Trying a variation on an old gambit, Larry Williams & Dora Williams, Docket No. 23883-12, filed 3/10/14, run aground on the same reef that sank two of the subjects of my previous blogposts, “Passive Aggressive”, 8/8/12, and “Passive Aggressive – Part Deux”, 11/13/12.

And STJ Armen, The Judge With a Heart, cites both cases that gave rise to those blogposts in this designated hitter.

Rob has a Sub S that owns real estate, which the Sub S rents to Rob’s C Corp. No dispute that the C Corp is an active business in which Rob materially participates, thus invoking Reg. Sec. 1.469-2(f)(6), the so-called “self-rental rule”, which activates the famously passive rental of real estate, thereby torpedoing Rob’s passive losses.

Rob’s argument? Sub S corporations aren’t subject to Section 469, the parent of the passive loss rules.

STJ Armen: “Although the Court agrees that section 469(a) does not literally apply to S corporations, which generally are not taxpayers, section 469(a) does apply to petitioners (as taxpayers who are individuals) and serves to disallow their passive activity loss. See sec. 469(a)(2), describing those persons who, as taxpayers, are subject to the general disallowance rule of sec. 469(a)(1).

“For purposes of section 469, a taxpayer’s ‘activities’ include those activities that the taxpayer conducts through an S corporation. Sec. 1.469-4(a), Income Tax Regs.; see Dirico v. Commissioner,139 T.C. 396, 402 (2012). Generally, the passive or nonpassive character of each item of gross income and deduction allocated to the taxpayer from an S corporation is determined by reference to the taxpayer’s participation in the activity. Sec. 1.469-2T(e)(1), Temporary Income Tax Regs., 53 Fed. Reg. 5718 (Feb 25, 1988); see also Dunn v. Commissioner,T.C. Memo. 2010-198, 2010 WL 3564725 at *11 n.21. Additionally, the selfrental rule of section 1.469-2(f)(6), Income Tax Regs., applies to an S corporation’s rental income passed through to the taxpayer from property rented to a C corporation and used in the C corporation’s business if the taxpayer materially participates in the business activity of the C corporation. Veriha v. Commissioner, 139 T.C. 45 (2012). Order, at p. 4.

Alert readers will recall that Veriha was the star of “Passive Aggressive”, op. cit., and Dirico was the star of “Passive Aggressive – Part Deux”, op. cit.

Interesting from a procedural point of view, this Order denies Rob’s motion for summary judgment, which STJ Armen recharacterizes as a motion for partial summary judgment. So maybe there’s more to follow here.

I’ve headlined two distinct blogposts as “Money-Back Guarantee”, 5/17/13 and 6/24/13. Each of those did provide for money back, but today’s blogpost, a designated hitter from STJ Daniel A. (“Yuda”) Guy, is anything but a guarantee that you’ll get your money back in Tax Court.

Tax Court’s labyrinthine jurisdiction, supposed to provide quick-and-cheap dispute resolution, instead provides quick-and-cheap dismissals. Here’s Reaz Ahmed & Ayesha Khatun, Docket No. 7292-13S, filed 3/7/14, getting the boot.

Reaz and Ayesha never got a SNOD or a NOD, so IRS moves for summary judgment, and wins, of course.

“The notice of deficiency has been described as ‘the taxpayer’s ticket to the Tax Court’ because without it there can be no prepayment judicial review by this Court of the deficiency determined by the Commissioner.

“The record reflects that (1) respondent did not issue a notice of deficiency or other notice of determination to petitioners for the taxable year …, and (2) petitioners are in fact attempting to prosecute a refund action. It is well settled that a letter disallowing a claim for a credit or refund does not constitute a notice of deficiency under I.R.C. section 6212. It follows that we lack jurisdiction in this case.” Order, at pp. 1-2. (Citations omitted).

Maybe the Tax Court website needs to explain this to taxpayers.

