No, this is not a reference to those spam e-mails, promising improvements not to be discussed in a blog meant for family reading, but with which we are bombarded. Rather, Judge Albert G (“Scholar Al”) Lauber, master textualist (hi, Mr Reilly), leads a full-dress T. C. to establish that the Section 6662(b)(6) nondisclosure-of-non-economic-substance transaction, as enhanced by the Section 6662(i) 40% chop, isn’t really a chop, but an enhancement.

The opinion is Jesus R. Oropeza, 155 T. C. 9, filed 10/13/20. For the backstory on JR and his microcaptivity, see my blogpost “Forty’ll Get Ya Twenty,” 7/21/20\, which dealt with the year after the year at issue here. But while in that case the 20% chop was sustained, here no chop survives.

Again we have as Revenue Agent Report (RAR) where the 40% amount is shown as zero, and a mix-and-match of 20% chops.  But as 3SOL was about to run, JR got Letter 5153, offering Form 872 SOL waiver and go to Appeals, or pay up. JR said “no,” so the RA, CPAF in hand, closed the case and got his boss’ sign-off on the CPAF. SNOD followed.

Summary J for JR.

IRS claims the SNOD was the kick-off for chops, and they had the Section 6751 Boss Hoss sign-off in hand. JR’s trusty attorneys say “no, the Letter 5153 and RAR said ‘penalties’, and that’s enough.” Judge Scholar Al goes with Belair (see my blogpost “Can We Talk – Part Deux,” 1/6/20).

“Respondent seeks to distinguish this case from Belair Woods, noting that the taxpayer there received a 60-day letter enabling it to go to Appeals, whereas petitioner did not receive a 30-day letter enabling him to do so. We find this to be a distinction without a difference. A 30- or 60-day letter is one way of communicating to a taxpayer that the Examination Division has concluded its work. But it is not the only way. The Letter 5153 clearly communicated the same message to petitioner: It told him that he could now go to Appeals, but only if he first executed a Form 872 that would give Appeals enough time to consider his case.” 155 T. C. 9, at p. 11.

OK, says IRS, the 20% chops are off the table, but the 40% chop is still in play, because that was only communicated to JR in the SNOD, not in the RAR or the Letter 5153.

Wrong, says Judge Scholar Al.

“Section 6662(a), captioned ‘Imposition of Penalty,’ provides that, ‘[i]f this section applies to any portion of an underpayment * * * , there shall be added to the tax an amount equal to 20 percent of the portion of the underpayment to which this section applies.’ Section 6662(b) provides that the penalty applies to the portion of any underpayment attributable to one or more of eight specified grounds. The sixth specified ground is ‘[a]ny disallowance of claimed tax benefits by reason of a transaction lacking economic substance.’ Sec. 6662(b)(6).

“Section 6662(i) is captioned ‘Increase in Penalty in Case of Nondisclosed Noneconomic Substance Transactions.’ It provides: ‘In the case of any portion of an underpayment which is attributable to one or more nondisclosed noneconomic substance transactions, subsection (a) shall be applied with respect to such portion by substituting “40 percent” for “20 percent”.’ Sec. 6662(i)(1). Litigants sometimes refer to section 6662(i)–like section 6662(h), applicable in the case of a ‘gross valuation misstatement’–as imposing a ‘40% penalty.’ As the statute’s text makes clear, however, section 6662(i) does not impose a distinct penalty. It simply increases the rate of the penalty imposed by section 6662(a) and (b)(6) for engaging in a transaction lacking economic substance.” 155 T. C. 9, at p. 13.

Judge Scholar Al paints the picture.

“The rule we extract from these cases is that boilerplate text in an IRS communication, determining liability for an accuracy-related penalty ‘attributable to one or more of’ specified grounds, will be interpreted to assert all of the specified grounds as alternative bases for the penalty, unless other portions of the communication explicitly limit the penalty determination to a subset of those grounds. Here, the Letter 5153 and the RAR determined that petitioner was liable for a 20% penalty ‘attributable to one or more of’ four specified grounds, including ‘a transaction lacking economic substance.’ Nothing in either document disavowed any of the four grounds as a justification for the penalty. We accordingly conclude that the IRS asserted in the RAR, but did not secure timely supervisory approval for, a penalty under section 6662(a) and (b)(6).” 155 T. C. 9, at pp. 15-16.

