Much have I admonished family law practitioners about their casual treatment of alimony and child support in the past. Congress has relieved me of that burden for divorces in years commencing January 1, 2019 and ending at midnight, December 31, 2025, as they’ve cut taxes and created jobs (or so they say…but this is a nonpolitical blog) by making alimony nondeductible and non-recognition for those years.

But here’s a family lawyer who did well, even though his/her client is pro se. So a Taishoff “Good Job” goes to the anonymous attorney for Jeremy Adam Vanderhal, 2018 T. C. Sum. Op. 41, filed 9/5/18.

CSTJ Lewis (“Spell It Again”) Carluzzo has this one, and he delves deeply into the ‘…the division and distribution of assets and debts * * * as set forth in the Exhibit ‘A” (agreement) attached to the divorce decree.” 2018 T. C. Sum. Op. 41, at p. 3.

Here’s where meticulous drafting pays off.

“The agreement includes a reference to a Sallie Mae student loan account that relates to petitioner’s former spouse.  That reference is found in the ‘Division of Community Debts’ section of the agreement and obligates petitioner to ‘assume and hold * * * [his former spouse] harmless’ from that debt.

“The agreement also includes a section titled ‘Tax Free Transfers’ that states

the parties ‘believe and agree that the transfers of property between them required by * * * [the agreement] are tax free transfers of property between them and are therefore tax-free transfers of property made pursuant to Section 1041 of the Internal Revenue Code and are not taxable sales or exchanges of property or payments for alimony, except where this agreement specifically denotes payments as such.’” Order, at p. 3.

The issue is whether Jeremy gets an alimony deduction for the Sallie Mae loan payments he made.

CSTJ Lew blows off IRS’ argument that it’s all property division, thus nondeductible.

“In this case the divorce decree and the agreement frequently distinguish between property and debt.  For example, the divorce decree states that petitioner and his former spouse ‘entered into an equitable agreement settling all issues regarding the division and distribution of assets and debts * * * as set forth in the’ agreement.  The agreement provides separate sections with respect to the division of community property and debt.  Other provisions of the agreement make reference to both community property and debt, in which case it is clear that the provisions apply to both.  Notably, the ‘Tax Free Transfers’  paragraph in the agreement refers only to ‘property’, without including any reference to debt.  As we construe the divorce decree and agreement, the reference to property in the ‘Tax Free Transfers’ section of the agreement does not clearly encompass the division of community debt.  Furthermore, in construing divorce or separation agreements, we can find no authority that suggests that the terms ‘property’ and ‘debt’ are interchangeable.  The divorce decree and the agreement do not otherwise address or ‘specifically denote’ the division of debts as tax-free transfers of property made pursuant to section 1041.” 2018 T. C. Sum. Op. 41, at p. 6.

So payment of loved-once’s debts are concededly alimony, and hence it’s not part of the property division.

Jeremy wins.

Back a year ago, I almost picked up on John Hawk-Bey, then known as John Hawkbey. See my blogpost “Does IRS Read My Blog?” 10/11/17.

John sorely tempted me, though. You can read about him again if you missed his first appearance in 2017 T. C. Memo. 199, filed 11/10/17. John was a frivolity merchant, and IRS whanged him accordingly.

But nowise deterred, either by his conviction after a jury trial on four counts of tax evasion in USDCEDPA or Judge Lauber’s blow-off of his petitioned SNOD above-referenced, John is back. Here’s John V. Hawk-Bey, Docket No. 10377-17L, filed 9/5/18, with STJ Diana L. (“Sidewalks of New York”) Leyden dealing with IRS’ motion.

Now John has petitioned a NOD from a CDP. IRS wants John’s petition tossed for failure to state a claim. John claims the Section 6702(a) chop he got is a “frivolous penalty.” Order, at p. 3, footnote 2.

After the usual supplementary paper joust, IRS admits it has both burden of production and burden of proof as to the Section 6702(a) frivolous-return chop. But IRS claims John still hasn’t stated a claim upon which relief can be granted.

Remember, STJ Di is the taxpayer’s friend, and even the non-taxpaying-frivolity-merchant’s friend.

