Or, Who Says Tax Is Unromantic?

Today is a rare day for this old softy. I’ve got a love story and a tax takeaway, and here’s STJ Daniel A. (“Yuda”) Guy with hearts, flowers and Schedule A, and a bye on the Section 6662(a) accuracy penalty for Lauren Elizabeth Miller, 2014 T.C. Sum. Op. 74, filed 7/28/14.

Lauren E. was the NYC rep for a California start-up called BrandingIron Worldwide, Inc. BrandingIron might have been long on iron but it was short on gold, at least while Lauren E. was repping them in the Apple. They had no office in NYC and weren’t going to get one, so Lauren E. had to work out of her apartment.

So the unreimbursed employee business expense I want to cover today is a fact of NYC life that y’all who live on the bayous, prairies, and Great Plains of our land wot not of, the NYC studio. Lauren E. had a large one, “…a single room with a total living area of 700 square feet. She provided a sketch of the apartment in which the space is divided into three equal sections: (1) an entryway, a bathroom, and a kitchen area; (2) office space, including a desk, two shelving units, a bookcase, and a sofa; and (3) a bedroom area including a platform bed and dressers. Petitioner had to pass through the office space to get to the bedroom area.” 2014 T. C. Sum. Op. 74, at p. 4. And she occasionally used the “office” space for personal purposes.

I lived in something that size for a year-plus, prior to finding the apartment of my dreams (and the Girl of My Dreams), with both of whom I am still happily affiliated.

Now exclusivity of the home office sinks most deductions (see my blogpost “Lock The Door!”, 8/18/11), but STJ Yuda is not oblivious to reality (and realty).

“Although petitioner admitted that she used portions of the office space for nonbusiness purposes, we find that her personal use of the space was de minimis and wholly attributable to the practicalities of living in a studio apartment of such modest dimensions. See Hughes v. Commissioner, T.C. Memo. 1981-140.” 2014 T. C. Sum. Op. 74, at p. 14.

So Lauren E. gets at least some of what she claims. As her annual rent for the palazzo in question was $26K (don’t gasp, you denizens of The Great Wide-Open; that’s what Manhattan costs), she gets about one-third, plus a piece of her cleaning bill.

IRS wants a Section 6662(a) accuracy penalty, but STJ Yuda says no.

“Petitioner provided her tax records to Mr. Letta, a certified public accountant, and she consulted with him regarding deductions for her business expenses. Mr. Letta reviewed petitioner’s tax records, considered them to be complete and accurate, and discussed the return with her before filing it. When he learned that many of petitioner’s original tax records had been lost, Mr. Letta contacted TurboTax in an ultimately unsuccessful attempt to retrieve worksheets that he completed while preparing the return for electronic filing.

“Considering all the circumstances, we conclude that petitioner reasonably relied on Mr. Letta to assist her in preparing a proper tax return for 2009. We likewise conclude that there was reasonable cause for, and petitioner acted in good faith with respect to, the underpayment in this case.” 2014 T. C. Sum. Op. 74, at pp. 21-22.

Now where was the romance I promised you? It comes in a footnote.

“Petitioner provided her tax records, including original receipts and invoices of her business expenses … to Michael Letta.” 2014 T. C. Sum. Op. 74, at p. 9 (Footnote omitted, but here it comes).

“Petitioner married Mr. Letta in August 2013.” 2014 T. C. Sum. Op. 74, at p. 9, footnote 3.

May they file jointly happily ever after.

Or, How Not To Do It

I can understand a little creativity in the tax world, and even some post hoc tax planning, but there comes a point–well, maybe it comes too late for Raymond E. Gardner and Sherry N. Gardner, 2014 T. C. Memo. 148, filed 7/28/14, as told by Judge Ruwe.

Ray did insurance big-time, and real estate medium-time, from his North Carolina home, when he went into the cattle-breeding business with a peripatetic cattle breeder from Indiana.

Except it wasn’t a business, and Ray loses the Section 183 roundup. I’ll spare you the cattle by-product that permeates this 70-page account of breached contracts (on both sides, that neither side pursued), unpaid bills, unpaid and unenforced promissory notes, unregistered genetics, endless spreadsheets with no substantiation (we call it “back-up” in the trade), and dubious testimony.

But the takeaway here is the post hoc tax planning.

“Due to the manner in which petitioner conducted his cattle operation, we take a critical view of the coinciding of the substantial increase in petitioner’s net loss from his cattle operation in the same year that the income from his insurance business and other ownership interests also substantially increased.

