I mean STJ Daniel A. (“Yuda”) Guy, who’s giving a slight judicial nod in the direction of us EAs, in James E. Kaminski, 2015 T. C. Sum. Op. 7, filed 2/3/15, a day when only small-claimers are being run.

James E.’s problems are the usual unsubstantiated deductions and dodgy travelogs, that stumble at the Section 274 fence. He does get some of the cellphone largesse handed out by the Small Business Jobs Act of 2009, even though some of the calls were to his insurance client who later became his wife; James E. is an insurance salesman, and he must sure throw a good sales pitch.

Eventually, Judge Yuda does a mix-and-match, but James E. is still in five-and-ten penalty trouble when the numbers sift out.

James E. relied on his trusty accountant, JRB. JRB is not a CPA. Now that is usually “game over” for any preparer whose efforts come before Judge Yuda; remember poor Charlene M., an H & R Blocker who was not a CPA, and received short shrift from Judge Yuda? No? Then see my blogpost “It Depends”, 10/22/13.

But JRB was an EA, having “…passed the Internal Revenue Service (IRS) examination for enrolled agents in 1992 and has been in the business of preparing tax returns for nearly 40 years.” 2014 T. C. Sum. Op. 7, at p. 7.

Well, leaving out the quibble that the Special Enrollment Examination (the EA exam) is administered by Prometric, a subsidiary of Educational Testing Service (which administered what was known in my young day as the college boards), Judge Yuda does admit “(S)tatus as an enrolled agent may tend to show competence as a tax professional. An enrolled agent is an individual who has displayed ‘special competence in tax matters’. 31 C.F.R. sec. 10.4(a) (2007).” 2015 T. C. Sum. Op. 7, at p. 17. (Citation omitted).

Thanks, Judge.

But I’m not through. Judge Yuda suggests that JRB was a wee bit casual in examining James E.’s dodgy logbooks. Well, again citing 31 C.F.R., this time 31CFR§10.34(d):

“A practitioner advising a client to take a position on a tax return, document, affidavit or other paper submitted to the Internal Revenue Service, or preparing or signing a tax return as a preparer, generally may rely in good faith without verification upon information furnished by the client. The practitioner may not, however, ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete.”

Perhaps JRB should have studied James E.’s logbooks more closely. But did he ignore implications? That’s a big step. EAs work for taxpayers, not IRS. We are not RAs, ROs or their managers.

EAs are on the front line. It’s a long way from there to 400 Second Street, NW.

No, not another post-mortem of SuperBowl XLIX (or whatever the number of this latest iteration).

Rather, this is the story of Estate of Rodrigo F. Fenta, Deceased, Carlos Fenta, Trustee of The Rodrigo Fenta Trust, 2015 T. C. Sum. Op. 4, filed 2/2/15, as told by The Judge With a Heart, STJ Armen.

The late RodFen ran a bar and restaurant, but most of the gross came from the sale of alcoholic beverages, paid for “in green”, as we say. The sales tax crew from the Golden State descended upon the late RodFen, but the late RodFen never produced the “Z tape”, only a handwritten summary thereof.

No, the “Z tape” is not what cooked President Nixon. It is the duplicate tape created by the cash register (and required of all retail establishments) for each transaction. And the late RodFen had neither books nor records to hand.

So when the CA Board of Equalization finished equalizing the late RodFen, the IRS came aboard and smacked the late RodFen with a deficiency.

And IRS followed the CABOE by using the percentage-markup method. Both took the late RodFen’s inventory and invoices from suppliers of the good news he served up, and took a percentage over for income, deducted cost of goods sold, and nailed the late RodFen for the overage.

After the SNOD, petition and answer, the “Z Tape” is produced. After some backing-and-filling, the parties resolve income, deductions and loss from theft and spillage for a figure much lower than the SNOD.

CarlFen, trustee of the RodFen trust, seeks Section 7430 legals and admins. CarlFen prevailed, right enough, but IRS was justified.

