Susan P. Kechijian, T. C. Memo. 2022-127, filed 12/28/22, watched from the gallery as both the trial of her late husband’s and her deficiency case was tried and then affirmed on appeal to 4 Cir. But she was represented by the same trusty attorney who represented her late husband in life and thereafter his estate (of which she was co-ex’r). And that’s enough for Judge David Gustafson to find claim preclusion (res judicata) barring Section 6015(g)(2) innocent spousery.

For the backstory, see my blogpost “Unvested Stock, Vested,” 4/24/17.

Susan never raised innocent spousery during the previous litigation. Representation by counsel does show participation, but that’s not enough. There are cases when the non-requesting spouse ran the show and shut out the requesting spouse, despite requesting spouse having the same attorney.

“…here Mr. Kechijian had died a year and a half before the trial in this case. He was not able thereafter to restrict Ms. Kechijian’s pursuit of her interests and, in particular, her pursuit of a claim under section 6015. She was no longer under the shadow of Mr. Kechijian but rather was in a position to control the litigation however she wished—both as a petitioner in her own right and as the co-executor of Mr. Kechijian’s estate.

“As to her co-executor, Mr. H, we assume it is true, as Ms. Kechijian alleges, that only he and not she gave instructions to counsel for the handling of the deficiency case after Mr. Kechijian’s death. However, that was by Ms. Kechijian’s choice.” T. C. Memo. 2022-127, at p. 14. (Name omitted).

Judge Gustafson says this may have been a wise tactical move, but Ms. Kechijian never claimed conflict of interest on her attorney’s part, nor that she was left out of the loop. Besides, says Judge Gustafson, once the late Mr Kechijian was the late Mr Kechijian, her attorney’s loyalty was to her; but Taishoff says, what about the estate? Were there heirs, legatees, or beneficaries whose interests might have been adverse to Ms. Kechijian’s?

Howbeit, Ms. Kechijian could have taken the helm, and chose not to.

No innocent spousery for her.

Takeaway- Attorneys, watch out for conflicts. Interspousals can be dangerous to your professional health.

I take my text from a Christmastide classic: Jeanne S. Leyvraz was dead, to begin with. There is no doubt whatever about that. The docket entries are clear and in due form, attested to by the Ch Clk, Ms Servoss, and the Ch J, the Hon. Kathleen (“TBS = The Big Shillelagh”) Kerrigan. The case is officially stricken from the trial session and officially restored to the general docket.

So it must be understood that Jeanne S. Leyvraz was dead, or there would be nothing remarkable about the case captioned “Estate of Estate of Jeanne S. Leyvraz, Deceased, Patricia Perlman, Executor” Docket No. 32009-21, filed 12/28/22.

It is a law school trusts and estates 101 maxim that a living person has neither estate nor heirs. To have two (count ’em, two) estates is double proof.

Charlie Dickens would definitely approve.

Judge Patrick J. (“Scholar Pat”) Urda needs little of his formidable intellect to deal with this discovery jumpball in Rock Bottom BBS, LLC, Barnett Properties, Tax Matters Partner,  Docket No. 9145-21, filed 12/27/22. The schema intended to accelerate the dispute resolution process by avoiding ambushes and bringing to light essential facts in advance of trial has turned into a prolonged and expensive quarrel. Rarely does it advance a case to trial and resolution. It does weaken and exhaust one’s adversary, assuming, that is, that it doesn’t do the same to one’s client.

It’s yet another GA boondockery, with a $12 million deduction on the line. So the Rock Bottoms send in five (count ’em, five) high-priced attorneys from a well-known tax litigation shop, who moved to compel IRS to respond to the following interrogs.

“…identify the provisions of I.R.C. § 170 and the accompanying regulations that Rock Bottom purportedly failed to satisfy, as well as the legal and factual basis underlying his position.” Order, at p. 2. IRS says that’s a BoP shift, but Judge Scholar Pat says it isn’t, and there’s precedent that says it’s OK, so answer, IRS. “We see no indication that these interrogatories are an impermissible attempt to shift the burden of proof (which, of course, would require a motion and this Court’s agreement that the requirements of Rule 142 or I.R.C. § 7491 have been met). To the contrary, they appear to be run-of-the-mill discovery requests to understand the Commissioner’s current factual and legal positions and, as such, should be answered in the normal course.” Order, at p. 2.

