But however cool you may be, cat, watch those stipulations. See my blogposts “Watch That Stip”, 3/20/13, and “Stipulate, Don’t Capitulate”, 9/23/11.

Mary A. Laciny should have heeded my words when she copped to some Section 7206 fraudulent return counts, as told by Judge Thornton in Joseph E. Laciny and Mary A. Laciny, 2013 T.C. Memo. 107, filed 4/15/13.

Mary A. was a triple-threat: she took unsubstantiated deductions on her corporate and personal returns, failed to report income, and diverted corporate monies to personal use.

Mary A. and Joe were the corporate czars of Sta-Cool Air Conditioning & Heating, Inc. Mary A. ran the back office and stayed cool, until nailed by the Federales. Mary A. and IRS stipulated to certain of Mary A.’s delictions, which Judge Thornton can’t reconstruct from the record, but Mary A. “signed a plea agreement, attached to which was a statement of facts which she signed and a worksheet calculating the ‘Total Unreported Diverted Funds’. 2013 T. C. Memo. 107, at p. 5 (Footnote omitted).

“Pursuant to her plea agreement Mrs. Laciny was sentenced to 12 months and 1 day of prison and 1 year of supervised release; she was also ordered to pay restitution of $195,938.” 2013 T. C. Memo. 107, at p. 5 (Footnote omitted).

The $195,938 supposedly covered “a calculated tax loss for criminal purposes.” 2013 T. C. Memo. 107, at p. 5, footnote 4.

Mary A. pays up in full when restored to society. But when IRS claims she owes more tax and fraud penalties, her defense “I gave at the office” avails her not.

“At trial petitioners’ counsel argued that Mrs. Laciny’s restitution payment should be applied to petitioners’ deficiencies. Respondent’s counsel agreed that the restitution payment should be applied to any deficiencies determined by this Court but argued that the restitution payment has no effect on the redetermination of petitioners’ deficiencies in this case. The District Court, in ordering that Mrs. Laciny make restitution payments as part of the judgment, did not determine petitioners’ civil tax liability and did not bar respondent from assessing a greater amount of civil tax liability against petitioners or from assessing civil fraud penalties. Accordingly, petitioners’ deficiency or underpayment is not affected by the restitution payment. See Morse v. Commissioner, 419 F.3d 829, 833-835 (8th Cir. 2005), aff’g T.C. Memo. 2003-332; Hicks v. Commissioner, T.C. Memo. 2011- 180.” 2013 T.C. Memo. 107, at p. 13, footnote 9.

Criminal defenders, make sure you deal with this in your plea bargains, and let your clients know that restitution may not be the end.

Mary Larceny learned this the hard way.

A quick by-the-way. This blogpost was delayed because of the effects of some recent dealings of mine with orthopedic professionals. But not those in Charles L. Barocas and Heidi Cohen, 2013 T. C. Memo. 106, filed 4/15/13, even though Charley is the director of the American Society of Orthopedic Professionals (ASOP). I broke my collarbone. Please omit flowers.

The latest brouhaha over the aged e-mail controversy (does the right of privacy improve with age, or deteriorate?), featuring IRS vs. ACLU, doesn’t provoke in me the righteous indignation most often encountered in the professionally righteously indignant. I never expected my e-mails were private, any more than any other electronic interchange.

The 1997 example of then-House Speaker Gingrich should ever be before us.

I was asked to comment by a certain Director at a major accounting firm. So I will remind her of her grandmother’s remark: “Every communication needs a salutation: Dear So-and-so and ladies and gentlemen of the jury.”

No, not an extract from the 1984 Starship opus “We Built This City”, that won Rolling Stone’s “worst song of the 80s” title for Bernie Taupin, Martin Page, Dennis Lambert and Peter Wolf, but the story of Aries Communications Inc. & Subs., 2013 T.C. Memo. 97, filed 4/10/13, with Judge Wherry being more mathematical than whimsical.

But even though the issue is the reasonableness, and therefore deductibility, of executive compensation, the star of our show is N. Arthur Astor, radioman first class.

