I’ve just completed a two-hour CLE on Federal litigation, so Judge Ashford’s opinion in Edward S. Flume and Martha S. Flume, 2020 T. C. Memo. 80, filed 6/9/20, seems like a continuation.

Briefly, Ed and Martha lost back in 2017 (2017 T. C. Memo. 21, filed 1/30/17, which I did not blog, as I was doing my bucket-list cruise through the Panama Canal). They were held to be 50% owners of their Belize international business company, despite having backdated the articles of association to claim otherwise, so as to avoid Subpart F CFC taxation. That case involved the Section 6038 chop for non-filing foreign assets.

Of course, now we have self-serving testimony that gets discarded.

“Issue preclusion focuses on whether (1) the issue in the second suit is identical in all respects with the one actually litigated, decided, and essential to the judgment in the first suit, (2) a court of competent jurisdiction rendered a final judgment in the first suit, (3) the controlling facts and applicable legal principles in the second suit have changed significantly since the judgment in the first suit, and (4) there are special circumstances, such as fairness concerns, that warrant an exception to preclusion in the second suit.” 2020 T. C. Memo. 80, at p. 24. (Citations omitted).

Ed and Martha are stuck.

“The controlling facts and applicable legal principles here have remained unchanged since the Court’s decision in Flume I; indeed, the trial transcript from Flume I is a stipulated exhibit in this case. There are also no special circumstances (such as fairness concerns) that would warrant an exception to preclusion in this case. Accordingly, we hold that the conditions for issue preclusion are satisfied; [the Belize company] was a CFC during the years at issue.” 2020 T. C. Memo. 80, at p. 26.

IRS unraveled Ed‘s and Martha’s unreported income, using the specific item method.

“The specific item method is a Court-approved ‘method of income reconstruction that consists of evidence of specific amounts of income received by a taxpayer and not reported on the taxpayer’s return.’” 2020 T. C. Memo. 80, at p. 19. (Citations omitted).

But IRS included in the specific items stuff that Ed and Martha had reported as income, so they get credit for that.

And for one of the three years at issue, the Belize company had no earnings and profits, so Ed and Martha got no Subpart F dividend income.

IRS has to wild-card in the Boss Hossery, as the trial was pre-Graev. Oh, the silt we stir!

Judge Mark V Holmes’ title is vindicated again.

Read Judge Pugh’s careful analysis of battling valuers in Theron E. Johnson, 2020 T. C. Memo. 79, filed 6/8/20, and see if you don’t agree with the following tête de cuvée Holmes dissent in Oakbrook.

“Conservation-easement cases might have been more reasonably resolved case-by-case in contests of valuation. The syndicated conservation-easement deals with wildly inflated deductions on land bought at much lower prices would seem perfectly fine fodder for feeding into a valuation grinder. Valuation law is reasonably well known, and valuation cases are exceptionally capable of settlement.

“Congress, however, enacted these sections of the Code and presumably wanted reasonably valued conservation easements to be allowed.” 154 T. C. 10, at pp.126-127

Theron, an ink-pan magnate, bought the ranch and did a cut-out conservation easement. There was a couple endangered leopard frogs around (hi, Judge Holmes), his farming was just haymaking, and he left room for a large hacienda on his Delta County CO spread.

Everyone agrees on highest-and-best use, farming and residence. Judge Pugh likes the quantitative approach of Theron’s expert. He took comparables, first adjusted by time between those sale and when Theron put on his easement. Then took location (nearness to towns) and size (over or under). Then he factored in irrigation, topography and improvements. That gave him before-easement. After is tougher; too few comparables.

IRS’ valuer took the qualitative approach. “He compared several characteristics for each comparable, including market conditions at the time of sale, location/access, size, aesthetic appeal, zoning, and available utilities, to evaluate the relative superiority, inferiority, or similarity of each comparable to the ranch. He then evaluated the overall comparability of each property to the ranch.” 2020 T. C. Memo.79, at p. 27.

Judge Pugh doesn’t like that so well. IRS’ valuer ignored quantitative factors, and just juggled Theron’s expert’s numbers.