IRM 4.10.4.3.3.5(6) (Aug. 9, 2011) specifically blesses the use of the percentage-markup method where taxpayer produces no records. And that applies whether or not fraud is in play.

The “Z tape” didn’t show up until after SNOD, petition and answer. IRS was justified at the magic moment.

Nothing novel here besides the “Z tape” and percentage-markup discussion.

But I really liked CarlFen’s claim for $26K in legals: “This amount includes a request for ‘student attorney fees’ of $17,025 for the services of a student at the Santa Clara University School of Law Low Income Taxpayer Clinic and a request for counsel fees of $9,595 for the services of the clinic director.” 2015 T. C. Sum. Op. 45, at p. 2, footnote 3.

I think I might go back to law school if I could bill $17K, especially when I had a clinic director to do all the work.

Yvonne K. Young had twenty years in as a tax preparer and accountant. Being inventive (and possibly bored with e-filing 1040s), Yvonne invented a fine swindle.

Yvonne claimed she received interest from four (count ‘em, four) banks in large sums, but that OID (original issue discount) was withheld, giving her a massive refund (especially after she failed to report other income).

Yvonne generated phony 1099-OIDs, which she claimed came from the banks aforesaid, except they didn’t.

IRS’s computer spat checks in Yvonne’s direction.

So pleased was Yvonne with her fiddle, that she generated 100 phony 1099-OIDs for herself and select clients of her tax prep business.

When the forces of righteousness descended, Yvonne petitioned the deficiencies, additions and penalties. IRS moved for summary J, Yvonne asked for more time to answer (and got it), but never answered.

Rule 37(c) means all of IRS’s assertions of Yvonne’s delictions are deemed admitted.

The fraud axe falls on Yvonne.

As General Galieni remarked about the taxis of the Marne, “Eh bien, voilà au moins qui n’est pas banal!”

You can read all about it at Yvonne K. Young, 2015 T. C. Memo. 18, filed 2/2/15.

Back again come Michael Shamrock & Victoria Bigg, Docket No. 28725-11, filed 1/30/15.

Mike & Vic lost in Tax Court, ran to Seventh Circuit, which overturned the loss, and sent Mike & Vic back to Judge Chiechi, who ordered an evidentiary hearing, because IRS asked for one. Mike & Vic wanted Judge Chichi to toss the case altogether.

See my blogpost “I Missed This One”, 12/24/14.

Mike & Vic aren’t happy, so they move for Judge Chiechi to recuse herself from their case.

That’s a heavy-duty diss, and Ch J Michael B. (“Iron Mike”) Thornton isn’t having any.

“It is obvious to the Court that petitioners consider the January 15, 2015 order with which they do not agree as a ruling that is adverse to them. The January 15, 2015 order was not based on any extrajudicial information. That order was based upon a deliberative process of determining what the Court should do on remand from the Court of Appeals in order to comply with that Court’s order, judgment, and mandate. As part of that deliberative process, the Court issued an order dated November 25, 2014 (November 25, 2014 order). In that order, the Court ordered the parties to file a status report in which they were to indicate what they believed the Court should do on remand from the Court of Appeals in order to comply with the order and the judgment of that Court.” Order, at p. 1.

Briefly, “Adverse rulings of the Court are not indications of bias or grounds for disqualification of a judge.” Order, at p. 2. (Citations omitted).

But what evidence is necessary? No one contends that the phony who sold Mike & Vic down the river while claiming to be a lawyer and a CPA, was in fact either a lawyer or a CPA. Or that the phony didn’t lie to IRS as well as to Mike & Vic.

The issue isn’t inadequate representation of counsel. That’s only for criminal matters. The issue is fraud, namely and to wit, that the stipulation Mike & Vic entered into was procured by fraud. And IRS was likewise defrauded in accepting the stipulation.

Applying basic contract law to stipulations, as has been reiterated often enough, isn’t necessarily on the table here.