As in Belair, the subjective thought processes of the RA are irrelevant. What was communicated to the taxpayer is the key.

Finally, “…failure to disclose the transaction on the return is not a separate penalizable offense. Rather, it is analogous to an ‘aggravating factor’ in criminal law that justifies a harsher penalty for the basic offense. Under 18 U.S.C. sec. 111 (2018), for example, a defendant who assaults or forcibly interferes with a Federal officer engaged in official duties faces a possible prison term of 8 years. But if the defendant uses a deadly weapon while committing that offense, the maximum term of imprisonment is extended to 20 years. See id. subsec. (b). In this scenario, using a deadly weapon is not a separate Federal crime. It is an aggravating factor that authorizes an enhanced penalty for the underlying crime.” 155 T. C. 9, at p. 19.

IRS can’t double-dip; having failed to get Boss Hoss sign-off for 20%, IRS can’t cover up its error and seek 40%.

Admin Record Variation

A classic line from a classic movie furnished me with great taglines for blogposts. I’ve said that it’s a gift that keeps on giving. Today, IRS plays a new variation in Jared Mitchell & K. Sullivan Mitchell, Docket No. 10883-19L, filed 10/13/20.

IRS wants summary J on the NITL with which it hit Jared & K. But you think you got problems? “In connection with their submission of an offer in compromise, petitioners informed the Appeals Office that Mr. Mitchell had been convicted of securities fraud, was incarcerated at that time, and had been ordered to pay restitution in excess of $9 million.” Order, at pp. 1-2.

But if Jared & K. have problems, IRS is not far behind.

“The record indicates that the Appeals Office rejected petitioners’ offer in compromise and, after reviewing their tax return for 2018, concluded that they could pay their outstanding tax liability in monthly installments of $2,150. Petitioners maintain that they provided all financial information that they had access to in connection with the IRS’s evaluation of their offer in compromise. When petitioners declined the proposed installment agreement, the Appeals Office issued the notice of determination in dispute.” Order, at p. 2.

My argute readers have already discovered what’s wrong with this picture, but I’ll let STJ Daniel A (“Yuda”) Guy tell the story.

“Respondent’s motion for summary judgment is not properly supported. What the record lacks is any documentation, such as a Form 433-A, Collection Information Statement, and related financial records, which would tend to show that the Appeals Office properly evaluated petitioners’ reasonable collection potential and their overall ability to pay the taxes they owe for the years in issue. Similarly, there are no transcripts of account (such as Forms 4340) that would demonstrate that the Appeals Office properly verified that the IRS followed all applicable laws and procedures in this case.” Order, at p. 2.

So, Appeals, do it right, build a record. And Jared & K., play nice, and give Appeals everything you got. So that when y’all come out, you’ve got something in your hands.

Judge Colvin Does

And he’s happy to provide a short summary, in support of a Sum. Op., Deborah Louise Biegalski, 4671-18S, filed 10/13/20. Deb’s Sum. Op. is 2019 T. C. Sum. Op. 35, filed 12/3/19. I didn’t blog it because I had four (count ’em, four) more interesting matters that day, including but without in any way limiting the generality of the foregoing (as my power-breakfasting colleagues would say) a full-dress T. C.

Deb filed a 162 vacation motion, but Judge Colvin says she meant Rule 161 reconsideration, treats the motion as such, and denies it. Deb says Judge Colvin got it wrong, and it matters whether her motion is considered pursuant to Rule 162; using Rule 161 is an error.

Wrong, says Judge Colvin. But here’s how they differ.

“The standard for granting relief under Rule 161 is ‘to correct substantial errors of fact or law and allow the introduction of newly discovered evidence that the moving party could not have introduced by the exercise of due diligence in the prior proceeding. Reconsideration is not the appropriate forum for rehashing previously rejected legal arguments or tendering new legal theories to reach the end result desired by the moving party. The standard for granting relief under Rule 162 is to make corrections after a showing of unusual circumstances or substantial error, e.g., mistake, inadvertence, surprise, excusable neglect, newly discovered evidence, fraud, or other reason justifying relief.” Order, at p. 1 (Citations omitted).

