The staple of many a CLE program has certainly made a mark on IRS’s counsel. Notwithstanding earlier ups and downs in pursuit of that goal (see, e.g., my blogpost “Win Your Case At Discovery”, 7/3/14) , the 1111 Constitution Ave NW guys are back at it in Eaton Corporation and Subsidiaries, Docket No. 5576-12, filed 2/24/15.

On a day with no designated hitters and only one unsubstantiated small-claimer, I have to write about something. But this is actually interesting. We have two orders with the same docket number, so, as Judge Holmes would say, now pay attention; follow the links: they’re leading in different directions.

In a three-day period earlier this month, IRS “… filed (1) a motion to compel production of documents (Index #0223), and (2) a motion to compel production of documents (Index #0224)” and a couple of days later … “(1) a motion to depose pursuant to Rule 74 (Index #0225), (2) a motion to depose pursuant to Rule 74 (Index #0226), (3) a motion to compel responses to interrogatories (Index #0227), (4) a motion to compel production of documents (Index #0234), and (5) a motion to compel production of documents (Index #0235).” Order, at p. 1.

The technical name for this is “flood the zone.” Not bad; keeps the adversary digging. Of course, Judge Kerrigan tells Eaton’s legal eagles to respond to all the foregoing, and get ‘er done by March 18.

Meanwhile Eaton’s legal eagles aforesaid haven’t been dozing on their eyries.

In a separate order, Judge Kerrigan notes that, at the same time IRS sprung their trap, Eaton “… filed (1) a motion to compel the taking of deposition (Index #0230), and (2) a motion to compel production of documents (Index #0232)” and also a day or two later …”filed a motion to compel production of documents (Index #0237).” Order, at p. 1

IRS must respond by March 18.

Looks like they all took the same CLE course. But what happens when both sides try the same tactic?

Sort of a coda to 44 USC§3501 et seq. today from STJ Lewis (“Champion Speller”) Carluzzo in a small-claimer, Gustavo E. Morles, 2015 T. C. Sum. Op. 13, filed 2/23/15.

Gus is younger than 59-1/2 years old, out of work and about to be evicted when he draws down his 401(k), his employee stock purchase plan, and Trad IRA (which he had funded with a non-deductible contribution) to preserve hearth and home. Of course, he loses when he claims drawdowns aren’t taxable, and he’s in line for the 10% chop as well.

“Although we sympathize with petitioner, we agree with respondent that the entire plan distribution is includable in petitioner’s 2010 income under section 72(a) and (e). Accordingly, respondent’s adjustment to that end is sustained.” 2014 T. C. Sum. Op. 13, at p. 5.

Now as to the Trad IRA, Gus’ investment in the contract is taken into account when reckoning what gain, if any, Gus got on the distribution. Investment in the contract is Section 72(c) language for basis. And nondeductible contributions to Trad IRAs are investment in the contract (or basis).

Now those of us with bases in Trad IRAs are now, or will soon be, struggling with this year’s Form 8606, after digging out Forms 8606 going back many years, and going through the convoluted hopscotch of said form, to extrapolate the miniscule allowable basis for the current year. And paid preparers will be asking for those forms from new clients.

But is this all necessary?

STJ Lew isn’t so sure: “Nondeductible contributions made to an individual retirement account must be reported annually on Form 8606, Nondeductible IRAs. See sec. 408(o)(4). The Form 8606 instructions state that a taxpayer must keep copies of records, including completed Forms 8606 for previous years, in order for the taxpayer to verify the nontaxable portion of the individual retirement account withdrawal or distribution. Although nothing in the record suggests that petitioner has complied with these reporting requirements, nothing in the statutory scheme suggests that a taxpayer who fails to satisfy these reporting requirements cannot include nondeductible individual retirement account contributions in the taxpayer’s investment in the contract. Taking into account the evidence that sufficiently shows the relevant transactional history of the IRA, we find that petitioner’s initial contribution to the IRA is taken into account in the computation of his investment in the contract for purposes of section 72.” 2015 T. C. Sum. Op. 13, at pp. 6-7.

