to all my loyal readers and friends.

Has hit Tax Court, and today, 12/20/12, all the filed cases involve unattached Forms 8332, the disclaimer of deductions and credits for children of divorced or separated parents.

I’ve been blogging this subject almost continually since Mickel and Mary Briscoe, 2011 T.C. Memo. 165, filed 7/11/11; see my blogpost “Supported Child, Unsupported Exemption”, 7/11/11. I blogged it again yesterday; see my blogpost “Swift, Light and Unattached”, 12/19/12.

The problem, of course, lies with the trade-off of tax benefits for timely payment of child support. As The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, His Honor Mark V. Holmes, put it in his dissent in Billy Edward Armstrong and Phoebe J. Armstrong,  139 T. C. 18, filed 12/19/12. “…maybe the Secretary, Congress, or our reviewing courts will decide that the more reasonable course is to read the Code to ensure that conditions on allocating the tax benefits of parenthood–conditions that Congress expected to continue when it enacted section 152(e), conditions that several states require as part of their family law, and conditions that parents assume in good faith are enforceable and effective will, if a parent like Mr. Armstrong fulfills them, be honored.”

I know IRS is neither Family Court nor Judge Judy. Commissioner Campbell cannot decide whether Daddy paid the full boat so he gets the deductions and credits; her job is to collect the revenue and enforce the law as Congress wrote it. IRS has few enough resources as it is. Just ask National Taxpayer Advocate Nina (“The Big O”) Olson.

And suing the matrimonial lawyers won’t help, if State law provides that tax incidents must be considered in awarding child support and alimony. And even if State law doesn’t, if Mama won’t sign a Form 8332, or a document that says exactly the same thing and states it was prepared solely and exclusively as a substitute for Form 8332 and for no other purpose or purposes whatsoever (in which latter event why not just sign a Form 8332?), Papa can sue her. Lotsa luck.

In fact, Jackson M. Browning did exactly that, in 2012 T. C. Sum. Op. 121, filed 12/20/12. Papa Jack and Mama Dane were never married, but had a son. They had a joint parenting agreement embodied in an order of the local court. They didn’t live together during the year at issue. Mama had custody but Papa Jack had visitation rights. He had to pay child support for his son, and Mama and Papa Jack would take the tax breaks in alternate years, but Jack got his only if he paid.

Judge Gale: “The permanent orders required petitioner and [Mama Dane] to alternate claiming the ‘tax dependency exemption’ for [son]. They granted petitioner the right to claim the exemption for 2007 and succeeding odd-numbered years and [Mama Dane] the right to claim the exemption for 2008 and succeeding even-numbered years. Petitioner was not entitled to claim [son] as a dependent for a given year unless he had paid all court-ordered child support for that year. The permanent orders were signed by [Mama Dane’s]  attorney indicating they were ‘approved as to form’ but not by [Mama Dane] personally.” 2012 T. C. Sum. Op. 121, at p. 3.

How the local judge allowed that eludes me, unless Mama Dane personally participated in all the hearings and is estopped to deny the deal. Howbeit, Papa Jack files his return without the Form 8332. Papa Jack doesn’t ask for the Form 8332 for the year at issue for nearly four years, but when he does, Mama Dane tells him to take a walk as he’s a deadbeat. He sues Mama Dane in local court, but when the Tax Court trial comes on, the local judge hasn’t ordered Mama Dane to cough up.

Post-trial, the local judge orders Mama Dane to sign, and she does. Papa Jack files the signed 8332.

Too late, says IRS. Mama took the deductions and credits, and now the year is closed so we can’t get back the credits from Mama Dane, and giving Papa Jack the deductions and benefits now would be a double-dip. “We have concluded in a number of cases that a noncustodial parent who fails to attach a Form 8332 to his or her return as filed is ineligible to claim the dependency exemption.” 2012 T. C. Sum. Op. 121, at p. 10. I omit the string of citations.

Judge Gale buys the double-dip argument. No deductions or credits for Papa Jack, but IRS generously doesn’t ask for penalties.

