No, not Sir Paul McCartney’s injunction to Jojo (whoever he was) on the Let it Be album that signaled the break-up of the Fab Four, but rather Judge Nega knocking out Marvin E. DeBough’s Section 121 exclusion when Marv took back his former principal residence from his welshing installment-plan contract vendee.

Read all about it in 142 T. C. 17, filed 5/19/14.

Marv and spouse bought the homestead in 1966, and Marv and spouse unloaded forty years later for a huge capital gain. They took the Section 121 $500K exclusion on the Year One cash, and did a Section 453 installment sale for the rest.

Spouse deceased in the interim, and Marv got a stepped-up basis thereby. But then the purchasers defaulted on the contract for deed (what we call a land sale contract), and Marv took back the property.

Marv reports all his gain on the sale over the course of years that the purchaser paid up, but not the $500K exclusion, claiming Section 1038 (reacquisition of property sold on installment) doesn’t trump Section 121. And Marv didn’t resell within a year after reacquisition, so no triggering of Section 1038(e), which would have given Marv an explicit bye.

Marv argues that Congress should have expressly nullified Section 121 if they intended that any repossession of a principal residence sold on the installment method would require recognizing the $500K excluded, if the property weren’t resold within one year.

But, say IRS and Judge Nega, Section 1038 expressly deals with reacquired installment sale property, and Section 1038(e) is the only safe harbor.

The aim is to put the selling principal resident back to where he once belonged, as Sir Paul so eloquently put it. And that means paying tax on whatever he didn’t pay tax before, unless he slides under the one-year tag.

Judge Nega: “Sellers fulfilling the requirements of section 1038(e) are essentially allowed to collapse the initial sale and subsequent resale into one transaction. The legislative history behind the section 1038(e) exception is unclear as to why Congress limited the exception to sellers who resell property within one year of reacquisition. Whatever the reasoning behind the exception, the relief offered by section 1038(e) is clearly limited to those sellers who resell their principal residences within one year of reacquisition. Since petitioner did not resell the property within one year of reacquisition, he is ineligible for the section 1038(e) exception and must recognize gain in accordance with the general rules of section 1038.” 142 T. C. 17, at p. 15.

Judge Nega sees nothing unfair in taxing Marv on his $500K exclusion, as he would be better off after the reacquisition, and the aim is to put him back where he was before the sale was made.

Get back, Marv.

Richard Wagner fans will remember the outraged outburst of the Meistersinger von Nürnberg in Act III, Scene V of the “song in praise of song”. I myself cited it in my blogpost “Va T’En, Enfants de la Patrie”, 4/2/14, when befogged by the totalization agreement between France and the United States of America.

But Judge Marvel wants enlightenment from petitioner and IRS on an interesting question, which so far as Judge Marvel and I know has never been decided. And she asks “was ist das?” in Ralim S. El, Docket No. 19012-12, filed 5/16/14.

”Das” is the Section 72(t) 10% chop for early retirement withdrawals. OK, the statute says that, if a taxpayer gets an early distribution “…the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.” Section 72(t)(1).

But while the taxpayer’s tax is increased, is the increase a “penalty, addition to tax, or additional amount”? And why should Judge Marvel care?

Well, first because there’s no evidence how old Ralim was when he (or she) got the distribution.

OK, that’s no problem. But who has to prove how old Ralim was?

Enter Section 7491(c), and that’s why Judge Marvel (and I) wants enlightenment.

Section 7491(c) says that “(N)otwithstanding any other provision of this title, the Secretary [IRS] shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title.”

Therefore, if the 10% chop is one of the Section 7491(c) three, there’s a burden on IRS to show something about how old Ralim was on the date in question.

So, IRS, which is it? Or is the answer “none of the foregoing”? And why?

And Ralim, you get a chance to reply.

Stay tuned.

Carole King’s 1971 lament echoes for Amazon.com Inc. & Subsidiaries, Docket No. 311997-12, filed 5/15/14, as Judge Lauber shuts down Amazon.com and friends when they try to wild-card a change in their RAB from a Revenue RAB to a Gross Profit RAB on the eve of trial, by way of a motion to amend their petition.

For those unfamiliar with offshoring profits to captive subs and increasing deductions to onshore parents, take a look at Reg. 1.482-7A. When Amazon.com and its playmates entered into their qualified cost sharing arrangement (QCSA) nine years ago, the Reg. was 1.482-7, but the changes made by the shift don’t affect the years at issue.

