I pointed out in a previous blogpost that Constitutional arguments in Tax Court get a slightly polite version of the tramp’s toss; see my blogpost “Losing My Religion”, 1/17/13, where I noted that such arguments are usually found in protester cases and usually get blown away.

And I pointed out in a more recent blogpost how partners and tax matterers are supposed to tell the IRS where they are, when they change addresses or otherwise move around and about.  See my blogpost  “Wait Just A Minute, Mr Postma”, 7/23/13.

Now if this were just an ordinary mailing address case, I wouldn’t blog it, but it’s a twofer from Judge Thornton, with a recap of partnership-level due process notice and how it’s supposed to be done.

So let’s take a brief look at Estate of Albert Simon, Deceased, Ellen S. Simon, Personal Representative And Ellen S. Simon, 2013 T. C. Memo. 174, filed 7/29/13.

The facts are the usual; the Late Al, before he was late, got himself and Ellen into a son-of-BOSS, a Section 752 mix-and-match of unrecognized gains and recognized losses in a pair of digital option trades. For some quick background, see my blogpost “Woodshedding Your Experts – Stobie Creek Part Deux”, 1/10/11.

Except for a 1% partner, who is nameless and apparently blameless, all the players are alter egos of the Late Al. But when IRS goes hunting for someone to nail with the NBAP, Al isn’t listed as tax matterer (nobody is), so there follows a series of letters, some from Al but most from IRS.

Ellen claims IRS knew about the Late Al, and should have sent the NBAP and FPAA to him. She claims she wasn’t given proper notice.

But IRS cites the then-temporary, subsequently permanent, regulations for letting IRS know partners’ whereabouts. Judge Thiornton: “The IRS’ duty to give a direct or indirect partner notice under section 6223(a) arises only to the extent that the IRS is furnished with readily available information containing the name, address, and profits interest of the partner in either or both of two ways. See Murphy v. Commissioner, 129 T.C. 82, 86 (2007). First, the IRS may be furnished the referenced information through the tax return of the partnership under audit. See id. at 86-87; see also sec. 6223(c)(1). Second, the IRS may be furnished the referenced information through a written statement that meets the requirements of section 301.6223(c)-1T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6784 (Mar. 5, 1987).” 2013 T. C. memo. 174, at p. 15 (Footnote omitted, but I covered this in my blogpost “Wait Just a Minute, Mr Postma”, op. cit., as the high-priced lawyers say.)

Ellen says she got a packet of stuff from IRS during the pre-trial show-and-tell that shows IRS knew right well where she and the Late Al were.

So what, says Judge Thornton. You never sent in the magic paper with the Big Five required points.

“Due process requires that notice be ‘reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.’ Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950); see also Byrd Invs. v. Commissioner, 89 T.C. 1, 6-7 (1987), aff’d without published opinion, 853 F.2d 928 (11th Cir. 1988). The Secretary, in part through specific congressionally delegated authority, has provided a reasonable regulatory procedure to meet that requirement.” 2013 T. C. Memo. 174, at p. 21.

Most important, Ellen never explained why she and the Late Al never sent in the magic statement, or why the Late Al put the old, invalid address on the tax return for the year at issue, when he filed it long after he, Ellen and the partnership had moved away.

The case has an interesting discussion of how penalties are to be dealt with in TEFRA partnership-level adjustments, but those are not often met with by the in-the-trenches preparer, for whom this blog is written. If you do encounter such a situation, where the Section 6662(h) 40% hammer and the Section 6651(a) negligence hammer are about to descend upon your partner-client, read Judge Thornton’s explanation.

The Judge Who Writes Like A Human Being, a/k/a The Great Dissenter, His Honor Mark V. Holmes, has written an Order that should be entitled “Summary Judgment Made Simple”. Though perhaps too simple for the in-the-trenches preparer, it might serve as a handout to clients to explain what to do when they get a Rule 121, and what will happen if they don’t do it.

The Order is Daniel Joseph Vanhook (sic), Docket No. 13284-12SL, filed 7/26/13, although Dan’s surname more properly should be set forth as “Van Hook”, as Judge Holmes does.

