The Virgin Islands, that is, as we come to what seems to be the end of the wannabe Virgins, the daughters of la famille Vento, in Renee Vento, et al, 147 T. C. 7, filed 9/7/16, with Judge James S. (“Big Jim”) Halpern bidding a none-too-fond farewell to the Vento daughters (Renee, Nicolle and Gail). Mom and Dad slid under the IRS tag and got VI residency for the year at issue, courtesy of the USCA Third Cir. and the loosey-goosey rules then in effect.

You’ll remember la famille Vento, surely? No? See my blogposts “The Non-Virgin Islanders,” 3/13/11, “Catching Up,” 9/30/13, and “Competent Authority,” 6/15/15.

Now that you’re caught up, the Ventos, having been stripped of their VI residency, want a foreign tax credit for the money they gave the VIBIR (Virgin Island Bureau of Internal Revenue), wherewith to apply against their US hits. I’m going to give their attorneys a Taishoff “Good Try, Second Class,” for that move.

The Ventos paid US estimateds, but these were sent to the VI when the Ventos claimed VI residency for the year at issue.

Then, when their claims to VI residency unraveled,  one of them filed a 1040X with the VIBIR, asking for her money back, but the VIBIR marked the file “closed” and gave her nothing.

The principle here is the “equality principle.” The idea is to treat VI tax as equivalent to US tax, but for the mirror image rule, which makes VI tax treatment equal to US tax treatment. Thus, a tax paid to VI is equivalent to a tax paid to a US State, so it could get Section 164 deductibility, but not Section 901 credit.

Anyway, what the Ventos paid VIBIR wasn’t a tax, because they weren’t obligated by law to pay VIBIR; they admit they had no VI-sourced income for the year at issue. And whatever their states of mind as regards the uncertainty of the law at that time (pre-2004, when residence rules clamped down on phony Virgins), the USDCVI and Third Cir. had no problem blowing off their claims.

“Petitioners claim that, because ‘there was no clear authority on determining residency in the Virgin Islands for [year at issue]’, the position that they were bona fide residents of the Virgin Islands and thus required to pay Virgin Islands income tax for that year was a ‘reasonable interpretation’ of applicable law.  The absence of clear authority in regard to an issue, however, does not establish the reasonableness of all possible means of resolving it.  The record includes no evidence that petitioners relied on the advice of competent advisers in taking the position that they were bona fide residents of the Virgin Islands….  Neither the U.S. District Court for the District of the Virgin Islands nor the Court of Appeals for the Third Circuit had any apparent difficulty concluding that petitioners were not bona fide residents of the Virgin Islands for [year at issue].  Of course, the courts’ decisions against petitioners do not, by themselves, establish that petitioners’ claims to bona fide Virgin Islands residence for 2001 were not based on reasonable interpretations of the applicable law.  But, as we read their opinions, the courts did not seem to find the decision a close one.” 147 T. C. 7, at 18. (Citations omitted).

And before the SOL ran on the Ventos’ chance to get back the payments they made to VIBIR, the 2004 rules were moving along, giving them a chance to beat the clock. But they didn’t. And Mom and Dad had much better cases than the Ventos, so Mom and Dad getting by proves nothing.

There’s no need to take a foreign tax credit, as whatever is paid to VIBIR for VI-sourced income is applied to the VI tax, and the remainder applied to US tax, so the VI-sourced income is taxed only once.

“A section 932(a) taxpayer (non-Virgin Islands resident) similarly has no need to credit Virgin Islands taxes paid under section 901 to reduce her U.S. tax liability.  Section 932(a) taxpayers, again, compute a single U.S. tax and allocate part of that tax to the Virgin Islands.  Sec. 932(a) and (b).  As a result of the required allocation, a section 932(a) taxpayer effectively pays tax to the Virgin Islands on her Virgin Islands income and pays tax to the United States on her remaining income.  In short, the coordination scheme implemented by section 932 provides sufficient means to prevent the same income from being subject to both U.S. and Virgin Islands tax.” 147 T. C. 7, at pp. 24-25.

Here’s how the Ventos’ lawyers earned their “good try, second class.”

