As the late great Yul Brynner so eloquently put Oscar Hammerstein II’s words in the 1951 smash-hit “The King and I”, STJ Lewis (Love That Name) Carluzzo confronts a similar predicament. No great legal principles here, but a good example of what a 19-year veteran STJ must deal with.

IRS’ NOD to Phil Filet Davis-Windsor, in Docket No. 15962-12L, filed 5/16/13, doesn’t sustain the proposed levy based on a Section 6702 frivolity penalty. So Phil Filet won, right?

It would seem so, but Phil Filet petitions nevertheless, although STJ Lew is at a loss to figure out why, because Phil Filet’s petition doesn’t enlighten him.

And IRS moves for summary judgment sustaining its determination that Phil Filet is off the levy hook. Of course, Phil Filet objects.

See my blogpost “You Won, Go Home”, 9/13/12. But there the taxpayer had an argument, although a losing one. Here, Phil Filet has nada.

“Taking into account the determination made in the notice and statements contained in the pleadings, the issue presented in this case can be stated as follows: whether respondent’s determination not to sustain the proposed levy in order to collect the underlying liability is an abuse of discretion. Adjudication of this issue in respondent’s favor, of course and in effect, is adjudication in petitioner’s favor as well. This point appears to have been lost on petitioner because, as noted, he objects to respondent’s motion. Petitioner’s objection, however, is no more informative than his petition.

“Be that as it may, and making what sense that we can from what has been submitted, we are satisfied that respondent has proceeded as required by section 6330(d) and nothing submitted by petitioner suggests otherwise.” Order, p. 2.

So summary judgment, and Phil Filet, you won, go home.

Tax Court will not assist a taxpayer in preparing his return. One might have mistakenly come to that conclusion by reading STJ Lew (Spell It Right) Carluzzo’s opinion in Loretta Lea Wanat, T. C. Sum. Op. 2012-92, filed 9/17/12, or my blogpost “Tax Court As Preparer?”, 9/17/12.

But Judge Morrison isn’t having any in Diep N. Hoang, 2013 T. C. Memo. 127, filed 5/15/13.

Diep claims he thought he was an accrual-basis taxpayer when he filed his first petition for tax year 2001, and Judge Vasquez disabused him of that notion.

So when he filed his next petition (late) for the “deficiency of $5,188,587 in federal income tax for 2006, a section 6651(a)(1) addition to tax of $1,297,533.50, and a penalty under section 6662(a) of $1,037,717.40.” 2013 T. C. Memo. 127, at pp. 1-2, he thought that Tax Court would tell him how to do it right.

Not quite, Diep. Diep tried to get into evidence some obviously altered brokerage statements and an explanation why he filed late, but Judge Morrison barred that.

And when Diep tried to avoid the Section 6662(a) penalties, Judge Morrison relegated Diep’s argument to a footnote: “According to the explanation (and to another document fragment and court papers), the Tax Court failed to assist Hoang in preparing his tax returns after the 2001 deficiency case was decided and, as a result, Hoang no longer had to file federal income tax returns. The Tax Court is not required to assist taxpayers in preparing their tax returns; taxpayers who do not receive such assistance are not absolved of their obligation to file federal tax returns. It would have been unreasonable for Hoang to believe that he had been absolved of his filing obligations. Such a belief would not constitute reasonable cause for failing to timely file his tax return.” 2013 T. C. Memo. 127, at p. 32, footnote 45.

Diep, next time you need to file a tax return, try a good tax professional; just not one in a black robe.

Harkening back to my youthful days On The Hill Far Above, I remember the late Professor I. R. MacNeil (the 46th MacNeil of Barra, “The Professor”) drumming into our heads the necessity of doing cite and substance checking in briefs and memoranda. I gratefully acknowledge all that he taught me, both about being a lawyer and being a man.

Incidentally, the clan history states: “ He was said to have been a well respected person by the residents of Barra, and that he took genuine interest in the life of the island and its inhabitants.” I certainly respected him, and honor his memory.

Old habits never die. I did some cite and substance checking on a Tax Court Order today, and Judge Wells’ chambers told me they will be correcting and reissuing the Order in Lorraine C. & Marvin T. Boyd, Docket No. 1780-12L, filed 5/15/13.

