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 And Learn About Insurance, If You’re Interested

An alumnus of DePaulUniversity, its law school, and Georgetown University School of Law, Judge Nega joins the Tax Court bench today. Welcome, Judge.

And it’s a good day to join, as Judge Vasquez has presented us with ninety-eight (count ‘em, 98) pages of insurance company loss reserve actuarial analysis, in Acuity, a Mutual Insurance Company, and Subsidiaries, 2013 T. C. Memo. 209, filed 9/4/13.

Don’t worry, I’m not going through the whole nine yards here. In the first place, the case is well outside the range of matters encountered by the in-the-trenches tax preparer for whom I’m writing this blog.

In the second place, it’s a lot more about penguins than anyone but a fellow-penguin would want to know, and maybe not even them. But Judge Vasquez gives a good introduction to insurance accounting and taxation in relatively simple language. So you might want to read from around page 8 to page 17 for background, and beyond if it grabs you.

The numbers are huge, so that a win by IRS would result in a bushelbasketful of tax and a real hit to Acuity, a mutual insurance company out of Wisconsin.

For starters, the year-one deficiency is $1.1 million, but year-two rises to $31 million, and that got me a phonecall from Mr Patrick Temple-West at Reuters, thinking there’s a big story here.

Well, there really isn’t, as this is a case of dueling actuaries and a review of some obscure Code Sections. In short, insurance company deductions for reserves for losses is a “fair and reasonable” test. Acuity’s actuarial hotshots got the numbers close enough for National Association of Insurance Commissioners standards, and also the actuarial sciences people. IRS’ guys couldn’t show otherwise, despite a lapse in language by one of Acuity’s vice-presidents in a letter to A. M. Best, the insurance raters.

No startling legal theories, so nothing really exciting here. Unless you’re an actuary, that is.

And I have to compliment Acuity’s counsel; they really woodshedded their experts. See my blogposts “Woodshedding Your Experts – Stobie Creek Part Deux”, 1/10/11, and “Woodshedding Your Expert – Redivivus”, 8/6/13.

Yes, he’s at it again, Judge Mark V. Holmes, The Great Dissenter, a/k/a The Judge Who Writes Like A Human Being.

Today he has a double-header, first writing 2013 T. C. Memo. 207, James R. Dixon, filed 9/3/13, overturning IRS’ levy on Jim and wife Sharon’s home for unpaid income taxes (because they did pay, albeit late, and via their wholly-owned corporation, as withholding taxes). Judge Holmes reviews the history of the Dixons and Tryco, their corporation, and finds IRS can only collect once. The records for the relevant years are lost, so IRS claims  Jim and Sharon can’t prove what was supposed to be withheld. Judge Holmes, however, finds Jim’s and Sharon’s testimony, and such records as remain from their criminal cases (yes, they were convicted) credible, and knocks out the levy. Even though the years of the non-withholding are closed, Tax Court can review those years to ascertain how to deal with a year that is open. And IRS’ levy on Jim and Sharon’s home gets lifted as the tax was paid.

So far, so good.

But the second opinion finds The Great Dissenter dissenting, even though the majority, per Judge Lauber, holds for Jim and Sharon in 141 T. C. 3, filed 9/3/13.

Jim and Sharon had income tax liabilities arising from their employment by their wholly-owned C Corp Tryco. So did Tryco, for not withholding when it should. After Jim and Sharon get nailed for their various delictions, they borrow money against their home and send the money to Tryco (which is more or less out of business), which in turn remits checks to IRS with Forms 941 and letters directing IRS to apply payments to Jim’s and Sharon’s withholding. But these are for the restitution and tax loss sustained by the government on account of Jim and Sharon’s criminal convictions.

IRS did, but then changed its mind, relying on the “withheld at the source” language of Section 31, and these payments clearly weren’t, and also mindful of the $23 million in payroll withholdings Tryco still owes.