Now Gus claims that, as he put in $1K nondeductible and nothing else,  and took out less than that, the whole distribution is nontaxable; IRS claims it all is. STJ Lew says there has to be an allocation, cites Section 72(e) and tells the parties to work it out in the Rule 155.

Now curb your enthusiasm, guys, before you start shredding those old Forms 8606, or leaving them off your current 1040. This is a small-claimer, can’t be cited as authority (Section 7463(b) says so), and STJ Lew cites no authority but his own peek at Section 408(o) and the Form 8606 instructions.

So if you go ahead and shred, don’t cite taishofflaw.com or Gustavo Morles when IRS comes to shred you.

I had commented some time ago about internet reportage of litigated matters. And so had Judge David Gustafson. See, e.g., my blogpost “Guess Who Reads My Blog? – Part Deux”, 8/11/14.

Well, now the New York Times has awakened to the e-filing barrage. And the consequences of unlimited access.

Here’s the link: http://www.msn.com/en-us/news/us/lawsuits%E2%80%99-lurid-details-draw-an-online-crowd/ar-BBhRzE7?ocid=mailsignout

I often see letters from self-representeds asking that their timely-filed petitions be withdrawn, as they elect to proceed administratively with IRS on the deficiency. This, of course, is a mistake, as once Tax Court has jurisdiction in a deficiency case, Section 7459(d) mandates decision (that is, judgment) in favor of IRS for the entire amount of the deficiency if the petition is tossed for anything other than want of jurisdiction. See my blogpost “Timing Is Everything”, 2/17/15.

So Ch J Michael B. (“Iron Mike”) Thornton puts Jamie Vorasai right, in Docket No. 30286-12S, filed 2/20/15.

Jamie asks to have his petition withdrawn, as he misunderstood the SNOD. He wants to work with IRS.

No, says Ch J Iron Mike, thereby saving Jamie’s right to Tax Court review. Jamie’s billet doux is recharacterized as a motion to dismiss, and is denied. So, “…the parties shall (1) either submit appropriate proposed decision documents, or (2) file written reports (preferably a joint report) with the Court concerning the then present status of this case.” Order, at p. 2.

And I often see timely petitions dismissed for failure to manually-sign or failure to pay the sixty bucks or seek a waiver.

Self-reps, once the magic 90 (or 150) days have run from date of SNOD, that’s it. Your right to petition Tax Court is gone. Worse, if you can’t make a deal and IRS gives you a NITL or a NFTL, you lost your chance to contest the underlying liability at a CDP, and “arbitrary and capricious” is an uphill battle.

If you want to work with IRS, that’s great. Pay the sixty bucks, or apply for the waiver, and sign the petition. If you make a deal, also great. If you can’t, you’ve preserved your rights. Including the collection stay.

No SNOD, no NOD, no go. That’s the story for Reginald Allen Porter, Docket No. 26218-14, filed 2/19/15.

RAP is two years late petitioning some SNODs he got, so that’s out. RAP wanted Section 6015 innocent spousery, but never filed joint returns for those years. Finally, RAP made an OIC that somehow, in a manner not clear to Ch J Michael B. (“Iron Mike”) Thornton, was related to his innocent spousery claim, but that IRS rejected, and RAP is petitioning that too.

It’s this last point that I want to consider here.

“Suffice it to say at this point that the various letters rejecting petitioner’s offer in compromise, and any potential claim for relief from spousal liability subsumed therein, do not constitute, and cannot substitute for, a notice of deficiency issued pursuant to section 6212, I.R.C., or a notice of determination issued pursuant to section 6320, 6330, and/or 6015, I.R.C. Only a narrow class of specified determinations by the IRS can open the door to the Tax Court. Although this Court has reviewed offers in compromise raised as a collection alternative in the context of a proceeding under sections 6320 and/or 6330, I.R.C., and as to which the disposition was incorporated in a formal notice of determination issued under those sections, the record does not show that to be the scenario here. Petitioner’s situation, in contrast, appears to concern a ‘stand alone’ offer in compromise solely under section 7122, I.R.C., outside the context of a section 6320 and/or 6330, I.R.C., collection case and over which no statute confers jurisdiction for review by this Court.” Order, at p. 3.