Next, the Rock Bottoms want to know why IRS denies they’re a partnership in the answer. IRS says they lack knowledge, but they’ll consider it as the case goes along, and that’s good enough for Scholar Pat.

“Rock Bottom finally seeks information about the witnesses that the Commissioner plans to call at trial, including the substance of their expected testimony and, for fact witnesses, their knowledge relating to the matters at issue. The Commissioner responds that the request is premature and that he ‘will identify potential witnesses in accordance with the Court’s Rules and Orders in this case.’” Order, at p. 3.

There’s a pre-trial scheduling order in place with deadlines for exchanging these particulars, so this is a nonstarter.

Taishoff says all this stuff should have been dealt with in a Branerton play-nice, rather than wasting time and running the meter. Rule 70(a) says it all: “…the Court expects the parties to attempt to attain the objectives of discovery through informal consultation or communication before utilizing the discovery procedures provided in these Rules.”

Today is a public holiday in the District of Columbia.

No Tax Court opinions or orders.

Generally (love that word!), anonymous petitioners filed redacted versions of their petitions and ancillary documents for public viewing. Rare indeed is the petitioner who is exempted from this requirement. Today, however, Whistleblower 35912-21W, filed 12/23/22, seeks and is granted exemption. Not even a single line will be seen except upon an explicit order of the Court.

Why? As usual, Ch J. Kathleen (“TBS = The Big Shillelagh”) ordered 35912-21W to file the redacted documents at the outset.

“… petitioner filed a Letter Regarding Redacted Documents, in which he indicates that because the unredacted Petition and Motion to Proceed Anonymously were handwritten, even redacted versions of those documents would be a means to identify petitioner.” Order, at p. 1.

Ch J TBS Kerrigan treats the letter as a motion, IRS doesn’t object, so 35912-21W stays hidden.

Once again, whistleblowing can be hazardous to your health. See my blogpost “The Whistleblower Blown Up,” 5/20/14.

Any lawyer who cannot find an ambiguity in any document or situation should find another way to make a living. Judge David Gustafson should not worry he chose the wrong profession: he has found plentiful ambiguities in Form 656 (OIC), when a single-member disregarded LLC and its member try to compromise the obligations of both member and  LLC.

One-size-fits-all doesn’t work very well for Appeals or for All Is Well Homecare Services, LLC, Docket No. 21210-19L, filed 12/22/22, or for sole member Dinah Opoku-Manu. AIW and DOM try to compromise both the $360K FICA/FUTA that AIW owes, plus DOM’s TFRPs and personal income tax debts, covering some nine (count ’em, nine) separate tax years.

DOM’s rep filled out both Sections 1 and 2 of the 656, although the instructions say not to.

At the same time DOM’s rep requested a CDP for the NITL IRS gave DOM and AIW. The NFTL/NITL issue I covered in my blogpost “Judge Gustafson’s Punt,” 12/15/22.

The one-size-fits-all Form 656 causes Appeals any amount of confusion. They treat the OIC as being for DOM only, not AIW, and it goes downhill from there. COIC gets into the act, and the result is a communications tangle that ends with Appeals claiming that the 656 was unprocessable and sustaining the NITL. AIW and DOM petition.

“The Commissioner is certainly correct in asserting that ‘the Court is unable to order the IRS to process and accept an otherwise deficient OIC.’ (Doc. 25 at 5.) We do not contemplate ordering IRS Appeals to accept an OIC. But we do have authority to evaluate IRS Appeals’ process and to determine whether IRS Appeals has abused its discretion not by declining to accept an OIC but by failing even to process an OIC,  which is the issue now before us.” Order, at p. 9.

Note that IRS wants summary J, so all DOM and AIW have to do is raise a question for trial, not prove their case.

