It is at least 45 years since I heard Sergeant Longry’s nasal, gravelly snarl resound through Tent City at Fort Jackson, South Carolina: “Sick call! Get out here, you sick, lame and lazy!” Only a near-death condition would suffice for ol’ Sarge.

But IRS Appeals should heed ol’ Sarge’s words. See my blogpost “Sick Sick Sick”, 9/26/12, the sad tale of A. DeeWayne Jones and his remand to Appeals from Judge Marvel.

Now Judge Wherry deals with the issue, this time featuring LaMar D. Pomeroy, briefed and argued with Dixie L. Pomeroy in 2013 T. C. Memo. 26, filed 1/22/13.

LaMar isn’t very sympathetic. He’s a habitual non-filer and frivolity merchant who has run up a substantial tax, additions and frivolity penalty liability. Judge Wherry: “Petitioners, LaMar and Dixie Pomeroy, are husband and wife, and both are retired. They have a long history of noncompliance with Federal income tax responsibilities, with unpaid income tax liabilities for the years 1997 through 2009. In addition, Mr. Pomeroy has unpaid liabilities for civil penalties for frivolous submissions assessed under section 6702(a) for the tax years 1999, 2000, 2003, and 2005. Mrs. Pomeroy has unpaid liabilities for civil penalties for frivolous submissions assessed for tax years 1994, 1999, 2000, 2003, and 2005.  For tax years 1997 through 2003 and 2006, petitioners did not file income tax returns, and respondent [IRS] prepared substitutes for returns under section 6020(b).” 2013 T. C. Memo. 26, at p. 3.

But he is a sick fellow, and Appeals didn’t give Dixie a fair chance to get a doctor’s note attesting to LaMar’s deteriorated physical state. Dixie did get a doctor’s letter, but produced it after the administrative record had closed, and Ninth Circuit learning bars introduction of such evidence after the administrative record has closed.

LaMar tried offers-in-compromise, but COIC determined he and Dixie could pay in full before the SOL on assessments ran out, and that’s fine, even though LaMar argued that 48 months was the limit, and COIC had to consider his physical ailments.

“The crux of petitioners’ argument appears to be that Mr. Pomeroy’s medical condition qualified them for offers-in-compromise based on effective tax administration even though they submitted the offers under doubt as to collectibility grounds. Indeed, IRM pt. 5.8.11.4(3) (Sept. 23, 2008) states that, for offers submitted as doubt as to collectibility offers, the settlement officer should also consider the offer as an effective tax administration offer if special circumstances exist even if the collection potential exceeds the liability. Petitioners point to numerous instances in the record to show that Appeals was well aware of Mr. Pomeroy’s stroke and should have considered the offers as effective tax administration offers once it determined that petitioners could fully pay the liabilities.” 2013 T. C. Memo. 26, at p. 17.

“Petitioners alerted respondent numerous times that Mr. Pomeroy was gravely ill. The administrative record reflects that Appeals was not only aware that Mr. Pomeroy had suffered a stroke, which could very well have a drastic effect on petitioners’ medical expenses, but it was also aware that Mrs. Pomeroy was in the process of trying to get a letter from a physician. SO gave petitioners only 10 business days, between the November 29, 2010, date of the letter and the December 13, 2010, deadline, to obtain a prognosis or diagnosis from a doctor.” 2013 T. C. Memo. 26, at pp. 18-19 (Name and footnotes omitted).

But one omitted footnote is worth quoting: “As Mrs. Pomeroy testified at trial: “’[W]hen you have a family member that is almost on their death bed, it gets kind of hard to do everything[.]’” 2013 T. C. Memo. 26, at p. 18, footnote 8.

Judge Wherry decides he can’t evaluate the record based upon what appears therein. So he sends the case back to Appeals, where presumably Dixie can put in the rejected doctor’s letter, and whatever other pictures, descriptions and accounts she can muster to document LaMar’s lamentable condition.

Even a hardened sinner like LaMar can get due process in Tax Court, if he’s on sick call.

Doug Shulman’s legacy, as brought to fruition by Dave Williams at the Return Preparers Office of IRS, namely the regulation of hitherto-unregulated tax return preparers via the Circular 230 RTRP (Registered Tax Return Preparers, pronounced “retreps”) provisions, has been torpedoed by Judge Boasberg in Loving vs. IRS, Civil Action 12-385, filed 1/18/13, in US District Court for the District of Columbia.

Sabina Loving and two other paid return preparers claim that IRS has no statutory authority to require them to take a test, pay an annual fee, and take 15 hours of CPE each year.

