Some Ambiguity Won’t Help You

I’ve had occasion before now to refer to Wm. Empson’s 1930 literary criticism classic, but today the ambiguities tilt the scale against the ambiguitists in Ronald Laudner, Jr. & Kathy Douglass, et al., Docket No. 30578-14, filed 2/11/19, a designated hitter from CSTJ Lewis (“Nom d’un Nom”) Carluzzo.

IRS his Ron & Kathy with a bunch of interrogs, but found “…several responses to interrogatories requesting background information with respect to various disallowed deductions are incomplete and/or vague. According to respondent, those responses need to be supplemented so that respondent can properly prepare for trial.” Order at p. 1.

Sounds reasonable enough. But CSTJ Lew goes beneath the surface.

“As we view the matter, the objectionable responses present more of a problem for petitioners than for respondent. As we have noted in opinions too numerous to count, deductions are matters of legislative grace…, and must properly be substantiated. See I.R.C. §6001. The responses that respondent describes as incomplete or vague strongly suggest that petitioners cannot substantiate the deductions to which the responses relate, and petitioners are bound by those responses.” Order, at p. 1. (Citation omitted, but it’s Colonial Ice, entering its 85th year and still going strong).

IRS suggests that maybe so Ron & Kathy engaged in spoliation of evidence. CSTJ Lew won’t go that far. And I concur; you don’t destroy evidence that would help your case.

But if IRS has proof of spoliation, they can raise that at trial before the trial judge.

Speaking of which, CSTJ Lew tells the parties to avoid further delays.

My patient readers may remember Peter Hendrickson, the author of the Protesters’ Bible. If not, see my blogpost “Cracking Up,” 2/27/14, wherein I chronicled Judge Buch’s deconstruction of Steven T. Waltner’s frivolity.

Pete furnished the ur-text for Steve’s frivolous Tax Court sonata.

Now Pete himself, along with spouse Doreen, are before Judge Buch, in Peter E. Hendrickson and Doreen M. Hendrickson, 2019 T. C. Memo. 10, filed 2/11/19.

Pete is up to his old tricks. I’ll spare you the recitation of Pete’s frivolities. You’ll not be surprised that, although Judge Buch repeats Pete’s history, Judge Buch avoids “somber reasoning and copious citation of precedent.” He merely ignores Pete’s well-worn rhetoric.

Of interest to my readers is that Judge Buch exonerates Pete from the Section 6663(a) 75% fraud chops.

But Pete isn’t home-free, because Section 6651(f).

“As relevant here, imposition of a section 6663(a) penalty requires that the taxpayer file a valid return, and a section 6651(f) addition to tax is applicable ‘only if * * * [the taxpayer] fails to file a timely return, and then only if the delinquency is fraudulent.’  Although the Hendricksons, and Mr. Hendrickson separately, submitted documents purporting to be returns for 2002, 2003, and 2004, we must determine whether the returns are valid for the purpose of imposing a section 6663(a) penalty or a section 6651(f) addition to tax.” 2019 T. C. Memo. 10, at p. 22 (Footnote omitted).

I expect you won’t be overly surprised to discover that neither nor both the Hendricksons filed valid returns. They did put in one valid item of income, so their returns weren’t the usual all-zeros nonsense. This avails Pete not.

“It is generally accepted that a taxpayer’s return reporting zeros for all income lines is not a valid return.  Additionally, even if the taxpayer provides some income information, the return is not valid as ‘there must also be an honest and reasonable intent to supply the information required by the tax code . . . .  In our self-reporting tax system the government should not be forced to accept as a return a document which plainly is not intended to give the required information.’ Finally the Commissioner’s processing of an invalid return does not make it valid.  As the Court has similarly held regarding the open limitations period with which to assess liabilities under section 6501(c), the Commissioner’s processing of a fraudulent return does not in and of itself start the limitations period.” 2019 T. C. Memo. 10, at pp. 22-23. (Footnotes containing “copious citation of precedent” omitted).

Pete has been reading Tax Court opinions, if not my blog, so he’s up on Section 6751(b) Boss Hossery. IRS got the trial record reopened to put in Form 11661, Fraud Development Recommendation – Examination, and a civil fraud lead sheet.  “Form 11661 lists Mr. Hendrickson’s name, includes the revenue agent’s notes asserting fraud penalties for [years at issue], is dated …and is signed by the revenue agent’s immediate supervisor.  The civil fraud lead sheet lists both Mr. and Mrs. Hendrickson, asserts fraud penalties for [years at issue], is undated, and includes a detailed description of the Hendricksons’ frivolous filing techniques.” 2019 T.C. Memo. 10, at pp. 12-13.

