This is another installment in my “Win Your Case” series. There has been a bushelbasketful of these orders arising out of listed transactions lately, principally a dodge known as the Sterling Benefit Plan. This particular shenanigan is rewarded with the Section 6707A chop.

These are nonassessables, that is, there’s no SNOD, but a trip to Appeals gives the alleged miscreant a chance to chip away the chop.

The exemplar I’m picking today is a designated hitter from Judge Kerrigan, Medi-Save Pharmacy, Inc., Docket No. 30058-13L, filed 8/27/14. And Judge Kerrigan seems to have gotten a bunch of these.

Medi got the chop, Medi’s counsel went to Appeals, Appeals sustained the chop ($10K), and Medi got a NITL. Medi filed a CDP, but didn’t take the phone conference offered or submit an alternative, so Medi got a NOD.

Medi petitions, saying “…that it is entitled to abatement of the penalty based on ‘an unexplained determination that related transaction and a provision of the Internal Revenue Code that is unconstitutional as a deprivation of due process’.” Order, at p. 2.

IRS moves for summary judgment and gets it, especially since Medi’s counsel doesn’t oppose.

The issue is whether Medi had a prior opportunity to dispute the chop.

“A prior opportunity to dispute a liability includes an opportunity for a conference with the Appeals Office offered either before or after assessment of the liability. Secs. 301.6320-1(e)(3), Q&A-E2, 301.6330-1(e)(3), Q&A-E2, Proc. & Admin. Regs. This Court has upheld the validity of these regulations. Lewis v. Commissioner, 128 T.C. 48 (2007). An opportunity to dispute tax liability under section 6330(c)(2)(B) includes an opportunity to dispute taxes to which deficiency procedures do not apply with the Appeals Office. See Mason v. Commissioner, 132 T.C. 301 (2009).” Order, at p. 3.

Win your case at Appeals. Or be prepared to go to the Court of Appeals.

At Least Until He Goes

That’s the moral Judge Cohen has for Zhengnan Shi in 2014 T. C. Memo. 173, filed 8/26/14.

Zhengnan, a Chinese (PRC) national, is fighting over the interest on his tax refund. I’ll spare you all but one of his losing arguments, but the one I want may be of use to the battle-weary practitioner.

Zhengnan claims the US-PRC tax treaty taxes Chinese resident nationals at 10% of their US-source income, and IRS wants 30%. And he claims he gets the treaty rate. Except he doesn’t.

OK, says Judge Cohen. But “Article 4 indicates that to be a resident of China for purposes of the China treaty, petitioner must show that under Chinese tax statutes and laws he was liable for taxation in [the year at issue] because he resided (or was domiciled or something to that effect) in China.” 2014 T. C. Memo. 173, at p. 11.

Zhengnan didn’t introduce any Chinese law or proof he was back in the PRC.

Anyway, five years before the year at issue, Zhengnan stated he was substantially present in the US, both in his return and his amended return, which he filed as resident alien.

And Reg. Section 1.871-5 says “Loss of residence by an alien.–An alien who has acquired residence in the United States retains his status as a resident until he abandons the same and actually departs from the United States. An intention to change his residence does not change his status as a resident alien to that of a nonresident alien. Thus, an alien who has acquired a residence in the United States is taxable as a resident for the remainder of his stay in the United States.” 2014 T. C. Memo. 173, at p. 16.

Zhengnan admittedly didn’t leave the US for another three years after the year at issue.

So he’s here because he’s here. And taxable accordingly.

And It’s Constitutional

While Parimal H. Shankar and Malti S. Trivedi make a to-do about the Constitutionality of the Section 219(a) IRA AGI adjustment (improperly called a deduction in the opinion) and limitation when applied to the self-employed spouse of an actively-participating employee spouse in 143 T. C. 5, filed 8/26/14, that’s not  what I’m aiming at in this blogpost.

Judge Halpern blows away the argument that Section 219(a) discriminates unconstitutionally against self-employeds by pointing out that self-employeds are not a suspect category (although I sure know a lot of self-employed types who are pretty suspect), and the IRA tax deduction isn’t a fundamental right. And Congress had a rational reason for precluding certain high-income joint filers from taking IRA deductions if one of them actively participated in a plan. See 143 T. C. 5, at p. 9, if you’re interested.