Judge Boasberg agrees. The 1884 statute (31 USC §330), which gives the Secretary of the Treasury authority to regulate representatives of claimants appearing before the Department, doesn’t give IRS authority to regulate those who merely prepare returns. Of course, if they show up at examination of a return they prepared, that’s another story.

The test is Chevron, of course; see my blogpost “Carpenter, Colony, Chevron and Mayo”, 4/26/11. When questioning the validity of a regulation, first see if Congress has spoken unambiguously; if so, game over, and the statute rules, says Chevron. Only if Congress either hasn’t spoken, or has spoken ambiguously, does a Court test whether the regulation is arbitrary, capricious or manifestly contrary to the statute, says Mayo.

Judge Boasberg says that §330 is clear: you have to do more than fill out a self-assessment, which is all that a tax return is, to represent someone before the IRS. And Congress could well desire to have those who deal with examination and appeals demonstrate greater expertise and character than one who fills out a return.

Moreover, Congress has enacted a number of specific preparer penalties, all of which would be overturned if IRS could use its penalty powers under Circular 230 to regulate preparers, as well as deprive them of certain procedural due process.

While IRS may have valid policy considerations, the statute remains, and only Congress can allow the procedures IRS desires. Likewise, prior inconsistencies in IRS’ position on preparers would only be relevant if we go to the arbitrary or capricious analysis, but we need not go there, says Judge Boasberg.

You can be sure we’ll be hearing more about this. I know the professional associations will be following this case as it proceeds.

That’s The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, Mark V. Holmes. There being no decisions out of Tax Court today, 1/18/13, I pulled a couple of orders from yesterday’s bushelbasket.

First up is Vernon Walter Menifee, III, Docket No. 8628-11, filed 1/17/13. Judge Holmes sets the scene: “This case is on the Court’s May 20, 2013 trial calendar for Buffalo, New York. It arises from seven years of deficiencies that the IRS determined Mr. Menifee owed after he apparently failed to file any returns.” Order, p. 1.

Simple enough, right? Just check out any SFRs, bank record reconstructions, third-party notices, receipts, logs, vouchers, and Vern’s quality and manner of life during the years at issue. But that won’t do, because Vern has another problem besides his tax problem.

“Mr. Menifee is cooperating with his counsel as best he can from federal prison, but the large amounts and numerous issues led both parties to agree that it made sense to wait until his release to try to settle the case or get it ready for trial.

“The Court will put this on a very long-term status report track and contact the parties — after Mr. Menifee is released — to set a date for the first one.” Order, p. 1.

Sounds like Vern has plenty of time to think about how to defend this case. And remember our friend Robert L. Willson, Sr., the star of 2011 T.C. Sum. Op. 132, filed 11/23/11. Judge Holmes noted in that case that the IRS let Willie serve out his time before going after him. See my blogpost “Basis for Dummies”, 11/24/11.

So don’t expect a decision soon.

Next up are Vasant S. & Panna V. Kale, Docket No. 11323-11, filed 1/17/13. Vas and Pan didn’t show when their case was called at the LA trial part. IRS moved to throw out the case for failure to prosecute, but Judge Holmes held off. “Petitioners did have counsel, and the Court wanted to ensure that it is petitioners and not just their counsel, who defaulted. We ordered them to show cause why we shouldn’t dismiss their case for lack of prosecution, and ordered them (and not just their lawyer) to be served.” Order, p. 1.

Remember my blogpost “How Not To Do It”, 11/21/12, where an attorney I pseudonymously called Feckless Freddie got the right-about-face from Judge Holmes?

Same story. Comes the return date of the OSC, and neither Vas nor Pan shows up or shows cause, and their counsel is similarly AWOL.

So Judge Holmes tosses their case, and nails Vas and Pan for better than $200K in deficiencies and penalties for the two years at issue.

But you can’t say Judge Holmes doesn’t try.

I missed this one, and it shouldn’t go unblogged, especially as it received some interest in specialist circles. I’m referring to Huda T. Scheidelman and Ethan W. Perry, 2013 T. C. Memo. 18, filed 1/16/13, another façade easement deduction case.

You’ll remember Huda from my blogpost “Method to His Madness”, 6/18/12, where I reported on Second Circuit’s finding that, although IRS might not like Huda’s expert’s appraisal, it was an appraisal, and facially comported with IRS’ regulatory provisions. So Second Circuit sent Huda and the IRS back to Tax Court, so that Tax Court might assess the credibility of the appraisal and its evidentiary worth.