OK, so what do we do now? Educate the local matrimonial-family law bar, and the judges too, for a start, so they stop making unenforceable booby-trap deals. Perhaps enact legislation that filing a Form 8332 when all payments due for child support have not been made, or claiming the tax benefits where another is rightfully entitled, is a separate criminal act under State law (although putting Daddy or Mommy in jail doesn’t help the children much). Or maybe have the divorce and family court judges just stop figuring and apportioning tax benefits up front, let the custodial parent get the deductions and credits, and give the noncustodial parent an annual offset against support for what the deductions and credits would have yielded if she or he had timely paid up, and let the local courts decide if the noncustodial spouse paid or not, and the number of the offset if they did.

Then we can forget about the stupid Form 8332, the IRS can get back to collecting the revenue, Section 152 with its giant slalom of conditions can wither away, and Tax Court need no longer be “not unsympathetic” to those who pay child support, bargain for the tax benefits, and then don’t get them.

Lawyers, legislatures and judges, please copy.

Some of my fellow Vietnam alumni may remember the colloquial motto of the 199th Light Infantry Brigade. Billy Edward Armstrong will regret that his modified divorce decree wasn’t attached to his Form 1040 for the year at issue, and didn’t state that the former Mrs. Billy “will not claim their child as a dependent” on her tax return.

See Billy Edward Armstrong and Phoebe J. Armstrong,  139 T. C. 18, filed 12/19/12.

This is the usual sad tale of a father who pays his child support, and is entitled under an amended divorce decree to the dependent tax exemption and the child tax credit, but who doesn’t get a current Form 8332 or the equivalent. Billy’s case comes from the last year that divorce decrees could be treated as equivalents of a Form 8332. I’ve blogged a number of such cases.

Billy didn’t attach the modification of the divorce decree to his Form 1040, but provided it at audit. No good, says IRS, the statute says “attached”, and it wasn’t, so Section 152(e)(2)(B) rules it out.

And anyway, the modified divorce decree said Billy would get the exemption and credit, and former Mrs. Billy would sign a Form 8332, if Billy was current on child support. Billy was current, but that’s not the point: former Mrs. Billy’s obligation was conditional, not unconditional.

And IRS is not required to enforce divorce decrees or child support orders.

Too bad for Billy; but he avoids the negligence penalty because he acted in good faith and could reasonably have believed that the modified divorce decree would serve in lieu of the Form 8332 the former Mrs. Billy didn’t sign.

Simple enough, and twelve Tax Court Judges agree.

Judge Goeke concurs and gets wrapped up in lexicography, namely and to wit, the meaning of the word “attach”. Judge Goeke says it means physically attached, and the ambiguity relied upon in the dissent tortures the plain meaning of the word. “We must be both circumspect and judicious in avoiding a manufactured ambiguity in our tax laws. The deliberate use of the word ‘attached’, in the context of section 152(e)(2)(A), was intended to prescribe a contemporaneous affixation requirement; we have so held before.” 139 T. C. 18, at p. 24. Seven Tax Court Judges agree.

Now there’s a dissent. Guess who writes it? No prize of course for the correct answer. It’s The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, Judge Mark V. Holmes, the same who bailed out Gary L. Scalone and Sandra Vieira Scalone; see my blogpost “Get The Years Right”, 5/2/12. But that was a 7463 throwaway.

Now Judge Holmes ransacks Webster’s Third and the American Heritage dictionaries (descriptive and prescriptive), and comes up with a meaning of “attach” that says to adhere, belong or relate, and would let in the amended divorce decree.

Judge Holmes delves exhaustively (and exhaustingly) into the legislative and administrative antecedents of the attachment rule.

“I would hold that ‘attaches’ in section 152(e) means ‘associates with’ or ‘connects to by attribution.’ I am convinced that this is the most reasonable way to read the section in light of the regulations contemporaneous with the amendment that suggest that attachment to a later filed amended return would suffice, the current administrative practice that encourages IRS agents to ask taxpayers for missing Forms 8332 when those forms are not physically fastened to the original return, and the practical impossibility of such a narrow reading in an era where the IRS is publicly and successfully encouraging taxpayers to file electronically. This construction of ‘attaches’ goes against nothing either Congress or the Secretary has said. If either wishes to clarify through amendment to the Code or by regulation what ‘attaches’ means, either is free to do so. Until then, I would understand the term to mean providing a Form 8332 or similar declaration to the Commissioner or this Court within the time for submitting materials that can be ‘associated with’ a given return in a case before us.

