At the IRS Nationwide Tax Forum in National Harbor, MD, I was soaking up knowledge and learning, and trying to find something to blog, when two Enrolled Agents from Washington State, Gene Bell and Kathy Hettick, put on quite a show. Aside from blasting through the hot topics on Subchapter S corporations, they dropped a bomb.

IRS is going after preparers, not for the few grand in preparer penalties (remember the poor lady who messed up the late Lawrence Wickersham’s and Dancehall Mary’s return?). No, because by auditing one dud return from a preparer, they can blaze a trail to dozens, if not hundreds, of dud returns perpetrated by said preparer; put the fear of the Righteous Jehovah and the Continental Congress in the hearts, minds and wallets of dozens, if not hundreds, of taxpayers, the erstwhile clients of said preparer; and hand out slam-dunk assessments to said taxpayers at all points of the compass.

Another bonanza, of course, is the Sub S corp, whose one and only shareholder, officer and director is actively engaged in a personal service trade or business, and whose Form 1120-S shows distributions to said one and only shareholder of hundreds of thousands of dollars, but reports no payroll, salary or wages. The S Corp files no Forms 941 and makes no payments of employment taxes withheld. Trust fund violation penalties follow, as well as recharacterization of distributions, assessment of interest, negligence penalties and other sleep-disturbing matters.

In short, beware.

I looked at the day’s Tax Court decisions, seeking diversion. Only one case looked vaguely interesting, Charles R. and Shanda G. Douglas, 2011 T.C. Mem. 214, released 8/31/11, and that not because of Ms. Douglas’ unique given name. No, not because IRS conceded the Section 6662(c) negligence penalty, or that Judge Goeke found that Charley and Shanda relied on their CPA and thus weren’t liable for the Section 6662(a) substantial understatement penalty either, although they did substantially understate their tax due.

The case involves a Sub S Corp, Bantam Leasing, Inc., but Sub S concepts don’t determine the outcome.

No, Judge Goeke unpacks the concept of the idle asset. Here’s Judge Goeke’s take: “…Shanda Douglas was the sole owner and officer of Bantam. Charles Douglas was an employee of Bantam, which operates an over-the-road trucking business.

“Roughly 75 percent of Bantam’s business is classified as ‘critical timing’ delivery services. In this line of work, punctual dispatch of cargo is important as Bantam’s accounts could be placed in jeopardy should Bantam fail to deliver on time. Mr. Douglas believed an aircraft would minimize the risk of losing customers on account of tardy delivery, not by moving freight but by potentially replacing drivers who become ill or who are unable to continue. Mr. Douglas consulted his certified public accountant … about the tax aspects of purchasing an aircraft.” 2011 T.C. Mem. 214, at p. 3.

Charley didn’t do things by halves. He bought one plane, sold it, bought another, wrote off the maximum expense permitted by Section 179, and wrote off operating expenses of the plane as well. Only one problem–Charley couldn’t fly a plane, and neither could Shanda. In fact, Bantam hadn’t a single employee, contractor or drinking buddy who could fly anything.

So Charley took to the skies, but by the time the year at issue arrived, all Charley had was a student license, the aerial equivalent of a learner’s permit. Neither Charley nor anyone else used the plane to deliver a spare driver, a spare tire or anything else. All Charley used the plane for was to take flying lessons.

IRS grounded Charley with a heavier-than-air deficiency. IRS argued that the Section 179 deduction only becomes available when the property is placed in service, that is, ready, willing and able to be used for a specified function. The plane was placed in service, right enough, but the purpose was personal use, not business use. Thus, no deduction.

Charley’s lawyers argued “idle asset”, that is, an asset ready, willing and able but awaiting the right moment for business use.