The Reg. allows a menu of methods for determining the share of expenses allocated to the onshore and offshore components (and thus deductions arising from shared costs). Those are called Reasonably Anticipated Benefits (thus RAB). Deductions follow what goodies each party to the QCSA expects to get out of the deal, and they must “buy-in” to the deal based on the FMV of what intangibles they are contributing.

Amazon.com didn’t pick one explicitly at the get-go, but Judge Lauber finds they were using Revenue RAB when the deal was done.

And both Amazon.com and its playmates, and IRS, always went with Revenue RAB from the beginning nine years ago until last year, when Amazon.com and its playmates decided that Gross Profits RAB was the way to go, and earlier this year amended their QCSA so to state.

Judge Lauber sorts out the contentions: “Petitioner contends that this amendment is appropriate because the Gross Profit RAB is superior to the Revenue RAB and because “[a] controlled participant’s anticipated benefits must be measured on the most reliable basis, whether direct or indirect.” See Treas. Reg. § 1.482-7(f)(3)(ii). Petitioner alleges that switching to the Gross Profit RAB as the formula for allocating development costs would decrease its taxable income for 2005-06 by $27.8 million. Respondent has informed the Court that ‘at no time before March 7, 2014, did petitioner indicate even informally that its Revenue RAB tax reporting was incorrect or that it was reconsidering its position on RAB shares.’” Order, at p. 3.

And Amazon.com and playmates haven’t said whether they’re amending their “buy-in” price for the intangibles contributed.

Judge Lauber isn’t impressed with this audible at the line of scrimmage: “Petitioner seeks to revise its RAB formula for 2005-06 eight years after those years ended and 15 months after it filed its petition. We agree with respondent [IRS] that petitioner’s delay in raising this issue is unjustified. On occasion, we have allowed a party to raise a new matter despite prejudice to the opposing party upon a showing of good cause for the delay, for example, where the party seeking to amend lacked an opportunity to raise the matter sooner.” Order, at p. 4.

But Amazon.com and playmates say they reach the Gross Profits RAB conclusion by examining data they had in 2005-2006. So, says Judge Lauber, if you had it, what were you waiting for?

“The Court also finds that allowing petitioner to raise this issue now would unfairly prejudice respondent. This case involves complex, fact-intensive issues that the parties anticipate will take a month to try. Discovery is nearing completion, and trial is set for November 3, 2014. During the examination phase, the IRS accepted the Revenue RAB, and petitioner repeatedly reaffirmed it. As a result, respondent has neither prepared for trial on this issue nor conducted discovery concerning it. Respondent had no reason to anticipate that petitioner would attempt to discard its Revenue RAB at this late stage of trial preparation.” Order, at p. 5 (Citations omitted).

Amazon.com and playmates claim only minimal discovery would be needed, but Judge Lauber buys into IRS’ argument that it would be a whole new ballgame, involving complex economic, regulatory and factual issues, and might even need expert testimony.

So Amazon.com and playmates, play it as you started it. It’s too late baby.

It won’t help you. That’s Judge Goeke’s lesson to Logan M. Chandler and Nanette Ambrose-Chandler, in 142 T. C. 16, filed 5/14/14.

Strike up the band, Sir Billy Walton, and shout it out, Dame Edie Sitwell, it’s time for more Façade.

Logan and Nanette owned two buildings in Boston’s now-ritzy South End. They sold one, but had put historic façade easements on both, and claimed heavy-duty Section 170 charitable deductions for both. They even followed the advice of the National Parks Service, who were advocating this sort of thing. IRS agreed they followed the rules, except that their appraisal didn’t prove either building lost any value.

Note that the vendor of these dodges, our old chums National Architectural Trust (NAT) provided surveillance (which Boston’s own municipal landmarks authority didn’t do, the Beantown landmarkniks relying on local whistleblowers), annual inspections to make sure the properties remained in their original state, and had an easement that covered the rear as well as the façade.

See my blogpost “Cover Your Rear”, 11/12/13.

No dice, says Judge Goeke. “We must determine the value diminution resulting from these additional restrictions. We recently performed this analysis under identical circumstances. In Kaufman v. Commissioner, T.C. Memo. 2014-52, we reviewed a NAT easement on a property in the South End Historic District. There we determined that the differences outlined above do not affect property values, because buyers do not perceive any difference between the competing sets of restrictions. Id. at *57. We see no reason to break with that result here. Mr. E’s report, which petitioners exclusively rely on to demonstrate their easements’ values, was not credible. Respondent has persuasively argued that a typical buyer would perceive no difference between the two sets of applicable restrictions here. We recognize technical differences between the easements and local law, but we agree with respondent’s conclusion that the restrictions were practically the same. Because petitioners have not proved that the easements they donated had value, we sustain respondent’s disallowance of the charitable contribution deductions they claimed.” 142 T. C. 16, at pp. 19-20 (name omitted).