Judge Cohen sets out the parameters of the remand: “The case was remanded for a determination of the fair market value of the easement if we do not accept respondent’s other statutory and regulatory arguments, which relied on section 170(h)(5)(A) (a contribution shall not be treated as exclusively for conservation purposes unless the conservation purpose is protected in perpetuity) and section 1.170A-14(g), Income Tax Regs. (requirements which must be met for the perpetuity requirement to be satisfied). See Kaufman v. Commissioner, 136 T.C. 294 (2011), aff’d in part, vacated in part and remanded in part, 687 F.3d 21 (1st Cir. 2012). Respondent no longer contends that the conservation deed and the annexed lender agreement failed the requirements of section 1.170A-14(g)(6), Income Tax Regs., that the contribution be protected in perpetuity.” 2013 T.C. Memo. 18, at p. 2.

So a thing of beauty need not necessarily be a joy forever, Mr. Keats. But it has to be worth something, at least in the negative sense that restricting the owner thereof from tampering therewith decreases the worth of the owner’s property whereon the thing of beauty rests.

And it isn’t worth anything, finds Judge Cohen. But even so, Judge Cohen will not revisit Tax Court’s earlier holding to let Huda and Ethan off the penalty hook. Likewise no new trial, as the parties agree to let the previous trial record stand and not add to it.

Once again, Tax Court disputes not the qualifications of Huda’s appraiser, Michael “Iron Mike” Drazner, but his conclusions. “There is no material dispute between the parties with respect to the value of petitioner’s property before the easement. Respondent’s criticism of the Drazner report, with which we agree, focuses on Drazner’s purported determination of the value of petitioner’s property after the easement was granted. Drazner determined the value of the easement by applying an 11.33% discount to the value of the property. His derivation of that percentage was not based on reliable market data or specific attributes of petitioner’s property, but rather on his analysis of what the courts and the IRS had allowed in prior cases.” 2013 T. C. Memo. 18, at p. 14.

This is an echo of the “Primoli memo”, the 10%-15% diminution that was a throwaway in an IRS training memo, long since superseded. See my blogpost abovecited. Or put another way, this appraisal was based on what would get by, not what was true.

But on the trial Huda didn’t call “Iron Mike”, although she referred to his report in her brief. She went with Michael Ehrmann, also qualified but a protegé of NAT, sponsor-seller of easement deductions. His testimony was even more flawed than Iron Mike’s appraisal. “He relied on outdated information rather than contemporaneous inspection, used alleged comparables from outside the geographical area of petitioner’s property, and applied an unsupported and unrealistic adjustment to petitioner’s Brooklyn townhouse as compared to a detached house in Evanston, Illinois. His methodology is undermined by these errors.” 2013 T. C. Memo. 18, at pp. 15-16.

Having compared apples to stale Fig Newtons, Mr Ehrmann’s credibility was gone.

Of course, IRS’ experts show that the property was rendered more valuable by being historic, and that New York City’s Landmarks Preservation Commission serves as fierce watchdog of historic strictures.

Finally, IRS had the local neighborhood preservationist guru testify that NYCLPC was good people, and that preservationism made the neighborhood what it was (desirable–and pricey).

So Iron Mike and Mr Ehrmann are discarded, along with Huda’s deduction.

Especially When They’d Rather Not

It’s an old jibe that lawyers are miserable businesspeople. Lawyers are too busy dealing with everyone else’s problems to take care of their own. And bookkeeping is such a tedious business, when dealing with clients, adversaries and fine theoretical points of law is so much more fun.

But tedium and busyness won’t help when a lawyer, especially a tax lawyer, fails to report heavy-duty amounts of income and even gets nailed criminally once, when other years get examined for the same sort of thing.

So The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, Mark V. Holmes, keeps the SOL open and lays a fraud penalty on Owen G. Fiore, in 2013 T. C. Memo. 21, filed 1/17/13.

Incidentally, this is a bad day for lawyers, as Humphrey, Farrington & McClain, P.C., of Independence, MO, get their unreimbursed expenses recharacterized as loans, per Sections 446 and 481, in 2013 T. C. Memo. 23, filed 1/17/13. Those who like accountancy can read this one for themselves. But at least Humphrey & Co. avoid most of the Section 6662(a) penalty by virtue of their good faith.

Owen G. isn’t so lucky.

Owen G. was a lawyer with an auditing background. Taxation was his specialty, and he was a leader in the field out West, making it rain; finding, wining and dining clients; and delighting his white-shoe partners with a bountiful harvest at the annual bloodbath–I mean compensation meeting.

