James (“Little Jim”) Haber, immunologist and dodgeflogger, has another of his progeny up today on a bounced OIC, claiming IRS needs a fresh Section 6751(b) Boss Hoss signoff on the long-ago decided chops in Humboldt Shelby Holding Corp., Docket No. 23763-16L, filed 12/7/22.

STJ Eunkyong (“N’Yawk”) Choi says no.

“This Court has found that ‘where the Court previously adjudicated and entered a decision determining the applicability of penalties, the settlement officer merely needs to determine that the penalty was properly assessed …’ Warner Enterprises, T.C. Memo. 2022-85 at *6. The settlement officer in this case did so. We therefore find that the settlement officer complied with the requirements of section 6330(c)(1).” Order, at p. 5.

For the Warner story, see my blogpost “How Now?” 8/22/22.

There’s another twist, of course. The OIC provided that it would be a universal settlement, letting off both Humboldt Shelby and “any person, as an alter ego, agent, nominee, transferee or otherwise, for my outstanding tax debt.” Order, at p. 6.

Well, since Little Jim’s M.O. involved intermediary transactions to avoid tax (shares of Mid-Coast), transferee liability is definitely in play.

What’s more, even though the initial offer was only $1K, and even though Humboldt Shelby is Broke From Brokesville, Humboldt Shelby’s lawyer thinks he might have more money in the file. STJ N’Yawk Choi jumps on that.

“If it truly is unreasonable to believe that respondent may be able to collect from a third party in this matter, then petitioner would not have gone so far as to impermissibly add this additional term to Form 656. Petitioner’s counsel previously indicated that petitioner is prepared to offer a ‘substantial amount of money’ to settle its liability. This is so even though petitioner submitted an OIC showing that petitioner has no assets and no income. The $1,000 offer amount and additional amount petitioner planned to negotiate can only come from a third party. It is reasonable for respondent to refuse to accept petitioner’s OIC based on the concern that doing so may foreclose collecting from a third party to the fullest extent possible.” Order, at p. 6.

Summary J for IRS. But I doubt that’s the last we’ll hear from Little Jim.

Takeaway, if one is necessary- Don’t be cute.

IRS tries to short-circuit the “primarily for the benefit of the shareholder” test by laying off all disallowed deductions on Benito Palmarini, a shareholder in Palmarini, Inc., T. C. Memo. 2022-119, filed 12/7/22. But Benito is not the largest shareholder, although he runs the corporation as its president, and writes off a lot of personal expenses from the corporation.                            

One can understand IRS’ frustration with Benito’s methods, or lack thereof. Palmarini, Inc., had no books and records.

“Palmarini Inc.’s disorganized recordkeeping (if it can be called recordkeeping) does not enable one to verify the business purpose and specific amounts paid for  ‘other’ expenses. His documents show a tangle of business and personal, of capital and ordinary, and of mixed lines of potential business. His information was in such disarray that he himself, preparing returns in the months after the close of the years at issue, was unable to determine with reasonable certainty his own deductible expenses, so he filed a series of amended returns claiming deductions inexplicably ‘not included’ in a return filed days before, or stating ‘[m]ore deductions found in Line 26’.” T. C. Memo. 2022-119, at p. 36.

To show a constructive dividend, the payment must be tied to the shareholder and shown to benefit the shareholder. The RA who did the bank account reconstruction had to drain a major swamp, but there were other shareholders who got money and did work for Palmarini, Inc. IRS is definitely behind the curve in tying disallowed deductions to Benito.

Although Benito filed seven (count ’em, seven) amended corporate income tax returns for Year One, and four amended returns for Year Two, he never filed FICA/FUTA, so Judge David Gustafson, obliging as always, reminds IRS that the SOL is open on that, T. C. Memo. 2022-119, at p. 30, footnote 17.

Judge Gustafson sorts out the constructive dividends, and Benito and IRS horsetrade most of the rest.

The Rule 155 beancount is going to be a beaut.

No, not President Truman’s foreign aid plan; these four points are what IRS needs to certify that a seriously delinquent tax debt exists, sufficient to cause a passport yank per Section 7345. Judge Elizabeth A. (“Tex”) Copeland enumerates them all in Eric P. Mattson, T. C.Memo. 2022-118, filed 12/6/22, at p. 6.