But vive la difference doesn’t help Deb.

“Petitioner does not prevail under either standard. Petitioner does not identify any substantial errors in fact or law in the opinion, does not present any evidence that was not available at the time of trial, and does not identify any unusual circumstances. She merely repeats her interpretation of the facts, her prior testimony, and the arguments she made at trial and in her posttrial briefs, all of which were previously considered by the Court.” Order, at p. 2.

I didn’t blog the Genius Baristas’ shutdown of USTC from November 20 through December 28, because I thought the blogosphere and the trade press would be all over the month-plus USTC offline, due to the installation of DAWSON (“Docket Access Within a Secure Online Network”).

Crickets.

As usual, the trade press and the blogosphere care little for pore l’il ole Tax Court, the “small court,” or its “dissions.”

But the October 7 press release contains one sentence that froze the electrons in my laptop.

“The Court does not anticipate issuing any orders or opinions during the time e-filing is inaccessible.”

Are y’all serious? Nothing for a month, with thousands of taxpayers and the IRS waiting on resolution of their cases, each of which is important to the parties involved, whether it be $10 or $10 million caught in this logjam up Dawson’s Creek without a paddle or a log Peavy.

I do not even consider mentioning that this shuts me down for a month, or however long it takes to get this latest coruscation up and running.

Given the schemozzle that occurred when the jazzy new homepage was unleashed in July, I can just see what December 28 will bring us, when the Genius Baristas push the “ENTER” key. “Shambolic” isn’t even close.

See my blogpost “If It Ain’t Broke, Don’t Fix It,” 7/20/20.

From an oldie but goodie, six years ago.

As Harry Golden, raconteur and essayist, put it more than fifty years ago, “The most famous expression among the immigrants on the East Side of New York was ‘A klug zu Columbus’n’ which, freely translated, meant that Columbus should have broken his head before he discovered it (America).  The expression was always used in good humor and often as a term of endearment, as we shall see.”

Mr Golden went on to describe Columbus as a folk-hero, a kind of mythic figure both praised and blamed, but ultimately the source of good-humored comment.

Howbeit, my readers, descendants of immigrants as we all are, whether our several ancestors crossed the Bering Strait coming from the Olduvai Gorge, or from the steppes of Central Asia, or even across the Atlantic or Pacific, I note that Tax Court is closed today, so I can bring y’all neither entertainment nor enlightenment.

Enjoy a day off, whether it be for you Indigenous Peoples’ Day or Columbus Day. And anyway, have a klug zu Columbus’n.

No, not that limerick. That’s for the reader in Peru, who must have tipped off eight (count ’em, eight) of his friends, because all nine of them viewed my blog today.

Before today, I’d had nineteen views from Peru in the last ten (count ’em, ten) years. A bonanza!

Now if the nine nice people from Peru would tip off their next-door neighbors in Bolivia….

No, not another one of those “what to pack for the cruise” thinly-concealed adverts for stuff you’ll never use again. Today, STJ Peter (“HB”) Panuthos (for the “HB” story, see my blogpost “Old-Time Head-Banging – Part Deux,” 9/4/20) gives the right-about-face to Shona S. Pendse, Docket No. 25665-17, filed 10/9/20.

Shona stiped out 8/30 when COVID-19 teletrial was set for 9/16. The stip said no tax due, no additions, no penalties, no overpayments. Stiped decision entered 9/3.

Shona now files for a vacation of the stiped decision, claiming conditions to do with a barred refund. IRS ripostes with e-mails and documents showing everybody agreed to everything.

So why am I bringing you this tale of settler’s remorse?

Because STJ HB Panuthos, seeing that IRS has gone the mile, goes the twain, thrain and quatrain. This is a checklist for those seeking to overturn a stip, especially one entered into on eve of trial.

To save time and electrons, I’ve omitted the “copious citation of precedent,” but get all the citations for your memo of law file.

