Were I a punster (Heaven forfend!) I might suggest we sing a chorus of Das Lied von der Urda to welcome the newest designee to the Tax Court bench, Judge Patrick J. Urda.

The Tax Court website, apparently taken unaware by Judge Urda’s appointment last week, has no biography, so I will crib one from the Internet to try to make amends for the first sentence hereinabove set forth.

Judge Patrick J. Urda, was born August 29, 1976, and received his Bachelor of Arts degree in classics, summa cum laude, from the University of Notre Dame, where he was inducted into Phi Beta Kappa. He received his Juris Doctor from Harvard Law School. He spent three years in private practice and clerked for Judge Daniel Anthony Manion on the Seventh Circuit Court of Appeals.

Note Judge Albert G (“Scholar Al”) Lauber is also an honors graduate in classics.

Judge Urda served as counsel to the Deputy Assistant Attorney General in DOJ Tax Division, litigated over eighty (count ‘em, eighty) tax appeals, appearing in all CCAs, appeared before the Supremes, and was a five-time winner of DOJ Tax Division’s distinguished attorney award. He received IRS’ Michael Rogovin award.

Let’s all give a hearty welcome to Judge Patrick J. (“Scholar Pat”) Urda. I look forward to great opinions.

Well, that’s the question for Richard M. Hellmann & Dianna G. Hellmann, et al., Docket No. 8486-17, filed 10/1/18.

The issue for Rich, Di and the als is whether their family investment operation (hereinafter “Hellmannco”) is a Lender; that is, entitled to the same treatment as Lender Management, LLC.

If you’ve forgotten Lender and the Section 162 vs Section 212 deduction issue for family investment operations, see my blogpost “All in the Family – Part Deux,” 12/13/17.

Hellmannco claims it’s in the trade or business of running a mutual fund. IRS says the operation is not a trade or business, but an “activity ‘for the production or collection of income’ or ‘for the management, conservation, or maintenance of property held for the production of income,’ within the meaning of section 212.” Order, at p. 2.

And of course Hellmannco gets all its business deductions if it is a trade or business, but if it’s a mere “activity” the members (and Hellmannco is an LLC, presumably box-checked as a partnership) get hit with the 2% AGI floor for the Schedule A miscellany, the Schedule A phaseout, and AMIT.

And with the 2017 Jobs Creation and Tax Act, Schedule A miscellaneous deductions don’t look so good for this year and out to 2026. You can’t take them until 2026, so the suspension of the Schedule A phaseout doesn’t help the Hellmannco crowd. They won’t figure in AMIT either.

“These cases appear to resemble Lender Management in some respects, but not in others. [Hellmannco] is a family office that managed investment assets for four family members. All four family members resided in the Atlanta metropolitan area and appear to have been on good terms. [Hellmannco] received performance-based compensation keyed to the success of the investments it made. One investor… appears to have had authority over day-to-day investment decisions. But here, unlike in Lender Management, all of the other investors were also owners of the management company, with each investor holding a 25% profits interest in [Hellmannco].” Order, at p. 3. (Name omitted).

Remember, the Lender crowd was spread out, and hated one another. And the Boss Hoss of the Lender mutual fund got 99% of the profits therefrom, but only had a small piece of the action in the portfolio.

In the end it’s facts & circumstances. Did the management entity add value, and personalize investment advice to the individual members (“know your customer”)? Most importantly, were the profits from the management arm paid over to the members of the investment arm in the same proportion as their interests in the investment arm?

“In cases such as these, an important question is whether the owners of the family office are ‘actively engaged in providing services to others,’ Lender Management, at *26, or are simply providing services to themselves. See Dagres, 136 T.C. at 281 (‘Selling one’s investment expertise to others is as much a business as selling one’s legal expertise.’). Here, each family member had a 25% profits interest in [Hellmannco]. If each family member (for example) also had an aggregate 25% interest in the assets under management, there would be perfect proportionality between the two streams of income. In that event, it would not matter how [Hellmannco] was compensated, because that compensation, once distributed ratably to the four owners, would simply replace investment income that each person would otherwise have derived from the investment portfolios. That was not the case in Lender Management, where one family member had a 99% profits interest in the management company, but held only minority interests in the assets under management. The facts currently in the record do not enable the Court to assess the degree or proportionality (or lack thereof) here.” Order, at p. 4.