Judge Holmes remanded Dan’s NFTL case to Appeals, and when our story opens, Appeals revised its earlier disposition. Here’s the whole story, and I can do no better than quote Judge Holmes in extenso.

“After considering the case again, the IRS was willing to reduce, but not eliminate, Mr. Van Hook’s tax bill and decided that it would keep a lien on Mr. Van Hook’s property until he paid.

“The next step in this process is for the Court to review the IRS’s work, which it does through summary-judgment motions. The IRS will file papers in which the IRS lawyer will argue that no trial is necessary in this case, because (the IRS says) no relevant facts are in dispute — everything is in the record that the IRS Appeals Officer already looked at (and which is called the ‘administrative record’). That motion will argue that, on the basis of these undisputed facts, the Court has to rule in the IRS’s favor.

“The Court will also want to hear from Mr. Van Hook. He will have to file a response to the IRS’s motion. If he disagrees with the facts set out in the IRS’s motion — e.g., there’s something in the record that shouldn’t be there, or something that is missing from the record that should be there — then his response should point out the specific facts in dispute. If he disagrees with the IRS’s argument as to the law, then his response should also set out his position on the disputed legal issues.

“He should label this response ‘Petitioner’s Cross-Motion for Summary Judgment and Response to Respondent’s Motion for Summary Judgment’ on the first page so that it gets filed as soon as the Court receives it.” Order, at pp. 1-2.

Judge Holmes refers Dan to the FAQs found on the taxpayer information link on the Tax Court website.

But Judge Holmes warns Dan that if he doesn’t respond, then, “if appropriate”, he will lose.

Can’t be clearer than that.

Not the Rick Astley 1988 hit, but rather a reiteration of the essential elements of a scenic easement, as Judge Haines deals with a Rule 161 reargument in Kayln M. Carpenter, et al., 2013 T.C. Memo. 172, filed 7/25/13.

This is a supplemental memo, as Kayln already lost in 2012 T. C. Memo. 1. But now Kayln claims Tax Court didn’t apply the learning in Gordo and Lorna Kaufman’s case. See my blogposts “A Joy Forever”, 4/4/11, and “‘A Joy Forever’–Maybe Not”, 7/20/12.

But Gordo’s and Lorna’s case had to do with termination of a scenic easement by reason of a mortgagee’s reservation of casualty insurance or condemnation proceeds, which aren’t in play here. And Gordo’s and Lorna’s deal “…stated that nothing in the conservation easement deed of trust shall be construed to limit the donee’s right to give its consent to changes in the conservation easement deed or to abandon some or all of its rights thereunder.” 2013 T. C. Memo. 172, at p. 17.

And the issue for a Rule 161 is whether there has been an intervening change in relevant law.

Kayln’s problem is the language in the grant of the easement in  her deal: “Extinguishment–If circumstances arise in the future such that render the purpose of this Conservation Easement impossible to accomplish, this Conservation Easement can be terminated or extinguished, whether in whole or in part, by judicial proceedings, or by mutual written agreement of both parties, provided no other parties will be impacted and no laws or regulations are violated by such termination. * * * [Emphasis added.]”. 2013 T. C. Memo 172, at p. 4.

Nothing in Kayln’s language limits the discretion of the parties to abrogate the easement. Gordo’s and Lorna’s deal with their donee limited the donee’s right to change the deal to changes in circumstances. Kayln and her donee could call off the deal at any time for whatever reason, change or no change in circumstances.

No good, says Judge Haines. Together forever is the deal.

In an earlier blogpost, I advised taxpayers seeking like-kind treatment of real property leases to “Go Long”, 6/24/13.

Now come Charles E. & Patti H. Bass, Docket No. 13025-12S, filed 7/25/13, who want to go small. Tax Court small claims procedure per Section 7463, that is.

But there’s a statutory $50K maximum for small-claimers, inclusive of amount of deficiency, additions to tax, penalties and any additional amounts permitted by law.