Pete claims this falls short of the Congressionally-mandated second look. Judge Buch says Section 6651(f) doesn’t even get one look, as Section 6751(b)(2)(A) leaves the whole of Section 6651 out of the Boss Hoss equation.

Maybe Congress should take a second look at the Section 6651(f) fraudulent non-filing carve-out, even if IRS need not. I’m not suggesting Pete is an injured innocent, but someone else might be.

The above inquiry, derived from the Old Mesopotamian, results from a cryptic order by Judge Elizabeth A Copeland (no cognomen yet, but watch this space) in Dana McCullick & Donny McCullick, Docket No. 6192-18S, filed 2/8/19.

IRS wants a continuance of the trial, and asks more than thirty (count ‘em, thirty) days before the trial date. IRS’ counsel alleges the shutdown shut down his chance to get to D&D to find out if they’re down with the requested timeout.

Then he files a status report. I regret I cannot go to 400 Second Street, NW, today, to peruse that report and answer my oft-asked question, “vot did she set?”

Whatever IRS’ counsel said, Judge Copeland dispatches the trusty Chambers Administrator to search diligently and inquire of D&D. And whatever D&D told the CA, it’s enough for Judge Copeland to deny IRS’ motion.

Again we have a case that is less than a year old and has never been continued. See my blogpost “Do Sweat the Small Stuff,” 2/6/19. IRS wants a continuance there, for the same reason as here (can’t talk to petitioner because shutdown). No status report there. However, but for the TEFRA wrinkle, STJ Armen was going to grant IRS’ motion.

So what did the status report say (or not), and what did D&D tell the CA, to the extent either is not privileged?

It really matters, Judge, because a lot of IRS attorneys will move for shutdown-induced continuances. And a lot of pro ses and practitioners will need to know what differentiates one case from another.

Among other obscurities in the much-contemned Affordable Care Act is the tanning salon excise tax. The tax is imposed on, and collected from, the tanee, but is a trust fund in the hands of the tanor, and a penalty for nonpayment awaits the tanor’s responsible persons, just like FICA/FUTA/ITW. Nonpayment to the fisc calls down the same penalty.

Daniel James Humiston, 2019 T. C. Memo. 9, filed 2/7/19, is fighting a NOD based on an alleged failure of Section 6751(b) Boss Hossery. DJ was here before on this very issue; see my blogpost “Tannery Row,” 5/24/18.

Well, heeding Judge Holmes’ designated hitter from last May, IRS goes to trial, puts the RA who handled case on the stand, and proffers Form 4183. That suits Judge Buch just fine. He finds no abuse of discretion, though, so he needn’t decide whether the tanning salon mulct needs a 6751(b) benediction from on high.

DJ’s tannery was undergoing Ch 11 resuscitation, and he claimed he’d have enough to pay off the $200K when that was done, but he neither provided Appeals a list of the tannery’s assets nor a Form 433-A for himself. Nor was the tannery paying off the taxes.

That’s enough for Judge Buch. We must possess our souls in patience while we await resolution of the Boss Hoss – TFRP conundrum.

Intervention may be great stuff for a TV series, but Judge Mark V Holmes isn’t ready to premiere David Marshall on behalf of Virginia Simpson, widow of the late Singleton (“Gerry”) Simpson, a/k/a “the estate,” stars of my blogpost “Settle Order on Notice – to the Nonparticipant,” 10/26/17.

The estate was an indirect partner in BCP Trading and Investments, LLC, William T. Esrey Trading Partners, LP, A Partner Other Than the Tax Matters Partner, et al., Docket No. 10200-08, filed 2/6/19. This case is almost as old as some Scotch I have. With Judge Holmes’ help,  IRS’ and BCP’s attorneys cobbled together a notice provision to let the estate (an indirect partner; apparently the late Gerry, with or without Miss Virginia, was a partner in BCP while he lived) object to the order and judgment after trial. Remember, when IRS and a partnership settle, any nonparticipant in the negotiated settlement gets sixty (count ‘em, sixty) days to object. But BCP and IRS litigated this one to a finish, without the estate in the ring, so the estate gets to object, Rule or no Rule.

