Attorney-at-Law

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INVENTIVE BUT FUTILE

In Uncategorized on 02/14/2020 at 16:28

Frivolites are inventive but never successful. That is, successful at anything but providing Friday afternoon designated hitters for Tax Court judges, and blogfodder for me.

Ronnie Theodis Demmons, Docket No. 18387-18L, filed 2/14/20, gets no Valentine’s Day gift from Judge Gale, but does get a $500 Section 6673 frivolity chop.

Ronnie is confronting IRS’ motion for summary J, but Ronnie’s inventive approach started with his petition, wherein “…petitioner disputed Appeals’ determination on the ground that it violated “positive law”, citing generally the Tax Reform Act of 1976, Pub. L. No. 94-455, 90 Stat. 1520, as well as section 6065. Despite having been warned of the possibility of a section 6673 penalty, petitioner again raised section 6065 (and no other arguments) in his response to respondent’s Motion, claiming that the Motion should fail because respondent has not presented petitioner with any ‘claims’ satisfying the requirements of section 6065. It is settled law that while section 6065 requires taxpayers to sign returns and certain other documents filed with respondent under penalty of perjury, it does not require respondent to do the same with respect to documents, such as notices of deficiency, issued to taxpayers.” Order, at p. 2. (Citations omitted)

Judge Gale notes that the caselaw allows him broad discretion, and Ronnie had been offered a list of LITCs, and shown the yellow card, back in December last year.

Takeaway- Don’t try this, at home or anywhere else. But if you do, bring your wallet.

“WE DON’T NEED NO BASIS DISCLOSURE”

In Uncategorized on 02/13/2020 at 16:12

Oh Yes, You Do

Judge Albert G (“Scholar Al”) drives his Chevron tanker through Oakhill Woods, LLC, Effingham Managers, LLC, Tax Matters Partner, 2020 T. C. Memo. 24, filed 2/13/20, yet another syndicated conservation dodge in the GA boondocks.

With all these cases, I’m on a roll just now.

The Oakies left off the basis number on the 8283, claiming Forever Forests, enabler, told them and their CPA they didn’t have to. The Oakies claim this lets them off the hook on Section 170(f)(11)(A)(ii)(II) grounds.

Judge Scholar Al: “That subparagraph excuses failure to satisfy the reporting requirements discussed above if ‘it is shown that the failure to meet such requirements is due to reasonable cause and not to willful neglect.’  This statutory ‘reasonable cause’ defense is broader than the regulatory ‘reasonable cause’ defense promulgated previously.  As noted supra p. 12-13, the latter defense is limited to situations where the taxpayer has reasonable cause ‘for being unable to provide the information required.’  Sec. 1.170A-13(c)(4)(iv)(C)(1), Income Tax Regs.” 2020 T. C. Memo. 24, at pp. 27-28.

But these are motions for summary J, and “reasonable cause” raises fact questions. “These questions include whether Forever Forests was a ‘tax professional’; whether Forever Forests was ‘a competent and independent advisor unburdened with a conflict of interest,’; whether Oakhill could reasonably rely on legal advice relayed to it indirectly; whether petitioner’s CPA was a competent tax professional who provided tax advice independent of the advice supplied by Forever Forests; and whether Oakhill actually relied in good faith on whatever advice it received.” 2020 T. C. Memo. 24, at p. 30. (Citation omitted). No summary J for IRS on failure to provide reasonable cause.

But Judge Scholar Al has no such questions about the validity of Reg. Section  1.170A-13(c)(4)(ii)(D) and (E), the reporting requirement, whether or not the Oakies had reasonable cause not to.

But DEFRA84 (the Deficit Reduction Act of 1984) told Treasury, as they say in the South, to Go Set a Watchman for dodgers trying to glide beneath the radar. And a good way is to compare what was paid for the property to what is claimed for the easement.

The Oakies claim that DEFRA84 says put it on the return, not the summary appraisal. No, says Judge Scholar Al, a return is more than the 1040, 1041, 1065, or 1120, it’s everything attached, like the 8283 and summary appraisal. IRS gets millions of returns and can’t rummage around finding buried ordnance. And even if “return” and “Summary appraisal” are somehow mutually exclusive, nothing prevents IRS from requiring inclusion on both.