She does tweak Theron’s expert’s numbers at p. 32, to account for some valid hits IRS’ experts scored.

To get the after-the-easement number requires some fancy sand-dancing.

“Both experts’ postencumbrance direct comparable sales analyses suffer from a lack of suitable comparables. Specifically, all of Mr. [IRS’] comparables and all but one of [Theron’s expert’s] encumbered comparables were in different markets throughout Colorado far from the ranch. All of the comparables for each expert, including [Theronls expert]’s local comparable in Delta County, required significant adjustments. Where the comparables are relatively few in number, we look for a greater similarity between comparables and the subject property. We do not find any of these to be suitable comparables for the ranch. We therefore reject both experts’ postencumbrance direct comparable sales analyses.” 2020 T. C. Memo. 79, at p. 38 (Footnotes and citations omitted).

But Judge Pugh is resourceful.

“The experts’ diminution in value analyses were similar in that each expert used four comparables that included a significant outlier.” 2020 T. C. Memo. 79, at p. 39. So toss the outlier from each, and they’re only 2% apart.

Like her much more exalted juridical predecessor when called to decide a maternity case, she cuts the baby in half.

Judge Pugh splits the 2% difference and applies the result to the before-the-easement number she tweaked, and lo and behold, she has the worth of the easement.

Valuation law is reasonably well-known, and it works.

Judge Kerrigan has a rare one for us today, a taxpayer telling Appeals that the loan he told Exam he took wasn’t a loan, despite a promissory note, stated interest, an Excel spreadsheet showing loan amounts, and a loan roll-forward schedule loan.

The RA generated Form 886-A man-‘splainer as follows. Taxpayer (name to follow) borrows from his controlled C Corp to invest in various healthcare outfits via an LLC that his family trust owned; he also takes draws from the C Corp, which were converted to loans at year’s end; and provides a spreadsheet showing loan balances at end of year at issue.

But he’d also given the C Corp a 20% membership interest in the LLC. Hence Van Wyk, 113 T. C. 29, filed 12/21/99, which says that if one borrows from an entity wherein one has a prohibited interest, one is not at-risk as to the loan amounts. His controlled C Corp, from which he borrowed, has a 20% piece of the action. Das ist verboten per Section 465(b)(3)(A)(ii) and (B), hence no deduction for losses from LLC. So $8 million deficiency plus chops go to Frederick Howe and Bonita A. Macvaugh-Howe, 2020 T. C. Memo. 78, filed 6/8/20.

Are they downhearted? No!

Fred gets new counsel, Boni-Mac keeps her old counsel, and they go to Appeals. Boni-Mac claims (and gets) Section 6015(f) innocent spousery.

Fred’s new counsel claims the loans weren’t from another shareholder in the C Corp. They were straight to Fred from the C Corp. Somehow the note never gets into the Appeals’ discussion. So Appeals and Fred and Boni-Mac sign off on a Form 870-AD, cutting the deficiency to $1.5 million and dropping the chops.

The Form 870-AD repeats Fred’s new counsel’s claim that the loans never were loans, whatever the C Corp’s books and spreadsheets say. Given litigation risks, Appeals caved on the at-risk argument.

“Form 870-AD stated that the case would not be reopened by the Commissioner unless there were specific occurrences including ‘fraud, malfeasance, concealment, or misrepresentation of a material fact’.” 2020 T. C. Memo. 78, at p. 8.

Happy ending, no? No!

When the Appeals folderoo hits the Exam team, there’s a huddle with Appeals, the team “records his Minute of Dissent,” as The Man From Mumbai put it, Exam reopens audit, claiming Fred’s counsel misstated a material fact and the Appeals Director signs off.

New SNOD. Petition.

Fred claims equitable estoppel. Contract argument is a loser. “Sections 7121 and 7122 and their accompanying regulations establish procedures for closing agreements and compromises of tax liabilities, respectively. These procedures are exclusive and must be satisfied for there to be a compromise or settlement that is binding on both the taxpayer and the Government. Form 870-AD is not a binding settlement agreement under section 7121.” 2020 T. C. Memo, 78, at p. 13 (Citations omitted).