“In support of his motion to dismiss respondent points out that much of the petition consists of frivolous materials that give rise to no justiciable issue. For the most part, the Court agrees. However, because the burden of proof with respect to the section 6702(a) penalty is upon respondent, petitioner’s pleading threshold is extremely low. In his Amendment to Amended Petition, petitioner claims he should not have been assessed a section 6702(a) penalty in his Amendment to Amended Petition and, therefore, has stated a claim for which relief can be granted.” Order, at p. 3.

So STJ Di strikes everything in John’s pleadings but the “shouldn’t have” part, and tells IRS to respond.

Takeaway- If IRS has burden of proof, you don’t have to plead much. Practitioner, enGraev that in concrete.

A client’s niece was in the original NYC cast of Rice-Lloyd Webber’s classic musical, so I saw it. She was splendid, but never did another Broadway (or anywhere else) appearance.

So when I saw today (9/4/18) that my blog had seven (count ‘em, seven) views from Argentina, when over the last seven years only 43 times had my blog caught the attention of the dwellers therein, I was amazed.

Can Bolivia be far behind?

C’mon, Bolivians, take a quick peek. If the Argentinians can do it, so can you.

As Enacted by Congress

As if more proof of this well-worn cliché were needed, we have Section 1291 (and no, I didn’t know about it before now either) and Roberto Toso and Marcela Salman, 151 T. C. 4, filed 9/4/18, as ex-Ch J Michael B (“Iron Mike”) Thornton really floors it going from the “on” ramp into the flow to start the Fall semester at the Glasshouse.

The question here is whether gain from disposition of PFIC (Passive Foreign Investment Company, like an offshore mutual fund) stock is gross income nor not. Before you quote Section 61 “money or money’s worth from whatever source derived,” take a look at what Congress did in 1986.

“Section 1291(a) provides that gain on the disposition of PFIC stock is allocated ratably to each day in the taxpayer’s holding period for the stock.*** The statute provides that gain allocated to the current year is included in the taxpayer’s gross income as ordinary income. Sec. 1291(a)(1)(B).  We shall refer to any gain that is included in the taxpayer’s gross income for the current year as current-year PFIC gain, and we shall refer to the rest of the gain, i.e., any gain on the sale of PFIC stock other than current-year PFIC gain, as non-current-year PFIC gain.

“Section 1291 treats current-year PFIC gains differently from non-current year PFIC gains.  Section 1291 expressly provides that ‘only’ current-year PFIC gains are included (as ordinary income) in gross income.  Sec. 1291(a)(1)(B) (‘[T]he taxpayer’s gross income for the current year shall include (as ordinary income) only * * * [current-year PFIC gains.]’).  Current-year PFIC gains are therefore taxed under the operation of sections 1, 11, 61, and 63 as ‘gross income’.

“By contrast, non-current-year PFIC gains are not included in gross income for the current year.  Instead, section 1291(a)(1)(C) provides that ‘the tax imposed* * * for the current year shall be increased by the deferred tax amount’.” 151 T. C. 4, at pp. 10-11. (Footnotes omitted.)

Now take a deep breath, and pay attention.

“Section 1291(c) generally provides that the deferred tax amount is calculated by (1) allocating the non-current-year PFIC gains to years in the taxpayer’s holding period (ratably by day pursuant to section 1291(a)(1)(A)), (2) multiplying the amount allocated to each particular year by the highest ordinary income tax rate in effect for that year, (3) computing an interest charge on that multiplicative product, and (4) taking the sum of all the products and interest charges for all years.  This sum, the deferred tax amount, is then added to the taxpayer’s income tax for the current year.” 151 T. C. 4, at pp. 11-12.

So any gain referable to years prior to the current year are not included in gross income for any year, but that gain is computed day-by-day at highest ordinary rate for each segment, and added to tax due for the current year, somehow never figuring in any year’s gross income.

The net result of these arithmetical double-back-jackknives is that Ron and Marcela are off the hook for two of the three years at issue, because their unreported PFIC gains, which are not included as gross income for those years, leave them under the 25% cutoff for 6SOL.

I agree with IRS. This produces a disparate result for onshore investors and offshore types like Rob and Marcela. Even though both are US persons and both invest in mutual funds, the onshore mutualist includes any gain (short or long, capital or ordinary) in gross income for 6 SOL purposes, but the offshore mutualist doesn’t.