IRS says an employer can’t allocate late withholdings to individual employee-taxpayers, but Judge Lauber says no, and cites a number of reclassification cases, where the employer can pay the tax as to one member of an employee class and sue for a refund, to challenge the reclassification of all members. Withholdings are “divisible” taxes, that is, allocated to a particular individual account.

Now the Section 6205 adjustment period for underwithholdings is long past for the years at issue. So Jim and Sharon don’t get the benefit of the Section 31 “even if not paid by the employer” credit for the late paid withholding.

But Judge Lauber and the majority do allow the credit for the designated payments made late by Tryco. IRS argues Tax Court has no jurisdiction over employment taxes. True, says Judge Lauber, but these are income taxes for Jim and Sharon. The amounts paid are not at issue; crediting them is.

Now this is a levy case, so either de novo or abuse-of-discretion applies, but either way, IRS must credit the payments as Tryco directed.

IRS’s general policy is that voluntary payments (and these were, even though Jim and Sharon made them as part of their criminal plea deal) must be credited as the taxpayer directs. And there’s much precedent to support this. For further details read Judge Lauber’s opinion.

And the policy prevents IRS from double-dipping–collecting the same tax twice, as in TFRPs and withholdings. To the extent the employee has paid the tax, the TFRP penalty is abated. This is so even if the Code does not provide explicitly.

Now of course Jim and Sharon owe interest and penalties. The late payment doesn’t wipe that out, as the taxes were not withheld “at the source” or within the correction timeframe of Section 6205. IRS can levy for those, if it wishes.

And Judge Lauber is not discussing any of Tryco’s tax incidents from this arrangement, or whether the payment by Tryco is additional compensation to Jim and Sharon.

Judge Goeke concurs, but points out that the majority rules on the law. Judge Holmes found the facts in 2013 T. C. Memo. 207, and the majority is not going behind those findings, including without in any way in limitation of the generality of the foregoing, as the high-priced lawyers say, the credibility of Jim and Sharon. “The Court is also aware that James Dixon pleaded guilty to Federal tax evasion for 2006, United States v. Dixon, No. 4:12CR00521-001 (S.D. Tex. Apr. 1, 2013), the same year petitioners testified that they knew nothing about the nonpayment of withheld taxes for tax years 1992-95. Similarly, Sharon Dixon was also later convicted for subsequent Federal tax crimes. United States v. Dixon, No. 4:12CR00522-001 (S.D. Tex. Feb. 13, 2013).” 141 T. C. 3, at pp. 39-40. Apparently Judge Goeke, and Judges  Wherry, Kroupa, Morrison and Lauber are less than thrilled with the credibility of Jim and Sharon.

But Judge Holmes, not a whit dismayed, charges to the front. “Imagine that a check arrives at the IRS from John Green with a letter that says ‘This check is to be applied to my tax bill for 2013. Also, please credit my friend Joe Black’s account for the same amount. He gave me the money that let me write this check and I’d like him to benefit as well.’ If things work as they should at the Service, Green’s account should be credited; and the suggestion that the same check should be credited for Joe Black’s account would cause some tittering, or maybe just a puzzled look on the face of the IRS employee opening the envelope.” 141 T. C. 3, at p. 41.

Now Judge Holmes agrees with the majority that the Section 31 credit doesn’t apply here, or else Jim and Sharon would be off the hook for interest and penalties. But designated payments don’t help either, as Section 31 says the employee only gets credit where the wages were withheld at the source. So while Tryco’s payments bailed out Tryco, they do nothing for Jim and Sharon even though they supplied the money (presumably as a capital contribution) to Tryco.

Judge Lauber and the majority can’t override the clear statutory bar to crediting payments made after the Section 6205 self-correct period is over. Yes, there’s an asymmetry here, but Congress should fix it, not Tax Court.