Now since the deductions were greater than would be allowed to offset taxable income in any one year, Logan and Nanette spread them over three years. IRS wants the 40% chop for all, but Logan and Nanette argue they have reasonable cause, and the drop in overvaluation from 400% to 200% in 2006, and the elimination in that year of a good faith defense, cannot be applied retroactively.

Judge Goeke blows retroactivity away: “Under either version of section 6662(h) the valuation misstatements are ‘gross’ and trigger the 40% penalty. However, the facts raise a novel issue concerning petitioners’ right to raise a reasonable cause defense for their 2006 underpayment. Petitioners note that a portion of the underpayment resulted from the carryover of charitable contribution deductions they first claimed on their 2004 return, which they filed before the PPA’s effective date. Accordingly, they argue, denying their right to raise a reasonable cause defense would amount to retroactively applying the PPA [Pension Protection Act, which changed the rules].” 142 T. C. 16, at pp. 24-25. “When taxpayers file a return that includes carryforward information, they essentially reaffirm that information. The amended reasonable cause rules were in effect when petitioners filed their 2006 return, which reaffirmed the … easement’s grossly misstated value. Applying those rules does not amount to retroactive application. The plain language of the statute makes the rules applicable for all returns filed after July 25, 2006. Petitioners filed their 2006 return after that date and consequently may not raise a reasonable cause defense for their 2006  underpayment, which resulted exclusively from gross valuation misstatements.” 142 T. C. 16, at pp. 25-26.

Notwithstanding the foregoing, as my high-priced colleagues would say, Judge Goeke lets Logan and Nanette off the penalty for the two years when reasonable cause was a defense to the 40% chop. Logan is a lawyer and an MBA, and Nanette is a self-employed interior decorator. But that doesn’t mean they know about valuing easements.

Most people can form some hazy idea of the value of regular real estate, but even the experts come seriously unglued when it comes to historic façade easements (and how!). After all, Judge Goeke bounced both Logan’s and Nanette’s appraiser and IRS’ appraiser, finding fault with both. And Logan and Nanette followed the National Parks Service guidelines. Unlike the Kaufmans in the cited case (and in my blogpost “A Joy Forever? Not Hardly”, 3/31/14), neither Logan nor Nanette evinced the misgivings that sent Gordo Kaufman to ask Mory Bahar of NAT whether the easement would really depress the value of Lorna’s mansion, and get the reply that sinks the Kaufmans without trace.

So Logan and Nanette avoid two years’ worth of 40% chop, but get nailed for the last. Looks like covering your rear is insignificant when facades are in play. at least in Judge Goeke’s courtroom. Hit it, Edie and Sir Billy!

My sister is going to her 50th college reunion soon, and it seems like yesterday I was at her graduation.

So, since it’s getting toward college graduations and reunions, I see The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being and implacable foe of the partitive genitive, His Honor Mark V. Holmes, is hosting his own reunion of familiar faces from my past few years of blogging. It’s all about The Markell Company, Inc., 2014 T. C. Memo. 86, filed 5/13/14.

We have a family PHC, holding a ton of stock with built-in gain (remember the late Helen P. Richmond and her hapless executrix Amanda Zerbey? Well, see my blogpost “Win Your Case” , 2/11/14); we have The Skull Valley Band of the Goshute Indians and their one-time tribal chairman Leon Dale Bear (“Chair Bear” to Judge Holmes), innocent bystanders (but see my blogpost “Don’t Ambush The Indians”, 4/7/11); and starring in this drama is none other than the Great Immunologist, James (“Little Jim”) Haber, CPA, mixmaster of digital European-style options which produce monumental paper losses.

We get all of Little Jim’s prior appearances here, from Ironbridge to Humboldt Shelby, with glances at Getting Shifty and Immunology.

And there are cameo appearances by James Rogers of Superior Trading fame, and Refco, the options dealer that went belly-up amidst allegations of massive fraud.

Historic Boardwalk Hall has a walk-on role as a non-existent partnership (like the one masterminded by Little Jim), supported by Jimastowlo Oil, LLC.

