evading $727K in Dad’s income tax. USDCWDWA hit Jason with $72K in restitution, 10% of Dad’s evading.

Jason filed bankruptcy, and IRS put in an unsecured claim, although Federal restitution is non-dischargeable per 11 USC §523(a)(13), 727(b) (2012). Jason claims IRS waived its chance to collect, as he got discharged in bankruptcy and paid IRS $17K.

Judge Lauber isn’t buying.

“Contrary to petitioner’s view, nothing in the Bankruptcy Code prevents a creditor of a nondischargeable debt from filing a claim.  Generally, all properly filed creditor claims are allowed in a bankruptcy case unless expressly disallowed by the Bankruptcy Court under a specific provision.  See 11 U.S.C. sec. 502(a), (b), (d), (e) (2012).  None of these provisions disallows claims for nondischargeable debts.  And no provision of the Bankruptcy Code prevented the IRS from filing a claim or attached any adverse consequences to its doing so.   Further, the IRS properly filed its claim as a general unsecured creditor.

“Because the IRS had not assessed the restitution obligation at the time of petitioner’s bankruptcy, let alone filed an NFTL, it was required to file its claim as a general unsecured creditor.” 151 T. C. 12, at p. 18 (Citations omitted).

Jason claims that IRS can’t assess the ordered restitution, because Section 6012 (a)(4(A) restitution was ordered “for failure to pay any tax imposed by this title.” But USDCWDWA ordered restitution for failure to pay Dad’s tax, not Jason’s.

I award Holly C. Henson, Esq., Jason’s attorney, a Taishoff “good try, first class.”

“Petitioner notes correctly that the tax, the payment of which he was convicted of evading, was not originally imposed upon him by title 26.  But neither section 7201 nor section 6201(a)(4) requires that this be the case.  Section 7201 criminalizes any willful attempt to evade payment of ‘any tax imposed by this title.’  Section 6201(a)(4) authorizes the assessment of restitution ‘for failure to pay any tax imposed under this title.’  Petitioner was ordered to pay restitution for aiding and abetting [Dad’s] failure to pay Federal income tax.  That tax was clearly ‘[a] tax imposed under this title.’

The phrase ‘any tax imposed under this title’ in section 6201(a)(4) contains no limiting language.” 151 T. C. 12, at p. 14. (Emphasis by the Court).

The reason for Section 6201(a)(4)(A) was that Justice prosecuted evasion and won restitution; Treasury (IRS) may not even have begun examination at that point, thus there was no account receivable against which to debit restitution. So Congress let IRS collect restitution “as if” it were a tax. Remember Hans Vaihinger, the philosopher of “as if”? No? See my blogpost “Als Ob,” 11/22/16.

And Congress could not have intended a gap that gives a free kick to aiders and abettors.

“If the IRS cannot assess restitution of the sort involved here, the problem Congress aimed to solve in 2010 would be perpetuated for a subset of restitution payments.  Indeed, the problem would be particularly acute in this context.  The IRS cannot commence an examination of petitioner to determine {Dad’s] civil tax liability.  Thus, it could never make an assessment against petitioner for that tax unless permitted to do so by section 6201(a)(4).  And this problem could arise in the case of restitution ordered, not just for violations of section 7201, but for violations of other Code provisions.  See, e.g., secs. 7202 (willful failure to collect or pay over tax) and 7203 (willful failure to file, supply information, or pay tax).  We decline to find a gap in the statutory scheme in the absence of any textual evidence suggesting that such gap exists.” 151 T. C. 12, at p. 16.

But IRS concedes that Section 6601(a) underpayment interest doesn’t apply.

IRS picks up on Frank Loesser’s 1950 anti-hero’s line in Greenteam Materials Recovery Facility PN, Greenwaste Recovery, Inc., Tax Matters Partner, Docket No. 21946-09, filed 12/11/18. All y’all will recall the Greenteamers (or Greenwasters) and their capital gains from franchise sales.

No? Seriously? Well, dig my blogposts “Das Kapital,” 8/6/13, “Das Kapital – Part Deux,” 6/21/17, and the most popular of the three, “Settle Order on Notice,” 6/23/17. There now.

The Greens won the FPAA joust, and did the numbers. The Greens won big.

But the Green’s counsel complains to Judge Mark V Holmes in a letter.

“In it he stated that the effect of these decisions was to generate a substantial refund to the individual partners for tax year X and small deficiencies for them for two later tax years. He also stated that the IRS proceeded at speed to issue the notices of computational adjustment to them to collect the deficiencies for those two later years, but invited the individual partners to sue in the Court of Federal Claims or their local District Court for the substantial refund for [Year X].” Order, at p. 1.

So counsel asks Judge Holmes to order IRS to pay up.

No can do, says Judge Holmes. At least not yet.

If this involved individual partners who were entitled to a refund, no need for another lawsuit. A Rule 260 motion based on Section 6512(b) does the trick. But this is a TEFRA FPAA. No amount of refund for each individual partner is part of the decision. Thus Tax Court may have no jurisdiction.

Or maybe it does. “One practitioner’s guide says this means that our Court ‘has overpayment jurisdiction with respect to affected items.’ IRS Practice Adviser Report, ¶ 430: Judicial Review of the FPAA/FSAA. Another practitioner’s guide warns instead: “Comment: It is unclear whether § 6512(b)(2) and Tax Court Rule 260 apply in partnership actions where an overpayment would result to a partner based on the decision entered by the court in the partnership proceeding.” Richard A. Levine et al., Proced. & Admin.: Tax Court Litigation, 630-5th Income Tax (BNA).” Order, at p. 3.

So Judge Holmes treats counsel’s letter as a Rule 260 motion, and denies same without prejudice.

“It may turn out that following the Rule’s procedures moves the Commissioner to act expeditiously to wrap these cases up. It may turn out that petitioners discover through their own research that they do not want to proceed under this Rule; or the Commissioner may want to argue that it is inapplicable either on its own terms or by analogy.” Order, at p. 3.

So make the motion in proper form, and we’ll see.

I bet you’re asking what will happen in new cases now that TEFRA is gone. My bet is that the whole thing gets done at once.