No, not Rule 162 motions to vacate. Tax Court is closed today, 2/13/14, so no T. C.s, no T. C. Memos, and no orders.

And Tax Court is not the only one on vacation.

I’m taking a bunch of days off. I’ll be back on February 25.

Looking forward to posting again at that time. Stay tuned.

Taypayers 2, IRS 0

If you’re like me, you probably have lost interest in Sochi, so we turn our attention to Tax Court today, where the results of different events have been posted.

First event, the statute of limitations race. Question: when is IRS “notified”, to start the clock? Well, says Judge Chiechi, in the case of the excise tax in Section 4979(a) where a disqualified person holds stock in an ESOP during the first nonallocation year, thus triggering the tax, because neither Section 4979 nor the regulations define “notified”, it’s when all of the details in connection with the disqualifying holding is filed with IRS before the time or at the time the taxpayer’s annual income tax return is filed.

And Judge Chiechi gets there by borrowing from the Section 1033 involuntary conversion regulations.

So Law Office of John H. Eggertsen P.C., 142 T. C. 4, filed 2/12/14, beats the three-year statute of limitations, because the returns filed in 2006 (date not specified) preceded IRS’ SNOD by about 5 years.

Next up is Shea Homes, Inc. and Subsidiaries, et al., 142 T. C. 3, filed 2/12/14, in the accounting method scramble. The question here is recognition of income, and it’s a big question for homebuilders who sell more than “sticks and bricks”, that is, whose developments include recreation facilities, meetingplaces, nature walks, private roads and what are called “amenities” outside the four walls and backyards of the houses they sell. And who may be closing houses and taking in money years before the job is finished.

Shea says they recognize when 95% of costs expended and the homes are “used”, that is, a certificate of habitability (or what we call a C of O, certificate of occupancy), is issued by the municipal authorities. And the 95% of costs means the last road is paved and the last performance, payment or labor-and-materials bond is exonerated.

IRS says no, of course; when the home itself gets the C of O, and Shea gets cash, that’s it. You’re selling homes; the amenities are “secondary”, which means you can count the separate cost for them (but not land acquisition, site preparation, or permitting) later.

Judge Wherry, anything but whimsical here, gives a course in real estate development and real estate sales, from site location and acquisition, through construction and marketing, with a strong dose of governmental restrictions and bonding requirements, which I strongly recommend to those interested. In short, what Shea sells is a package, not just a house.

Judge Wherry: “Purchasers of homes in their developments were conscious of the elaborate amenities and would have understood that the price they paid for a home included the amenities of the development. If a purchaser did not want to live in one of the planned developments with its accompanying amenities, it is likely he or she could have paid much less for an otherwise comparable dwelling outside of a development and with no seller-provided amenities.” 142 T. C. 3, at pp. 51-52. (Footnote omitted, but read it. Amenities accounted for around 25% of indirect costs of each project, and “To believe that the consumer homebuyer did not view the fruits of these expenditures as an integral aspect of their home purchase decision strains credibility.”).

Actually, it strains credulity, Judge, but it’s all the same.

And while IRS has broad latitude to change accounting methods to reflect income and expenses accurately, and gets a stronger-than-usual presumption in its favor when it does mandate a change, it can’t make a taxpayer change from one inaccurate method to another, nor can IRS force a change from a clearly-acceptable method.

And the whole thing goes off on…drumroll…facts and circumstances.

So Judge Wherry gives us a massive exegesis, and decides that Shea’s accounting is correct. Shea is selling more than bricks-and-sticks. Shea hasn’t dragged its feet to avoid recognizing income.

Taxpayers are two-for-two today in the big events.

“It might be that allowing the IRS to regulate tax-return preparers more stringently would be wise as a policy matter. But that is a decision for Congress and the President to make if they wish by enacting new legislation. The ‘role of this Court is to apply the statute as it is written – even if we think some other approach might accord with good policy.’ Burrage v. United States, __ S. Ct. __ (2014) (internal quotation marks and brackets omitted). The IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading of Section 330.” Loving v. IRS, No. 13-5061, 2/11/14, at p. 19.

Thus the DC Circuit puts paid to Dave Williams’ and Doug Shulman’s attempt, via the RTRP regulations, to rein in the paid preparers, a small sampling of whose shenanigans I’ve catalogued in these blogposts.