“What colors these cases, and makes the Dixons look sympathetic, is that the money Tryco paid is money that the Dixons contributed to the corporation after they took out a home-equity loan for almost a half-million dollars. It was this money that they sent to Tryco, and had Tryco pay over to the IRS….The Dixons couldn’t have been much more clear… they told the IRS to pay the taxes “of the corporation,” the same entity that formally sent along the payment. The Dixons did ask the IRS to apply the payments to the portion of Tryco’s employment-tax bill that was attributable to Tryco’s failure to withhold taxes from James’s and Sharon’s wages. But that isn’t the same thing as asking the IRS to apply the payments directly towards the Dixons’ individual income-tax liabilities, because Tryco was asking the IRS to apply the payments toward a specific part of Tryco’s tax bill.” 141 T. C. 3, at pp. 43-44. (Emphasis by the Court).

Now let’s give a Taishoff “good try” to Larry Campagna, Esq., Jim’s and Sharon’s astute attorney. Larry testified he used the Tryco maneuver because “had Mr. and Mrs. Dixon remitted the income taxes directly for their account, then the 941 liability for Tryco would not have been reduced by the payment, and the Government would have been asking for a double collection of the same money on the income tax side and the employment tax side.” 141 T. C. 3, at p. 44.

No, says Judge Holmes, because Section 3402 would have credited Tryco for the payment Jim and Sharon made, but not vice versa.

But Larry was hunting bigger game than the $92K involved here. “By instead contributing the money to Tryco–their employer–and then having Tryco pay it as employment tax, the Dixons hoped that the IRS would treat the payments as the IRS treats normal withholding payments, which would then erase many years of interest and penalties.” 141 T. C. 3, at p. 45 (Footnote omitted, but read it; the interest was over $530K. And when Larry testified that he wasn’t worried about the interest when he planned this, Judge Holmes didn’t find “this particular part of his testimony credible”.)

Now for the big story: “The majority glosses over some of the other tax consequences of its decision today. The Dixons had to contribute $602,119 to Tryco because Tryco wasn’t doing much business anymore. The Dixons were controlling shareholders, and their capital contributions would have increased their bases in the Tryco stock. Tryco’s employment-tax burden is smaller to the extent of the payments that it made, but it is still so large that the company stock may still be worthless, manufacturing a tidy loss for the Dixons. When the Dixons eventually abandon or sell Tryco, they’ll get a bigger loss than they otherwise would have because of their increased bases.

“And we shouldn’t forget that Tryco was the Dixons’ employer. As the majority acknowledges… employers that pay their employees’ bills are treated as if they were paying wages instead….. But Tryco’s payments were in 1999 and 2000, meaning the Dixons have untaxed income for 1999 and 2000, years for which assessment is now barred by the statute of limitations (assuming that the Dixons began filing their tax returns on time). We also shouldn’t forget that paying wages–this time in the form of paying tax bills–also comes with its own withholding tax obligations for Tryco under section 3403, which it, once again, won’t have fulfilled.” 141 T. C. 3, at pp. 57-58. (Citations omitted).

Finally, with a really loud “good try” to Larry Campagna, Esq., : “The Dixons did what they did because they were swinging for the fences–they wanted to reduce Tryco’s employment-tax bill, reduce their own income-tax liabilities, bump up their bases in probably worthless Tryco stock, and use section 31 to erase many years of penalties and interest. I don’t blame them for trying–the law was, and after today, will remain, unclear.” 141 T .C. 3, at p. 59.

But Congress created the asymmetry–the employer gets the break when the employee pays late, but not the other way around. And Congress should fix that, not Tax Court. Judges Halpern and Buch agree.

As I was lamenting the absence of good material for this blog yesterday, along comes Judge Posner and the Seventh Circuit, who lays a beating on John Rogers and his DADs, along with a sideways slap at Judge Wherry, in Superior Trading, LLC, et al., v. Com’r, Nos. 12‐3367, 12‐3368, 12‐3369, 12‐3370 and 12‐3371, decided 8/26/13.