So unless one enters through the “narrow gate” of Sections 6015, 6212, 6230 and 6330, one must stand alone, and not in the precincts of 400 Second Street, NW, or wherever Tax Court comes to your neighborhood.

It’s an estate tax case, but the principle involved is our old friend from the façade wars, “so remote as to be negligible.” This is the test in Section 642(c)(2) for set-asides permitting an estate to take a charitable deduction even when it hasn’t actually spent the money.

The case is Estate of Eileen S. Belmont, Deceased, Diane Sater, Executrix, 144 T. C. 6, filed 2/19/15.

The late Eileen wanted the residuum of her estate to go to a genuine 501(c)(3), but the part of the cash therein included was income in respect of a decedent (a pension plan distribution), and wasn’t paid when the 1041 return was due, so the estate’s CPA, filing the 1041, took the deduction anyway, even though the cash was in an unsegregated checking account.

So the “permanently set aside for the purpose” is at issue, with the savings clause from the Regs: “…’unless under the terms of the governing instrument and the circumstances of the particular case the possibility that the amount set aside, or to be used, will not be devoted to such purpose or use is so remote as to be negligible.’ Sec. 1.642(c)-2(d), Income Tax Regs.” 144 T. C. 6, at p. 12.

There is no Tax Court learning on this point, but Judge Ruwe finds plenty from our old chum Larry Graev, Esq. Remember Larry and Lorna? No? Then check out my blogpost “Money-Back Guarantee”, 6/24/13.

The money for the charity has to come from gross income (OK, pension plan distribution is income), must be made pursuant to a governing instrument (Eileen had a will, duly probated, executor qualified), and must be set aside. Or maybe any chance that the gift would be defeated must be “so remote as to be negligible”.

Judge Ruwe draws on Larry’s case and cases therein cited.

When the 1041 was filed, unbeknownst to the CPA who filed it, there was protracted litigation in the offing. The late Eileen’s brother claimed a resulting trust, giving him a life estate in Eileen’s Santa Monica condo. He claims he took care of their mother until her death, and lived in the condo for a while. He wins in the CA courts ultimately, but the legal backing-and-filling depleted the estate’s cash, so the charitable donation never got paid.

I’ll spare you any mention of Dead Man’s Statutes; apparently it never got raised in the condo litigation, and maybe CA doesn’t have one or it is inoperative.

Howbeit, brother eventually wins. The estate claims “so remote as to be negligible”.

The test is “…‘a chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction’. In Briggs v. Commissioner, 72 T.C. 646, 657 (1979), aff’d without published opinion, 665 F.2d 1051 (9th Cir. 1981), we construed the standard as being ‘a chance which every dictate of reason would justify an intelligent person in disregarding as so highly improbable and remote as to be lacking in reason and substance. With these interpretations in mind, we will consider the facts and circumstances of the matter sub judice to determine whether the possibility that the estate would invade the money set aside for the foundation was ‘so remote as to be negligible’.” 144 T. C. 6, at pp. 14-15. (Footnote omitted, but read it; the magic number for estates is a 95% win probability).

Judge Ruwe finds that brother’s claim was known to all hands, bar the CPA who filed it, before the 1041 was filed. Brother was represented pro bono by a CA lawyer of substantial credentials. When the executor tried to buy out brother, he refused. His attorney filed a Lis Pendens, started a lawsuit, and appeared ready for battle.

The executor never told the CPA all this.

So no non-negligible possibility of defeasance, so not permanently set aside, so no deduction.

Takeaway– Tell your preparer, please.