Not a surprising result. I agreed with Judge Boasberg in the DC District Court from the beginning. “To begin, I agree with Judge Boasberg that Doug Shulman and Dave Williams went from first to third without touching second … by roping in the unregistered preparers to Circular 230. See my blogposts ‘Chevron, Mayo – I’m Loving It’, 1/21/13, and ‘Modified Loving’, 2/4/13.” From my blogpost “A Rant – Part Deux, 4/3/13.

But the bottom line remains (and again I quote myself):  “Though Judge Boasberg got it right on the law, in the field the situation is still out of control. And as Congress is the only body that can try to get things straightened out, then it’s time.” Idem, as the high-priced lawyers say.

Rather than seeking cert from the Supremes, an effort that I think must fail, IRS would do well to petition Congress extra-hard.

Thanks to Mr. Bob Jacobson for the news.

On the Return

So here I am in South Beach, thinking about a light supper to cap off a delightful sunny day, when it strikes me I need to put up a blogpost, lest my readership, few in number though they be, feel I’ve deserted them.

Scanning this day’s annals of Tax Court, rather like a deckhand extra in an episode of The Deadliest Catch inspecting a pot newly hauled from the depths, I spy a T. C. Memo., number 26 of that ilk, bearing the name of Judge David Gustafson.

But the catch shows none of Judge Gustafson’s obliging nature. It’s another battle of the appraisers, this time ascertaining the FMV of a PHC with BICG by means of NAV.

If any of this gibberish enthralls you, dear reader, my deepest condolences. Read for yourself the tale of Estate of Helen P. Richmond, Deceased, Amanda Zerbey, Executrix, 2014 T. C. Memo. 26, filed 2/11/14.

I shall not weary you with the minutiæ. I will, however, use this case to point out what I have heard (and doubtless many of you have heard) in any number of continuing education courses, classes and seminars. Win your case at the earliest possible moment: win at the pleadings stage, or at discovery, or with motion practice, or on your opening statement.

Here, win your case when you file the return. Amanda was not particularly hip as to estate taxes, so her now-deceased co-executor John W. Lyle, C. P. A., chose a colleague, Peter Winnington, C. P. A., to value the late Helen’s greatest asset, her 23.44% interest as shareholder in the family personal holding company, a C Corp. founded by Old Grand Dad in 1928. The PHC held publicly-traded, dividend-producing stock, distributed all dividends received, and, in the last words of many a patriarch “never sell nothing never.”

So the PHC had a ton of valuable stock with a ton of built-in gain. If the PHC liquidated its holdings, as it was a C Corp, it would get hit with a 39% combined Federal, State and local capital gains tax.

So the issue was whether to value the late Helen’s 23.44% piece based on the potential income stream from present investment strategy, or based on the net asset value of the portfolio of stocks, in either case with discounts for minority (lack of control), unmarketability, and built-in capital gain.

I’ll leave the battling experts to Judge Gustafson. The issue is Pete Winnington.

“Mr. Winnington graduated with a bachelor of science degree in accounting from the University of Delaware in 1971, and he received his master of science degree in taxation from Widener University in 1983. Mr. Winnington has been employed as an accountant with [the firm] since October 1986, and he currently chairs the firm’s corporate service department and sits on the firm’s executive committee. Mr. Winnington has experience in public accounting involving audits, management advisory, litigation support and tax planning, and preparation services. Mr. Winnington became a C.P.A. in the State of Delaware in 1975 and a certified financial planner in 1988, and is a member of the American Institute of Certified Public Accountants (AICPA), the Delaware Society of Certified Public Accountants (DSCPA), and the Wilmington Tax Group. Mr. Winnington has appraisal experience (i.e., having written 10-20 valuation reports and having testified in court), but he does not have any appraiser certifications.” 2014 T. C. Memo. 26, at pp. 12-13.

Nevertheless, Amanda and the late Lyle give Pete Winnington the brokerage statements and tell him to value the Late Helen’s piece.

As Pete Winnington’s firm did work for the late Helen, he had information about the hold-fast-forever investment philosophy of the PHC, so he valued the late Helen’s piece on the capitalization-of-dividends method, not net asset value, and did a draft report.

Judge Gustafson takes it from there: “He provided the unsigned draft of the valuation report to the executors and to the return preparer, and he was never asked to finalize his report. Without further consultation with Mr. Winnington, the estate reported the value of Ms. Richmond’s interest in PHC as $3,149,767 on the Federal estate tax return filed with the IRS.” 2014 T. C. Memo. 26, at p. 13.