Judge Posner affirms Judge Wherry’s deconstruction of Mr. Rogers’ phony partnerships among US highrollers looking for writeoffs and a Brazilian retailer with bum paper. For background, see my blogposts “More Shell Games”, 9/2/11, “Mr. Rogers’ Neightborhood – The Adventure Continues”, 11/23/11, and “Night Of The Living Dead – Mr. Rogers’ Neighborhood”, 5/10/13.

So no deductions. Therefore penalties: but is it the 20% substantial understatement or the 40% substantial overvaluation? Of course, IRS wants the 40% hammer that Judge Wherry gave them, but that’s not cut-and-dried.

After all, if the deal was a sham from the get-go, then the valuation, over or under, is beside the point, no? See my blogpost “It’s A Sham – And That’s An Understatement – Not!”, 9/25/12.

No, says Judge Posner: “There is a disagreement among courts of appeals concerning the applicability of the penalties for misstating valuation when the transaction involving the overvalued asset is itself disregarded because it lacks economic substance. Compare, e.g., Crispin v. Commissioner, 708 F.3d 507, 516 n. 18 (3d Cir. 2013); Gustashaw v. Commissioner, 696 F.3d 1124, 1136–37 (11th Cir. 2012), and Fidelity Int’l Currency Advisor A Fund, LLC v. United States, 661 F.3d 667, 672 (1st Cir. 2011), with Keller v. Commissioner, 556 F.3d 1056, 1059–61 (9th Cir. 2009), and Heasley v. Commissioner, 902 F.2d 380, 383 (5th Cir.1990). The majority view, which we now join, is that a taxpayer who overstates basis and participates in sham transactions, as in this case, should be punished at least as severely as one who does only the former. The Supreme Court has granted certiorari to resolve the circuit conflict. United States v. Woods, 133 S. Ct. 1632 (2013).” Decision, at pp. 9-10.

And Judge Posner has little sympathy for the “partners” in Mr. Rogers’ deals. “The appellants would have avoided the penalty had they proved they had “reasonable cause” to deduct the built‐in losses. 26 U.S.C. § 6664(c)(1); see United States v. Boyle, 469 U.S. 241, 250–51 (1985); University of Chicago v. United States, 547 F.3d 773, 785 (7th Cir. 2008); Richardson v. Commissioner, 125 F.3d 551, 558 (7th Cir. 1997). They didn’t prove that. They were all just tools—extensions, really—of Rogers, an experienced tax lawyer who had more than 30 years of experience in the taxation of international business transactions. The tools had no more autonomy than his fingers. There is not even a colorable basis for the tax shelter that he created and the appellants implemented. There are as we’ve seen multiple grounds for disallowing the partnership losses that Rogers engineered (in fact more grounds than we’ve bothered to discuss), and all are grounds that he either knew about or should, given that he is no tax neophyte, have known about.” Decision, at p. 10.

Now, having affirmed Judge Wherry all along the line, Judge Posner waxes waspish, parenthetically: “(We note with disapproval the loquacity of, and lame attempts at humor in, the Tax Court’s opinion, which include making fun of Rogers’ name, as in the section title ‘Mr. Rogers’ Neighborhood.’)”. Decision, at pp. 2-3.

“Lame attempts at humor” from that whimsical jurist, Judge Wherry? Aw, Judge Posner, can’t ya take a joke?

Or maybe not, but you have to ask.

I thought I’d make it through a three-day weekend without my Tax Court fix, and I almost did, as I’m writing this just as my ship’s clock has struck five bells. But the urge is strong, so I had to hunt up the most likely order among Friday’s dross. And even though it’s a thrice-told tale, here’s the story of Harold W. Kuisel, Jr., Docket No. 19849-12, filed 8/30/13, as told by Judge Buch, the latest luminary on the Tax Court bench.