“It is one of the great theorems of law that if all sides are rational actors with perfect knowledge and zero transaction costs, the allocation of resources–even including exemptions, child tax credits, and the like–would be the same regardless of the rules we choose. See Ronald H. Coase, “The Problem of Social Cost”, 3 J.L. & Econ. 1 (1960). But in our fallen world, there are few stages on which rational actors are more outpeopled by the children of wrath than in domestic-relations law.” 139 T. C. 18, at pp. 68-69.

Moreover, several States require that tax benefits be included in the calculation of child support payments, but the ability of a noncustodial parent to claim these must be based upon that parent making the required payments.

Judge Holmes’ peroration is worth reading: “…maybe the Secretary, Congress, or our reviewing courts will decide that the more reasonable course is to read the Code to ensure that conditions on allocating the tax benefits of parenthood–conditions that Congress expected to continue when it enacted section 152(e), conditions that several states require as part of their family law, and conditions that parents assume in good faith are enforceable and effective will, if a parent like Mr. Armstrong fulfills them, be honored. I would have held that the Armstrongs attached the 2007 state-court order–a declaration that, in my view, conformed to the substance of Form 8332–to their return and would have allowed them to take the dependency exemption….” 139 T. C. 18, at p. 70.

And Judges Vasquez and Halpern agree. Amazing, considering Judge Wherry’s lecture to Judge Holmes about grammar in Tigers Eye Trading, LLC, Sentinel Advisers, LLC, Tax Matters Partner; see my blogpost “The Great Dissenter – Part Deux”, 2/15/12.

Justify the IRS’ Confusion

 No, this is not a political rant; I’ve said it many times, this is a non-political blog. I grind no axes here. But today I hearken back to the National Taxpayer Advocate, Nina (“The Big O”) Olson, and her tale of woe, recounted in pertinent part, as the high-priced lawyers say, in my blogpost “Come Sit Down Beside Me And Hear My Sad Story”, 1/13/12.

Let me quote myself: “The Big O laments that Congress has starved IRS for funds; tweaked, tinkered, tortured and generally mucked IRC about so that IRS spends too much time explaining and generating forms and instructions, and trying to stop the fraudsters and gameplayers who are looking for the seams in IRS’ zone defense among these continual outbursts of unguided Congressional largesse.”

I had hoped that the First Time Home Buyer Tax Credit Second Iteration, known to the cognoscenti as FTHBTC2, had, like the Marxist state, withered away. Alas not, and here’s proof of what IRS had to deal with in that particular Congressional coruscation.

I respectfully direct the reader’s attention to Elizabeth H. Ratcliffe a.k.a. Elizabeth H. Hiatt, 2012 T. C. Memo. 349, filed 10/18/12. And this case is a debut for Special Trial Judge Daniel A. (“Yuda”) Guy; see my blogpost “Welcome Judge Guy”, 4/24/12.

Eliza married Ian and went to live in his house, which he owned before the marriage. Cf. our old friends Bob and Marianna Packard, stars of my blogpost “Old Tax Credits Never Die”, 11/6/12. Eliza claimed she had no ownership interest in the house, but when Ian refinanced the mortgage, Eliza signed aboard the Deed of Trust (what we hereabouts call a mortgage).

Marriage blows up in 2008, Eliza gets a divorce in September, 2009, and buys a new house for herself in October, 2009, but claims the FTHBTC2 for 2008, relying on the Section 36(g) look-back that allowed someone buying in 2009 to claim the 2008 version of the FTHBTC2.

IRS claims she co-owned Ian’s house per the Deed of Trust, and also couldn’t use the look-back because she was still married to Ian in 2008, so gives her a SNOD and an Appeals hearing.

Eliza hires an attorney (good move, Eliza!), who wows IRS and gets Eliza her $8K credit, with a lesson on the law of dower and rights of a surviving spouse in North Carolina thrown in which is why wives sign deeds of trust in North Carolina.

Eliza’s attorney wants $5K under Section 7430, the “wrestled and prevailed” statute.

No go, says Yuda. The magic date for determining whether IRS’ position was “substantially justified” was the date IRS issued the SNOD. Appeals never issued a NOD, because IRS timely and properly folded at the Appeal stage when Eliza’s lawyer trotted out the North Carolina statutes and precedents and Federal cases in support thereof.