The taxes, add-ons, chops and interest constituting the debt 1) has been assessed; (2) exceeds $50,000 (adjusted for inflation; year-at-issue number was $51K); (3) is unpaid and legally enforceable; and (4) is the subject of a filed lien notice or a completed levy. I.R.C. § 7345(b)(1), (f).

Eric claims the SOL has run on enough of his six (count ’em, six) unreported, unpaid years to knock him down from $61K to $31K. Except he had a CDP, which he timely petitioned, and from the sustentation of the NOD denying the petition which he further appealed to 9 Cir, all stayed the SOL, so the whole boat was current at date of certification of the debt.

Eric claims there was no Boss Hossery for the Section 6673(a)(1) chop he got when he frivoled on his CDP, but as Tax Court imposed it and not IRS, there needn’t be. And it was only $2K, so it wouldn’t help.

Judge Tex Copeland notes that while the NFTL in this case expired after 10 years by its own terms, expiry only impacts third parties, whose rights as against Eric are no longer impaired by the Section 6321 lien. IRS’ lien as against Eric continues until the SOL runs out. And Section 7345 doesn’t require that a current NFTL be filed at certification date, only that an NFTL was filed and the lien be then enforceable by IRS as against Eric. One filing fits all.

Interesting review of Section 7345 learning here; worth keeping in your toolbox.

I’m a great fan of summary judgment (“summary J”). It’s a discovery device too seldom used. It gives discovery of your client’s case (how strong does her/his story look in cold print?). It gives a fast and cheap look at your adversary’s case (what’s their story? And it’s great for cross-examination if you get that far). And it gives discovery of the most important person in the case: the judge. What does the judge think is the most important fact in dispute in the case?

But summary J should never be wasted to try to avoid caselaw that is squarely against you. IRS does this in Gale E. Stephens & Anne M. Stephens, Docket No. 9920-21, filed 12/5/22.  Gale and Anne own a couple Sub Ss (hi, Judge Holmes) that design and sell custom air flow systems. I don’t know what those are, either. But each one is different, and Gale & Anne have to design each one, get customer approval and tweak to suit, sign a contract, and then get components fabricated by third parties. Then Gale & Anne build the system. Gale & Anne claim the cost of the fabricated parts are research expenditures and take Section 41 write-offs for wages of personnel and “panels, hinges, screws, nuts, valves, monitors, and ducts” used by third party manufacturers who build the components. Order, at p. 2. But only supplies, and not wages, are under the microscope here.

IRS says these supplies “were purchased to build air flow systems that [Sub Ss] were contractually obligated to build,  they were purchased regardless of whether qualified research was being conducted.  Additionally, the Commissioner argues that because the supplies were not used in an investigative nature, and instead for the actual construction of products (i.e., the airflow systems) with the purpose of fulfilling contractual obligations, the section 174 test is not met.” Order, at p. 3.

Judge Ronald L. (“Ingenuity”) Buch finds caselaw that says the fact that the Sub Ss were contractually obligated to produce the systems doesn’t mean that research wasn’t involved. And the fact that the supplies went into a product that was sold to customers doesn’t disqualify the supplies as being purchased for research.

But Judge Buch makes it clear: “The fact that supplies were purchased for the purpose of constructing a final product for delivery to a customer does not preclude those supplies from being qualified research expenditures. Whether they are, in fact, qualified research expenditures is a question to be resolved at trial.” Order, at p. 7.

For some caselaw on what is and what isn’t, see my blogposts “Little Sandy Coal – No Credit,” 2/11/21, and “The Stretch,” 4/15/19, both involving cases Judge Buch cites.

Judge Elizabeth Crewson Paris’ Tax Court biography says she is the author of numerous “agriculture articles and chapters.” So she clearly has the expertise to assess the story of Steven F. Hoakison and Judy C. Hoakison, T. C. Memo. 2022-117, filed 12/5/22. Steve graduated high school and started farming; while his farm was nearly foreclosed, he got a job delivering for UPS, working 12-hour days. But Steve kept farming, working before dawn and after sundown, and not missing a UPS shift, even after triple bypass surgery. Steve and Miss Judy sound like they could pose for Grant Woods’ immortal painting.