“DEFRA section 155(a)(3), which petitioner fails to cite, wholly undermines its argument.  That paragraph, captioned ‘Appraisal summary,’ provides that, ‘[f]or purposes of this subsection, the appraisal summary shall be in such form and include such information as the Secretary prescribes by regulations.” (Emphasis added.)  Congress thus left the Secretary with discretion to require inclusion on Form 8283 of whatever information the Secretary reasonably deemed relevant…. The Code provision governing appraisals makes the depth of the Secretary’s discretion plain.  See sec. 170(f)(11)(C) (requiring that taxpayers obtain a qualified appraisal and ‘attach[] to the return* * * such information regarding such property and such appraisal as the Secretary may require’).  For these reasons we reject petitioner’s contention that the regulation violates Chevron step one on the theory that it contravenes ‘the unambiguous language of the statute.’” 2020 T. C. Memo. 24, at p. 25-26. (Citation omitted)

And of course the Reg. satisfies Chevron as a permissible reading of the statute, as a comparison of basis to claimed worth of easement shows up an inflated appraisal like luminol shows blood.

Reg. sustained. Dodgers, look out.

 

THIS IS A MEMO? THE ADVENTURE CONTINUES

In Uncategorized on 02/13/2020 at 12:35

See my blogposts “This Is A Memo?” 6/10/16, and “Cut Uncut,” 8/17/18. One issue Medtronic and its various appendages had was litigation risk.

It sure is real.

 

“A STRAIGHTFORWARD CASE” – NOT!

In Uncategorized on 02/12/2020 at 16:15

Ex-Ch J L Paige (“Iron Fist”) Marvel might have thought that the unreported distributions that Richard Essner, 2020 T.C. Memo. 23, filed 2/12/20, took from the IRAs he inherited from his late father via his late mother presented “a straightforward case”, when AUP (Automated Underreporting Program) electronically handed Richard a SNOD (2020 T. C. Memo. 23, at p. 4).

Except.

While Richard’s petition was pending from the AUP SNOD, Compliance Officer J (name omitted) started an audit of the same year (among others), but Richard petitioned only the one AUP year for Section 7605(b) duplicative audit violation. Initially, Officer J only looked at legals, travel and meals, and eventually gave Richard a SNOD only for one of the two years wherein Richard took said IRS draws, never mentioning the IRA draw for either year. Richard subsequently petitioned that year too.

Clear? Thought not.

Ex-Ch J Iron Fist: “At the outset, we note that petitioner’s interactions with the IRS–both through the AUR program and his correspondence with Officer J–would be confusing to an ordinary taxpayer. Various offices of the IRS contacted petitioner without coordination, without clarity as to what the other parts were doing, and without providing petitioner a clear explanation as to why the IRS was speaking out of many mouths. A taxpayer ought not to have been subjected to such a byzantine examination. However, we are not empowered to police what ought to have occurred in an examination; we are limited to considering whether section 7605(b), as written, was violated. See Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974).” 2020 T. C. Memo. 23, at pp. 10-11.

But the AUP isn’t an examination of taxpayer’s “books and records,” because it only looks at the taxpayer’s return and the third-party reporting. Besides, Richard conceded all or part of what Officer J proposed as adjustments on audit, so Officer J’s examination wasn’t unnecessary.

Richard argued that there was unrecaptured basis (original investment in the account) in his late father’s IRAs. “At trial petitioner stated that he had contacted the financial institutions that had held the IRA–TD Ameritrade and Fidelity– seeking documentation to determine the portion that represented his late father’s original investment. Unfortunately, neither institution had the records he sought. At trial he conceded that he could not substantiate that any portion of the distributions represented a return of his late father’s original investment.

“We find credible petitioner’s statement at trial that he attempted to find records that could substantiate his position, and we sympathize with him for the dilemma in which he found himself when he inherited his late father’s IRA. But petitioner bears the burden of proving respondent’s determinations to be incorrect, and he has not. Therefore, we must sustain respondent’s determinations.” 2020 T. C. Memo. 23, at p. 7. (Footnote omitted, but it says if Richard could have proved original investment of after-tax dollars, he could have done better).

But Richard stiped in the Boss Hoss sign-off, and never told his paid preparer about the IRA draws. Sympathetic or not, Richard gets the Section 6662(b) five-and-ten; he’s a cancer surgeon who only checked the IRS website when he took a bundle of cash from late father’s IRA. “Given petitioner’s background and the substantial size of the distribution, this is not reasonable. We therefore conclude that petitioner did not have reasonable cause for his underpayment and that he is liable for the accuracy-related penalty under section 6662(a) and (b)(2)….” 2020 T. C. Memo. 23, at p. 14.