This was a pre-trial stipulation, as Seventh Circuit emphasized: “The Commissioner likened the petitioners’ stipulations to ‘settlement agreements’ that are ‘governed by general principals of contract law.’ But the petitioners signed pretrial stipulations, which did not reflect the computation of the deficiency and penalties or purport to resolve conclusively the petitioners’ liability. See Lovenguth v. C.I.R., 93 T.C.M. (CCH) 1040, at *3–*4 (2007) (distinguishing stipulations under Rule 91 from ‘settlement stipulations’ and stating that Rule 91 ‘allows us to consider factors that might not be sufficient to upset a contract’).” Shamrock, Case No. 14-1916, at p. 3.

“The Commissioner makes much of the fact that the petitioners did not have a right to effective assistance of a lawyer in their civil tax case. As we understand the Commissioner’s argument, a taxpayer should be bound by any stipulation induced by his representative’s deceit so long as the Commissioner was unaware of the fraud. That contention simply refuses to accept that stipulations must be set aside when ‘justice requires,’ and does not resolve whether these petitioners have articulated a valid reason to set aside the stipulation….. Even though the petitioners had no right to an effective lawyer, the petitioners and even the Commissioner’s counsel all believed they were dealing with an attorney authorized to represent taxpayers before the IRS and the Tax Court. The Commissioner minimizes that deception, but the Tax Court should have evaluated whether it provided good cause to set aside the petitioners’ stipulations.” Shamrock, Case No. 14-1916, at p. 3-4. (Emphasis by the Court) (Citations omitted).

The issue was a deduction. The phony induced Mike & Vic to stipulate pre-trial they were only entitled to half. When the phony ducked out because he couldn’t try the case, his successor, a USTCP, found good argument that Mike & Vic were entitled to all.

I’m still looking for the evidentiary question here. Is IRS claiming they knew the phony was a phony, or that Mike & Vic knew he was a phony? Is IRS claiming that Mike & Vic didn’t rely on the phony’s advice? Or would have settled anyway?

What is the disputed material fact here?

And exactly how is IRS prejudiced? Let them try the case.

Enough already.

 Islander

And that’s what saved the day. Unfortunately, the surge that saved the day came too late for Travis L. Sanders.

No, this surge had nothing to do with Iraq. This surge was the surge that Travis’ surge suppressor outfit was suppressing. The outfit threw off much money, funneled to Trav via his grantor trust’s interest in a Virgin Islands limited partnership, the kind that IRS described as a scam in IRS Notice 2004- 45, Meritless Filing Position Based on Sections 932(c)(4) and 934(b).

If that sounds familiar but you can’t quite place it, check out my blogpost “Catching Up”, 9/30/13, the ongoing saga of la famille Vento and their excursion to our Insolvent Islands in the Sun.

Trav entered into the usual employee leasing deal, dreamt up by VI tax whiz Marjorie Roberts, Esq., ex-Treasury maven for Virgin Islands Bureau of Internal Revenue (VIBIR). He gets VI CPA Scott Blair to do his taxes, and he files as a bona fide resident of VI for the years at issue.

Now when dealing with la famille Vento aforesaid, Judge Hardiman in Third Circuit set down the basic rules for VI residence, which gives escape from mainland taxation and bestows on that happy crew all the unguided largesse with which bona fide residents of those isles are favored.

But Trav went above and beyond, as the gamers say.

IRS claims Trav wasn’t a bona fide VI resident, but the four (count ‘em, four) lawyers on Trav’s side (plus one from the Virgin islands government, intervenor) suppress the five lawyers from IRS, and Judge Kerrigan rules the SOL bars IRS’s SNOD, because Trav filed properly with VIBIR per IRS’s confusing instructions and publication.

Trav “…maintained a checking account at Banco Popular de Puerto Rico in St. Thomas, USVI. The address for the checking account was a USVI address. Decedent reported his residence as St. Thomas, USVI, on his license and certificate of marriage. Decedent was married in the USVI….. [Trav] had bank accounts with UBS Financial Services, Inc., in the USVI and First Bank in St. Thomas in the USVI. [Trav’s] checks for his First Bank account showed a USVI address as his address.” 144 T. C. 5, at p. 9.