But another no win, this time for Michael S. Mountanos, 2014 T. C. Memo. 38, filed 3/6/14. Mike was previously hit with a 40% substantial undervaluation on his would-be conservation easement. He didn’t stipulate that the purported grant was a sham, but instead fought it out in Tax Court–and lost. Tax Court calls that opinion Mountanos I.

But Mike is persistent. He wants to fight over the carryover charitable deduction he didn’t get, which was denied based on the overvaluation. “Petitioner now asks us, in a calculated maneuver to avoid the accuracy-related penalty, to address the alternative grounds respondent raised for disallowing the carryover deductions. We will deny his motions.” 2014 T. C. Memo. 38, at p. 2.

You may remember our old friend Keller. No? See my blogpost “It’s A Sham”, 9/25/12. If a deduction would have been disallowed based on taxpayer’s confession it was all a sham, whether or not overvaluation was in play, then Ninth Circuit said there was no overvaluation.

But in the meantime, the Supremes weighed in with “…United States v. Woods, 571 U.S.__, 134 S. Ct. 557 (2013). The Court held that the Commissioner’s determination that a partnership was a sham is not independent from a taxpayer’s overstatement of basis for purposes of the gross valuation misstatement penalty.” 2014 T. C. Memo. 38, at p. 6, Footnote 2.

Besides, Keller stipulated his deal was a sham. That kept him from contesting whether it was or wasn’t. Mike fought it all the way to a finish. He had his shot to prove his deal was valid and the valuation he claimed was real. He lost.

Judge Kroupa isn’t giving him a second shot at avoiding the 40% chop by arguing alternative grounds.

“Petitioner now attempts to lose his redetermination argument on a different ground so as to avoid liability for our applying the gross valuation misstatement penalty. Thus, he is attempting to take two bites at the same apple. The Court of Appeals in Keller noted that a taxpayer’s concession had significant consequences because it meant that the taxpayer was no longer able to argue the merits of his deficiencies in the Tax Court. Here, petitioner is attempting to gain advantage by both arguing the merits of his deficiencies in the Tax Court and then later seeking to lose his redetermination argument on a non-valuation ground to avoid the gross valuation misstatement penalty.” 2014 T. C. Memo. 38, at pp. 8-9, Footnote 4 (Citation omitted).

Mike is nothing if not inventive. He appealed to Ninth Circuit, so he wants Tax Court to consider his alternative grounds in case Ninth Circuit remands.

But that would be an advisory opinion, as it’s conjectural that Ninth Circuit would remand, and anyway Mountanos I disposed of the whole 40% chop issue.

“We held dispositively in Mountanos I that petitioner failed to prove that the conservation easement had value. Our addressing the alternative grounds that respondent raised would have no impact, then or now, on our disposing of this case. The alternative grounds that respondent raised for disallowing the carryover deductions are therefore moot. Accordingly, we decline the invitation to issue an advisory opinion.” 2014 T. C. Memo. 38, at pp. 10-11. (Citations omitted).

Mike hasn’t shown unusual circumstances or substantial error, and Mike’s Rule 162 arguments are the same as his (losing) Rule 161 arguments.

So Mike loses; but it was a good try.

No surprises while The Judge Who Writes Like a Human Being, a/k/a The Great Dissenter (and implacable foe of the partitive genitive) Mark V. Holmes is on the case.

So it’s no-go for Robin A. Murphy, Docket No. 2955-13, filed 3/6/14.

Robin wants to amend her petition at the calendar call. Judge Holmes gives her an off-the-bencher turn-down, but explains why.

Robin and IRS agreed on every issue but two. Robin claims at calendar call that she was an IC, not at EE, for one of the years at issue, and that she did not authorize the filing of the 1040 for another year.

The latter contention, of course, would make her a nonfiler, with all the attendant additions to tax, interest and penalties appertaining thereto. Judge Holmes isn’t sure Robin wants that, but anyway IRS would have to do a lot of discovery to find out what Robin did mean by that, and the time for discovery is over.