Finally, Owen G. strikes out on his own, but is a technophobe who keeps insouciant records, doesn’t open bank statements and leaves everything to “his Gal Friday”, who is as technophobic as he is.

IRS finally catches up to Owen G., but the revenue agent is a new hire who gets bogged down on unsubstantiated deductions, not unreported income, and Owen G. gives her a finely-choreographed ballet, using the Macbeth gambit: “Tomorrow and tomorrow and tomorrow”: rescheduling meetings, avoiding, postponing, promising paper and not delivering.

Now IRS calls in one of their gunners, who shows up unannounced, looks around, reads Owen G. his rights, reconstructs income, and Owen G. pleads to one count for one year, reserving his rights for the others. So Judge Holmes has to go through the merit badges of fraud, to see if Owen G. is an eagle scout or a vulture.

Floating over this case is Owen G.’s history: he is a tax attorney with an auditing background. But his sloppy recordkeeping might be attributed to his client-searching and the fact that he went from big firms with lavish accounting support to single-shinglehood (I did that, and let me tell you, after forty years of life in firms large and small, it don’t come easy). So Judge Holmes isn’t clearly convinced, and “clear and convincing” is the standard of proof for fraud.

Now Owen G. failed to play nice with IRS, shucking and dodging. Judge Holmes: “Fiore was a master of delay during the audits and the criminal investigation, repeatedly rescheduling meetings and giving up documents only grudgingly or not at all. He offered implausible explanations about nontaxable deposits and transfers into his general account. Still, he was constantly traveling to develop business, to set up his Idaho retirement, and to advise his clients. He shouldn’t have canceled so many meetings with the IRS, but–though it edges the Commissioner closer to proof of fraud here–it’s not quite clear and convincing given Fiore’s consistency in poor recordkeeping.” 2013 T. C. Memo. 21, at p. 18.

And Owen G. was smart enough not to agree he evaded for any year but the year for which he pled guilty, so IRS can’t argue pattern-of-fraud clearly or convincingly. That the first IRS revenue agent didn’t check out unreported income doesn’t help IRS.

But now comes the meat of Judge Holmes’ analysis, and again, The Great Dissenter goes where few have gone before. “So far, then, it’s not clear whether Fiore had fraudulent intent. But underlying all the factors discussed above is another important question–was Fiore willfully blind to the unreported income?

“Willful blindness is a relatively underdeveloped area of law in Tax Court jurisprudence–at least in fraud cases. In Fields v. Commissioner, T.C. Memo. 1996-425, 1996 WL 530108, at *14, we mentioned willful blindness. Fields received advice from his attorney that he should report commission income and ignored the advice. Id. We reasoned that Fields’s “lack of regard for [his attorney’s] advice was for the primary purpose of evading taxes.” Id. We added that, although not necessary to the conclusion,

‘fraudulent intent can be found by reasonable inference drawn from proof that a taxpayer deliberately closed his or her eyes to what would otherwise have been obvious to him or her * * * a trier of fact may infer that an individual knew of his or her evasion of tax from his or her willful blindness to the existence of that fact.’” 2013 T. C. Memo. 21, at p. 31.

So Judge Holmes goes into willful blindness as proof of culpability in the criminal context at length, and finds that Owen G. knew he needed lots of cash, told a prospective lender he made lots of money, yet didn’t open bank statements, and didn’t keep good records.

“We cannot accept that a person of Fiore’s intelligence, training, and experience was not aware when he filed his returns for 1996 and 1997–at a time when he knew his need for cash was ballooning–that there was a high probability that he was underreporting his income. And we find that he deliberately avoided steps that would have confirmed that underreporting, since all he had to do was read his monthly bank statements to verify the accuracy of his estimates of taxable income that he put on his returns.” 2012 T. C. Memo. 21, at p. 31.

So Owen G. gets hammered for two more years of fraud. What an unhappy end to a career. Read and heed, tax lawyers.

No, it’s not Peter Buck’s and Michael Stipe’s 1991 R. E. M. hit, it’s the lament of Lucy Gabey, in her eponymous Tax Court case, 2013 T. C. Memo. 17, filed 1/16/13.

I find popular songs do define the essence of litigation, especially tax litigation, but that’s a story (or a blogpost) for another day.