Here’s the threshold. “The decision to grant a motion to vacate or revise a decision lies within the discretion of the Court. A motion to vacate is generally not granted absent a showing of unusual circumstances or substantial error, e.g. mistake, inadvertence, surprise, excusable neglect, newly discovered evidence, fraud, or other reason justifying relief.” Order, at p. 2.

STJ HB Panuthos says he eyeballed the pictures, descriptions and accounts of the negotiations between the parties, and is satisfied Shona was onboard with the stip.

“We have held that ‘[a] settlement is a contract and, consequently, general principles of contract law determine whether a settlement has been reached.’ In settling a case each party agrees to concede some rights which may have been asserted against the opposing party as consideration for those secured in the settlement agreement.

“A valid settlement, once reached, cannot be repudiated by either party; and after parties have entered into a binding settlement agreement, the actual merits of the settled controversy are without consequence. This Court has declined to set aside a settlement duly executed by the parties and filed with the Court in the absence of fraud, mutual mistake, or other similar ground. Where the parties’ settlement leads to the vacating of an imminent trial date, the Court applies stringent standards to modify or set aside the settlement. In such cases the moving party must satisfy standards akin to those applicable in vacating a judgment entered into by consent. The Court has discretion to set aside a settlement agreement filed with it, but its discretion will not be exercised unless good cause is shown.” Order, at p. 2.

“Hear, read, mark, learn, and inwardly digest,” as a much better writer than I put it.

The forest fires lately ravaging Oregon won’t excuse a video non-appearance at teletrial for Bryan M. Griggs & Valerie D. Griggs, Docket No.  18035-16, filed 10/9/20, especially as (1) Valerie D. showed, (b) Bryan M. phoned in, and (c) all the rest of the calendared Oregonian parties showed.

Bryan M. claims he can’t get to the law library because forest fires, so he needs more time, and wants a continuance (that’s an “adjournment,” for you State courtiers). Judge Albert G. (“Scholar Al”) Lauber says this is a “pure substantiation case” (Order, at p. 1). Hence, there’s no law question, only facts. IRS moved to toss Bryan D. for want of prosecution (he hadn’t done any pretrial prep with IRS), but Judge Scholar Al held that off for the next day, telling Bryan M. to show.

Bryan M. now wants to appeal Judge Scholar Al’s refusal to continue the case. But Section 7482 says the appellant needs a certificate from Tax Court, and Judge Scholar Al doesn’t hand those out so fast.

“Certification for an interlocutory appeal under I.R.C. sec. 7482(a)(2) is appropriate when the Court verifies that an interlocutory order (1) involves a controlling question of law, (2) with respect to which there is a substantial ground for difference of opinion, and (3) an immediate appeal from that order may materially advance the ultimate termination of the litigation. All of these requirements must be met before the Court will certify an interlocutory order for immediate appeal.” Order, at p. 2. (Citations omitted, but get them for your memos of law file).

Interlocutory appeal fast-tracks a major question of law which, if dealt with up front, could be a walk-off homer, or a called third strike on the last hitter up. And it must be pure law, no need for the Appelicans to review the record or anything else.

Bryan M.’s alleged arboreal conflagrations are none of the above. Besides, Bryan M. is obviously stalling, says Judge Scholar Al.

“Mr. Griggs’ reasons for requesting a continuance are groundless. There is no substantial ground for difference of opinion regarding Mr. Griggs’ assertion that he could not participate in the trial as scheduled. He first petitioned this Court in August 2016, and he was notified of the trial date on July 7, 2020, more than three months ago. He has had adequate time to prepare for trial, and there were no technological impediments to his participating in the trial via Zoomgov or telephone, as shown by his participation in the calendar call and the other parties’ participation in the trial.

“Nor would an immediate appeal advance the ultimate termination of this litigation. Virtually by definition a continuance would delay it. For the past year Mr. Griggs has persistently declined to cooperate with respondent’s counsel in preparing this case for trial. The record of this case makes clear that his motions for continuance, followed by a request for interlocutory appeal, are part of an ongoing campaign to defer trial of this case indefinitely. The final judgment rule is designed to prevent precisely this sort of ‘dilatory and harassing appeal.'” Order, at p. 3 (Citation omitted).