OK, so Eliza prevailed, and she didn’t prolong the proceedings, and she and her attorney cooperated with IRS, but IRS was substantially justified before Eliza’s lawyer worked his magic.

“Respondent [IRS] maintains that (1) although the FTHBC was enacted in July 2008, by early 2011 the IRS was still in the process of finalizing FTHBC policy positions and coordinating those policies with IRS personnel across the country, and (2) during the period in question there was no meaningful body of caselaw interpreting section 36, particularly with regard to the proper application of the FTHBC provisions in cases involving various marital property rights under State law. Respondent avers that the facts in petitioner’s case, including her election to claim the credit in a taxable year in which she was married to Mr. Ratcliffe, and questions related to the nature of her interest in Mr. Ratcliffe’s residence, required coordination with the Commissioner’s National Office to ensure consistency and uniformity in the treatment of similarly situated taxpayers.” 2012 T. C. Memo. 349, at p. 15.

“Considering the complexity of the applicable statutory provisions, the facts underlying petitioner’s case, and the novel issues presented, we conclude that respondent’s position disallowing the credit was reasonable and represented a goodfaith effort to enforce the internal revenue laws.” 2012 T. C. Memo. 349, at p. 18.

“We reject petitioner’s assertion that respondent should have discovered the deed of trust and conceded that she was entitled to the FTHBC before issuing the notice of deficiency. Deductions and credits are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction or credit claimed. Although the record shows that petitioner was cooperative and responsive to the examining agent’s request for information, there is no indication that she offered independent corroboration of her assertion that she did not own an interest in Mr. Ratcliffe’s residence, nor did she offer to explain the genesis of the deed of trust or the nature of her interest in Mr. Ratcliffe’s residence before [the SO] raised the matter with [Eliza’s attorney] in her letter dated October 14, 2011.” 2012 T. C. Memo. 349, at p. 19.

And though IRS did publish guidance on its website that might have supported Eliza’s lawyer, “(W)e have reviewed the IRS articles and materials that petitioner cites and find that they are not controlling with regard to the finer points of law presented in her case.” 2012 T. C. Memo. 349, at p. 20.

So what’s a taxpayer to do when the IRS is as clueless as they are? More to come when the “fiscal cliff” is bridged, and we all have to tease out what the law will be.

The popularity of the conservation easement donation deduction guarantees lots of cases for Tax Court. Here it comes again, in today’s solitary Memorandum, Walter C. Minnick and A.K. Lienhart, 2012 T. C. Memo. 345, filed 12/17/12, Judge Morrison wading through another. But while lacking in legal novelty, the story has its moments.

Here the issue of the 40% substantial overvaluation of Wally’s gift to the Land Trust of Treasure Valley, Inc. (Treasure Valley lies outside Boise, ID) goes away, because Wally’s gift didn’t comply with the regulations. As we saw in BLAK Investments, if the deduction is disallowed on grounds other than the valuation, the valuation is irrelevant. See my blogpost “It’s A Sham”, 9/25/12.

Wally’s deduction comes unglued because the 74-acre parcel of Treasure Valley that Wally donated, 80% of which was subject to the easement, was encumbered by an unsubordinated mortgage, which Wally only got subordinated two years after IRS dropped the SNOD on Wally.

Wally claimed he was misled by the form of grant of easement he got from the Treasure Valley treasurers, in which he warranted that the land was unencumbered when in fact it wasn’t, and that the bank would have gladly subordinated. But a bank officer testified it wouldn’t, and the bank made Wally pay down the principal of the mortgage to get the subordination.

Wally tries to distinguish his case from Ramona Mitchell (see my blogpost “Subordinate or You Lose”, 4/4/12), but fails. He claims the Idaho version of the Uniform Conservation Easement Act would have protected the charitable use. Maybe, says Judge Morrison, but what it would have protected is whatever was left after the bank got its money out. And here there was not even the partial subordination, such as Gordo and Lorna Kaufman got; see my blogposts “A Joy Forever”, 4/4/11, and “‘A Joy Forever’? – Maybe Not”, 7/20/12. But it might behoove Wally to appeal and see if the Ninth Circuit buys the rationale of the First Circuit in Kaufman v. Shulman, 687 F.3d 21 (2012).