Judge Wherry: “N. Arthur Astor has been in radio broadcasting for over 60 years. He was involved in several television shows, did a little film work, and worked as a talent in radio broadcasting before he decided to become involved in broadcasting sales. After many years of managing sales for a multitude of different radio broadcasting companies, Mr. Astor in June 1970 was employed as general manager of KADY, a 50,000-watt radio station in Los Angeles owned by Atlanta-based Rollins Broadcasting. In 1975 he was employed by Dratch & Knott Enterprises, which owned three radio stations and was the number one programing company supplying programing and special features to radio stations nationally.” 2013 T.C. Memo. 97, at p. 3. Two “m”s in “programming”, Judge, but it’s radio, right?

NAA starts buying radio stations as owner-operator. Aries is his flagship, but he has various subsidiaries. “Mr. Astor was Aries’ president, chief financial officer (CFO), and sole shareholder from its incorporation in 1983. Mr. Astor acted as general manager of each of petitioner’s radio stations. He was a ‘hands-on’ manager who was actively involved in many aspects of petitioner’s day-to-day operations. Mr. Astor’s duties included: (1) oversight of petitioner’s other management personnel; (2) planning and overseeing the execution of programming; (3) negotiating and communicating with petitioner’s lenders; (4) participating in sales meetings; and (5) communicating with outside advisers (such as lawyers and accountants).” 2013 T.C. Memo. 97, at p. 5.

Aries ran into tough times, but NAA sold off stations from Aries’ stable for top dollar, and guaranteed loans that kept Aries afloat while he haggled and higgled for the last centime out of other would-be czars of the airwaves.

When Aries finally had cash on hand, he voted himself a handsome bonus. Aries took the Section 162 deduction, and IRS said no, disguised dividend.

So we’re back to comparable pay for comparable work (like women who still are fighting that fight), and when that fails, our hypothetical friend, the unrelated investor looking for maximum return.

Now the comparable pay gambit means a regression analysis, which, Judge Wherry explains “…is a statistical technique designed to determine the effect that one or more explanatory independent variables have on a single dependent variable. This method may allow an expert to test the causal relationship, if any, between the explanatory independent variables and the dependent variable.” 2013 T.C. Memo. 97, at p. 14, footnote 9.

So we have the duelling experts and judicial mix-and-match extracted from their opinions, with such oracular pronouncements as “(3) on the basis of the P-values of the coefficients in all of the regressions, the coefficients are not useful; and (4) on the basis of the R-squareds of the regressions, the regressions do not explain the variation in either the fixed compensation or the variable compensation.” 2013 T.C. Memo. 97, at p. 15.

Reminds me of Malvolio’s celebrated comment in “Twelfth Night”: “…this is my lady’s hand these be her very C’s, her U’s and her T’s and thus makes she her great P’s.” Act II, Scene V.

Finally, however, NAA’s rescue gets some reward above what IRS would allow, notwithstanding Aries’ barely going-concern state and NAA’s total control of its affairs. NAA gets compensated for previous years when he was underpaid. And Aries gets to deduct about one-third of what it paid NAA.

But because neither NAA or anyone else can say what info Aries gave its accountants, who prepared the returns for the years at issue, it’s 20%-penalty time.

No, not a law firm (although it could be an appropriate moniker for several I know of), but rather the sad tale of Johnny Steven Vallejo, Petitioner, and Elfida O. Vallejo, Intervenor, 11397-11S, filed 4/9/13, a designated hitter from Judge Daniel A. (“Yuda”) Guy, Jr.

Johnny Steven stips to entry of an order that he’s not an innocent spouse. What Elfida does is not stated. After the 90-day Section 7481(b) period has run and the stipulated order is final, and the Rule 162 30-day period for moving to revise or set aside has run, Johnny Steven moves to set aside.

Johnny Steven claims he has Post Traumatic Stress Disorder and was confused about the effect of the stip he signed.

That’s a thwacking great xin loi, good buddy, says Judge Yuda.

“The Tax Court normally lacks jurisdiction to vacate a decision once it becomes final. The Court of Appeals for the Ninth Circuit recognizes a narrow exception to the general rule, holding that the Tax Court may vacate an otherwise final decision if it was obtained through fraud on the Court.” Order, at pp. 1-2. (Citations omitted). The Ninth Circuit gets involved as this is a California case, appealable to Ninth Circuit.

