Bad law, as the old law school mantra goes, and John Bruce Corcoran and Frances H. Corcoran, 2012 T. C. Sum. Op. 119, filed 12/10/12, proves it true yet again. Judge Gerber feels constrained to follow Ninth Circuit and earlier Tax Court decisions, to render a decision that he admits “is inequitable and does nothing to further the congressional purpose underlying the enactment of section 219.” 2012 T. C. Memo. 119, at pp. 6-7.

Section 219 is the deduction (generally reported on one’s Form 1040 as an adjustment to gross income) for contributions to IRAs, where the taxpayer meets certain age and income limits, and is not “actively enrolled” in any employer sponsored retirement plans. And “actively enrolled” means your name is on the books, whether or not you contribute to, or have the right to get one penny from, the employer retirement plan.

Mr. Cork was a salesman for New York Life, “The Company You Keep”, according to their advertising slogan. But though Mr. Cork wanted to keep New York Life, New York Life did not keep Mr Cork. They canned him for low sales in the year in question.

But before kicking him to the proverbial, New York Life did enroll Mr Cork, concededly without his knowledge, in their defined benefit plan. The hitch, of course, is that Mr. Cork would have to stay with New York Life for five years, and meet certain sales hurdles he knew he’d never surmount, before his rights would vest. Mr. Cork never contributed to the defined benefit plan, and never joined New York Life’s defined contribution plan, because he knew he’d never see back centavo uno from anything he kicked in to any New York Life plan.

So he made a $6K IRA catch-up. But New York Life sent him a W-2 stating he was enrolled in a company plan. So IRS disallows Mr. Cork’s deduction.

Mr. Cork argues he didn’t know he was enrolled, got nothing, and New York Life never contributed a dime anyway, because, in the immortal words of the Kerry Dancers, he was “gone, alas, like our youth, too soon.”

But Judge Gerber is constrained to follow precedent (which I suggest can be distinguished, and unhappily, since this is a 7463 throwaway, will not be examined by an appellate court). So agreeing that the result is entirely inequitable, and does nothing to further Congress’ intendment that individuals who choose to postpone present laughter for retirement jollity should catch a wee break, Judge Gerber finds for IRS.

Takeaway- Employees, don’t let your employer do you any favors. If the proffered retirement plan is more like steel chains than golden handcuffs, just say no. And make sure HR gets the word you don’t want it.

I mean the Isle of Man, the UK’s original tax haven, the right-little, tight-little British Crown dependency in the Irish Sea. It seems the IOM and the UK Revenue have made a deal à la FATCA. In announcing the Manx-UK deal under date of 12/7/12, Chief Minister Alan Bell was quoted thus:  “The Island already shares tax information automatically under the EU Savings Directive and has recently announced that it will do so on a wider basis with the USA.”

Have the dodgers been voted off the island? Stay tuned.

But they do give rise to some interesting, if unanswered, questions. Here’s a reprise of the second iteration of the First Time Home Buyer Tax Credit, known to the initiate as FTHBTC2, the $8000 actual credit, as distinct from FTHBTC1, which was a fifteen-year interest-free loan disguised as a credit.

Case in point is Robert Perez Morales, 2012 T. C. Memo. 341, filed 12/6/12, with its companion case Ronda Kay Morales. Apparently the Moraleses filed separate returns for separate principal residences on the same tax lot (nice move, guys; see my blogpost “Old Tax Credits Never Die”, 11/6/12, showing similar fancy, but more successful, footwork by Bob Packard and wife Marianna). Each claims the $8K credit, of course.

Unfortunately, neither Morales checks the calendar. They sold their last principal residence 4/27/06, according to the 1099-S they got from the settlement company. They bought the new principal residences 3/17/09.

What’s wrong with this picture?