The usual equitable estoppel requirements are that party to be estopped must know the facts, the other side must not, the party to be estopped must intend the other side to act as if they believed what the party said or did, and the other side must be injured thereby.

But wait, there’s more, as the telehucksters say.

“In addition to the traditional elements, the party seeking equitable estoppel against the Government must show that: ‘(1) the government engaged in affirmative misconduct going beyond mere negligence; (2) the government’s wrongful acts will cause a serious injustice; and (3) the public’s interest will not suffer undue damage by imposition of estoppel.’ These three requirements need to be met before any determination of whether the traditional elements of equitable estoppel are present.” 2020 T. C. Memo.78, at p. 15. That means the government must deliberately lie or make a series of false promises.

That the note wasn’t raised by IRS at Appeals is nothing to the point; IRS didn’t lie. And counsel should know that a Form 870-AD isn’t a contract.

Besides, Fred knew there was a note. And that Fred paid $17K of interest on the lower deficiency isn’t detrimental reliance. Paying interest on a debt you owe, partially or fully, isn’t detrimental reliance.

No estoppel.

“The Last Extension”

Judge Albert G (“Scholar Al”) Lauber is always good for blogfodder, for which I’m grateful during this lockdown. Although Our Fair City is up today for the Phase I Law of Return, I am still homeworking and teletubbying until I get the “All Clear.”

Judge Scholar Al’s order in Yong S. Park & Yu J. Park, Docket No. 18282-18, filed 6/8/20, reminds me of the days of my youth, when I was sent to cover calendar calls.

The State court trial calendars were lengthy, and calendar calls brought out brigades of attorneys, horse-trading, posturing, seeking out one another “across a crowded room,” as the song has it. The battle-weary jurist assigned as catherd-of-the-day would enter (all standing), and the clerk, a hardcase child of the Depression, would call the calendar, carefully mispronouncing parties’ names.

The judge would clear the calendar like an experienced goalie.

The prolific pleas for adjournments (that’s “continuances,” to you high-priced Federalists) were kaleidoscopic in their inventiveness. Many were adjourned, but not a few were “marked final,” that is, no more adjournments. Except there usually were.

Judge Scholar Al gives Yong’s & Yu’s CPA, whom I’ll call Mr. K, one last chance, after Mr. K thrice failed to hand over documents substantiating Yong’s Sched C. Yong claims Mr. K tried on 4/29, but IRS counsel’s office was shut. That was after a couple orders (hi, Judge Holmes) starting last December, to unload.

“In light of these extraordinary circumstances, we permitted petitioners one more extension of time, to June 1, 2020, within which to produce documents, cautioning them that no further extensions would be given.

“On June 1, 2020, petitioners filed petitioner Young [sic] S. Park’s Motion for Extension of Time, seeking two more weeks to produce documents to respondent’s counsel. In their motion petitioners cite the health of their CPA as the reason for the delay in producing documents and request that the due date be extended to June 14, 2020. On June 2, 2020, respondent filed a status report in which he objected to petitioners’ motion for extension of time.

“Given the history of this proceeding, respondent’s objection to granting petitioners additional time is not unreasonable. However, in light of current circumstances, we will give petitioners the additional time they have requested, subject to the proviso that this really will be the last extension.” Order, at p. 2.

So let Yong & Yu call up IRS’ counsel, doublecheck the mailing address, and send the documents forthwith. If IRS’ counsel doesn’t get them by 6/14, they can’t be used at any trial.

Really.

No, not the 82nd Airborne Division’s unit so purposed. I have written elsewhere of my introduction to that outfit many years ago and far away.

Today Judge Vasquez gives the chronology of the rapid responses by a law firm, in William M. Dearman, III, Docket No. 5439-18, filed 6/5/20.

I know nothing of the facts of Bill3’s case, whether simple or complex, big-ticket syndicated easement or simple indocumentado, or why an attorney not a member of the team is listed in the docket search as attorney of record. So I’ll stick to Judge Vasquez’s narration.

