I’ve said it often: whistleblowers are there to connect the dots. However, they need all the help they can get. My colleague Peter Reilly CPA was posting today on LinkedIn concerning the complexities of tax law and how journalists and others looking for a story get it all or partially wrong. Here’s a perfect example of how IRS gets it wrong, and how a pro se whistleblower can’t put it right.

David Shaun Neal, 2020 T. C. Memo. 135, filed 9/28/20, says he blew the whistle on a DADs deal. He was working for the target, and was feeding the information to the RA that he asked for, but it wasn’t on point. IRS says there was an earlier blow on the same target, and they got zip. Dave says that’s because the RA wasn’t looking in the right place; he says he told the RA where to look (outside the hearing of his bosses), but the RA ignored him.

Then Dave filed his Form 211, but he didn’t fill in all the blanks, and omitted important items. The Ogden Sunseteer who got Dave’s 211 saw no need to send it to evaluators because IRS had already identified the issue, and bounced it. But the bounce letter said it “does not contain a determination regarding an award under section 7623(b)”. 2020 T. C. Memo. 135, at p. 7.

Five (count ’em, five) months later, IRS hit target again and collected $13 million. Two months after that, the Ogden Sunseteer sent Dave another bounce, which he petitions.

Administrative record, right? Dave says the RA is lying when RA says Dave told him nothing and only participated in one phoneathon, where Dave said nothing.

Judge David Gustafson holds an evidentiary hearing. Was evidence withheld from the administrative record, as Dave claims?

Well, Judge Gustafson saw the witnesses, and heard Dave’s cross-examination (remember, Dave was pro se). I just read some of it, and I winced. Look at 2020 T. C. Memo. 135, at p. 13.

Judge Gustafson believes the RA.

“First, Agent B credibly denied this allegation. He had no recollection of any meeting with Mr. Neal and, assisted by contemporaneous notes, was able to say only that Mr. Neal participated in one telephone conference call that Agent B had with the target’s officers. Agent B did not recall Mr. Neal’s speaking in that call, and the subject of that call was not relevant to the tax abuse that Mr. Neal alleges. When the opportunity came to cross-examine Agent B on this important point, Mr. Neal’s contention wilted, and the agent’s account went unchallenged. We do not know whether  Mr. Neal’s allegations were a knowing fabrication or were a badly distorted memory, but we believe Agent B. He received no information from Mr. Neal.

“Second, even if we were to credit Mr. Neal’s account, what he actually testified is that Agent B never understood what Mr. Neal was trying to explain. ‘[H]e kind of ignored me, basically. Didn’t take any of my information.’ This is evidence not of information received by the agent but rather of information ignored by him.” 2020- T. C. Memo. 135, at pp. 19-20. (Name omitted).

I make no secret of my respect for Judge Gustafson, but he got it wrong, unless Dave is the world’s worst witness as well as the world’s worst cross-examiner. Does IRS have carte blanche to blow off a whistleblower without listening to him, especially an employee of the target? Or did IRS magically discern from another source what Dave was telling them?

I already admitted I didn’t see the hearing, so I can’t evaluate body language, tone of voice, or facial expressions (and even if I did see and could evaluate, I’m not the judge). Dave’s fold on the cross-examination was probably enough for Judge Gustafson, and maybe would have been enough for me. When a witness “can’t remember,” that’s the time to go all in.

But I’m shaking my head. Any whistleblower who files a Form 211 without counsel, much less goes into an evidentiary hearing, even if they scale the Van Bemmelen obstacle course, is asking to lose.

For U S Tax Court

“Scarce judicial resources” is a cliché, but like all clichés there is a substratum of truth. And for this cliché, the substratum is substantial. Expense and delay are multiplied when there aren’t enough courtrooms, facilities or judges to deal with all the justiciable problems. And no law affects so many as the Internal Revenue Code. Even permissible nonpayers only become so by virtue of those laws (and no, this is not a prelude to a political diatribe, or even a sober analysis, of a certain taxpayer’s return; my colleague Peter Reilly, CPA, has already commented on that).

So Judge David Gustafson proves the truth of the foregoing today in a $296 misunderstanding, more particularly bounded and described in Doris Ann Whitaker, Docket No. 4899-18, filed 9/28/20.