I thought at first glance that the tale of 436, Ltd., Robert Heitmeier, Tax Matters Partner, 2015 T. C. Memo. 28, filed 2/18/15, would provide some interest. After all, Judge Holmes (I’m leaving out the honorifics to save time) quoting Mark Twain on the antebellum joys of riverboat pilotage would certainly liven up this blog.

But alas, it’s just another son-of-BOSS phony foreign exchange dodge, the only twist being that outside basis isn’t brought into play in this TEFRA case. Nonetheless, Pilot Bob’s tax dodge gets blown up, with heavy-duty substantial undervaluation penalties.

Read the opinion for an update on Mark Twain’s Mississippi, but as for tax learning, it’s much of a muchness.

More interesting is Tim Sheridan, 2015 T. C. Memo. 25, filed 2/18/15. Tim says he’s going to claim his million-dollar theft loss annually until 2070, 2015 T. C. Memo. 25, at p. 10, but Judge Lauber isn’t buying it for 2009, 2010, or 2011, and the rest of the upcoming years don’t look so good neither.

Unusually for a guest on this blog, Tim is an inventor of something besides tax dodges. “He is the holder of U.S. patent No. 7,415,982, filed in 2001, for a ‘smokeless tobacco vaporizer.’ Certain other patents, which also involve a mechanism for heating materials so that they can be vaporized and inhaled through a tube, predate petitioner’s patent. His patent, like those other patents, precedes by almost a decade the recent rise to popularity of ‘e-cigarettes.’” 2015 T. C. Memo. 25, at p, 3.

Well, where there’s smoke there’s the cliché, but Tim’s device never caught fire (sorry, guys).

So Tim brooded. “He alleges (among other things) that Internet search engines have intentionally demoted his product; that social media platforms have conspired to diminish his product’s visibility; that the U.S. Postal Service has intentionally misspelled the name of his business; that a telecommunications firm has prevented him from sending crucial emails; that his computer has been continuously hacked to prevent him from retrieving important information; and that Wikipedia has improperly removed edits he sought to make to an Internet article discussing vaporizers. He contends that these perceived wrongs have enabled other companies to use his intellectual property and make vaporizer sales that his business would otherwise have made.” 2015 T. C. Memo. 25, at p. 3.

Like river pilot Heitmeir, Tim runs aground. Tim has no proof of anything. Instead “… he derives his damages by applying various formulas of his own creation, which apply estimates and randomly assigned multipliers to geographic populations, Internet traffic, total market, competitors’ sales, and other items.” 2015 T. C. Memo. 25, at p. 4.

Tim has been up to Fourth Circuit on his attempt to enjoin the collection of the deficiencies herein, but the Anti-Injunction Act (26USC§7421(a)) blew that away. Fourth Circuit was less than kind to Tim. “The Court of Appeals termed ‘nonsensical’ petitioner’s claim that he was entitled to a refund of $20 billion on account of losses he had suffered over the life of his patent.” 2015 T. C. Memo. 25, at p. 5.

Merely owning a patent doesn’t prove infringement. The theft loss in Section 165(e) requires criminal misappropriation, which Tim can’t prove.

Anyway, Tax Court isn’t the place to try a patent infringement case. “See 35 U.S.C. sec. 281 (2006) (‘A patentee shall have remedy by civil action for infringement of his patent.’); 28 U.S.C. sec. 1338(a) (2006) (‘The district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents[.]’).” 2015 T. C. Memo. 25, at p. 8.

“Petitioner clearly is not claiming a loss deduction for ‘theft’ but for alleged damage to his business from supposed anticompetitive behavior. Such damages, if they can be proved, are not deductible as ‘theft losses’ under section 165(e).” 2015 T. C. Memo. 25, at p. 10.

Inventive to the last, Tim “…contends that he is entitled to his $1 million deductions under section 186. Section 186(a) provides that, ‘[i]f a compensatory amount which is included in gross income’ is received for a ‘compensable injury,’ a deduction is allowed equal to the lesser of the ‘compensable amount’ or ‘the unrecovered losses sustained as a result of such compensable injury.’ Section 186(b)(1) defines a ‘compensable injury’ to include ‘injuries sustained as a result of an infringement of a patent issued by the United States.’ 2015 T. C. Memo. 25, at pp. 10-11.

