As it’s April Fools’ Day, let me once again quote the Sage of Concord: “A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.” Ralph Waldo Emerson, 1803-1882.

But consistency is foolish when an electing Section 927(f) foreign sales corporation meets the Section 4973 excise tax on Roth IRA contributions after it’s too late for IRS to reallocate the distributions from the FSC to the individual shareholders thereof (as their tax years have closed).

So says Judge Chiechi in Celia Mazzei, 2014 T. C. Memo. 55, filed 4/1/14 (happy palindrome day, by the way).

But some with long memories will cite my blogpost “Foolish Consistency”, 5/5/11, when Judge Nimms in Ohsman, 2011 T. C. Memo. 98, filed 5/3/11, gave IRS the right-about-face, when IRS treated the taxpayer one way for income tax purposes and another for excise tax (excessive Roth IRA contributions) purposes.

The game used to be (prior to 2004, when Notice 2004-08, 2004 IRB 4, 1/26/04*, the abusive IRA Notice, put paid to such shenanigans) that a business owned by the taxpayer would pay commissions or dividends to a C Corp, all the shares of which were owned by the taxpayer’s Roth IRA, getting around income tax (dividends or commissions actually property of taxpayer, not C Corp), and excise tax on excessive Roth contributions. And the C Corp would be a tax-favored vehicle, like a DISC or a FSC.

Well, IRS didn’t go after Celia’s income tax (because those years were closed, IRS didn’t pick up on the Roths, and fraud wasn’t alleged), so going after the excise tax is inconsistent, isn’t it?

No, says Judge Chiechi. IRS didn’t assess income tax against Celia because the years in question were closed years. Unlike Ohsman, IRS never tried to assess Celia’s additional income taxes, because if they had, it would have been futile.

But the Roths are still in play for excess contributions.

*IRB 2004-04 (Rev. January 26, 2004) – irb04-04

Here’s a designated hitter from one who reads my blog. The case is Nerida Patrica Lopez, Docket No. 2601-13, filed 4/1/14, and there’s no interesting point of law, or even interesting facts, but there is evidence that the exalted author thereof reads my blog.

Offer of proof in substantiation of the foregoing: “She produced a couple boxes, see nationalorganizationopposingforever.wordpress.com (regarding grammatical point), to prove that she has offsetting deductions, but these included nonsense like a brochure describing how to operate an alarm system and a photo of a house scattered among disorganized records.”Order, at p. 1.

Check out the URL cited; it’s interesting, but that doesn’t make it correct.

And guess who wrote the order? No prize for the correct answer.

This one is for the IRS, says Ch J Michael (“Iron Mike”) Thornton in Roosevelt Powell, Docket No. 26454-13S, filed 3/31/14. Note well that letter “S”, for thereby hangs the tale.

IRS wants a Rule 37(c) order that undenied allegations in their answer be deemed admitted, because Roosevelt didn’t serve and file a reply to IRS’ answer denying them.

But Ch J Iron Mike reminds IRS of Rule 173(c). In a small-claimer (“S”) like this, petitioner (taxpayer) Roosevelt is barred from serving and filing a reply unless the Judge tells him, failing which any affirmative allegations in the answer are deemed denied.

IRS never asked for a reply, Ch J Iron Mike never told Roosevelt to reply, so IRS’s desired admissions that Roosevelt committed fraud on his 2001 return (thus opening an otherwise closed SOL) are deemed denied.

Ordinarily I’d give IRS a Taishoff “good try, third class”, but this falls below even my minimal standard for crafty. More like desperation, when they haven’t got “clear and convincing” evidence.

Gordon Kaufman and Lorna Kaufman, Ph.D.s both, coming off a First Circuit win (see my blogpost “A Joy Forever? –Maybe Not”, 7/20/12), are back in front of Judge James S. (“Big Jim”) Halpern, playing five-on-two (five lawyers for Gordo and Lorna, and only two for IRS), in 2014 T. C. Memo. 52, filed 3/31/14, and Lorna’s Section 170 facade easement gets blown away to the tune of a 40% substantial understatement chop.