As to the IC-vs-EE contention, “(M)oreover, the government would clearly be disadvantaged by this change in the theory of Ms. Murphy’s case. Changing one’s status from independent contractor to employee or vice versa involves an examination of a whole list of factors.

“It’s a multifactor test that varies from circuit to circuit and would have required the government, for instance, to come up with witnesses who know exactly what she did or what the conditions of her employment were during the year in question. They would have had to look at any employee manuals and other conditions of employment, and they simply had, government simply had, no opportunity to do any of this in the short period of time that Ms. Murphy gave them.” Order, at pp. 6-7.

Robin does have an entry in the Taishoff “excuses” prize-less sweepstakes.

“As to the reason that Ms. Murphy offered, she did describe the emotional trauma that she’s been suffering recently in the last couple of years where an unidentified stalker has affected her life, as well as a terrible roommate situation in which the roommate, a self-proclaimed witch, put black magic curses on her and left voodoo objects in her room. I want to be careful that we are not saying that she was asserting that she was herself ensorcelled here, but only that she had a very bad roommate situation that caused her emotional trauma and ultimately led to seek an order of protection to enable her to move from her apartment.” Order, at p. 6.

Not bad, Robin. But Judge Holmes, even though Robin actually got him to use the partitive genitive in the preceding paragraph, isn’t buying. Judge Holmes wasn’t that ensorcelled. So he immediately relapses into his old, anti-partitive-genitive, ways.

“But all that happened some time ago and doesn’t really suffice as a good reason for not bringing this very different theory of the case to the Court’s attention until the calendar call, or to the government’s attention, apparently, at the earliest, a couple weeks ago.” Order, at p. 6.

A “couple of years”, but a “couple weeks”? C’mon, Judge.

Anyway, Robin is stuck with her case as previously presented.

Takeaway- Rule 41 is liberal, but not that liberal. If you’re changing theories so as to require different items of proof, rather than just a different view of the law, you had better move fast.

It’s a fact; nobody listens to me. When I went over the Bank Of New York Mellon Corporation, as Successor Interest to The Bank Of New York Company, Inc., rematch (see my blogpost “Never Borrow Money Needlessly”, 9/23/13), I laid out what I thought was a worthwhile appeal strategy for IRS.

Nevertheless, IRS caved and didn’t appeal Judge Kroupa’s Supplemental Memorandum, which granted the Mellon 15’s request that the interest on the loan Mellon took out from Barclays be an allowable deduction, even though the rest of the deal was a sham.

Well, apparently the gremlins of Tax Court repented, because “(D)ue to an inadvertent clerical error, however, the Court denied the reconsideration motion through an Order dated February 19, 2014.” Bank Of New York Mellon Corporation, as Successor Interest to The Bank Of New York Company, Inc., Docket No. 26683-09, filed 3/5/14.

So Judge Kroupa enters the above-cited order straightening this out, and the Mellon 15 get their deduction after all.

IRS didn’t listen to me. Nothing new in Tax Court today, either.

Back from a one-day layoff, and a delayed start today, March 4, Judge Goeke orders the parties to stand by for trial in Gaughf Properties, L.P., Balazs Ventures, LLC, A Partner Other Than the Tax Matters Partner, Docket No. 12898-07, filed 3/4/14.

Remember the Gaughfs, Andy Jackson Gaughf and his spouse Nan? No? See my blogpost “A Busy Day”, 9/10/12. The whole issue was whether IRS was obliged to use information acquired otherwise than filed on a Form 1065 and allied documents to ascertain that the Gaughfs were indirect partners in a Jenkens & Gilchrist phony basis-builder.

Tax Court said “no”, so the three-year statute of limitations hadn’t run against IRS when they sent Andy Jackson and Nan the FPAAs they’re fighting about.

Well, the Gaughfs appealed. And back on 12/17/13, DC Circuit affirmed Tax Court.