Chas and Patti have a $190K adjustment in the SNOD, with tax above $50K. So IRS moves to remove the magic letter “S” from the docket number, and it looks like a slam dunk.

But Chas and Patti answer IRS’ motion by saying they’re willing to concede $70K of that adjustment. Thus, only $43K of deficiency remains in dispute.

Good enough for Chief Judge Colvin to let Chas and Patti go small.

Takeaway–Tactically, it might be well to concede your way into a small-claimer.

June Shaw gets stung when her bad debt turns out to be neither a debt, nor bad when she claimed it was, in the eponymous 2013 T. C. Memo. 170, filed 7/24/13.

That learned jurist Judge Lauber, the star of my blogpost,  “Acceuillons, Let’s Welcome, Judge Albert B. Lauber”, 2/5/13, is the decider. And he wastes not his judicial learning on the desert air here.

June is bookkeeper and CFO of her family’s real estate business, but in her spare time she sold an apartment building she herself owned, taking away a seven-figure capital gain just before the real estate market cratered in 2008, and reporting on the installment method. Big taxable payment comes in in 2009.

Coincidentally, Brother Ken needs money for a development venture the family business is undertaking, because his money lady walked away as the real estate market headed south.

June steps in and  takes a note from the business, interest and principal accruing until the due date of the note in 2011. The note is unsecured, and evidences an open line of credit.

June funds about $900K, but claims the loan is a business bad debt and became worthless in 2009.

No, says IRS. No, says Judge Lauber. On both counts.

Interfamilial loans get close scrutiny. Even if the paper formalities are observed, what the parties did is the real test.

No arms’-length lender would have made the deal June did, and no arms’-length lender would have forborne to demand payment, give notice of default, or sue.

Moreover, the note wasn’t due until 2011, so what evidence was there in 2009 that June wouldn’t have been repaid? Merely that a business loses money, and its prospects are none too bright, doesn’t mean it couldn’t recover. June had the books and records as CFO; if she had evidence that the viability of the family business as a going concern was going down the drain, she never introduced the records, so Judge Lauber invokes our old chum Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), aff’d, 162 F.2d 513 (10th Cir. 1947). If June had evidence of worthlessness, she’d introduce it. If she doesn’t, then she loses.

The deal is more like a gift or capital contribution. It doesn’t resemble a commercial loan as to economic substance, June didn’t act like a creditor, and she never established that she had no chance of recovering her money by 2011.

No debt, but plenty of sting. Big deficiency, late payment addition, and substantial understatement of tax.

But if you don’t come back to us, game over. That obliging jurist, Judge David Gustafson, once again shows his obliging ways to Sean Richards, in 2013 T. C. Memo. 171, filed 7/24/13. But Sean does not respond to Judge Gustafson’s generosity.

Sean, like John Carter, the star of my blogpost “We’ll Come To You”, 9/18/12, is in the Stony Lonesome, the duration of his stay therein being indefinite.

Sean got a distribution from a qualified retirement plan, but wasn’t yet past the magic 59-1/2 year milestone, so he’s looking at the 10% excise tax. And he has no back-up for his claimed lifetime learning credit. And he claims he never got his refund (but that went for child support).

Well, IRS wanted to toss Sean for non-prosecution when he didn’t reply to their Branerton show-and-tell letter. But Judge Gustafson refused, saying that Sean’s situation as a prisoner makes it hard to participate in a show-and-tell, but likewise IRS needn’t wait until Sean rejoins the Land of the Free.

Maybe this case is ripe for a Rule 121 summary judgment. Maybe there are no disputed facts. So Judge Gustafson suggested IRS move for summary judgment, and instructed Sean on summary judgment and where to look on the Tax Court website to find out what to do.

IRS did; Sean didn’t.

Still, Sean as non-movant gets every reasonable doubt and benefit of every inference. “However, the non-moving party may not sit on his hands. He is required by Rule 121(d) to ‘set forth specific facts showing that there is a genuine dispute for trial. If the adverse party does not so respond, then a decision, if appropriate, may be entered against such party.’ Despite having this requirement called to his attention, Mr. Richards failed to make any response to the IRS’s motion for summary judgment.