No prize for the correct answer, so I’ll let Judge Kroupa provide it: “A first-time homebuyer is any individual who has had no present ownership interest in a principal residence during the 3-year period ending on the date of the purchase of the principal residence in question. Sec. 36(c)(1); Foster v. Commissioner, 138 T.C. 51, 53 (2012). Petitioners purchased the new principal residences on March 17, 2009. Accordingly, petitioners are eligible as first-time homebuyers only if they had no present ownership interest in a principal residence between March 16, 2006, and March 17, 2009. Petitioners sold their prior principal residence on April 27, 2006 and therefore had a present ownership interest in a principal residence during the relevant period. Petitioners are therefore not entitled to the claimed first-time homebuyer credit.” 2012 T. C. Memo. 341, at pp.3-4.

And see my blogpost “This Old House”, 1/30/12, for the story of Francis T. and Maureen P. Foster, the parties alluded to in the case cited in Judge Kroupa’s decision.

So the Moraleses should have looked at the calendar and adjourned the closings. Nothing novel here; the statute is plain, three years means three years, and the Moraleses’ defenses are futile. So what’s interesting?

The question Judge Kroupa decides not to answer. The Moraleses claim the shrink-wrapped guru, in this case TurboTax, led them astray. But they don’t say how. See my blogpost “The Shrink-Wrapped Guru”, 9/14/12.

Judge Kroupa:  “The TurboTax instructions and the specific information petitioners entered into TurboTax is not in the record. Moreover, petitioners failed to introduce other evidence that demonstrates their improperly claiming the first-time homebuyer credit was the result of a TurboTax programming flaw or instructional error. We note we find it unlikely that TurboTax would allow a result inconsistent with the Code if its instructions were properly followed. Petitioners may have acted in good faith but likely made a mistake. We find that petitioners’ use of TurboTax is not a defense to the accuracy-related penalty.” 2012 T. C. Memo. 341, at pp. 6-7. (Citations and footnote omitted.)

But the interesting part is the omitted footnote: “We leave for another day whether reliance on tax preparation software such as TurboTax is sufficient to avoid the accuracy-related penalty where the taxpayer has provided evidence demonstrating a programming flaw or an instructional error.” 2012 T. C. Memo. 341, at p. 7,  footnote 2.

Of course, as I said in my cited blogpost “The Shrink-Wrapped Guru”, “I’m sure the software developers’ counsel have festooned box and contents with disclaimers and exculpatory exhortations worthy of the medieval indulgence mongers.” So perhaps the hypothetical software glitch will not spare the taxpayer.

However,  Special Trial Judge Armen, the Judge with a Heart, who spared poor Kurt E. Olsen in 2011 T. C. Sum. Op. 131, filed 11/23/11, might be willing to do so. See my blogpost “Basis for Dummies”, 11/24/11, a Judge Mark V. Holmes and STJ Armen doubleheader.

Jerry Rawls should join in the last line of the Alma Mater with a loud voice and true thankfulness, after he reads Rawls Trading, L.P., Rawls Management Corporation, Tax Matters Partner, 2012 T. C. Memo. 340, filed 12/5/12, as his trusty accountant, a graduate of the Cornell Law School (just like me), saves him from the Section 6662(a) accuracy penalties in the cited case, a follow-up to Judge Vasquez’s earlier decision; on background, see my blogpost “Finishing the Play”, 3/26/12.

This is a son-of-BOSS, Section 752 unrecognized cover of a short sale, to build phony outside basis to bury a big-time capital gain. Needless to say, it gets shot down on a TEFRA FPAA, notwithstanding a tax opinion from Lewis, Rice & Fingersh, L.C., a St. Louis white-shoe, which says the deal works.

Jerry was a Texas Tech engineering graduate, who quit his job and hocked his house to start a fiber optic company with the unprepossessing name of Finisar before anyone had ever heard of fiber optics. It wound up being worth hundreds of millions, and when it went public, Jerry had a ginormous capital gain.

Solicited by a sheltermonger called Heritage who introduced him to Lewis Rice, Jerry signed with Heritage (who got 2% of the tax savings) after he consulted his brother Walter the CPA, who said it looked okay. “Mr. Rawls believed the Heritage strategies were ‘investments where you had to put up real money but you had the real opportunity to profit.’ Furthermore, Mr. Rawls entered into the Heritage agreement to increase the diversification of his holdings and reduce the economic risk related to the volatility of the market price of his Finisar common stock.” 2012 T. C. Memo. 340, at p. 7.