Judge Goeke shoots that one down (sorry, guys), thus: “Depreciation deductions may be available under the ‘idle asset’ rule in situations where an asset, while not in actual use, was nevertheless devoted to the business of the taxpayer and was ready for use should the occasion arise. See Piggy Wiggly S., Inc. v. Commissioner, 84 T.C. 739, 745-746 (1985), affd. 803 F.2d 1572 (11th Cir. 1986). In the context of the established facts, however, petitioners’ attempt to employ the ‘idle asset’ rule cannot succeed as their aircraft does not fit within the rule’s requirements. The Cessna 172 was not idle in that it was used for training by Mr. Douglas, and it was simply never available for its alleged business function of providing an expedited method of transporting drivers to retrieve disabled vehicles. An aircraft cannot be considered ready and available for business use without a suitable pilot to fly it. …no employees or officers of Bantam held a pilot’s license that would have enabled them to use the aircraft to transport a replacement driver. Petitioners’ vague assertion that there were ‘stand-by pilots’… is not credible. There is no evidence in the record, aside from Mr. Douglas’ statement, that there were any ‘stand-by’ pilots for the aircraft; and there is no evidence at all that would support a finding that Bantam had access to standby pilots on an expedited schedule, which was the alleged business reason for the aircraft. There is no evidence in the record of any agreement between a qualified pilot and Bantam that might suggest his or her availability for the purpose of flying drivers to disabled vehicles on short notice.” 2011 T.C. Mem 214, at pp. 5-6.

So the upkeep and maintenance deductions for the plane also crash, because they were not business expenses.

But, as aforesaid, Charley and Shanda are spared the Section 6662 (a) substantial underreporting penalty. Apparently Charley asked his trusted CPA about business use of aircraft, told her the full story, and relied in good faith on her expertise (presumably that was the last time he will so rely), so Charley and Shanda are off that hook.

I’ve taken the title of one of Hemingway’s lesser novels as the theme of this post, because it illustrates what is necessary both to have not (in the case of Kenneth Lay’s annuity sale) and to have (in the case of the late Clyde Turner, Sr.). And why it is sometimes better to have not than to have.

Clyde’s story is told in Clyde W. Turner, Sr.,  Deceased, 2011 T.C. Memo. 209, filed 8/30/11. Clyde was a self-made millionaire, a World War II vet who went into the lumber business. Judge Marvel tells the Turner story at length, but cutting to the proverbial, Clyde Sr.’s daddy Ollie was the first depositor and pioneer stockholder in a little crossroads Georgia bank that grew into Regions Bank, mutated by phonetic transcription into Regents Bank, 2011 T.C. Memo. 209, at p. 40. Clyde Sr. got the stock, however you spell, it, bought more and never sold nuthin’ never.

Senior set up a life insurance trust for the benefit of his children and grandbabies, but paid the premiums himself, not out of trust assets. These, Judge Marvel ruled, were gifts of present interests, as the trust instrument provided that the children and grandbabies could demand present distributions, thus qualifying them for the annual gift exclusions. Even if the children and grandbabies never even knew they could demand present distributions, if they had the legal right to demand and receive, they had. Therefore the payments Senior made were gifts to them, even though they had not known that they had, and qualified for the annual gift exclusion, therefore Senior had not gift tax liability.

Unhappily for Senior’s heirs, son Marc hired some good ol’ boy lawyers from down the road to help Senior and Miss Jewell, his wife of nearly 60 years, plan for the inevitable. The lawyers put together an off-the-rack limited partnership, using a business agreement they drafted for someone else and adding the word “family” in places. The assets with which Senior and Miss Jewell funded the trust were all bank deposits and long-term buy-and-hold stock positions; though Senior had engaged in some real estate buying and selling, no such assets wound up in the LP.

Judge Marvel found that there was no non-tax business purpose to the creation of the LP. There was no need to centralize management of assets at risk of dissipation or which required special attention. There were no real risks of interfamilial litigation. All that the LP did was create a new bucket into which to drop whatever passive investments Senior had.

Thus, there was no bona fide sale of the assets Senior transferred to the LP, even though the heirs and IRS stipulated that Senior did receive full and adequate compensation in the form of the trust beneficial interests he got in exchange for the assets he contributed.

Moreover, Senior used the trust as an alternate bank account, paying himself a management fee though he did no work, and using the trust to make gifts to his children and commingled personal funds with trust corpus. And as sole general partner, he could amend the partnership agreement without consent of the limited partners.