Meanwhile, Lucy is a tribal elder of the Navajo nation, and she claims Section 152(c)(2) deprives her of her religion and equal protection of the laws. Lucy is supporting her nephew, a minor. Her nephew is neither her child nor her descendant; he is not “a brother, sister, stepbrother, or stepsister of petitioner or a descendant of any such relative”. 2013 T. C. Memo. 17, at pp. 2-3.

But he is a clan relative, and the Navajo have clan relationships that mandate such support. Unfeeling IRS, carrying out the mandate of an unfeeling Congress, strips Lucy of her dependency exemption deduction, head of household filing status, earned income credit, and child tax credit, but later concedes the nephew’s qualifying relative qualification, giving Lucy back her dependency exemption deduction.

“According to petitioner, in Navajo culture and tradition children are not only children of the parents; they are also children of the clan. Petitioner submits that a Navajo clan consists of the first clans of the child’s mother, father, maternal grandfather, and paternal grandfather and that the clan relationship may extend beyond the foregoing if, for example, the child is adopted.” 2013 T. C. Memo. 17, at p. 5.

It’s unusual to see Constitutional arguments in Tax Court outside of protester cases, where they get blown away, but here Judge Cohen has to deal with the Constitution and the Religious Freedom Restoration Act of 1993 (known to the cognoscenti as RFRA). RFRA was intended to restore compelling governmental interest and least intrusive method to tests for infringement on free practice, and to give litigants a claim or defense if burdened by governmental action inhibiting their religious convictions.

I’ll skip the law review stuff; it’s obvious that I wasn’t on Law Review, having neither the brains nor the patience for writing seven-page footnotes. I am an ardent fan of the Supreme Court Justice (was it O. W. Holmes?) who brushed aside a citation to the Harvard Law Review thus: “I don’t pay attention to schoolboy magazines.”

But the upshot is that RFRA only applies if a person is deprived of a benefit because of, or compelled by threat of civil or criminal penalty to act contrary to, their religious exercises.

“The section 152(c)(2) relationship classification does not condition petitioner’s receipt of tax benefits on her forgoing her clan obligations to TD or force her to choose between following her clan obligations to TD and receiving tax benefits. Furthermore, the section 152(c)(2) relationship classification does not deny petitioner tax benefits because she fulfills her obligations to TD or force her to abandon her clan obligations to TD by threat of civil or economic sanctions. Regardless of petitioner’s ineligibility for tax benefits such as the earned income credit, she is at liberty to fulfill her clan obligations to TD. Petitioner’s argument for the burden on her religious rights is, instead, financial hardship and continuing Navajo child poverty. However, the Supreme Court has rejected the notion that a taxpayer’s free exercise of her religious beliefs is somehow not fully realized unless it is subsidized by tax benefits such as the earned income credit.” 2013 T. C. Memo. 17, at pp. 17-18 (Citation omitted).

No burden, so IRS need not show “least invasive method”.

Lucy’s arguments about Navajo child poverty and the Treaty of 1868 don’t fare any better. “Neither financial need nor poverty, standing alone, identifies a suspect class for purposes of equal protection analysis. There is no proof or even an indication that Congress selected or reaffirmed the section 152(c)(2) relationship classification because of or in spite of any adverse effects on petitioner or the Navajo or that the section 152(c)(2) relationship classification is a hostile and oppressive discrimination against her and the Navajo. For the foregoing reasons, the section 152(c)(2) relationship classification neither involves petitioner’s fundamental right to the free exercise of her religion nor proceeds along suspect lines.” 2013 T. C. Memo. 17, at p. 11. (Citations omitted).

“A strong presumption of constitutionality is granted to legislation conferring monetary benefits, because Congress should have discretion in deciding how to expend necessarily limited resources.” 2013 T. C. Memo. 17, at p. 12 (Citation omitted).

Finally,  IRS argues that Section 152(c) is quick-and-easy, and Judge Cohen agrees. Any bright-line test will leave somebody out who should be in, but unless there’s an invidious purpose behind it, the test must stand.

While I was mediating a real estate litigation on January 14, President Obama appointed Ronald L. Buch to the Tax Court Bench, for a term to end in 2028. The President never even bothered to leave me a message, much less ask my opinion; I feel slighted.

But I bear Judge Buch no ill-will. In fact, I wish him well.

Judge Buch followed the usual cursus honorum to reach his present exalted position, from a tax concentration in law school to the obligatory LL.M. in taxation, admission to the Bars of several States, to a Big Four accounting firm to Chief Counsel’s Office, back to a couple of white shoes with partner status, with a bushel-basketful of Bar Association committee chairs thrown in. A nice resume.

So hail to Judge Buch. I await many learned decisions.