Ex-Ch J Iron Mike, never one to shun a dictionary chaw or a duck-dive into the Joint Committee’s labyrinthine explications, finds that, pre-1986 (and also pre-2017 Tax Cuts and Jobs Creation Act), if a foreign corporation (like a mutual fund) had no effectively connected US income, and if antideferral provisions don’t apply, and earnings are retained offshore and not distributed to US onshores, tax is effectively indefinitely deferred. And when the onshore sells its offshore mutual fund shares, the onshore takes capital gains treatment, while the shares are bloated with deferred ordinary income.

So Section 1291 recaptures the ordinary for the years prior to the year of disposition at the highest ordinary rate in effect for those prior years.

A US mutual fund (known as a RIC or regulated investment company), to keep its tax status, has to distribute 90% of current year’s earnings to its shareholders.

So ex-Ch J Iron Mike goes to town.

“Upon close inspection of section 1291 and its legislative history, however, it is not immediately apparent that the PFIC provisions were enacted so that taxpayers investing in PFICs would be treated similarly to taxpayers investing in domestic investment companies in every respect.  We think any correspondence between PFICs and RICs is somewhat more attenuated than respondent would suggest.  For example, the definition of a PFIC (provided in section 1297) differs from the definition of a RIC (provided in section 851) in key respects:  In general, the PFIC provisions apply to a range of international investment companies that is broader than the range of domestic investment companies to which the RIC provisions apply.  As another example, the default rules of section 1291 do not provide for identical treatment of PFICs and RICs.  Among other differences, the entire amount of gain on the sale of PFIC stock is taxed under section 1291 as ordinary income or at the highest ordinary rates, whereas RICs may make capital gain dividends, sec. 852(b)(3), and sales of RIC stocks are generally treated as sales of capital assets, see sec. 852(b)(4).” 151 T. C. 4, at pp. 18-19.

So Section 1291 is an anti-deferral mechanism.

OK, Rob and Marcela are out for two years (3SOL has run and no fraud), but as to the third, they want to offset some PFIC losses against the gains wherewith they are grabbed by 6SOL.

No go.

“We agree with respondent that section 1291 does not provide for the netting of gains and losses on dispositions of PFIC stock.  Section 1291(a)(2) provides that the PFIC tax rules apply ‘to any gain recognized on such disposition [i.e., on a disposition of stock in a PFIC]”.  The use of the singular, ‘any gain recognized on such disposition’ (emphasis added), indicates that section 1291 applies to each disposition of PFIC stock separately, rather than to an annual aggregation of sales of multiple stocks.  Consequently, section 1291 applies to any disposition upon which gain is recognized.  Section 1291 does not address, and therefore does not apply to, dispositions upon which losses are recognized.  Accordingly, we conclude and hold that in applying the provisions of section 1291, petitioners are not entitled to offset gains from sales of PFIC stocks with losses from sales of PFIC stocks.” 151 T. C. 4, at pp. 23-24.

I give Rob’s and Marcela’s attorneys a Taishoff “good try, second class,” as they argue that they should be able to net per Section 165, before Section 1291 kicks in. Nope, says ex-Ch J Iron Mike; two different statutes, two different rules.

That Obliging Jurist, Judge David Gustafson, does not state whether or not he has done military service, but had he served, he might have encountered this phrase, acquired during the occupation of Germany. It means “no matter.”

And Judge Gustafson properly applies the term at the end of the road (maybe) for Fighting Joe Insinga. Long-time readers of this my blog will surely recollect the long career of Fighting Joe, from his 2013 debut up to his most recent appearance in “He Loves Conundrums,” 7/25/18.

Fighting Joe wanted to dismiss his own petition, but demands same be “without prejudice.” Problem arising, of course, is that Fighting Joe timely petitioned 2016 blow-off of his Form 211. Since more than thirty days have elapsed since then (by a factor of around 25), he can’t possibly petition that blow-off.

He can of course drop a new Form 211, get blown off again, and petition that, da capo al fin, if ever.

So Judge Gustafson asked Fighting Joe and IRS what they want.

Here’s the answer in a designated hitter, Joseph A. Insinga, Docket No. 16575-16W, filed 8/31/18.