Thus Senior had the trust corpus at date of death, and after paying estate taxes, his heirs had not as much as they thought they had.

Ken Lay, of Enron fame (or infamy), on the other hand, had not, during his lifetime, so no income tax due. This is the result Judge Goeke reaches in Estate of Kenneth L. Lay, Deceased, Linda P. Lay, Independent Executrix and Linda P. Lay, 2011 T.C. Mem. 208, filed 8/29/11.

While Ken was riding high at Enron, he made retirement noises. The Board, which Judge Goeke deemed independent, wanted to keep him, but Ken wanted spot cash free of tax. So the Board let Ken sell Enron an annuity he had bought from Manulife for a price within 5% of FMV, after much corporate formality, appraisals and complying with State law and the requirements of Manulife, and for no gain above his basis in the annuity contract. So Ken reported no gain in year of transfer.

IRS tried to make much of the fact that Manulife claimed it didn’t receive the originals of the assignments and didn’t change title on their books. No matter, says Judge Goeke. Enron treated the annuity as its own, listed it on the asset matrix in its bankruptcy petition, and faxed copies of all the transfer documents to Manulife. Both Enron and Ken fully performed under their written contract of sale. That Enron sent Ken an amended W-2, showing the sale proceeds as wages, years later, as part of a deal Enron made with IRS during the Enron bankruptcy, didn’t change an already fully consummated transaction.

Equitable title, benefits and burdens, is the test. Enron had, Ken had not. To prove this, Lovely Linda approached Manulife saying she wanted some cash, and asked for it. Manulife told her “no, nacho money.”

IRS tried the Section 83 gambit, that the “sale” was disguised payment of wages, as the annuity supposedly “sold” was not subject to substantial risk of forfeiture. By the terms of sale, if Ken wasn’t fired or quit before 4.25 years, he could get the annuity back from Enron. The sale was golden handcuffs, to keep Ken working for Enron and on the straight and narrow. If he didn’t stay, he wouldn’t get the annuity back. Nor was the annuity segregated or placed in trust, to prevent Enron’s creditors from seizing. So there was substantial risk of forfeiture.

Thus, no non-qualified deferred compensation plan.

So although Ken had $5 million from Enron, he had not a taxable gain.

Back on 3/15/11, in my post “A Good Day for Taxpayers”, I gave scant space to the decision in Christy & Swan Profit Sharing Plan, 2011 T.C. Mem. 62, filed 3/15/11, largely because of my erroneous conclusion that the point was obvious–for a retirement plan to be qualified, it must comply with the Code, as amended, to the letter, whether the plan will actually do any of the acts to which the Code, as amended, pertains. Salvatore Bochicchio, CPA, however, brings me up short. Thanks, Mr. B.

That something is obvious to professionals doesn’t mean it’s obvious to everyone. The traps are set for the unwary, the “unwary” being the nonprofessional, like the unfortunate Mr. Swan, who ran a real estate business with an old-law qualified 401 (a) plan. For the years at issue, Mr Swan was the sole participant and trustee. He missed the amendments required by various subsequent Congressional tweaks, tried to cure them retroactively with a catch-all letter, and ended up with his plan being disallowed years later.

No matter that the amendments had nothing to do with the plan’s real-life operations. Judge Swift said Section 7476 tied his hands. “…(S)ection 7476 ‘does not provide a broad grant of authority to the Court to conduct a review of factual matters related to controversies over retirement plans and to fashion equitable remedies to resolve these controversies’.” 2011 T.C. Mem. 62, at p. 8. Abuse of discretion is the only standard of review. Since adherence to the letter of the law, whenever Congress tinkers with it, is what Congress required, IRS was right to disqualify the plan, and poor Mr. Swan does a swan-dive (sorry, guys).

Now we may worthily lament that the idea of an Internal Revenue Code, with year-to-year stability in place of annual Revenue Acts that left everything up in the air, such as was envisioned by the first Internal Revenue Code of 1939, has gone by the boards. We have instead annual tweaks, adjustments, revisions, automatic sunsets, cliffhanging extensions and non-extensions, and other agents of chaos that make tax planning more like gambling. But we’re stuck with this régime; so we must learn to stop worrying and love the annual Congressional bomb.