You can guess the rest. When Amanda and the late Lyle locate an expert after they get the SNOD, and after their expert, IRS and Judge Gustafson get through with the 706, while Amanda avoids the 40% gross undervaluation penalty, the 20% chop is definitely in play because Pete Winnington’s numbers are about 3-plus million low.

“Although Mr. Winnington gave factual testimony about his valuation report, which formed the basis for the value reported on the estate tax return, the estate did not proffer Mr. Winnington as a valuation expert and instead requests that we adopt Mr. X’s appraised value.” 2014 T. C. Memo. 26, at p. 16. (Name omitted, but Mr. X is the estate’s expert pinch-hitter).

And that’s my point.

I’m not beating up on Pete Winnington; he prepared a draft report, doubtless expecting a review by the appraisers, and discussions with executors, attorneys, and, in T. S. Eliot’s immortal words “time yet for a hundred indecisions, And for a hundred visions and revisions, Before the taking of a toast and tea.”

No, the case got blown when the co-executors took his numbers, and without thinking slapped them into the 706, posted same off to IRS, and called it a day.

Judge Gustafson sums it up: “On the record before us, we cannot say that the estate acted with reasonable cause and in good faith in using an unsigned draft report prepared by its accountant as its basis for reporting the value of the decedent’s interest in PHC on the estate tax return. Mr. Winnington is not a certified appraiser. The estate never demonstrated or discussed how Mr. Winnington arrived at the value reported on the estate return except to say that two prior estate transactions involving PHC stock used the capitalization-of-dividends method for valuation. Furthermore, the estate did not explain–much less excuse–whatever defects in Mr. Winnington’s valuation resulted in that initial $3.1 million value’s being abandoned in favor of the higher $5 million value for which the estate contended at trial. Consequently, the value reported on the estate tax return is essentially unexplained.” 2014 T. C. Memo. 26, at pp. 49-50.

Takeaway- Prepare the return as if you were preparing for trial. If you want to win, you must try to win on the return. By the time you get the SNOD, it may be too late.

STJ Armen’s comment, which I questioned in my blogpost “Admittedly Close?”, 12/9/13, certainly doesn’t apply to IRS’ attempt to wildcard in a claim that a couple of trusts are shams, or that taxpayer’s previous delictions, for which he did time, prove that he had unreported income. So Judge Marvel, finding IRS didn’t come close, sends Christopher Carl Close and Lisa Marie Close off to a Rule 155 beancount, but strips IRS of most of its claimed deficiencies and nearly all of its asserted penalties.

Read all about it in 2014 T. C. Memo. 25, filed 2/10/14.

Now Chris wasn’t a model citizen. Although he founded a medical equipment company, which he later sold,  “(W)hen they petitioned this Court, Mr. Close was incarcerated in a Federal prison camp in California and Mrs. Close resided in Idaho.” 2014 T. C. Memo. 25, at p. 3.

A jury convicted Chris of “…30 counts of healthcare fraud, 9 counts of money laundering, 1 count of obstructing a Federal audit, and 1 count of obstructing a Federal healthcare fraud investigation.” 2014 T. C. Memo. 25, at p. 4.

IRS now claims Chris failed to report income from various lumbering operations. Chris put the deals into two trusts. IRS raises the sham issue three weeks before trial, never having raised it before.

IRS tries to put into evidence summaries of earnings from the logging operations that they never showed Chris, claiming they didn’t have time, and the evidence itself was too voluminous. This was to show the unreported income.

I remember a similar claim in a non-tax matter where I was of counsel, and it didn’t go over there either. Judge Marvel: “The contents of voluminous writings that cannot conveniently be examined in court may be presented in summary form only if the writings are made available for examination or copying, or both, by other parties at a reasonable time and place. See Fed. R. Evid. 1006. Respondent admits that the underlying documents were not made available to petitioners before trial; respondent contends that this was because we relieved petitioners of their deemed admissions shortly before trial. We reject respondent’s suggestion that there was insufficient time to make the underlying documents available to petitioners. We relieved petitioners from their deemed admissions more than a month before trial, and respondent had more than sufficient time to make the documents available to petitioners. Because respondent failed to make the underlying documents available to petitioners before trial, we reject respondent’s attempt to rely on these exhibits to prove the truth of the matters asserted therein.”  2014 T. C. Memo. 25, at p. 22. (Footnote omitted).

