I’ve often praised Judge Gustafson, a solicitous judge if ever there was one. See my blogposts “We’ll Come to You”, 9/18/12, “An Obliging Judge”, 10/8/12, and “We’ll Come to You – Part Deux”, 10/22/12. He’ll visit you when you’re in prison, answer your frivolous tax questions, and track you down when you don’t follow his orders.

Now Judge Gustafson has issued another order, this time to Travis Hawk Dickens, Docket No. 22248-11, filed 11/8/12, a Designated Order today, when no decisions have issued.

Travis Hawk is another missing person like Thomas John Babcock, the star of “We’ll Come to You – Part Deux”, op. cit. as the high-priced lawyers say.

IRS says Travis Hawk hasn’t responded to IRS’ letters or other correspondence, but Judge Gustafson “has not yet heard from Mr. Dickens and does not prejudge the case based on the IRS’s allegations. However, because of those allegations the Court would attempt to conduct a telephone pretrial conference, but does not have a working telephione [sic] number for Mr. Dickens. The Court therefore offers to Mr. Dickens these general reminders that the Court would have given in the phone conference….” Order, p. 1.

And Judge Gustafson gently but firmly suggests to Travis Hawk that he bestir himself, gird up his documentation, and exchange papers with IRS, stipulating fairly to what facts he agrees.

As I said in my blogpost “We’ll Come to You”, supra, “my kind of court”.

It’s an old legal locution when the law is clear: “It is well-settled”. Well, Sheri Beersman settled with Reggie Lopez when they fought over her mom’s estate, but because Reggie was named beneficiary both in the will Sheri wanted probated and in the one Reggie wanted probated, no deduction for the $575K she had to pay Reggie to end the ensuing litigation.

Judge Foley shows us how well settled may not be well-settled in Estate of Sylvia E. Bates, Deceased, Sheri Beersman, Executor and Trustee, 2012 T. C. Memo. 314, filed 11/7/12.

The late Sylvia was a real estate tycoon. She executed a will, which poured whatever assets weren’t needed to pay her debts and taxes into a trust created by her late husband for the benefit of Sylvia’s grandkids, with Sheri as trustee, but included a bequest of $100K to Reggie, who helped Sylvia with various matters (and was fully paid for his services). Reggie lived in a house owned by Sylvia, but timely paid her rent.

Of course, Reggie produces a later will, which gives him half of everything, the other half going to grandson Scott, at the relevant time a guest of the Show Me state at Moberly Correctional Facility, and makes Reggie the executor.

It is well-settled that, in the words of Addison Mizner, “where there’s a will, there’s a lawsuit.” See my blogpost “Where There’s a Will”, 6/20/12. So it’s off to court, where Sheri wins at trial level, but the California Supremes reverse, and send Reggie and Sheri back to duke it out over undue influence and elder abuse, without the caregiver presumption (Sylvia had Alzheimer’s).

Sheri decides to buy peace and pays Reggie $575K to go away, $300 up front and $275 when he agrees not to sue Sheri and her brother Kenneth.

Sheri wants a deduction for what she paid Reggie. Negative, says Judge Foley: “Decedent had a longstanding and extremely close relationship with Mr. Lopez, expressly provided that he would receive estate assets, and memorialized her testamentary intent in both the First Trust and the Second Trust. In addition, the superior court resolved the amount of estate assets that Mr. Lopez was entitled to receive, and the settlement payment was paid in full satisfaction of any claim relating to the First Trust or the Second Trust. Furthermore, on the estate tax return, the estate reported that Mr. Lopez was a beneficiary and the settlement payment was paid to settle title to beneficiaries. During decedent’s lifetime Mr. Lopez was paid for the services he rendered, and no part of the settlement payment related to a claim for unpaid services. In short, Mr. Lopez’s claim represented a beneficiary’s claim to a distributive share of the estate rather than a creditor’s claim against the estate.” 2012 T. C. Memo. 314, at p. 9. (Citation omitted).

Reggie had been paid for his services by Sylvia while she lived. He was named beneficiary in both wills and both trusts. He wasn’t a stranger with a claim outside the will or trust. Therefore no deduction.

Sheri tried to deduct reimbursement to Scott for Mr. O’s fees; Mr O. was the private eye Scott hired to keep watch over the litigation and the estate assets while he sojourned at Moberly. No to that, says Judge Foley: “Scott testified that Mr O was paid to monitor the trust litigation and investigate decedent’s oil and gas investments. While Mr O, in a letter demanding payment for his services, stated that he and Scott had ‘discussed’ investigating decedent’s oil and gas investments, there is insufficient evidence to establish precisely what Mr O did. We are convinced, however, that Mr. O was paid to protect Scott’s interest in the estate and monitor the trust litigation. Therefore, the estate’s payment to Scott is not deductible.” 2012 T. C. memo. 314, at pp. 11-12 (Citations and footnote omitted). Payments to preserve a beneficiary’s interest in the estate are not deductible.