Hal starts off with what he calls “Petitioner’s Motion to Compel Respondent’s Compliance with Rules Governing Interrogatories and Requests for Production. Mr.Kuisel attached to his motion a copy of his request for production and interrogatories dated November 20, 2012, a copy of a Branerton letter from respondent dated December 20, 2012, and a letter from Mr. Kuisel to respondent dated February 6, 2013.”  Order, at p. 1.

You’ll remember the oft-quoted Branerton case, 61 T.C. 691 (1974), which states the well-worn “play nice and discover informally” rule. See my blogpost “Can Tax Court Be Habit-Forming?”, 12/20/11; I’ve cited Branerton at least eight (count ‘em, eight) times since then.

Well, Hal has bypassed Branerton, and that, as we know well, is a no-no. Judge Buch puts Hal right: “The documents petitioner attached to his motion reflect that Mr. Kuisel has made no attempts at informal discovery, such as simply requesting from respondent the documents that were used to create the substitute for return under section 6020(b) (to which he is entitled). However, the requirement of informal discovery continues and the document petitioner sent to respondent with interrogatories and requests for production of documents is formal, despite the title given to it by petitioner of ‘Informal Discovery Request’. An insistence on ‘compliance with his formal discovery requests in advance of any conference between the parties does not effectively present an opportunity for the “discussion, deliberation, and an interchange of ideas, thoughts, and opinions between the parties” that our Rules contemplate.’ Petitioner may continue to proceed in writing if he prefers, but that writing should not be in the form of making demands.” Order, at pp. 1-2. (Citations omitted).

Now Judge Buch set up a conference call with IRS and Hal, and it appears they’re playing nice and having a show-and-tell. They may even get around to the “discussion, deliberation, and an interchange of ideas, thoughts, and opinions between the parties that our Rules contemplate.”

Down at National Harbor yesterday, one of the TIGTA Deputy IG’s, R. David Holmgren, gave us an overview of what TIGTA does. I asked him after the lecture why TIGTA didn’t deal with the unending stonewalling by the Whistleblower Office, which seems to spend its waking hours denying claims when they’re not claiming that they haven’t determined anything. I cannot disclose his reply, here or elsewhere, as I asked informally.

See my blogposts “The Whistleblower Blows It”, 6/20/11, and “Qui Tam?” 9/12/12. In the former, I commented upon the case of William Prentice Cooper, III, 136 T.C. 30, released 6/20/11. So does STJ Daniel A. (“Yuda”) Guy, Jr., in blowing up would-be whistleblower Roy J. Meidinger, Docket No. 16513-12W, in a designated hitter filed 8/30/13.

The usual story: Roy turns up alleged skullduggery, sluggery and thuggery at a 501(c)(3) and drops a Form 211 on Bullet Bob Gardner, the retiring chief of the Whistleblower Squad. Remember Bullet Bob and his skirmishes with would-be Whistleblower Joe Insinga? No? Then check out my blogpost “A Voyage Of Discovery”, 3/30/12.

Here’s STJ Yuda’s story: “The Whistleblower Office forwarded petitioner’s information to the IRS Exempt Organizations Division and the Large Business and International Division. After reviewing petitioner’s original information and supplemental information, the Commissioner prepared Form 11369, Confidential Evaluation Report on Claim for Award, explaining his decision not to proceed with an administrative or judicial action against the taxpayers in question. … Robert Gardner, the Program Manager for the Whistleblower Office, sent a letter to petitioner stating that the information he provided did not result in the collection of any proceeds, and, therefore, he was not eligible for an award under section 7623.” Order, p. 2.

Roy claims IRS abused its discretion, but IRS counters with the Cooper case–no money, no award.

Roy comes back, claiming he had a contract with the IRS, and cites the Tucker Act, 28 USC §1491(a), and demands specific performance and binding arbitration.