Seeking to avoid penalties, Wally claims he “should not be held to the standard of an experienced tax attorney because he worked only for a few months as an attorney and that he spent only a fraction of his time practicing tax law.” 2012 T. C. Memo. 345, at p. 14. He claims he asked his CPA about the conservation easement, and had an expert appraiser do the appraisal. And he used the Treasure Valley model form.

No dice, says Judge Morrison.

All the CPA told Wally was conservation easements give rise to deductions. “However, he did not tell Minnick that the particular conservation easement Minnick granted to the Land Trust was deductible. In the absence of such advice, Minnick could not have reasonably relied on the C.P.A. when he claimed a deduction for the conservation easement contribution. Minnick should have been alerted by the warranty provision in the conservation easement that there might be a problem with the lack of subordination. The easement contained a warranty from Minnick that there was no unsubordinated mortgage on the land. It is true that the form Minnick used to grant the easement was a ‘model’, but that does not matter. This model easement form was not suited to Minnick’s particular parcel of land.” 2012 T. C. Memo. 345, at pp. 15-16. (Footnote omitted.)

The omitted footnote is well worth reading, as it shows a fine example of what sailors call “scuttlin’ up to winnard”. “Note the C.P.A.’s careful response to the following question from Minnick and Lienhart’s counsel:

“Q Did you advise Mr. Minnick as to whether the conservation easement was deductible or not?

“A I advised him that a conservation easement, the donation of a conservation easement is deductible as a charitable contribution, and is specifically provided for in the code.

“We infer that the C.P.A. declined to tell Minnick the grant of the particular easement was deductible and that Minnick should have recognized this.” 2012 T. C. Memo. 345, at p. 16, footnote 3.

And the appraiser was qualified to provide an expert opinion of the easement’s value, not the deductibility or otherwise thereof.

So negligence penalty for Wally.

Footnote- Apparently Wally served one term in the United States House of Representatives. That explains much.

No, not coffee or tea or sodapop, it’s the Central Authorization File system, IRS’ handy-dandy guide to Power of Attorney (Form 2848) and Tax Information Authorization (Form 8821); in short, the master list of who can speak for taxpayers and who can look at what.

The system will be down from one minute after midnight on December 26, 2012 through and including same time on January 3, 2013. Thus, IRS cannot tell who is authorized to do anything.

If you need transcripts or anything else that requires you to prove your authority, do it NLT 11:59 p.m., Eastern Time on 12/25/12, or else hold your peace until January 3, 2013.

If you have a crash emergency that won’t wait during the De-CAF, IRS has suggested the following: “If you need to contact the IRS for help with a client and you have an established power of authority on file, be prepared to provide a faxed copy of that authorization. Our Customer Service Representatives will not have access to the CAF and will have limited research capability during the outage. New authorizations submitted for this purpose will be forwarded to the CAF for processing. You will not need to re-submit it through the Disclosure Authorization function of e-Services.

“Please contact the Practitioner Priority Service at 866-860-4259 if you have questions.”

Happy Holidays.

Or, Scar Tissue

That’s the question for Karl E. Cross, in 2012 T.C. Memo. 344, filed 12/13/12, and Judge Jacobs gives him and his seasoned attorney Mitch an answer they don’t like.

We all know that a Notice of Deficiency is the ticket to Tax Court. Karl E. got Letter 531-T, at the top of which and in capital letters is written “NOTICE OF DEFICIENCY”, for the year in question. The items disallowed giving rise to the deficiency are erroneous, as the computation apparently came from IRS’ RTVUE synopsis of the return as filed, rather than the document itself.

The IRS’ RTVUEr apparently transcribed items incorrectly, ascribed a tax shelter to Karl E. that he wasn’t part of for the year at issue, and thereby caused Mitch to stipulate to bind Karl E. to the outcome of cases having nothing to do with Karl E.’s tax situation for the year at issue, and Mitch alleges IRS knew this all along.

Mitch claims no jurisdiction, as the Notice of Deficiency was so deficient as to be no notice at all. In other words, no ticket.