No, I find more juice in the “Thank You” points.

Parimal cashed in 50K “Thank You” points he got from Citibank, wherein he stashed his cash, apparently in exchange for his patronage. With the cashed points, he got an airline ticket to anywhere in the lower 48, Alaska and Canada. This is set forth in an affidavit from a duly authorized records custodian at Citibank. “Attached to the affidavit are documents and computer transcripts from Citibank showing that Mr. Shankar redeemed 50,000 thank you points…to purchase a restricted coach class airline ticket for travel in the lower 48 United States, Alaska, and Canada. Also attached to the affidavit is a letter… in which… the custodian of records for Citibank, represents that the fair market value of the airline ticket was $668.” 143 T. C. 5, at pp. 4-5.

The affidavit and attachments go in as business records (see FRE 803(6) and 902(11), and yes, Parimal and Malti got the 902(11) notice and the right of inspection).

Now Judge Halpern nails Parimal for unreported income for the airline ticket, despite Parimal claiming he never got it. Parimal has the burden, and his unsupported testimony doesn’t beat Citibank’s records. And Malti doesn’t show up for trial, so no testimony from her.

But why are the redeemed points income? “We are not here dealing with the taxability of frequent flyer miles attributable to business or official travel, with respect to which the Commissioner stated in Announcement 2002-18, 2002-1 C.B. 621, he would not assert that a taxpayer has gross income because he received or used frequent flyer miles attributable to business travel. Petitioners have provided us with no information concerning the reason Citibank awarded Mr. Shankar thank you points.” 143 T. C. 5, at p. 13.

And Parimal’s counsel didn’t object when IRS’ counsel said that unreported interest income was at issue here. Note the word “interest”; Judge Halpern does.

“We proceed on the assumption that we are dealing here with a premium for making a deposit into, or maintaining a balance in, a bank account. In other words, something given in exchange for the use (deposit) of Mr. Shankar’s money; i.e., something in the nature of interest. In general, the receipt of interest constitutes the receipt of an item of gross income.” 143 T. C. 5, at pp. 13-14.

And Parimal didn’t argue that the FMV of the airline ticket he said he never got was less than the $668 Citibank claimed it was worth.

But the best part is in the footnotes. And that’s my takeaway.

“Neither party has addressed, nor do we consider, whether award of the thank you points, itself, may have been the taxable event.” 143 T. C. 5, at p. 14, footnote 2.  The award, note well, not the redemption.

Aye, there’s the rub.

Practitioners, if you’re hit with a thanks-but-no-thanks, if the points were awarded and accumulated over years, especially years before the year at issue and now outside the SOL, make the argument.

And recipients of bank-issued largesse, remember: “Timeo Danaos et dona ferentes”. I need not, of course, translate.

No, not another child-of-Rand zeroing-out of the child credit, but we have got a child issue here. This is the story of Michael Swiggart, 2014 T. C. Memo. 172, filed 8/25/14, but it’s really about his hard-charging lawyer Eric William (“EW”) Johnson, Esq.

For the Rand story, see my blogpost “The Rebate Debate – Part Deux”, 11/18/13.

Mike files his return timely, claiming HOH but not stating the name, rank and serial number of the dependent who qualifies him for that status. Mike ducks, because he let the dependent’s mama claim the exemption for that year, which he doesn’t claim. Also Mike’s tax due is more than his withholding, and he doesn’t stump up the differential.

Mike is out on the differential, of course. But all is not lost, as IRS really loses the ball in the sun on this one.

IRS gives Mike a math error notice, with the usual “tell us in 60 days and we’ll abate the assessment”, thus setting Mike up for a SNOD if they don’t like his story. Sixteen (count ‘em, sixteen) days after the math error, IRS sends Mike a NITL.

Enter EW. He timely files the request to abate to the right address by certified mail. He timely files Form 12153, likewise certified and likewise to the address specified in the NITL. IRS replies to the math error letter with a letter with a number of inconsistencies, like EW isn’t authorized to represent Mike, but mails the letter to EW. Then Appeals rejects EW’s CDP with a NOD that looks pretty sloppy.