In the Boyd Order, Judge Wells cited to 2013 T. C. Memo. 57, filed 2/21/13. But that opinion had to do with Alfred Q. Campbell, III. I didn’t do a blogpost on that opinion, because it was the usual fact-driven opportunity-to-contest meets arbitrary-and-capricious CDP, with little to add to the accumulated learning thereon.

What Judge Wells meant to cite was his opinion in 2013 T. C. Memo. 100, filed 4/11/13, concerning Boyd, likewise a CDP with like issues.

I took the liberty of calling Chambers and letting the Judge’s people know. They promptly returned my call and told me they were putting things right.

Thanks again, Professor MacNeil.

No opinions or designated orders out of Tax Court today, 5/14, so I was going to take the day off. But I thought I’d give my loyal readers something, and there was that opinion filed 5/13/13 by The Judge Who Writes Like a Human Being, a/k/a The Great Dissenter, His Honor Mark V. Holmes, Edmond Audrey Heinbockel and Lydia Rose Heinbockel, 2013 T. C. Memo. 125, filed 5/13/13.

Now I skipped those 76 pages of Judge Holmes’ colloquial prose yesterday in favor of Alexander (the Friend) Salvagno (see my blogpost “Quo Usque Tandem Abutare, Alexander, Patientia Nostra?”, 5/13/13) and Judge Kerrigan’s three-page exegesis of the life and miracles of Raul and his next friend son Alexander.

And the tale of E. Audrey and Lydia is the usual story of want-of-documentation, hobby-disguised-as-business (Section 162 meets Section 183) with Section 274 thrown in, and self-serving trial testimony, so that there’s really little to “long detain the tourist”, as Michelin (or was it Baedecker?) used to say.

But for want of better subject for a rant, I again deplore Judge Holmes’ war on the partitive genitive: c’mon Judge, a Harvard Law graduate perpetrating solecisms like “making a couple loans to one’s brother” (2013 T. C. Memo. 125, at p. 32), and “no more than a couple hundred dollars“ (2013 T. C. Memo. 125, at p. 57) crosses the line from colloquial to illiterate.

Do you ask for  “a cup coffee” or “a piece cake”, at the Tax Court cafeteria?

And y’all are capable of better, as witness your dissents in  Randall J. and Karen G. Thompson, 137 T. C. 17, filed 12/27/11(see my blogpost “The Great Dissenter”, 12/28/11), and Tigers Eye Trading, LLC, Sentinel Advisors, LLC, Tax Matters Partner, 138 T. C. 6, filed 2/13/12 (see my blogpost “The Great Dissenter – Part Deux”, 2/15/12).

Now to the opinion. One point worth noting is the burden of proof shift where new matter is introduced, an anti-ambush provision.

Judge Holmes: “After a case has begun, Rule 142(a) places the burden on the Commissioner ‘in respect of any new matter, increases in deficiency, and affirmative defenses, pleaded in the answer.’ However, we distinguish between new matters and new theories. See Hurst v. Commissioner, 124 T.C. 16, 30 (2005). ‘[W]e have held that for respondent to change the section of the Code on which he relies does not cause the assertion of the new theory to be a new matter if the section relied on is consistent with the determination made in the deficiency notice relying on another section of the Code.’ Id. (citation and internal quotation omitted). A ‘new matter’ is one that reasonably would alter the evidence presented. A ‘new theory,’ in contrast, is just a new argument about the existing evidence. Id. Although the notice of deficiency challenged virtually all of Collective Flight’s 2007 expenses, proof that a business is engaged in for profit is reasonably likely to require the presentation of evidence different from that required to prove that expenses should be allowable because they’re ordinary and necessary. We give the benefit of the doubt to the Heinbockels here, and construe the Commissioner’s new argument for 2007 as a new matter (not just a new theory), and therefore shift the burden to him for that year.” 2013 T. C. Memo. 125, at pp. 19-20.

Doesn’t much matter, though; E. Audrey and Lydia get some deductions, but most of what they claimed gets shot down. I won’t tease it all out, but read the extracts of their testimony Judge Holmes quotes, especially Lydia’s.