No, says Judge Jacobs. “It is well settled that no particular form is required for the notice of deficiency to be valid. The Court of Appeals for the Eleventh Circuit, the court to which this case is appealable barring  a stipulation to the contrary, has held that the notice will be treated as valid if the Commissioner demonstrates that ‘the IRS has determined that a deficiency exists for a particular year and specif[ies] the amount of the deficiency’.” 2012 T. C. Memo. 344, at pp. 11-12 (Citations omitted).

Besides, Mitch’s arguments go to the accuracy of the determination, not the fact that there is a determination. The one case to the contrary, Scar v. Com’r., 814 F.2d 1363 (9th Cir. 1987), rev’g 81 T.C. 855 (1983), involves a statement in that notice that the tax return itself was not examined, ascribed to the Scar taxpayer a tax shelter with which Scar had never had a relationship (unlike Karl E., who had been in the tax shelter referred to in the Notice of Deficiency in the past), and assessed tax at the top marginal rate without consulting the Code. Ninth Circuit held that was not a notice.

Here, however, though there may be factual inaccuracies, “(W)e disagree with the position taken by petitioner’s counsel. His arguments in both the motion to dismiss and the supplemental motion are arguments as to the correctness of respondent’s determinations in the notice of deficiency, not the validity of the notice of deficiency. Consequently, these arguments do not support the position he takes because our jurisdiction in this matter does not hinge on the correctness (or incorrectness) of respondent’s determinations in the notice of deficiency.” 2012 T. C. Memo. 344, at p. 15.

Judge Jacobs: “The facts in this matter are readily distinguishable from those in Scar. In this matter, the notice of deficiency specifically addresses petitioner’s income tax return. Unlike the notice in Scar, here the notice of deficiency does not state that the income tax is being determined at the maximum rate simply to protect the Government’s interest. It does not refer to a tax shelter with which petitioner had no relationship. Nor does the notice of deficiency indicate that petitioner’s tax return (or the transcript thereof) was never examined. In sum, we cannot say that the notice of deficiency reveals on its face that respondent failed to determine a deficiency.” 2012 T. C. Memo. 344, at p. 17.

Mitch tries to argue that the Notice of Deficiency should follow the pleading requirements of the Federal Rules of Civil Procedure. No authority for that, says Judge Jacobs; at most, the Notice of Deficiency, like a complaint, sets out the basis of a claim and confers jurisdiction on the Court, but that’s all.

Finally, Mitch’s claim he was hoodwinked into signing onto a determination in cases having nothing to do with the year at issue gets short shrift from Judge Jacobs. Mitch “is a longtime member of the Tax Court bar, is an experienced attorney, and was formerly an attorney in the Commissioner’s Office of Chief Counsel. We are skeptical that he could be induced to consent to such an important agreement by respondent’s counsel without any supporting materials to justify its signing. But we need not make a  determination with respect to [Mitch’s] allegations. Even if true, they would not affect our analysis regarding the validity of the notice of deficiency.” 2012 T. C. Memo. 344, at p. 19, footnote 7, second paragraph).

So Tax Court has jurisdiction, and Mitch can try to get out of the stipulation, and get Karl E. out of the deficiency.

The Judge Who Writes Like a Human Being, a/k/a The Great Dissenter, Judge Mark V. Holmes, has a Designated Order, Docket No. 11884-11, Estate of Bernard Dorman, Deceased, Dennis Dorman, Executor, filed 12/12/12. Incidentally, this is the last time an identical numerical designation of month, day and year will occur for the next 89 years.

Back to Judge Holmes, who in effect paraphrases Mark Twain’s famous statement “Tell me where a man gets his cornpone, and I’ll tell you where he gets his opinions.” Judge Holmes would have it “Tell me where I get my interpretations of the Federal Rules of Evidence, and I’ll tell you where I get my opinions.”

Judge Holmes does the telling: “We are bound by the rules of evidence applicable in a trial without a jury in the United States District Court for the District of Columbia. Rule 143(a); sec. 7453. In light of that mandate, we have applied the law of the D.C. Circuit when it comes to issues concerning application of privilege.” Order, p. 1.

The particular points involve Bernie’s Estate’s appraiser/valuer, the terms of his retention and that of his firm, what the appraiser/valuer was told, and on what assumptions he relied. This IRS wants, but Denny claims work product and material prepared for litigation, so privileged.