Little Jim grapples the Fifth Amendment to his soul with hoops of steel, with Judge Holmes’ blessing, but adverse inferences can be used in civil proceedings, and much adversity follows Little Jim’s Constitutional stroll.

The partnerships and maneuverings (with three diagrams to show the wheeling-and-dealing) have but one aim–tax avoidance. No business was done, just a single in-and-out basis-builder, matching long and short to zero out economically, but using the old Section 752 dodge to build basis and cover the built-in gain on the sale of all that stock Grandpa had stashed all those years ago.

Judge Holmes does give retroactive application to Section 1.752-6T, the loophole plugger subsequently made permanent, relying on Section 7805(b)(6) and various court cases, although these don’t uniformly support retroactive application. Moreover, Judge Holmes finds Congress gave Treasury explicit authority to apply the loophole plugger retroactively. For one case not applying the loophole plugger retroactively, see my blogpost “Woodshedding Your Experts – Stobie Creek Part Deux”, 1/10/11

So no partnership, but plenty of tax, and a 40% substantial overvaluation chop.

Nothing exciting from Tax Court, Treasury or IRS today, and even if there had been, my mind is elsewhere. Arrived this morning 5/12/14, at 9:22 a.m., CDT, my granddaughter Natasha.

Well, in the words of the old Toyota commercial, “you asked for it, you got it”; I wanted some good designated hitters, and The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, Mark V. Holmes, delivers one.

And it’s a one-sentence course in standard of review out of a NOD from a CDP. See infra, as my two-yacht colleagues would say.

Mark Melfa, Docket No. 17536-11L, filed 5/9/14, sets the stage. And Mark the petitioner (hereinafter “MTP”, to distinguish him from Mark The Judge, hereinafter “MTJ”) sets the stage by doing nothing until he gets to Tax Court, whereat he claims (a) he never got the chance to contest the underlying liability, so he’s entitled to de novo review, and (b) he was entitled to a face-to-face at the CDP.

Well, MTP obviously never read my blogpost “Stipulate, Don’t Capitulate”, 9/23/11, or either of my two follow-ups, “Stipulate, Don’t Capitulate – Part Deux”, 5/24/13, and “Stipulate, Don’t Capitulate – Redivivus”, 9/19/13, because he and IRS stipulate that the administrative record is true and complete.

Of course, the admin record sinks MTP. Here’s MTJ: “Mr. Melfa now argues that he didn’t receive any notice of deficiency. His problem is that when his case was before the IRS, he not only didn’t put that argument on his Form 12153 (the official IRS CDP-hearing request form), which is an informal administrative pleading, but he never once in the administrative record as a whole asserts anything other than that “I do not recall ever receiving a statutory notice of deficiency . . . .” Letter from Mark Melfa to IRS Memphis Appeals Campus (June 10, 2011). We cannot fault the officer for not responding to an unmade argument.” Order, at p. 2 (Citation omitted).

Now we know that non-receipt of a SNOD doesn’t help for the 90-day limit on petitioning the deficiency, if same was properly and provably mailed to last-known address. But it does help on a CDP, as non-receipt is a basis for de novo review of the underlying liability. Except “(M)r. Melfa didn’t put his supposed nonreceipt into his request for a CDP hearing, didn’t attend that hearing, and didn’t even mention it in any of his correspondence with the officer who ran the hearing.” Order, at p. 3.

And he stipulated to the administrative record. Game over on that one.

That leaves face-to-face. But face-to-face isn’t required by law or regulation or the IRS Manual.

“The regulation [Sec. 301.6330-1(d)(2) A-D8, Proced. & Admin. Regs.] says that a taxpayer who challenges his underlying tax liability with irrelevant or frivolous issues doesn’t get a face-to-face hearing…; we see no error, and no abuse of discretion, in similarly denying a face-to-face hearing to someone who raises no issues about liability at all.” Order, at pp. 3-4.

The one-sentence gem in all this? Standard of review when abuse-of-discretion is in play: MTJ: “A handy shorthand for abuse-of-discretion review is that it looks for an error of law, a clearly erroneous finding of fact, or an irrational chain of reasoning.” Order, at p. 3.

How’s that for a gem? You can use it in all of your memoranda of law, free of charge.

Ol’ Tommy Gray, son of a scrivener, got it right in his 1751 masterpiece. There’s a lot of blushing flowers in Tax Court, legal and practical roses wasting their sweetness amidst the daily dross of orders.