So while Judge Albert G (“Scholar Al”) Lauber lays out a laundry list of questions for Hellmannco and IRS to answer, as to ownership, management, operation, services, and portfolio composition of Hellmannco, the real question is the old question: “Who got the money?”

This well-known rhetorical technique does not serve IRS very well in Semere Misgina Hagos, Docket No. 2018 T. C. Memo. 166, filed 10/1/18.

Judge Goeke shreds Seme’s deductions for nonsubstantiation. But back in April he told Seme and IRS to do a Branerton-style play-nice to resolve the Section 6751(b) Boss Hoss reopener IRS wanted so as to stick Seme with the Section 6662(a) accuracy chops. And let him know how it all comes out.

Seme’s attorney bails at this point, and no one objects, so Judge Goeke lets him out. I might mention Seme or his attorney tried a Battat recusal that flunked. For Battat, see my blogpost “Necessity Knows No Law,” 2/6/17.

But neither IRS nor Seme tells Judge Goeke anything about their efforts to resolve the reopener.

“The Court issued a second order seeking a response on the Graev issue.  In response to this second order respondent simply asserts that the Court should reopen the record.  Given respondent’s failure to respond to our order of April 4, 2018, to seriously seek an agreed resolution of the evidentiary issue, and to address the issues raised in petitioner’s objection filed to the motion to reopen the record, we decline to reopen the record and hold that respondent has failed to carry the threshold burden for the Court to sustain the penalty.” 2018 T. C. Memo. at pp. 8-9.

Play-nice beats dogmatic assertion every time in Judge Goeke’s courtroom. And I wouldn’t bet too many quatloos that it works too well in any other courtroom.

I’m sure my readers will join with me in expressing our thoughts and prayers to the family, friends and colleagues of Judge David Laro.

The title expresses my views.

Here is the Tax Court press release. https://www.ustaxcourt.gov/press/092518.pdf

My colleague Peter Reilly CPA has promulgated a series of laws of tax under his name. I forget which one gives me my text for today, but the purport is that filings should not be put off to the last minute. The consequences of last-minute filings are often disastrous.

Today’s victim is Connect Ya Communications, Inc., Docket No. 7661-18, filed 9/28/18, and Ch J Maurice B (“Mighty Mo”) Foley has the bad news. Connect Ya failed to connect.

“The record reflects that respondent sent a notice of deficiency to petitioner… on January 17, 2018. The 90-day period under I.R.C. section 6213(a) for filing a timely Tax Court petition as to that deficiency notice expired on April 17, 2018. The petition, filed April 20, 2018, arrived at the Court in an envelope bearing a U.S. Postal Service Click-N-Ship Priority Mail 2-day label day label dated “04/18/2018″—one day after the statutory 90-day period expired. Tracking information from the USPS Tracking Webpage (attached as Exhibit B to respondent’s August 30, 2018, motion to dismiss) shows that petition was accepted at the USPS origin facility on April 18, 2018.” Order, at pp. 1-2.

Connect Ya claims “…it attempted to mail the petition to the Court timely on April 17, 2018, but that the U.S Postal Service affixed an untimely April 18, 2018, postmark, to the mailing envelope.” Order, at p. 2.

My longer-suffering readers may remember the tale of Julie M. T. Walker, member of the Judges’ Club, and her postal mix-up, more particularly bounded and described in my blogpost “Going Postal,” 2/4/13. But at least Julie M. T.’s wrong papers got into the mail on the right day, and had the legible USPS datestamps to prove it.

Connect Ya’s attempt to prove USPS got it wrong cuts them no slack from Ch J Mighty Mo.