Judge Buch is not a fan of sloppy: “The notice of determination states that Mr. Swiggart raised and disputed the head of household filing status but also states that he made no challenges to the existence or the amount of the underlying liability. The notice of determination states both that the hearing occurred on January 11, 2012, with Mr. Johnson and that it occurred on January 17, 2012, with a representative named Nicole McGuire. It is clear portions of the notice of determination relate to another taxpayer’s hearing with a different representative.” 2014 T. C. Memo. 172, at p. 5, footnote 4

Mike timely petitions the NOD, and after IRS claims Mike had full opportunity to contest at the CDP, EW moves for summary judgment, conceding the underpayment of tax at HOH level, but contesting the rest. IRS caves on the classification, because you don’t need to claim dependency credit for the dependent that puts you into HOH status, just the magic days, and abates the excess to the extent thereof.

Mike wants administrative and litigation costs and fees. IRS, of course, says he didn’t prevail.

Oh yes he did, says Judge Buch. IRS argues Mike’s agreed shortfall was $7 more than the reclassification increase, but that’s not the issue. The issue was whether IRS wrongfully denied abatement of the math error notice and failed to recognize the law about abatement at the CDP. And here Section 6213(b)(2)(a) is mandatory; if the taxpayer disputes the math error, the assessment “shall” be abated, and deficiency procedures must be followed. IRS, to its credit, never claims that position was justified, because caselaw says that a CDP can’t cure an unabated disputed assessment on a math error notice.

And that’s the test. For the admins, what the IRS knew as of the date of the NOD is what counts.

Mike and EW can split $3100 in fees and costs. Of course, EW’s hourly rate is cut by at least one-third. But he can console himself with a Taishoff “Good job, first class”.

Oh yes, and Mike gets his $60 petition fee back.

IRS Com’r John (“Kosi”) Koskinen’s ringing endorsement of the Whistleblower Program, dated 8/20/14:

Click to access Koskinen%20whistleblower%20statement%20-%20version%20082014%20(2).pdf

With an “amen” from Deputy Dalrymple:

Click to access IRS%20Whistleblower%20Program%20Memorandum%20(signed%20by%20DCSE).pdf

Comment is superfluous.

Note, you may have to cut and paste the URL for Dalrymple and add the “f” after “pd”, as the wordprocessor for this blog doesn’t seem to assimilate the URL.

I read Tax Court orders the way sane people eat peanuts. And such reading can produce a mental equivalent to the physical result of having eaten too many peanuts.

But there are gems. And this one reminds me of the late John Florence Sullivan, better known as Fred Allen, master humorist, who invented the Vice-President in Charge of Leaky Dixie Cups.

From Judge Marvel: “The parties state in the report, among other things, that the parties have negotiated a comprehensive settlement proposal for the instant cases….The Office of the Assistant Attorney General for the Tax Division, U.S. Department of Justice, reviewed the settlement proposal and forwarded the proposal to the Joint Committee on Taxation (JCT)…. JCT completed its review of the proposal … and has forwarded the settlement proposal to the Associate Attorney General, U.S. Department of Justice, who approved the proposal. (R)espondent [IRS] made a referral to the Complex Interest Team, IRS Office of Appeals, for interest computations for the instant cases and the related refund suit. Upon completion of the interest computations, respondent will forward them to petitioner for review, and if agreed to by petitioner, a formal acceptance of the computations under the terms of the settlement will be issued to petitioner by the Assistant Attorney General for the Tax Division, U.S. Department of Justice.” Vail Resorts, Inc., Docket No. 894-10, filed 8/22/14.

Gotta tell ya, Judge David Gustafson is obliging as all get-out. Just two days after I ranted about his not designating his useful and instructive orders, he’s got two (count ‘em, two) designated hitters today, and they are really obliging and instructive.

If anybody cares, my rant, that seems to have inspired Judge Gustafson’s emergence from his wonted modesty, is to be found at the end of my blogpost “I’m From the Government, and I’m Here to Help”, 8/20/14.

But Judge Gustafson came through in fine style today.

First to the plate is (or are) Kimberly Warren & Leslie Warren, Docket No. 21532-13, filed 8/22/14. Kim & Les claim they mailed their petition on Day 90, but the petition and the properly addressed but not postmarked envelope containing same arrived thirteen days later. Kim & Les claim they went to the post office on Day 90 and posted off the envelope with petition securely therein contained.