Lewis Rice prepared all the transactional documents and oversaw the implementation. Jerry claims he relied on Lewis Rice, but Judge Vasquez isn’t buying: “…the Lewis Rice lawyers were not being paid to evaluate a deal or to tweak it; they were being paid to make the transactions happen. They did more than simply evaluate Heritage’s strategies; they implemented them. They created the entities involved and prepared all the paperwork involved. Therefore, Mr. Rawls cannot rely on the advice of Lewis Rice because it was a promoter of the transactions involved.” 2012 T. C. memo. 340, at p. 33. Oh yes, and Lewis Rice got a six-figure flat fee for their trouble.

Promoters, upon whose advice taxpayers cannot rely, are those who “make it happen”. And this is additional support to my argument that the authors of marketed opinions should make it clear that their opinions cannot be relied upon for Section 6664 purposes, so IRS, keep at least part of Circular 230 §10.35.

So does Jerry have to take the Section 6662(a) hit? No, because Larry Poster was his accountant. Jerry’s former accountant had only done his routine tax returns for years, did not understand the heavy complexities of Jerry’s newly-gained wealth, and anyway was getting ready to retire. So Heritage gave Jerry a list of accountants, and Jerry chose Larry.

Larry never paid Heritage for referrals and never charged above his normal low hourly rates for the work he did, which was to look over the paperwork and prepare the returns. So he wasn’t a promoter.

But can Jerry rely on Larry’s advice? Yes, if he’s competent. Judge Vasquez:  “We find that Mr. Poster was a competent professional. Mr. Poster graduated from Cornell Law School, was a certified public accountant, and had almost 30 years of experience in tax when Mr. Rawls hired him, including 13 years as a tax partner at a major accounting firm. Not only was Mr. Poster a competent tax return preparer; he also had knowledge of the relevant aspects of Federal tax law. He had experience evaluating short sales involving section 752 issues.” 2012 T. C. Memo. 340, at p. 35 (emphasis added.)

IRS argued that Larry was incompetent because he gave Jerry the wrong advice. To require the taxpayer to cross examine one with much more expertise than he, and evaluate complicated tax plans, negates the whole purpose of hiring an adviser.

Moreover, Jerry told Larry the whole story. IRS says Larry should have sweated Jerry more, but it’s not the taxpayer’s fault if the expert, who should know what questions to ask, doesn’t ask them. How can the taxpayer know what the expert should ask?

Finally, Jerry was acting in good faith, even though IRS claims he should have known the Heritage deal was too good to be true. “Mr. Rawls is not a sophisticated investor and is not familiar with tax law. Before the success of Finisar, Mr. Rawls’ wealth consisted of the equity in his home, which was subject to two mortgages in order to finance Finisar. Mr. Rawls was not familiar with managing a large fortune and, as of early 2000, he did not have an estate plan or even a will. We find that Mr. Rawls did not have the background or experience necessary to have known that the Heritage plan was too good to be true.” 2012 T. C. Memo. 340, at p. 39.

Larry the Cornell Law alum (from a later class than mine) saves the day for Jerry. Hail, all hail, Cornell!

In the words of Oasis guitarist and songwriter Noel Gallagher’s 1996 hit “Champagne Supernova”, but not as far as Judge Wells is concerned; the Judge wants the taxpayer to tell IRS by internet, telephone, or at least use a USPS Form 3575 “Official Mail Forwarding Change of Address Form” when taxpayer changes his or her address.

The story is found in Robert P. Duplicki, 2012 T. C. Sum. Op. 117, filed 12/4/12. You can’t quote it, but you should know it.

Judge Wells isn’t buying it when Rob claims he didn’t get the mandated Section 6303(a) demand for balance due for the tax IRS assessed. Of course, Rob hadn’t filed returns for at least four years at that point. Rob moved from one house to another, but rented a P. O. Box in between, and that’s where the notice of assessment was sent, and from where the obliging USPS forwarded same to Rob’s new house.