It doesn’t get better for IRS. Though IRS can place the burden of proof concerning unreported income on the taxpayer if it shows connection with an income-producing activity or actual receipt of unreported income, here it’s irrelevant because IRS’ claim is based on the sham trusts, and this is a new claim, at variance with the SNOD and requiring different proof. And the summarized voluminous documents are inadmissible because not properly substantiated by IRS’ witness.

And IRS never called the trustees of the two trusts as witnesses, or showed how they disregarded the terms of the trust instruments. IRS never challenged that trusts were validly created under State law.

There’s a lot more, including how IRS and the US Attorney’s office coerced a trustee into filing an improper tax return by threats of forfeiture, but you can read this for yourselves.

Chris is liable for penalty for nonfiling one year’s return, if he was required to file for that year, but that will come out in the Rule 155 numbers game. As for not paying the tax shown on IRS’s SFR, those never got introduced into evidence, so no penalty there.

As for nonpayment of estimated tax, “(R)espondent [IRS] introduced certified records showing that petitioners did not file Federal income tax returns for 2002 and 2003 and made no estimated tax payments for 2003. However, respondent also introduced certified Forms 4340 for each of petitioners’ individual income tax accounts for 2002 that each show no tax assessed, no payments made, and an account balance of zero. The Forms 4340 further show that respondent filed a substitute for return for Mr. Close but did not file a substitute for return for Mrs. Close for 2002. The Forms 4340 do not show that respondent issued a notice of deficiency to either petitioner for 2002.” 2014 T. C. Memo. 25, at p. 45-46.

But Section 6654(e)(2) says if previous year’s tax was zero, no estimateds due for next year, so Chris is off the hook.

Judge Marvel sums it up: “This case would have benefited from a more fully developed record regarding the creation, funding, and administration of X Trust and Y Trust; the conduct of logging operations on both the A Road and B Road properties; the use and amount of the income generated by the logging activities; and the acquisition of and payment for the two properties. This case would also have benefited from the earlier assertion and development of respondent’s sham trust theories. Unfortunately, respondent chose to rely on actions taken in connection with Mr. Close’s criminal case and particularly the Government’s misguided attempt to position itself for an easy forfeiture of the trusts’ assets. The resulting product was poorly developed and unconvincing.” 2014 T. C. Memo. 25, at p. 46. (Names omitted).

Lest anyone conclude I’m piling on after the whistle here, I repeat yet again that we’ve all blown cases big time, and the bigger the case, the bigger the hurt if you blow it. So I’m not gloating over IRS’ counsel’s discomfiture here, nor encouraging others to do so.

I’m just going back to my blogpost, “Thoroughness”, 10/27/11, wherein I wrote: “‘Thoroughness settles the question in more cases than any other one thing as to whether or not a person will be successful. A lawyer needs to be thorough in the first place because it is only fair to the state which has given him his license to practice.’ Thus spake Adelbert Moot, a leader of the Buffalo (N.Y.) Bar, at the first Irvine Foundation lecture at the Cornell Law School (my alma mater), on May 29, 1914 (and no, I was not in attendance).”

What is Notice 3219N, and why should I care about it? Those are the questions perplexing The Judge With A Heart, STJ Robert N. Armen, Jr., in Edward A. Jackson & Cherilyn M. Jackson, Docket No. 12170-13S, filed 2/7/14.

Now as I just got down to South Beach to escape the Polar Vortex engulfing My Fair City, you may wonder why I care. But since I don’t want to wade through sixteen (count ‘em, sixteen) pages of Tax Court orders to find anything worth blogging, and as Tax Court never releases opinions on Friday, I’ll gladly take on a STJ Armen designated hitter.

Back in December, STJ Armen ordered IRS and Ed and Cherilyn each to file papers showing cause why the petition should not be dismissed for want of a SNOD, or, if IRS claims there was a SNOD and that Notice 3219N was one, then IRS had to show how Notice 3219N came into being, and attach a copy of the Notice 3219N allegedly served on Ed and Cherilyn.

IRS, replying, says Notice 3219N is a SNOD, but that the one they sent only pertained to Ed, and they move to dismiss as to Cherilyn, as there is no SNOD pertaining to her.

But Ed and Cherilyn say nothing. Thus STJ Armen, logical if softhearted: “One might conclude, therefore, that petitioners either are unable to show cause why the Court should not dismiss this case in its entirety or affirmatively think that the case should be so dismissed.” Order, at p. 1.