IRS agrees Fighting Joe can “rise and fight again.” And Fighting Joe admits he can’t fight anew over the 2016 blow-off.

Judge Gustafson says Fighting Joe admits as follows: “since (1), any appeal must be filed with this court within 30 days following the date of the claim’s formal denial, i.e., July 18, 2016, and (2), there is no savings statute permitting the withdrawal and refiling of the petition after the 30 day appeal period has lapsed, then there is no prejudice to respondent in any event, and the case should be dismissed. Petitioner agrees that the foregoing result would obtain, as the court observes, even if the court were to characterize the dismissal as ‘without prejudice.’ [Doc. 26 at l.].” Order, at p. 1.

So Judge Gustafson concludes: “Thus, neither party has pointed to any actual consequence that would result from specifying whether dismissal of this case is with or without prejudice.” Order, at p. 2.

This is of course true in any case where the SOL has run on a refiling, and no statute mandates entry of anything but dismissal. Of course, tossing a petition from a SNOD for anything but jurisdiction means automatic entry of decision for IRS for the full deficiency.

I’m hoping Fighting Joe comes back, with fresh blogfodder. I’d hate to lose a good source.

No, Judge James S (“Big Jim”) Halpern is not suggesting that George E. Joseph, 27759-15, filed 8/30/18, depart from the strictest level of propriety.

It’s just that George’s seriatim opening brief (seriatim is one after the other, as opposed to simultaneous) has some hyperlinks to exhibits, and IRS objects. Some exhibits aren’t in the record (and you can’t wild-card stuff in via a brief), and some of those hyperlinked have notations on them not on those that were in evidence.

So to cool this hyper situation down, Judge Halpern runs a phoneathon, and sends George (and us) a designated hitter. George shall give IRS and Judge Halpern the thumb.

“The Court and the parties agreed that petitioner submitting a thumb drive with a copy of his brief hyperlinked to copies of the exhibits in evidence would be helpful to all. The Court will give petitioner leave (1) to file an amended brief, unaccompanied by exhibits, and (2) to provide the Court and respondent with a thumb drive containing an electronic copy of the amended brief with hyperlinks to electronic copies of the exhibits received into evidence, also contained on the thumb drive. The Court will strike from the record the five files containing exhibits….” Order, at p. 1.

And everyone gets more briefing time.

Of all the obsolete media floating around, the thumb drive is my least favorite, although I use it for backing up. They’re so easy to misplace or lose. Surely a PDF of the documents can be furnished via Dropbox or similar cloud formations.

No, not another essay about a point of law that’s past being argued about. This is about what a settlement consisting of two valid section 7121 closing agreements, both completed on Form 870-LT, Settlement Agreement for Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax, and Additional Amounts and Agreement for Affected Items, did to Michael McAvey and Kathleen McAvey 2018 T. C. Memo. 142, filed 8/20/18.

Since each of the closing agreements provided Mike and Kath had no quarrel with the numbers set forth therein, Mike and Kath petition the NITL on an OIC doubt-as-to collectability claim.

But Mike and Kath can’t exclude sales proceeds on some land because they spent some of the proceeds on unsubstantiated living expenses (although IRS did allow some of the unsubstantiateds), and they have to waive their heavy-duty NOLs arising from the torpedoed partnerships.

Ex-Ch J Michael B (“Iron Mike”) Thornton: “It is generally the Commissioner’s policy that collateral agreements waiving losses are appropriate to consider in situations where the taxpayer’s RCP is less than the amount of liability.  See IRM pt. 5.8.6.2 (Oct. 29, 2010).  As petitioners were claiming that their RCP was less than the amount of their debt, there was no abuse of discretion in the AO’s request for a collateral agreement. Moreover, it would appear that the collateral agreement was essentially offered in exchange for excluding petitioners’ partnership interests and income from calculation of their RCP.  The documents petitioners provided to the AO in support of their claims do not answer why, if the partnerships were worthless, the partners were choosing to report large amounts of interest income rather than wind up the partnerships.  There may be a perfectly reasonable answer, but petitioners did not provide it.  Consequently, it was not unreasonable for the AO to propose an alternative solution which avoided the issue, namely, the collateral agreement.” 2018 T. C. Memo. 142, at pp. 14-15.