“Although extrinsic evidence is sometimes allowed to prove the date of mailing where an envelope containing a Tax Court petition lacks a postmark or the postmark is illegible, such evidence is irrelevant where the envelope bears a legible U.S. Postal Service postmark after the 90th day prescribed for filing a timely petition. I.R.C. sec. 7502(a); see also Shipley v. Commissioner, 572 F.2d 212, 214 (9th Cir. 1977); Kahle v. Commissioner, 88 T.C. 1063, 1068-1069 (1987); and Wiese v. Commissioner, 70 T.C. 712, 715 (1978).” Order, at p. 3.

Maybe the Connect Yas got to the post office after 5 p.m., when all the postmarking machines tick over to the next day’s date.

Takeaway- Don’t wait. If you get a SNOD or NOD, blast in a downloaded form petition claiming everything in the SNOD or NOD is wrong, and throw in the sixty buck check. You can amend later.

To take or not to take a proffered remand is a decision that requires careful analysis. I’ve argued before that an offeree may not wish to give Appeals a chance to remedy an abuse of discretion that could derail IRS’ case. Even more is this the case where Tax Court has given Appeals a blueprint how to remedy all their faults in the order to remand.

But the remand might help where the offeree has the blueprint of what evidence to proffer and what arguments to make, from the same source.

Today that Obliging Jurist, Judge David Gustafson, revisits Lauri Denise Johnson & David Michael Roberson, Docket No. 22224-17L, filed 9/27/18.

Back on 9/10/18, Judge Gustafson, finding serious question whether Lauri & David got the SNOD upon which this case is based, asked parties to show cause why he shouldn’t remand for Appeals to review the nonreceipt issue and whether David & Lauri can dispute the underlying liability.

Judge Gustafson held a phoneathon with IRS and Lauri (who spoke both for herself and David).

“The Court observed that, where IRS Appeals has abused its discretion in the CDP process, the Commissioner does not have a right to a remand. But the Court explained for Ms. Johnson’s benefit: that many petitioners benefit from a remand (since, for example, it gives them another opportunity to seeks remedies from Appeals at a supplemental hearing); that the remand does not deprive the taxpayer of ultimate judicial review of Appeals’ supplemental determination; and that if there is no remand and the Court simply decides that Appeals’ determination cannot be sustained, that decision, without more, does not bar the IRS from future collection activity, for which activity section 6330(b)(2) (“One Hearing Per Period”) may preclude judicial review. Ms. Johnson nonetheless stated that petitioners do not want a remand and will be ready to proceed to trial.” Order, at pp. 1-2.

OK, so Judge Gustafson will try receipt or nonreceipt. And then either toss the NOD for abuse (in which event Lauri & David get to try their underlying liability, if any), or sustain it, with no challenge to underlying liability.

“Ms. Johnson seemed to state that the petitioners intend to prove 16 ‘due process’ violations committed by the IRS. We will not prejudge this issue before hearing it. But we advise petitioner that defects behind the IRS’s issuance of an SNOD are usually out of bounds in a de novo consideration of a taxpayer’s liability; rather, the case simply begins with the IRS’s (arguably defective) determination and then effectively cures any such defects by allowing the taxpayer to demonstrate her actual tax liability. A taxpayer could not avoid her actual liability by proving that the IRS did a bad job in its examination of her tax return. On the other hand, it is true that defects committed by Appeals in the CDP process can indeed be reviewed in a CDP case like this one; but if, in a case like this one, the Court makes such a review and determines that Appeals abused its discretion by failing to follow correct procedure in considering a challenge to underlying liability, then the remedies are either (1) a remand to Appeals so that it can engage in a proper hearing (which remedy petitioners decline) or, if there is no remand, then (2) a de novo trial before the Tax Court on the issue of underlying liability. Again, the taxpayer could not avoid her tax liability simply by showing that Appeals did a bad job in the CDP hearing.” Order, at p. 2.

Since the SNOD dealt with medicals, charitables and “miscellaneous” deductions, let Lauri & David gather up their papers and show them to IRS, so they can stipulate them into evidence, rather than do a one-at-a-time introduction.