As the great trial lawyer Henry Miller has said, “when the witness’ testimony sends your client’s case down the drain, smile your most winning smile, as if this is just what you wanted to hear.” It beats putting your head down on the counsel table and sobbing loudly.

I Need Not, Of Course, Translate

This is the sequel to my blogpost “With Friends Like Him”, 2/26/13. Judge Kerrigan, the embodiment of long-suffering forbearance, finally loses it after six years of masterful inaction by Raul Salvagno and his next friend, Alexander Salvagno, in Raul Salvagno, Incompetent, Alexander Salvagno, Next Friend, Docket No. 16800-07, filed 5/13/13.

I offer this gem as an example of how far procrastination and dodging can carry a taxpayer, and in rebuttal of the oft-times stated jibe that Tax Court is hostile to taxpayers.

Raul is an incompetent because “Petitioner is a 74 year old incarcerated person serving a 20 year sentence at FCI Otisville.” Order, at p. 1. For those of you on the right side of the law, FCI (Federal Correctional Institution) Otisville is a medium-security (with a satellite low-security) facility 70 miles northwest of the Big Apple. Raul’s delictions aren’t stated, but we can assume they have a certain substance if he’s doing 20.

Enter Alexander, the frequenter of law libraries. In Sir William Schwenk Gilbert’s immortal words, like the House of Peers, Alexander “Did nothing in particular, And did it very well”.

Judge Kerrigan: “The Court notes that in the almost 6 years this case has been pending, the Court has repeatedly denied respondent’s motions to dismiss for failure to properly prosecute to provide petitioner with an opportunity to prosecute his case, as a pro se petitioner, through his next friend, or through counsel. Petitioner has not availed himself of those opportunities. Petitioner, whether individually or through his next friend, has been repeatedly non-responsive to the Court’s Orders, and non-compliant with the Tax Court Rules of Practice and Procedure, despite multiple warnings that failure to comply with either the Rules or the Court’s Orders could result in the dismissal of this case. See, e.g., Rules 123(a) and (b). During the time this case has been pending: (1) the matters contained in respondent’s Requests for Admissions were deemed admitted because of petitioner’s failure to respond; (2) the facts as set forth in respondent’s Motion to Show Cause Why Proposed Facts and Evidence Should Not Be Accepted as Established were deemed established for the purposes of this case due to petitioner’s failure to either respond to the Court’s Order to Show Cause dated September 12, 2012, or to participate in the stipulation process (frequently referred to as ‘the bedrock of Tax Court practice’; and (3) petitioner has not presented any documentation or other evidence to support any claim that respondent’s determinations are incorrect, see Rules 142(a), 149(b); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115 (1933).” Order, at p. 2. (Citations Omitted).

And the IRS has been uncommonly kind to Raul and Alexander: “As respondent explained during the trial session of the Court held October 22, 2012: in the last five years, Respondent has made every attempt to communicate with Petitioner or Petitioner’s next friend in preparation for seven different trial calendars. These communication attempts include numerous telephone calls, eight letters informally requesting information, two sets of requests for admissions, one set of interrogatories, a request for documents and a proposed stipulation of facts. None of which — of these have been — has been substantially responded to by Petitioner or Petitioner’s next friend.” Order, at pp. 2-3.

And IRS even concedes the Section 6654(a) underpayment penalty.

But now Judge Kerrigan tosses the Salvagnos, and dismisses the petition for failure to prosecute.

Finally.

Judge Foley (“MightyMo” to his many friends) excoriates IRS in a designated hitter, 5/10/13, Anonymous 1 and Anonymous 2, Docket No. 12472-11W.

Remember the Anonymous Duo? No? Well, check out my blogpost “Your Name Is Not Your Fame”, 11/2/12, where Mighty Mo blew off the Anonymous Duo because IRS said they didn’t use the info the Anonymous Duo put on their Forms 211, saying “didn’t use the info and didn’t get any cash.” So MightyMo gave IRS summary judgment tossing the Anonymous Duo.

May I claim prophetic vision, as I wrote at the end of the aforementioned blogpost: “I know it’s a waste of time asking Congress to do anything; they can’t stop the country from falling off the fiscal cliff they created, much less clean up the whistleblower provisions of the Internal Revenue Code. But this charade really has to stop.”