Now there is a way a Judge can rescue these gems of purest ray serene from the dark unfathom’d caves of the Orders link on the Tax Court website.

They can elevate these to designated hitter status, by the simple act of tipping off the hard-laboring clerks at 400 Second Street, N. W., directing the said clerks to ennoble their coruscations above the common herd.

And some Judges do. STJ Lewis (“Love That Spelling”) Carluzzo is a great exponent of the designated hitter, sometimes overdoing it in his zeal to help his homonymical pal here at the blogger’s keyboard. And Judge Gustafson, whose off-the-benchers are often illuminating, will send up a smoke signal when he’s delivered something useful.

But too many Judges are wont to issue orders to fortune and to fame unknown. And I’ve blogged these.

By patient and unremunerated toil, I’ve waded through multitudinous seas, if not exactly incarnadine then murky with the silt stirred up by Judge Holmes’ colleagues, reading volumes of “the Court held a conference call with the parties to the above-docketed cases. During the call, the parties represented that they would be submitting a stipulation of settled issues shortly.” And “ORDERED that, on or before May 22, 2014, petitioner shall file a response to respondent’s motion to dismiss for lack of jurisdiction and to strike as to the taxable year 2006.” Soporific isn’t the word for it.

I’m rather like the pig who hunts out the truffles, rootling round in the underbrush until my snout picks up the sweetness in the desert air, unearths that gem of purest ray serene aforesaid, and deposits same on the Internet, to the delectation of the battle-weary, hard-bitten, in-the-trenches practitioner.

It’s a tough job, but somebody has to do it.

Thanks for reading. 

 Mostly Aren’t

We poor bloggers catch a lot of flak. See my blogpost “Modified Loving”, 2/4/13, wherein Judge Boasberg of USDCDC threw a flag on IRS reliance on a blogpost.

Well, Judge Buch,  nowise reluctant to flog the blogger,  lowers the boom on IRS, when the Service again tries the Internet expert to trump the expert on the scene.

You can read it for yourself in John M. Alterman Trust U/A/D May 9, 2000, Ronald Gordon and Donald Gavid, Trustees, Transferee, et al., filed 5/8/14, Docket No.6936-10. There are four orders involved here in four cases, but the story is the same.

Richard C. Alderman is involved in all four, and is the target of an IRS trial subpoena to testify (even though he did testify once already) and to produce documents.

But Richard C. has problems. “Richard C. Alterman has Parkinson’s disease and he underwent two brain surgeries earlier this year. Prior to his first surgery, the parties agreed to take, and took, Mr. Alterman’s deposition under Rule 81 in order to perpetuate his testimony. By letter…, Mr. Alterman’s neurologist informed the Court that Mr. Alterman has impaired cognitive function and memory loss after his surgeries, is fatigued, and has episodes of confusion exacerbated by stress.” Order, at p. 1.

Sounds like Richard C. might not be the best witness this time around, maybe so?

Nothing daunted, IRS claims  “(1) live testimony creates a superior record and (2) respondent expects to have questions for Richard C. Alterman that he was not able to pose at the deposition. Respondent explained that those questions might arise as a result of the testimony of trial witnesses or documents that are produced at trial.” Order, at p. 2.

Judge Buch blows away the second argument. What might happen at the trial or on further depositions is too speculative. If IRS knows what they need, they should speak up. If not, Judge Buch isn’t letting them haul Richard C. into a deposition on a “might be, could be”.

But as to the first, IRS claims Richard C.’s impairment isn’t all that serious. “…despite Mr. Alterman’s doctor’s very recent statement that Mr. Alterman has impaired cognitive function and memory loss, respondent [IRS] asserts that Mr. Alterman’s side effects from brain surgery are not permanent and provides a WebMd article stating that patients undergoing Mr. Alterman’s procedure can expect a full recovery and are usually able to return to work within 4-6 weeks.” Order, at p. 2.

If it’s on the Internet, it must be true, right? Well, my blogposts are, anyway.

But Judge Buch boots, and doesn’t reboot, IRS’ Internet discovery.

“Respondent’s [IRS’] inclusion of a WebMd article is not well taken. Certainly Mr. Alterman’s neurologist is in a better position to evaluate his cognitive impairment than a WebMD article. See Campbell ex rel. Campbell v. Secretary of Health and Human Services, 69 Fed. Cl. 775, 781 (2006) (finding that a special master’s inclusion of medical articles from websites including WebMd arbitrary and capricious because the articles were not reliable and websites, specifically including as WebMd, caution that reliance on the information contained in the articles should be used ‘solely at your risk’). Beyond the inherent unreliability of internet research, the WebMd article speaks in terms of generalities, whereas Mr. Alterman’s doctor speaks to his specific condition.” Order, at p. 2.