Takeaway- Be ready to go to trial on all issues if you reject a remand.

The words of the Sweet Swan of Avon will serve to describe the appraisal in Marc Chrem and Esther Chrem, et al., 2018 T. C. Memo. 164, filed 9/26/18, but only if IRS prevails on the trial. No summary J either to Marc and Esther (and their sisters, cousins, aunts and other family who comprise the als), or to IRS, which claims assignment of income based on the give-and-go from Marc and Esther and the als of 13% their stock in the Hong Kong C Corp the family owned to a certain 501(c)(3) and over to the ESOP of a US Sub S they also owned.

The Hong Kong C Corp did testing and quality control for the US Sub S and got paid commissions. The Sub S’ ESOP wanted to buy 100% of Hong Kong’s stock to cut out the commissions, achieve vertical integration, get Hong Kong’s intangibles (trademarks), and of course get $27 million out of the ESOP at capital gains rates.

The family agreed to sell 87% of Hong Kong to the ESOP for cash and notes, and certain members donated an aggregate of 13% to the 501(c)(3).

But the ESOP buyout was all-or-nothing, so the 501(c)(3) had to come in or the US S Corp would have to reverse merge or squeeze out the 501(c)(3) at the same price per share as the family were getting for their Hong Kong shares, within 60 days, or all bets were off.

But since both Hong Kong and the US Sub S were under common command and control, ERISA required a FMV appraisal of the shares. The family got this from an admittedly competent appraiser, and the numbers worked.

Except.

The family members whose contributions to the 501(c)(3) exceeded the $5K cutoff didn’t attach the appraisal to their 8283s, the appraisal expressly stated it was for ERISA purposes and not income tax, and the 13% the 501(c)(3) was donated was valued as if the 501(c)(3)’s shares were already part of the deal. In the last-named, the IRS claims the valuation was wrong because the 13% shares were worth much less if valued separately (minority discount, y’know). IRS argues the appraiser valued the deal as one deal, when there were two.

The family argues reasonable cause and substantial compliance on the appraisal.

Judge Albert G (“Scholar Al”) Lauber has this one.

“This Court has previously considered the assignment of income doctrine as applied to charitable contributions. In the typical scenario, the taxpayer donates to a charity stock that is about to be acquired by the issuing corporation via redemption, or by another corporation via merger or acquisition. In determining whether the taxpayer has assigned income in these circumstances, one relevant question is whether the prospective acquisition is a mere expectation or a virtual certainty. “More than expectation or anticipation of income is required before the assignment of income doctrine applies.” Greene v. United States, 13 F.3d 577, 582 (2d Cir. 1994).

“Another relevant question is whether the charity is obligated, or can be compelled by one of the parties to the transaction, to surrender the donated shares to the acquirer. Rev. Rul. 78-197, 1978-1 C.B. 83 (1978); see Rauenhorst v. Commissioner, 119 T.C. 157, 166 (2002) (finding ‘the donee’s control to be * * * an important factor’). The existence of an ‘understanding’ among the parties, or the fact that transactions occur simultaneously or according to prearranged steps, may be relevant in answering that question. See, e.g., Blake v. Commissioner, 697 F.2d 473, 480 (2d Cir. 1982) (stating that an ‘understanding’ among the parties need not be ‘legally enforceable under state law’), aff’g T.C. Memo. 1981-579; Ferguson v. Commissioner, 108 T.C. 244 (1997) (finding assignment of income with respect to proceeds of merger that occurred contemporaneously with charitable contribution), aff’d, 174 F.3d 997 (9th Cir. 1999).” 2018 T. C. Memo. 164, at pp. 12-13.

But questions of fact obtrude. Was the Hong Kong – US Sub S deal a lead-pipe cinch? Second, when did the family give the stock to the 501(c)(3), before or after the 501(c)(3) agreed to go with the deal?