 

 

PROOF FIRST, BURDEN AFTERWARDS

In Uncategorized on 02/12/2020 at 10:03

And since it seems today we’re dealing with hysteron proteron (as Judges Scholar Al and Scholar Pat would say), let me first give a Taishoff “good try” to Matthew T. Journy, Esq., attorney for Guardian Community Trust, Inc., Docket, No. 23668-16X, filed 2/12/20.

Matt wants CSTJ Lewis (“Can’t Get Enough of That Name”) Carluzzo to stick IRS with the burden of proof and simultaneously strip them of the presumption of correctness, in bouncing his client’s 501(c)(3). And CSTJ Lew, again modestly eschewing his Chieftainship and signing simply as “STJ,” denies Matt’s motions, but without prejudice.

“The parties have already submitted the administrative record, or at least a substantial portion of it…. At the hearing both parties recognized the possibility that the administrative record could be supplemented as the case proceeded. Neither party was in a position to predict whether the case could be submitted entirely on the basis of the administrative record, or for that matter, whether they would be in agreement as to what materials should be included in the administrative record. Petitioner had not yet decided whether to request trial in order to resolve any factual disputes that might arise.” Order, at p. 1.

Matt says he was worried that, if Guardian had BOP, access to IRS’ records that Guardian needed would be impaired. Also, if IRS had BOP, that would “…allow for a better informed decision on how to proceed.” Order, at p. 2.

CSTJ Lew doesn’t dismiss Matt’s concerns out of hand. “We appreciate and have seriously considered petitioner’s approach….” Order, at p. 2.

But.

“At various points during the hearing the Court expressed its inclination that the relief sought in petitioner’s motion was premature, and that the judicial officer ultimately assigned to resolve the substantive issues might be better positioned to consider the relief petitioner now seeks after the parties have had the opportunity to further prepare the case for trial or summary disposition.” Order, at p. 2.

Like maybe Branerton? Interrogs? Document production? Even a final version of the administrative record, or if not agreed upon, at least with each side’s list of additions and strike-outs.

CSTJ Lew gracefully exits.

 

 

 

THE TRUE VINTAGE

In Uncategorized on 02/11/2020 at 15:51

Chutzpah often makes me shake my head in admiration. Today CSTJ Lewis (“That Magnificent Name”) Carluzzo has a truly fine example in a designated hitter (thanks, Judge), Sneeds Farm, Docket No. 24671-18L, filed 2/11/20.

Sneeds doesn’t contest they owe tax, or additions for failure to pay estimateds or late payment, or interest.

Sneeds offers an IA that ya gotta love.

“…petitioner requested an installment agreement of $5,000 per month to pay the underlying liability totaling $111,039.94…. Taking into account the financial information that petitioner provided, the settlement officer concluded that petitioner did not qualify for an installment agreement because it had sufficient equity to fully pay the underlying liability, and should either sell assets or take out a loan. Specifically, petitioner had total assets of $5,562,524 and total liabilities of $593,736, reflecting a net equity in assets of almost $5 million. Petitioner does not dispute these facts.” Order, at p. 2.

CSTJ Lew (modestly signing himself only as STJ Lew) spends another page citing caselaw, that when you have enough to pay in full, you should pay in full.

 

NON-NEGLIGIBLE BANKRUPTCY

In Uncategorized on 02/11/2020 at 15:27

There’s no new conservation (scenic) easement case today, but the recent freshet from The Glasshouse at 400 Second Street, NW, with its concomitant attack on extinguishment clauses, makes one think. At least, it makes me think.

I’d rather glibly dismissed the chances of extinguishment based upon eminent domain. Most conservation easement cases arise in boondock localities, where the local taxpayers make Howard Jarvis look profligate. The chances of a municipality raising taxes to buy an abandoned strip-mine for a public park that maybe five people will ever visit are, as Reg. 1.642(c)-(2)(d) says “so remote as to be negligible.’”

But maybe bankruptcy is not so remote. Judge Morrison ducked the direct issue (see my blogpost “Thanks a Lot, Judge,” 10/11/16). He decided Rose Hill on the short-changed 501(c)(3) clause and the non-public availability of most of the servient tenement, although nodding in the direction of the powers of Bankruptcy Court to avoid the easement.

And his treatment of the 20% chop is interesting. Rose Hill’s preparer gets his clients off that chop, because he wasn’t wrong in treating as a real possibility the powers of Bankruptcy Court or the bankruptcy trustee to avoid the easement .