We all know that Section 7502 says “filed when mailed, but mailed means USPS postmark”. Kim & Les “…argue that section 6213(a) or section 7502 does not require the petition to be filed in this Court within the 90 day statutory period.” Order, at p. 2.

Of course that goes down trailing smoke and flames. So it looks like Kim & Les are finito.

Especially since the SNOD from which Kim & Les petitioned states their address and their petition states the same address, and said address located in the Great State of Tennessee. The Great State of Tennessee is nestled within the bounds of the Sixth Circuit. And Golsen-izing, Judge Gustafson finds that Sixth Circuit says taxpayers who send petitions by anything but certified or registered mail do so at their peril.

But Judge Gustafson, ever obliging, throws the rope: “We point out the following to the Warrens: Rule 162 permits a party to file a motion to vacate a decision within 30 days after the decision has been entered. If the Warrens wish to move the Court to reconsider this order (e.g., by presenting additional legal authorities, or by showing that they resided other than in the Sixth Circuit when they filed their petition), then they may appear at the calendar call in Columbia on September 8, 2014, and make an oral motion for the Court to vacate the decision. In the ordinary course this case would not be called (since it will have been dismissed), so if they intend to make such a motion, then they should arrive early on September 8 and should advise both the IRS counsel and the Court’s trial clerk that they are there and wish to make a motion.” Order, at p. 4.

Now that’s really obliging.

Not to be outdone, Judge Gustafson has the same handy tip for Gerald P. New, Docket No. 29161-12L, filed 8/22/14.Gerry was a wee bit casual in responding to IRS’ requests for information to work out a collection alternative, and never bothered returning Judge Gustafson’s phonecall.

Not a good idea, Gerry. There are Tax Court judges who get mighty peevish when ignored. But Judge Gustafson’s good nature shines through.

Although he tosses Gerry for failure to prosecute, he has the rope ready.

“We point out the following to Mr. New: Rule 162 permits a party to file a motion to vacate a decision within 30 days after the decision has been entered. If by September 22, 2014, Mr. New has obtained information that would show that his tax liability has been paid to an extent greater than the IRS acknowledges, or would show that he is eligible for a collection alternative, or would otherwise show that this decision should be vacated, then he should appear at the calendar call on that date and make an oral motion for the Court to vacate the decision. In the ordinary course this case would not be called (since it will have been dismissed), so if he intends to make such a motion, then he should arrive early on September 22 and should advise both his IRS counsel and the Court’s trial clerk that he is there and wishes to make a motion.” Order, at p. 2.

Now Judge Gustafson has done everything but offer to bring coffee and Krispy Kremes for Kim & Les, and Gerry, to the calendar calls.

And he’s even designated these orders so I didn’t have to spend an extra hour digging them out, on a cloudy Friday afternoon in August.

Way to go, Judge Gustafson.Thank you, Your Honor.

No, not a parody of the Sherman Brothers’ Oscar-winner from Walt Disney’s 1964 vehicle for Julie Andrews. This is a designated hitter from The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable Foe of the Partitive Genitive, Judge Mark V. Holmes.

The case is Renka, Inc., Docket No. 15998-11R, filed 8/21/14. It was argued on Tuesday, August 19, and I’d intended to go to the Center Courtroom at 400 Second Street, NW, to hear the argument, but an illness of a family member prevented me. Fortunately, Judge Holmes has dispelled my disappointment and curiosity.

IRS wants summary judgment and doesn’t get it. IRS started by claiming the Renka ESOP terminated in 1998 in their revocation letter, but moves for summary judgment based upon transactions and occurrences in 1999, claiming it doesn’t matter what year the ESOP failed, if it failed once it failed for all years.

The Great Dissenter nails that one: “There are at least two problems here. The first is the Commissioner’s seeming abandonment of his explanation of revocation, which disqualified the ESOP only because of facts as they supposedly existed in 1998. This raises a Chenery question. See SEC v. Chenery Corp., 332 U.S. 194 (1947) (Chenery II); SEC v. Chenery Corp., 318 U.S. 80 (1943) (Chenery I). The Chenery doctrine is an administrative-law principle that says ‘a reviewing court, in dealing with a determination or judgment which an administrative agency alone is authorized to make, must judge the propriety of such action solely by the grounds invoked by the agency.’ Chenery II, 332 U.S. at 196 (describing its holding in Chenery I). The Supreme Court not too long ago announced that ‘we are not inclined to carve out an approach to administrative review good for tax law only’ and noted ‘the importance of maintaining a uniform approach to judicial review of administrative action.’ Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. __, 131 S. Ct. 704, 713 (2011) (citation and internal quotation marks omitted).” Order, at p. 2.