“The parties also dispute the dates on which relevant events occurred. Petitioners assert that they transferred their shares to [501(c)(3)] on December 5 and there appears to be documentary evidence arguably supporting that assertion. Respondent contends that [501(c)(3)] did not acquire ownership of its 900 shares until (at the earliest) December 10, allegedly after [501(c)(3)] unconditionally agreed to sell the 900 shares to [US Sub S]. That contention derives arguable support from other documentary evidence, as well as from [appraiser]’s description of the proposed transaction, which recited that petitioners would transfer 900 shares to [501(c)(3)] ‘[s]imultaneously with [US Sub S]’s acquisition of the 6,100 shares.’”  2018 T. C. Memo. 164, at p. 14.

Also in doubt is the extent to which 501(c)(3) was obligated to go ahead and sell the shares it just got for $4.05 million. The only evidence in the record is that the family told the 501(c)(3) to do it. Of course, as Judge Scholar Al points out with his usual perspicacity, if 501(c)(3) doesn’t go along, the deal collapses and 501(c)(3) is left with “a 13% minority interest in a closely held Hong Kong corporation, the market value of which might be questionable.” 2018 T. C. Memo. 164, at p. 15.

If I had been advising 501(c)(3), I might suggest agreeing to go along for another half-million or so deductible cash contribution. But they didn’t ask me.

Howbeit, there be fact questions.

As for substantial compliance and reasonable reliance, although the appraisal was both unattached and not directed to income taxes, the family claims the appraiser signed the 8283s, there was no need for a minority discount for the 501(c)(3) shares as those shares weren’t being sold separately, and the family relied on their trusty CPA.

“The record as it stands now is silent concerning the advice (if any) that the CPA provided petitioners regarding the Empire report and whether they relied in good faith on whatever advice she may have supplied. For these reasons, we conclude that petitioners’ ability to rely on the “reasonable cause” defense of section 170(f)(11)(A)(ii)(II) presents genuine disputes of material fact that are not susceptible to resolution by summary judgment.” 2018 T. C. Memo. 164, at p. 25.

So try the assignment of income and the reasonable reliance issues.

Or, Appeals Hits the Trifecta

The “elevator pitch” may be the chance to change your career path, but a chat with a Collection Officer during an OIC is not a proceeding for “prior proceeding” CDP purposes.

This from Judge Buch writing for a unanimous Court in James Loveland, Jr., and Tina C. Loveland, 151 T. C. 7, filed 9/25/18.

IRS gets three (count ’em, three) strikes from Judge Buch: they abused their discretion by failing to consider Jim’s and Tina’s OIC, IA, and economic hardship.

Jim is a disabled ex-boilermaker and Tina just survived breast cancer. They lost their home in the ’08 Great Meltdown. They stopped paying their taxes. IRS gave them a NITL.

Jim and Tina proffered an OIC with all the info. They were negotiating with a CO, who bounced their OIC. Jim and Tina went to Appeals to contest the bounce, with an IA as a back-up, but Appeals told them they couldn’t raise IA if they wanted to appeal the OIC.

So Jim and Tina dropped the IA and went back to negotiating.

As they were trying to mortgage another piece of property they owned so as to pay their taxes down below $50K to do a small-claimer, IRTS dropped a NFTL, thereby blowing up the mortgage process.

Jim and Tina timely appealed. The AO asked for the usual financials. Jim and Tina said they gave them with the OIC. The AO refused to consider anything except proposing an $853 per month IA, when Jim and Tina proposed $800. Apparently the back-and-forth with the CO on the OIC was a “prior opportunity.” But, as we shall see, that’s not enough.

IRS wanted summary J, but didn’t furnish the AO’s declaration until Jim and Tina had already responded to the motion, so they got a second chance.

“We are faced with a unique question here: whether negotiations with a collections officer constitute a previous administrative proceeding under section 6330(c)(4)(A)(i) and section 301.6320-1(e)(1), Proced. & Admin. Regs. The Lovelands made an offer-in-compromise in a separate collection proceeding that is not before us. Then, in the CDP hearing underlying this case, they renewed their offer-in-compromise. In response to a January 23, 2017, letter from the Commissioner, the Lovelands resubmitted their previously rejected offer-in-compromise along with their financial information.” 151 T.C. 7, at p. 14 (Footnote omitted, but it says IRS claimed Jim and Tina never gave financial information, except Judge Buch says they did).

