IRS hasn’t had an easy time with Anthony I. Provitola & Kathleen A. Provitola, et al., Docket No. 16187-17, filed 1/27/20. Anthony is an attorney who is more inventive than most. See my blogposts “I Love My Cigar,” 2/6/19, and “A Canard,” 12/11/19. In fact, Anthony invented, and got seven (count ‘em, seven) patents for, some kind of device to improve television viewing. And, as the aforementioned blogposts more particularly set forth, he has led both IRS and Tax Court a merry chase.

Judge Buch has the finisher, in an off-the-bench designated hitter, wherein Anthony’s roundy-round with money between APPA (his Professional Association, a/k/a his law practice) and Kathleen’s Sub S (the marketing arm of his invention) runs aground. Kathleen’s Sub S has no deduction for what she paid APPA, because those are Section 195 start-up costs, not Section 162 ordinary-and-necessaries, because the TV stuff isn’t up and running.

IRS’ arguments are far from crystalline. IRS first claims substance-over-form, but the transfers were real.

Form-over-substance craters. “However, we will respect [Sub S] ‘s form because it is engaged in activities with a business purpose. Mr.  Provitola is currently working on inventing and bringing to market his television viewing product through [Sub S]. He has developed the product and obtained several patents in the process. Although it is unclear at this time whether the product will be commercially viable, approximately 1,000 units of the product have been manufactured with the hope of eventual sale. A website has been created for that purpose, although that website is not yet public. The Provitolas treated [Sub S] as a discrete entity; for example, [Sub S] maintains a separate bank account. [Sub S] is not a ‘sham or unreal’ nor is it ‘a bald and mischievous fiction.’ [Sub S] exists to develop an bring to market Mr. Provitola’s invention, and we will respect its existence.” Transcript, at pp. 11-12.

Judge Buch notes the SNOD only questioned the deductions by the Sub S, not the income to APPA. So this isn’t a true roundy-round, because therefore the income to APPA is real. But Anthony isn’t home free.

“Distinct from the substance over form argument, the Commissioner argues: ‘[Sub S] was not actually engaged in business during the [years at issue]. At best, the transfers from [Sub S] to the law practice could be considered start-up expenses, which are not deductible for the years they were made.’ We will characterize this as a start-up expenditures argument.” Transcript, at p. 9.

“[Sub S] has not yet commenced an active trade or business. …[Sub S] has taken significant steps to prepare for the business of selling Mr. Provitola’s invention. [Sub S] has not yet attempted to market or sell a product. It has not made any sales, made its website public, or attempted to market a product.” Transcript, at p. 15.

So Sub S can amortize the start-up expenses, if, as and when it starts operating.

True, the start-up argument is new matter, but Judge Buch says IRS easily bore the burden of proof on that. And Anthony did his own taxes, he’s a Tax Court admittee, and he put in no evidence about substantial authority. IRS only has the Section 6751(b) Boss Hoss for substantial understatement, so if the numbers work for the five-and-ten, Anthony and Kathleen get chopped therefor.

Most Tax Court petitioners are self-represented. But even when a petitioner has an attorney, it may turn out that she doesn’t.

Here’s Estate of Anthony K. Washington, Deceased, Lenda Washington, Personal Representative, Docket No. 20410-19L, filed 1/24/20.

An earlier order directed that a properly executed petition be filed, but didn’t state why the petition theretofore filed was defective. Today Ch J Maurice B (“Mighty Mo”) Foley enlightens us, Lenda and Lenda’s counsel.

“…the petition had been submitted by counsel C but had reflected only his photocopied signature. Counsel therefore was not treated as having entered an appearance in this matter, and the petition was considered to be pro se. Therefore, in order for this Court to acquire jurisdiction to consider this case, it is necessary to obtain a Ratification of Petition bearing petitioner’s original signature and ratifying the petition previously filed.” Order, at p. 1. (Name omitted).

Neither Lenda nor C replied to the earlier order, and I can understand why.

So counsel, when your client comes tearing in at ten to five on Day Thirty with NOD in hand and panic on face, get out your quill pen and wet ink your signature on the blank form petition you print out from your desktop, stuff it in the preprinted and postpaid envelope, and hotfoot it to the post office.

And tell ‘em Lenda sent you.

Judge James S (“Big Jim”) Halpern reminds us that Section 6229(a) is not a separate SOL, but only a one-year extender for Section 6501 three-year SOL, after a FPAA has run its course, and the fallout has to be distributed to the partners.