Doris Ann is questioning the credits applied to a couple twenty-five (count  ’em, twenty-five) year old tax liabilities (hi, Judge Holmes), for which Doris Ann can seek refunds in USDC or USCFC if SOL hasn’t run, and one fifteen year old liability for which Doris Ann got Section 6015 innocent spousery. After a phoneathon and many filings, the upshot of the credit hopscotching is that Doris Ann is entitled to $296.

Applying the credits (or getting them refunded) relates to the years to which the credits were applied, not to the year from which an overpayment was credited. Thus, a refund from a credit from 2005, which was applied to 1994 and 1995, can only be refunded in proceedings for 1994 and 1995, not 2005.

“It may be counterintuitive, but under the law a taxpayer whose 2005 overpayment has been credited against other liabilities for 1994 and 1995 has thereby received that 2005 overpayment, not in the form of a refund check but in the form of a crediting against the other liabilities. To receive refunds for those other years, she would need to file timely refund claims for those years and, if they were denied, file a refund suit not in the Tax Court (which except in limited circumstances does not have jurisdiction over refund claims) but instead in Federal district court or in the U.S. Court of Federal Claims.” Order, at p. 4.

But in the meantime Doris Ann got innocent spousery in 2016, so she’s entitled to a refund of $296 from her 2005 overpayment that pertained to spouse’s income.

But how does she get it? IRS proposes that Judge Gustafson order “…that after application of I.R.C. § 6015(b) for the taxable year 2005, there is no overpayment in income tax and no addition to tax due to petitioner, and there is an offset from the taxable year 2016 in the amount of $296.00 that will be released to petitioner” Order, at pp. 4-5. (Emphasis by the Court).

Judge Gustafson is perplexed.

“We do not understand why we should decide that there is no overpayment and that an ‘offset’ of $296 should be ‘released’, rather than simply deciding that there is an overpayment of $296.” Order, at p. 5. (Emphasis by the Court).

So let IRS do some ‘splainin’.

Doris Ann gets the same attention for $296 that a multinational would get if the $296 was followed by six zeros. For her innocent spousery story, see my blogpost “De Novo? Record Rule?” 5/15/20.

Well, maybe trial was unnecessary, but expedite litigation? Sixteen (count ’em, sixteen) years after the year the return was filed; eleven (count ’em, eleven) years after the SNOD and petition; ten (count ’em, ten) years after IRS moved for summary J; eight (count ’em, eight) years after petitioners responded and cross-moved; today (drumroll and cymbal crash) Judge Gale decides for IRS in James W. Loomis & Janice K. Usher, Docket No. 8739-09 (yes, that’s not a misprint), filed 9/25/20.

I’m a fan of summary J motions. It gets all the cards on the table, and is way cheaper than the usual discovery gameplaying. Like the old Yellow Pages, when summary J is the game, if it’s out there, it’s in here (your papers); if not, you may be barred from using it.

But it shouldn’t take eight years to decide.

Jim’s & Jan’s unhappy tale gives me another look at that improbably-named but larcenously-inclined Yuri Debevc Derivium. Y’all will remember YDD, of course? Well, if any amongst you are having a senior moment, see my blogpost “We Wuz Robbed,” 8/7/12.

It’s the usual. Jim is trying to Section 1042 rollover his way out of a $4.26 million gain on his eponymous corporate stock (basis zilch) by laying same off on an ESOP, and buying Qualified Replacement Property (QRP), which everyone agrees qualifies for deferral.

Except.

Jim immediately hands same to YDD’s shell-shill, which sells at once, and “lends” Jim & Jan 90% of proceeds for 29 years, non-recourse. The loan documents give the shell-shill absolute rights; there’s no need for events of default, notice, consent: YDD can do what it wants with the QRP.

Jim & Jan did pay interest on the “loan” for a couple years (hi, Judge Holmes). And no one claims Jim & Jan acted in bad faith. But chops aren’t on the table (this is all way before Boss Hossery blipped the radar).

And economic substance is the key, however Judge Gale describes it.