” Section 301.6320-1(e)(1), Proced. & Admin. Regs., states that ‘the taxpayer may not raise an issue that was raised and considered at a previous CDP hearing under section 6330 or in any other previous administrative or judicial proceeding if the taxpayer participated meaningfully in such hearing or proceeding.’ Whether a previously rejected collection alternative can be raised at a CDP hearing does not hinge on whether the taxpayer had a prior opportunity to challenge the rejection; it hinges on whether the rejected collection alternative was actually considered at a previous administrative or judicial proceeding. In other words it is not a question of whether there was a prior opportunity, but whether there was a prior proceeding.” 151 T. C. 7, at pp. 14-15. (Emphasis by the Court).

Jim and Tina could have gone to Appeals on the OIC, but that meant dumping their IA, so they didn’t. Thus, no prior proceeding, thus the OIC and the IA are still in play.

And the Section 6320 levy regs only talk about prior opportunity to contest amounts, not spousals, appropriateness (like maybe hardship, ETA, etc.) and OICs.

Of course Appeals is entitled to updated financials where circumstances have changed. See my blogpost “Back to the Future,” 8/1/11. But the AO never looked at the old and never asked for any new.

And the AO never considered Jim’s and Tina’s ailments or hardships.

IRS hits the trifecta. Abuse of discretion three ways.

This one goes back to Appeals.

More than two (count ’em, two) years ago, I had suggested myself as candidate for the post of proofreader (unpaid) to the United States Tax Court. See my blogpost “I Volunteer,” 4/6/16. My offer was not taken up, for reasons that seem obscure to me.

So I remember today Harold Ross, legendary editor of the New Yorker magazine, which, in my college days, I dreamed of editing.

It was said of Ross that he believed only two persons were universally known by only one name, Houdini and Holmes (sorry, Judge; Ross meant Sherlock). Wherefore, Ross was wont to blue-pencil every piece wherein a person was referred to for the first time by only one name, no matter how prominent the person or unique the name, with his famous phrase “who he?”.

The joke was that he once blue-penciled a drama criticism wherein the name “Euripides” appeared with a “who he?”

Well, at last I can ape my salad-days’ hero.

Here’s Estate of Eunice Sherwood, Deceased, Anthony Sherwood, Independent Administrator,  Docket No. 25111-17, filed 9/25/18. It seems the late Eunice became the late Eunice post-petition, so Judge Gale amends the caption appropriately. Then he approves the late Eunice’s attorney’s (whom I’ll call Mr. W) exit, as none of Mr. Sherwood the Indie Adm’r, his counsel, or IRS, objects thereto.

But there remains the question what happens now.

Judge Gale deals with that. “In the circumstances, we conclude that Mr. W lacks authority to act on behalf of decedent’s estate and must withdraw from the case. In view of Mr. Sherwood’s appointment as administrator of decedent’s estate, we will order that he be substituted as a party. In the event Mr. Sherwood does not wish to prosecute this case, he should consent to a motion by the Commissioner (respondent) to dismiss for failure to properly prosecute. Mr. Sherman is advised, however, that– barring any concession by respondent–a dismissal of the case for failure to properly prosecute will result in a decision in respondent’s favor for the entire amount of the deficiency.” Order, at p. 2.

“Mr. Sherman”? Who he?

Tax Court, notwithstanding that it has neither press office nor press officer, conjures up a document entitled “press release” announcing that “…effective as of October 19, 2018, Senior Judge Carolyn P. Chiechi has fully retired and is no longer recalled for judicial service.”

The press release states the thanks the Court offers “…Judge Chiechi for her excellent service and contributions to the Court’s jurisprudence.”

All Judge Chiechi’s open cases will be reassigned.