“Petitioners’ rather unusual situation might have given them an opportunity to slip through a crack in the statutory framework.  The literal terms of section 932(a)(3) do not deny petitioners the credits in issue because no petitioner earned as much as a dollar of Virgin Islands income.  We cannot imagine, however, that, while Congress did not intend to allow a foreign tax credit for Virgin Islands taxes paid by bona fide residents of the Virgin Islands or by non-Virgin Islands residents with Virgin Islands income, it nonetheless intended to allow a credit under section 901 for amounts paid as tax to the Virgin Islands by a taxpayer who is not a bona fide resident of the Virgin Islands, has no Virgin Islands income for the year in question, and thus did not actually owe tax to the Virgin Islands for that year.” 147 T. C. 7, at p. 28.

VIBIR should have disgorged, but didn’t. So, while Judge Big Jim has some sympathies that the Ventos are paying twice, their purported move to the VI would have saved them $9 million in taxes if it worked.

Many years ago that phrase was used to describe a Super Bowl loss, but Judge Gerber is stuck with the result in Eric L. Cox, 2016 T. C. Sum. Op. 53, filed 9/6/16. Though I remember a colleague claiming Judge Gerber was pro-IRS, he wasn’t so here.

He was confronted with “…(1) an anomalous circumstance where petitioner might have been able to successfully contest the underlying liabilities and (2) the resulting question of whether it was an abuse of respondent’s discretion not to permit him to attempt to do so.” 2016 T. C. Sum. Op. 53, at p. 5.

IRS hit Eric with TFRPs for an outfit Eric claimed he’d sold before the quarters at issue, and he showed documentary proof thereof at the Tax Court trial, but his notice of appeal from the Letter 1153 was delivered and mailed one (count it one) day late.

Letters 1153 are notices sufficient to trigger the right of appeal, and sixty days means sixty days. Eric was a day late and a lot more than dollar short. Of course, Eric can pay one quarter and sue in USDC or USCFC.

Still, says Judge Gerber “It seems curious that respondent [IRS] would not consider petitioner’s evidence because it could have saved the Government and parties time, effort, and expense if petitioner had been able to easily show that he was not liable for the TFRP liabilities.  We understand that respondent was precluded from considering petitioner’s appeal of the proposed assessment because it was untimely, but respondent is not otherwise statutorily prohibited from considering petitioner’s arguments during the CDP hearing (after an assessment has already been made). Nevertheless, this Court’s role is to review what has transpired and to decide whether there has been an abuse of discretion.  Because respondent was not required to consider petitioner’s underlying liabilities as part of the CDP hearing, respondent’s failure to do was not an abuse of discretion.” 2016 T. C. Sum. Op. 53, at pp. 6-7.

And the SO filled in all the blanks on the checklist, so no abuse of discretion.

But Not Here

Ex-Ch J Michael B (“Iron Mike”) Thornton welcomes us back from the three-day end-of-summer layoff with Elliot Herskowitz, Docket No. 21233-15L, filed 9/6/16. And no, he didn’t designate it. Apparently ex-Ch J Iron Mike feels I should work harder.

IRS liened on Elliot for some back taxes. Elliot told Appeals “…he has a ‘history of making excessive estimated payments, the liability…should be reversed, or, at a minimum, the interest and penalties should be reversed.’” Order, at p. 1.

He had a phone-a-thon CDP, and the liens got sustained.

Then IRS grabbed the “excessive payment” Elliot made for a subsequent tax year, applied it to the liabilities that gave rise to the NFTLs plus penalties, and gave Elliot a NOD.

The NOD said, “nothing due, no further action.”

Elliot petitions. “The sole assignment of error in the petition was: ‘Due to exigent circumstances the penalties and interest should be waived.’” Order, at p. 2.

Of course waiving interest is a nonstarter.

IRS answers: “(1) this case is moot because there remains no unpaid Federal income tax liabilities for the years at issue and the liens underlying the NFTLs have been released; and (2) the Court lacks jurisdiction to determine an overpayment or to order a refund or credit of taxes.” Order, at p. 2.