However, this is nothing to the point, which is whether Notice 3219N is a SNOD sufficient to confer Tax Court jurisdiction over anybody for anything.

So since STJ Armen still doesn’t know how Notice 3219N is a SNOD, and since Ed and Cherilyn deserve a chance to respond to IRS’ motion to toss Cherilyn, STJ Armen orders all hands on deck in Chicago next month to argue the point.

And this is the only notice they’re getting of the hearing.

By the way, the IRS’ website says that Notice 3219N means, in human language: We didn’t receive your tax return. We have calculated your tax, penalty and interest based on wages and other income reported to us by employers, financial institutions and others. Pay up, file a return, contest these numbers with us, or petition Tax Court.

Sounds like a SNOD to me.

No, not Julie Jordan, the heroine of the Rodgers and Hammerstein 1945 classic, whose song led off many an AIDS Walk. No, this is the story of Dr. Elizabeth A. Vitarbo, whose story appears in a small-claimer from the word processor of STJ Lewis (Gotta Love That Name) Carluzzo, namely and to wit, 2014 T. C. Sum. Op. 11, filed 2/6/14.

Dr. Vitarbo is a neurosurgeon. Induced by promises of payoff of student loans, moving expenses, and guaranteed income, Dr. Vitarbo moved to Wilson, NC, and began practicing there. There was the usual disappearing indebtedness, represented by promissory notes which IRS agreed was real debt, to make sure Dr. Vitarbo stuck to Wilson and environs and kept on practicing.

She did.

But she did as employee of her wholly-owned Sub S corporation. And she gave herself W-2s, until she dissolved the Sub S. STJ Lew says the tax consequences of the dissolution are unknown, and he, Dr. Vitarbo and IRS are apparently content to leave it so.

After that, Dr. Vitarbo worked for the local hospital, but got into a fight with them. They settled the lawsuit: Dr. Vitarbo paid the hospital $240K, and her lawyer $120K. Half the lawyer’s fee was paid in the year at issue.

Dr. Vitarbo had a bunch of ordinary-and-necessaries, along with the $60K legal fee, all of which IRS concedes.

So why the fight? Well, do the ordinary-and-necessaries and the $60K go on Schedule C (and thus hit the 1040 above the line), or do they go on Schedule A (miscellaneous itemizeds) and hit below the line, less 2% of AGI of course. And subject to phaseout and AMIT.

Dr. Vitarbo claims self-employed. She agrees that employees can deduct ordinary-and-necessaries, but claims she’s not an employee. She never was employed by the hospital. She went to work for an educational institution (unnamed) after she dissolved the Sub S.

STJ Lew says she’s right, but that isn’t the point. “We agree with her that she was never so employed, but respondent’s [IRS’] position that the deductions are properly claimed on a Schedule A is not premised upon the ground that she was. Instead, respondent points out that petitioner did not practice medicine as a sole proprietor at any time relevant here, and therefore any income or deductions attributable to that practice are not properly reported on a Schedule C. As respondent views the matter, petitioner’s status as: (1) an employee/shareholder of [her Sub S] until her employment with the educational institution began… and (2) as an employee of that educational institution during…, the year the expenses giving rise to the disputed deductions were paid, is taken into account in the determination of the proper treatment of the disputed deductions, not her employment relationship with [the hospital]. As respondent views the matter, all of the disputed deductions are properly claimed on a Schedule A, subject to reductions as provided in section 67(a) and taken into account in the computation of petitioner’s alternative minimum tax liability.” 2014 T. C. Sum. Op. 11, at pp. 9-10.

Dr. Vitarbo worked for some unknown party before relocating to colorful downtown Wilson, NC (employee), was employed by her Sub S (although a Sub S is a passthrough, it’s not a disregarded), and then by the educational institution, so she never walked alone. Thus, never self-employed.

Since IRS conceded the legal fee payment and most all of the ordinary-and-necessaries, it only remains to plug the numbers into a Schedule A, lose the Schedule C, and do a quick Rule 155.

And IRS even concedes the Section 6662(a) accuracy chop.

Tax Court is trying valiantly to catch up with the tech revolution, but hasn’t yet. So Toni Marie Ognibene must refile her papers from a fixed platform. See Docket No. 9464-12 L, filed 2/6/14.