“At the outset, we note that regardless of what a borrower might subjectively wish to accomplish by engaging in a transaction like the one at issue here, a loan providing a borrower with 90% of the value of the pledged collateral in cash would produce two tax benefits compared to simply selling the collateral for 100% of its value. First, whereas any gain realized upon selling property generally must be immediately recognized for Federal income tax purposes, see sec. 1001(a), (c), loan proceeds are not treated as income and a borrower can therefore make use of the proceeds tax free throughout the loan term…. Second, a borrower with a low basis in the collateral (here, respondent determined that Mr. Loomis’s basis in the [QRP] was zero, and petitioners have not challenged that determination) would expect to retain only about 80% of the value of the collateral after selling it and paying tax on the capital gain; a 90% loan would therefore allow the borrower to make use of an additional 10% of the collateral value during the loan term. See sec. 1(h) (setting maximum capital gains tax rates); Calloway v. Commissioner, 135 T.C. 26, 30 (2010) (noting that the taxpayer in that case testified that he engaged in a 90% loan transaction with Derivium because it made more economic sense than selling the collateral and paying 20% in tax).” Order, at p. 6, footnote 7.

Non-recourse means Jim & Jan have no risk. If at maturity the QRP is worth more than the loan balance, pay off the loan balance and get back the QRP, or make Derivium buy it in the market, and he loses money. If worth less, let Derivium keep the QRP and walk with the proceeds.

True, Jim & Jan paid interest. But the QRP was floating rate notes from United Parcel Service, which hasn’t defaulted yet, and the interest from UPS was an offset to the interest Jim & Jan owed Derivium on the “loan.”

The QRP was never collateral; as per Derivium’s SOP, he dumped the QRP on Day One. And the short-sale loan of stock to a broker analogy fails, because the broker in the leading case was only able to lend the stock to its customers for short-selling when the owner approved. Moreover, Congress subsequently enacted Section 1058; no gain to lending stockholder, provided they keep benefits and burdens; they must get back the identical shares. If they go up or down, the lending stockholder gets the gain or takes the loss. Here, Derivium could do anything he wanted, no consent necessary, and Jim & Jan got a loss-free ride. If the QRP went up at maturity, they got the gain, but if it went down they could walk at no cost.

Jim & Jan argue that the SNOD names the year after the transfer took place, and that’s the wrong year. “The relevant provisions of section 1042 establish that, in order to defer recognition of gain from selling stock to an ESOP during a given taxable year (Year 1), a taxpayer must do two things: (1) acquire QRP within a 15 month period that begins 3 months before the date of the sale and ends 12 months thereafter, and (2) file an election no later than the due date of his or her tax return for Year 1. See sec. 1042(a), (c)(3), (6). The end of the period for acquiring QRP and the deadline for filing the section 1042 election therefore both will always fall during the next taxable year (Year 2). Thus, if a taxpayer waits until Year 2 to purchase QRP, properly files a section 1042 election during Year 2 along with his or her Year 1 tax return, and also–for whatever reason–sells the QRP during Year 2, section 1042(e)(1) ends the deferral and the taxpayer will have to recognize the deferred gain on his or her Year 2 tax return. In such a scenario — which is precisely the scenario at issue in this case–the taxpayer has still successfully deferred recognition of the gain realized in Year 1 (and thus payment of any tax due on that gain) for a full taxable year. This remains true no matter how close in time the taxpayer’s purchase and sale of the QRP might be. Petitioners have pointed to no authority that persuades us that we should decline to hold them to the election that they made and from which they benefitted.” Order, at p. 16.

Don’t get me wrong. I’m grateful to Judge Gale for his exposition of Section 1042 rollovers. I’m grateful once again to encounter Yuri Debevc Derivium; they don’t make ’em like that any more.

But why make me flip through 249 (count ’em, 249, and I did) orders to find this gem? Judge Kerrigan designated a simple 6320 CA shootdown where the petitioner wasn’t current with taxes.

I know you want to keep me busy during the lockdown, Judge, but please, give me a break and designate these, before your Genius Baristas take designated orders away altogether.

BOGO today. Ch J Maurice B (“Mighty Mo”) Foley has issued a checklist of jurisdictional bases for Tax Court proceedings in Denise J. Goltz, Docket No. 22847-19S, filed 9/25/20.

The reason for my rant will be apparent from the following.