I wanted to give Tim a Taishoff “Good Try, Second Class” for the last one, but Judge Lauber won’t let me.

“Even if petitioner could establish patent infringement, which he has not done, he has not alleged that he received, or included in gross income for 2009, 2010, or 2011, any ‘compensatory amount.’ See sec. 186(c) (defining ‘compensatory amount’ to mean an amount received ‘as damages as a result of an award in, or in settlement of, a civil action for recovery for a compensable injury’). Section 186 has no possible application here.” 2015 T. C. Memo. 25, at p. 11.

And Tim gets a penalty kick thrown in. He had no good-faith claim for a tax break. If he claims his patent was infringed, let him sue.

When it comes to deficiencies, there are two kinds of dismissals from Tax Court: want of jurisdiction, and everything else. Everything else includes, but is not to be deemed or construed in any way as limiting or abridging the generality of the foregoing (as my paid-by-the-word colleagues would say) lack or want of prosecution, or failure to state a claim.

See 26USC§7459(d): once Tax Court’s jurisdictional octopus has grasped the petition from a SNOD, the only way out is a win for the petitioner or a win for the IRS. No second-place winner.

So, on a day when teletubbying is the only show in snow-shrouded 400 Second Street, NW, Ch J Michael B. (“Iron Mike”) Thornton delivers the only order (!) on the Tax Court Board today; and it makes the distinction clear.

Even when the petitioner is dead, the basis of dismissal matters very much. See John L. Madden and Edna E. Madden, Deceased, John L. Madden, Surviving Spouse, 10989-14S, filed 2/17/15.

Edna, intestate, had gone to “a far, far better rest” when the SNOD arrived, but the SNOD was directed both to John L. and the late Edna. John L. timely sent in the petition. Unsigned. But he ratified it.

Ch J Thornton expatiates: “Hence, given that the death occurred prior to the filing of petition instituting this proceeding, and no fiduciary has been duly appointed by a court of competent jurisdiction, the record suggests that this case should be dismissed for lack of jurisdiction as to Edna E. Madden, Deceased. Conversely, the provisions of Nordstrom v. Commissioner, 50 T.C. 30 (1968), involving dismissals for lack of prosecution, would appear to be inapplicable.” Order, at p. 1.

So Ch J Thornton orders the parties to show cause why the petition should not be dismissed as to the late Edna.

As it is, John L. can fight on. And IRS can try to levy on whatever the late Edna left behind (which probably isn’t much, as there was no rush to appoint a personal rep).

But if the late Edna had died post-filing, and no personal rep continued the fight, then dismissal for want of prosecution would result in decision against the late Edna’s estate for the entire amount of the deficiency.

Takeaway– Might be a good idea to apply for letters, just in case, maybe to raise innocent spousery.

As someone once remarked, everyone is born again – on a Monday. And today it’s Abraham Lincoln’s turn.

I have purposely entitled this blogpost in the singular, as George Washington plays no part in an income tax discussion. And Tax Court and IRS are both closed today.

But Father Abraham is certainly in some sort the founder of our feast. Remember, he was the father of the 3% tax on gross income, enacted in 1861.

For a quick rundown on that iteration, see my blog post “A Rant – Part Deux”, 4/3/13.

Though Congress repealed that statute ten years later, the memory lingered on.

So we live, move and have our being in the tax world because of President Lincoln. Happy President’s Day.

Three years ago I quoted The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a the Irrepressible, Irrefragable, Illustrious, Indefatigable, Irreplaceable, Indomitable and Implacable Foe of the Partitive Genitive, Judge Mark V. Holmes. The blogpost was “The Great Dissenter”, 12/28/11, and Judge Holmes, in dissent of course, was making a simple, rational (and therefore never-to-be-realized) suggestion.