“On February 11, 2020, respondent filed a first request for admissions. On March 20, 2020, respondent filed motions to compel production of documents and responses to interrogatories. That same day counsel for petitioner filed an entry of appearance.” Order, at p. 1.

The docket search on the Tax Court’s website states both notice of trial and standing pre-trial order had issued the previous December. I can’t tell if there was a Branerton play-nice before the discovery barrage above set forth then or thereafter.

Howbeit, when the Entry of Appearance was filed, the team also filed objections to both motions to compel. Of course, within a couple days (hi, Judge Holmes) the trial date was canceled due to COVID-19. But no virus stopped the team.

Trial or no trial, less than three weeks after coming on board, the team produced the response to the request for admissions, and within another two weeks a response to the request for responses to interrogatories. It did take the team another three weeks to respond to the documents request.

Two weeks later came the first status report. “Therein they state that petitioner has responded to respondent’s initial discovery requests and that the parties anticipate further discussions over the next 60 days.” Order, at p. 1.

Judge Vasquez, unlike Judge David Gustafson who is wont to praise and encourage parties who move promptly, is laconic but helpful today.

“…on or before August 4, 2020, the parties shall file a joint status report setting forth the then present status of this case. The report should address whether respondent’s motions to compel are moot. The report should also address whether petitioner’s deemed admissions should be withdrawn or modified to reflect the filing of petitioner’s response to respondent’s first request for admissions on April 8, 2020. See Rule 90(c), (f), Tax Court Rules of Practice and Procedure.” Order, at p. 1.

A Taishoff “Good Job” goes to Simpson Gray Edmondson, Esq., Joshua W. Sage, Esq., and Charles J. Allen, Esq., Bill3’s hard-laboring counsel.

Judge Mary Ann (“S.E.C.” = She Eschews Cognomens) Cohen also eschews trying to turn a dubious (to be generous) expert’s report into a proper valuation. Especially of water storage rights. I blogged the prelude to this back in February, in my blogpost “The Counter to the Valuation Blocker,” 2/7/20.

Brannan Sand & Gravel Co., LLC, J. Curtis Marvel, Tax Matters Partner, 2020 T. C. Memo. 76, filed 6/5/20, is fighting over a $200K charitable deduction for some pits they were giving to a local water district in a convoluted three-way swapmeet, which would have gotten them inside Section 170. They claim they were giving 5000 acre-feet of storage.

The 8283 that accompanied Brannan’s 1065 was remarkably scanty.

“Form 8283, Noncash Charitable Contributions, was attached without ‘Page 1’ but included two ‘Page 2’ pages. The second ‘Page 2’ includes a handwritten note to ‘see attached appraisal’ under part III, declaration of appraiser, and an undated donee signature under part IV, donee acknowledgment. The two copies of ‘Page 2’ are otherwise identical. Brannan Sand claimed a $200,000 charitable contribution deduction. The Form 8283 reported that the ‘[d]onor’s cost or adjusted basis’ was ‘None’, that $200,000 was the appraised fair market value, and that the donor purchased the property. The reported ‘[d]escription of donated property’ was “Silver Peaks Property”. The Form 8283 reported ‘VAR’ for the date acquired and left blank whether the charitable contribution was made by means of a bargain sale.

“In part III, declaration of appraiser, the signature, title, date, identifying number, city, State, and ZIP Code spaces were left blank, but ‘See attached appraisal’ was inserted under the business address section. In part IV, donee acknowledgment, the employer identification number, authorized signature, and date spaces were left blank. However, there is a signature in the ‘[t]itle’ space.” 2020 T. C. Memo. 76, at p. 8.

Attached to this form is a two-page letter from one who admits that he has no appraisal qualifications, but has acted as a litigator in some similar transactions, which he does not enumerate. “Missing from the … letter was the method of valuation or the specific basis for determining the fair market value of the property, the physical condition of the property, or a statement that the purported appraisal was prepared for Federal income tax purposes. There was no explanation comparing the transactions that he observed with the property in the Brannan Sands transactions. [He] gave no indication that he was familiar with the terms of the purchase agreement, the contribution agreement, or the MOU entered into by the donor, the donee, and [third-party] B relating to the conveyance of the property contributed. There was no comparison to the alleged comparables or explanation of whether they involved a willing buyer and a willing seller or were simply a way to resolve litigated disputes. There was no justification for choosing the high end of the range that [he] identified.” 2020 T. C. Memo, 76, at p. 10. (Names omitted).