Elliot comes to the point. IRS consented to jurisdiction when they issued the NOD, which says I should go to Tax Court timely, which I did. Oh, and check out my prior liabilities and the penalties.

Ex-Ch J Iron Mike: “The Tax Court is a court of limited jurisdiction; we may exercise jurisdiction only to the extent expressly provided by statute, see, e.g., Henry Randolph Consulting v. Commissioner, 112 T.C. 1, 4 (1999), and the parties’ consent does not confer on this Court’s [sic] jurisdiction not otherwise so provided. High Adventure Ministries, Inc. v. Commissioner, 80 T.C. 292, 297 (1983).” Order, at p 2.

Judge, didn’t you mean “the parties’ consent does not confer on this Court jurisdiction not otherwise so provided”?

Howbeit, from a CDP all Tax Court can do is sustain or deny the lien or levy. If there is neither lien nor levy, game over at 400 Second Street, NW. And all of IRS’ piety and wit don’t mean a thing.

“Whatever other advice or instructions respondent might have given petitioner does not make it otherwise. If petitioner seeks a refund or overpayment credit, then any legal remedy would lie in the United States District Court or the United States Court of Federal Claims rather than in this Court.” Order, at p. 3.

And the offset per Section 6402 is not a levy per Section 6330. See my blogpost “An Offset Isn’t a Levy,” 2/21/12.

When IRS tries this Scriptural gambit, it doesn’t fly with The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Incomparable, Incontrovertible, Irrefragable, Indomitable, Ineluctable, Ineffable, Illustrious and Indefatigable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes, in his second designated hitter of the day, Michael V. Shannon & Hope W. Shannon, Docket No. 16441-12, filed 9/2/16.

I’m ready for a dark rum and cola with a big chunk of lime just about now, but Judge Holmes has “a couple pretrial motions pending”, Order, p. 1 [sic], before sending IRS and Mike & Hope off to try their troubles in Birmingham.

Mike’s & Hope’s trusty lawyer, whom I’ll call Chris, hits IRS with some discovery demands, which Judge Holmes doesn’t even itemize as he grants them.

Then Chris throws a couple requests (hi, Judge Holmes) for admissions (RFAs) at IRS, which here in NY State we call notices to admit, and I love them. Very useful tool, cheap and easy.

IRS ripostes with the title of this blogpost.

“For RFAs 1, 6, and 7 respondent objected on the basis that the burden of proof is on petitioners. The Court agrees with petitioners that this is not a good ground for objection. These RFAs seek to show that respondent doesn’t know of facts to justify its litigating position on the issues described. Petitioners are not, by seeking this information, trying to shift the burden of proof; they are trying to find out if respondent has relevant information. We’ve said for forty years that this sort of simplification of pretrial preparation is one of the aims of the request-for-admissions tool. See Estate of Allensworth, 66 T.C. 33, 39 (1976).” Order, at p. 1.

But IRS may have a save. “In his answers to RFAs 9 and 10 respondent made the same objection but coupled it with a cross-reference to earlier denials that were sufficient. The Court will overrule the objection and require a better response to these, but recognizes that a denial-with-cross-reference might well suffice.” Order, at p. 2.

Chris wasn’t wrong to try those RFAs. The previous answers might not fly, when explicated.

Next, maybe Chris and Judge Holmes both read my blogpost “Stipulated but Irrelevant,” 8/30/16.

“Respondent also objected to RFA 11 on the additional ground that it concerned how respondent made a determination that was reflected in the notice of deficiency. This is generally a good objection…, but it is an objection as to relevance. Our Rule 90(c) is clear that such an objection should be noted but ‘is not to be regarded as just cause for refusal to admit or deny.’” Order, at p. 2.

It’s the old “past isn’t even prologue, never look behind the SNOD” defense, but that’s only relevance, not fact.

Chris gets a Taishoff “Good Job, First Class.”

The highly exalted source from which the title is taken once again proves how apposite that source can be.

This time the story proving the point is told by The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Incomparable, Incontrovertible, Irrefragable, Indomitable, Ineluctable, Ineffable, Illustrious and Indefatigable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes.