Is Judge Scholar Al going to reach for the Section 6673 yellow card?

Edited to add, 7/23/21: Judge Scholar Al did not. He let off Valerie D. on innocent spousery, and whanged Bryan M. for the post-concession deficiencies. See Order and Decision, 6/4/21.

Francis I. Spagnoletti, 2020 T. C. Memo. 140, filed 10/8/20, was disputing the additions and interest for his two late-filed returns, but hadn’t paid the full balances shown thereon, nor had he paid estimateds on two subsequent years.

The SO at the CDP agreed that since the NITL issued without a SNOD (self-reporteds and arithmetic), Francis could contest. But Francis sent in no Form 433-A. He offered to pay the whole $1.9 million in 120 days, but the SO couldn’t give him an IA. She did hold off the NOD affirming the NITL until five weeks after the 120 days Francis wanted.

Francis paid nothing, and petitioned.

Judge Albert G (“Scholar Al”) Lauber has this one, but Francis hasn’t helped his case.

“Petitioner admits that he ‘did not raise an issue as to the reported tax due * * * for 2015 and 2016.’ But he asserts that he did dispute his liability for additions to tax and interest. He qualifies this assertion, however, by saying that he advanced such a challenge ‘to the best of his recollection.’” 2020 T. C. Memo, 140, at p. 7. 

Well, the SO’s notes don’t show that.

“The SO’s case activity record contains no reference to any challenge by petitioner to his liabilities for interest or additions to tax. Her summary of the… telephone call describes petitioner’s position as being that ‘he just need[s] the 120 days and he will full pay what he owes.’ The notice of determination states that the underlying liabilities were ‘not raised as an issue for the period(s) being considered in this hearing.’ And in his petition to this Court petitioner advanced no challenge to any portion of his underlying liability….

“In the light of this record evidence, petitioner’s assertion that he raised his liabilities for additions to tax and interest ‘to the best of his recollection’ is not sufficient to create a genuine issue of material fact. Petitioner appears to contend that he made this point inferentially by complaining that the IRS caused delay by not returning his initial phone calls inquiring about a payment plan. That complaint was not sufficient to raise a cognizable challenge to his underlying tax liabilities.” 2020 T. C. Memo. 140, at pp. 7-8.

I again quote an ancient saying: “Worst piece of paper better than best human memory.”

Judge Scholar Al notes that Francis is an attorney, 2020 T. C. Memo. 140, at p. 2. It was drilled into my head in my greenest moments at the Bar that the record is your friend: protect, preserve, and defend the record. And fill it with every material element you need. In writing.

Edited to add, 11/16/20: Francis tries a Rule 162 vacation, but it doesn’t go, even though Judge Scholar Al designates the order.

Or, a Bad Day in Ogden Gets Worse

Judge David Gustafson continues today’s tear, with the Ogden Sunseteers still down range.

John Worthington, 2020 T. C. Memo. 141, filed 10/8/20, blows on some multi-county law enforcers who grab tons of cash by way of fines, and bestow this largesse upon themselves. “The entity or operation (“the Target”) as to which Mr. Worthington sent information is the product of ‘interlocal agreements’ in which the ‘component entities’ are county law enforcement agencies in a State. Mr. Worthington has been involved in a controversy with the target and those agencies about whether, in what sense, and to what extent the target is a ‘legal entity’. 2020 T. 141, at p. 4.

Honest John has a court decision that he says holds this arrangement is not a legal entity. OS initial evaluater says may meet Section 7623(b) criteria. That’s discretionary award. But it’s not IRS’ function to determine any entity’s legal status in a State court proceeding. So the evaluater tries to get the file bucked to CI, but a senior evaluater overrules her. All the State court decision does, says senior, is toss Honest John because he’s sued a non-existent party. But the whole decision isn’t in the AR.

However, Honest John wants Judge Gustafson to order IRS to “really” review his information. But that means order an audit, and that Tax Court cannot do. And whether Honest John’s information crosses the $2 million threshold of Section 7623(b)(5)(B) isn’t jurisdictional.