Now complexity invites ambiguity, and imperfections in a form designed to cover the multiplex problems of individuals and disregardeds perforce must have ambiguities. But Form 656 is the lawyer’s delight.

“The instructions on Form 656 use ‘should’ and ‘must’ in a manner that may be misleading. When an individual (with a Social Security number (‘SSN’)) who owns an LLC (with an employer identification number (‘EIN’)) proposes to compromise her individual income tax issues and trust fund recovery penalties associated with her SSN and the employment tax liabilities associated with the EIN, she sees the apparently non-mandatory instructions in Section 1 telling her that she ‘should‘ fill out Section 1 (which does include lines for employment tax liabilities); but she also sees the apparently mandatory instruction in Section 2 telling her, ‘If your business is a[n] . . . LLC, . . . and you want to compromise those debts, you must complete this section.’ (Emphasis added.) When Ms. Opoku-Manu did what the instructions in Section 2 of the form said she “must” do (i.e., complete that Section 2 for the LLC), IRS Appeals deemed the form unprocessable.

“The Commissioner maintains that the instructions above Section 1 should govern (‘but not both’), but even that might be unclear: First, those instructions, too, are apparently non-mandatory (saying, ‘You should fill out either Section 1 or Section 2, but not both’). Second, the “but not both” instruction may appear to be contingent, since it says ‘but not both, depending on the tax debt you are offering to compromise’. A reader might construe the form to mean that the ‘not both’ instruction ‘depend[s]’ on whether one is offering to compromise just business liabilities or individual liabilities (in which case, fill out only the relevant section) or instead is offering (like petitioner here) to compromise both business and individual (in which case, do fill out both?). Third, the Section 2 instructions for a business remind the taxpayer to include ‘a separate $186 application fee’, perhaps suggesting an application fee ‘separate’ from the application submitted for the individual named in Section 1.” Order, at p. 12.

Actually, COIC deemed the 656 unprocessable, but I don’t blame Judge Gustafson for being confused at this point.

If Appeals or COIC had a flexible attitude, the ambiguities might be resolved, at least to the extent of letting the form be processed. But Appeals claimed the form was unprocessable, bounced it, demanded a second set of fees for a resubmission, and offered no defense for this double whammy.

That’s enough for Judge Gustafson to deny summary J without prejudice, and send the parties off to decide whether to remand or try the case.

What a wonderful blueprint for wits, wags, and wiseacres this order provides, to bombard Appeals and COIC with internally contradictory Forms 656, and tell ’em Judge Gustafson sent them.

Billy Gilbert’s invocation of the Chief of the London Fire Brigade doesn’t help Erik Schwartz, T. C. Memo. 2022-125, filed 12/21/22. Erik is back from remand, when the admin record from his CDP was too scanty to evidence a prior chance to contest four years ago.

Erik sought a credit elect for an overpayment made pursuant to his divorce decree, but didn’t file for that year (hereinafter “Year of Divorce”) because he thought an interlocutory decree of State court prevented him from filing. On remand, the AO said the epistolary volleying between Erik and IRS didn’t constitute an informal request to apply the remaining balances of the overpayment from Year of Divorce to the five (count ’em, five) subsequent nonconsecutive years Erik claims.

First issue, this is a real credit. Erik did pay, IRS credited Year of Divorce but put the rest in an excess collections account, and never issued a Section 6532(a)(1) notice of disallowance.

Second, the credit Erik wants to apply is a credit against income tax, the tax for which the overpayment was made, not some unrelated liability. The problem is whether Erik’s letter-writing and telephonic campaign constituted an informal request to apply the overpayment from Year of Divorce to the subsequent years within the Section 6511 lookback.

Judge Vasquez: “It has long been recognized that a writing which does not qualify as a formal refund claim nevertheless may toll the period of limitations applicable for refunds if (1) the writing is delivered to the Commissioner before the expiration of the applicable period of limitations, (2) the writing in conjunction with its surrounding circumstances adequately notifies the Commissioner that the taxpayer is claiming a refund and the basis therefor, and (3) either the Commissioner waives the defect by considering the refund claim on its merits or the taxpayer subsequently perfects the informal refund claim by filing a formal refund claim before the Commissioner rejects the informal refund claim.” T. C. Memo. 2022-125, at p. 14. And there’s “copious citation of precedent,” so get it for your memos of law.