Well, Congress didn’t, but IRS reopened the matter on its own hook, apparently, and sent the Anonymous Duo a letter so stating. So the Anonymous Duo move to vacate the summary judgment they lost, and IRS opposes.

“Respondent reopened petitioners’ original award claims, yet requests that the Court deny petitioners’ motion. Furthermore, respondent states that ‘The Court’s Order and Decision specifically made reference to the petitioners’ information and respondent’s subsequent investigation; the Court granted respondent’s Motion for Summary Judgment, aware of that possibility.’ Respondent’s statement is misleading. The Court was aware that respondent opened a subsequent investigation, however, respondent assured the Court that the SB/SE investigation was independent and that the information petitioners provided in their original Forms 211 was not being used. Moreover, respondent did not inform the Court that he was considering subsequent action relating to petitioners’ original award claims.” Order, at p. 2.

Now for the good part: “It appears, despite respondent’s assertions to the contrary, that the information provided by petitioners in their original Forms 211 has been used by respondent in the SB/SE investigation. Furthermore, respondent has repeatedly failed to provide the Court with relevant information: respondent failed to timely inform the Court about the SB/SE investigation, failed to inform the Court that respondent was considering reopening petitioners’ original award claims, and, most egregiously, failed to inform the Court that respondent did, in fact, reopen petitioners’ original award claims. We do not know whether these failures were the result of bureaucratic confusion or ineptitude. We do know, however, that the obfuscation surrounding this matter has either been caused or exacerbated by respondent.” Order, at pp. 2-3,

Now the Anonymous Duo’s Rule 162 vacate-or-reverse motion is filed way later than the thirty-day requirement. “Motions to vacate are generally not granted absent a showing of unusual circumstances or substantial error (e.g., mistake, inadvertence, surprise, newly discovered evidence, fraud, or other reason justifying relief).” Order, at p. 3. (Citations omitted).

But this case is pretty unusual, ya think?

Anyway, Mighty Mo thinks so, and his thought is what counts: “The Whistleblower Office’s reopening of petitioners’ original award claim is an unusual circumstance. Furthermore, respondent provided the Court with incomplete, misleading, and possibly inaccurate information. Accordingly, we vacate our Order and Decision dated November 2, 2012, and conclude that respondent’s April 26, 2011, determinations were not valid. “ Order, at p. 3.

So the Anonymous Duo can wait until IRS completes its new inquiry, and if they’re unhappy with the result, they can petition afresh.

Now IRS, in the immortal words of the late great Desi Arnaz: “Lucy, you got some ‘splainin’ to do!”

Fridays are usually slow days on the Tax Court website. Very rarely is there an opinion; even the 7463s seem to have the day off. The designated hitters are rarely the stuff of game-changing pronouncements, so the earnest blogger is put to his own devices to fill the ether with engaging blather.

Not today, May 10, however.

You’ll remember Jetstream Business and its siblings. If not, see my blogposts “More Shell Games”, posted 9/2/11, “Mr Rogers’ Neighborhood – The Adventure Continues”, posted 11/12/11, and “Mr Rogers Tries Again”, 4/17/12. There, now, you remember the celebrated Mr. John E. Rogers, who has a B.A. in mathematics and physics from the University of Notre Dame, a J.D. from Harvard Law School, and an M.B.A. from the University of Chicago, with a concentration in international finance and econometrics.

Well, his famous marriages of big US capital gainers with distressed Brazilian debt, a/k/a DADs, cratered big-time, and now, as Judge Wherry predicted, the time has come for the “silent waters that run deep”–the dozens of deep-pocketed investors who acquired ownership interests in the various holding companies, which in turn sought to exploit the inflated basis of the chimerical receivables. After all the linen is washed, these investors constitute the fonts whither the promised tax savings from chimerical losses would have drained and whence the required tax payments for determined deficiencies and accuracy-related penalties will flow.

IRS wants Judge Wherry to fire Jetstream (and Mr Rogers) as tax matters partner for the multiplicitous entities that shared in Mr Rogers’ attempted raid on the US fisc.