The estate objects. The objection is based “… on the entirely reasonable ground that it had no idea what liability it faced under the proposed decision. As a result, we ordered the Commissioner to estimate the effect of the proposed decision on the estate to determine whether it wanted to object and seek intervention.” Order, at p. 2.

The estate moves to intervene, solely to preserve a SOL argument, the years at issue being even older than most of the aforesaid Scotch.

As usual, Tax Court Rule 245 doesn’t help, because this case was litigated to a decision, not stiped out. So FRCP 24 is called in, but before Judge Holmes can decide whether intervention is of right or permissive, the motion to intervene must be timely. IRS claims the estate blew the cut-off, but IRS agreed to BCP’s and Judge Holmes’ sixty-day time-out, so the Rule 248(b)(4) lash-up beats IRS’ Rule 245 freeze-out.

OK, all the estate wants is to preserve its SOL argument. If the SOL argument is a loser, there’s no reason to hold up entering the decision.

The estate claims they never signed the 872-Is and 872-IAs that extended the original SOL, only those long after the original SOL had run, and therefore the latter were invalid, as they extended nothing.

Nope, says Judge Holmes.

“So where does that leave the estate? It argues that, because the Simpsons signed their individual consents after the three-year assessment period for 2000 and 2001, the consents had no legal effect and did not extend the statute of limitations. However, this argument fails to acknowledge that the statute of limitations could be extended by either the Simpsons or BCP’s TMP. See § 6229(b)(1)(A)-(B). The estate’s incorporation by reference of the petitioners’ failed statute of limitations arguments challenging the validity of the TMP’s extensions preserves the argument for any appeal, but doesn’t help them here. Because we held that the extensions filed by BCP’s TMP were valid and bound both BCP’s direct and indirect partners, it follows that the estate, an indirect partner of BCP, is also bound by those extensions.” Order, at pp. 5-6.

So Judge Holmes isn’t permitting intervention.

“This in turn leads us to conclude that the TMP has adequately represented the estate by making the best of what was in the end an unsuccessful argument, which defeats intervention of right. See Fed. R. Civ. P. 24(a)(2). Intervention would also merely duplicate the TMP’s efforts at a very late stage in the case, which would serve only to further delay its conclusion.” Order, at p. 6 (citations omitted).

I wouldn’t blame Judge Holmes if he wanted to open that Scotch already. I can wait, though it’s sometimes a struggle.

If I were the estate, I’d appeal. If the client had the cash for a bond. And my fee.

The often-quoted words of Julius Henry Marx describes the underpinning of STJ Diana L (“The Taxpayer’s Friend”) Leyden’s order in Anthony I. Provitola & Kathleen A. Provitola, et al., Docket No. 12357-16, filed 2/6/19.

It’s Anthony’s story. Anthony is a lawyer. Like most lawyers, your humble and obed’t serv’t included, Anthony loves summary J.

In fact, he loves it so much he tries it three (count ‘em, three) times, losing each and every time.

The problems are not unusual: “… whether petitioners engaged in the Schedule C activity with an actual and honest profit motive, whether petitioners actually incurred legal fees for the purposes of section 162, and whether the legal and professional services fees paid by petitioners were ordinary and necessary expenses.” Order, at p. 3.

Questions of fact, these.

“Summary judgment continues to not be appropriate in these cases. As the Court has concluded when it considered the three previously filed motions for summary judgment there still exists material questions of facts, namely whether petitioners engaged in the Schedule C activity with an actual and honest profit motive, whether petitioners actually incurred legal fees for the purposes of section 162, and whether the legal and professional services fees paid by petitioners were ordinary and necessary expenses. Neither the self-serving declaration of petitioner husband nor the stipulations of facts resolve any of these factual issues. Further, there is also a factual issue as to whether respondent obtained the required managerial approval under section 6571(b) with respect to the accuracy-related penalty imposed under section 6662(a) for 2013 and 2014.” Order, at p. 5.

So STJ Di suggests Anthony do as Julius Henry Marx suggested, and take it out once in a while.

“Petitioners are admonished that should they continue to pursue frivolous or groundless arguments before the Court or if they maintain these cases primarily for delay, they may be subject to penalties under section 6673 up to the amount of $25,000 in the future.” Order, at p. 5.

You’d have to search youtube.com thoroughly, but those among us who yearn again to hear the nasal but compelling tones of Edward R. Murrow piercing the fog and blackout can again hear “This…is London.”

