Unlike O. Henry’s 1903 short story that became the Broadway classic, the reformation here wasn’t the result of a judicial proceeding commenced within 90 (count ’em, 90) days after the due date of the estate tax return, so the attempted reformation of the Katz Trust, a subtrust of the late Susan R. Block’s own revocable trust, costs the late Susan’s estate the charitable deduction for the remainder of the Katz Trust. The case is Estate of Susan R. Block, Deceased, Julie B. Saffir and Peter A. Block, Executors, T. C. Memo. 2023-30, filed 3/13/23.

The late Susan, before she became the late Susan, wanted to provide for her sister and sister’s spouse, so she put $761K in the Katz Trust. Sister, and sister’s spouse if he survived sister, was to get the greater of all net income or $50K annually, remainder to a 501(c)(3). The co-trustees of the Katz Trust, who were also the late Susan’s co-ex’rs, had power to amend the Katz Trust to maintain compliance with Section 664(d)(1) and Rev. Proc. 2003-57.

And they did amend to reform, but only after IRS was auditing the estate tax return. And more than a year after the estate tax return was due. And they never started a judicial proceeding.

Problem: Section 2055(e)(2)(A) requires the income beneficiaries to get annual distributions of a fixed dollar amount or fixed percentage of net asset value, and Katz Trust did neither. Prior to enactment of Section 2055, settlors and income beneficiaries were playing games, by whacking up income distributions so as to shortchange charitable remainderguys after claiming big charitable deductions based upon cooked numbers. So whether the reformation might be made pursuant to State law (CT) is irrelevant.

Judge Elizabeth A. (“Tex”) Copeland finds substantial compliance doesn’t rescue the Katz Trust.

“Petitioners ask us to deem the Estate to have substantially complied with the exception. We decline to do so. As we have previously observed, Congress made clear that the rules for qualified reformations are to be construed strictly, in order to prevent abuse of the charitable deduction. Specifically, Congress was concerned that if the reformation regime were overly lenient, taxpayers would not reform trusts to comply with the split-interest rules unless and until the IRS discovered defects upon audit.” T. C. Memo. 2023-30, at p. 8. (Citation omitted).

I don’t mean to suggest that the ex’rs here, or their trusty attorney, were playing games, although this error was expensive.

I would suggest to my estate planning brethren and sistern that the kind of free-riding the statute means to prevent is a dangerous game. If you’re reforming a CRAT, make it a proper reformation.

No, this is not the story of a yuppie romance. It’s the apparently ongoing saga of Dennis Lee Simpson, Docket No. 17771-21, filed 3/10/21. Scarcely two weeks ago, I chronicled Dennis’ monumental requests for admissions; see my blogpost “Inadmissible Admissions,” 2/27/23.

Nowise daunted, Dennis now seeks “(A)ll and complete copies of IRS files and responses from the Jeff/Lori Hoyal IRS tax audit, the Crater Lake Trust IRS tax audit, and the Noel M. Parducci/Kenneth L. Parducci IRS tax audit.” Order, at p. 1.

Dennis is conjoined for briefing, trial, and opinion with the Hoyals, the Parduccis, and the Crater Lake Trust. So once again Judge Ronald L. (“Ingenuity”) Buch is called upon to exercise his considerable talent for devising ingenious solutions.

“Mr. Simpson’s request is facially overbroad, in that it has the potential to yield information that is wholly unrelated to the matters at issue in this proceeding. But his request also runs afoul of section 6103’s general prohibition on the disclosure of returns or return information by government employees. There are several exceptions to this general rule, and a limited exception is applicable here. Section 6103(h)(4) allows some disclosures in administrative or judicial proceedings. One such disclosure that is permitted is ‘if such return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding.’ To the extent Mr. Simpson’s request seeks information regarding transactions between and among parties to these cases, we will grant his motion.” Order, at p. 1.

IRS is down with this, and says it can have the stuff for Dennis by month’s end.

“We will enforce that deadline,” says Judge Buch.

The Great Chieftain of The Jersey Boys furnishes me with the latest addition to my “Stealth” collection in Techtron Holding, Inc., T. C. Memo. 2023-29, filed 3/9/22. Judge Vasquez has to decide whether to toss the petition for want of jurisdiction (IRS’ pursuit of Techtron Holding’s successor-by-merger for deficiency and Section 6663 fraud chops goes on), or invalid SNOD (case goes away as SOL runs).