Judge S.E.C. is pardonably not amused.

“Brannan Sands does not dispute that it has the burden of proof but ignores the absence of expert testimony in the record. Instead, it argues that the ‘comparable sale’ of an additional undivided interest in the water storage easement that entitled B to store an additional 250 acre-feet of water in the North Cell when completed for $480,000, or $1,920 per acre-foot, justifies, at a minimum, a value of $96,000. Of course there is no explanation of the discrepancy between this amount and the amount claimed on the… partnership return. That discrepancy highlights the lack of credibility of the claimed deduction.” 2020 T. C. Memo. 76, at p. 12.

Maybe if the author of the letter “…had explained how his experience in litigation related to agreed values between a willing buyer and a willing seller and compared the three-party circumstances under which the transfer to the District occurred in this case, but he did not. He described asking prices but did not describe completed transactions. The purported appraisal is not qualified regardless of [his] qualifications.” 2020 T. C. Memo.76, at p. 16. (Name omitted).

But there’s just too much missing here even to characterize the letter as substantial compliance.

No evidence of value, no deduction.

Judge Travis A. Greaves is dealing with another Graev matter in Choong H. Koh, 2020 T. C. Memo. 77, filed 6/4/20. Opposing IRS in this fight over $16K in chops is the grandpappy of all the Graevdiggers, Frank Agostino, Esq., the man who made Graev a household word.

In the SNOD, IRS stung Choong with $43K in deficiencies for two years, with chops per Section 6662(j), the offshore 40%. Judge Greaves doesn’t tell us if there was Boss Hossery in respect thereof pre-SNOD, unlike Whimsical Judge Wherry in the Roth case, cited by Judge Greaves. Judge Wherry catalogued every Boss Hoss who laid hoof to recommendation. See my blogpost “Tag ‘Em All – Part Deux,” 12/28/17.

Here, the answer switched the chops to Section 6662(b)(1) or (2), negligence, disregard or understatement, basically 20-percenters. The chops per-SNOD still look like 40% to my imperfect math, and the deficiency numbers don’t seem to justify the 40% substantial undervaluation or overstatement add-on, but maybe the trial or the  Rule 155 beancount will clear that up.

Anyway, since Judge Wherry in Roth said mox nix what happened before IRS counsel and Associate Area Counsel signed off on the answer, and 10 Cir affirmed, Judge Greaves says who cares?

Mr A wants partial judgment on the pleadings that counsel hadn’t authority to shift the basis for the penalties, and Judge Greaves is willing as far as the question whether IRS’ counsel could make the switch.

“In his reply to respondent’s answer, petitioner challenges not only respondent’s counsel’s authority to assert penalties, but also whether respondent’s counsel followed the proper procedure under sec. 6751(b)(1). This second issue may involve factual considerations, and therefore we do not decide it today. We note that the Court has found that an IRS Chief Counsel attorney satisfies the supervisory approval requirement under sec. 6751(b) where the attorney’s immediate supervisor personally approved in writing the assertion of a penalty that was first raised in the answer, as evidenced by the signature of respondent’s associate area counsel on the pleading. See Roth v. Commissioner, T.C. Memo. 2017-248, at *11, aff’d, 922 F.3d 1126 (10th Cir. 2019).” 2020 T. C. Memo. 77, at p. 4, footnote 3.

I point out that Roth, both below and above, was pre-Clay. 10 Cir’s affirmation is dated 4/29/19. Clay was filed 4/24/19. No way 10 Cir could have considered Clay, which is not cited in their decision. Choong is Third Circuit (NJ) anyway.

Unless it can be shown that the Boss Hossery happened before 30-day letter (or equivalent) was issued, even for an erroneously-designated chop, I question whether IRS counsel, associated or not, can wild-card in a different chop at the answer.