Johnny Steven doesn’t claim he was defrauded, or that the Court was defrauded. He was confused.

No good. I have no jurisdiction to set the stipulated order aside, says Judge Yuda.

Nothing like litigating with a confused, traumatized and stressed self-represented, huh, IRS?

No, not a misspelling of some lyrics from Dave Guard’s 1958 hit “Scotch and Soda”, but rather the latest FATCA trademark for compliant FFIs (Foreign Financial Institutions), the Global Intermediary Identification Number. IRS announces the list schema 4/8/13, so we can all see who is a Global Intermediary Icon.

Check it all out at http://www.irs.gov/Businesses/International-Businesses/IRS-FFI-List-Schema-and-Test-Files.

But a Good Try

A multi-million-dollar estate and GSTT case turns out to be a lot less when Judge Morrison boils it down, in Estate of John F. Koons III, Deceased, A. Manuel Zapata, Personal Representative, 2013 T.C. Memo. 94, filed 4/8/13.

I was hoping for some hot news on GSTT, but only got the usual battle of the appraisers. The only interesting part was worthy of a Taishoff “good try”, when A. Manuel borrowed $10,750,000, but claimed an interest deduction north of $71 million.

The late Koons was a Cincinnati beer brewer who transitioned to bottling Pepsi-Cola; he really hit the spot, and got bought out by Pepsi for telephone numbers. He dies in the middle of the buy-out, and the estate needs cash to pay the estate tax.

Of course, no such deal as this is complete without LLCs, trusts, children, grandchildren, ex-spouses and the whole corps de ballet. So here’s Judge Morrison with the story: “On February 27, 2006, CI LLC’s Board of Managers executed a consent resolving that ‘it is in the best interests of the Company to loan the * * * [Revocable Trust] the principal amount of $10,750,000.’

“On February 28, 2006, CI LLC lent the Revocable Trust $10,750,000 in exchange for a term promissory note in the principal amount of $10,750,000 at 9.5% per year interest with principal and interest due in 14 equal installments of  approximately $5.9 million each between August 31, 2024, and February 28, 2031. The terms of the loan prohibited prepayment. The total interest component of the 14 installments is $71,419,497. The proceeds of the loan would be used to make a payment toward the estate and gift tax liabilities.” 2013 T.C. Memo. 94, at pp. 30-31.

CI LLC is the buyer-out, and the Revocable Trust is the vehicle of the estate.

Good try, guys. Interest on a loan to pay estate taxes is deductible as an administrative expense, right?

Not twentyfive years’ worth.

In the first place, CI LLC was loaded with cash, and the Revocable Trust could force it to distribute, so no need to sell assets. Lending the money depletes CI LLC’s cash hoard as much as a distribution, and the Revocable Trust has almost no operating assets to protect from a forced sale to pay estate tax.

Finally, this deal keeps the estate alive for 25 years after the Late Koons became the Late Koons. Too long. But a good try, even though no deduction.

I’m quoting an old blogpost, “Thoroughness”, 10/27/11, and am about to reiterate, but gently, a very old rant. Adelbert Moot delivered a lecture at my alma mater in 1914 (and no, I wasn’t in attendance then) in which he spoke of thoroughness as being that which “settles the question in more cases than any other one thing as to whether or not a person will be successful.”

Well, Judge Buch encounters a lawyer who isn’t, but gives the client a break, in Swanson-Flosystems Co., Docket No. 27975-11.

It’s three weeks before trial (and remember Judge Buch gets peevish if attorneys aren’t ready to roll three weeks before trial; see my blogpost “Throwing the Buch,” 3/5/13), and SwanFlo’s attorney is begging for a continuance (that’s called an adjournment whence I come).

This is a monumental no-no under Rule 133; if you don’t have “exceptional circumstances” (like a death certificate), move to continue thirty days or more before the date, time and place certain, or be denied as dilatory.