And the settlement agreements foreclosed any arguments about Section 6751(b) Boss Hossery.

“Petitioners have not alleged or supported any fraud, malfeasance, or misrepresentation of material fact with respect to these closing agreements, and we deem petitioners to have waived or conceded any such argument.  Consequently, respondent may not reopen those aspects of petitioners’ case addressed in the closing agreements, and the closing agreements that petitioners signed may not be annulled, modified, set aside, or disregarded in this proceeding.  The closing agreements at issue specifically provide that petitioners consent to assessment of the penalties in question.  In signing these agreements, petitioners therefore agreed to waive the procedural requirement of section 6751(b)(1).

“Consequently it is clear that if there was any error in the AO’s failure to obtain verification of compliance with section 6751(b)(1), it was harmless error because neither respondent nor this Court may set aside petitioners’ valid closing agreements or petitioners’ consent to assessment contained therein.” 2018 T. C. Memo. 142, at pp. 22-23.

Takeaway- Be careful what you settle. Best to be well-settled.

Harry Dixon Loes’ 1920 evergreen gives me my text for today. My subtext comes from my blogpost “I’m Beginning to See the Light,” 4/9/18. And the case in point is Ted John Nelson, Jr. a.k.a. Theodore John Nelson, Jr., Docket No. 11098-18, filed 8/29/18.

My abovecited blogpost detailed the exposure by ex-Ch J L Paige (“Iron Fist”) Marvel of the petitioning of a plethora of years, whether or not SNODs or NODs actually were issued. The idea was to try to cut off nonassessables, which of course doesn’t work.

I remarked back in April “But dodgers, beware. Someone trying this risks the Section 6673 $25K yellow card.”

Looks like TJ is up for the yellow card.

“The motion sought dismissal on the ground that no notice of deficiency, as authorized by section 6212 and required by section 6213(a) of the Internal Revenue Code (I.R.C.) to form the basis for a petition to this Court, had been sent to petitioner with respect to taxable years 2000 through 2017, nor had respondent made any other determination with respect to petitioner’s tax years 2000 through 2017, including any determination pursuant to section 6320 and/or 6330, I.R.C., that would confer jurisdiction on the Court, as of the date the petition herein was filed. The motion further requested that the Court impose a penalty under section 6673, I.R.C. That section authorizes the Court to require a taxpayer to pay to the United States a penalty not in excess of $25,000 whenever it appears that proceedings have been instituted or maintained by the taxpayer(s) primarily for delay or that the position of the taxpayer(s) in such proceeding is frivolous or groundless.” Order, at p. 1. (Emphasis by the Court).

TJ wisely ducks.

“…petitioner did not deny the jurisdictional allegations set forth in respondent’s motion regarding lack of a pertinent notice or determination, nor did it suggest the existence of any relevant notice or determination. To the contrary, the response contained the statement: ‘I consent to dismissal’.” Order, at p. 1.

No Section 6673 frivolity chop for TJ, but TJ is admonished by Ch J Maurice B (“Mighty Mo”) Foley “…that the Court will consider imposing such a penalty in future cases commenced by petitioner seeking similar relief under similar circumstances.” Order, at p. 2.

The  three T. C. Memos cases today, 8/29/18, are a trio of no-substantiations. Judge Judy and others of her ilk have much to answer for; people think they can go to court with no paper, no witnesses, and a sob story. Well, they can, but if they have burden of proof they’re sunk.

So I’ll return to a theme from yesteryear. See my blogpost “Take the Hint,” 11/25/15. Do you take a remand to Appeals or don’t you?

Back in 2015, I said “But when a Judge suggests you might think about a remand, do think, and think twice. You might reject the suggestion if you don’t want to give Appeals a second chance to sink your client. But you might take the hint if you think you have enough good stuff to win at Appeals.”

But there are other choices, especially if you’re IRS’ counsel.

Here’s STJ Robert N Armen, “The Judge With a Heart,” dropping the hint to IRS in Michael Edward Kelly, Docket No. 26941-17SL, filed 8/29/18.