Judge Big Jim has all the cites in Ramat Associates, Wil-Coser Associates, A Partner Other Than The Tax Matters Partner, et al., Docket No. 22295-16, filed 1/23/20.

Ramat wants all the SNODs tossed because 3SOL. No, says Judge Big. Jim.

“Petitioner has a fundamental misunderstanding of the statutory limits on the period during which tax resulting from the adjustment of partnership items may be assessed against a partner. Section 6229(a) does not provide a separate period of limitations on that assessment. It serves only to extend, in some cases, the period of limitations under section 6501(a) on assessing tax against a partner.” Order, at p. 3.

“Section 6501(a) provides that the amount of any tax shall be assessed within 3 years from the date a taxpayer’s return is filed. The term ‘return’ for purposes of section 6501(a) does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit, e.g., a partnership return. Sec. 6501(a). Section 6501 provides the general period of limitations for assessing any tax imposed by the Code.

“Section 6229 establishes the minimum period for the assessment of any tax attributable to partnership items (or affected items) notwithstanding the period provided for in section 6501. Section 6229 is not a stand-alone statute of limitations but can extend the section 6501 period of limitations with respect to the tax attributable to partnership items or affected items.” Order, at pp. 3-4.

And IRS can assess even if 3SOL has run, provided there’s an open year into which any of the fallout from the FPAA has fallen, even though the transactions on which the fallout is based is a closed year.

But that’s a question of fact, so no summary J.

Mr Charles here is not a symbol, as in the James Baldwin 1964 drama. Mr Charles is the proponent of a software program that Floyd X. Proctor, Docket No. 13072-18, filed 1/23/20, tried valiantly to use to complete his overdue tax returns.

Floyd admits his fault in delaying. But Floyd failed to input some 1099-MISCs he got for snowplowing. Floyd had a dump truck and an LLC. The truckin’ life he led was incidental to his main job.

Who better to let Floyd off the Section 6662 chops than that Obliging Jurist, Judge David Gustafson, in this designated hitter off-the-bencher?

“Mr. Proctor has a high school education. After he graduated in 1985, he worked at a Safeway grocery store. Since about 1987 he has worked as an explosive operator for the Department of Defense (‘DOD’) as a civilian employee.” Transcript, at p. 4.

Here’s the story. “Mr. Proctor was uncertain how to report hi trucking activity on his return. A friend referred him to  a supposedly knowledgeable man named Mr. Charles, who (Mr. Proctor believed) owned a truck and used it in an income-  producing activity similar to Mr. Proctor’s. Mr. Proctor obtained tax preparation software called “Tax Act”, and when he prepared his … returns, Mr. Charles came over to Mr. Proctor’s house and stood over his shoulder, helping him respond to the software prompts and fill in the information that was reported on Schedule C.

“When Mr. Proctor prepared his tax returns in this manner, he showed Mr. Charles the Forms 1099 that he had received and that he had issued to workers, as well as cancelled checks, invoices, and receipts for his trucking expenses. Mr. Proctor used the Forms 1099 that he had received from customers to tally and report income from his trucking activity. However, he did not realize that he had not received Forms 1099 from all of his trucking activity income (probably missing Forms 1099 for income from snow-plowing jobs in both years), so he under-reported his income on his returns. He reported trucking activity expenses on the returns that, he eventually agreed by stipulation, should be reduced; but we conclude the deductions he claimed were not deliberately faked.” Transcript, at p. 5.

Floyd testified forthrightly. Given his education and his good-faith efforts to do the right thing, even belatedly, Judge Gustafson lets Floyd off the penalties, but not the late-filing additions.

Lon B. Isaacson, 2020 T. C. Memo. 17, filed 1/23/20, brings forcefully to mind Abraham Lincoln’s words: “A moral tone ought to be infused into the profession which should drive such men out of it.”

I’ll spare you an extensive dissection of the overreaching, lies, fraud and other disbarable offenses. You can read all 56 (count ‘em, 56) pages of ex-Ch J L Paige (“Iron Fist”) Marvel’s prose. When I saw a 60% of recovery contingent fee charged to victims of childhood sexual abuse, which he concealed, and how he diverted the remainder to his own use, lying all the while, it was enough for me.

The petitioner also practiced in the field of tax fraud defense. He apparently learned nothing from the experience.

Honest Abe got it right.

When accuracy or substantial understatement of tax chops are in play, the preparer is often the person under the gun. So look for signs that point the way to ducking the chops, based upon the trustworthiness of the preparer.