Judge Holmes needs a look-see, but gives the IRS some of what they ask for, the rest to follow if the DC Circuit permits. Documents can be multi-purpose. “…the D.C. Circuit opted to follow the Second Circuit…. The test we have to use in judging the extent of work-product protection for a dual-purpose document is whether a document was created ‘because of anticipated litigation, and would not have been prepared in substantially similar form but for the prospect of that litigation.’ The D.C. Circuit held quite plainly that ‘a document can contain protected work-product material even though it serves multiple purposes, so long as the protected material was prepared because of the prospect of litigation.’” Order, p. 2. (Citations omitted).

Judge Holmes gently reproves counsel for both sides (and I’m surprised at IRS’ counsel, though; they should know this). “…since they both seemed unaware of the Code’s somewhat obscure requirement that this Court follow D.C. Circuit evidence law, Petitioner may supplement his response with evidence and argument relating to Respondent’s motion to compel production of document requests 1 and 2; and Respondent may supplement his response with evidence and argument relating to Petitioner’s motion for a protective order relating to document requests 1 and 2.” Order, p. 5.

Mark Twain is vindicated.

This remark, attributed to Voltaire on his deathbed when an abbé approached him and said he came from God, should be remembered by Tax Court litigants seeking to have Tax Court cut them some slack from penalties via Section 6664(c), the “reasonable cause and good faith” out, principally evidenced by reliance on advisors.

So many times taxpayers, usually but not exclusively pro se, claim they relied on a preparer, but introduce no evidence as to the show-and-tell they had with the preparer, or what, if any, credentials the preparer possessed.

Today’s reiteration of this lesson, which I previously expounded in my blogpost “Another Argument”, 6/7/12, among other places, is Carnell Specks and Cheryl Specks, 2012 T. C. Memo. 343, filed 12/11/12.

Nothing novel here in point of law. On the facts, Carnell, a police officer in the fair metropolis of Houston, TX, the residence of the most wonderful child in the world, my granddaughter, moonlights as a security provider, marching about in uniform with personal six-shooter at his side. On the facts, he’s an IC, not an EE, so owes SE, but didn’t pay.

IRS attacks his deduction for rental real estate losses in their answer, so IRS has burden of proof. Carnell establishes material participation, IRS concedes all his rental activity as a single activity, but Carnell can’t show 750 hours, as he’s too busy policing and securitizing. So he’s got the $25K limit under Section 469(i), rather than the $51K he claimed.

Looks like substantial understatement after the Rule 155.

But Carnell says he relied on his preparer, a many-times-told tale. Again, no credentials in evidence, or what Carnell (Cheryl did nothing) told the preparer. So no dice.

One would hope the message finally gets through. IRS has a link on its website which purports to instruct taxpayers how to find a preparer. Maybe the “how to” should include what to tell the preparer, and warn the taxpayer to get the preparer’s resume.

The Kersting tax shelter cases, now approaching their thirtieth birthday, are still winding their way through Tax Court. Henry Kersting, supposedly a U-boat commander for Nazi Germany in World War II, created a package of tax shelters and thereby left a legacy which torpedoed some 1300 airline pilots and their families, and set them adrift in a modern Jarndyce v. Jarndyce, with appellate findings of official misconduct, tampering and general governmental skullduggery.

I’ll skip the details, although a simple Google search will turn these up instantly.

The reason why I turn to this antique is that it continues to befuddle Tax Court to this day. Case in point: Richard J. Buckley and Estate of Jean Buckley, Deceased, Diane Tsubota, Personal Representative, Docket No. 17756-82, filed 12/10/12.

It’s a simple order. IRS has a computation of who owes whom what, and either Richard and Diane sign aboard, or they can submit their own; but if Richard and Diane don’t sign aboard or object, then Chief Judge Thornton will enter IRS’ computation as the decision.

Simple, no?

But that’s not all. Here’s the relevant paragraph, in full: “(2) file the computation and a motion for entry of decision with a proposed decision document; respondent must serve a copy of the motion on petitioners, and petitioners must file their objection, accompanied by an alternative computation, on or before 45 days after the date of service; if petitioners fail to file an objection, then the Court may grant respondent’s motion and enter the decision in accordance with respondent’s proposed computation. It is further”. Order, P. 1.

It is further what?

I told you the Kersting cases continue to befuddle the Tax Court.