“As a general rule, a petitioner like Mr. Richards bears the burden of proof at his trial in a deficiency case. See Rule 142(a)(1). The Supreme Court has held that where the party who does not have the burden of proof (the Commissioner) has attempted discovery, but the party with the burden of proof (Mr. Richards) has not responded with evidence sufficient to carry his burden of proof, summary judgment may be granted in favor of the party who shows that discovery yielded no evidence. Celotex Corp. v. Catrett, 477 U.S. 317, 323-324 (1986).” 2013 T. C. Memo. 171, at p. 8.

So Sean is out on the 10% hit, and out on the lifetime learning credit (although give Judge Gustafson credit, he taught Sean plenty).

As for the refund Sean didn’t get, “(F)irst, section 6402(c) provides that ‘[t]he amount of any overpayment to be refunded * * * shall be reduced by the amount of any past-due support’ (emphasis added), see also 42 U.S.C. sec. 664(a)(1) (2006); and section 6402(g) provides that ‘[n]o court of the United States shall have jurisdiction to hear any action, whether legal or equitable, brought to restrain or review a reduction authorized by subsection (c)’. This bars us from reviewing the reduction of Mr. Richards’s 2009 overpayment to pay his child-support debt.” 2013 T. C. Memo. 171, at p. 10.

In fact, the Supremes have held that to get a refund one must sue in USDC or CFC, as Congress didn’t let Tax Court go there. See United States v. Clintwood Elkhorn Min. Co., 553 U.S. 1, 11 (2008).

Takeaway–If an obliging Tax Court Judge offers to come to you, be prepared to come back. And if you want tax money back, don’t waste time in Tax Court.

Or, Don’t Dismiss Yourself

 The Judge With a Heart, Special Trial Judge Robert N. Armen, Jr., has a rescue in hand today for Peter Dand Prescott & Rita Da Silva Vint, Docket No. 6648-13S, filed 7/23/13, a small-claimer with only about $2K in tax on the line.

The problem started when the Defense Finance and Accounting Service sent Pete a W-2 for wages; Pete said he got neither wages nor a W-2, because he was retired.

You remember that DFAS wasn’t the swiftest off the mark; see my blogpost “Sunk By The Navy?”, 9/28/11, starring Farmer Monica Kleber and her paper chase with DFAS.

So Pete claims IRS has the burden of proof, hasn’t borne it (even though there’s been no Branerton show-and-tell or anything else), and moves to dismiss.

Now it’s true that where an information return (like a W-2, 1098, or any of the 1099 progeny) is prepared by a third party, the taxpayer can challenge and the IRS has the burden of proof. See Section 6201(d).

But it’s early times yet.

STJ Armen: “Petitioners’ motion, however, suggests a possible misunderstanding of the nature and implications of a dismissal in Tax Court practice. The dismissal of a Tax Court case is not the equivalent of ‘dismissal’ of the underlying notice of deficiency or the determined deficiency in tax.” Order, at p. 1.

In fact, a dismissal of a Tax Court petition, otherwise than for want of jurisdiction, requires entry of decision in favor of IRS. Pete was timely, so if he dismisses, he’s lost.

See my blogpost “Dismissed!”, 5/8/12, in which I discuss the Settles case, which case STJ Armen quotes at length. Section 7459(d) “generally” (don’t you just love “generally”, the ultimate tax weasel-word?) requires that IRS wins when a petition is dismissed if Tax Court had jurisdiction.

So, says STJ Armen: “Here, the early stage of the litigation means that the record at present consists of little more the pleadings and the motion and response now before the Court. As a consequence, petitioners have not yet had an opportunity to appear at trial or otherwise to submit evidence that all prerequisites for a shift of burden under either section 7491(a) or 6201(d), I.R.C., have been met.” Order, at p. 1.

And as Pete didn’t bring a petition in order to lose his case on his own motion, the motion is denied.

Pete, time for show-and-tell.