Here’s Circuit Court Judge Karen LeCraft Henderson: “While the  regulation provides that the IRS ‘may use other information in its possession,’ it also makes clear the IRS ‘is not obligated to search its records for information not expressly furnished under [the regulation].’ Treas. Reg. § 301.6223(c)-1T(f) (emphases added); cf. Walthall v. United States, 131 F.3d 1289, 1296 (9th Cir. 1997) (‘mere fact that the IRS possesses in its database the name and address of indirect partners does not mean that it has been “furnished with” this information’ so as to trigger IRS obligation to notify indirect partners of administrative proceedings under I.R.C. § 6223). Nor does the regulation give effect to the ‘[i]ncorporation by reference of information contained in another document previously furnished to the Internal Revenue Service.’ Treas. Reg. § 301.6223(c)-1T(c).” Gaughf Properties, et al v. CIR, 13-1026, 12/27/13, at p. 21.

So it’s back to Tax Court, and on to the trial.

Means no job. Polar vortex, y’know.

Tax Court is closed today, Monday, March 3, but will open tomorrow, March 4, with the full lineup on deck and ready to go.

Or, Be Careful What You Ask For

I remember a judge in Our Fair State giving me that warning twenty years ago, when I listened to my client and made a successful motion to appoint a receiver that wound up creating a first-class mess. But I never learn.

Case in point: my blogpost “Neri Do Well”, 3/15/12, wherein I asked Judge Halpern to explain why he let the petitioner off the hook for the 20% chop based on good-faith reliance. I said “In the wilderness of single instances, which is the basis of our law, any thread from which we can suspend a reasoned evaluation in aid of our clients, and the public generally, is to be welcomed.”

Oh boy, did Judge Buch throw the book at all of us, in 63 pages of well-chosen words, in Steven T. Waltner, 2014 T. C. Memo. 35, filed 2/27/14.

Steve is a frivolity merchant, taking his lead from the notorious Peter Hendrickson, author of the Protesters’ Bible, Cracking the Code: The Fascinating Truth About Taxation in America (2007).

In a fight over a Section 6702 $5K chop, Judge Buch uses up 20 pages in the procedural history of the slanging match between Steve and IRS; but whereas IRS cut out the slang when Judge Buch called them on it, Steve, like the Bunny of advertising fame, just kept on going and going and going.

Now generally (don’t you just love that word? Whenever I see it, I know about 250 pages of exceptions will follow) such stuff is disposed of via “Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984) (‘We perceive no need to refute these arguments with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit.’).” 2014 T. C. Memo. 35, at p. 22, footnote 6.

But Judge Buch is irked that Steve burned so many judicial hours. And Judge Buch clearly is no friend of Hendrickson. So because Steve is obviously a disciple of Hendrickson (and Judge Buch plows through Steve’s papers and produces a concordance of Steve and Hendrickson), “…a written opinion is warranted.” 2014 T. C. Memo. 35, at p. 23.  And Judge Buch has a plenitude of somber reasoning and copious citations; you betcha!

Notwithstanding, however,  anything otherwise or to the contrary set forth elsewhere herein, as my expensive colleagues say, Judge Buch takes up where I left off two years ago, and says what I meant better than I did.

“Judicial opinions are the ‘heart of the common law system’ and serve as ‘a critical component of what we understand to be the “law.”‘ Statutes and regulations provide simply an outline; judicial opinions fill in the details by providing the rule of law the court applied, the court’s rationale in applying that law, and the underlying facts.

“Judicial opinions serve many purposes: they assist attorneys in advising clients and preparing cases; they provide the lower court’s rationale when the appellate court must evaluate its decision; they inform the public of the court’s analysis; and they establish clear and articulate rules for the future.” 2014 T. C. Memo. 35, at pp. 24-25. (Footnote omitted).

I wish all judges would read and heed Judge Buch’s words. I know they’re overloaded often, and hearing the same claptrap endlessly would wear down the stoutest, but I for one agree with Tom Jefferson and our own Judge Mark V. Holmes (“…a decent respect for the opinions of informed mankind requires an explanation of why we believe our holding will not have a pernicious effect.” quoted in my blogpost “Gone Too Far”, 2/11/13).