Sir W. S. Gilbert to the contrary notwithstanding,  the Merriman is the maid, Merriman R. Mathewson, Docket No. 12087-10, filed 9/2/16.

As the old wedding ceremony had it, Merri’s husband endowed Merri with his worldly goods, but they included a pre-marital thwacking great deficiency from a listed transaction that he carried over onto their MFJ return, plus, at no extra charge, a 40% valuation chop.

Merri wants innocent spousery, but her problem is what she knew.

She tries the Lennon-McCartney 1966 gambit: “I said, even though you know what you know, I know that I’m ready to leave.”

That doesn’t get it with Judge Holmes. “Mathewson argues that whether she knew or had reason to know of her husband’s understatement is irrelevant because the loss carryforward was attributable to the …tax year, before they were married. We can assume that’s true — but the standard in section 6015(b) is whether the spouse requesting relief knew or had reason to know of an understatement of tax. I.R.C. § 6015(b)(1)(C).” Order, at p. 2 (Footnote omitted, but it says it doesn’t matter that Merri didn’t know about the chop; all she needed to know was the understatement of tax.)

Now generally (I love that word), innocent spousery is a question of facts and factors, with much marching and counter-marching around the Section 6015 prickly pear.

But Merri lets the feline poke its wee nose out of the cliché, and that’s the point of this blogpost (and I can hear my readers say, “There is one?”).

“Mathewson has not provided any facts necessary for a determination of her knowledge. Indeed, she concedes that she ‘might not be able to establish that she had no reason to know that Respondent might not assert a deficiency in tax . . . against [her husband]… based on the carryforward … of unused capital loss of[his] from his participation in… the…Tax Shelter.’” Order, at p. 2.

Tell it not in Gath.

See my blogpost “Take the Hint,” 11/25/15. I don’t know if Harjit Bhambra, Docket No. 1395-16L, filed 9/2/16, read it when it came out (or thereafter), but Judge James S. (“Big Jim”) Halpern echoes the words he spoke back then in this latest designated hitter.

IRS wants a remand, Harj objects, so Judge Big Jim runs a phone-a-thon.

He adjures Harj: “The Court pointed out to petitioner that, in general, the taxpayer bears the burden of proof, see Rule 142(a), Tax Court Rules of Practice and Procedure, and that he might benefit by a remand to clarify facts. We also pointed out that if defects in respondent’s determination procedures are proved at trial, the Court might at that time remand the case.” Order, at p. 1. (Emphasis by the Court).

Harj continues to object. So Judge Big Jim ships him and IRS off to trial, with a savings clause: “We believe that the case can proceed to trial without a remand.” Order, at p. 1.

So I’ll echo my words from last November:  “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.” Blogpost op. cit.

Bruce W. Peterson thought he was in good hands as a flogger of insurance and financial products for the aforesaid good-handers, until Allstate Insurance dropped him as an EE but engaged him as an IC. He took no part in the class action brought by the disgruntled ex-EEs, but he did take his Allstate pension payout and put it in a SEP-IRA.

He thereupon bought a single-payment annuity with the funds from said payout, which got properly placed in his SEP-IRA.

OK, you’ll say, so why are you blogging Bruce W. Peterson and Lisa A. Peterson, 2016 T. C. Sum. Op. 52, filed 9/1/16?

It’s not the variance between the 1099-R Bruce got when he cashed in the annuity and pocketed the proceeds and the letter he got from the issuer that stated a lesser amount, when Bruce put the greater amount on line 15a of his 1040 but left it out of line 15b. That set off bells for IRS, but not for me.

It’s about the Section 72 medical out.

Bruce claims he had heavy medical expenses. He drew down the entire annuity because, although the first medical bill was a lot less, he was told he might have further complications, as to which the trial record speaketh not.

Bruce trots out Publication 590, the IRA bible. Everyone agrees he was sick to the tune of a little less than 10% of what he took.

Judge Paris says Bruce got it wrong, and didn’t ask his accountant. Moreover, he got his authority from the wrong place.

“The flaw in petitioner’s argument is that the section on early distributions on which he relies concerns the 10% additional tax assessed on early distributions under section 72(t).  Petitioner was 60 years old when he received the [SEP-IRA] distribution; therefore, the additional tax under section 72(t) does not apply.

