My readers will remember the Fairey Fireflying Edward G. Kurdziel, Jr., Docket No. 21186-12, filed 9/9/19. If you don’t, see my blogpost “The Excuse Sweepstakes,” 3/21/19.

Well, after the pretrial discovery and briefing, after the trial, and after the posttrial briefing, IRS finds they messed up the numbers and wants to amend their pleadings.

For one of the years at issue, Ed owes less post-amendment, so he’s cool with that. But there’s two more years.

“Commissioner now wants to make — after discovery, after the trial, after even the posttrial briefing — would mean that Kurdziel owes more to the IRS for two of the years at issue. The Commissioner has moved to amend his answer to increase the deficiencies he now wants.

“Kurdziel objects.” Order, at p. 3. Surprise, surprise.

Judge Holmes has this one.

“Section 6214(a) of the Code does give us jurisdiction ‘to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency* * * if claim therefor is asserted by the Secretary at or before the hearing or a rehearing.’ (emphases added). The italicized language is no bar to the Commissioner’s motion — though it might surprise a nonspecialist, that phrase doesn’t mean ‘at or before the trial,’ but means any time before our Court enters a final decision.” Order, at p. 3. (Citations omitted).

Now some of the changes result from the Section 469(i)(3)(a) phaseout of Ed’s rental real estate losses, and maybe Judge Holmes might let that go, as Ed wasn’t ambushed. “The revenue agent should have noticed this, but by the time of trial the Commissioner had. At the very start of trial, the Court raised it with the parties and Kurdziel’s lawyer specifically acknowledged that the phase out would apply to any posttrial computations and would be entirely mathematical.

“There’s no surprise and no unreasonable delay here. As the Commissioner rightly points out, there is much case law that allows amendments to conform to things that happen at trial.” Order, at p. 4. (Citations omitted).

But there’s a hitch. There’s usually a hitch.

“There’s a difference, however, in the somewhat more complicated changes that the Commissioner proposes for the treatment of the gross receipts from Mr. Kurdziel’s plane project. These were not brought up at trial. And the only excuse for delay that the Commissioner suggests for their late arrival is that he didn’t notice them until it came time to do the computations.” Order, at p. 4.

Judges have discretion when it comes to out-of-time amendments to pleadings, and Judge Holmes uses his.

“Justice doesn’t require letting him fix mistakes in his own notice of deficiency that he should have noticed a long time ago and that now come as a surprise to his adversary.” Order, at p. 5.

Ed wins that one. But I still wish he’d named his plane “Rufus T.”

Two-and-a-half years ago I addressed the august Tax Section of the American Bar Association, an exalted assemblage to which I do not belong (probably being too dusky of shoe), when I suggested that choice of trial should have some nexus to parties, witnesses, physical evidence or something.

The ABA Taxers thought any further requirement of filling in forms would further befog the hapless pro ses. Perhaps they were right, but I suggest that it wasn’t only the innocents who were in the trial venue game.

See my blogpost “Same Time, Next Year,” 3/3/17. It featured none other than Al Benavides and Louise A. Benavides, 2019 T.C. Memo. 115, filed 9/9/19, now back for some heavy deficiencies and Section 6663 fraud chops ( the 6663s are only on Al because IRS can’t prove Louise had guilty knowledge). Al and Louise had a boatload of unreported income via constructive dividends from the C Corp, which housed Al’s accounting and tax practice.

It’s the usual game, running money between entities, claiming business expenses when personal expenditures were involved. My older readers may recall the late Leona Helmsley, who played a similar game, albeit on a larger scale. Al also went down on a count of Section 7206(2) false returning in USDCDMT.

Al’s testimony doesn’t help. A sloppy bookkeeping claim from a forty-year CPA earns a Judge Pugh classic: “To suggest that taxpayers who made a living handling the tax and accounting matters of others should escape the fraud penalty because of sloppy bookkeeping–itself a badge of fraud–is risible. The ‘reasonable compensation’ argument advanced by Mr. Benavides is a dog that will not hunt. He did not report the diverted gross receipts on his personal returns as compensation from BCO or pay applicable self-employment taxes. He cannot ignore reality or rewrite history now that he has been caught out. Mr. Benavides’ intentioned steps to lower BCO’s taxable income (as well as his own) are clear and convincing evidence of the requisite fraudulent intent for BCO and Mr. Benavides alike.” 2019 T. C. Memo. 115, at p. 39.

Judge Pugh allows a reopener to show IRS satisfied the Section 6751(b) Boss Hoss requirement.