A decent respect for the opinions of the informed (and the still uninformed seeking enlightenment) requires an explanation.

Well, Judge Buch has given me what I asked for. All 63 pages’ worth.

 Even if It’s “Famously” Non-Taxable

Thus the Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, Mark V. Holmes, in a quartet of designated hitters. I’ll cite only to Block Developers, LLC, William J. Maxam, APC, Tax Matters Partner, et al., 3198-10, filed 2/26/14.

Block had four partners, each of whom was a Roth IRA, and each of whose trustees got a NBAP (Notice of Beginning of Administrative Proceeding), the TEFRA equivalent of a summons with notice for you civilian practitioners. But the beneficiaries of the several Roths got nothing.

Now if a partner, whether direct or “indirect” but entitled to receive a NBAP, doesn’t get a NBAP, the IRS can be in trouble.

Judge Holmes: “NBAPs are important because, if a person who is entitled to get one doesn’t, he receives in compensation a right to elect out of TEFRA’s partnership-level proceedings and treat all his partnership items as nonpartnership items. IRC§ 6223(e). This can in turn mean an increase in the probability of the Commissioner’s making a mistake in issuing a valid notice of deficiency, and sometimes that means that a partner wins his tax case on a procedural default.” Order, at p. 2.

So who are the “partners” entitled to the NBAPs– the Roth IRA trustees or the individual beneficiaries?

The individuals argue that they are the real partners, and not pass-thru partners who are only entitled to receive a NBAP from their Roth IRA trustees, who IRS claims are the real partners entitled to receive the NBAPs, because a partner is defined as one whose tax liability is determined directly or indirectly by the partnership items in question.

“Roth IRAs are famously exempt from worrying about their tax liability at all — and so petitioner reasons that means that Roth IRAs can’t be partners, and if they can’t be partners, they can’t be ‘pass-thru partners.’” Order, at p. 2.

Another “nice try”, but the beneficiaries are out of luck. Section 6231(a)(9) includes trusts as pass-thru partners, and only the trustee is entitled to the NBAP. If the trustee doesn’t tell the trustor, too bad, so sad, but that’s not IRS’ problem.

“So everything comes down to what exactly ‘trust’ means. Petitioner here has another distinction that he urges on us — a distinction between trusts that have tax liability (e.g. complex trusts, IRC § 641) and trusts (e.g. grantor trusts, IRC § 671 and Roth IRAs, IRC § 408A) that don’t. Only the former, he argues, qualify as ‘partners’ and only ‘partners can be ‘pass-thru partners.’

“We must of course use the definition that the Code itself gives us, and on this point the Commissioner has to be right. And we have definitively held that Code section to mean what its language suggests:

“‘section 6231(a)(9) plainly defines the term “pass-thru partner” to include a “trust” that holds an interest in a partnership. We read nothing in the relevant provisions that expresses a legislative intent to limit that definition to any particular type of trust.’ Murphy v. Commissioner, 129 T.C. 82, 88 (2007).” Order, at p. 3.

Now the bad news: “Murphy is a T.C. opinion. We must follow it.” Order, at p. 3 (Citation omitted).

See my blogpost “This Old House”, 1/30/12. T. C. opinions are reviewed by the whole Court, and have, as I said, “a certain gravitas; if not an Olympian pronouncement, then at least an oracular quality.”

As Gertrude Stein would have put it, simple, complex, taxable or non-taxable, a trust is a trust is a trust.

That’s the story of Craig Patrick. No, not that Craig Patrick. That Craig Patrick was the man who blew the whistle for the 1980 US Olympic Ice Hockey Team, of glorious memory. Fans will remember the 2004 cinematic retelling of that epic feat, wherein Kurt Russell played the late Herb Brooks and Noah Emmerich played Assistant Coach Craig Patrick, he who blew the whistle endlessly as the exhausted US amateurs skated back and forth in the darkened rink.