Here’s SwanFlo’s attorney’s sad tale: “Petitioner’s various arguments in favor of a continuance, distilled to their essence, are all premised on a lack of preparation: the case appeared headed for settlement, and thus it was not adequately prepared; the case was more complex than counsel anticipated, and thus it was not adequately prepared; a flurry of procedural motions by respondent created a significant burden, and thus the case was not adequately prepared; respondent provided inadequate discovery responses, and thus the case was not adequately prepared.” Order, p. 1 (Footnote omitted, but Judge Buch notes that if SwanFlo’s attorney wasn’t happy with IRS’ discovery responses, s/he never made a motion to compel proper responses.)

Automatic admittee to Tax Court, ya think?

SwanFlo’s attorney admits in the motion for a continuance that s/he is outclassed and wants to add counsel. That’s not a reason for continuance, and IRS yelps they’ll have to start from scratch when new counsel (or supplementary counsel) waltzes in.

But Judge Buch has a heart. There’s $2 million at stake, Swan-Flo will be seriously prejudiced if they can’t go to the bullpen, and it doesn’t look like Swan-Flo or their attorney was playing tactical games. And even though Swan-Flo’s attorney didn’t mention it in his/her motion papers, the bullpen responded and the additional counsel has filed their notice of appearance, so “(T)he hiring of additional counsel, however, provides some assurance to the Court that, if a continuance were to be granted, this case would be adequately prepared.” Order, p. 2, footnote 2.

Hope springs eternal, eh Judge?

Now IRS will be inconvenienced, it’s true, and won’t have the advantage of an inept adversary (as they usually do, encountering the self-represented and the usual run of automatic admittees; rather like shooting very large fish in a very small barrel), but that’s not prejudice.

So time out, Swan-Flo, let your relief pitcher warm up, and to move things along, here’s a pretrial scheduling order for your reading pleasure. Follow it.

I missed this while I was packing to go to Texas last week, but DC Circuit shot down IRS’ attempt to stay Judge Boasberg’s decision in Loving v. IRS  on March 27 last.

If you missed the kerfuffle, see my blogposts “Chevron, Mayo – I’m Loving It”, 1/21/13, and “Modified Loving”, 2/4/13.

And best of all, see my blogpost “A Rant – Part Deux”, 4/3/13.

DC Circuit was unimpressed with IRS’ arguments that the RTRP program should go forward in its entirety.

The per cur reads like this: “ORDERED that the motion for stay be denied. Appellants have not satisfied the stringent requirements for a stay pending appeal. See Winter v. Natural Res. Def. Council, 555 U.S. 7, 129 S. Ct. 365, 374 (2008); D.C. Circuit Handbook of Practice and Internal Procedures 33 (2011).”

While this doesn’t mean, of course, that Sabrina and her pals have a slam-dunk winner, it is a sign that Doug’s and Dave’s legacy shines a wee bit less bright.

Stay tuned.

Try Chutzpah

I won’t give Blonde Grayson Hall, 2013 T. C. Memo. 93, filed 4/4/13, a Taishoff “good try”, because it wasn’t. I must admit Blonde showed a high level of chutzpah, first by not bothering to file four years’ worth of tax returns (like a certain former mayor of Our Fair City), second by copping a plea to three counts of willful failure to file (Section 7203), in which copping she agreed to sign and did sign a Form 4549, agreeing to the tax assessed and interest and penalties, after a proper allocution by the US District Judge; third by paying the tax but not the interest and penalties (about $322K worth), and fourth, when IRS filed a NFTL, by claiming she signed the 4549 under duress.

She never appealed the sentence (a year hard), but her husband did, and Third Circuit (Blonde was a PA resident) affirmed.

I won’t go through Judge Ruwe’s lengthy (I won’t say over-lengthy) review of the law of duress, except to say that when offered a plea by the US Attorney’s Office, you can always take your chances with a jury. If you choose to forgo that course of action, it’s not duress. And complying with law, when there’s serious hurt if you don’t, is by definition not duress.

So the NFTL is sustained as to Blonde.

Careful observers will note that this opinion is captioned Blonde Grayson Hall and Neal E. Hall, giving rise to the question “so what’s Neal’s story”?

Well, first there’s a NOD from Appeals sustaining IRS’ filing against Blonde for her four years. But she and Neal also didn’t bother paying taxes for four more years after that, so there was a NOD for those. These two are quite a pair.