Patrick Lind and Mary Beth Blotnick Lind, 2020 T. C. Sum. Op. 7, filed 1/22/20, relied on their trusty preparer of thirty years’ unblemished service. So notwithstanding their want of substantiation, constructive dividends, and failure to account for inventory in their wholly-owned C Corp Reliable, among other delictions, they get off without being chopped.

Here’s CSTJ Lewis (“The Man Can Spell”) Carluzzo.

“The Linds and Reliable engaged a paid income tax return preparer to prepare their Federal income tax returns for the years in issue.  We are satisfied that they relied completely upon the preparer not only for advice in the preparation of the relevant Federal income tax returns but also during the examinations of the returns and the preparations for trial in these cases.  The return preparer testified on behalf of the Linds and Reliable in response to questions presented by Mr. Lind but, more likely than not, drafted by the return preparer.  We are further satisfied that the Linds and Reliable presented what financial information each had before each return was drafted, and it is the return preparer who is responsible for the positions taken on each of those returns.  Although we now reject some of those positions, we find that the Linds’ and Reliable’s reliance on the return preparer was made in good faith.  The Linds and Reliable employed the same return preparer for more than 30 years before the years in issue, and nothing in the record suggests they had any reasons to question the return preparer’s competence.” 2020 T. C. Sum. Op. 7, at p. 21.

But here be dragons, so woodshed your preparer good before you put the preparer on the stand.

“As to the return preparer’s competence, we note that he testified on behalf of the Linds and Reliable at trial and his competence was not attacked during cross-examination.  We can envision circumstances that could support a finding of a return preparer’s incompetence from nothing other than the improper positions taken on a Federal income tax return.  This, however, is not that case, and we are reluctant to assume or infer incompetence here.  It follows and we find the Linds and Reliable are not liable for a section 6662(a) accuracy-related penalty for any year in issue.” 2020 T. C. Sum. Op. 7, at pp. 21-22.

Trusty but incompetent? Trusty but a writer of fiction? Don’t find out at the trial.

For definition of the term “tohubohu,” see my blogpost “More TEFRA Tohubohu,” 9/12/17. For the background to Lori J. Manroe, 2020 T. C. Memo. 16, filed 1/22/20, see my blogpost “It’s A Sham,” 9/28/12. And for the history of the Gunther case, much-cited in the T. C. Memo. aforesaid, see my blogpost “Hearing the Bad News,” 2/5/19.

OK, so what’s new? Well, IRS has hit Lori with two (count ‘em, two) SNODs for affected items arising out of her blown-up Son-of-BOSS partnership currency swaps. And, at no extra charge, they throw in 40% overvaluation chops per Section 6662(h).

All sides agree Tax Court has jurisdiction over the SNODs. Per Gunther, there’s the question of Lori’s basis in the Swiss francs she allegedly swapped, whether what she swapped was the same as what she bought, and whether she had any other basis. But IRS assessed tax before issuing the SNODs, so they were offside. Wherefore Section 6213(a) gives Tax Court jurisdiction to enjoin collection, and cause IRS to refund what was grabbed. IRS agrees with all the foregoing.

But Lori wants IRS enjoined as to the chops; Judge Patrick J. (“Scholar Pat”) Urda says no. No jurisdiction for that.

“Our analysis begins with section 6230(a)(1):  ‘Except as provided in paragraph (2) or (3), subchapter B of this chapter shall not apply to the assessment or collection of any computational adjustment.’ Section 6230(a)(1) establishes a default rule that ‘normal deficiency procedures generally do not apply to the assessment or collection of computational adjustments.’ Our jurisdiction over the penalties at issue, therefore, relies on whether the penalties are computational adjustments and whether they fall within the exceptions to the default rule set forth in section 6230(a)(2) or (3).  … we conclude that the penalties at issue constitute computational adjustments and that neither exception applies.” 2020 T. C. Memo. 16, at pp. 11-12 (Citations omitted).

The gross overvaluation is a partnership item, not a partner-level item, and is therefore computational. Lori also claims the chops relate to her outside basis, therefore is an affected item and not computational. Except the Supremes in Woods put paid to that. “…the Supreme Court’s decision in Woods refutes the notion that penalties that relate to adjustments to partnership items and penalties relating to affected items that require partner-level determinations are mutually exclusive. To the contrary, ‘[t]he valuation-misstatement penalty at issue can be an affected item requiring partner-level determinations while also relating to adjustments to partnership items.’ As the valuation-misstatement penalty is related to an adjustment to a partnership item, it ‘fall[s] within § 6230(a)(2)(A)(i)’s exclusion of such items from deficiency jurisdiction.’” 2020 T. C. Memo. 16, at p. 15 (Citations and footnote omitted).