Well, who better to take up the cudgels for The City on the Thames than Tom Sawyer Abroad, that intrepid DOJ attorney who is determined to protect, preserve and defend international law and comity in Jonathan Zuhovitzky & Esther Zuhovitzky, Docket No. 3489-16, filed 2/6/19?

You remember Tom? What, no? Well, peruse my blogpost “Tom Sawyer, Tax Attorney,” 6/22/18. Sam Clemens would be proud of Tom, carrying on the tradition of his 1905 sequel.

It seems Jon’s bad back has gotten a wee bit better, but he still can’t get to the Land of the Free. And Tom Sawyer, Tax Attorney, filed a DOJ Statement of Interest, which has made an international incident out of Jon’s and Esther’s Berlin TV debut before Judge Vasquez.

It seems German sovereignty and goodwill between nations is on the line.

“In the Justice Department’s Statement of Interest Mr. Sawyer sought reconsideration of the Court’s… Order granting petitioners’ motion to permit contemporaneous testimony from Berlin, Germany. Mr. Sawyer argued that allowing remote testimony from Germany would violate principles of international comity. He further argued that petitioners had several alternative means of presenting their trial testimony without violating German sovereignty. One of these options would require petitioners to travel to and testify remotely from a common law country such as the United Kingdom.” Order, at p. 1.

But what about Jon’s bad back?

Well, maybe so it isn’t all that bad.

“…petitioners filed a response to the Justice Department’s Statement of Interest. Therein petitioners asked the Court to modify the…Order to allow petitioners to testify via contemporaneous transmission from London.” Order, at p. 1.

Magnanimously, Tom dropped his objection on behalf of the 320 million of us US citizens and Angie Merkel’s millions. IRS will work with Jon & Esther to facilitate their TV show. And all hands agree they can do the TV segment without ruffling any UK feathers.

With hard Brexit vs soft Brexit, I doubt Terry May or anyone else is going to crumble their crumpets over this one.

Has The Judge with a Heart, STJ Rob’t N Armen, so soon forgotten the admonition he gave in my blogpost “Don’t Sweat the Small Stuff,” 8/7/13?

Well, when it’s a partnership case, rather than a full-dress-T. C.-worthy international FICA kerfuffle, STJ Armen feels he has to sweat the small stuff.

Case in point is Pharmar Farms, LLC, Peter Flowers, Tax Matters Partner, Docket No. 9416-18S, filed 2/6/19. IRS wants a shutdown continuance, but can’t get hold of Pete to suss out whether he agrees. STJ Armen is inclined to go with the hold anyway, as the case has never been continued and it was only filed last Spring. Apparently a case hanging around for less than a year is a spring clichê in the Glasshouse, where ten-year-old cases are not uncommon.

But though the petition asks for small-case treatment, and references and attaches IRS notices, there is neither SNOD nor NOD to be found. Rather, pro se Pete has attached FPAAs for the two years he wants to place at issue.

IRS says nothing. I’m sure my learned readers have already picked up on the problem, but for those coming new to the post, I’ll let STJ Armen get a word in.

“…respondent does not, and has not since the filing of his Answer, questioned that this case qualifies as a ‘small tax case’ to be ’conducted under the small tax case procedures.’

“IRC section 7463 sets forth procedures governing certain types of disputes, most typically actions for redetermination involving deficiencies where the amount in dispute does not exceed $50,000. Subsection (f) of section 7463 specifies additional cases in which proceedings may be conducted under such section. Such additional cases do not include partnership cases. See Rule 170, Tax Court Rules of Practice and Procedure.

“Inasmuch as the present case appears to be a partnership case and not a deficiency case, it would not qualify as a ‘small tax case’ to be ‘conducted under small tax case procedures’. The Court’s February 25, 2019 Chicago, IL trial session is devoted to ‘small tax cases’, and the undersigned, who is assigned to conduct such session, is not authorized to decide partnership cases. See IRC 7443A(c).” Order, at p. 2. (Footnote omitted).

And let both sides show cause why this shouldn’t go on the regular docket.

Sometimes ya gotta sweat the small stuff.

As If One Wasn’t Bad Enough

That Obliging Jurist, Judge David Gustafson, is hardly a cheerful chap when it comes to divining the future of Tax Court and IRS funding.