“To the extent that this case stems from a notice of deficiency issued for tax year 2016, the record reflects and petitioner does not dispute that the notice of deficiency for petitioner’s 2016 tax year was issued after the petition in this case was filed. As to any other basis for an action herein for tax year 2016, the record is bereft of any evidence or suggestion that respondent has at any time issued any notice of determination for tax year 2016 that would confer jurisdiction on this Court. Therefore, the Court does not have jurisdiction over petitioner’s 2016 tax year under the petition filed in this case.” Order, at p. 3.

IRS has played this game for years. See my blogposts “Fake Out,” 12/16/14, and “Fake Out – Part Deux” 6/23/15. IRS drops a SNOD after the petitioner has either petitioned a non-SNOD or late-petitioned a SNOD. By the time the hapless petitioner finds out “the record is bereft of any evidence or suggestion that respondent has at any time issued any notice of determination for [year(s) at issue] that would confer jurisdiction on this Court” it’s too late to petition the real SNOD.

This is dirty pool. If a petitioner late-petitions a SNOD or petitions a non-SNOD, and if thereafter IRS issues a real SNOD, Tax Court should have jurisdiction without the need for another petition (and a sixty-buck fee, and maybe more legal fees), even if it takes an act of Congress to get it. Hey, Congress, get with the program.

Now for the checklist. In addition to SNOD (Section 6212) and CDP NOD (Sections 6230 and 6330), here’s Ch J Mighty Mo’s list.

“Other types of IRS notices which may form the basis for a petition to the Tax Court, likewise under statutory prescribed parameters, include a Notice of Final Determination Concerning Your Request for Relief From Joint and Several Liability, a Notice of Final Determination Not To Abate Interest, a Notice of Determination of Worker Classification, a Notice of Certification of Your Seriously Delinquent Federal Tax Debt to the State Department, and a Notice of Final Determination Concerning Whistleblower Action.” Order, at p. 2.

I’d add Declaratory Judgments Relating to Status and Classification of Organizations under Section 501(c)(3), etc. (Section 7428).

Looks like IRS is using the ubiquitous status report to short-circuit discovery in Libia Higuita Turner, Docket No. 15169-18S, filed 9/24/20.

Judge Pugh lets this pass without comment.

“…respondent filed a Status Report with attachments in the nature of evidence.” Order, at p. 1.

Judge Pugh simply orders “…respondent’s Status Report…is recharacterized as respondent’s ‘Proposed Trial Exhibits’.” Order, at p. 1.

OK, this is a small-claimer, so maybe dispensing with strict rules makes sense. But I’ve seen dozens of attempts by petitioners to attach evidence to petitions and motion papers get shot down, in cases regular and small, with the admonition to “save it for trial.”

And what price Branerton, the most revered of Tax Court sacred kine? No ““discussion, deliberation, and an interchange of ideas, thoughts, and opinions between the parties that our Rules contemplate”? See my blogpost “‘Ask, and Ye Shall Receive’,” 9/3/13.

If IRS can do it, why not petitioners? And maybe even intervenors?

Or Two

Or maybe three, but Judge Elizabeth A (“Tex”) Copeland feels that Beverly Robinson, 2020 T. C. Memo. 134, filed 9/23/20, deserves innocent spousery after her nogoodnik ex-husband welshed on the tax debt, carried on with another lady, and generally comported himself on the stand with less than candor.

Bev was a high school graduate and machine operator for a big lumber company. She knew nothing of taxes or finances. But she never claimed abuse or financial hardship on her Form 8857, or at trial.

Bev did sign and file the fictitious name form for ex’s business with FL Dep’t of State in her name, but he was on the day shift at their former employer, so only Bev could sign it. She also claimed being the boss so she could sign it. She also claimed being employed by ex’s business to “embellish” her resumé when looking for work. She was a signatory on ex-spouse’s business account but signed no checks.

And “(P)etitioner also failed to make a good faith effort to comply with the Federal income tax laws. In her Form 8857 signed days after her 2014 return was due, petitioner indicated that she knew she had an obligation to file a tax return; nevertheless she believed that it would be unfair if an overpayment from her 2014 tax year was applied against the 2010 tax liability. From this it is clear that petitioner intentionally failed to timely file her 2014 return and therefore did not make a good faith effort to comply.” 2020 T. C. Memo. 134, at p. 35.