All that said, even if there’s a bankruptcy down the road, and even if the Bankruptcy Court (or the bankruptcy trustee) successfully avoids the easement, what will be left for the owners of the property after administration expenses and creditors’ claims?  Or for the 501(c)(3) for that matter?

Time to forget about hypotheticals and draft easements that track the current Code and Regs. And, as has been suggested by some commentators smarter than I, not take boilerplate deeds of easement proffered by the 501(c)(3)s, without giving them a hard look and tailoring them to suit. The 501(c)(3) isn’t going to have the deduction disallowed; your client is.

INEXPERT

In Uncategorized on 02/11/2020 at 14:46

While it’s outside my experience, I must presume that when one wears shoes of the whitest, and has paying clients well up in the foodchain, one studies the rules of the court in which one appears (or details the appropriate first-year for that purpose). And acts in strict accord therewith.

Well, today Judge Albert G (“Scholar Al”) Lauber, who has served a term as partner in a white-shoe, gently reproves a trio of fellow-exalteds in Banco Bradesco, SA, Docket No. 13217-18, filed 2/11/20.

The trio “…e-filed the Expert Report of G H at docket entry #22.” Order, at p. 1. (Name omitted).

Of course, my well-schooled readers will immediately whistle the play dead and, holding arms before chest and rotating same, signal “illegal procedure, offense, e-filing, five-yard penalty, repeat the down. Tweet!”

Judge Scholar Al elucidates: “Under Tax Court Rule 143, expert witness reports are to be exchanged with the opposing party and submitted in paper form to the trial Judge. An expert witness report does not become part of the record until it is admitted into evidence at trial pursuant to Rule 143(g)(2).” Order, at p. 1.

Bur Scholar Al, in an indulgent mood (but don’t count on it continuing, chaps), doesn’t toss G H’s magnum opus in the recycle bin.

Although striking docket entry #22 from the record, “(T)he Court has made and will retain a copy of the report. Petitioner is not required to provide another copy of the report at this time.” Order, at p. 1.

Takeaway- High-priced partner, read the Rules yourself. Twice.

THE FEEDLOT CONTINUES

In Uncategorized on 02/10/2020 at 15:23

Upton Sinclair has nothing on Judge David Gustafson, who is running his own packing plant, and providing fresh examples of the Texas Maxim.

Here’s Rock Creek Property Holdings, LLC, Rock Creek Land Manager, LLC, Tax Matters Partner, Docket No. 5599-17, filed 2/10/20. It’s another iteration of the failed proportion at extinguishment. Once again, the 501(c)(3) would be short-changed on any appreciation of the property on extinguishment of the conservation easement.

“Rock Creek Holdings (like the petitioner in Railroad Holdings) advances the same arguments about the text of the deed, arguing that because the donee is entitled to ‘at least’ an amount, the donee ‘is not limited to that amount.’ (Doc. 13 at 19). But, as we have explained, a provision that the donee is not necessarily ‘limited to that [deficient] amount’ is insufficient, because the donee must be entitled to the full amount. A deed that provides for the donee a share of proceeds that may be less than the minimum cannot comply by adding ‘at least’ to its deficient formula. The defect cannot be cured by part D of article VI, which purports to resolve any ambiguities in the conservation easement in favor of its validity. See Railroad Holdings, LLC v. Commissioner, at *17-*18. Even if we assumed ambiguity in the paragraphs regarding extinguishment, a cure to the validity of the deed of easement does not cure the non-deductibility of the contribution, and construing part D as a saving clause would render it unenforceable. Id. at *18 (‘A donor cannot reserve in an easement deed a right that section 170(h) does not permit * * * but then save his charitable contribution by mentioning the rule he has violated and calling for that rule to kick in and save the day if his violation subsequently comes to light.’).” Order, at pp. 7-8.

For Railroad Holdings, see my blogpost “The Old Texas Maxim,” 2/5/20.

But the point here is that Aiken, who had inherited various parcels of Georgia scrub land ”… had effectively received about $1.2 million for the entire property in September 2013; and Rock Creek Holdings claimed that the easement on the property was worth about $7.9 million three months later in December 2013.” Order, at p. 5.

Once again, the fate of the hogs is as heretofore stated.