Note that IRS threw Swan a rope. Per Rev. Proc. 2008-50, 2008 I.R.B. 35-464, Swan could have made a deal with IRS, paid some money based upon the severity of his transgressions, and received plenary absolution. Swan chose to duke it out instead. Wrong!

Takeaway–Freedom is not free. If you want your plans to benefit from the largesse of Section 401 et. seq., have a professional review your plan. And if you blow it, make a Rev. Proc. 2008-50 deal with IRS. As Mr.Kipling said, “It ‘alves the gain, but safer you will find.”

Thanks again, Mr. Bochicchio.

Or, Six Out of Sixty-Four Isn’t Enough

While I ordinarily wouldn’t spend much time on a run-of-the-mill substantiation case, I couldn’t resist the petitioner’s name in light of the current hurricane brouhaha.

So here is the short story of Jeremiah and Addie Weatherly, 2011 T.C. Mem. 206, filed 8/25/11.

Jeremiah was a bailiff. He hired various casual laborers to help him evict tenants, serve process and move property. Jeremiah claimed he got names, addresses, and SSANs for all his workers.  IRS disallowed all his labor deductions.  On audit, he produced 64 1099-MISCs, but had never filed them with IRS. At the audit, IRS requested Jeremiah to provide Forms 4669, Statement of Payments Received, for all the casuals.

Jeremiah produced eight, but two got bounced for mismatched SSANs. The number of orphan SSANs must be in the millions; SSA was quoted years ago as saying that billions in FICA payments were not credited to individual workers due to mismatches. The reasons varied from illegal immigrants using stolen numbers to people changing their names when they got married and not telling SSA to identity thieves to simple keypunch errors.

IRS concedes the payments to the six as a deductible expense. Jeremiah wants an approximation for the rest.

No can do, says Judge Haines. “Petitioners have not provided contemporaneous books and records to substantiate their contract labor expense for 2005.  Further, Mr. Weatherly failed to testify at trial to the recordkeeping practices of his business. Petitioners merely produced 64 Forms 1099-MISC prepared for the audit without any supporting documentation. These Forms 1099-MISC were not filed with the IRS. Petitioners were able to produce only six valid Forms 4669 for six daily workers, for which respondent conceded a deduction of $25,115. As to the remainder of their claimed contract labor expense, petitioners have failed to substantiate that such an amount was paid. In fact, the evidence submitted does not provide us with a reasonable basis upon which an approximation of an allowed amount of contract labor expense could be made under the Cohan rule. Accordingly, we sustain respondent’s determination with respect to the contract labor expense.” 2011 T.C. Mem. 206, at pp. 4-5.

Moral–Six out of sixty-four is too few.

Footnote– Jeremiah and Addie represented themselves. Further, the amount of the deficiency was more than $67K. Why Jeremiah did not find an attorney to represent him baffles me. Bailiffs tend to have contacts in the legal profession. Nevertheless, Jeremiah and Addie went it alone, and encountered stormy weather.

No statute of limitations to update a previous posting, but Tax Court has to reconsider letting the Virgin Islands Government intervene in Arthur I Appleton, Jr. So said the Third Circuit on June 10, 2011.

The decision is available online sub. nom.,  as the high-priced law school graduates say, Arthur I. Appleton, Jr. v. Commissioner of Internal Revenue; Government of the United States Virgin Islands, Appellant.

So is my earlier posting dated 12/28/10, entitled “Statute of Limitations? Maybe Not”. I said I’d follow the case. Took me a wee while, but here is the follow-up.

Briefly, Third Circuit remands, saying Tax Court misstated the standard for permissive intervention by a government. I leave the Fed.  R. Civ. P. 24 technical exegesis to the technicians.

The rest of us now await what Tax Court will do. But for the moment, the statute of limitations issue is still up in the air.