It’s that simple to form a partnership for Federal income tax purposes, whatever State law may say. That’s the story from The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being (and this time doesn’t mess up the partitive genitive), His Honor Mark V. Holmes.

Oh yes, the case in point is Abdolreza T. Azimzadeh and Zohra Ehsan, 2013 T. C. Memo. 169, filed 7/23/13. The partnership story is all about Ab; Zohra is in it only for some W-2 wages she never bothered to report.

Ab isn’t big on recordkeeping, and that sinks a lot of his used-car dealings, with Judge Holmes preparing his usual tables.

Ab claims he was partners with Ray Barghi, or maybe Ray’s car business Luxury For Less.  If Ab was partners with Ray or LFL, his tax bite would be less, as Ray would be in it with him.

IRS says State law (California) should decide the partnership question.

“The Commissioner doesn’t think that Azimzadeh and Barghi were partners, and asked us to look at California law to see if they were. But federal tax law, and only federal tax law, controls the classification of  ‘partners’ and ‘partnerships’ for federal tax purposes.” 2013 T. C. Memo. 169, at p. 5. (Citations omitted.)

Judge Holmes goes on: “A partnership is a business entity with two or more owners. The business entity requirement doesn’t mean that the partnership needs to exist separately from its owners or otherwise be recognized under state law…, so it’s not fatal that Azimzadeh and Barghi didn’t form a separate state-law entity to do business. Rather, the hallmark of a partnership is that ‘the participants carry on a trade, business, financial operation, or venture and divide the profits therefrom.’” 2013 T. C. Memo. 169, at pp. 5-6 (Citations omitted).

Well, Ray could sign the business checks and did write himself a bunch of checks, some of which he labeled “Draw”, and he was around, but Barghi never shows up to testify. And there’s no written agreement, and Ab’s recordkeeping, as aforesaid, is almost non-existent. And of course Ab never filed a Form 1065 or issued K-1s. So Judge Holmes can’t tell what Ray contributed, or what he did, and Ab’s testimony doesn’t help.

In fact, Ab has “dented” his credibility generally. “Azimzadeh actually admitted at trial that he had changed the dates on numerous receipts that he had given to the Commissioner. We find this admission credible, and its natural effect is to reduce the weight we give his testimony on this and other issues.” 2013 T. C. Memo. 169, at p. 22, footnote 6.

Remember the Luna factors? If not, see my blogpost “Substance Over Form”, 2/11/11, where Judge Haines “distills” the Luna factors for deciding who is a partner and what is a partnership.

Burden of proof  is on Ab, and he flunks. No partnership.

No, not the 2009 Faith Anthony and Jill Wesolik opus, but rather a look at Section 107, of which I was only dimly aware but on which a close relative of mine was at one time an expert. Case in point– Ricky R. Williams and Pamela D. Williams, 2013 T. C. Sum. Op. 60, filed 7/22/13, a “not for nuthin’” Section 7463 small-claimer.

Ricky was a duly ordained Baptist minister and was employed under the terms of a written agreement at the St. Johns Missionary Baptist Church.

The employment agreement was the problem. It set forth Ricky’s wages, but specified a $500 monthly housing allowance for the first six months of Ricky’s employment. The payment could be extended by vote of the Church’s Deacon Ministry, but the agreement said nothing else, and apparently neither Ricky nor the Deacons did anything else.

Ricky and the Deacons tried to amend the agreement retroactively seven years after the fact, and after IRS audited Ricky and Pam and blew away most of their Schedule A and Schedule C deductions, and nailed them for unreported Schedule C income.

No go, says CSTJ Panuthos.

“Section 107(2) provides that the gross income of a minister does not include ‘the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities.’ As a prerequisite for this exclusion, the taxpayer must establish that there was a designation of the rental allowance pursuant to official church action before payment. Sec. 1.107-1(b), Income Tax Regs. The regulations state in pertinent part:

The term ‘rental allowance’ means an amount paid to a minister to rent or otherwise provide a home if such amount is designated as rental allowance pursuant to official action taken * * * in advance of  such payment by the employing church or other qualified organization when paid after December 31, 1957. The designation of an amount as rental allowance may be evidenced in an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action. The designation referred to in this paragraph is a sufficient designation if it permits a payment or a part thereof to be identified as a payment of rental allowance as distinguished from salary or other remuneration.” 2013 T. C. Sum. Op. 60, at p. 6.