Today he’s dealing with Cross Refined Coal, LLC, USA Refined Coal, LLC, Tax Matters Partner, Docket No. 19502-17, filed 2/5/19, and Cross is really cross. Pre-trial prep was in full swing going into December 2018 BS (Before Shutdown), but as the Great Hiatus loomed, IRS moved for continuance (that’s what we State courtiers call an adjournment). Cross objected.

True, Congress has funded operations through and including 2/15/19, but what happens after that is at best uncertain.

So Judge Gustafson tries to cover the bases.

“…respondent’s motion is denied without prejudice. Respondent may renew his motion after February 15, 2019. The Court advises the parties that it is inclined to adjust the pretrial schedule to account for respondent’s counsel’s furlough, and that it is willing to consider a trial date two or three weeks later than the current schedule. However, the trial in this case probably cannot be set to begin in September 2019, because numerous regular sessions will take place that month, and the Court is strongly disinclined to schedule a trial to take place after the end of the Government’s current fiscal year on September 30, 2019, when new funding issues might arise.” Order, at p. 1.

Judge, you said it. The Rolling Shutdown rolls on.

Robert C. Gunther and Jayne C. Gunther, 2019 T. C. Memo. 6, filed 2/5/19, have plenty of bad news to hear. Though collection of their partner-level deficiencies are enjoined pending the decision in their case, Tax Court cannot hear their claims concerning the 40% overvaluation and 20% accuracy chops. Those must wait for post-payment review.

As these chops aggregate around $850K, that will be an expensive hearing.

I again refer to Judge Holmes’ famous remark so long ago. Where does the taxpayer go to hear the bad news? See my blogpost “The Great Dissenter,” 12/28/11.

Bob and Jayne were in a phony currency swap partnership, which got blown away in USCFC. There follows the usual debate: must there be further partner-level determinations (opening the door to SNODs and deficiency proceedings), or does the partnership-level determination of the FPAA just generate arithmetic (computational).

As to the tax itself, even though the partnership was a sham, Bob and Jayne had some basis in the stock they sold, so that the exact amount thereof, and the exact tax due, needs to be figured. Of course, they had no Section 732(b) carryover basis from the sham partnership.

The chops are another story.

Judge Goeke explains.

“Section 6230(a)(1) provides that normal deficiency procedures generally do not apply to the assessment or collection of computational adjustments.  However, there is an exception where a computational adjustment is attributable to an affected item that requires partner-level determinations.  Sec. 6230(a)(2)(A)(i).  That exception applies to the tax liabilities in this case, which we have said require partner-level determinations.  However, the plain language of that exception renders it inapplicable to ‘penalties, additions to tax, and additional amounts that relate to adjustments to partnership items.’  Id.; see also sec. 301.6231(a)(6)-1(a)(3), Proced. & Admin. Regs.  Respondent urges that because there is no exception for penalties, the general rule applies and deficiency procedures are inapplicable.” 2019 T. C. Memo. 6, at pp. 11-12. (Citation omitted).

Bob and Jayne run for the Woods, claiming the Supremes said that penalties are provisional. They may be, says Judge Goeke, but that doesn’t confer jurisdiction on Tax Court to decide the impact on the several partners.

“…the Supreme Court does not make the same leap that petitioners do in this case–i.e., that the later imposition of the provisional penalties must be done under normal deficiency proceedings.  The Supreme Court only notes that ‘[e]ach partner remains free to raise, in subsequent, partner-level proceedings, any reasons why the penalty may not be imposed on him specifically.’  Under section 6230 the appropriate venue for partners to raise subsequent challenges to the imposition of penalties is in a postpayment refund action.  Sec. 6230(c)(4), (c)(1)(C); sec. 301.6221-1(c), Proced. & Admin. Regs.; see also Woods, 571 U.S. at 39 (‘[M]ost computational adjustments may be directly assessed against the partners, bypassing deficiency proceedings and permitting the partners to challenge the assessments only in post-payment refund actions.”). Thus, we find that we have no jurisdiction in this pre-payment forum to consider the penalties determined at the partnership level.” 2019 T. C. Memo. 6, at pp. 13-14.

Bob and Jayne claim no due process, but they have got a post-payment forum, so that’s not an issue.

That Jayne may claim innocent spousery is nothing to the point, as she didn’t raise that in her pleadings except as a conclusory statement.

So pay first and sue later, when it comes to TEFRA chops.

I’m looking forward to the one-size-fits-all PATH approach, where partnership and partners get sorted out all at once.