Gordo is “Morris A. Adelman Professor of Management Emeritus of the Sloan School of Management at the Massachusetts Institute of Technology. He specializes in statistical analysis.” 2014 T. C. Memo. 52, at p. 4. Spouse Lorna, a Ph.D. in psychology, has her own business and donated a facade easement on her historic Boston townhouse.

So maybe Gordo should be leery of the valuation of Timothy J. Hanlon, which claims the diminution of value of wife Lorna’s Boston townhouse is 12%, based on the ill-considered Primoli article and one Tax Court case that has no progeny, with some juggling and jiggling of Timothy J.’s own creation.

Gordo is appropriately concerned, and sends an e-mail to Mory Bahar, a representative of the National Architectural Trust, vendor of easement deductions and promoter of this deal. Gordo’s e-mail is distilled by Judge Big Jim: Gordo “expressed his concern that ‘the reduction in the resale value of the property due to the [facade] easement [is] so large as to overwhelm the tax savings that accrue from it.’ He asked Mr. Bahar: ‘[D]o you have statistical documentation that bears on how much of a reduction in resale value takes place for residential properties?’” 2014 T. C. memo. 52, at p. 10.

Although Judge Big Jim takes 86 pages to deconstruct Timothy J.’s appraisal, while lauding the efforts of IRS’s star witness John C. Bowman III, one paragraph of Mory Bahar’s reply e-mail is enough to tell you how this case is going to end.

“One of our directors, Steve McClain, owns fifteen or so historic properties and has taken advantage of this tax deduction himself. He would have never granted any easement if he thought there would be a risk or loss of value in his properties.” 2014 T. C. Memo. 52, at p. 11.

How do you spell “smoking gun”?

Now if a client shows you such an e-mail, what do you do? Well, Gordo’s team apparently introduced this gem into evidence, to show Gordo’s good faith attempt to verify Timothy J.’s appraisal. See 2014 T. C. Memo. 52, at p. 73.

Judge Big Jim: “Gordon Kaufman testified that he found the Bahar email only ‘mildly informative’ because he questioned the statistical basis of Mr. Bahar’s conclusions. It is somewhat odd, and not at all persuasive, that, in support of their argument that Gordon Kaufman verified that the $220,800 value for the facade reached by Mr. Hanlon was correct, petitioners bring to our attention Mr. Bahar’s email, in which, whether Gordon Kaufman accepted it or not, Mr. Bahar expressed his opinion that the conveyance of the facade easement to NAT had little or no effect on the value of the property. Petitioners have not convinced us that they made a good-faith investigation of the value of the facade easement by virtue of Gordon Kaufman’s email correspondence with Mr. Bahar.” 2014 T. C. Memo. 52, at pp. 73-74.

Kind of hard to rely on an appraisal when the promoter of the deal tells you that, no matter what the appraiser said, one of their own principals did this fifteen times and lost nothing. And you put this little gem into evidence.

How do you spell “own goal”?

Anyway, Judge Big Jim goes painstakingly through Timothy J.’s appraisal, notwithstanding his statement that: “(W)hether we exclude his testimony under Fed. R. Evid. 702(c) as not being the product of reliable principles and methods or consider it and give it no weight would seem to make little difference in this bench trial.” 2014 T. C. Memo. 52, at p. 54, footnote 12.

There’s a lot more, but you get the idea.

My sources tell me Luxembourg signed a FATCA Model 1 on Friday. Welcome, Luxembourg.

By Bitcoins

Yes, they’re property, and yes, they’re taxable. See Notice 2014-21. Here’s the link: http://www.irs.gov/pub/irs-drop/n-14-21.pdf

I’ve already blogged that practicing accounting can be hazardous to your health, and that practicing in Tax Court can be hazardous (to one’s wallet if not to one’s health), but a very sad story from Judge Elizabeth Crewson Paris shows that even mailing in a petition can be hazardous to your health.