IRS said they were too busy to reply, but they wrote Erik that he didn’t need to do anything else. And IRS’ logs showed Erik’s phonecalls. IRS waived formal notice.

But all Erik establishes is a credit elect for Years Two and Three. Years Four, Five, and Six took place after a two-year gap. The gap puts paid to Erik’s cascade.

“The record does not establish a chain of cascading credit elects linking petitioner’s [Year of Divorce] overpayment to his [Years Four, Five , and Six] liabilities. To be sure, the [Year of Divorce] overpayment resulted in credit elects for [Years  Two and Three], and petitioner elected to apply his [Year Two] overpayment against his [Year Three] estimated tax. However, tax returns for [Years Two and Three] are not in evidence. Although respondent’s transcripts show no tax liabilities for those years, it is unclear whether petitioner elected to apply his [Year Three] overpayment for [Year Four] and his [Year Four] overpayment for [Year Five]. Moreover, the return information for petitioner’s [Year Five] tax year does not reference a credit elect from [Year Four] and does not include an election to apply an overpayment against his estimated tax for [Year Six]. Because there is no evidence of cascading credit elects from [Years Three, Four, and Five], we cannot link the [Year of Divorce] overpayment to any years beyond [Year Two].

“Accordingly, we are without jurisdiction to direct the application of credit elects against petitioner’s [Four, Five, and Six] liabilities unless petitioner has an ‘available credit’ from an unrelated nondetermination year. The record does not include any transcripts or other evidence showing such a credit. We therefore sustain respondent’s determinations not to apply the [Year of Divorce] overpayment against petitioner’s [Years Four, Five, and Six] liabilities nondetermination year. The record does not include any transcripts or other evidence showing such a credit. We therefore sustain respondent’s determinations not to apply the [Year of Divorce] overpayment against petitioner’s [Years Four, Five, and Six] liabilities.” T. C. Memo. 2022-125, at p. 12.

To avoid the fate of Captain Shaw in the Gilbert opus, each level of the cascade must be proven. Don’t count on IRS’ transcripts. There’s no substitute for copies of the returns themselves.

No, not the one who takes back your car; this is Robert Lewis Starer and Merle Ann Starer, T. C. Memo. 2022-124, filed 12/20/22. Robert Lewis transferred parcels of land owned by his Sub S corp. to various business associates subject to repurchase agreements, whereby the purchaser could compel the Sub S to repurchase the property at the original price. Robert Lewis claims these were loans, to allow the associates to mortgage the properties for cash, but IRS changes the deals to sales per Section 481.

Judge Wells isn’t buying the loan story.  And the IRS change affects timing, not ultimate receipt, so it involves a material item, not an overall change to the Sub S’s accounting method. While Robert Lewis and Merle Ann transferred much of their shareholdings in the Sub S into a couple grantor trusts (hi, Judge Holmes), they never elected electing small business trust treatment per Section 1361(c)(2)(A)(v), so there’s no showing that any tax incidents flow to the trusts.

The Sub S owned the house where Robert Lewis and Merle Ann lived rent-free, so constructive dividend. Likewise the transfer of one plot of land to son-in-law, the claim of joint venture failing for want of Luna principles. And a transfer for no consideration to a long-term business associate, who promptly mortgaged it and used the proceeds for other ventures (although transfer tax was paid on a marked-up value) fails as a loan for want of documentation, so is a gift of appreciated property taxable to Robert Lewis and Merle Ann, per Section 1386(b).

And a bad debt claim from an advance to a controlled entity fails for want of documentation, and some wonderful trial testimony. “According to petitioners, [related] never formally requested a loan from [Sub S]. Instead, Mr. Starer described how [controlled] would request a loan from {Sub S] by testifying that ‘Bob Starer, CEO of [controlled], would say to Bob Starer as CEO of [Sub S], “let me have some money.” Petitioners cannot create a deduction simply by deciding to record an intercompany debt without formalities and then canceling it.” T. C. Memo. 2022-124, at pp. 26-27.