All yours, Mr A.

That’s the lesson Judge Goeke teaches Joyner Family Limited Partnership, Gary Joyner Revocable Trust, A Partner Other Than The Tax Matters Partner, et al, Docket No. 24704-15, filed 6/4/20.

You’ll doubtless remember that the Joyners, who I hope bought their documents from the office supplies company where one of my nearest and nearest is employed, won their case. If you don’t, see my blogpost “We Don’t Need No Installment Method,” 12/11/19. Now their able counsel want legal and admins.

No dice, says Judge Goeke. During exam, the Joyners’ accountant and their “power of attorney” (I think you mean “representative,” Judge, a Power of Attorney is a piece of paper or maybe a bunch of conjoined electrons) didn’t get back to the RA timely. So she bounced them.

And when the RA sent the 30-day letter, which didn’t mention any appeal rights, she did enclose Publication 3498, which does, extensively. That’s enough for Judge Goeke.

“We find the lack of a 60-day letter does not excuse petitioners’ failure to request an Appeals conference. First, respondent is not required by statute to issue a 60-dayletter. Second, petitioners were informed of their Appeal rights in the 30- day letter. It is immaterial that the 30-day letter did not explicitly state JFLP had a right to Appeals because the enclosures provided that information.” Order, at p. 3.

Of course, Publication 3498 says “If you do not want to appeal your case within the IRS, you may take your case directly to tax court.” Publication 3498, at p. 6. What Publication 3498 doesn’t say is that, if you don’t appeal, you haven’t exhausted your administrative remedies and are precluded from getting Section 7430 legals and admins.

So Appeal. Whatever IRS sends you, appeal.

Judge Goeke rehashes the qualified offer issue in the FPAA context. Fortunately the PATH Act renders this obsolete, as there will be no FPAAs post-effectiveness. How the qualified offer will play out under the new régime is unclear. I see the same objection in the new partnership setting as Judge Goeke finds in the old; subchapter K is still there. Barring FICA/FUTA/ITW, partnerships aren’t taxpayers, partners are.

“…the offer tries to settle the effect of the TEFRA proceeding on the liability of the individual partners. The offer is unclear as to how it would resolve the tax liabilities of the individual partners. It listed the docket number and stated the offer is to resolve all outstanding issues’ and later states it ‘relates to tax years 2010-2012’ and is ‘to settle all issues and claims with finality by payment of a sum equal to $100,000’. We can assume that the partners sought to resolve their collective tax liabilities for $100,000. However, the offer is not clearly worded as to the adjustments it seeks to resolve with respect to each partner.” Order, at p. 10.

And there’s another thing; IRS’ newly-beloved amendment gambit. The qualified offer “… does not address how the offer would treat the losses that the FPAA computed for 2011 and 2012; the offer date is before the amendment to the answer that disallowed the losses.” Order, at p. 10.

So if IRS amends, must you make a new offer? Assuming, of course, that IRS doesn’t get leave to amend after the first date for trial is set, because the qualified offer period closes 30 days before the case is “first set for trial,” Section 7430(g)(2)(b). PATH changed none of this. And cases rarely get tried on the date first set for trial.

The Joyners lose, through no fault of their able counsel, although Judge Goeke finds the Joyners didn’t establish how able they were. “However, they have not identified any unique skills required, and we find the accounting method issues did not require distinctive knowledge or a unique and specialized skills that would constitute a special factor. We find that the issues were not of such difficulty to warrant any increase in the rates sought.” Order, at p. 11. But as he wasn’t awarding legals anyway, able counsel have only their labors for their pains.

How many times have I said it: “stipulate, don’t capitulate”? Too many. Here’s one follow-up, Vishal Mishra & Ritu Mishra, Docket No. 16492-18, filed 6/3/20. I’m sure all y’all will remember Vishal & Ritu; no?

Dig my blogpost “Backing Out,” 4/28/20.

Judge Albert G (“Scholar Al”) Lauber told Vishal & Ritu to dish why they should be let out of their stip to the Section 6662(a) chops.