As Otis Blackwell wrote, and Elvis Presley sang in 1957, 400 2nd Street, N.W., in colorful downtown Washington (Our Nation’s Capital), D.C., home of the United States Tax Court, is “All Shook Up”, apparently.

The following appeared on the Court’s homepage 8/24/11:

“THE TAX COURT HEADQUARTERS BUILDING IN WASHINGTON, DC, IS CLOSED.

“Employees should not report to work until the building is deemed safe by the structural engineer. Updates will be posted to this Web site as information becomes available.

“eFiling is not affected by the closure of the Tax Court Building, although there may be some delay in processing eFiled documents.

“Hand-delivery to the Courthouse is not available during the period the Tax Court Building is closed. Taxpayers must comply with deadlines established by statute or Court rule or order by timely mailing to the Court or by timely eFiling. Timeliness of mailing is determined by the United States Postal Service’s postmark or the delivery certificate of an approved private express delivery company.”

So, though the governmental servants of tax justice are hors de combat by virtue of the trembling earth, taxpayers and their professionals must still file and serve as if, to quote another old song, “the earth stood still.”

I’ll post more as it becomes available. Meantime, friends, keep those petitions, briefs, motions and cross-motions comin’.

Fortuitously, I’m hors de combat un peu my own self next week, as I’m off to beautiful National Harbor, Maryland on Monday to absorb knowledge at the IRS Nationwide Tax Forum.

Cain’t hardly wait.

In the immortal words of Dave “Curlee” Williams and James Faye “Roy” Hall, as sung by Jerry Lee Lewis. In fact, school is out at the United States Tax Court, and the website is bereft of cases. Instead of the usual “no cases today” tagline, there now appears “we post Monday through Friday at 3:30 p.m.”, even after 3:30 p.m., EDST.

I must therefore assume that new filings take a backseat to Mother Nature and the subterraneans.

And yesterday’s cases were hardly a treasure trove, just a musician writing off his vacation with his wife as a business expense (Section 274a really put paid to all sorts of shenanigans) and a spouse seeking 6015(f) relief with as near to no basis as one could imagine. Nothing worth commenting on.

So I will rant anent the IRS Nationwide Tax Forum. I attend this, as it’s usually good CPE, and when it was held in New York City it couldn’t have been more convenient.

But this year, the Powers-That-Be decided to eschew my native heath in favor of National Harbor, Maryland. Aside from sticking me with car rental, hotel bill (forget the Gaylord National Harbor, that’s theft; they want $19/day for self-service parking, for Pete’s sake! Even the Days Inn at Alexandria, VA is no bargain) and two very long drives, the scheduling always has a conflict in the courses I want to take. So after this year’s safari, it’s aloha on the steel guitar, lads and lasses.

Or, What Price Exclusivity?

Yesterday I noted the case of Luis Bulas, 2011 T.C. Mem. 201, filed 8/17/11, for Judge Haines’ exegesis of Rule 41(b)(1), the “unfair surprise at trial” rule. But as is almost always the case, there were other issues raised and decided in Judge Haines’ decision. Thinking over one of them, I concluded it was worth a few words.

In my post, I stated that Lulu got a partial win on his home office deduction. Lulu had added a bathroom to his home, across the hallway from the bedroom he had asserted he had converted to use as his office, where he carried on his tax preparation business. There was no question that he had no other place of business, or that he met with his clients , or that any personal use was made of the bedroom.

The problem was the hallway and bathroom, both of which Lulu claimed was for the use of his clients. He took a deduction in respect of the hallway and bathroom, as well as the bedroom. IRS disallowed the entire deduction.

Lulu gets to keep the bedroom, but the hallway and the bathroom go down the drain.

Judge Haines shows how IRS proves at least part of its case from Lulu’s own mouth: “Because there are business and personal motives for the expenses related to petitioner’s residence, we must determine what portion of the residence was used regularly and exclusively for petitioner’s business. See Intl. Trading Co. v. Commissioner, 275 F.2d 578, 584-587 (7th Cir. 1960), affg. T.C. Memo. 1958-104; Deihl v. Commissioner, T.C. Memo. 2005-287. Combined personal and business use of a section of the residence precludes deductibility. See generally Sam Goldberger, Inc. v. Commissioner, 88 T.C. 1532, 1557 (1987).