“We note that petitioner reported $780,729 of net losses for the taxable years 2001 through 2004. The 2005 tax year was the first year that petitioner reported a net income from his cattle operation. Coincidentally, the IRS began an examination of petitioner’s cattle operation during 2005. The initial appearance of a profit in the taxable year in which the IRS commenced an examination is conspicuous.

“We find that this factor is neutral.” 2014 T. C. Memo. 148, at pp. 59-60.

Maybe the factor is neutral, but I’m sure IRS’ reaction wasn’t. And maybe IRS’ reaction isn’t the only one.

No, it’s not a parody of the classic New York doo-wop 1959 gold record “Sixteen Candles” (by the Crests, notable for being one of the rare integrated groups of the time, three black members (one of whom was female), one Puerto Rican, and one Italian-American: real New York).

But it could be, if someone is inclined to write it.

No, it’s the number of attorneys Amazon.com, Inc., and subsidiaries puts on a partial summary judgment motion that Judge Lauber blows off in ten pages (double-spaced).

Read all about it in 2014 T. C. Memo. 149, filed 7/28/14.

You’ll remember my earlier blogpost “Win Your Case at Discovery”, 7/3/14. Well, this is a follow-up, since The Big A made this motion while IRS was seeking more discovery concerning the allocations of expenses attributable to the components of this deal between Jeff Bezos’ still-in-the-USA retailing octopus and the Luxembourg subsidiary with which it was allegedly creating all this IP.

“Petitioner has yet to demonstrate that the T&C category contains nontrivial costs that are properly characterized as something other than IDCs. Respondent has sought discovery on this issue and was seeking additional discovery at the time this motion was filed. At the moment, therefore, it is a disputed question of material fact whether the T&C category contains ‘mixed’ costs. Until petitioner establishes that the T&C category contains a nontrivial amount of ‘mixed’ costs, we cannot rule as to whether respondent abused his discretion in determining that 100% of T&C category costs constitute IDCs.

“Petitioner contends that it is not required by the regulations to show that its T&C costs are ‘mixed’ before applying an allocation formula. In petitioner’s view, it need only prove that the allocation formula it developed and applied is ‘reasonable.’ If that formula is ‘reasonable,’ petitioner contends, the formula necessarily allocates costs correctly as between the intangible development activity and other business activities.

“Petitioner’s argument puts the cart before the horse. The regulations permit costs to be allocated only ‘[i]f a particular cost contributes to the intangible development area and other areas or other business activities.’ Sec. 1.482-7(d)(1), Income Tax Regs. The status of costs as ‘mixed,’ in other words, is a precondition to the application of an allocation formula. Petitioner must show that this condition has been satisfied before it can proceed to the next step, which is to show that its allocation formula reasonably allocates mixed costs. At this stage of the litigation, we cannot rule as to whether respondent abused his discretion in declining to permit the use of an allocation formula with respect to T&C category costs.” 2014 T. C. Memo. 149, at pp. 8-9.

Amazon.com seems to think establishing the mixing would be tedious and time-consuming, but Judge Lauber says they can use sampling methods or a review of critical cost centers to do the sorting out.

“One way or another, petitioner must establish that it has T&C category costs requiring allocation before the Court will permit petitioner to allocate such costs.” 2014 T. C. Memo. 149, at p. 10.

No summary judgment.

IRS has only five lawyers; Amazon.com and Subsidiaries has sixteen (count ‘em, sixteen), all  white-shoe, I’ll wager, with the meters running. No wonder Amazon Prime went from $80 to $99 per year.

How often over the last thirty-five or forty years have I wished for a little black box, not larger than three cubic inches, that would sit quietly upon my desk. If I got mail (snail or e), or the phone (desk or cell) rang, on that wonderful little black box would glow either a red or a green light, not bigger than a nailhead. If green, the little black box would be telling me that I was about to acquire a really good-paying client, with either a solid case or an interesting transaction, with whom it would be a pleasure to work, with generous compensation.

But if red, the little black box was saying, in words I remember from long ago, “Incoming! Hit the dirt and grab an extra mag!” No lengthier gloss is needed.

Alas, I never had such a box. I wish I could have invented and patented it.

Such a box would be valuable beyond rubies before picking up the phone when the phonecall begins with “You are the third lawyer I’ve consulted….”

Case in point, a designated hitter from Judge Wherry, John W. Harris & Delilah E. Harris, Docket No. 20421-10, filed 7/25/14.