So marrying a Virgin (Islander) really helps the cause.

But Trav doesn’t show up for the victory party. Trav died while the case was pending, so we have Estate of Travis L. Sanders, Deceased, Thomas S. Hogan, Jr., Personal Representative, Petitioner, and the Government of the United States Virgin Islands, Intervenor, 144 T. C. 5, filed 1/29/15.

Were I the true grammatical stickler that some have called me, I would have entitled this post “See With What We Have To Deal.” But Mr Jefferson’s (and Judge Holmes’) “decent respect to the opinions of mankind” (and even more so of womankind) requires I should forgo that locution.

Here is an extract from a curriculum vitæ, or more properly a cursus honorum, of a currently-sitting Tax Court STJ. “Received undergraduate and law degrees, Villanova University, 1971 and 1974. Admitted to New Jersey Bar, 1974. Served as law clerk, New Jersey Superior Court Judge. Associated with law firm in Bridgeton, NJ, 1975, also serving as city prosecutor. From 1977 until appointment as Special Trial Judge, employed by the Office of Chief Counsel, Internal Revenue Service, as attorney, Washington, DC, District Counsel’s Office. In 1983, appointed Special Trial Attorney on staff of the Associate Chief Counsel, Litigation. From 1992 to 1994, assigned to the Office of Special Counsel, Large Case. Appointed Special Trial Judge, United States Tax Court, on August 7, 1994.”

Impressive, right?

Much less impressive is a certain blogger’s resume: “BA cum laude Hunter College (Bronx) 1963; LL.B. Cornell Law School, 1966 (Moot Court Board); U. S. Army, 1967-1969. Ten years New York State Attorney General’s Office Grade 28 Attorney. Private law practice, large and small firms and solo, 38 years. Admitted New York State, US District Courts Eastern and Southern Districts, United States Tax Court. Enrolled Agent.”

And this is what that esteemed jurist and this much more humble practitioner has to deal with. No opinions today, so here’s a designated hitter.

Jerald E. Sark, Docket No. 20861-14, filed 1/28/15. Case comes up on motion to dismiss for failure to state a claim.

For you civilians, that means that the petition doesn’t set forth any facts that establish the petitioner’s legal right to anything.

“In a notice of deficiency… respondent [IRS] determined a deficiency in, and imposed additions to tax with respect to petitioner’s 2011 Federal income tax. According to the notice, petitioner received ‘Nonemployee Compensation’ during 2011, but failed to file a 2011 Federal income tax return reporting that income. These points are not disputed by petitioner in the petition, amended petition, or in anything else he has submitted. Instead, in page after page of frivolous assertions, petitioner, who was living in Texas when the petition was filed, insists that he is not subject to Federal income taxation or otherwise obligated to have filed a 2011 Federal income tax return. Given the amount of income attributed to him in the notice, he is mistaken on both points… and nothing else needs to be said in that regard. See Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984).” Order, at p. 1 (Citations omitted, but they’re the usual ones).

“We further note that nothing in the petition, amended petition or anything else submitted by petitioner suggests that the deficiency is overstated because petitioner is entitled to deductions not taken into account in the notice. And to the extent that anything submitted by petitioner explains his failure to file a 2011 Federal income tax return, the explanation hardly constitutes reasonable cause.” Order, at p. 2.

Of course, Jerald gets tossed, with a showing of the usual Section 6673 yellow card.

So, gentle reader, spare some pity for Exalted Lew, with a wee bit of pity left over for Humble Lew, as we deal with this stuff.

Besides Judge Holmes, Of Course

I cannot think too many people, even among the loyal 135 who follow this my blog (a poor thing, but mine own), are hanging breathless on the answer.

But since on this day of the great Snowmageddon, as the media have dubbed NYC’s non-event but Boston’s blizzard, the teletubbies at 400 Second Street, NW, have launched neither opinion nor designated hitter, I am relegated to reading orders yet again.