“Petitioner has confused an exception to the additional tax for an early distribution for unreimbursed medical expenses with the general rule that any distribution from an annuity contract will be includible in gross income.  The fact that petitioner used a portion of the distribution to pay medical expenses does not shield the distribution from taxation.” 2016 T. C. Memo. 52, at pp. 9-10. (Footnote omitted).

And he’s in for the full boat, because he paid for the annuity with pre-tax dollars from the good-handers, and put in no post-tax cash; therefore zero basis.

Finally, Bruce is in the accuracy-chop stakes. “Petitioner testified that he gave all of the pertinent documents to his accountant and that ‘it takes about 15 minutes to do his taxes’.  Petitioner did not review the return after his accountant prepared it and did not ask his accountant about the discrepancy between the amount on the Form 1099-R, which was attached to his return, and the amount in the [issuer’s] letter.  Taxpayers have a duty to review their tax returns before signing and filing them.” 2016 T. C. Sum. Op. 52, at p. 12.

Bruce also never asked his accountant about basis in his SEP-IRA annuity.

This doesn’t help Bruce. “Because of petitioner’s experience as a financial and retirement investment adviser, his failure to seek his accountant’s advice about his annuity contract and the cancellation of the contract and the distribution…, and his failure to review his…return, the Court finds that he failed to prove that he acted with reasonable cause and in good faith in his effort to assess his proper tax liability.  Therefore the Court will sustain respondent’s determination of an accuracy-related penalty for an underpayment due to a substantial understatement of income tax.” 2016 T. C. Sum. Op. 52, at p. 12-13.

It may take 15 minutes to do your taxes, but give it a few more minutes to review them once you’re done.

As background, see my blogpost “Slow Down, You Move Too Fast,” 9/24/13. The case of Tom Szekely, upon which I expatiated in the blogpost aforesaid, is the basis for Judge Buch bouncing IRS on summary J even when petitioner doesn’t respond to the motion.

The designated hitter is Yves Alexander Bergquist, Docket No. 20041-15L, filed 8/31/16.

But show up for trial, YA, the game isn’t over yet.

YA was trying for collection alternatives to an undisputed liability, but papers are going astray, there’s a mismatch in years under consideration, and the SO ignores the 4340 that says YA filed an extension when she claims that YA never filed.

And she gives YA three days to come up with an updated Form 433-A.

Even without YA on the field, it wasn’t going well for IRS.

“…Mr. Bergquist provided SO S a copy of the Form 4868 he filed for 2014. SO S rejected this document the same day Mr. Berquist submitted it and stated that ‘there was no valid extension to file’ in place. The question for SO S is not the quality of Mr. Berquist’s recordkeeping of his extension request or whether it is typewritten or handwritten. The question is whether there was an extension in place. SO S’s conclusion that no extension was in place is directly contradicted by the Commissioner’s own records.” Order, at p. 8. (Name omitted).

Judge Buch might have said “RYFF,” which means “Read Your File.” The “F” is for emphasis.

It gets worse for IRS.

“SO S made an initial request for an updated Form 433-A on June 16, 2015. Reviewing the evidence in a light most favorable to the nonmoving party, it wasn’t until ten days later, on June 26, 2015, that SO S explained the specific financial information she sought. She gave Mr. Bergquist only three days to submit it. Even if using the date of the initial request for an updated Form 433-A, SO S allowed only thirteen days to provide the financial information.” Order, at p. 8.

Judge Buch notes IRS’ manual. “The Commissioner’s own guidance instructs its employees to consider the circumstances of the taxpayer and the complexity and volume of information needed when setting deadlines to submit information. One such guideline states: ‘Allow at least 14 calendar days for a taxpayer to collect and provide information necessary for considering collection alternatives or issues of dispute.’ IRM pt. 8.22.5.8.1(2) (Nov. 8, 2013) (emphasis added).” Order, at p. 7.

So no summary J. Go to trial.

My takeaway- If Congress starves IRS of resources, it doesn’t hurt IRS. It hurts the taxpayers. This case should have been disposed of at Appeals.