 Or, The Hidden-Ball Trick

Once more, Joe Alfred Izen, Esq., and Karen Cooley are trying for Section 7430 administrative and litigation expenses; see my blogpost “The $2000 Misunderstanding”, 6/12/12. This time Judge Kroupa encounters the dynamic duo in Karen Cooley, 2013 T. C. Memo.15, filed 1/15/13.

Readers of my earlier blogpost will remember that Joey A. and Karen are married, but signed a post-nup that said each would keep separate all income and expenses. As they live in a community property state (Texas), absent such an agreement each spouse’s property is shared with the other.

Joey A. and Karen record their post-nup, Karen files married separate, doesn’t include half of Joey A.’s income, and when IRS increases Karen’s income by that amount, Karen, represented by Joey A. of course, asserts the post-nup (styled a “partition agreement”) and tells IRS to search the public records for same. IRS gives Karen a SNOD instead.

Joey A. files a petition with Tax Court, asserting the partition agreement without providing a copy to IRS.

“Respondent [IRS] requested additional time to answer the petition to obtain the partition agreement from petitioner. On the very same day petitioner’s counsel sent the partition agreement to respondent by facsimile. Respondent conceded the deficiency determination in his answer.

“Petitioner thereafter filed a motion for litigation costs and expenses. Petitioner’s purported costs were primarily incurred during the administrative proceeding. Accordingly, we interpret it as a motion for administrative costs as well as litigation costs. Respondent opposes the motion.” 2013 T. C. Memo. 15, at p. 3.

“Petitioner argues that respondent’s administrative position was unreasonable because respondent did not follow the ‘lead’ petitioner provided to search public records for the partition agreement. Respondent counters that his administrative position was reasonable because petitioner did not rebut the community property presumption by providing the agreement. We agree with respondent.” 2013 T. C. Memo. 15, at p. 6.

In a community property state, a spouse filing separately is deemed to have received one-half of the other spouse’s income. While IRS has been found to be justified when it searches the public record, it is not deemed unjustified when it fails to do so.

And Karen is an old hand at the hidden-ball trick, concealing evidence until after the proceeding is commenced. Judge Kroupa cites 2012 T. C. Memo. 164,  the subject of my abovecited blogpost, wherein Judge Holmes, The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being,  berates Karen and Joey A. for their trickery in an earlier case for not playing show-and-tell up front.

So IRS is substantially justified both at the administrative and litigation checkpoints. And to quote my earlier blogpost again “So no payday for Joey A. But Joey A is quite a card. And he and Karen are quite a team.”

This one takes me back to my days on the stoop of a Bronx apartment building, long ago, in a galaxy far away. We played Baby Base or our version of handball (it would take too long to explain) with the pink rubber ball bearing the jet-black script lettering “Spalding” (pronounce it “Spaldeen”, accept no substitutes, or forever be labeled a foreigner; and yes, it is named for the famous Albert Goodwill Spalding, 1850-1915, pitcher and sporting goods magnate). If a ball went astray, or someone committed a solecism not requiring a graver sanction, the play was scrubbed and a “do-over” declared, occasionally followed by a vociferous colloquy. I’m getting nostalgic; oh, for a fifteen-cent Creamsicle from the Good Humor truck so long since gone!

Anyway, back to serious business. Comes now Special Trial Judge Robert N. Armen, Jr., the “Judge With a Heart” (see my blogpost “Ignorance Is Bliss?”, 11/10/11), and gives a do-over to IRS and Pete Disimone, Docket 23850-12, filed 1/11/13, the same day he got the case from Ch. J. Thornton. Now that’s what I call service!

IRS hit Pete with a $2700 deficiency for TY2009, but didn’t send the SNOD until April 16, 2012. Okay so far, but Pete never responds, and when he gets an “amount due” notice in August, he fires off a Tax Court Petition to redetermine in September, claiming IRS sent the SNOD to the wrong address, and IRS had his new address because he filed his TY2011 return timely in 2012, and that’s where IRS sent the “amount due” notice.

No, says IRS, it’s true you filed, but on April 16 we couldn’t know your new address if you filed April 15; but IRS doesn’t attach a copy of the return or any evidence when they received it to their papers seeking to dismiss for want of jurisdiction (late filing of petition).