TH merged into its wholly-owned sub, which in turn merged into a BVI Corp. The Jersey Boys and its predecessor firm represented the whole shebang pre-and-post merger. While BVI claimed to take on all of predecessor’s tax liabilities as transferee, IRS says that’s not the same as being fiduciary. BVI claims it is, but neither files notice per Section 6903, and doesn’t undertake to ratify petition prontito. Transferee’s liability extends only to what transferee got from transferor per Section 6901, which may be less than what transferor owes IRS, hence BVI’s reticence to go all-in.

The SNOD was sent to TH at last known address, even though it had previously ceased to exist per local (DE) law. Section 6212(b) says this is OK, absent notice of a fiduciary relationship.

“Although [BVI]’s Form 2045 references the ‘tax liabilities of [petitioner] for 12-31-2000,’ it does not state that [BVI] is acting for petitioner in a fiduciary capacity. Instead it identifies [BVI] as the “Transferee’ of certain assets from Techtron, petitioner’s initial corporate successor. The terms  ‘transferee’ and ‘fiduciary’ are distinct terms under the Code and applicable regulations. Compare § 6901(h) (defining ‘transferee’ to include a ‘donee, heir, legatee, devisee, and distributee’), and Treas. Reg. § 301.6901-1(b) (expanding the definition of ‘transferee’ to include a ‘distributee of an estate of a deceased person, the shareholder of a dissolved corporation, the assignee or donee of an insolvent person, the successor of a corporation, a party to a reorganization as defined in section 368, and all other classes of distributees’), with § 7701(a)(6) (defining ‘fiduciary’ to mean ‘a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person’). Thus, [BVI]’s identifying itself as a ‘transferee’ did not serve as notice to respondent that it was ‘acting for another person in a fiduciary capacity.’ See § 6903(a); see also §§ 6901(h), 7701(a)(6); Treas. Reg. § 301.6901-1(b).” T. C. Memo. 2023-29, at pp. 11-12.

Rule 63 doesn’t help BVI sub in for TH; TH never properly petitioned, as it had ceased to exist by DE law when it was merged. True, Rule 60 allows for timely ratification by proper party seeking to amend caption and join case, but BVI said it wasn’t going to do that until validity of the SNOD was determined. That’s not enough for Judge Vasquez, who wants a clear indication BVI would ratify without delay.

Taishoff says “The Rule says ‘a reasonable time’ must be allowed. Is The Great Chieftain being cute? Or is his objection reasonable? Worth an appeal?”

But at close of play, TH is out as nonexistent, and BVI is timed out.

However, all is not lost. “Dismissal of this case for lack of jurisdiction does not constitute a decision that petitioner is liable for the determined deficiency.” T. C. Memo. 2023-29, at p. 15, footnote 15. (Citations omitted).

Edited to add, 3/9/23: How could I have omitted a Taishoff “Good Try, First Class” for the transferee-fiduciary gambit, and the Rule 60-63 Shuffle? The Great Chieftain is always trying.

Ex-Ch J L Paige (“Iron Fist”) Marvel rules it’s too soon to decide whether Cindat Manhattan Hotel Portfolio LLC, Docket No. 12905-20, filed 3/8/23, can withdraw its Rule 90(f) deemed admissions, or whether Cindat can withdraw its Rule 37(c) deemed admissions at all.

As to the Rule 90(f) admissions, the bulk of those from which Cindat is seeking to bail, Cindat is light with facts to show that “the presentation of the merits of the case will be subserved thereby, and the party who obtained the admission fails to satisfy the Court that the withdrawal or modification will prejudice such party in prosecuting such party’s case or defense on the merits.” Order, at p. 2. That Cindat has a newly-retained attorney, and that discovery might help, doesn’t answer. Neither does substituting bookkeeping entries for corroborative proof.

As to the Rule 37(c) deemed admissions, while caselaw says the same considerations apply as with Rule 90(f) withdrawals, there is no explicit out in Rule 37(c) as there is in Rule 90(f). Ex-Ch J Iron Fist needn’t go there either now.