Mike is fighting a NFTL. When Mike got the NFTL, he went to Appeals. He claimed he couldn’t pay, which STJ Armen takes to be a request for currently-not-collectible, or CNC, status. Appeals proffers the Case Activity Record of the now-retired SO who bounced Mike’s CDP, which “…states that documents requested by him were never received and that petitioner never responded to the settlement officer’s letters other than in a single voice-mail message saying that he had unintentionally missed the administrative hearing and would like the settlement officer to call him back.” Order, at p. 2.

Mike “passionately” ripostes to IRS’ motion for summary J based on the foregoing with “…a very different scenario, alleging repeated efforts to contact IRS personnel and the furnishing of pertinent documentation.” Order, at p. 2.

No summary J, obviously. Whether Mike replied to the now-retired SO, or tried, and how often and with what, and what the now-retired SO did or didn’t do, are material facts. And the case is on for trial next month.

But does IRS really want a trial?

STJ Armen: “Rather than let this case proceed to trial at that time and place, the parties might care to consider whether it would be mutually advantageous if this case were to be remanded by the Court to respondent’s Appeals Office for a supplemental administrative hearing to be conducted by a settlement officer in an office proximate to petitioner’s residence…in order to consider petitioner’s request for a collection alternative. After all, if this case were to be tried, and if the Court were to conclude that petitioner strove, but to no avail, to communicate with the settlement officer during the administrative process and to provide requested documentation, then the remedy might very well be a remand for a supplemental administrative hearing. Given that the original settlement officer is now retired and may therefore not be readily available to respondent as a witness at a trial, and further given the fact that the present case involves a lien and not a levy, thereby assuring the Government of its priority over other possible creditors, the filing of a motion to remand, coupled with a motion for continuance of trial…would appear to present little (if any) downside to respondent and might very well lead to the disposition of this case on a basis that is mutually agreeable to the parties.” Order, at p. 3. (Emphasis by the Court.)

Something to think about.

Ol’ Noah W., the dictionary dude, says it means “dejected, depressed, cast down in spirit.” And after finally having run down Ernie Ryder and his traveling show, IRS sees their Section 6662 accuracy, and Section 6663 fraud, chops go “slip slidin’ away,” as a much finer writer than I put it.

The problem is Graev and Chai. If you don’t know those cases, you haven’t been reading this my blog. Ernie’s little show has been running for more than eight years, and IRS was a wee bit casual with documenting Boss Hossery back then, so when they throw in a couple “redacted Examination Case Processing Sheet (Form 3198)” they need to have some declarations from IRS personnel to backstop their claim that the 3198s somehow are Section 6751(b) sign-offs.

Well, what about res gestæ? The Form 3198 is offered for the fgact that it exists, not that it’s true.

Maybe, but that doesn’t solve the problem. Certainly not for Judge Holmes, the Mixmaster of Silt Stirring.

“In some earlier orders, we found that penalty-approval forms were admissible under the business-records exception to hearsay, see Fed. R. Evid. 803(6); more recently, we’ve found that the forms were verbal acts, admissible to show that the supervisor approved the penalty, not that the penalty was justified or even what the supervisor was thinking when he approved it, see Fed. R. Evid. 801(c) advisory committee’s note (‘[i]f the significance of an offered statement lies solely in the fact that it was made, no issue is raised as to the truth of anything asserted, and the statement is not hearsay”). We can’t say that the verbal-act analysis applies here. While the Examination Case Processing Sheet does appear to be signed by Ms. P’s manager and does have penalty amounts listed on it, the document itself doesn’t give any indication on its face that it has anything to do with a supervisor approving Ms. P’s initial determination of penalties. Indeed, if it wasn’t for Ms. P’s declaration, it would be entirely unclear to us why the Commissioner wants the Examination Case Processing Sheet in the record.” Ernest S. Ryder & Associates, Inc., APLC, et al., 14619-10, filed 8/24/18, at p. 6. (Footnote and name omitted).

For both sets of chops, IRS has the same problem. As Mama said, “Don’t know anybody who needs to be explained.” The declarations explaining the Forms 3198 aren’t contemporaneous (they’re made years later), and the forms mean nothing without the declarations. The declarations aren’t records kept in the ordinary course of business by one required to do so, so they’re hearsay and inadmissible.

Once again, IRS is Graevly chopfallen. Sorry, guys.