I’ve seen innocent spouse applications bounced on that ground alone.

But Judge “Tex” Copeland cuts Bev some slack.

“On the basis of the foregoing facts and circumstances, we hold that the equities weigh in petitioner’s favor. The factors that weigh in favor of relief are marital status, knowledge, and lack of significant benefit. The factor that weighs against relief is compliance with Federal income tax laws. The remaining factors are neutral. Our decision whether relief is appropriate is not based on a simple tally of those factors. Instead the weight given to each factor is based on the requesting spouse’s facts and circumstances. As a result, when we weigh petitioner’s facts and circumstances, we hold she is entitled to relief from joint and several liability under section 6015(f) for tax year 2010.” 2020 T. C. Memo. 134, at p. 37. (Citations omitted).

And a Taishoff “Good Job, First Class,” to Bev’s trusty attorney James R. (“Good Feelings”) Monroe, Esq., whose great namesake should be a model for these times.

I’ve been around long enough to know that Sherlock Holmes got it right: “When you have eliminated the impossible, whatever remains, however improbable, must be the truth.”

In witness whereof, we have IRS offering to extend to petitioners the same amount of time they are seeking in Lorance & Thompson, A Professional Corporation, Docket No. 13844-19, filed 9/23/20.

I’ll defer to Judge Emin (“Eminent”) Toro: “…respondent filed an unopposed Motion To Extend Time Within Which To File Response To Motion for Partial Summary Judgment (“Motion for Extension of Time”) (Doc. 13). The motion requests the Court extend the time which respondent shall file a response to petitioner’s Motion for Partial Summary Judgment, as well as the time for petitioner’s reply.” Order, at p. 1. (Emphasis added).

All y’all will recollect that I thrice called out IRS’ counsel for seeking extensions of time, or filing supplementary papers, up to, or nearly up to, the date certain when petitioners’ papers were due, and offering petitioners no additional time to respond. You don’t? Then see my blogposts “Play Nice or Go Home,” 3/20/20, “Time Sensitivity”, 4/13/20 and “Make It Easy – Maybe Not,” 8/24/20.

Judge Toro of course gives both sides additional time.

Improbable? Yes. Impossible? No. Maybe this my blog serves some useful purpose, even in such exalted precincts as 1111 Constitution Avenue, NW.

When ex-Ch J Michael B (“Iron Mike”) Thornton cut the bases on which a blower might put additional evidence into the administrative record in a Section 7623 whistleblower case from six grounds to three (count ’em, three), he certainly raised the bar.

For more details, see my blogpost “Administering Supplements,” 8/27/20.

And long-time blower Joseph A. (“Fighting Joe”) Insinga, Docket No. 9011-13W, filed 9/23/20, is the first to try to clear it.

Judge David Gustafson lists the grounds: “(1) if the agency deliberately or negligently excluded documents that may have been adverse to its decision; (2) if background information was needed to determine whether the agency considered all the relevant factors; or (3) if the agency failed to explain administrative action so as to frustrate judicial review.” Order, at p. 3.

IRS plays the John Keats gambit; the 4372 Bates-stamped pages before the Court are “all ye know on earth and all ye need to know.”

Judge Gustafson lets Fighting Joe put in whatever he’s got that isn’t in the 4372 pages. However, Fighting Joe has to show they’re not duplicative. “If any of the documents without such Bates numbers that Mr. Insinga has cited and submitted are in fact in that numbered series (but the numbers were not visible in Mr. Insinga’s submission), then he shall provide copies that do bear the numbers.” Order, at p. 4.

And Fighting Joe has to show that each of his documents falls within the ambit of one of the foregoing three grounds.

I’m sure my readers remember Judge Albert G (“Schiolar Al”) Lauber’s blow-off of the Jersey Boys, when they invoked that cat-and-mouse certify-decertify Section 7345 gambit.

What, no? The see my blogpost “Ruesch to Judgment,” 6/25/20. True, the Jersey Boys, as usual, were swinging for the fences and were out on a foul pop-up behind the plate.

But I stand by what I wrote in June. There’s no limit to the number of passport-grabbing certifications IRS can send State.