Of course, that argument bites the dust. Judge Yuda says that Section 7623 controls Whistleblowing, and doesn’t go into the statutory language that places jurisdiction over Tucker Act claims with the Court of Federal Claims or the USDCs, but leaves out Tax Court.

Not surprisingly, Roy’s demand for relief doesn’t even get the usual “we ain’t got no equitable jurisdiction”, and anyhow Tax Court couldn’t order binding arbitration even if they did have equitable jurisdiction.

So Roy is tossed. “It is well settled that the threshold for a whistleblower award is the Commissioner’s collection of proceeds upon which an award can be based. That threshold not having been crossed here, petitioner is entitled to no award. There is no genuine issue as to any material fact, and we will dispose of this case in respondent’s favor on the basis of Cooper v. Commissioner, 136 T.C. at 601.” Order, at p. 3. (Footnote omitted).

OK, so as far as Tax Court is concerned, once IRS says there’s no money, that ends the Whistleblower’s relationship with IRS. To quote Mr. Kipling,  “If a year of life be lent her/If her temple’s shrine we enter/The door is shut/We may not look behind”.

Now lest I be misunderstood, I agree that the Courts’ role in reviewing administrative determinations by the Executive branch should be limited. We still have some vestige of a Constitutional separation of powers. There are places where courts cannot, and should not, go.

But the administrative agency here has its own check and balances, provided by the Legislative branch. There’s TIGTA, whose mission is “(T)o provide integrated audit, investigative, and inspection and evaluation services that promote economy, efficiency, and integrity in the administration of the internal revenue laws.”

Might could be y’all should take a look at how the Whistleblower Office is doing.

See my blogpost “A Dangerous Thing”, 4/13/11, for my take on Alexander Pope’s famous verses on drinking deep from the Pierian spring.

Well, another Alexander, Dr. Stanley by name, and Ruth, his wife, didn’t even sip much, and it helped them avoid the 75% fraud hammer from the hand of Judge Goeke in Stanley L. Alexander and Ruth A. Alexander, 2013 T. C. Memo. 206, filed 8/29/13, which I finally get to blog as I’m homeward bound from National Harbor, MD,  and the 2013 IRS Nationwide Tax Forum, that well-known fount of knowledge.

Stan and Ruth get hooked up in one of those offshore employee leasing roundy-rounds. Ruth claims to be just a farm girl, but she did bookkeeping for Stan and her pleas of innocence are belied by her participation via her grantor trust and the absence of any records of her farming activity.

For a quick review of the offshore leasing game, see my blogpost “What Not To Say”, 11/3/11, the tale of Merry Perry Browning, whose case is cited by Judge Goeke here. Instead of the credit cards Merry Perry and Mrs. Merry Perry used, Stan and Ruth used revolving credit lines from their offshores, and there were many, to funnel the cash parked offshore back to Stan and Ruth. From Ireland to Isle of Man to Hungary runs the tangled trail, and Judge Goeke runs them all down.

If old-time wheeling and dealing sings to you, read the full opinion.

Of course Stan gets nailed for underreporting, failure to file, failure to pay, and accuracy, and his controlled corporation gets nailed for nonpayment of withholding taxes. As aforesaid, Ruth is in there with Stan, jointly and severally.

Now Stan is a retired Air Force light bird and a plastic surgeon of repute. He was an honors graduate of Otterbein College with an MD from Ohio State. Ruth had a BFA from Wright State in Dayton, OH, and took accounting and computer courses thereafter. Not a stupid couple, and Judge Goeke makes that clear.

So after blowing up the employee leasing scam and eviscerating the farming claims and the unsubstantiated deductions, Judge Goeke turns to penalties. And he hands out plenty, to Stan and his corporation, and Ruth.

But when it comes to fraud, Judge Goeke says IRS didn’t prove it clearly and convincingly. IRS shows that Stan was in the thick of the wheeling and dealing, and Ruth was by his side, although the deals were concocted and run by a couple of lawyers Stan met through an offshore peddler of leasing deals.