When IRS drops a NFTL on him, Rob demands a CDP, whereat he claims he never got the aforesaid demand for balance due (demand), but that of course is irrelevant; actual receipt is not required, just mailing to last known address. Rob claims that the P.O. Box wasn’t his last known address.

Judge Wells: “The term ‘last known address’ is well defined in the tax law. A taxpayer’s last known address is the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return, unless the IRS is given clear and concise notification of a different address. It is the address to which, in the light of all the surrounding facts and circumstances, the Commissioner reasonably believes the taxpayer wished notice to be sent.

“If the Government has become aware of a change of address, the Commissioner may not rely on the address listed on the last-filed tax return but must exercise reasonable care to discern the taxpayer’s correct address. Although the Commissioner must exercise reasonable diligence in ascertaining the taxpayer’s correct address, the burden is upon the taxpayer to keep the Commissioner informed of the taxpayer’s correct address.” 2012 T. C. Memo. 117, at pp. 7-8 (Citations omitted.)

But Rob had the burden of proof that IRS knew his whereabouts (he didn’t ask for a Section 7491 burden shift). He claims he never told IRS to use the P. O. Box. However, Reg. 301.6212-2(b)(2)(i) lets IRS mine data from the National Change of Address (NCOA) data base maintained by USPS, and if they find someone whose name and old address match someone whose name and new address show up there, that’s okay.

If Rob wanted IRS to use another address, he should have filed USPS Form 3575, or sent a “clear and concise notice” to IRS, or maybe best of all,  filed the returns he hadn’t filed for four years, using the address he wanted.

No, says Judge Swift. Whether Tax Court has jurisdiction to remand a case to Appeals due to change in circumstances between the CDP hearing and the Tax Court trial, even if Appeals made no error,  is a question whose answer must await another day. But there’s no remand coming for W. Russell Van Camp and Teresa Van Camp, in 2012 T. C. Memo. 336, filed 12/3/12.

Russ has enough problems, aside from not having filed returns for three years, and not contesting the liabilities IRS imposed or the NFTL or Notice of Levy, because Russ’ attorney dropped the installment agreement he was negotiating with the SO. Judge Swift: “…before final approval and implementation of the installment agreement, petitioners’ attorney informed the settlement officer that petitioners’ financial affairs were ‘going from bad to worse’ and that petitioners ‘would not be able to pay anything under an installment agreement.’

“Petitioners’ attorney did not explain to respondent’s settlement officer the specific reason petitioners would not be able to pay anything under an installment agreement (namely, the imminent disbarment of Mr. Van Camp).” 2012 T. C. Memo. 336, at p. 4.

So the SO tells Russ’ attorney the immortal words of Toni Stern’s and Carole King’s 1972 Grammy winner:  “It’s too late baby now it’s too late.”

Russ’ derelictions are too numerous to recount here, but those interested in such things can check them out at 257 P.3d 599 (Wash., 2011). Russ is disbarred after the CDP hearing.

Russ’ attorney claims changed circumstances, but doesn’t claim the SO abused her discretion or didn’t follow the law. IRS says no, and Judge Swift agrees. “Remand of a CDP case to the Appeals Office may be appropriate in limited circumstances where there occurred some omission or error in the original hearing or in the record of the hearing. These cases present no such circumstance, and respondent argues that as a matter of law we have no authority to remand a CDP case to the Appeals Office on the basis of a change in a taxpayer’s financial circumstances that occurred after the CDP hearing was completed, where the Appeals Office did not abuse its discretion and where there is no ambiguity or omission in the administrative record before the Court.” 2012 T. C. Memo. 336, at p. 6. (Citations omitted.)

When Russ’ attorney dropped the proposed installment agreement and said Russ could pay nothing, he informed the SO of Russ’ dire financial straits and abandoned any collection alternative. So even though Russ’ attorney didn’t go into details, he did disclose that Russ was bust, and the SO had no choice but to go ahead with lien and levy.

All is not lost for Russ and poor Terry, or their hapless attorney. They can go back to Appeals under Section 6330(d)(2), pursuant to which Appeals has continuing jurisdiction over collections, but which is not a continuation of the present proceeding (which is closed). And in a Section 6330(d)(2), there is no appeal to Tax Court.