I was going to give Lori’s counsel a Taishoff “Good Job,” but as her counsel is the celebrated Ernest S. Ryder, whose exploits I’ve blogged ofttimes elsewhere (see, e.g., my blogpost “Privileged Characters,” 5/21/15), I have to set forth the omitted footnote.

“We pause to address two additional points.  First, the Manroes argue that the stipulation in the partnership-level proceeding that BLAK was a sham resulted in the ‘agreed creation of a new TEFRA partnership’.  The Manroes claim that this new TEFRA partnership entitled them to a substantially similar tax result to the one they hoped to achieve through their Son-of-BOSS transaction.  This argument is patently ridiculous.  Second, Ms. Manroe asserts that she is entitled to innocent spouse relief.  Her vague statement in her petition that ‘it would appear that * * * [Ms. Manroe] would be eligible for innocent spouse relief, to the extent the Court finds any additional tax liability’ does not satisfy our pleading requirements under Rule 321(b).  Therefore, we do not consider the merits of any potential innocent spouse claim Ms. Manroe may have.” 2020 T. C. Memo. 16, at pp. 15-16, footnote 4.

There’s no fee to attend the continuing education classes put on by the Honcho of the Jersey Boys. While I’ve often denounced continuing education courses as a racket, today’s class was stimulating and a real learning experience. You can contact The Jersey Boys to find out more here: https://www.agostinolaw.com/

It’s only a small-claimer, and Jemar Y. Purdie, 2020 T. C. Sum. Op. 6, filed 1/21/20,  didn’t even respond to IRS’ summary J, so maybe Judge Ruwe gave this one more than it required.

Still, it’s nice to note that the Automated Underreporting (AUR) program is exempt from Boss Hossery pursuant to Section 6751(b)(2)(B).

“The examination of petitioner’s 2016 return was processed through the AUR program.  This software program automatically determined the amount of income petitioner had omitted from his return and automatically calculated petitioner’s tax deficiency.  Based on this information the program automatically calculated the penalty under section 6662(a).  This penalty falls firmly within the exception provided under section 6751(b)(2)(B), and the Commissioner was therefore not required to obtain written supervisory approval.” 2020 T. C. Sum. Op. 6, at p. 9.

Jemar took a couple draws (hi, Judge Holmes) from retirement accounts, the trustees generated 1099-Rs, but Jemar didn’t bother to list $41K thereof on his return. IRS gets a declaration from the trustees, the 1099-Rs, and sundry other paperwork, to show Jemar got the dough. IRS bears burden of production handsomely.

Judge Albert G (“Scholar Al”) Lauber is diligently sifting the silt that Graev unleashed upon an unsuspecting world, and today turns his attentions to the TFRPs, the hundred-percent chops for responsible persons who behave irresponsibly and finance their businesses with the withholding from payroll.

Apparently, David J. Chadwick, 154 T. C. 5, filed 1/21/20, is one such. IRS wants to chop Dave for a bunch from each of his two wholly-owned LLCs. A serious deliciton, to be sure, but is it Graeven in stone that a Boss Hoss is required to sign off prior to the Letter 1153?

Yup.

“Section 6751(b)(1) provides that “’[n]o penalty under this title’–that is, no penalty under the Code—’shall be assessed unless the initial determination of such assessment’ receives the requisite supervisory approval.  Section 6672(a), which authorizes the assessment of TFRPs, provides that a responsible person who fails to collect or pay over any tax ‘shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.’  The plain text of section 6672(a) indicates that a TFRP is a ‘penalty’ under the Code.” 154 T. C. 5, at pp. 11-12 (footnote omitted).

Now we all know IRS can collect only once. If the LLCs have money and pay, Dave is off the hook. So isn’t the TFRP really a tax? No, because it only applies to responsible persons who willfully fail to pay. And Section 6671 just says the chops are to be collected as if such penalties were taxes; that doesn’t make them taxes.

And when it comes to “as if”, Judge Scholar Al is a true disciple of the early Twentieth Century philosopher Hans Vaihinger. See my blogpost “Als Ob,” 11/22/16.

But IRS has learned from hard experience, and produces Forms 4183s from the appropriate Boss Hosses prior to the Letters 1153 hitting the postbox.