But it doesn’t matter for Louise. She isn’t getting the fraud chops.

As I said in my blogpost (Part Un), “No, not the one-hit wonder The Hombres campaigned in 1967. It’s the general view manifested in Tax Court when taxpayers request protective order, or make motions in limine, or motions to strike pleadings.” See my blogpost “Let It All Hang Out,” 9/17/13.

Some things never change.

Leon Max, Docket No. 20237-16, filed 9/6/19, has two in limines to IRS’ one, with trial less than two weeks off, and Judge Buch kicks all three to the cliché.

Maybe Max’s expert’s background doesn’t impress IRS, but “(H)is report is helpful to the Court in that it discusses industry practices and provides useful background information.” Order, at p. 2.

As for IRS’ experts, while one expresses conclusions and Max claims exceeds the expert’s area of expertise, Judge Buch doesn’t think so.

As for the other, Max’s concerns about old Rule 41 issues go away as the Rule was changed, and IRS claims they won’t introduce evidence of the sampling discussions between counsel.

Anyway, “(A)lthough we fully expect that Mr. Max may make any objections at trial he feels necessary, including relevance objections, we do not share his concerns about confusion of the witnesses or the Court. Witnesses testify to relevant facts, not legal standards. If questions relate to topics that are not relevant, the Court will address objections made at that time. We are not concerned that the Court will become confused as to the correct legal standard.” Order, at p. 3.

Melinda Jean Welwood, 2019 T.C. 113, filed 9/4/19, claims she was abused by her late husband, Mike, flogger of the low-income housing tax credits that gave a quick write-off but heavy recapture in later years.

The famous 1986 Internal Revenue Code put paid to this, among many other tax savers (to be charitable). So as part of a divorce that never happened, Mike conveyed half-interests in his write-off partnerships to Mel. What did happen, of course, was that the old write-offs came back as phantom income.

Mel and her trusty CPA filed, showing the income, but paying no tax, because Mel commendably spent the money taking care of Mike, who, after four (count ‘em, four) strokes, was massively disabled.

Mel claimed Mike abused her, but also stated on her CDP that Mike didn’t have “…the cognitive ability to peel an orange. The RS [Requesting Spouse] didn’t provide any dates of abuse or explain how the abuse is related to the tax matter.” Order, at p. 9.

And she stayed married to him, lived for a time in the same house, and paid his bills instead of IRS.

Judge Cohen: “We next examine whether the requesting spouse knew or had reason to know that there was an understatement or deficiency on the joint income tax return, or knew or had reason to know that the nonrequesting spouse would not or could not pay a reported but unpaid tax liability. We believe the evidence compels the conclusion that petitioner knew that M. [Mike] Welwood would not and could not pay the reported liabilities. Petitioner contends that her knowledge was obviated by a pattern of abuse throughout the marriage, but we are unpersuaded that any perceived abuse was material to the issues before us. She testified that she was fearful because her husband had guns, but the only incident she specifically described occurred…while he was in a nursing and rehabilitative care facility. During the incident M. Welwood stated that he wanted a gun in order to commit suicide. There is no evidence that he threatened petitioner with a gun or that he had access to a gun at the time.” 2019 T. C. Memo. 113, at pp. 21-22.

It doesn’t get better for Mel.

Mel knew about the tax deals’ back-end hits from her trusty CPA. She took them and the money they threw off, and paid Mike’s bills and hers. Yes, she had major health problems. But.

“Certain of petitioner’s health problems have been with her from birth. With respect to petitioner’s age-related health issues, they have not prevented her gainful employment and are not unusual. They may be a consideration in future collection efforts by the IRS. We agree with respondent that as of now this factor is neutral.

“By our estimation, petitioner’s knowledge weighs heavily against relief and all of the other relevant factors are neutral. Although petitioner’s situation is difficult and unfortunate, the circumstances are not compelling and do not justify relief from the joint liabilities. She offered no reasonable alternatives to the proposed collection actions and has suggested no abuse of discretion with respect to that determination. She chose only to pursue total relief under section 6015(f). We are not persuaded that she is entitled to such relief.” 2019 T. C. Memo. 113, at pp. 23-24.

Petitioners are well-advised to heed a warning from the Judge that their litigating positions are frivolous. While Derrick Barron Tartt, 2019 T. C. Memo. 112, filed 9/3/19, escapes the Section 6673 chop from Judge Lauber, who only shows him the yellow card, George J. Smith and Sheila Ann Smith, 2019 T. C. Memo. 111, filed 9/3/19, persist in post-trial brief after being warned by Judge Halpern on the trial that the tired old FICA non-wages argument is a non-starter.