Blonde plays the “duress” card, so IRS moves to sever Blonde from Neal, to consider Blonde’s claim. See Rule 141(b), which provides “(T)he Court, in furtherance of convenience or to avoid prejudice, or when separate trials will be conducive to expedition or economy, may order a separate trial of any one or more claims, defenses, or issues, or of the tax liability of any party or parties.”

I note in passing that Blonde was a lawyer, admitted in Our Fair State in 1985, but currently under suspension until she straightens out her tax issues. See Matter of Hall, 67 AD3d 32 (AD 1, 2009), and 2012 NY Slip Op. 65645(U), (AD 1, 2012).

I should also note that Blonde told the NY App Div that her tax problems stemmed from being “exhausted”, and not from venality.

I can testify from my personal knowledge and experience that lawyers are often exhausted; but some of us actually file returns and pay taxes. And if we sign a 4549, that’s it.

Just back from a visit to daughters and granddaughter in the Magnolia City, celebrating first birthday of granddaughter Kathryn, I find that Tax Court has provided me with an opinion worth a rant.

To begin, I agree with Judge Boasberg that Doug Shulman and Dave Williams went from first to third without touching second (it’s baseball season and I already have my first set of tickets) 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.

IRS took an 1884 statute to do with phony Civil War claims for requisitioned cavalry mounts, and tried to make it fit for-pay preparers of income tax returns. Congress already has passed preparer penalties, and evinced no intent at any time to require registration (although they should have). Moreover, by 1884 the idea of a Federal income tax was just that – an idea. You’ll remember that Abe Lincoln got a Revenue Act through Congress in August, 1861, imposing a flat 3% tax on income, which lasted for ten years until Congress repealed it. But by 1884 all that was history.

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.

Case in Point: Thornell Johnson and Nicole Smith, 2013 T. C. Memo. 90, filed 4/2/13. The facts are not particularly novel. Both Thornell and Nicole (married during the year at issue but divorced afterwards) failed to report salary and wage income in small amounts. Nicole gets innocent spouse except as to what her couple of grand in wages adds to the tax bill at the Rule 155.

But Thornell is a for-pay preparer.

Thornell’s case involves the Schedule C panoply of unsubstantiated home office deduction, unsubstantiated Section 274 expenses, and the usual trial of dubious testimony and no reliable records. We’ve seen this before; see my blogpost “The Preparer – Unprepared”, 11/8/11.

It’s Thornell’s Section 6662 penalty argument that gets me into rant mode.

Judge Morrison: “Johnson did not specifically discuss the penalty in his arguments at trial. We ordered posttrial briefs, but Johnson failed to file one. We can, however, interpret some of his arguments at trial as assertions that he should not be penalized because he meets the requirements of reasonable cause and good faith under the terms of the section 6664(c)(1) exception.” 2013 T. C. Memo. 90, at p. 20.

OK, Thornell, lay it on us. “Johnson asserted that he did not file his returns accurately because he did not fully understand the ‘complex’ tax code. But Johnson worked as a tax preparer. He claimed that he prepared the third-highest number of tax returns of any tax preparer on the East Coast of the United States. He testified that he prepared returns for taxpayers who ran businesses and filed Schedule C with their returns. He claimed to be familiar with reporting and substantiation requirements. Thus, his purported ignorance of the rules, even if it were enough to qualify for a reasonable cause exception, is not credible. We hold that Johnson does not qualify for the reasonable cause and good faith exception under section 6664(c)(1).” 2013 T. C. Memo. 90, at pp. 20-21.

However onerous a $60 registration fee, $100 to take a test on Form 1040, and a 15-hour annual CPE requirement might be, if the self-styled preparer of “the third-highest number of tax returns of any tax preparer on the East Coast of the United States” is, as he swears, totally clueless, then how can Congress, in the face of a series of budget deficits and a national debt beyond imagining, continue to permit Thornell and his unregistered colleagues to hold themselves out to unsuspecting taxpayers as competent?

Now granted, competency does not come only from registering, passing tests and taking CPE classes. But it is a start, and registration provides a simpler means of imposing discipline on preparers than hit-or-miss audits (and I’m sure many of Thornell’s customers are in for a surprise).

But until Congress acts, Thornell is free to remain blissfully ignorant–and keep charging for preparing all those returns.