I won’t dwell on John’s efforts to extricate himself from the stipulation that sinks his case. Allegations of IRS skullduggery are occasionally true (cf. Kersting and his offspring), and so is alleged lawyer inadequacy, but more often these are the loser’s auto-condolences. Make up your own minds.

But the point of this blogpost (and I can hear my readers, those happy few, saying “I can’t believe it! Twice in one month he has a point!”) is just one sentence.

“We acknowledge that, at the time of the conference call, petitioners’ current counsel, the third attorney to represent them in this four year-old case, may not have been completely familiar with its procedural history.” Order, at pp. 7-8.

I’ll be prepared to wager ten new pence with my UK readers that this is not the only point in John W.’s & Delilah E.’s history with which said third lawyer is not “completely familiar”.

Would you be paralyzed with shock when I tell you that John W. is an attorney, and that he states on his website that “his expertise includes taxation, bankruptcy, public finance, real estate and commercial litigation, including eminent domain and other land use matters.”?

Automatic Tax Court admittee, of course. But read Judge Wherry’s order and decision.

In the immortal words of Monty Python, “nudge nudge, wink wink, say no more say no more.”

Woody Guthrie’s words and Billy Bragg’s music about sum it up for STJ John F. Dean, who “has retired after 20 years of service on the Court.  The Court deeply appreciates Special Trial Judge Dean’s outstanding service and dedication to the Court.”

Meets “Irrelevancies and Frivolous Contentions”

First up, batting for forthrightness, credibility and largely undisputedness is Patrick A. Davis, 2014 T. C. Memo. 147, filed 7/24/14.

Pat is a single Dad. He claims EITC and dependency for daughter Ashley, aged 19, full-time nursing student. Ashley lives with Dad and grandma (Dad’s mama) 20 miles from campus, works only for minimum wage part-time, and gets more than half her support from Dad, grandma, Ashley’s mama (from whom Pat was divorced years ago, but who was named custodial parent in the divorce decree), and the other grandma.

The famous Section 152 custodial-noncustodial dispute, with Form 8332 attached, is off the table, because no one disputes Ashley lived with Dad and grandma for more than half the year in question, and that fact, by virtue of Section 152(e)(4)(A), makes Pat the custodial parent.

So Ch J Michael B. (“Iron Mike”) Thornton blows off IRS’ counsel, whose sole argument seems to be the divorce decree from years ago.

IRS already conceded the penalty, and didn’t raise the issue whether Ashley, aged 19 (and therefore over age 18 during the year in question), might be emancipated by State law and therefore not anyone’s qualifying child. So, obviously convinced by Pat’s “forthright, credible and largely undisputed testimony” (2014 T. C. Memo.147, at p. 3), Ch J Iron Mike gives Pat the whole deal.

Can’t say IRS counsel covered himself with glory in this one, but we’ve all had such days.

Second batter, and looking at a lot tougher pitching, is Janice Marie Cross. There are two docket numbers, and thus two orders, for these designated hitters from that Obliging Judge, David Gustafson, but I’ll reference Docket No. 1439-13, filed 7/24/14. The texts of both orders are identical.

The cases were consolidated, but that doesn’t deter Janice Marie, who sent Judge Gustafson a billet doux entitled “Petition and Memorandum of Law”, which Judge Gustafson treats as a motion.

Judge Gustafson is not amused.

“..,.petitioner’s motion is denied in full. The motion lacks merit to the extent it (1) re-argues petitioner’s objection to consolidation of these two cases, (2) asks the Court to compel a deposition (without demonstrating compliance with Rule 74(c)), (3) asks the Court to compel certain discovery (without showing its relevance) or to enforce her alleged rights under the Freedom of Information Act (which rights are outside this Court’s jurisdiction), (4) asks the Court to order respondent to cite (or to provide copies of) Internal Revenue Code sections beyond those stated in the notice of deficiency, or (5) asks the Court to order the IRS make corrections in its records concerning petitioner (which would require mandamus authority the Court does not have). To the extent petitioner’s motion argues some aspects of the merits of her case pertaining to her … tax liability, the Court motion is denied, since those contentions are intermingled with irrelevancies and frivolous contentions. Petitioner will have an opportunity at trial to prove what her actual liability is.” Order, at p. 1.

Now Judge Gustafson twice before cautioned Janice Marie to eschew frivolity or face the Section 6673 fastball.

“Nonetheless, petitioner’s recent filings have been replete with frivolous contentions. If, in making these frivolous arguments, petitioner is following the advice of persons claiming to be knowledgeable, then she should realize that she is being misled.” Order, at p. 2.