“Petitioner used one of the bedrooms of his residence exclusively as his office for his accounting business. Petitioner argued that he also used the hallway and the bathroom adjacent to this bedroom exclusively for his accounting business. Petitioner testified, however, that his children and other personal guests occasionally used the bathroom. Accordingly, the hallway and the bathroom were not used exclusively for business purposes.” 2011 T.C. Mem. 201, at p. 6.

Lulu tried to claim his children as employees, which might have saved the hallway and bathroom deduction if they were in fact employees, but Lulu couldn’t prove they were, and in any event they weren’t the only non-business users.

No exclusive business use, no deduction. The occasional non-business uses to which Lulu testified cost him money.

Takeaway- Either keep a journal of use of space claimed for home-office use, showing name of user, date, time and business purpose for each use of the space, or lock the space so that entry and use is confined to business visitors. And tell your family and friends to go elsewhere.

That’s the message Judge Haines delivers to the IRS, via a footnote, in Luis Bulas, 2011 T.C. Memo. 201, released 8/18/11.

My readers (bless you all) will remember my posting of 4/7/11, fetchingly entitled “Don’t Ambush the Indians”, where I discussed Judge Morrison’s rebuke to IRS, when IRS first raised an issue in its pre-trial memorandum. There, IRS didn’t give fair notice to the taxpayer via pleadings, so Judge Morrison, citing Rule 31(a), refused to let IRS try the issue. Judge Morrison had no occasion to invoke Rule 41(b)(1), the “implied consent” rule, that states whenever an issue is raised, even at trial, it can be tried by the parties if there is no unfair surprise, or if no party objects to trying the issue then and there.

But Lulu does object when IRS claims he double-counted his insurance deductions. The case arises out of disallowed business deductions, home office being the lead (and Lulu gets a partial win here); but IRS claims at trial that Lulu’s Schedule C deductions for insurance also appear in his deductions for car and truck expenses.

No fair, says Judge Haines, but in more refined language, and in a footnote. Footnotes are worth reading.

Judge Haines: “At trial respondent alleged that petitioner had double-counted car insurance expenses on Schedule C by including them in both car and truck expenses and insurance expenses. This issue was not raised in the pleadings. Rule 41(b)(1) provides that in appropriate circumstances, an issue that was not expressly pleaded but was tried by express or implied consent of the parties may be treated in all respects as if raised in the pleadings. LeFever v. Commissioner, 103 T.C. 525, 538-539 (1994), affd. 100 F.3d 778 (10th Cir. 1996). This Court, in deciding whether to apply the principle of implied consent, has considered whether the consent results in unfair surprise or prejudice to the consenting party and prevents that party from presenting evidence that might have been introduced if the issue had been timely raised. See WB Acquisition, Inc. & Subs. v. Commissioner, T.C. Memo. 2011-36; Krist v. Commissioner, T.C. Memo. 2001-140; McGee v. Commissioner, T.C. Memo. 2000-308.

“Petitioner testified that he did not know whether the insurance expense claimed for his accounting business was for car insurance or another form of insurance and that he needed time to investigate. Because respondent raised this issue for the first time at trial, we find that petitioner would be unfairly prejudiced if we were to consider this issue without petitioner’s having the opportunity to conduct an investigation of his 2007 insurance records. Accordingly, we do not find implied consent pursuant to Rule 41(b)(1), and the Court will not consider whether petitioner double-counted car insurance expenses.” 2011 T.C. Mem. 201, at p. 2, footnote 2.

Lulu is an ex-IRS employee, both as a revenue agent and as an Appeals Officer, now self-employed as an accountant and tax preparer (although apparently neither a CPA nor an EA). He wins this skirmish with his old employer, but only in part. His other deductions take a beating.

But the principle is the same–don’t ambush the Indians–or the accountants.