Finally, Sheri got confused advice about filing the Form 706. Her initial letters of administration only permitted her to find estate assets, not take possession of them. When her tax accountant said she had to file a Form 706 timely, her litigation attorney (who had no tax credentials) told her she couldn’t file a Form 706 as she lacked authority under the letters as issued.

But Sheri did petition the probate court to authorize her to reimburse herself for certain expenses from the estate, and was successful. IRS claims a late filing and late payment penalty when Sheri does get final letters post-litigation and files and pays late. Sheri says she relied on her litigation lawyer.

No, says Judge Foley, you never went to the probate court to get authority to file the Form 706. “Sheri testified that Mr. C [her litigation attorney] advised her that she lacked authority to file the estate tax return, but Mr. C was not a tax adviser and testified that he ‘never discussed taxes with her.’ Regardless of what advice Mr. C actually provided, the estate has failed to establish that any reliance on his advice relating to filing of the estate tax return was justified. Mr. G (the tax accountant) readily acknowledges that he told Sheri that ‘the estate tax return needed to be filed.’ After speaking with Mr. C, Mr. G and Sheri concluded that she lacked authority to file the estate tax return, but she did not petition the superior court for the authority to do so, seek additional advice, or otherwise attempt to resolve the issue. See Estate of Cavenaugh v. Commissioner, 100 T.C. at 427 (holding that an estate failed to establish reasonable cause where it did not timely petition the probate court for the appointment of an authorized representative to file an estate tax return).” 2012 T. C. Memo. 314, at pp 13-14 (Citations and footnote omitted).

Takeaway- A good example of How Not To Do It.

To paraphrase the late great John Lennon’s 1968 hit, that’s what Thomas Tran wanted in his not-for- nuthin’ Section 7463 small claimer, 2012 T. C. Sum. Op.  210, filed 11/6/12. And Judge Swift gives it to him.

Tom got into trouble with his credit cards, and the banks were breathing down his proverbial. Tom found a debt resolution outfit that charged him $2400 to cut $6700 off his aggregate debt. The banks sent Tom 1099-Cs, but Tom didn’t bother reporting the cancellation of debt income. IRS remedied that defect by giving Tom a SNOD.

Tom claimed an offset of the $2400 he paid as a deduction against the income, but that doesn’t fly. “Specific statutory exclusions or offsets from gross income are provided in sections 101 through 140. Of these only section 108 could possibly apply in this case. Section 108 excludes from gross income COI in certain circumstances such as insolvency of the taxpayer. No evidence before us establishes petitioner’s insolvency, and as indicated, the parties have stipulated that the sole issue before us is the legal issue described above.

“The fees before us were paid to a third-party debt resolution company and would not qualify to be treated as some type of merchant or company discount.”  2012 T. C. Sum. Op. 210, at p. 4.

Tom next claims miscellaneous itemized deduction for the $2400, arguing money spent for production of income. In an example of unjustified reliance that would get a taxpayer who made that argument hanged, IRS tries to deny Tom the deduction based on a footnote. “As authority in this case for not allowing a miscellaneous itemized deduction for the $2,343 respondent erroneously relies on Melvin v. Commissioner, T.C. Memo. 2009-199. However, in that case we simply noted in a footnote that the taxpayer therein conceded any claim to a deduction under section 212(1) for fees paid to a debt resolution company because of application to the taxpayer of the alternative minimum tax. Melvin provides no support for respondent’s position herein that fees paid to a debt resolution company, as a matter of law, may not be deducted under section 212(1).” 2012 T. C. Sum. Op. 210, at p. 5.

Nobody claims the money paid to the debt resolution company was excessive, out of the ordinary or unnecessary. The debt resolutionists did get Tom $6700 in relief for his $2400 expenditure. Without their efforts, no one suggests Tom would have gotten anything.

So Tom can have his miscellaneous itemized deduction, subject to the 2% AGI floor and any AMT disallowance of miscellaneous itemized deductions.

IRS tries a last-gasp rescue of its losing case in its post-trial brief, but Judge Swift dismisses it in a footnote: “In his posttrial brief respondent suggests that petitioner has not substantiated that the fees paid to the debt resolution company were paid in 2008. However, at the hearing held on April 12, 2012, respondent conceded that the fees were paid by petitioner, and respondent and petitioner stipulated that the only remaining issue was the legal issue described above. Respondent’s attempt to raise on brief a fact issue relating to whether petitioner paid the fees in 2008 is rejected.” 2012 T. C. Sum. Op. 210, at p. 6, footnote 3.