“Nonetheless, we think it is appropriate to deny petitioner’s Motion with respect to its deemed Rule 37(c) deemed admissions without prejudice for the same reasons that we deny petitioner’s Motion with respect to its Rule 90(c) deemed admissions without prejudice. We caution petitioner that if it again makes a motion to withdraw its Rule 37(c) deemed admissions, its timeliness in making such a motion before its trial date would likely be a factor in deciding whether respondent is prejudiced by the withdrawal of those deemed admissions.” Order, at p. 6.

Note the decretal paragraph of the Order speaks only to the Rule 90(f) motion, not the Rule 37 request. Might want to clarify the point that both motions are involved.

Taishoff says ex-Ch J Iron Fist is right, given the state of the current record. If Cindat has sufficient evidence to warrant reconsideration, let them try again, taking care not to get into the pretrial Red Zone, potentially ambushing IRS with eve-of-trial wildcards.

Taishoff also says we’re two weeks short of a year since ex-Ch J Maurice B (Mighty Mo”) Foley proposed his Rule changes. Let’s get those approved, and turn attention to amending Rule 37 to bring it into line with Rule 90, as regards withdrawing deemed admissions. Why rely on 30-year-old caselaw, as ex-Ch J Iron Fist must do here, when a simple Rule change would solve the problem?

1973 North Rulon Road in The City of the Golden Spike is a perfect site for a statue of Mandy Mobley Li, whose perfect own-goal lightened forever the burdens of the Ogden Sunseteers, and forever immunized said Sunseteers from any form of judicial scrutiny.

Thomas Shands, 160 T. C. 5, filed 3/8/23 (a very special day in our family’s calendar), delivered a Swiss bankster, an architect of hidey-holes for tax evaders, into the hands of the Federales. Tom claims the highly-publicized bust caused numerous hidey-holeowners to come out with their hands up, confess their sins and join OVDI II. Tom wore a wire for IRS CI and got Renzo Gadola, leading skulldugger, to spill the legumes thereinto. The US Attorney at Renzo’s sentencing told everyone that Tom was the man who made the case.

Of course, John (“Hoppin’ John”) Hinman’s crew says the info Tom gave IRS didn’t involve specific taxpayers, and the fact that a bunch Swiss squirrels (hi, Judge Holmes) fessed up isn’t a “related action” within the meaning of Reg.  Section 301.7623-2(c)(1).

Judge Travis A. (“Tag”) Greaves agrees.

Section 7623(b)(5)(A) refers to money realized from an action or proceeding “against a taxpayer.” Renzo was none of the above. “We likewise reject petitioner’s argument that inherently voluntary participation in OVDI by a taxpayer constitutes an administrative or judicial action by the IRS. This Court has recognized that a taxpayer’s voluntary compliance absent an examination entailed no administrative action, even if IRS scrutiny prompted the taxpayer’s compliance.” 160 T. C. 5, at p. 9. (Citation omitted). (Emphasis by the Court).

No longer does Lacey afford Tax Court a backdoor to oversee whether the Sunseteers are taking serious looks at Forms 211. All the Sunseteers need do is claim “no dough, no award.”

And of course the Li decision debars Tax Court from looking behind any rejection or denial of a whistleblower’s claim. Anyway, there’s no difference between rejection and denial. Bottom line is blower gets nothing, Treasury gets billions.

So, blowers, virtue is definitely its own reward.

Even If You’re in CNC

CNC is not a slam dunk for innocent spousery. STJ Peter (“HB”) Panuthos has that lesson for Ahmed Maregn Mohamed, T. C. Sum Op. 2023-6, filed 3/7/23.

Ahmed’s troubles are 97% his own, because he failed to report his unemployment insurance receipt and $15K of his wages when he was working. His 1040 MFJ with ex-spouse Zemzem also failed to include her qualified dividends. Ahmed “… indicated that he had not reviewed the tax return before it was filed and that a mistake had been made by the preparer. Petitioner also indicated that he had knowledge of Ms. Bedada’s income as a ‘W–2’ and a ‘health-related benefit.’” T. C. Sum. Op. 2023-6, at p. 3.

STJ Panuthos rules out hardship, because Ahmed is in CNC. ” Petitioner has been granted currently not collectible status for tax year [at issue]…. There is nothing in the record from which to conclude that denying relief would cause economic hardship. This factor is neutral.” T. C. Sum. Op[. 2023-6, at p. 7.

And knowledge defeats everything else.