Steve had a bunch old tractors (hi, Judge Holmes), which IRS claims are collectors’ items, but Steve shows photos of his haybale stabber and similar accoutrements, which render the tractors working class if not professional grade. And Steve could buy them for four figures and fix them his own self under the shade tree at the Home Place, the propane heated, unair-conditioned, 100 year old farmhouse, where he and Miss Judy lived for their forty five (count ’em, forty five) years of happy marriage, paying cash for everything.

Steve did double-dip a couple of items, which he expensed per Section 179 and then tried to depreciate per Section 167. And Steve’s 1999 Dodge Durango is too much like a passenger car, even with mud tires, so Section 274 shuts Steve down.

There’s a bunch of concessions, and much Cohanic horsetrading and shoehorning, but Steve comes out pretty well.

These guys are what made America great.

And their preparer of thirty years’ standing saves Steve and Miss Judy from all the chops save those for the double-dip depreciation. While the Boss Hossery is only a sign-off on the Form 4549, it does the trick.

“Examining the facts in this case, the Court finds that Mr. [trusty preparer] was a competent tax adviser with sufficient expertise to justify petitioners’ reliance. Mr. [trusty preparer] held a master’s degree in agricultural education and had decades of experience assisting farmers with economic and financial matters, including preparing income tax returns for farmers since 1981. He had met Mr. Hoakison nearly 50 years earlier and had prepared petitioners’ returns for nearly 30 years.  He was familiar with petitioners’ personal and business affairs through his long relationship with them and provided detailed instruction on what information they would need to collect for their tax returns each year. Nothing in the record indicates that petitioners had any reason to doubt his competence to provide the advice they sought.” T. C. Memo. 2022-117, at pp. 38-39.

And trusty preparer taught Miss Judy how to keep the books. She gave trusty preparer everything he asked for, and, except for the double-dip, they were justified in relying on him.

I give Steve’s and Miss Judy’s trusty attorney, James R. (“Good Feeling”) Monroe, Esq., a Taishoff “Good Job.” He told a real good story. Go and do thou likewise.

Judge David Gustafson has corrected his masterpiece Hallmark Research Collective, 159 T. C. 6, corrected 12/5/22.

Unfortunately, Judge Gustafson does not highlight his pentimenti, so I must leave it to my readers to download both the corrected and uncorrected texts, and run whatever software permits a line-by-line comparison.

I regret I have neither the time nor the equipment to do so.

Judge Courtney D (“CD”) Jones, confronted with an arithmetical barrage in Jacqueline Denise Ford & David Lindsay Ford, Docket No. 29172-21L, filed 12/2/22, seeks refuge in a remand to Appeals. She finds it, in a failure by the hard-pressed SO to accord appropriate attention to Jacquie’s return to the office from enforced teletubbying.

In calculating RCP, Judge CD Jones finds SO P (name omitted) should have considered proffered bank statements, pay stubs, and expense statements showing pre-pandemic parking expenses, Order, at p. 10. Parking at the office is necessary for production of income.

SO P also failed to consider personal loans taken out by Jacquie & Dave, although repaying the 401(k) loan Jacquie took out doesn’t make the cut for OIC because necessity not shown.

“However, the same cannot be said regarding the personal loans from Lending Club and Bay Country. The record clearly reflects that both COIC and SO P considered the inclusion of the Fords’ 401(k) loan, but there is scant evidence that the Fords’ personal loans were considered. The record contains one reference to the consideration of the personal loans, wherein the COIC case history states: ‘Other Secured Debt: 401-k loan and personal loans: $1,782 listed and disallowed. Not allowable expenses.’ There is no associated discussion or reasoning following this statement, and it does not appear as if the two personal loans were ever considered by SO P. All other references to the ‘secured debt’ category include a specific mention of the Fords’ 401(k) loan, but do not include any reference to or discussion of either of the Fords’ personal loans.” Order, at p. 12.

This is an IRS motion for summary J sustaining the NOD affirming a NFTL, so Jacquie & Dave get the benefit of every doubt.

There’s an interesting procedural point. Jacquie & Dave contest seven (count ’em, seven) years covered by the NFTL and NOD, but their OIC includes an additional year, for which no collection action has been taken.