IRS wants more, as always. “Respondent disagrees with petitioners and with a suggestion made in a number of our opinions that we have the authority to remand CDP cases to the Appeals Office merely where a remand may be regarded as ‘helpful’, ‘necessary’, ‘productive’, and/or due to ‘changed circumstances.’ See e.g., Kelby v. Commissioner, 130 T.C. 79, 86 n.4 (2008); Lunsford v. Commissioner, 117 T.C. 183; Kuretski v. Commissioner, T.C. Memo. 2012-262, at *11; Churchill v. Commissioner, T.C. Memo. 2011-182. Respondent contends that, absent the exercise of an abuse of discretion by the settlement officer or a defective or incomplete administrative record, this Court lacks any remand authority in CDP cases.” 2012 T. C. Memo. 336, at p. 8.

See my blogpost “Back to the Future”, 8/1/11, where the irrepressible Judge Who Writes Like a Human Being, a/k/a The Great Dissenter, Mark V. Holmes, says Tax Court can do just that. Cf. Churchill, supra, at pp. 13-14.

Judge Swift ducks. Since on these facts Tax Court doesn’t find changed circumstances between CDP hearing and trial (Russ was broke throughout, so nothing changed), there’s no need to consider Tax Court’s jurisdiction to remand.

When it comes to unraveling real estate wheeling-dealing, there’s nobody like The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, His Honor Mark V. Holmes. In support of the foregoing, I make an offer of proof in my blogposts “Basis for Dummies”, 11/24/11 and “The Sum of Its Parts”, 3/12/12.

And His Honor is on his game with Stephen M. Gaggero, 2012 T. C. Memo. 331, filed 11/29/12.

Steve thought his name was Blanchard from his earliest youth, until he met his natural father and became Gaggero. Though a high-school dropout, he taught himself carpentry, worked for film studios, bought and rehabbed real estate, and memorialized his youthful name in his wholly owned C Corp, Blanchard Construction Company (BCC). He employed 40 people at one point, but when the facts in this case came to a head, he was down to a dozen or so, including in-house counsel, designers, decorators and laborers. But high on Steve’s faves list was his trusty CPA, Jimbo Walters.

Steve was a success story. He bought a tumble-down shack in Malibu during one of California’s periodic real estate crashes, and made a deal with BCC: BCC will rehab the place and Steve will live there as his primary residence. “BCC redesigned, rebuilt, and expanded the house and grounds–adding amenities such as a small golf course, stadium tennis court, new pool and secret pathway that wound from the home through the woods to a private beach–and Gaggero personally paid approximately $1.5 million for the cost of these improvements.” 2012 T. C. Memo. 331, at p. 4. (Footnote omitted.)

In exchange for completing the rehab, if the house was ever sold, BCC would get half the gain over a stipulated $3 million value at contract signing. And there was a contract. And BCC did complete the work.

But the house wasn’t sold for six years. And when it was sold, to a Belgian biochemist after a contentious negotiation, it fetched $9.6 million. Steve never told the Belgian about his deal with BCC, but did file some papers later showing BCC’s involvement. He also paid BCC $3 million, which BCC reported as ordinary income.

Steve took whatever gain he had made on what he claimed was his piece of the deal and rolled it over under old Section 1034, whose effect ceased a few months after Steve’s mansion got sold. But the new house he bought within the two-year timeframe of old Section 1034 cost about $3 million less than the sales price of the mansion BCC built. Steve claimed he only got what the new house cost, and BCC got the rest.

IRS says no. IRS claims BCC was just a contractor with nothing more than a mechanics’ lien. No, says Judge Holmes. This was a real land sale contract. BCC did have equitable title and could have sued Steve. And the contract contemplated that Steve might sell BCC at some future point; while Steve could call the shots during development and rehab, if Steve sold BCC, all decisions would have to be unanimous between Steve and any future owner of BCC. The Belgian biochemist was a tough customer, the broker was trying to sabotage the deal, so Steve was justified in keeping quiet about BCC’s involvement.