But IRS matches Robert Lewis and Merle Ann, by playing the Michael Corleone gambit, main line Boss Hoss variation.

“In the instant case, respondent did not file a motion to supplement the record addressing the effect of section 6751(b) on this case. Neither did he direct the Court on brief or otherwise to any evidence of section 6751(b) supervisory approval in the record.  Consequently, respondent has failed to satisfy his burden of production to establish compliance with section 6751(b); therefore, petitioners are not liable for accuracy-related penalties under section 6662.” T. C. Memo. 2022-124, at p. 28.

And Take Suzanne Jean With You

I am sure Judge Nega is too well-bred to frame his order in Suzanne Jean McCrory, Docket No. 3443-18W, filed 12/20/22, in such terms.

But the effect of said order is exactly that, as Judge Nega chronicles the end of the road for Mandy Mobley Li, the highly-credentialed blower who blew any hope for judicial review of an Ogden Sunseteer no-cash shootdown, however arbitrary or capricious John W. (“Hoppin’ John”) Hinman’s myrmidons might have been.

Suzanne Jean, ex-GAO auditor, is a serial blower whose activities have provided much blogfodder. She had been tossed on Li grounds back in July, but played the certiorari gambit, and got reinstated per Section 7481. Incidentally, Suzanne Jean played the same gambit in another blow back in October before Judge Elizabeth A. (“Tex”) Copeland; see my blogpost “‘No’ Deid Yet’ – Part Deux,” 10/1/22.

Well, Judge Nega delivers the coup de grace.

“By order issued October 31, 2022, the Supreme Court denied the whistleblower’s petition for a writ of certiorari in Li. A review of the Supreme Court docket in Li reflects that a petition for rehearing of the order denying the writ of certiorari has not been docketed, as of the date of this Order. See U.S. Sup. Ct. Rule 44(2) (providing that such a petition must be filed ‘within 25 days after the date of the order of denial’). Order, at p. 2.

Judge Tex Copeland, please copy.

So march out, Mandy Mobley, and take Suzanne Jean with you.

Except.

Hey Supremes, you’ve furnished us all with some wild and crazy decisions this year. How ’bout finishing up with a wee bit equitable tolling?

Judge Albert G (“Scholar Al”) Lauber is, I have often noted, a man of many attainments. Although an East-Coaster in his youth, he is familiar enough with Los Angeles traffic at rush hour to remark that staying in a hotel in Santa Monica to avoid a 60-mile commute to Irvine “might well have been a rational choice” T. C. Memo. 2022-123, at p. 7.

In fact, it’s enough to spare Section 6662 five-and-ten chops for the hotel bills that IRS disallowed amidst the massed indocumentado deductions of Kambiz Aryia, T. C. 2022-123, filed 12/19/22.

Kam was a long-time car salesman, managing a Honda dealership in Santa Monica, CA. He claimed to be a “consultant” and filed Sched C, but was really an employee, so at best he would have gotten unreimbursed employee business expenses for the last year those were deductible, if he could prove them.

He did prove the hotel bills, but those were for his convenience. His tax home was where he worked. But he did have a good faith belief he could deduct those. And had a winning personality on the trial; no surprise, few grumpy car salespeople last very long.

“Petitioner had comprehensive and accurate documentation for these expenditures. His trial testimony convinced us of his belief that he could not successfully discharge his duties as manager of the Honda dealership if he spent three to four hours every day commuting from Irvine. He understood that he could not deduct commuting expenses. But we think he genuinely believed that his lodging expenses were different and had a logical business nexus, enabling him to work the 60 hours per week required to hold on to his managerial job. We accordingly conclude that petitioner is not subject to penalty on the portion of the underpayment attributable to disallowance of his $40,174 lodging expense deduction.” T. C. Memo. 2022-123, at p. 12.