THE COUNTER TO THE VALUATION BLOCKER

In Uncategorized on 02/07/2020 at 14:36

I just the other day stressed the importance of appraisals when valuation is in play. An appraisal, even if it barely slides under the tag, is the blocker to IRS’ summary J motion, and gives the petitioner a chance to settle based on litigation risk, or a possible judicial mix-and-match after the trial.

But to get there, clear out the non-essentials, the law stuff that summary J can resolve. And sweat your expert. The valuation report must clear the bar.

Brannan Sand & Gravel Co., LLC, J. Curtis Marvel, Tax Matters Partner, Docket No. 27474-16, filed 2/7/20, gives me a fine opportunity to second-guess the Gravel Gang’s strategy in going with Rule 122 stipulated facts. The Gravel Gang claimed a $200K charitable for water storage rights; IRS said that doesn’t qualify for Section 170 treatment, or any other provision.

Judge Mary Ann (S.E.C. = “She Eschews Cognomens”) Cohen has a heavy lift.

“Upon review of the briefs of the parties, it appears that they dispute complicated issues, including but not limited to: whether certain materials attached to the partnership return constituted a qualified appraisal of the property donated; whether other technical requirements concerning the contents of a return reporting a charitable deduction (on Form 8283) were satisfied; whether the claimed contribution was part of a quid pro quo transaction; or whether the transaction should be treated as a bargain sale so that part of the value of the property is treated as a deductible contribution. These issues are made more difficult because of the relatively unusual property involved, that is, water storage rights.” Order, at p. 1.

But Judge Mary Ann (S.E.C.) Cohen is not wanting heavy lifts. Rule 122 doesn’t shift burden of proof, what constitutes proof, or what happens if the party with the burden drops the same. And Rule 149(b) lets her toss any party with burden of proof on an issue who adduces no proof of same.

“In the interest of judicial economy, the Court may decide a dispositive issue without addressing all of the issues and arguments presented by the parties. If one issue is dispositive, an opinion’s discussion of other issues is dictum. This maybe an appropriate case for application of Rule 149(b) to decide that the partnership is not entitled to the $200,000 charitable contribution deduction claimed because petitioner has failed to prove the fair market value of the water storage rights transferred.” Order, at p. 4.

The valuation here has some real problems.

“The ‘valuation opinion’ is based on the author’s experience as a litigator and purportedly comparable transactions indicating a price per acre-foot of$3,500 to $4,000. He gives no indication that he is familiar with the details of the interrelated transactions entered into by the partnership or why he would choose the high end of the range for the water storage rights here in issue. There are inadequate explanations of whether the identified transactions involved a willing buyer and a willing seller and thus are an indication of fair market value. In other words, there is no comparison to the comparables except by general geographic area.

“The parties argue about the qualifications of the author of the opinion to provide an appraisal. However, whether or not he is qualified with respect to the property in issue, there are serious questions about the reliability or admissibility of his opinion in the absence of an adequate discussion of the specific circumstances in which the water storage rights were donated. Respondent criticizes the opinion at length in contending that it does not constitute a ‘qualified appraisal’. Whether or not a qualified appraisal, the valuation opinion has not been received as evidence and might not qualify if offered at trial. Expert opinions that disregard relevant facts affecting valuation are rejected.” Order, at p. 3.

And if one issue is dispositive (like the valuation is worthless) then the others need not be resolved, as such resolutions are dictum.

So let the parties “…show cause, if any they have, why the remaining issue in this case should not be decided against petitioner and in favor of respondent under Rule 149(b), Tax Court Rules of Practice and Procedure, by reason of petitioner’s failure to present evidence in support of the charitable deduction claimed on the partnership’s 2010 return.” Order, at p. 4.

Note- There are lots of cases (the historic building easement cases) where appraisals, even if not of the best, pass muster. I’ve blogged a number of those. Make sure you have them in your memo of law files, because this is the latest countergambit.

Edited to add, 2/14/20: I don’t wish to belabor the point, but Judge Holmes didn’t toss IRS’ expert witness even when he lied under oath; he said “Only when an expert report becomes absurd or ‘so far beyond the realm of usefulness’ does bias make an expert report inadmissible. See Boltar, L.L.C. v. Commissioner, 136 T.C. 326, 335-36 (2011).” See my blogpost “He Lied – So What?” 9/29/17. Take away the expert here, and IRS wins by suppression of petitioner’s only witness, in a matter that everyone admits is at least a “relatively unusual property involved.”

Taishoff says let the witness testify, face a solid cross-examination, and toss his testimony thereafter if worthless.