“That is, where the WBO denies or rejects a whistleblower claim, we have jurisdiction to review its final determination whether or not the amount in dispute turns out to be $2 million. Consistent with that holding, the WBO issued to Mr. Worthington a determination that explicitly states: ‘This letter is a final determination for purposes of filing a petition with the United States Tax Court.’ We have jurisdiction to review that determination, and the Commissioner does not contend otherwise. Moreover, in a case like this one, where there has been no collection action, the WBO’s analyzing the claim under section 7623(a) as opposed to section 7623(b) makes no practical difference, and we perceive no harm to Mr. Worthington as a result of the label used by the WBO.”2020 T. C. Memo, 141, at p. 20.

Honest John doesn’t get summary J, but neither does IRS.

The initial evaluater wanted to send the file to CI, but was overruled. However, the senior who overruled did some research, and told the evaluater to do some more research.

“Such research seems to be inconsistent with what the regulations provide concerning a threshold rejection, and this ‘research’ by both SB/SE and the WBO tends toward characterizing the subsequent action as a denial. However, if the determination was a denial, not an action based solely on the claim, then the information generated in the research should have been included in the administrative record. Evidently it was not. The court opinion that Ms. [senior] quotes in her email seems to be missing from that record (except for the excerpt that she quotes). So it is difficult to characterize the process set out in the administrative record as leading to either rejection or denial.” 2020 T. C. Memo. 141, at p. 24. (Name omitted).

In Ogdenese, “rejection” means tossed out of hand; “denial” means “we looked at the stuff but it yielded nothing.”

Judge Gustafson man-‘splains.”…what we review is the actual determination reflected in the WBO’s letter. When we look to the final determination letter sent to Mr. Worthington, we see an apparent self-contradiction. It states: ‘The claim has been rejected because the IRS decided not to pursue the information you provided.’ (Emphasis added.) ‘[D]ecid[ing] not to pursue the information’ would seem, under the regulations, to indicate a denial; but the letter says the claim is being rejected.” 2020 T. C. Memo. 141, at p. 25. (Footnote omitted).

IRS’ summary J “…motion asks us to hold that ‘the Whistleblower Office did not abuse its discretion in rejecting petitioner’s claim for award’ and also asserts that “the Whistleblower Office did not abuse its discretion in denying petitioner’s claim for award”. (Emphasis added.) This inconsistency recurs throughout the motion.” 2020 T. C. Memo. 141, at p. 25.

When IRS’ motion speaks of rejection, the bounce letter uses the “not specific, credible or speculative” rejection language. But when it speaks of denial, it says no proceeding started nor funds collected.

“But the motion then seems to veer in order to state: “Therefore, the Whistleblower Office rejected petitioner’s claim”. (Emphasis added.) In the next sentence, however, the motion rights itself and states: ‘Because the undisputed material facts demonstrate the Whistleblower Office did not abuse its discretion in denying petitioner’s claim for award, this Court should grant respondent’s motion.’ (Emphasis added.) We cannot grant the Commissioner’s motion, because we cannot discern in it–nor in the WBO’s final determination–a coherent ruling consistent with the regulations and supported by the administrative record.” 2020 T. C. Memo. 141, at p. 27.

But the problem isn’t just IRS being “colloquial.”

“The problem, we stress, is not simply that of a poorly drafted determination. If the final determination made a ‘rejection’ that it explained poorly but that the administrative record justified, then we might be able to sustain the rejection. Or if the final determination made a ‘denial’ that it explained poorly but that the administrative record justified, then we might be able to sustain the denial. But in this instance we cannot tell what the WBO actually determined, and this unclarity in the final determination letter corresponds to a lack of clarity that arose in the preceding administrative process and that recurred thereafter in the Commissioner’s motion. We will therefore deny the motion and will order the parties to show cause why the case should not be remanded to the WBO for further consideration.” 141 T. C. Memo. 141, at pp. 27-28. (Emphasis by the Court).

Taishoff says Honest John has a valid point about excessive fines and selective enforcement being used to fund local law enforcement without appropriate legislative or judicial oversight, although WBO is not the place to go for redress. But as this is a non-political blog, I’ll say no more; at least not here. I have made my views clear elsewhere.