The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Incomparable, Incontrovertible, Illustrious, Irrefragable, Ineluctable, Ineffable, Indefatigable and Implacable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes, can choose between Dorothy L. Sayers and an even more exalted author for a title for today’s essay in Estate of Michael J. Jackson,  Deceased, John G. Branca, Co- Executor And John McClain, Co- Executor,  Docket No. 17152-13, filed 8/31/16.

This is the estate of that Michael Jackson, and this is the case anent which a certain self-styled maevin expatiated under the fetching title “Jackson Estate Says ‘Beat It, IRS.’” I suggested the maevin aforesaid spoke too soon; see my blogpost “Letter to the Editor,” 11/19/13.

Well, not only didn’t IRS “beat it,” as the maevin aforesaid so elegantly put it, but they’re trying to clamp down on the Jackson’s attempt at a full-court press.

A great fan of phone-a-thons, Judge Holmes gets ‘em on the blower.

“…the Court spoke with the parties on various questions of pretrial preparation. Respondent was concerned about the potential number of petitioner’s expert witnesses. His concerns about the contents of these reports can be dealt with through motions in limine, but after discussion we agreed to require petitioner to briefly summarize the subject matter each of its experts will testify about.” Order, at p. 1.

The old trick of lining up a bunch of people outside the courtroom to look like witnesses used to work in tort trials long ago, but doesn’t play today.

But IRS, too, is playing an old game.

“Petitioner was concerned that respondent has issued subpoenas duces tecum without notice. As this division of the Court has observed in the past, this is acceptable under an unintentional divergence between our Rules and the Federal Rules of Civil Procedure. As this division of the Court has also done in the past, it will exercise its discretion to eliminate this divergence and require both parties to notify the other of any such subpoenas.” Order, at p. 1.

Judge, why should playing fair be limited to “this division of the court”? Is everywhere else in Tax Court a free-fire zone? As you yourself pointed out in another context, this can be fixed by changing the Tax Court rule to comport with FRCP. There’s no reason why the rule should be different in Tax Court than in any other Federal Court.

I was going to title this blogpost with a pun from a much more exalted source than Tax Court, but “conscience doth make cowards of us all,” as a much better writer than I put it. So y’all will have to go without what Judge Posner of Seventh Circuit termed in another context “the loquacity of, and lame attempts of humor in,” this blogpost.

So, unembellished, here is Estate of Minnie Lynn Sower, Deceased, Frank W. Sower, Jr. and John R. Sower, Co-Executors, Docket No. 32361-15, filed 8/30/16, a designated hitter from Judge Buch.

Frankie and Johnny (you could write a song…enough already!) want a Rule 91(f) stip-in of a billet doux from an AO to their attorney.

IRS says it’s “’…merely the irrelevant legal opinions, conclusions, and analysis of the Appeals Officer’ and that ‘the content of such letter represents the items actually in dispute between the parties.’” Order, at p. 1.

Who cares what the AO thought or said?

Judge Buch agrees.  “Citing Greenberg’s Express v. Commissioner, 62 T.C. 324, 327 (1974), respondent correctly observes that ‘[t]he Court does not look behind the notice of deficiency’. ” Order, at p. 1.

The past ain’t even prologue. All that counts is the SNOD, the whole SNOD and nothing but the SNOD.

OK, but the time to toss the AO’s epistolary irrelevancies is not on a Rule 91(f).

Judge Buch: “All of this distills down to an argument about relevance.

“Relevance is not an appropriate objection to a stipulation. Rule 91 is explicit in this regard: ‘Where the truth or authenticity of facts or evidence claimed to be relevant by one party is not disputed, an objection on the ground of materiality or relevance may be noted by any other party but is not to be regarded as just cause for refusal to stipulate.’ So the proper course would be to admit to the paragraph and the document and reserve a relevance objection.” Order, at pp. 1-2.

A lot of things are real and true, but may have zero probative value as to matters in dispute. If it’s agreed to be real and true, and if one side says it’s relevant but the other says “no,” it goes in, but the objectant reserves all rights to challenge on relevance.