IRS didn’t cover itself with glory in this case.

Oh, and I misquoted the 1968 Beatles hit in my blogpost “Stipulate, Don’t Capitulate”, 9/23/11.

And they don’t fade away either, unlike Gen. MacArthur’s old soldiers. They are embalmed in Tax Court opinions, which, as we are reminded by the Tax Court’s “taxpayer info” link on its website “(G)enerally… is issued in a regular case when the Tax Court believes it involves a sufficiently important legal issue or principle.”

Once again, the First Time Homebuyer Tax Credit Second Edition (FTHBTC2) presents what Tax Court deems “a sufficiently important legal issue or principle”, even though the tax credit giving rise thereto has long since faded away. But the opinion in Robert D. Packard, 139 T. C. 15, filed 11/5/12, does show that proper tax planning is as important a part of planning a wedding as the ceremony, the reception, and the Viennese dessert table.

Bob marries Marianna in November, 2008, while FTHBTC1 (the $7500, 15-year loan) is still on the books. But they don’t move in together until they buy a house on December 1, 2009, after FTHBTC2 (the $8000 credit) comes on the scene. Marianna owned her prior principal residence for more than five years before buying the new house. Bob owned no principal residence for three years preceding the purchase; he was a renter throughout.

Marianna claims she’s qualified for FTHBTC2 under the Section 36(c)(6) longtime homeowner exception (owned for five years out of the past eight), and Bob claims he’s qualified under Section 36(c), as he didn’t own a principal residence for the past three years.

IRS says no, you can’t mix-and-match, you’re both either three-year non-owners or five-out-of-eight owners.

Why not mix-and-match, asks Judge Wells: “Paragraph (6) operates to expand the scope of the first-time homebuyer credit by treating an individual who has owned and resided in the same residence for the five-consecutive-year period as if that individual were a first-time homebuyer for purposes of section 36. By its terms, it provides an exception to the definition of first-time homebuyer pursuant to section 36(c), a definition that is provided in paragraph (1). In other words, the exception pursuant to paragraph (6) expands the definition of who qualifies as a first-time homebuyer pursuant to paragraph (1).

“It is a well-established rule of statutory construction that a statute is to be construed so as to give effect to its plain and ordinary meaning unless to do so would produce absurd or futile results.” 139 T. C. 15, at pp. 6-7 (Footnote omitted).

Congress intended that no couple could get the credit unless each qualified. But Congress didn’t say that each had to qualify under the same provision. IRS concedes that Bob and Marianna individually would qualify.

So summary judgment for Bob and Marianna. Great tax planning, guys!

No, not another consequence of Hurricane Sandy. This is the story of Frank & Suzanne Cardamone, Docket No. 22935-12 (filed 11/2/12). Frank and Suzy didn’t bother to sign their Tax Court petition, but they did get an attorney, A.S., who files notice of appearance and proffers a decision document.

Unfortunately, A.S. notices her appearance after the purported filing of the unsigned petition. She can’t sign on behalf of her clients, says Chief Judge Thornton.

“On September 25, 2012, the Court issued an Order directing petitioners to file, on or before October 15, 2012, an Amendment to Petition ratifying and affirming the petition filed to commence this case. On October 3, 2012, A. S. entered an appearance on behalf of petitioners. On October 22, 2012, the Court received a proposed decision document signed by Ms. S. on behalf of petitioners. That decision cannot be entered, however, until the petition filed to commence this case is properly ratified by petitioners; petitioners’ counsel, having entered her appearance after the date the petition was filed to commence this case, cannot ratify the petition on petitioners’ behalf.” Order, p. 1. (Emphasis in original.)

I do not see why A.S. cannot sign the amended petition nunc pro tunc (“now for then”, as the high-priced lawyers say). She has authority from the Cardamones. Chief Judge Thornton cites no Rule or decision in support of his conclusion. Neither Rule 23 nor Rule 33, as amended this past July, expressly states that a subsequent signature to a pleading is invalid.

Going through this additional step of having the Cardamones sign the “amendment”, rather than letting A.S. sign it and get the decision document entered, just delays matters and wastes resources.

Of course, A.S. should have reviewed the September 25 Order and had her clients sign the amendment in the first place.

Takeaway for attorneys– Check the papers your prospective client gives you and search the Tax Court websites for orders; if you find any, make sure your prospective client complies.