“The Fords have failed to present any evidence showing that the IRS issued a notice that would provide this Court with jurisdiction to review the Commissioner’s collection activities relating to [out year], as is their burden. See Abraham v. Commissioner, T.C. Memo. 2021-97, at *10. However, the Court does have jurisdiction to review a settlement officer’s rejection of an OIC that encompasses liabilities for both CDP years and non-CDP years. See, e.g., Flynn v. Commissioner T.C. Memo. 2022-5, at *7 (citing Sullivan v. Commissioner, T.C. Memo. 2009-4, 2009 WL 20979, at *8–9).

“Accordingly, this Court has jurisdiction to review the IRS’s collection activities for taxable years [1 through 7] and the settlement officer’s rejection of the OIC that encompasses both CDP and non-CDP years. However, this Court does not have jurisdiction to review a claim relating to the Commissioner’s collection activities for [out year], and any such claim is dismissed for lack of jurisdiction. See §§6320(c), 6330(d)(1); see also Alt. Pac. Mgmt. Grp., LLC v. Commissioner, 152 T.C. 330, 333 (2019).” Order, at pp. 5-6.

For Abraham, see my blogpost “Lawyers Can’t Add – Part Deux,” 8/3/21; for Flynn, see my blogpost “Accustomed Standard of Living,” 2/3/22; and for Atl. Pac. Mgmt., see my blogpost “The Taxpayer Bill of Goods – Part Deux,” 6/20/19.

When you check out the arithmetical back-and-forth, Taishoff says SO P did a good job.

Of course, Jacquie’s & Dave’s trusty attorneys also did a good job protecting their clients. Their firm is a well-known whiteshoe that donates a great deal pro bono time and effort (hi, Judge Holmes) as calendar call commandos and CPE/CLE providers.

And, purely coincidentally, their firm’s name is also Jones.

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Charlie Dickens’s 1854 serial gives me the title for Kevin T. Lipka and Shelly Z. Lipka, T. C. Memo. 2022-116, filed 12/1/22, as Judge David Gustafson, fresh off his Herculean Hallmark opinion, dives into Reg. Section § 301.6343-1(b)(4) and finds that Kev comes up short in the hardship stakes.

Kev reported, but did not pay tax on, $466K of income in year at issue, because Kev was under criminal indictment in NJ, and available assets were tied up. He also said he was facing heavy-duty legal fees (bit did not quantify same). IRS had given Kev and Shelly a NITL, which they appealed, and when Appeals sustained, they petitioned.

Want of supporting documentation torpedoes a lot of what Kev and Shelly claim, so I’ll focus on economic hardship as basis for release of lien.

“Under the pertinent regulation… IRS Appeals is to consider any information provided by the taxpayer,  including the following: (1) the taxpayer’s age, employment status and history, ability to earn, number of dependents, and status as a dependent of someone else; (2) the amount reasonably necessary for food, clothing, housing, medical expenses, transportation, current tax payments, or other court-ordered payments; (3) the cost of living in the geographic area in which the taxpayer resides; (4) the amount of property exempt from the levy which is available to pay the taxpayer’s expenses; (5) any extraordinary circumstances such as special education expenses, a medical catastrophe, or a natural disaster; and (6) any other factor that the taxpayer claims bears on economic hardship. Treas. Reg.  § 301.6343-1(b)(4)(ii). Reasonable basic living expenses are based on the taxpayer’s circumstances but do not include amounts needed to maintain an affluent or luxurious standard of living. Treas. Reg. § 301.6343-1(b)(4)(i).” T. C. Memo. 2022-116, at p. 9.

Kev and Shelly wanted Appeals to consider the legal fees they would incur in defending the criminal case. “The case activity report reflects that they complained during a telephone conference of ‘a large bill’ associated with the impending criminal matter against  them.  The IRS Appeals officer subsequently asked them for documentation regarding their legal expenses, but the supplemental documentation they provided did not include any legal bills.” T. C. Memo. 2022-116, at p. 9.

I have yet to hear of a criminal defense lawyer who deferred billing when her/his client might go down.  

Takeaway: Defense lawyers bill; if your client is situated as Kev and Shelly, put in the retainer agreement and any invoices you have.

Jim D. Parker should bear through the days ahead like a torch in flame the immortal words of the late great Lawrence Peter Berra first above set forth at the head hereof (as my expensive colleagues would say).

Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan D. sent Jim D. off in Mary Y. Escobedo, Docket No. 21183-19, filed 12/1/22. Mary Y., through her trusty attorney, petitioned a SNOD that named both Mary Y. and Jim D. But trusty attorney filed in the name of, and solely on behalf of, Mary Y. And Jim D.’s attempted ratification of said petition is a wee bit beyond the 90-day cutoff. Like a year.

Ch J TBS: “In general, when a notice of deficiency is issued to more than one person, each person wishing to contest it must do so by signing the petition within the specified 90-day period in order to invoke the Court’s jurisdiction. See Rules 34(a), 34(b)(7). Rule 41(a) explains that ‘[n]o amendment shall be allowed after expiration of the time for filing the petition, however, which would involve conferring jurisdiction on the Court over a matter which otherwise would not come within its jurisdiction under the petition as then on file.” In other words, an amendment such as a ratification of petition cannot confer jurisdiction upon the Court where there was none.'” Order, at pp. 1-2.

Jim D., take heart. Taishoff says read and heed the words first written at the head hereof. Move to vacate per Rule 162, and cite Boechler, P. C., No. 20-1472 (2022), U. S. Supreme Court. Tax Court should have considered equitable tolling. When did you first see the SNOD? Did you receive a copy? On what terms were you with Mary Y. when the petition was mailed to you? Did you think Mary Y.’s petition covered you as well as her?

Suppose you lose the vacation, because you don’t have the facts.

All is not lost. Follow the case. When decision is entered and IRS seeks to collect, file for innocent spousery. You may not be able to contest liability for your items, but what about Mary Y.’s?

Talk to IRS’ attorney about settlement.

And if you qualify, talk to a LITC.

Thus I remarked ten (count ’em, ten) years ago. Today Judge Ronald L. (“Ingenuity”) Buch unloads six (count ’em, six) IRS webposts, of which he takes judicial notice. After having noticed, and recounted the post-handoff bobble by AO M. (name omitted), who took the case from AO S. (name omitted), who hadn’t been able to get to her office because COVID, Judge Buch bucks Ryan Michael Sterling, Docket No. 10995-21L, filed 11/30/22, back to Appeals in an off-the-bencher..

Ryan was another victim of the midyear fall from ACA grace when a pay raise or other good fortune lifts the lucky winner above the 400% of poverty limit, causing the APTA cutoff. Since Ryan Michael’s pickup of the overage was a self reported, he never got a SNOD, so he could challenge liability as the CDP he got after IRS gave him a NITL.

But his “no fair” argument wasn’t raised at the telephonic hearing, and even if it had been, “we apply the law as written.” Transcript, at p. 11.

So Ryan Michael is out, right?

No. Because AO S was locked out of her office, whence Ryan Michael had mailed the Form 433-A and supporting documents in support of his IA request, Judge Buch has the webposts to prove the lockout, and Ryan Michael was a believable witness when he swore he mailed the materials timely.

AO M. got the case from AO S. for reasons unexplained. AO M. should have followed up with Ryan Michael before issuing a NOD.

“Here, Mr. Sterling raised the issue of a collection alternative. Generally, it is not an abuse of discretion for a settlement officer to refuse to consider collection alternatives if the taxpayer failed to submit requested financial information. The settlement officer’s failure to follow up with the taxpayer regarding missing information before sustaining a collection action, however, might be considered an abuse of discretion. See, e.g., Lewis v. Commissioner, T.C. Memo. 2012–138, 103 T.C.M. (CCH) 1758, 1761.” Transcript, at p. 12.

For the story on Lewis, see my blogpost “Patching Doesn’t Cover,” 5/16/12. But here the story is worse.

” Ms. S. sent Mr. Sterling a letter scheduling a hearing and requesting collection information. Going into the telephonic hearing, Ms. S. was unaware whether Mr. Sterling had mailed the requested information because she had not been to the office. Ms. S. again requested financial information. Mr. Sterling testified that he promptly mailed the information to Ms. S. The case activity record does not show that anyone followed up with Mr. Sterling, even after his case was reassigned to a new settlement officer, Ms. M. She received the case and immediately proceeded to issue a notice of immediately determination….” Transcript, at pp. 13-14.

But the webposts prove that IRS was well aware that there were more than 2.9 million (count ’em, 2.9 million) pieces of unopened mail sitting in various IRS locations, Transcript, at p.10..

Abuse of discretion. Back to Appeals, and go find Ryan Michael’s packages.