It’s a truly pathetic tale, and shows the mutability of human existence, as same is played out in Tax Court.

Judge Paris: “This case is calendared for trial at the April 7, 2014, Kansas City, Missouri Trial Session of the Court. On February 25, 2014, respondent [IRS] filed a motion to dismiss for lack of prosecution. In respondent’s motion, he states that (1) petitioner died on the day the petition was filed, (2) no representative or fiduciary is currently authorized to act on behalf of petitioner, and (3) respondent is conceeding [sic] the deficiencies and penalties in this case.” Tyra Mae Cundiff, Docket No. 9058-13, filed 3/28/14, at p.1.

No doubt that Dawn Marie Moore-Ahmed can sing the George M. Cohan 1917 hit, because she was over there in Iraq, and getting paid by the US Army for her services, but Dawn Marie’s pay is not excludable from US income tax. And the correctly-spelled Special Trial Judge, STJ Lewis (Way to Spell It, Judge) R. Carluzzo puts Dawn Marie wise in the eponymous off-the-bencher at Docket No. 10438-13S, filed 3/28/14.

Dawn Marie started as a high school dropout, but finished up eventually and even took some college courses. After eleven years’ service with the active-duty Army, she was released due to injuries sustained.

Dawn Marie got hired as what we used to call, and for all I know may still call, a DAC (Department of the Army civilian). And for the years at issue, Dawn Marie was sent to Iraq and spent time there as a DAC.

Dawn Marie’s paid preparer (after consulting Dawn Marie) excluded a part of her income, claiming Section 911 treatment and also that she was in a combat zone.

As to Section 911, even though Iraq might have been Dawn Marie’s tax home, the money she earned wasn’t foreign earned income “because the wages were ‘paid by the United States or an agency thereof to an employee of the United States or an agency thereof.’  Sec. 911(b)(1) and (2).”  Order, at p. 7.

If Uncle Sam paid you, whatever he paid you is not foreign earned income, wherever you were when he paid you.

Besides, being paid while in a combat zone is only part of the Section 112 exclusion from income. “Section 112 provides that ‘gross income does not include compensation received for active service as a member below the grade of commissioned officer in the Armed forces of the United States’ for service during certain periods which such member ‘served in a combat zone.’ Sec. 112(a).” Order, at p. 8.

Dawn Marie wasn’t a member of the armed forces of the United States, so Section 112 doesn’t help her.

I’m sure Jim Daly, whose Iraq and Afghanistan experiences I blogged in my blogpost “At Home Abroad”, 6/6/13, is pleased that Executive Order 12744 designated Iraq as a combat zone, even though the Secretary of the Treasury never got around to doing so.

But civilian Dawn Marie is out of luck. However, her educational background spares her the accuracy penalty.

That’s what every taxpayer is entitled to in Appeals, a new look from an impartial AO, that is, one who took no part in any prior activity with the taxpayer.

But that isn’t what Patricia A. Moosally got, when AO S, who had previously bounced her OIC, got assigned her CDP off a Letter 3172 and a NFTL.

Judge Wells gives IRS the bad news: Patty Moo gets to go back to Appeals, with a fresh looker checking out her CDP. The case is Patricia A. Moosally, 142 T. C. 10, filed 3/27/14.

Patty Moo is fighting over TFRPs, and some unpaid personal income taxes. She admits she owes them, but claims she lost her job and can’t pay.

AO S started reviewing Patty Moo’s OIC before she lost her job, bucked it to COIC who said she could pay, and bounced the OIC without issuing a NOD. Meanwhile, IRS issued a NFTL and Letter 3172, from which Patty Moo appealed. This appeal got handed to AO K, but when the computer discovered at AO S had the OIC, the file got handed to her.

AO S upholds the lien, and Patty Moo petitions Tax Court.