“On completion of its development work, BCC had a share of the benefits and burdens in the property and received part-ownership in the property. We accept Gaggero’s explanation that disclosure of BCC’s interest to [the Belgian] would have jeopardized the sale of the property, but note that both Gaggero and BCC filed separate real-estate reporting solicitation forms to the escrow agent, showing that there were multiple transferors. Both Gaggero and BCC were paid directly from the escrow for their respective ownership interests. And the $9.6 million sale proceeds was allocated according to the Sale Agreement–$6.6 million to Gaggero, and $3 million to BCC.” 2012 T. C. Memo. 331, at p. 27.

So Steve’s sale to BCC is real. But Steve never reported the capital gain on his sale to BCC.  And BCC only reported ordinary income on the $3 million it got (a corporation couldn’t use Section 1034).

So Judge Holmes carefully crafts a table, and calculates percentages wherewith to fill in the blanks (which see, at pp. 36-50; yes, it’s long, and yes, it’s prosy, but it’s vintage Holmes).

And Steve owes capital gains tax on his sale to BCC, which he can’t bury in the new house because he already used his share.

Now as to penalties, to wit, substantial understatement, as Steve never mentioned $3 million in gain. Steve claims he relied on Jimbo. Judge Holmes looks to the usual three-part test, competence of expert, information given expert and actual good faith reliance. IRS claims Steve didn’t rely in good faith, because he knew as much as his lawyer at the trial, suggesting questions, overruling his attorney’s advice, manifesting a deep understanding of tax law. Just the sort of client an adviser should love.

So IRS argues “the deal is too good to be true, and Sophisticated Stevie should have known it.” Moreover, IRS claims Steve may have carefully crafted his erroneous return so as to plead ignorance if caught.

Judge Holmes isn’t buying. Steve did the BCC deal six years before he sold the house. It had economic substance, Jimbo was with a big-ticket CPA firm and had substantial real estate and tax creds, and Steve was a credible witness.

So Steve must pay capital gains on his sale to BCC, but no penalty.

And again, Holmes fans, this is the real deal.

Even If It Isn’t

That’s Judge Ruwe’s lesson to IRS in a 7463 “not for nuthin’”, Terrance Dale Moore, Jr., and Rhonda R. Moore, 2012 T. C. Sum. Op. 116, filed 11/29/12.

TD and Rhonda got hit for $26K in tax, interest and penalty; they paid about $6K to IRS, who wanted the balance, but TD and Rhonda filed Chapter 13. IRS filed a proof of claim for $16K (by mistake, IRS trial counsel admits), TD and Rhonda get a Chapter 13 payment plan confirmed, and TD and Rhonda pay IRS’ claim in full.

After IRS got paid in full what they (erroneously) claimed they were owed, TD and Rhonda converted the 13 to a 7, and get discharged. IRS demands the balance, around $5K plus interest. TD and Rhonda claim they paid what IRS demanded in the Chapter 13, IRS gives them a levy letter and Appeals gives them a NOD, and so off to Tax Court.

Judge Ruwe: “A confirmed chapter 13 plan determines the amount each creditor will be paid. Parties who fail to object to the confirmation of a plan are generally barred from later attacking the confirmed plan. It is a well-established principle of bankruptcy law that a party with adequate notice of a bankruptcy proceeding cannot ordinarily attack a confirmed plan. Respondent did not object to the bankruptcy court’s confirmation of petitioners’ chapter 13 plan. Indeed, respondent received the full amount of the claim he made in petitioners’ chapter 13 bankruptcy case.” 2012 T. C. Sum. Op. 116, at p. 8. (Citations, internal parentheses and quotation marks omitted.)

Moreover, “In the bankruptcy proceeding petitioners listed the correct amount of their tax liability. There was no subterfuge by petitioners. Respondent then filed a proof of claim for a lesser amount. The mistake was solely the responsibility of respondent. In the final analysis respondent got everything he asked for in the bankruptcy proceeding and suffered no disadvantage in that proceeding when it was subsequently converted.” 2012 T. C. Sum. Op. 116, at p. 9.