And I find that Chenery is once more coming to bat. No, not the two-time Supreme Court extravaganza, quoted by Judge Holmes in my blogpost “He Loves Chenery”, 12/17/14. No, this is a similarly-named entity that showed up on my blogpost “‘Oh No, It Isn’t!’ ‘Oh Yes, It Is’”, 6/3/14.

In the latter order, what IRS at first claimed wasn’t a NOD turns out to have been a NOD, and IRS conceded it was. So Chenery gets a hearing, right?

Not quite yet. First Ch J Michael B. (“Iron Mike”) Thornton must take it off the calendar for March 2 in Our Nation’s Capital, and then find some Tax Court Judge to deal with Chenery and its problems, “by trial or otherwise in due course,” Chenery Management, Inc., Docket No. 23888-13L, filed 1/27/15, at p. 1.

Well, you remember Tax Court acquired fresh talent last December, so Ch J Iron Mike looks over the rookies and assigns this case to Judge Tamara W. Ashford, who first appeared in my blogpost “New Kids on the Block”, 12/22/14.

As I said in my blogpost “Even More Impressive”, 1/1/15, “I look forward to posting many more scintillating opinions from Judge Ashford.”

Maybe she’ll even love Chenery.

The sixty-buck-ticket-to-justice, if invoked, can lead the invokers down paths not dreamt of when they mailed in the petition for redetermination of deficiency.

Maybe you don’t owe Our Nation’s Treasury at close of play, but if you think Mr. Lew and his coadjutors owe you, you can’t just walk away from 400 Second Street, NW.

Case in point, Neal G. Brower & Deborah A. Brower, Docket No. 22260-14, filed 1/26/15.

Neal & Deb filed the petition all right, but now move to dismiss, attaching a “no change” letter from IRS.

Now maybe their motion should be recharacterized as a motion for entry of decision, because dismissing a petition for redetermination of deficiency, where Tax Court has jurisdiction, means entering decision for everything IRS claimed in the SNOD.

And Ch J Michael B. (“Iron Mike”) Thornton is a master recharacterizer. Not a Tax Court working day goes by without Ch J Iron Mike spinning straw into gold–or whatever.

But IRS is not happy. It seems Neal & Deb submitted an amended return, claiming they’re owed money, and IRS wants to duke it out here and now.

Ch J Iron Mike, exponent of judicial economy, agrees.

Motion to dismiss denied, and “…petitioner shall file an Amendment To Petition setting forth, if so be the case, their claim for overpayment….” Order, at p. 1.

Takeaway– When you petition, more than you think is on the table.

And all the rest of it, as the Swan of Avon put it in Act II, Scene vii.

Well, we’ve got plenty of winter wind, and it’s blowing pretty good here in The City That Never Sleeps. So I decided to follow the lead of the Federales, including but without in any way limiting the generality of the foregoing, as my canceled-out-of-Com’r-Koskinen’s-lunchtime-remarks-tomorrow colleagues would say, the crowd at 400 Second Street, NW, who can teletubby today if they wish.

I’m teletubbying today my own self. For the benefit of readers seeking a glossary (see my blogpost “Maybe Not So Obvious – Part Deux”, 1/22/15), the Federales call it “telework”; I prefer “teletubby”, as it involves sitting at one’s computer or smartphone as opposed to bestirring oneself and venturing abroad.

Now that the overture is finished, here is the mini-opera. It’s Dennison R. Heuer, Jr., Docket No. 5076-14, filed 1/26/15, an off-the-bencher from Judge Kathleen Kerrigan.

Here’s a fine example of “man’s ingratitude” and indeed the winter sky is not as biting as “benefits forgot.”

Denni plunders his 401(k) to the extent of $69K, but hadn’t reached the 59-1/2 year safe harbor. He did report the income (he got a 1099-R) and prepared his own return, being one of a dwindling band who does.

But Denni left off the 10% Section 72(t) addition or penalty or whatever it is. IRS hits Denni with the 10% plus the 20% five-and-ten substantial understatement chop.

Denni claims hardship.