The second agreement (or the amended agreement, whichever it is) was not executed before Ricky got the alleged payment. Therefore no exclusion and the deficiency stands.

“We understand that petitioners are not tax experts, but we conclude that they did not act with reasonable cause and in good faith and that they are liable for the accuracy-related penalty under section 6662(a)….” 2013 T. C. Sum. Op. 60, at pp. 9-10.

Parson, get it in writing and get it in advance, lest, like an exalted predecessor, you find you have not where to lay your head.

And No, That’s Not A Typo

 Our latest case of going postal involves Mr. Richard Postma of Grand Rappids (sic), MI, who claims he’s a notice partner but not a tax matters partner in Taurus FX Partners, LLC, Richard Postma, A Partner Other Than The Tax Matters Partner, 2013 T. C. Memo. 168, filed 7/22/13.

Richard was the sole member of FX Trading, LLC, which in turn was a partner in Taurus. Bricolage Capital, LLC was both managing partner and tax matters partner of Taurus, but FX was notice partner.

Then FX sold its interest to Littlefield, a Sub S of which Richard was sole shareholder.

When IRS began looking at Taurus’ return for the years in issue, they sent a Notice of Beginning of Administrative Proceeding (NBAP) to FX care of Bricolage, and to FX and to Richard at the Grand Rappids (sic), MI, address.

IRS dealt directly with Richard, asking him to send documents concerning his investment in Taurus and also asking him to sign a Form 872-P SOL extender, which he signed both as Authorized Signer and as TMP. His representative stated in a covering letter that Richard never was formally designated as TMP.

Bricolage, true to its name as something thrown together out of whatever came to hand, apparently did nothing while this was going on, but did file bankruptcy, thus disqualifying itself as TMP and turning all its partnership items into nonpartnership items.

IRS got around to sending the FPAA to Bricolage and some other investors, and also to FX at another Grand Rapids address (this time getting the spelling right).

Richard claims the FPAA was invalid because not sent to the proper partner, namely, him, as IRS knew all about him. And his petition was filed after the 150-day window had closed.

No, says Judge Buch, you’re too late, Richard.

Since partners come and go, and adjusted items may spread over years, “(T)he last known address rules applicable to notices of deficiency do not apply to FPAAs. Section 6223(c)(1) instructs that the partnership return is the starting point for identifying where to mail notices. The IRS must update that information only to the extent the updated information is provided in accordance with the regulations. The regulations require that updates be made by submitting a written statement, generally to the service center where the partnership return was filed….” 2013 T. C. Memo. 168, at pp. 8-9 (footnotes omitted, but you can tell Judge Buch was on law review, because he loves footnotes).

There’s a five-part test for what has to go into the notice, and nothing that Richard can produce shows he ever sent the relevant service center anything that comes close.

If you’re interested, the required notice has to (a) identify the partnership, each partner for whom information is supplied, and the person supplying the information by name, address, and taxpayer identification number; (b) explain that the statement is furnished to correct or supplement earlier information with respect to the partners in the partnership;(c) specify the taxable year to which the information relates; (d) set out the corrected or additional information; and (c) be signed by the person supplying the information.

And IRS can mail a generic NBAP or FPAA addressed to “Tax Matters Partner” at the partnership’s address as shown on the Form 1065 for the year at issue, without filling in the TMP’s name.

Richard says his prior dealings with IRS show IRS knew right well who and where he was. Says Judge Buch, while IRS “may” use whatever information they have to send you notices, that’s permissive and not prescriptive. See my blogpost “A Busy Day”, 9/10/12, which quotes one of the regs Judge Buch quotes here in Taurus.

IRS can send you notices if they know where you are, even if you haven’t told them per the regs, but they are not required to, and you have no beef if they don’t.

So Richard, you’re late and you’re out.