Toni Marie, obviously techsmart and streetwise, was ahead of Tax Court, and certainly ahead of William (“Old Bill”) Wise, Esq., of my blogpost “(Old) Technophobes, Rejoice!”, 12/18/13, and poor Louis Samuel, Esq., of my blogpost “Practicing in Tax Court Can Be Hazardous”, 1/28/14.

Here’s Ch J Michael B. (“Iron Mike”) Thornton: “…petitioner submitted two documents for electronic filing: (1) a Motion for Extension of Time and (2) a Notice of Change of Address. The Court’s electronic filing system does not currently support the submission of documents from a smartphone. Accordingly, cover pages were generated and filed in the case, but the documents that petitioner attempted to upload and file were not properly made a part of the record of this case. Petitioner may resubmit these documents for filing in this case. However, this should be done using a platform other than an unsupported smartphone.” Order, at p. 1.

Get with it, Tax Court. I don’t use smartphones, but I am in the “old” category for sure. The younger generation will soon be looking at Sir Andrew, my 2007-vintage  MacBook 13.3, like an escapee from the Smithsonian.

Join the 21st Century.

Target and Neiman-Marcus were bad enough, but now these cybercriminals have besmirched the fair name of the United States Tax Court.

From the Tax Court website homepage today, 2/6/14:

“SCAM ALERT: The United States Tax Court has been notified of individuals receiving an official looking letter/e-mail which appears to originate from the Court and solicits money from its recipient.  Please be aware the United States Tax Court does not solicit money via letter or e-mail.   If you are in receipt of such a solicitation letter or e-mail, please immediately report it to the Internet Crime Complaint Center (IC3 – www.ic3.gov) and your local law enforcement office.”

No opinions or designated orders again today, 2/5/14, so again the diligent blogger trudges through volumes of “pay the $60 already” and “Simon Says answer the motion”.

The alternative is to romp through the muddy field of Rev. Proc. 2014-16, effective 1/24/14, among whose purposes are to provide: “…the procedures by which a taxpayer may obtain the automatic consent of the Commissioner of Internal Revenue to change to the methods of accounting provided in §§ 1.162-3, 1.162-4, 1.263(a)-1, 1.263(a)-2, and 1.263(a)-3 of the Income Tax Regulations and §§ 1.162-3T, 1.162-4T, 1.263(a)-1T, 1.263(a)-2T, and 1.263(a)-3T of the temporary regulations. This revenue procedure also modifies Rev. Proc. 2011-14 and provides the procedures by which a taxpayer may obtain the automatic consent of the Commissioner of Internal Revenue to change to a reasonable method described in § 1.263A-1(f)(4) for self-constructed assets and to change to a permissible method of accounting under section 263A(b)(2) of the Internal Revenue Code and § 1.263A-3(a)(1) for certain costs related to real property acquired through foreclosure, by deed in lieu of foreclosure, or in another similar transaction. Finally, this revenue procedure also modifies section 3.0 of the APPENDIX of Rev. Proc. 2011-14 regarding a change to the method of accounting described in Rev. Proc. 2011-43, 2011-37 I.R.B. 326, for taxpayers in the business of transporting, delivering, or selling electricity.” Rev. Proc. 2014-16, at pp. 1-2.

Sorry, readers, this is not my primary area of interest. I leave that sort of thing to the trade press, where battalions of CPAs at Big Whatever-The-Number-Is firms grind out newsletters, blogs and webinars.

No, today I would respectfully draw the reader’s attention to an off-the-bencher from The Judge Who Writes Like a Human Being, a/k/a The Great Dissenter, Judge Mark V. Holmes, decided 1/10/14, but filed 2/5/14, Lori A. Harris, Petitioner and Kenneth Donnelly, Intervenor, Docket No. 14290-12.

As is obvious, this is a Section 6015 innocent-spouser. All the facts are stipulated.

Lori and Ken split during the year at issue, but Ken prepared the joint 1040, and had Lori come over at 9 p.m. on April 15 of the next year, put the form in front of her and told her to sign. They’d never had tax troubles before, Lori says she was tired, had no time to get to a tax pro to scope out Ken’s arithmetic, so she signed.

Ken disclosed all their income and took no unwarranted deductions. But he didn’t include the 10% Section 72(t) chop for premature withdrawals from his IRA.