“The stipulation reflected major concessions by both parties: Respondent conceded more than half of the deficiencies, and petitioners agreed that they were liable for the balance of the deficiencies and ’for accuracy- related penalties pursuant to I.R.C. §6662(a) for the 2014 and 2015 taxable years.’” Order, at pp. 1-2.

Judge Scholar Al asked Vishal & Ritu for their story back in April.

“petitioners filed a response to respondent’s motion stating that they did ‘not wish to concede that they are liable for an accuracy-related penalty.’

“Contrary to the plain language of the stipulation that they signed, they assert that ‘there was no mention of a 20% penalty being added to the agreed upon numbers.”” Order, at p. 2.

Judge Scholar Al holds them to the deal.

“Paragraph 5 of the stipulation of settled issues plainly states that ‘the parties stipulate and agree that petitioners are liable for accuracy-related penalties pursuant to I.R.C. § 6662(a) for the 2014 and 2015 taxable years.’ That concession is utterly unambiguous.” Order, at p. 3.

Judge, I most respectfully submit it is ambiguous.

Not to you, or to me, or to Vishal’s & Mitu’s able counsel.

Maybe so we’ve all of us been doing this too long, or maybe too often we’ve represented sophisticated clients who know as much as we do, if not more.

But I’ll wager a few quid that Vishal & Mitu don’t deal with IRC Sections every day. We know what the Section 6662 accuracy, negligence, and five-and-ten substantial understatement of tax 20-percenters are.

They don’t. A Code Section in the middle of a lengthy stip is gibberish to the unsophisticated. So maybe IRS, and certainly we practitioners, should put the precise dollar amount of the chops in our stips.

Lest anyone jumps on me for claiming unilateral mistake of law or fact voids a contract, take it slow. I know that they don’t. I know a stip is a contract.

Likewise before claiming I’m playing Monday-morning quarterback with Vishal’s & Mitu’s able counsel, I’ll confess that, under time pressure, I’ve also overestimated clients’ comprehension as I’ve read a document to them, and didn’t check for the deer-in-the headlights look.

Yes, I know interest is another story, and we can’t know precisely how much that will be.

But guys, I’m only giving a practice hint here.

Thomas M. McCarthy, 2020 T. C. Memo. 74, filed 6/3/20, receives a lecture from ex-Ch J Michael B (“Iron Mike”) Thornton in the above-entitled course. Only the tuition isn’t cheap; Tom gets a $7K deficiency confirmed.

Tom is a CPA with an MBA. His chum JQ is also a CPA, plus an attorney and tax preparer. Tom claims he bought a stake in JQ’s CA MacMansion, which he paid for with a note and deed of trust (unrecorded). Instead of paying cash, he claims JQ owed him money, so he forgave the debt. He also claims he lived there some time during year at issue. Except both his return for year at issue and his petition show a MN address, which he says is a rental where he lived with his parents.

It gets better. Tom owned a NYC co-op apartment, which he rented to an unrelated for the entire year at issue, yet took his mortgage interest deduction on Sched A, not Sched E. My ultra-sophisticated readers will no doubt exclaim “rental real estate equals passive deduction against passive income, not ordinary deduction against ordinary income!”

Tom tries the Section 163(h)(4)(A)(i) two residence gambit. “On his [year at issue] Federal income tax return petitioner did not ‘select’ either the New York City property or the [CA] property as his second residence, nor did he indicate on his return which of these properties he regarded as his principal residence. Neither the Code nor the regulations fix the time or manner by which a taxpayer makes a selection of the ‘1 other residence’ under section 163(h)(4)(A)(i)(II). Accordingly, making the selection in litigation is acceptable.” 2020 T. C. Memo. 74, at p. 7. (Citations omitted).

So Tom is cool when he claims NYC coop as principal residence on trial, right?