“After weighing the factors and considering the facts and circumstances, the Court is unable to conclude that it would be inequitable to hold petitioner liable for the tax liability. Petitioner had knowledge of the item giving rise to the unreported income before signing the return. Therefore, petitioner is not entitled to relief under section 6015(b), (c), or (f).” T. C. Sum. Op. 2023-6, at p. 9.

Whenever the dodge du jour goes into high gear, the dodgefloggers ramp up production. The aim, of course, is to get as much merchandise into the market as the market will consume, and sell it off fast. In the course thereof, speed of production overtakes quality. Degraded and defective products enter the market, leading to retrofit attempts that complicate matters, especially when IRS hauls in its favorite gambit, partial summary J.

Of course, this is another GA boondockery.

When 11 Cir kicked out “highly contestable readings of what it means to be perpetual” in Hewitt, IRS substituted the defective deed.

I missed Lodebar Property, LLC, Lodebar Manager, LLC, Tax Matters Partner, Docket No. 11780-20, filed 5/11/22, but Judge Albert G (“Scholar Al”) Lauber sure remembers it, even though he miscites it in Dorchester Farms Property, LLC, Dorchester Farms Manager, LLC, Tax Matters Partner, Docket No. 6441-20, filed 3/7/23, as “Docket No. 1178-20,” Order, at p. 4.

Much the same cast of characters in both. Same appraisers (who’ve been here before), same GA county, similar misdesignations of acreage, similar attempted correction deeds signed by same person, similar trudge through GA law on scrivener’s error.

Judge Scholar Al denies IRS’ motion for partial summary J, sets both down for trial to ascertain the intent of the parties.

Spoiler alert- Taishoff says the intent of the parties was to convey shares in the write-off of semi-worthless GA scrub to  syndicated conservation easement dodgefloggers, who marked the stuff up by a factor of ten, off-loading to highrollers looking to dodge taxes. And those charged with papering the deal were robosigners, copying each deal’s document from the last, not even changing every variable.

Word to IRS- I love summary J, but enough is enough. As Judge Holmes said, it’s all about valuation.

Phuong H. Phan, Docket No. 31743-21S, filed 3/6/23, failed to pick up two (count ’em, two) retirement plan distributions he got in year at issue. One he concedes, but claims he paid off the other, which was a loan from his employer’s 401(k).

Alas, no paper.

Phuong has run into a qualified plan loan offset, the loan being paid by tasking the unpaid balance from the retirement account and treating it as if paid by Phuong, with Phuong picking up the distribution as if he’d gotten cash, hence taxable. Phuong had apparently borrowed from his 401(k) before, but paid those loans back. This time, however, the 1099-R he got from the plan’s trustee showed “… in box 7, a ‘Distribution Code’ of 1M. The instructions for that form indicate the number 1 in the distribution code refers to ‘Early distribution, no known exception, (in most cases, under age 59-1/2)’ .  And the letter M refers to ‘Qualified plan loan offset’.” Transcript, at p. 6.

STJ Diana L. (“Sidewalks of New York”) Leyden explains.

“In general, a loan from a qualified employer plan gives rise to a distribution that is taxable for the year in which the loan is received. However, section 72(p)(2) provides an exception to the general rule where the loan, when adding to the outstanding balance of all other loans from the same plan, does not exceed a specified limit. See IRC section 72(p)(2)(A). Sections 72(p)(2)(B) and (C) further provide that the general rule does not apply where the loan, by its terms, must be repaid in five years from the date of its inception, or was used to finance an acquisition of a home that is a principal residence of the participant, or where the loan is subject to substantially level amortization with quarterly or more frequent payments required over the term of the loan.” Transcript, at p.7.

OK, but if the loan is not repaid per the loan documents, that’s a taxable distribution of the plan loan offset amount.

“A distribution of a plan loan offset amount can occur in a variety of circumstances, e.g. where the terms governing a plan loan require that in the event of the employee’s termination of employment or request for a distribution, the loan be repaid immediately or treated as in default. A distribution of a plan loan offset amount also occurs when under the terms of the governing plan loan, the loan is canceled, accelerated, or treated as if it were in default, e.g. when the plan treats a loan as in default upon an employee’s termination of employment or within a specified period thereafter.” Transcript, at p. 8.