The usual Friday no-decision day at Tax Court, so here’s an order keeping two whistleblowers’ names shrouded in secrecy, Anonymous 1 and Anonymous 2, Docket No. 12472-11W, Judge Foley drawing the veil.

Need I add that in a separate order Judge Foley gives the whistleblowers nothing, because IRS claims they got no money out of the equally anonymous Company X? Of course, the Anonymous Duo allege IRS started its own proceedings after blowing them off, but Judge Foley ducks that one, because the statute says “no cash to IRS, no cash to whistleblower”, and Tax Court has no jurisdiction to look behind IRS’ statement.

The Anonymous Duo are ex-employees of Company X. They fear retaliation, stigma and inability to find future employment, if it becomes known that they blew the whistle.

Judge Foley: “Petitioners contend that revealing their identity will result in professional stigma and will prevent them from obtaining employment in the future….

“In general, trial courts balance a number of factors to determine whether litigants should be allowed to proceed anonymously, including. (1) social interests; (2) whether the case involves highly sensitive personal information; (3) whether disclosure of the party’s identity will pose a credible risk of physical harm; (4) whether disclosing the party’s identity will cause “other significant harm” (e.g., professional stigma or economic retaliation); and (5) whether the party is a confidential informant. See Whistleblower 14106-10W v. Commissioner, 137 T.C. 183, 195-203 (2011). Tax whistleblowers are especially vulnerable to professional stigma, retaliation, and economic duress. See id. at 203.

“In determining whether a whistleblower may proceed anonymously, the Court must consider whether the need for anonymity outweighs the prejudice to the opposing party and the general presumption that the parties’ identities are public information. See id. at 192. Anonymity for whistleblowers is specifically contemplated by Rule 345(b) which became effective July 6, 2012.

“Petitioners have demonstrated that they are of an age and station in life which necessitates continued employment and that revealing their identity would harm their future employment prospects. See id. at 203. The fact that petitioners are no longer employed by Company X does not immunize petitioners from possible retaliation. See id. at 204. Petitioners have demonstrated that the risk of harm to them exceeds mere embarrassment or annoyance. See id. In addition, respondent [IRS] knows petitioners’ identity and will not be prejudiced if they proceed anonymously.” Order, at pp. 1-2.

Of course, having now been permitted to proceed anonymously, the Anonymous Duo are permitted to proceed out the Tax Court door, as IRS gets summary judgment.

I know it’s a waste of time asking Congress to do anything; they can’t stop the country from falling off the fiscal cliff they created, much less clean up the whistleblower provisions of the Internal Revenue Code. But this charade really has to stop.

From a blogpost by Sir Richard Branson, 10/2/12, on starting a successful business, forwarded by my colleague Michele Peters, Esq.:

“If you aren’t having fun, you are doing it wrong. If you feel like getting up in the morning to work on your business is a chore, then it’s time to try something else. If you are having a good time, there is a far greater chance a positive, innovative atmosphere will be nurtured and your business will fluorish [sic]. A smile and a joke can go a long way, so be quick to see the lighter side of life.”

If the deal where you acquired the money is a sham, using proceeds in a legitimate deal doesn’t give business purpose to the sham. Thus Judge Jacobs to Don Kipnis and Larry Kibler, the golden boys of the Florida construction industry, in Donald J. Kipnis, 2012 T. C. Memo. 306, filed 11/1/12. Don and Larry are consolidated for briefing, trial and disposition.

Don and Larry need more net quick. This is not chocolate milk, but working capital to allow them to get bonded for bigger construction deals. Having taken a big hit on a recent job, their net quick has the bonding companies worried, they say, so they can’t bid the big lucrative jobs where contractors must be bonded.

So Don and Larry enter into a CARDS deal, one of the phony mix-and-matches with an offshore tax indifferent, where a phony loan is floated by a German bank (later the subject of a fraud investigation) with strings attached that guarantee that no one takes a loss or makes a profit (except the promoter of the deal and the bank), but a big tax loss is generated.

Some cash does get thrown off to Don and Larry, which they put into their contracting sub S (M&S), thereby giving them more of the desirable net quick. This, they claim, legitimizes the deal, as everyone agrees M&S is a leading Florida contractor, and net quick gets you bonded.

“The other CARDS transactions are essentially the same as the transaction in this case, with one exception. In the other cases the taxpayers did not use the proceeds arising from the CARDS transaction to actually make an investment. Petitioners assert this difference is significant and mandates a holding that they are entitled to the loss deductions claimed because they, in fact, used the proceeds from the CARDS transaction to increase M&S’ net quick.” 2012 T. C. Memo. 306, at p. 25.