So IRS hits them both with a $6300 deficiency and a $1300 penalty. Lori claims innocence, IRS says no, and Lori petitions. While her petition is pending, IRS’ trial counsel agrees Lori is innocent, but Ken intervenes (as is his right, says Judge Holmes; when Judge Holmes makes remarks like that about a party, that party is in for a rough trip).

IRS’ guidelines are now found in Rev. Proc. 2013-34. See my blogpost “Innocence Is Bliss”, 1/6/12, which I optimistically subtitled “Less Work for Us Tax Court Bloggers?”. There was plenty of work until Rev. Proc. 2013-34 became final, but here it is, retroactively applied by its terms to Lori.

And though Tax Court must consider the guidelines in Rev. Proc. 2013-34, Tax Court isn’t bound by them.

Lori and Ken weren’t making fraudulent transfers (transfers pursuant to a divorce decree don’t count), knowingly trying to defraud the government, or hiding assets, and Lori’s sole basis for innocence is Section 6015(f) equitable relief. Now the issue of whose tax incident gave rise to the deficiency is a little tricky, as Lori and Ken were Californians, and the Bear Republic is community property country, so Lori has a one-half share in Ken’s IRA distributions under local law. But there’s a savings clause in Rev. Proc., 2013-34 that lets innocent spouses off the hook if they’re only on the hook because of community property laws.

So Lori crosses the Rev. Proc. 2013-34 threshold; now to see if she can pass the balancing-of-factors test. Judge Holmes: “The general rule is that I have to look at all the factors and all the facts and circumstances, and that I’m not limited to any particular group of factors. Nevertheless, as Tax Court has generally done, we look at the Revenue Procedure in effect at the time. This is particularly noteworthy in this case, because the current Revenue Procedure in Section 3.01 states that this Revenue Procedure ‘gives greater deference to the presence of abuse than [previous Revenue Procedures]. The Service  recognizes that the issue of abuse can be relevant with respect to the analysis of other factors, and can negate the presence of certain factors. This change is entitled to give greater weight to the presence of abuse when its presence impacts the analysis of other factors.’” Order, at pp. 9-10.

Now abuse is not defined in any of the Rev. Procs., old or new, except that it’s less than duress. Duress means “…any constraint of will so strong that it makes a person reasonably unable to resist demands to sign a return.” Order, at pp. 10-11.

But that negates innocent spousery, because a return signed under duress is not a joint return at all.

“But it’s abuse as a factor by itself, and not just as a relevant bit of evidence about one spouse’s state of knowledge, that I’m looking for in this case. It’s an important point because it liberates me from focusing on the moment the return is signed. The relevant abuse here precedes that moment. And there’s no suggestion in any of the Revenue Procedures, including the current one, or any other source of relevant law that limits my consideration to whether a spouse was abused only to abuse that causes a particular instance of non-compliance with the tax law.” Order, at p. 11.

So it’s not only “sign or I’ll slug you”, but rather a pervasive pattern.

Now, as Judge Holmes said in Brett Van Alen and Kimberlee Van Alen, 2013 T. C. Memo. 235,  pay attention: “This leads to the heart of my inquiry on this particularly important factor. What is abuse for purposes of innocent spouse relief? If there was verifiable physical harm, that would likely be sufficient. And here, in fact, there was verifiable physical harm to the two daughters, albeit not Ms. Harris, caused by Mr. Donnelly.” Order, at p. 12.

But there’s what lawyers call a caveat: “One has to be aware of the danger that requesting spouses, in trying to escape financial liability, may easily exaggerate the level of non-physical abuse. Innocent spouse cases often spring from the dissolution of troubled marriages, and there’s an obvious incentive to vilify the non-requesting spouse.” Order, at p. 12.

Ken never abused Lori, only their two daughters, causing permanent injury to one child’s shoulder, and constantly belittling them, to the point that neither wanted anything to do with Ken. You can read for yourself what Judge Holmes found in the divorce proceedings; it isn’t pretty.

But it’s enough to cause Judge Holmes to find Ken abused Lori.

“In the applicable Revenue Procedure, the Commissioner has instructed his employees– and I think it’s a good thing, and the Court will do it as well in this case– that abuse of the requesting spouse’s child or other family members living in the household may constitute abuse of the requesting spouse, depending on the facts and circumstances….” Order, at pp. 16-17.

Going through the factors, Judge Holmes tosses Ken and holds Lori innocent.

It’s unfortunate this off-the-bencher can’t be cited. But it sure can be argued.