“Accordingly, a distribution occurs at the time in the amount of the then-outstanding balance of the loan if the loan is defaulted, considered a qualified plan offset, or the total amount of the loan exceeds a specified amount.” Transcript, at p. 9.

Phuong must pick up the distribution, but all is not lost: IRS folds the Section 6662(a) chops.

Although restitution ordered as part of the sentence of a criminal conviction is collected “in the same manner as if such amount were such tax,” criminal restitution arises from 18 USC §3663(a)(3). Thus, the usual Section 6213 restraints on assessment don’t apply; see Section 6501(c)(11), and Section 6213(b)(5).

Mehlek Dawveed, T. C. Memo. 2023-28, filed 3/6/23, took a three-year fall in USDCDMD for Federal false claims, wire fraud, and Section 7212 obstruction. IRS gave him a NITL and NFTL at no extra charge when he failed to pay up. Mehlek requests a CDP, raises SNOD defenses (a no-go), and his argy-bargy about last-known-address fails, as he timely got the notices and timely petitioned.

Mehlek claims he sent in an OIC, but there are no OICs from criminal restitution. Mehlek also claims he sent in a 1040X, but restitution liability and tax liability aren’t the same. As for an IA, Mehlek never sent in Form 433-A and backups.

Judge Albert G (“Scholar Al”) Lauber, who gets his share of such types as Mehlek, is used to this.

“Petitioner’s filings devote little attention to the issues actually raised in respondent’s Cross-Motion for Summary Judgment. His submissions consist largely of cut-and-pasted text, cast in boilerplate legalese, much of which seems to have been downloaded from the internet. He does not allege any genuine dispute of material fact, and we find the case appropriate for summary adjudication.” T. C. Memo. 2023-28, at p. 6.

Since Mehlek can’t challenge his tax liability underlying the restitution order per Section 6201(a)(4), the only standard for review is abuse of discretion, against which Mehlek’s legalese cannot prevail.

His claim that his wife should get innocent spousery fails, as she has to raise it via Form 8857, and she hasn’t. Likewise his claim that he doesn’t own certain realty founders when he can’t produce any evidence of who owns it.

Mehlek has “a potpourri of other arguments,” T. C. Memo. 2023-28, at p. 10, but Judge Scholar Al blows them off.

If I repeat myself, I beg my readers’ pardon, but the Section 6673 guidelines question I raised in the past (see my blogpost “Guidelines – Redivivus” 11/21/22) remains unanswered.

I won’t weary my readers by retelling the protester jive from recidivists Howard R. Edge & Lisa M. Edge, Docket No. 13488-21L, filed 3/3/23. Judge Mark V (“Vittorio Emanuele”) Holmes does that, and even provides some citation of precedent, although not copious. Somber reasoning too is absent. Anyway, the Edges are middle class, educated Texas teachers, Golsenized to 5 Cir., which long ago said “'[w]e perceive no need to refute these arguments with somber reasoning and copious citation or precedent; to do so might suggest that these arguments have some colorable merit.’” Order, at p. 4, footnote 3. (Citation omitted).

Last time around, some fifteen (count ’em, fifteen) years ago, STJ Lewis (“Oh, That Name”) Carluzzo hit Howard & Lisa with a Section 6673 grand chop. Judge Holmes doubles that this time.

I note that the years at issue in the instant proceeding are 1999, 2001, and 2007 for Howard, and 2001, 2007, and 2008 for Lisa. Order, at p. 1. Moreover, the AO in the CDP found that Howard & Lisa hadn’t filed for “at least tax years 2015 through 2019.” Order, at p. 2.

I most respectfully suggest that if one can dodge paying one’s taxes for better than 23 (count ’em, 23) years, at the cost of a couple Tax Court filing fees and a couple grand 6673s (it is Judge Holmes’ order, after all), it’s a wonder that any taxes are paid and collected at all.

There should be serious sanctions for dodgers, protesters, and the wits, wags, and wiseacres who enable them. Judges should have the means and the guidance to impose same. While sentencing guidelines are much disfavored lately, reducing the possibility of challenges to Section 6673 sanctions on the grounds of abuse of discretion is worth enacting. Guidelines might do the job.

Congressional laments about government spending and budget deficits are all very well, but perhaps if the revenue was seasonably collected as Congress enacted, the need for such laments might be lessened.

Oh yes, this is a nonpolitical blog.