But that’s not enough for Judge Goeke. “While Dr. Alexander is highly educated and a very accomplished medical doctor, respondent [IRS] did not establish that he understood complex tax law issues. To be sure, Dr. Alexander has a basic understanding of corporate structures and filed his own tax returns, but nothing in the records establishes that he understood the complex tax laws involved with the OEL [overseas employee leasing] transaction, nor that he possessed the knowledge to determine that the OEL transaction did not comply with applicable tax laws. Similarly, Mrs. Alexander does have some accounting education, but she does not possess the education or experience for the Court to hold her to a higher level of understanding when it comes to the OEL transaction.

“The evidence shows that Messrs. Kritt and Reiserer [the promoters] explained the OEL transaction in detail to Dr. Alexander and assured him the plan complied with the tax laws. There is nothing in his education or experience that would indicate that he should have known differently. Messrs. Reiserer and Kritt structured and implemented every aspect of the OEL transaction. Dr. and Mrs. Alexander relied upon the assurance of Messrs. Reiserer and Kritt that the OEL plan conformed to the tax laws. Dr. and Mrs. Alexander do not possess the education and experience to understand that the plan did not conform to the applicable tax laws.” 2013 T. C. Memo. 203, at p. 44.

So, unlike the famous frankfurter, neither the doc nor Ruth must answer to a higher authority when it comes to knowing tax law.

Of course, their asserted good-faith reliance on the promoters gets sunk, as the promoters made the deal happen.

But maybe a little knowledge isn’t such a dangerous thing, after all.

Footnote for a lady– This is my post number 555–Triple Nickel.

The readers of my blogposts (“the few, the happy few”, to paraphrase a much finer writer) should not think I have a grudge against tax matters partners. It’s true I’ve stated that their duties as partners exceed those as tax matterers; see my blogpost “Bang – A Warning to Tax Matters Partners (and their advisors)”, 1/5/11, and “Wise Guys?”, 4/22/13. I’ll come back to “Wise Guys?” later.

But I feel it necessary to remind the TMPs, as they’re known in TEFRA circles, and their colleagues the notice partners and the five-percenters, that they’re all in it together. And therefore the exercise of diligence and prompt internal communication are essential.

As an ornament to the Supreme Court once remarked, “A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior… the level of conduct for fiduciaries [has] been kept at a level higher than that trodden by the crowd.” (Citation omitted).

So today’s illustration is found in 2013 T.C. Memo. 202, filed 8/28/13, involving Biomage, LLC, Front Row Enterprises LLC, Tax Matters Partner. It’s the usual FPAA and Tax Court petition case.

IRS moves to dismiss the petition as untimely.

Front Row claims IRS never mailed it the FPAA, but if it did, then the petition was timely, as they sent it within 150 days of the date that IRS mailed a notice partner a copy of the FPAA.

Ch J Thornton brushes aside the claim by Front Row that they never got the FPAA, and that the USPS Form 3877 proof of mailing misstates the tax year involved; the IRS employee who prepared the 3877 swears it was a mistake. And USPS confirms delivery of the certified letter to the address given by Front Row.

“Petitioner asserts alternatively that if the IRS mailed an FPAA to petitioner, then the petition was filed timely as to the notice partner copy so as to invoke the Court’s jurisdiction. To that end, petitioner contends that it filed the petition as a partner other than the TMP within 150 days of the day that the IRS mailed petitioner the notice partner copy in its capacity as a notice partner of Biomage. We disagree with petitioner as to its understanding of the 150-day petitioning period (i.e., 90 days for the TMP plus 60 days for notice partners). Contrary to petitioner’s suggestion that the period begins on the day that the notice partner copy was mailed to petitioner, section 6226(a) and (b) requires that the count begin on the day that the FPAA was mailed to the TMP. See Han Kook LLC I-D v. Commissioner, 102 T.C.M. (CCH) at 259. The count, therefore, began on June 4, 2010, and petitioner’s petition was untimely.” 2013 T. C. Memo. 202, at p. 12.