Judge Wherry: “…the Court does not intend to grant respondent’s motion to remove Jetstream as tax matters partner in these cases. The Court also notes that these ultimate investors, to the extent they have an interest in the proceedings under section 6226(d), have a right to participate in these proceedings under section 6226(c). Generally, such notices of election to participate should be made within 90 days of the date of service of the petition by the Clerk on the Commissioner. Rule 245(b). Pursuant Rule 245(c), the Court may grant leave to file such notices of election out of time upon a showing of sufficient cause. In these cases, the Court would be inclined to grant motions for leave to file a notice out of time.” Kenna Trading, LLC, Jetstream Business Limited, Tax Matters Partner, Et Al., Docket No. 7551-08, filed 5/10/13.

But if any of you want to settle, the name and phone number of IRS counsel is in the Order.

Maybe this will finally end this unworthy successor to the Kersting nightmare.

And Chief Judge Colvin is culling out all the non-filers and non-payors who filed unsigned or otherwise improper petitions, dismissing them sua sponte and en masse, as the high-priced lawyers say. So many orders today.

Finally, this is a non-political blog. I will refrain from comment on the IRS’ apology to conservative groups for improperly singling them out during the previous election. I am sure others will have plenty to say.

I just finished the second of two mediations, successfully I might add, in which I was informally called upon to bridge some troubled waters. Though taxing, no tax issues were involved, but I derived much satisfaction from being able to help, as well as some cash.

Well, here’s STJ Lew (right spelling) Carluzzo getting into the act, via a designated hitter courtesy of Chief Judge Colvin. The matter is Charles T. & Mary A. Bruce, Docket No. 29005-10, filed 5/9/13.

Here’s the story: “… the Joint Motion for Appointment of a Mediator Pursuant to Rule 124(b)(5) is granted, and this case is assigned to Special Trial Judge Lewis R. Carluzzo for purposes of conducting the mediation, to be concluded by not later than May 17, 2013. It is further

“ORDERED that Special Trial Judge Lewis R. Carluzzo shall have access to the Court’s files and any other documents held by the trial judge and shall have authority to direct or order the parties to provide further information to aid him with his consideration of and his assistance with this case.” Order, p. 1.

And by the way, guys, to keep y’all focused, “…this case remains calendared for trial at the Court’s May 20, 2013 Mobile, Alabama trial session.” Order, p. 2.

Go to it, STJ Lew.

 “Direct or indirect”, that is the question, and the ever-obliging jurist, Judge David Gustafson has the answer, namely and to wit, “any which way you slice it”, in Lawrence F. Peek and Sara L. Peek, 140 T.C. 12, filed 5/9/13.

The Peeks and their pals the Flecks think that putting out fires is the way to wealth, so they decide to buy a fire suppression company. They go to Chris Blees, CPA, who suggests each couple set up a traditional IRA, form a corporation, all of whose stock is split between the two trad IRAs, and buy the suppressor in the corporation.

But Chris warns against the Section 4975 prohibited transactions, which torpedo IRAs per Section 408, in general terms, not mentioning what Peek and Fleck eventually do (and never tell Chris about). The seller of the suppressor wants cash, which Peek and Fleck give via the corporation, but come up short. The corporation offers its note, but the seller wants personal guarantees from Fleck and Peek.

These they gave, and that’s when the trouble starts, but isn’t apparent for years.

Down the road, but before the suppressor hits the jackpot, Fleck and Peek each roll their stock from the trad to a Roth, paying minimal tax.

A few years later the suppressor goes big time, and the corporation sells the suppressor for mucho moolah, pays off the note, and parks the cash in the Roths.

IRS calls capital gains from Fleck and Peek personally, claiming the guarantees violate Section 4975(c)(1)(B): “any direct or indirect– * * * (B) lending of money or other extension of credit between a plan and a disqualified person”.

Peek and Fleck claim that the subsidiary corporation isn’t the plan, but agree that a guaranty is a “lending of money”.