Janice Marie, you’re going to have to prove your income, credits and deductions for the year at issue, so get with it.

No, not Rudy Kipling’s celebrated Boer War poem that made the Blighty hit parade when Sir Artie Sullivan put a tune to it. This is the story of Paul O. Reynolds, Docket No. 7405-14S, filed 7/23/14, a designated hitter that makes blogging Tax Court fun.

Paul petitions, apparently from a NOD, but he and IRS both agree there never was a NOD, it was a SNOD.

So when The Judge With a Heart, STJ Armen, tells Paul to produce said SNOD, Paul “… argues that he never received the original notice of deficiency and that the incomplete copy attached to the Supplement Objection was all he has.” Order, at p. 1.

IRS says oh yes, there was a SNOD, and Paul petitioned that SNOD a year ago.

STJ Armen pores through the files, and finds “…a timely petition was filed with the Court on July 9, 2013, in response to a notice of deficiency for tax years…. A copy of relevant pages of the deficiency notice… was attached as an exhibit to the petition. After the Court issued two separate Orders…directing petitioner to ratify the petition…, the case… was closed by Order Of Dismissal For Lack Of Jurisdiction… on the ground that the petition was not properly executed by petitioner as required by Tax Court Rules of Practice and Procedure. Petitioner did not move to vacate that Order of Dismissal, and it became final….” Order, at pp. 1-2. (footnotes omitted).

I omitted the footnotes, but read them both. Footnote 1 says the addresses on the SNOD, the petition in Case No. 1 and the petition in this case were all the same address. Footnote 2 says both orders told Paul to properly execute the petition or face dismissal; he didn’t and he did.

Sorry, Paul. No jurisdiction. No excuse for being absent-minded.

Old-time followers of this my blog might just possibly recall the story of VECO Corporation and Subsidiaries, as more fully set forth in my blog post entitled “Ya Gotta Do it To Accrue It”, 11/20/13.

Well, it’s the same story for Giant Eagle, Inc., 2014 T. C. Memo. 146, filed 7/23/14, with Judge Haines taking up where Judge Marvel left off.

No, this isn’t about prohibited bird parts in Rauschenberg collages, as in my blogpost “The Eagle Sleeps Tonight – Part Deux”, 5/21/13. This is about a grocery and gas chain that gave frequent eater points to its customers, that allowed them, if they ate enough, to gas up (their vehicles) at reduced rates.

The Eagle gang wanted to accrue the expense of the earned eater points as earned, because their customers could redeem them. They argued the Section 461 accrual test, and the Reg. Sec. 1.451-4 future redemption cost offset to current revenue.

IRS concedes one prong of the three-prong accrual test; that the amounts earned can be computed with reasonable accuracy, but “all events” necessary to fix liability hadn’t happened in the year that the expense is accrued.

Before the frequent eater points could be redeemed, the frequent eater had to gas up at the Eagle gang’s pumps. Even with enough points, a frequent eater might not be a frequent gasser, and the points could expire 90 days after being earned.

And for that reason the Reg. Sec. 1.451-4 gambit fails. The frequent eater has to do more than just turn in the points to get the “merchandise, cash, or other property” which are the hooks to get the taxpayer anchored within Reg. Sec. 1.451-4(a)(1) safe harbor. The frequent eater has to buy the gas, or the frequent eater gets nothing.

“Allowing a present deduction with respect to redemptions conditioned on an additional purchase can result in a mismatching of expenses and revenues, contrary to the regulation’s primary purpose.” 2014 T. C. Memo. 146, at p. 12.

And even though a sufficiently gluttonous frequent eater could accumulate enough points to get a tank of gas for nothing, that still depends upon the price of gas at the time the frequent eater becomes a frequent gasser. So the benefit is not fixed until the additional purchase (even for zero) is made.

That’s the message from Ch J Michael B. (“Iron Mike”) Thornton to poor old Renald Eichler. Ren is the lead-off hitter for 143 T. C. 2, filed 7/23/14, and he claims to be both poor and old, after his non-profit educational corporation cratered, leaving Ren in the hole for about $200K in TFRPs.

Ren submitted a proposed short-pay installment agreement, but what with coding mishaps at IRS and a lengthy mail delay, IRS sent Ren an NIL while his proposed installment agreement was under review.

Ren claims that’s a no-no under Section 6331(k)(2).