Well, IRS used the WebMD article at its own risk. And IRS loses.

IRS also loses the document portion, as they ask fewer than 45 days before trial date, and Rule 70(a)(2) says “no”. Trial subpoenas are not substitutes for ordinary discovery. For more about that one, see my blogpost “Ask Politely”, 8/22/12, where Judge Gustafson teaches IRS a lesson they apparently forgot this time around.

So Richard C. is left in peace, although IRS can use his previous deposition if they so wish.

Or, The Expanding Tax Universe

The numbers are rolling, and Judge Cohen decides that one year of Cherie L. Hickman’s multi-year tax troubles gave rise to a deficiency, and therefore Tax Court can consider the Section 6651(a) additions to tax for that year.

Read all about it in Docket 27695-12, filed 5/7/14.

Orders, even designated ones, aren’t precedent, so you can’t cite them, but you can use the reasoning and the citations; even lift language verbatim.

The additions are the Section 6651 (a) failure-to-file-timely and failure-to-pay-timely, and Cherie admits she didn’t and she didn’t, respectively.

And for four out of the five didn’t-and-didn’t years, IRS assessed tax and additions based on Cherie’s late-filed returns, and those are off the table. Self-reporteds are no ticket to Tax Court.

But for one year, IRS sent a SNOD (which Judge Cohen calls NOD I; I eschew confusing a Statutory Notice of Deficiency, the so-called “90-day letter”, which I call a SNOD, with the Notice of Determination from Appeals after a CDP, which I call a NOD). The number alleged in NOD I was wrong for the one year at issue, as it was higher than what Cherie reported on her delinquent return.

Eventually, IRS and Cherie agreed that the right number was less than NOD I claimed, but more than Cherie put on her delinquent return.

But is there a deficiency, and therefore can Cherie challenge the Section 6651 additions for that year?

Yes, says Judge Cohen. IRS claims that the NOD I additions are attributable to the unabated portion of the tax due, and those were spelled out in NOD I, so there is no new deficiency.

And IRS’ motion to dismiss all years just says Cherie had a chance to petition from NOD I, and concededly didn’t.

Cherie replies that nothing in NOD I shows that it was based on what Cherie filed in her delinquent return for the year at issue, and in fact IRS and she agreed on a totally different number afterwards.

Judge Cohen: “Section 6211(a) of the Code defines ‘deficiency’ as the amount by which the tax imposed exceeds the excess of the sum of the amount shown as the tax on the taxpayer’s return, plus the amounts previously assessed (or collected without assessment) as a deficiency, over the amount of any rebates. In following this deficiency definition, respondent asserted that the tax imposed (as agreed upon by the parties) is $172,309; the amount shown as the tax on the taxpayer’s return is $0 (because the Internal Revenue Service (IRS) did not process petitioner’s delinquent … return); the amount previously assessed as a deficiency is $255,807; and the amount of the previous abatement (which constitutes a ‘rebate’) is $83,768. Respondent’s position is that a calculation of these numbers pursuant to section 6211(a) results in no deficiency. ” Order, at p. 3.

But that assumes a steady-state tax universe. And that isn’t so.

Judge Cohen: “…the concept of a deficiency–for purposes of section 6665(b)(1) in tandem with section 6211–is dynamic. A deficiency over time is expected to change as various assessments, abatements, and other actions take place. Yet such change does not erode the deficiency’s underpinnings–that at some time a deficiency, subject to the deficiency procedures, occurred; and that is enough for section 6665(b)(1) to apply. Here, respondent [IRS] originally determined a deficiency of $255,807 for … and assessed that amount. By agreement of the parties, that deficiency was reduced to $172,309, causing respondent to abate $83,768. Because the IRS did not process petitioner’s return, zero tax was reported from the return. Thus all of the $172,309 tax liability that remains from the original $255,807 deficiency stemmed from that deficiency. Consequently, the additions to tax at issue were wholly derived from a deficiency.” Order, at p. 4.

Section 6665(b)(1)? That’s the “additions based on deficiencies are deficiencies” section, and must IRS follow the deficiency procedure, not assessment.

So Cherie gets to fight about the additions.