“Petitioner contends that he made the withdrawal from his 401(k) due to financial hardship. He testified that by making the withdrawal he was able to retain his employees and eventually sell his company. He testified further that the new owners of his company retained the employees. Without making the withdrawal from his retirement account, petitioner believed that he would be unemployed.” Order, at p. 6.

Tough, Denni, says Judge Kerrigan. “We have considered similar claims in the past and have observed that there is no authority in the Code, the legislative history, or caselaw for a general financial hardship exception to the imposition of the 10% additional tax on early distributions. While we are sympathetic to petitioner’s position, the Court may not add an exception to section 72(t) by judicial fiat and we are obliged to apply the law as written.” Order, at pp. 6-7 (Citations omitted).

But Denni’s tale is not solely one of woe.

“Petitioner prepared and filed his own tax returns. This is not a situation of omission of income or an exaggeration of deductions, but rather the proper reporting of income governed by the Code, the regulations, and the interpretation of the relevant statutory provisions by numerous cases. On the record before us, we are satisfied that petitioner acted in good faith and with reasonable cause with respect to that portion of the underpayment relating to the 10% additional tax under section 72(t).” Order, at p. 8. (Citation omitted).

Denni gets hit with the 10% addition, but not the 20% chop.

No, not a 1950s-style film noir, rather Judge Kerrigan protecting everyone’s privileged, attorney work product and trade secrets in a pair of designated hitters, Eaton Corporation, Docket No. 5576-12, filed 1/23/15 and Medtronic, Inc. & Consolidated Subsidiaries, Docket No. 6944-11, filed 1/23/15.

Breaker breaker, good buddy, remember Eaton Corporation and its battle with IRS over its offshore circuit breaker manufacturing? No? Then check out my blogposts “Advance and Retreat”, 6/26/13, and “Walk Right In, Set Right Down”, 10/15/14.

Looks like we’re not going to be listenin’ to Lacey after all. Lacey was one of the key players in shooting down Eaton’s advance pricing agreements. Apparently John Hinding was another key player, and Eaton’s counsel wants another crack at Johnny as well as another crack at Lacey, with them answering the questions IRS’s counsel told them not to answer. IRS claims their testimony would reveal privileged matter and attorney work product.

Judge Kerrigan: “Petitioner has already had the opportunity to depose Ms. Lacey and Mr. Hinding. During these depositions deponents were instructed not to answer questions on the grounds responses would have resulted in providing privileged information. See Rule 70(b)(1) (the information or response sought through discovery may concern any matter not privileged and which is relevant to the subject matter involved in the case).” Order, at p. 1.

Anyway, Eaton’s counsel got a memo from IRS addressing the whys and wherefores, redacted to protect work product. Depositions are extraordinary in Tax Court, only allowed when nothing else works. And privileged matter and attorney work product are off the table in all events.

Now Eaton can try to prove that IRS was arbitrary and capricious, without any idea of who said or did what.

Medtronic is another long-running show, but Judge Kerrigan is more sympathetic to the Meddies. She unloads a six-page saddle blanket that covers just about everything.

To get there, “The Motion for Protective Order is accompanied by an affidavit by Gary L. Ellis, Executive Vice President and Chief Financial Officer of petitioner. This affidavit contends that petitioner has made a significant effort to ensure that all of petitioner’s officers, employees, contractors, and agents guard confidentiality of proprietary information. The affidavit further contends that petitioner will sustain irreparable economic harm from proprietary information being divulged. Petitioner contends the release of proprietary information would allow competitors to determine petitioner’s current business strategies, strengths, and weaknesses in the market.” Order, at p. 1.

After the ritual nod to “the goal of this Court to provide as robust a public record as possible” (Order, at p. 2), Judge Kerrigan nevertheless affirms the “commonsense proposition” that spilling the Meddies’ beans would hurt them.

But since Gary L limits the requested sealing of the record specifically to certain items, Judge Kerrigan erects the fortifications with some precision, while trying to “enable the largest possible percentage of the trial record to be made available for ultimate public inspection, consistently with the protection of petitioner’s proprietary information.” Order, at p. 2.

See for yourself.