And Section 7345 makes no exception for a seriously-delinquent debt where the SOL has run on collection; even when the collection remedy is gone, nothing stops IRS from a passport-grab. Of course, there’s no SOL on when the grabee can petition the grab, either; presumably, as long as the certification is in force, the grabee can petition. And there’s no one-petition-per-grab rule either.

So here’s Ivan Rivas, Docket No. 15489-18P, filed 9/22/20. Ivan petitions two (count  ’em, two) Section 7345s, covering six (count ’em, six) tax years. Judge Colvin takes up the story.

Note the chronology. “On August 3, 2018, petitioner filed a petition with this Court seeking relief from certifications dated July 18 and November 26, 2018, which stated that under section 7345(a)1petitioner was an individual owing seriously delinquent tax debt for taxable years 1999, 2000, 2001, 2002, 2003, and 2009, collectively.” Order, at p. 1.

So somehow Ivan knew in August that, beside the grab in July, there was another coming in November. If Ivan could tell the future, he should’a gone to the online betting sites; he could’a played the dime Superfecta in every track in the country and won enough to pay off every debt he ever had before the bookies got wise.

Ivan petitions both, but IRS plays the Matty Dean Vigon gambit, more particularly bounded and described in my blogpost “Crafty – Akin to the Weasel,” 7/24/17.

“On February 11, 2019, respondent ‘mistakenly caused the reversal of the certification[s]’. The following week, on February 18, 2019, respondent issued a new notice of certification to petitioner informing petitioner that he was ‘an individual owing seriously delinquent tax debt for taxable years 1999, 2000, 2001, 2002, and 2003’ under section 7345(a). Respondent notified the Secretary of State of the new certification.” Order, at p. 1.

So Ivan is tossed for mootness as to the two certifications he petitioned. Apparently, his fortune-telling streak ended.

“The relief we are authorized to grant per section 7345(e)(2) is an order directing respondent to ‘notify the Secretary of State that such certification was erroneous.’ Because both certifications were reversed and the Secretary of State was notified of such reversals, petitioner has received all of the relief that we could grant. Ruesch v. Commissioner, 154 T.C. __, at __ (slip op. at 17). Thus, petitioners’ claims are moot.” Order, at p. 2.

So Ivan can petition the February 28, 2019 grab. And while that petition is pending, IRS can “mistakenly” withdraw that certification, and hit Ivan with a fresh one. Or Ivan can sue in USDC, where maybe a Judge has, or can find, jurisdiction to end this game.

No, not my latest Italian-while-you-wait excursion; rather, it’s summing up Judge Courtney D (“CD”) Jones’ pinning of Section 6751b) Boss Hossery on Sunil S. Patel and Laurie McAnally Patel, et al., 2020 T. C. Memo. 133, filed 9/22/20.

IRS does miss one year of the four (count ’em, four) years at issue, but get the remaining three right. Sunil and Laurie were running one of the micro-captive insurance dodges, funneling cash into a no-lose insurance company. I’ve blogged these so often before I won’t lard this narrative with “copious citation of precedent.”

Having blown off Year One for want of timely Boss Hossery (Letter 5153 and RAR before CPAF, Section 6751(b)’s equivalent of leg before wicket), Sunil and Laurie want to argue the Boss Hoss just rubberstamped the CPAFs and, in the case of Year Two, the amended answer (IRS’ counsel having gotten the Area Counsel into the act).

No go.

“When asked to conduct inquiries into whether the Commissioner’s employees gave sufficient consideration to the penalties they proposed and approved, we have determined that such lines of questioning are ‘immaterial and wholly irrelevant to ascertaining whether respondent complied with the written supervisory approval requirement of section 6751(b)(1)’. Raifman v. Commissioner, T. C. Memo. 2018-101, at *61. In sum, the ‘written supervisory approval requirement of section 6751(b)(1) requires just that: written supervisory approval.’ Id.” 2020 T. C. Memo. 133, at pp.14-15.

For the story of Greg and Sue Raifman, see my blogpost “Too True to be Good,” 7/3/18. For the chronology of the Boss Hossery in the four years in Sunil’s and Laurie’s case, read Judge CD’s opinion.

Takeaway- For Section 6751(b) Boss Hossery, timing is everything. How closely the Boss Hoss looked is nothing to the point. Taishoff says “The return of the robosigner?” They sign, you lose.