Quoting me quoting Judge Holmes, “Once again, Judge Holmes says it in a footnote: IRS could clear this up in the abusive shelter area by creating a single-track deficiency procedure, where both partnership and partners are in it together. 137, T.C. 17, at p. 44, footnote 3.”

The problem, of course, is the two-track TEFRA partnership-item vis-à-vis affected-item. And as Judge Holmes said way back when, ““(T)he silt we stir today will cloud the cases we plunge into tomorrow.” 137 T. C. 17, at p. 61.

This was the Randall J. and Karen G. Thompson case, various permutations and anfractuosities of which I have blogged elsewhere.

But Judge Cohen is now swimming in the silt in a designated hitter, Jason Chai, Docket No. 18330-09, filed 2/13/15. And this Friday the Thirteenth is an unlucky day for IRS.

IRS wants Tax Court to hold Jason in, when Jason wants out. Judge Cohen lets Jason out.

The original SNOD nailed Jason for $63K in tax and $12K in penalty. Jason petitions that, IRS answers, then amends its answer to increase deficiency and penalty ten-fold. It’s OK for IRS to amend: once a petitioner puts a year in play, it’s a free-fire zone.

Here, however, the amendment comes before a TEFRA is completed, which TEFRA when completed blows up Jason’s phony partnership. No need to cite US v. Woods, 571 US___ (2013). Tax Court has jurisdiction to apply penalties, but IRS waives the ten-fold penalty.

IRS then amends its amendment with a First Amendment to Amendment, claiming it won the TEFRA, so go ahead and let’s try Jason’s case with the ten-fold tax bash in.

But does Tax Court have jurisdiction over the amended TEFRA ten-fold tax bash? Jason says “no”, IRS says “yes.

IRS claimed they could ignore the then-undecided TEFRA issues and just disallow any partnership items. Yes, says Judge Cohen, they can disregard the partnership losses Jason claimed, but then Tax Court only has jurisdiction over whatever tax issues are completely unrelated to the TEFRA issues. Any items related to TEFRA must await the TEFRA results.

And even though, after the answer and amended answer had been filed and served, IRS won the TEFRA joust and amended yet again, that doesn’t empower Tax Court.

Remember, there are arithmetic issues and fact-determination issues impacting a partner after the TEFRA jumpball is finished. Fact-determination issues can he hashed out in the deficiency proceedings; mere arithmetic need not be.

Judge Cohen: “For purposes of the Motion to Dismiss, the critical inquiry then is whether the increased deficiency is an affected item that requires a partner-level determination before it can be assessed….. If the increased deficiency is an affected item that requires a partner-level determination before it can be assessed then the results of the … TEFRA partnership-level proceeding are properly applied to petitioner through the subchapter B deficiency procedures and the Motion to Dismiss should be denied. However, if the increased deficiency is not an affected item that requires a partner-level determination then the results of the … TEFRA partnership-level proceeding can only be applied to petitioner through a Notice of Computational Adjustment.

“The increased deficiency is not an affected item that requires a partner-level determination. There is no factual determination that must occur in the petitioner’s deficiency proceeding before respondent can apply the results of the TEFRA partnership-level proceeding. The disallowed losses from the TEFRA partnership level proceeding can be applied to petitioner’s 2003 income taxes regardless of the outcome of this deficiency proceeding (whether the $2 million at issue in this case is taxable non-employee compensation or a return of capital). Therefore, because the increased deficiency is not an affected item requiring a partner-level determination, section 6230(a)(1) requires that the results of the TEFRA partnership-level proceeding be applied to petitioner through a Notice of Computational Adjustment. As a result, the First Amendment to Answer did not cure the Court’s lack of jurisdiction over the increased deficiency, and the Court will grant petitioner’s Motion to Dismiss for Lack of Subject Matter Jurisdiction as to the increased deficiency.” Order, at pp. 4-5.

So now we’re back to what court Jason goes to hear the bad news. And will Jason get a whack at the whole story in a CDP? Whatever the result here, the word of Judge Holmes is justified.