Readers of E. M. Forster’s 1924 classic novel “A Passage to India” will remember the chant of the Indians outside the courtroom, where Dr. Aziz’s trial for attempted assault on Miss Quested proceeds, without what they believe is the ultimately exculpatory evidence. They are certain that the testimony of Mrs. Moore, mother of Magistrate Heaslop, would clear their beloved compatriot of this cruel and baseless charge. But Mrs. Moore lies dead at sea, having died on her passage back to England.

So they chant “Esmiss Essmoore, Essmiss Essmoore,” invoking the spirit of the one they believe will bring the truth and justice to light.

Now Judge Vasquez finds that another Essmiss Essmoore, this time a divorced and living spouse, got a final payment from her former husband that was not alimony; but IRS magnanimously concedes the Section 6662(a) accuracy penalty, in James F. Moore, 2011 T.C. Memo. 200, filed 8/16/11.

Jim and Mrs Moore split in 1996. The divorce decree provided that Jim would make all mortgage payments on the marital residence back home in Indiana, possession of which was awarded to Mrs Moore. Jim got the deductions for the periodic payments of interest and taxes. If, as and when Mrs Moore sold, she would pay off the mortgage and Jim would pay her back whatever principal and accrued interest she paid to the lender. The decree said Jim would hold Mrs Moore harmless from any tax consequences. Most importantly, the decree said nothing about payments ceasing with the death of Mrs Moore.

Mrs Moore sold and paid off the mortgage, but Jim appealed (grounds not stated; probably meant petitioned the Court to amend the earlier decree and had to appeal the denial below). He settled with Mrs Moore, only having to pay her $20K and not the $74K she paid to the mortgagee on the sale.

Jim claims alimony and takes a Section 215 deduction. IRS says no; in the first place, the decree states that Mrs Moore has no income tax obligations with respect to any payments. Jim argues that means only periodic installments of principal, interest and taxes, not the final payoff, but Judge Vasquez doesn’t rule on the point.

The IRS’s second “no” is what decides the case; Section 71(b)(1)(D), the “no payment after death of payee” provision, sinks Jim. No use in chanting “Essmiss Essmoore”.

Here’s Judge Vasquez’s unpacking of the law: “If the divorce instrument is silent as to the existence of a postdeath obligation, the requirements of section 71(b)(1)(D) may still be satisfied if the payments terminate upon the payee spouse’s death by operation of State law. If State law is ambiguous in this regard, however, a ‘federal court will not engage in complex, subjective inquiries under state law; rather, the court will read the divorce instrument and make its own determination based on the language of the document.’

“The divorce decree is silent as to whether petitioner’s obligation to reimburse Ms. Moore terminates in the event of Ms. Moore’s death. Thus, we consider whether the obligation to make payments terminates upon Ms. Moore’s death by operation of Indiana law.

“Indiana statutory law is silent as to whether the obligation to make maintenance payments terminates on the death of the payee spouse. The parties point us to no caselaw, and we have discovered none, that expressly states whether the obligation of maintenance terminates upon the death of the payee spouse. Therefore, we conclude that Indiana law is ambiguous.

“Finally, faced with a silent divorce decree and no State law resolution of the question, we independently review the decree to make our own determination as to the satisfaction of the section 71(b)(1)(D) requirement. We do not read the decree as requiring the termination of payments in the event of Ms. Moore’s death. Under the decree, petitioner’s obligation is terminated only by satisfaction of the mortgage or reimbursement to Ms. Moore of the mortgage payoff amount. In fact petitioner stated that the termination of the payments was tied to the mortgage payoff period and not a particular need of Ms. Moore.” 2011 T.C. Mem. 200, at pp. 5-8. [citations and footnotes omitted.]

So no deduction for Jim.

Note to matrimonial lawyers: unless there’s a reason to continue payments after death of payee spouse, state that all payments to payee spouse cease upon death of said spouse. Otherwise you’ll be standing outside Tax Court, disconsolately chanting “Esmiss Essmoore, Esmiss Essmoore”.

Edited to add, 9/11/21: Jim sought rearugment, and lost, in 2011 T.C. Memo. 265, 11/8/11. See also my blogpost “Same Again?” 11/8/11.