But Ch J Iron Mike isn’t having it. All Section 6331(k)(2) does is bar the levy, not the Notice of Intent to Levy (NIL). And though IRS tries arguing the installment agreement wasn’t “pending” when the NIL was sent, Ch J Iron Mike doesn’t have to go there. Pending or not pending, the bar is on the levy, not the notice.

Ch J Iron Mike brushes aside a contrary case in a footnote. “We are mindful that in Tucker v. Commissioner, T.C. Memo. 2011-67 (upholding Appeals’ rejection of an OIC), aff’d, 676 F.3d 1129 (D.C. Cir. 2012), in the ‘Background’ section of the opinion, a footnote indicated that the IRS had withdrawn a notice of intent to levy that it had issued after the taxpayer had submitted an OIC. By way of explanation, the footnote stated: ‘Section 6331(k)(1) provides for a restraint on levy while an OIC is pending, and the issuance of the notice of levy violated that restriction.’ Id., slip op. at 8 n.6. This dictum, however, did not represent a holding or a predicate to any holding in Tucker, as made explicit in the same footnote: ‘The issuance of that first levy notice (and its subsequent withdrawal) was not part of the CDP hearing or determination and is not part of the CDP appeal at issue here.’ Id. Accordingly, the dictum in Tucker concerning sec. 6331(k)(1) does not control this case.” 143 T. C. 2, at pp. 154-15 footnote 6.

Ren claims the IRM is inconsistent and that he should get the benefit of the more favorable of the two Manual provisions. Poor old Ren can’t get a break.

Ch J Iron Mike: “IRM pt. 5.11.1.2.2.8 appears in the part of the IRM that provides information and guidance to revenue officers in the collection process. It directs the IRS Collection Division to rescind notices of intent to levy in certain circumstances, one of which is when a notice of intent to levy is issued while levy action is prohibited and the taxpayer timely requests an Appeals hearing. By contrast, IRM pt. 8.22.2.2.2.2(5) (Dec. 14, 2010) states that Appeals should not rescind a notice of intent to levy that was issued during the pendency of an installment agreement, even where levy is prohibited. Petitioner argues that these two provisions are inconsistent and that we should treat IRM pt. 5.11.1.2.2.8 as controlling. We disagree. The IRM is not necessarily inconsistent in directing the Collection Division and Appeals to take different actions.”.143 T. C. 2, at p. 15. The SO who sustained the NIL was in Appeals, not Collections, so she followed the book as far as Appeals was concerned.

Besides, “…provisions of the IRM do not carry the force and effect of law or confer rights on taxpayers.” 143 T. C. 2, at pp. 14-15.(Citation omitted).

But the SO didn’t consider that Ren and Mrs Ren were old and ill, and that whatever they had in the bank was borrowed from Mrs Ren’s sister, Mrs Ren not being a party to this proceeding. So no summary judgment, and Ch J Iron Mike sends Ren back to Appeals to discuss the whole installment bit.

I said in my blogpost “Not Always A Phone Call”, 7/14/14, that the riposte would be interesting. And it is.

Remember Vandy, counsel for Brent T. Wiedbusch & Christina Wiedbusch, Docket No. 15257-13? No? Then see my aforecited blogpost hereinabove referred to, as my high-priced and paid-by-the-word colleagues would put it.

Vandy got a chance to respond to Brent and Christina, who aspersed Vandy’s conduct of their case. Here’s the story: Brent T. Wiedbusch & Christina Wiedbusch, Docket No. 15257-13, filed 7/23/14.

And here’s Judge Gale, who wanted to know the whole story: “After reviewing [Vandy’s] July 17 Response, we are satisfied that, for purposes of resolving his Motion for Leave to Withdraw, petitioners had knowledge of, and had consented to, the contents of the Petition. We are also satisfied that petitioners’ other allegations concerning [Vandy’s] representation of them provide no grounds for denying his motion.” Order, at p. 1.

But for you advocates who seek to bail, here’s some hints from a footnote: “In petitioners’ Response to First Supplement to Motion for Leave to Withdraw, they admitted signing an engagement agreement with … [Vandy’s] employer, which provided that [Vandy] withdraw from representing petitioners if they failed to reach a settlement with respondent’s Office of Appeals and decided to proceed to trial. Such agreements are not binding on this Court, and in appropriate circumstances the Court may decline to permit withdrawal where such an arrangement would unduly burden the taxpayer, the Commissioner, or the Court. Nonetheless, in this case respondent did not object to a continuance and the Court granted it.” Order, at p. 2, footnote 1.

So bail early, bail often, but don’t hang up your soon-to-be-ex client, IRS, or Judge Gale and his colleagues.