So Han Kook cooks Biomage’s goose (sorry, guys).

And as I said in “Wise Guys?”, “Tax Matters Partners, read and heed; send in that petition at once. And five-percenters and notice partners (Section 6226(b)(1), check in with the TMP and be ready to roll on Day 91.”

No, other plant life, namely green supplements, flax seeds and D-3, in the case of Kenneth Delano Humphrey, 2013 T. C. Memo. 198, filed 8/28/13.

So Paul Simon doesn’t feature in today’s blogpost.

KD was an officer in the US Dep’t of Homeland Security during the year at issue, and scheduled numerous deductions in his Schedule A, most of which Judge Goeke blows off for want of substantiation. But KD’s plant life gets a juridical OK.

“As part of phytotherapy, petitioner claimed as medical expenses the purchase of various natural supplements (green supplements, flax seeds, and D-3) to alleviate his prostate cancer. The regimen was based on medical guidelines by Johns Hopkins Medical Urology, Harvard Medical School, and the Mayo Clinic. Petitioner has been under the care of two doctors since 2008.” 2013 T. C. Memo. 198, at pp. 3-4.

“Petitioner seeks to deduct supplements and health foods as a medical expense. Medical care deductions are not strictly limited to traditional medical procedures but include amounts paid for affecting the structure of the body. Medical expenses for nontraditional medical care may be deductible under the broad view of medical care. The term ‘medical care’ includes amounts paid ‘for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body’.” 2013 T. C. Memo. 198, at p. 7. (Citations omitted).

Judge Goeke is willing to give KD the benefit of the doubt: “To prevail, petitioner must show that the health foods and supplements cure, mitigate, treat, or prevent his prostate cancer or affect any structure or function of his body. To be deductible, the treatment must be for the specific purpose of alleviating the prostate cancer, rather than for the general well-being of petitioner. Sec. 1.213-1(e)(1)(ii), Income Tax Regs. It is difficult to determine the difference, but here we feel petitioner has proven that the health foods and supplements were for alleviating his prostate cancer rather than just for general health.

“Petitioner provided receipts from a discount health food store to substantiate purchases of green supplements, flax seeds, and D-3. It is pertinent to determine whether the health foods and supplements were prescribed by a doctor. From the record we find that the expenses for health foods and supplements have been substantiated. Petitioner provided credible testimony that his doctors suggested the health foods and cited medical guidelines by Johns Hopkins Medical Urology, Harvard Medical School, and the Mayo Clinic.” 2013 T. C. Memo. 198, at pp. 8-9.

Takeaway- Don’t overlook those supplements. Good medical evidence wins the day.

 Will deter that obliging jurist Judge Gustafson from bringing a case on to trial. Although Frank is dead and Dulce’s health has seriously deteriorated since they petitioned in 2009, Judge Gustafson isn’t prepared to wait much longer to deal with whatever the issues might be in Estate of Frank San Pedro, Deceased, Alberto E. San Pedro, Personal Representative, and Dulce San Pedro, Docket No. 11905-09, filed 8/28/13.

Trial is set for a date certain less than three months away, but apparently Alberto asked for a continuance. Judge Gustafson doesn’t say who wants the time-out, but in any case he’s not obliging this time.

“The record shows that Frank San Pedro died in July 2009 (several months after the petition was filed) and that Dulce San Pedro’s health has seriously deteriorated. While such circumstances are sometimes a reason to continue a case, a continuance should be granted only if the passage of time will better enable the parties to try the case. In a circumstance like this, a continuance may have the disadvantage of making it only more difficult to locate witnesses and documents relevant to the case. The parties should therefore be aware that the Court will not reflexively grant any further continuance.” Order, at p. 1.

So file a status report, guys, and get with it.