Now although Tax Court hasn’t ruled on whether Chenery I or II applies to an ESOP revocation, “…such proceedings also stem from an IRS determination made after the assembly of an administrative record and that determination is also reviewed for abuse of discretion. This inclines us to think that Chenery might be a reason by itself to deny the Commissioner’s motion.” Order, at p. 3.

But alas and alack! Renka’s legal team didn’t raise Chenery I or II in opposing IRS’ motion. And DC Circuit said last year that it’s a “use it or lose it” defense. I’ll have more to say about this in my takeaway.

For the moment, Judge Holmes deconstructs IRS’ argument by using Section 1563(c)(2)(B) to unravel IRS’ chain that binds Renka to a brother-sister control group. I leave that to the specialists.

No summary judgment for IRS.

And now, the takeaway. Litigators, when opposing motions for summary judgment or demands to admit facts or stipulate, read the administrative determination–carefully. And claim Chenery for “whatsoever is not read therein”.

Those nine (9) words, which, to the late President of the United States Ronald Wilson Reagan, were “the nine most terrifying words in the English language”, shouldn’t be for Barbara Delon & Welbon Delon, Docket No. 7097-13L, filed 8/20/14, because that Obliging Jurist, Judge David Gustafson, is throwing Barb and Wel a rope they shouldn’t drop, even if they don’t understand why it’s a rope.

Appeals admits they blew the CDP, so IRS wants a do-over and asks for a remand. You’ll remember that remands, like Ira Gershwin’s and Dubose Heyward’s idea of Woman, is a sometime thing. See my blogpost “Demand for Remand?”, 12/3/12, where Judge Swift sorts through a bushelbasketful of cases on Tax Court’s remand powers. But here it’s IRS asking, not Tax Court suggesting, so what’s the problem?

Barb and Wel don’t wanna go back to Appeals. So Judge Gustafson gets them on the blower with IRS and tries to tell them why they want to go back. And here’s what the practitioner, confronted with this situation, might wish to ponder as well.

First, only Appeals can grant a collection alternative. Tax Court can’t order IRS to provide one. So if Barb and Wel want installment, OIC, or CNC, Appeals is the only game in town. As for all the majesty and power of Tax Court, “…our final decision in a CDP case must be simply to sustain or not sustain Appeals’ determination, and the blunt instrument of not sustaining the determination would not give the taxpayer the collection alternative he seeks.” Order, at p. 1.

Next, each CDP considers one, and only one, “collection episode”. “If we decline to sustain Appeals’ determination and decide instead in favor of the taxpayer, our decision does not bar the IRS from subsequent collection attempts. If a proposed levy is not sustained, then the IRS may be able to propose another levy; if a given notice of lien must be withdrawn, then the IRS may be able to file another notice of lien. For some taxpayers, that truism will be a reason to consent to a remand.” Order, at p. 2.

Taxpayers, please copy. No double jeopardy here. Tax Court can bounce IRS, and provided SOL hasn’t run, IRS can lob another NFTL or NITL the next morning.

Worse, and finally, the Section 6320(b)(2) single-shot provision: only one CDP hearing for any tax period. So even if Barb and Wel win the trial and the lien or levy they’re fighting gets tossed, IRS can come back the next morning with a fresh one, and Barb and Wel have no ticket to a CDP or to Tax Court. Even if they won, they lost.

Now no court has so held. But “…for the unpaid liabilities at issue here, the Delons are entitled under this provision to ‘only one hearing’ with respect to the IRS’s filing of a notice of lien and the IRS’s issuance of a notice of levy. If a taxpayer prevails in a CDP case and thus succeeds in having the IRS’s notice of lien withdrawn, and if the IRS then files another notice of lien, the taxpayer may then want to propose a collection alternative. But does the taxpayer again have recourse to review by Appeals and by this Court? Perhaps the statutory limit of ‘only one hearing’ means that the answer is no, as the IRS appears to contend (see Internal Revenue Manual pt. 8.22.7.9.1.3(3) (Nov. 5, 2013); or perhaps instead the taxpayer is entitled to a supplementation of his original CDP hearing as a continuation of that ‘one hearing’, and not as a new, second hearing; but no court has yet answered this question.” Order, at p. 2.