IRS tried to argue that when the Chapter 13 was converted to Chapter 7, all bets were off and it was open season on TD’s and Rhonda’s liability. No, says Judge Ruwe, while that’s the rule as to creditors who weren’t paid in full what they claimed pre-conversion, IRS got what they asked for pre-conversion.

Based on the unique facts here, TD and Rhonda are off the hook. And as for the post-discharge interest on non-dischargeable debts, IRS didn’t state what the amount of interest was or how it was calculated, so clearly it was an abuse of discretion by Appeals to confirm a levy without having firm numbers.

TD and Rhonda win.

Down Mexico way, as more particularly bounded and described in the 1939 hit tune by Michael Carr and Jimmy Kennedy, the Ministry of Finance and Public Credit of the United Mexican States and the US Dep’t of the Treasury signed up to the FATCA bilateral agreement. So it was announced on 11/28/12.

The launderers and the dodgers now must be reported, each country to each, even if the name of the counterparty changes from The United Mexican States to Mexico.

Negotiations are in progress with numerous other countries, says Treasury, and all the world (the tax world, anyway) awaits further news of the spread of FATCA.

See my blogposts “You Wash My Back – Part Deux”, 7/27/12, and “You Wash My Back – Redivivus”, 11/8/12.

Judge Marvel gets a chance to decide what the SOL is for Section 6702 frivolity, but passes by the return-vs-activity test, with a sidetrip to Congressional intent, because Elizabeth O’Brien claims the statute began to run even before she got frivolous, in the eponymous 2012 T. C. Memo. 326, filed 11/27/12.

Originally Liz filed a 1040 with husband Danny Boy and got it right, but later filed a 1040X that claimed compensation for services wasn’t income and sought a refund. Judge Marvel heard this frivolous old song before. So she’s ready to sustain the Section 6702(a) $5K hit to Liz (Danny Boy being out of the case because his determination letter wasn’t a NOD).

Judge Marvel must also bypass an interesting question. IRS wants to impose a separate 6702(a) hit on Danny Boy and on Liz. “Because the case with respect to Mr. O’Brien has been dismissed, we need not decide, in the case of a frivolous return document that is a purported joint Federal income tax return, whether respondent is entitled to impose a sec. 6702(a) penalty on both filers, or whether respondent is limited to imposing one sec. 6702(a) penalty per frivolous return document.” 2012 T. C. Memo. 326, at p. 14, footnote 11.

Now to Liz’s claim that SOL ran, per Section 6501(a), the 3SOL, before the Section 6702(a) hit was imposed. Liz claims the 1040X relates back to the tax year for which she timely filed her original (nonfrivolous) 1040. “Neither party addressed the issue of whether petitioner’s liability for the sec. 6702(a) penalty is properly considered to be a part of her Federal income tax liability for 2004. Although the notice of determination shows that respondent assessed the sec. 6702(a) penalty with respect to petitioner’s 2004 tax period, the harm targeted by sec. 6702(a) is the same as that targeted by sec. 6700, the conduct of the taxpayer. Sec. 6702(a) specifically targets the conduct of a taxpayer in filing a frivolous return document and, like the sec. 6700 penalty, applies to specific acts and transactions and not to a specific time period.” 2012 T. C. Memo. 326, at p.16, footnote 12.

“This Court has not decided whether a statute of limitations applies for the assessment of a section 6702(a) penalty. In fact, it appears that no court has. While it may be appropriate to decide this issue in the future, we need not do so in order to resolve this case. We need examine only when a period of limitations, assuming one is applicable for the assessment of the section 6702 penalty, would begin to run under accepted limitations analysis.” 2012 T. C. Memo. 326, at p. 19.

The general rule is that, as against the United States, if there is no clear SOL, then there’s no limit. And Liz’s relation-back argument is ridiculous, since the SOL (if there is a SOL) would have started running before she did anything frivolous.

So the SOL for frivolity, if there is one, starts when the party acts frivolously, not when the tax return is due.

Stay tuned. We may yet find out when the SOL for Section 6702(a) frivolity ends.