Judge Gustafson: “This reading of the statute, however, would rob it of its intended breadth. Section 4975(c)(1)(B) prohibits ‘any direct or indirect * * * extension of credit between a plan and a disqualified person’. (Emphasis added.) The Supreme Court has observed that when Congress used the phrase ‘any direct or indirect’ in section 4975(c)(1), it thereby employed ‘broad language’ and showed an obvious intention to ‘prohibit[] something more’ than would be reached without it. Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152, 159-160 (1993). As the Commissioner points out, if the statute prohibited only a loan or loan guaranty between a disqualified person and the IRA itself, then the prohibition could be easily and abusively avoided simply by having the IRA create a shell subsidiary to whom the disqualified person could then make a loan. That, however, is an obvious evasion that Congress intended to prevent by using the word ‘indirect’”. 140 T. C. 12, at p. 16.

So there was a prohibited act, terminating the trad IRA as of Day One of the year wherein the prohibited act occurred. But that’s not the year at issue. So Peek and Fleck claim the SNODs don’t cover that, and the termination year is closed.

Wrong, says Judge Gustafson: “The loan guaranties were not a once-and-done transaction with effects only in 2001 but instead remained in place and constituted a continuing prohibited transaction, thus preventing Mr. Fleck’s and Mr. Peck’s accounts that held the [corporation] stock from being IRAs in subsequent years. On January 1, 2006, it remained true that Mr. Fleck and Mr. Peek guaranteed the loan to [corporation]; if [corporation] defaulted, they would pay. By its nature, the loan guaranty that each man made put him and his account in an indirect lending relationship that would persist until the loan was paid off.” 140 T. C. 12, at p. 18 (footnote omitted).

So the conversion from trad to Roth was a nullity, because the trad was no longer an IRA when the purported “conversion” took place. And it probably is too late for Peek and Fleck to try to get back any tax they paid.

Now of course Peek and Fleck claim they relied on Chris, but Chris was a promoter, and besides they never proved they told Chris what they were doing with the guarantees.

“Direct or indirect”? Any which way you slice it.

But Don’t Push Your Luck

Judge Buch, known as one who is loath to cut slack for attorneys who don’t cover their clients’ cases (see my blogpost “Throwing the Buch?” 3/5/13), nevertheless will cut a self-represented some slack, if good faith be shown.

That’s the story in Randy Lee Lother, Docket No. 26538-11, filed 5/8/13.

Randy Lee’s sole issue was to whom the Secretary of the Treasury had delegated authority to lay upon Randy Lee the two SNODs he was petitioning.

Judge Buch: “The information regarding to whom authority is delegated was important because Mr. Lother’s only argument was that the people who signed the notices of deficiency lacked the authority to do so. Other than the stipulations, Mr. Lother offered no evidence.” Order, at p. 3.

If Randy Lee had read the Rule 91(f) stipulations IRS had prepared and sent him pre-trial, he would have seen that authority was properly delegated. So IRS wants a Section 6673 frivolity penalty, because Randy Lee didn’t read the aforesaid stipulations until he was in front of Judge Buch and on the record. IRS claims delay of the game.

No, says Judge Buch. “After reviewing this material for what appeared to be the first time, Mr. Lother appeared to withdraw his delegation of authority argument, which  was appropriate, given that the declarations clearly resolve the issue. He presented no other arguments and no evidence concerning errors in the notice of deficiency.” Order, at p. 4.

Judge Buch: “Whether IRS personnel ‘have acted outside their delegated authority can be consequential.’ The Court does not fault Mr. Lother for merely having raised the delegation of authority  argument. Where Mr. Lother can be faulted, however, is for not having read the materials that were sent to him that clearly answer the question. The Court could impose on Mr. Lother a penalty for delay. Once the information was provided to him in January, he should have abandoned this argument. But to his credit, once the Court called the information to his attention, he did not perpetuate the argument. It also should be noted that the Court has not identified a prior proceeding in which Mr. Lother presented frivolous arguments or was warned about possible sanctions under section 6673.” Order, at p. 5.

Neither could IRS’ counsel point to any like infraction by Randy Lee.

So Judge Buch shows Randy Lee the  yellow card, as the footballers say. “The Court warned Mr. Lother on the record, and restates it here in this bench opinion, that perpetuating frivolous arguments or causing needless delay of a proceeding before this Court may subject him to sanctions in the future.” Order, at p. 7.

Read and heed, you self-representeds.