Heartily agreeing, I again quote that sage and savant of New York Civil Practice, Prof. David Siegel, now or formerly of Albany Law School: “Find out the answer in S. E. C.–Someone Else’s Case.”

Or, as Clint Eastwood might have put it: “Feelin’ lucky?”

“A taxpayer resisting remand therefore incurs the risk of forfeiting what may be his last chance for IRS Appeals and the Tax Court to review IRS collection activity. So that the Delons may further reflect on this matter, and so that the parties may have additional time to attempt to settle their dispute, it is ORDERED that the IRS’s motion to remand is taken under advisement ….” Order, at pp. 2-3.

And so the parties can talk among themselves, show up in Winston-Salem in September, guys, and we’ll all talk about it. And defer the trial.

Barb and Wel, listen to fatherly and obliging Judge Gustafson: he may be from the government, but he is here to help.

Footnote- Ya’d think Judge Gustafson would designate this order, as it has great information for the in-the-trenches practitioner and the ordinary taxpayer. But no! Instead I had to blow away a perfectly good hour wading through a fact-bound T. C. Memo., and four (4) designated exegeses on discovery that left me as wise as I was before (like, “what part of ‘answer the question’ don’t you understand?”). Modesty is all very well, Judge, but sometimes a modest blast on one’s own horn does no harm.

No, not Ado Annie’s line from Rodgers’ & Hammerstein’s “no legs, no jokes, no chance” musical that saved the Theatre Guild. No, this was The Judge Who Writes Like a Human Being, a/k/a The Great Dissenter, s/a/k/a The Implacable Foe of the Partitive Genitive, Judge Mark V. Holmes, telling IRS that they “cain’t say no” to that diehard whistleblower Kenneth William Kasper, Docket No. 22242-11W, filed 8/19/14.

This is yet another variation on the theme “win your case at discovery”. But first, do you remember Kenneth William? No? Then read my blogpost “The IRS Loses a Doubleheader”, 7/12/11, where some sloppy mailing by IRS keeps Kenneth William in the Hunt for the Gold. And Kenneth William isn’t giving up soon.

Kenneth William wants to check out IRS’ files in a bankruptcy case, whereat IRS may have gotten some boodle based on Kenneth William’s pictures, descriptions and accounts of corporate and individual skullduggery.

IRS says no, but Judge Holmes gets the parties on the horn (a great fan of teleconferencing, he), and as they stick to their positions, Judge Holmes, recognizing the law is, in his words, “uncertain”, calls for briefs.

Well, Kenneth William comes out swinging.

“A review of their briefs shows that a major issue in the case is whether the record rule applies in whistleblower cases. It is a strong possibility that this Court will find that it does, and it is also quite possible that the documents that Mr. Kasper seeks will not be in that administrative record. But one of the ways in which a litigant in a case governed by the record rule gets a trial is if he alleges that something is missing from the record that ought to be there – such as whether an agency ‘has considered all relevant factors and explained its decision.’ Tri-Valley CAREs v. U.S. Dept. of Energy, 671 F.3d 1113, 1130 (9th Cir. 2012). This makes discovery – particularly a very pointed and well-described request like Mr. Kasper’s – useful and available.” Order, at p. 1.

For those who tuned in late, the record rule, much beloved by, among others, Ninth Circuit (and trial is set for Phoenix, AZ, Ninth Circuit country), is the contrapositive of the Yellow Pages’ famous slogan: “If it’s not in here, it’s not out there”.

In “record rule” jurisdictions, the courts review agency determinations based upon the record before the agency at the moment of determination. “All thy piety and wit”, as the Persian bard put it, cannot change a line of it, either by addition or subtraction. If the parties are unhappy with the proffered record, they must say so.

So hand it over, IRS, right after Labor Day.

Takeaway for whistleblowers and their representatives: Get the discovery demand that Kenneth William put together and govern yourselves accordingly.