Judge Wells on the basics: “If a taxpayer requests a hearing in response to an NFTL pursuant to section 6320, a hearing must be conducted by an impartial officer or employee of the Appeals Office. Sec. 6320(b)(1), (3). An impartial officer or employee is one who has had no prior involvement with respect to the unpaid tax specified in section 6320(a)(3)(A) before the first hearing under section 6320 or section 6330.” 142 T. C. 10, at p. 8. (Footnote omitted).

What is “prior involvement”? Judge Wells: “Sec. 301.6320-1(d)(2), A-D4, Proced. & Admin. Regs., also provides that ‘[p]rior involvement exists only when the taxpayer, the tax and the tax period at issue in the CDP hearing also were at issue in the prior non-CDP matter, and the Appeals officer or employee actually participated in the prior matter.’ We note, however, that at least one Federal court has stated that the provision is invalid. See Cox v. Commissioner, 514 F.3d 1119, 1127 n.10 (10th Cir. 2008), rev’g 126 T.C. 237 (2006). We also note that the provision does not affect the instant case, which, as we explain below, involves a taxpayer, tax, and tax periods that were at issue in both the CDP hearing and a prior non-CDP proceeding and an Appeals officer that participated in both matters.” 142 T. C. 10, at p. 9, footnote 4.

But though the Cox case is distinguishable from this case, that doesn’t help IRS. The Cox case AO’s involvement was “peripheral”, but here it was spot-on. And AO bias isn’t the issue; friendly or unfriendly, the AO cannot have been in on the prior doings, whether or not a NOD was issued.

And even though it might be easier to let the same AO consider both the OIC and the NFTL, thus letting Tax Court consider both, that isn’t what Section 6330(c)(2)(A)(iii) says. And Tax Court’s jurisdiction is strictly limited. Judge Wells cannot rewrite the law, however convenient it might be. The only way to consider a bounced OIC is off a NOD, and AO S never issued one for that, only for the NFTL.

Patty Moo goes back to Appeals and a fresh AO, who has never laid eyes on Patty Moo or her case.

I will not translate this phrase, but Judge Morrison is a fan of trusts, and proves it in Frank Aragona Trust, Paul Aragona, Executive Trustee, 142 T. C. 9, filed 3/27/14. There’s an independent trustee as well, but he only oversees capital invasions and plays no part in the decision.

Question: can a trust avail itself of real estate professional treatment, per Section 469(c)(7)? It’s not a closely-held C Corp, and it isn’t an individual, but enough of its trustees work on the rental real estate corpus, or through the LLC which the trust wholly owns. The late Frank set the deal up, and son Paul is the boss, with his several siblings either actively working the realty, or along for the ride.

If the personal services and 750-hour tests are met by the trustees, that’s good enough for professional grade.

Judge Morrison: “The IRS argues that a trust is incapable of performing ‘personal services’ because the regulation defines ‘personal services’ to mean ‘any work performed by an individual in connection with a trade or business’. Sec. 1.469-9(b)(4), Income Tax Regs. We reject the IRS’s argument. A trust is an arrangement whereby trustees manage assets for the trust’s beneficiaries. 1 Restatement, Trusts 3d, sec. 2 (2003) (a trust ‘is a fiduciary relationship with respect to property, * * * subjecting the person who holds title to the property to duties to deal with it for the benefit of’ others); see also sec. 301.7701-4(a), Proced. & Admin. Regs. (‘In general, the term ‘trust’ as used in the Internal Revenue Code refers to an arrangement created either by will or by an inter vivos declaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts.’). If the trustees are individuals, and they work on a trade or business as part of their trustee duties, their work can be considered ‘work performed by an individual in connection with a trade or business.’ Sec. 1.469-9(b)(4), Income Tax Regs. We conclude that a trust is capable of performing personal services and therefore can satisfy the section 469(c)(7) exception.” 142 T. C. 9, at pp. 17-18.

So Judge Morrison need not decide if the trustee fees are expenses of the real estate operation, because they are active and not passive.

This is a case of first impression. My bet is IRS appeals.