STJ Armen: “… respondent [IRS] filed a Response to petitioner’s Objection. In his Response, respondent generally does not dispute petitioner’s factual contentions and specifically ’does not dispute that the filing by petitioner of his 2011 tax return * * * constituted ‘clear and concise notification’ of his new address.” Respondent contends, however, that petitioner filed his 2011 return on April 15, 2012, and that respondent was unable, in one day’s time, to update his records to reflect petitioner’s new address. However, the record does not include a copy of petitioner’s 2011 return nor any transcript showing its date of receipt by respondent. Further, under the circumstances herein, we are unwilling to uncritically regard a statement in petitioner’s Objection as an admission upon which respondent can rely to seek the dismissal of this case.

“Noteworthy is the fact that the year for which respondent determined a deficiency is the calendar year 2009. The three-year period of limitations on assessment has yet to expire. Thus, respondent has several months’ time within which to mail petitioner a statutory notice addressed to him at his current (and last known) address. If respondent were to do so, and if petitioner were then to file a petition with this Court within the statutory 90-day period, this Court would have jurisdiction to redetermine the deficiency.” Order, p. 2. (emphasis by the Court).

So STJ Armen denies IRS’ motion to dismiss, but enters his own order, dismissing the case because the SNOD was sent to the wrong address.

Now the parties have a do-over.

Just Fill In the Blanks

This is the story of the late Dr. Sheldon C. Sommers, physician and art-lover, and his less-than-happy family, wife Bernice, and nieces Wendy, Julie and Mary Lee. Doc Shel had an art collection literally to die for, and he did. But before departing this vale of tears, Doc Shel gifted (or maybe not) his precious collection to the nieces aforesaid, via interests in a limited liability company created for the purpose.

Doc Shel had been married to Bernice but divorced her before he started the LLC. His only blood relatives were the nieces aforesaid. He had the paperwork done, but there were blanks therein, and thereby hangs the tale of Estate of Sheldon C. Sommers, Deceased, Bernice Lang Sommers, Executrix, Petitioner, and Wendy Sommers, Julie Sommers Neuman, and Mary Lee Sommers-Gosz, Intervenors, 2013 T. C. Memo. 8, filed 1/10/13, with Judge Halpern as our docent.

“These consolidated cases arose as a result of two notices of deficiency issued to petitioner in January 2007. One notice determined gift tax deficiencies of $245,733 and $209,723 for 2001 and 2002, respectively. The other determined an estate tax deficiency of $542,598. The gift tax deficiencies (challenged by petitioner in docket No. 9305-07) are premised on respondent’s position that, in reporting as taxable gifts decedent’s December 27, 2001, and January 4, 2002, transfers of LLC units to the nieces (2001 and 2002 transfers), a position which petitioner now rejects as improper, petitioner undervalued those units for Federal gift tax purposes.” 2013 T. C. Memo. 8, at p. 4.

So why is Bernice here? Well, after Doc Shel divorced her and gifted (or didn’t) the artwork to the nieces aforesaid, he and Bernice remarried, after which Doc Shel died, fewer than the three magic years after the gift (or non-gift). Doc Shel, at the time of the gift (or non-gift), was a resident of the State of Indiana, home of raconteurs George Ade, Ernie Pyle and Jean Shepherd.

His Indiana counsel set up the LLC, Doc Shel signed over the artworks, including but not in any way in limitation of the generality of the foregoing, as the high-priced lawyers say, a few by Bernard Buffet, Charles Burchfield, Alexander Calder, Salvador Dali, Edward Hopper, and Joan Miro.

Standard operating procedure is to create LLC as a special purpose entity, ringed round with a moat of operating agreement provisions to prevent sale, dispersal or falling into hands of deadbeat spouses, profligate offpsring or their multiplex creditors. Now to get the LLC interests out of Doc Shel into the hot little hands of the nieces aforesaid without incurring gift tax.

“Decedent then would make gifts to the nieces, over a period of time, of his interests in it. The attorneys explained to decedent that, if the artwork was owned by a limited liability company, subsequent gifts of minority interests in it would have a lower value than gifts of the artwork itself because the recipients could not freely resell the interests and would lack control of it.” 2013 T. C. Memo. 8, at p. 9.

In other words, minority interest discount and limited scope of sale would decrease the FMV of the individual interests each niece aforesaid got. And the artwork was already spread out among the residences of the nieces aforesaid.

Because the unified credit was scheduled to increase over two years, Doc Shel and his advisers decided to split the gifts. “The idea was for decedent to give the nieces, in 2001, LLC units in an amount not to exceed his “basic exclusion amount” ($675,000) plus the three $10,000 annual exclusions then available. He then would transfer any remaining value (in the form of LLC units) in 2002 or in a later year.” 2013 T. C. Memo. 8, at p. 9. In the later years, he hoped to use the annual exclusion amounts, as they increased.