IRS says no: “Respondent [IRS] posits that to look to the use of the proceeds from the CARDS transaction would permit taxpayers to legitimize sham transactions by grafting them onto legitimate business transactions. Continuing, respondent argues that petitioners had no business purpose in entering into the CARDS transaction per se. In sum, respondent asserts that after all was said and done, petitioners’ primary intent was to offset their significant business income with the losses arising from their involvement in the CARDS transaction.” 2012 T. C. Memo. 306, at pp. 25-26.

Don and Larry agree that the CARDS deal had no economic substance, but they needed what little cash they got to build up the net quick. But cash-on-cash, the deal was negative; it cost Don and Larry $1.2 million to net $423K.

“Petitioners were unequivocal about one thing: Any contribution to M&S had to be in the form of a loan. Contributing their own money to M&S was not an option. Both petitioners and their witnesses explained that the construction industry was built on leverage. Moreover, Mr. Kipnis was emphatic that personal considerations prevented him from putting his own money into M&S. And yet, after all was said and done, Messrs. Kipnis and Kibler spent nearly $1.2 million of their own money in order for $423,000 to ultimately reach M&S. No genuine leveraging arose from the CARDS transaction.” 2012 T. C. Memo. 306, at pp. 32-33.

So what Don and Larry did with the money doesn’t matter. They took a huge tax loss. See my blogpost “It Ain’t What You Do With What You Got”, 8/11/11.

A bona fide expenditure won’t save a phony deal.

 But Some Can

I was at the Bureau of National Affairs Advisory Committee meeting October 25, talking to my old friend Joel E. Miller, Esq., about the recent spate of scenic easement cases, and the Whitehouse decision, 139 T. C. 13, filed 10/23/12 (see my blogpost “Chipping Away the Facade – Part Deux”, 10/24/12).

Between the Coca Cola and Cracker Jack that preceded the meeting, Joel mentioned that he had brought to Judge Halpern’s attention an arithmetic flub in the decision. Taxpayer had overstated the valuation by 400%, not that the taxpayer’s valuation exceeded the actual valuation by 400%.

I had missed the arithmetic error when I blogged the decision, and said so. I told Joel that lawyers can’t add, so I wasn’t surprised.

But conscientious Judge Halpern has amended his decision to correct the errors in an Order, Docket No. 12104-03, filed 10/31/12. He doesn’t credit Joel, so I’ll take the liberty of doing so now.

Loren G. Rice, as Trustee of what looks like a self-settled trust, wants IRS to stay away and mail her a timely NFTL, but she gets neither from Judge Wells in Loren G. Rice Trust, Loren Georgette Rice, Trustee, 2012 T. C. Memo. 301, filed 10/31/12, as Tax Court comes back on stream after the Sandy-induced layoff.

Loren claimed her trust had a $90K refund coming and got the check, but IRS determined an overstatement of withholding and gave Loren a Form 3552 Notice of Tax Due, hand-delivered to her at her place of employment, and on the same day filed a NFTL. Loren didn’t get her five-day notice; that didn’t show up for two weeks.

Loren claims the NFTL is invalid because she didn’t get the five-day notice mandated by Section 6320. Judge Wells: “‘The validity and priority of a NFTL is not conditioned on notification to the taxpayer pursuant to section 6320. Therefore, the failure to notify the taxpayer concerning the filing of a NFTL does not affect the validity or priority of the NFTL.’ See sec. 301.6320-1(a)(2), Q&A-A12, Proced. & Admin. Regs. Ms. Rice has not challenged the validity of this regulation. Accordingly, we conclude that respondent’s failure to provide notice within the five-day period after filing the NFTL does not affect its validity.” 2012 T. C. Memo. 301, at p. 11. Maybe she should have; or maybe, with $90K on the table, she should have hired a lawyer. See my blogposts “Hire A Lawyer”, 8/13/12, and “Heavy Weather – for Weatherly”, 8/26/11.

But Loren grouses about the visitation from the revenue agent to drop off the Form 3552 Notice of Tax Due at her place of employment. She claims Section 6304(a)(2) prohibits IRS from coming to her workplace if her employer objects.

True, but IRS has to know that visits to the taxpayer’s workplace are out of bounds. Judge Wells: “There is no evidence that Ms. Rice provided respondent [IRS] with notice not to visit her at work or that her employer prohibits such visits. Accordingly, the revenue agent’s decision to deliver the Form 3552 to Ms. Rice at her place of employment was consistent with both section 6304(a) and section 6303(a), which states that a notice and demand for payment may be delivered to the taxpayer’s usual place of business.” 2012 T. C. Memo. 301, at p. 11.

So let IRS know they can’t come knockin’, or be prepared for them to come to you.