Wrong. Tom filed MFS. “Pursuant to section 163(h)(4)(A)(ii)(II), if a married couple does not file a joint return for the taxable year, each of them ‘shall be entitled to take into account 1 residence unless both individuals consent in writing to 1 individual taking into account the principal residence and 1 other residence.’ The record does not reflect that petitioner and his wife both consented in writing to petitioner’s taking mortgage interest deductions with respect to more than one residence. Consequently, petitioner is precluded from claiming mortgage interest deductions with respect to both the New York City property and the [CA] property. The Code does not make clear, however, in these circumstances which of these properties, if either, should be considered the ‘1 residence’ that petitioner may take into account pursuant to section 163(h)(4)(A)(iii). “ 2020 T. C. Memo. 74, at p.8. As Ben Franklin put it, “He that would thrive, must ask his wife.”

Anyway, Tom is out because he can’t prove he ever lived in the NYC coop during year at issue. While Tom claims there is a saver per Section 121 (using a carryover from old Section 1034, which it replaced), he can’t show that he moved and rented because he couldn’t sell.

“The lack of a ready market for selling a property may be taken into account in determining whether the property remained the taxpayer’s principal residence after he moved out; if the taxpayer’s efforts to sell the property demonstrate that his dominant motive was to sell the property at the earliest possible date instead of holding it for rental income, the property would not necessarily cease to qualify as the taxpayer’s principal residence.

“Petitioner asserts that renting his New York City property was a financial necessity for him in [year at issue] because a downturn in the real estate market during the 2008 financial crisis had caused the New York City property to be worth significantly less than he had paid for it. He asserts that he sold the property in [year at issue plus one]. Petitioner has offered no evidence, however, as to what he paid for the New York City property (or exactly when he bought it), what he sold it for, what efforts he made to sell the property after he moved out…, or to what extent market conditions might have created a bar to his selling the New York City property when he moved out of it….” 2020 T. C. Memo. 74, at pp. 10-11. (Citations omitted).

And Tom flunks the driver’s license, employment, mailing address, voter registration, motor vehicle registration, religious institution and civic activities tests for residence. It’s MN all the way.

The CA MacMansion fares no better.

Tom has a note and a deed of trust (that’s a CA mortgage), and a document supposedly tying them together, that he says shows the debt for which he claims his CA interest deduction. “The aforementioned deed of trust includes an acknowledgment form indicating that the document was notarized on December 16, 2004, and that the notary’s commission expired January 28, 2007. At trial neither petitioner nor Mr. Rodgers, who testified as petitioner’s witness, was able to explain why the purported deed of trust shows that they both signed it January 13, 2010, but that it was notarized in 2004 by a notary whose commission expired in 2007. Furthermore, neither petitioner nor Mr. Rodgers was able to explain adequately the provenance of any of these documents. The unexplained inclusion of an obviously fictitious acknowledgment form as part of the deed of trust, as well as the lack of a clear explanation as to where these photocopied documents even came from, calls into question the genuineness and trustworthiness of these three interrelated documents.” 2020 T. C. Memo. 74, at p. 15-16. Anyway, even if this stuff got into evidence, which it didn’t of course, no showing the deed of trust was recorded, so the debt is unsecured under CA law. See Reg. Section 1.163-10T(o)(1)(ii).

Ex-Ch J Iron Mike says JQ was an attorney. If I saw a client trying to put this stuff in evidence, I’d ask for an in-chambers and wouldn’t even keep the ripcord.

There’s more, but we can stop here, unless you enjoy watching a case go down in flames.

But IRS has their own problems. Note the dates, because they’re relevant.

“…respondent relies exclusively on a notation in a one-page stipulated exhibit captioned ‘Correspondence Examination Automation Support’, dated April 25, 2018. On this document in a single line entry dated September 6, 2017, with an indication that it was ‘Submitted by’ an otherwise unidentified ‘Brodnax Felicia L’ and with an indication that the ‘Action Type’ is (mysteriously) ‘Non Action’, the ‘Note’ states in its entirety: ‘6662 penalty approved’. Without any other supporting evidence or explanation or elaboration, on brief respondent argues that this document “reflects the timely managerial approval of the accuracy-related penalty.’ Respondent’s position is problematic for a variety of reasons.” 2020 T. C. Memo. 73, at p. 28.

I’ll leave it to my ultra-sophisticates to enumerate the reasons. Or they can read for themselves, to check their answers.

This blogpost is long enough.