Okay, but as it wasn’t known in Year One (2001) what was the worth of the art, the documents left the percentages of LLC interests blank in the assignments, to be filled in when they got the appraisal.

They got the appraisal in 2002. There was good news and bad news. First the good news: the appraisal was way higher than Doc Shel or his advisers expected. Their reaction would have looked great on Antiques Roadshow. The bad news: the basic exclusion amount was way low, the annual exclusions a joke, so much gift tax would follow.

So the assignment of LLC interests was amended in 2002 to provide that the nieces aforesaid would pick up whatever gift tax wasn’t basically or annually excluded. And the blanks were filled in with the percentage interests each was getting.

Then, you remember, Doc Shel remarries Bernice, and dies. Bernice is Doc Shel’s sole legatee and executrix. The good news–Bernice gets everything. The bad news–everything includes a thwacking great estate tax bill, as the Indiana appraisal was way low, and gifts inside the three-year curtain are included in the estate.

Bernice wants either the gifts canceled and her marital exclusion boosted thereby, or the nieces to eat the enhanced gift tax and estate tax based on the true value if they get to keep the gifts.

In the meantime, Bernice and the nieces aforesaid battle it out in an Indiana arbitration (Bernice loses; arbitrator finds Doc Shel surrendered dominion and control in Year One notwithstanding blank spaces in the assignment), which the Indiana intermediate appellate court affirms. Then Bernice goes to New Jersey (Doc Shel moved from Indiana to New Jersey when he remarried Bernice, and died there) and tries her luck in their courts, but strikes out there as well. The advisers were dual agents for Doc Shel and the nieces aforesaid; all they did was fill in the blanks.

Not a whit dismayed, Bernice claims in Tax Court that Federal law is different, collateral estoppel and issue preclusion don’t work, whether the Indiana or the New Jersey variety.

After much palaver, Judge Halpern finds “Petitioner is collaterally estopped by both the Indiana and New Jersey decisions from arguing (1) that the 2001 and 2002 gifts were not gifts for Federal gift tax purposes and (2) that, in making those gifts, decedent retained a section 2038(a)(1) power to ‘alter, amend, revoke, or terminate’ those gifts until that power was relinquished on April 11, 2002.” 2012 T. C. Memo. 8, at pp. 42-43.

Bernice makes much over the blank spaces in the assignment, claiming these showed Doc Shel could have altered, amended, etc., the gift. No, says Judge Halpern: “We interpret the 2001 and 2002 gift documents in the context of the overall agreement among decedent and the nieces, which was for him to give his LLC units to them free of any obligation on his part to pay gift tax. On December 27, 2001, and January 4, 2002, the actual number of LLC units that decedent could transfer on those dates, free of gift tax, was unknown because the parties had not yet received the … valuation. The parties agreed, however, that once they had received the … valuation the blank LLC share amounts would be filled in on the basis of that valuation. Thus, the blanks manifested the parties’ intent to have [advisor] complete the gift documents consistent with their agreement that decedent give his LLC units to the nieces free from Federal gift tax. The parties’ intent with respect to the blanks was to have [advisor] carry out the terms of the original agreement, not to grant decedent the right to alter, amend, revoke, or terminate it. When the … valuation came in higher than expected, [advisor] advised the nieces that both prongs of their agreement with decedent could not be realized because decedent could not transfer all of his LLC units and still avoid gift tax; i.e., the 2002 gift would be subject to tax. The nieces and [advisor] were able to preserve the terms of the original agreement by having the nieces agree to pay the 2002 gift tax associated with the 2002 gift (a solution to the problem that had been discussed during the nieces’ initial meeting with [advisor]), and the original 2002 gift document was modified to reflect that undertaking on the part of the nieces. That modification and the other (nonsubstantive) modifications to the 2001 and 2002 gift documents carried out the parties’ original agreement; they did not alter or amend it.

“In essence, filling in the blanks was to be a ministerial act of completing, not revising or abandoning, the terms of the parties’ original agreement. The one substantive change that did occur (the nieces undertaking to pay any gift tax) was required and previously contemplated as a means of satisfying the one condition that had been built into the original agreement: that decedent not be subject to gift tax. That change enabled decedent to give all, rather than a portion, of his LLC units to the nieces, tax free, just as the parties intended.” 2013 T. C. Memo. 8, at pp. 44-46 (footnote omitted).

So it’s time to try the valuation of the art, and who must pay what by way of estate tax and gift tax.