Who can forget Russell’s bark “Again”, and Emmerich, pitying and disgusted, blowing the whistle once more, as the hangdog rink rats gave it their last gasping breath?

I will not discuss the debacle in Sochi. My alibi is that I was on a ship in the Caribbean, and it wasn’t on my watch.

No, I herald my return to snow, cold and blogdom with this,  the story of Craig Patrick and Michele Patrick, 142 T. C. 5, filed 2/24/14, with Judge Kroupa on the bench.

Craig did blow the whistle, however. No, not in a Section 7623 scrimmage. And he won.

Craig worked for a medical equipment manufacturer, whose gadget was designed for outpatient application, but was marketed to providers for inpatient (admitted to hospital) use, to boost the Medicare reimbursement illegally. Craig managed the reimbursement side, got hold of incriminating material, and filed a classic 31 USC False Claims Act qui tam. That’s the “everything but taxes” variety.

If you care, the phrase qui tam comes from the Latin “qui tam pro domino rege quam pro se ipso in hac parte sequitur,” which means “who pursues this action on our Lord the King’s behalf as well as his own.” 142 T. C. 5, at p. 5, footnote 4.

Well, there isn’t a king any more, but the Federales leapt in to Craig’s lawsuit, and took $75 million from the various skullduggers in two bites. Craig was in for about $6 million one year and nearly $900K the next. He also got Forms 1099-MISCs for those amounts, at no extra cost.

But Craig is nothing if not inventive. He agrees it’s income, but claims capital gains treatment. He says he held the proofs of thuggery of a year and sold it to the Feds. He had a contract right to sell the info to the Feds, thus a “sale or exchange” of a “capital asset”.

Craig gets a real good “nice try” from me, and a brusque “who’re you kiddin’?” from Judge Kroupa.

“Petitioners argue the sale or exchange requirement is met because the qui tam complaint establishes the relator’s contractual right to a share of the recovery. We disagree. Absent a legislature’s clear indication to contractually bind the government, a law does not create private contractual rights. The Government does not purchase information from a relator under the FCA. Rather, it permits the person to advance a claim on behalf of the Government. The award is a reward for doing so. No contractual right exists.” 142 T. C. 5, at p. 8 (Citations omitted).

Not dismayed, “Petitioners analogize the relator’s provision of information to the sale of a trade secret. A transfer of trade secret rights, however, constitutes a sale for capital gains purposes only when all substantial rights are transferred. Petitioner husband did not transfer any rights to the Government.

“Put simply, a relator does not sell or exchange his information for a fixed amount of money or in return for other property. The sale or exchange requirement is not met.” 142 T. C. 5, at pp. 8-9 (Citations omitted).

The right to receive income is not a capital asset. Check out Judge Holmes’ take on what is a capital asset in my blogpost “Das Kapital”, 8/6/13. So whatever Craig sold, if he sold anything (and Judge Kroupa said he didn’t), it wasn’t a capital asset.

“Information supporting a qui tam complaint and provided to the Government does not constitute a capital asset. A general characteristic of property is that an owner has the legal right to exclude others from use and enjoyment of that property. The most significant rights held by the owner of a trade secret are the rights to prevent both the unauthorized use and the disclosure of the secret. Petitioner husband obtained documents through his employment. The FCA (False Claims Act) obligated petitioner husband to give the Government all supporting documentation. Petitioner husband did not demonstrate any right to prevent [the skulldugger] or the medical providers from using or disclosing the information.” 142 T. C. 5, at p. 11 (Citations omitted)..

Oh, by the way, Craig, ya done good. “Petitioner husband helped bring to light systematic fraud, causing the recovery of tens of millions of dollars. Those efforts are to be applauded and were rewarded. Rewards, however, are treated as ordinary income, and the qui tam award is subject to tax as such. Petitioners have not demonstrated that either requirement for capital gains treatment was met.”, 142 T. C. 5, at p. 12.

Now how about those who unmask tax shenanigans, and get nothing?