First, George’s and Sheila’s story.

“At the beginning of the trial, we informed petitioners that, on the basis of our reading of the petition and their pretrial memorandum, they appeared to be proceeding with only frivolous or groundless claims.  We warned them that we could impose a penalty of up to $25,000 for such conduct.  After reading petitioners’ 36-page posttrial brief, which repeats the arguments they made in the 40-page petition and in their pretrial memorandum, and with which we have dealt supra, we believe that petitioners are deserving of a penalty because they lack grounds for their claim and their arguments are frivolous.  We will impose on them a section 6673(a)(1) penalty of $2,500.” 2019 T. C. Memo. 111, at pp. 13-14.

Derrick Barron wants to offset monies he claims the Feds owe him for employment discrimination against his income tax liabilities for three (count ‘em, three) years of six-figure income.

For a start, Derrick Barron tried to get the money in USDCNDIL (twice), got tossed both times, and 7 Cir. affirmed. So Derrick Barton doubled down. “Petitioner then filed a complaint alleging that the participants in the preceding lawsuits–including the defendants, their attorneys, the presiding judges, and the U.S. Government–had joined in a conspiracy to deprive him of employment benefits.  The Court of Appeals summarily affirmed the dismissal of that action and imposed sanctions on petitioner for frivolous filings. ” Order, at p. 3. (Citation omitted).

Derrick Barron did report the income, so IRS gave him a NFTL. Derrick Barron got a CDP but only stated he couldn’t pay but would go to the Supremes on his most recent toss. So he got a NOD.

Judge Lauber: “At the CDP hearing petitioner did not contend (or supply evidence) that his reported …tax liabilities were incorrect.  Nor did he allege that he has an ‘available credit’ from another year that could be applied to reduce those liabilities.  Rather, he wishes to offset against those liabilities a monetary judgment that he seeks in litigation deemed frivolous by every court to consider the question.

“We lack jurisdiction to consider petitioner’s collateral attack on his…tax liabilities.  Neither the SO nor we have authority to second-guess the decisions of the courts that have ruled against him.  Even if we had such jurisdiction, no legal authority exists for offsetting, against an assessed Federal tax liability, a claim against the Government in a totally unrelated matter.” 2019 T. C. Memo. 112, at pp. 8-9.

No Section 6673, but Derrick Barron does get the yellow card, because he wasn’t in Court (this was IRS seeking and getting summary J), so he wasn’t warned before proceeding.

I have often said that poets get it right, but I would caution Tax Court petitioners to be wary of William Blake: “If the fool would persist in his folly he would become wise.” Possibly wise, but maybe also poorer.

Judge Buch has a refresher for attorneys who want to check out of a case. Nicholas W. Buruse & Lynn Medalia-Buruse, Docket No. 22579-18, filed 9/3/19, are on for trial in December.

Their erstwhile attorney files a Rule 24 check-out motion, wherein she states “”Petitioners wereinformed [sic] of Counsel of Record’s wish to withdraw as counsel for at least 3 months.” Order, at p. 1. (Edit by the Court).

Well, I’m sure my readers know that the checker-out has to state what the petitioners, who after all are the clients, want. And whether IRS is on board. And it doesn’t suffice that the petitioners have gone to the bullpen. “Counsel also informs the Court that ;’Petitioners engaged the services of J. David Tax Law, LLC’ – but attorneys enter appearances in the Tax Court, not law firms.” Order, at p. 1.

I’ve noticed this anomaly before. See, e.g., (as my expensive colleagues say) my blogpost “Admitted but not Recognized,” 4/16/19. If the attorney named in the Entry of Appearance is actually on trial elsewhere, or is on parental leave, or is sick, on the day a motion is to be argued or the calendar to be called, the colleague who shows up to cover must file a separate Entry of Appearance and promptly withdraw, after going through the consent rigmarole, lest s/he be served with papers his/her absent colleague should be getting. Makes no sense.

Howbeit, Judge Buch has the right approach here.

“The Model Rules require the attorney to notify the client that he or she is leaving the firm and keep the client informed of the status of her case. The client must be informed that he or she may continue to employ the attorney or to remain with the firm, but it is the client’s choice. Both the departing attorney and those who remain in the firm have an obligation to assure that their representation is not adversely affected by an attorney’s departure and that the departure is accomplished without material adverse effect on any client’s interest. Even then, ‘[a] lawyer must comply with applicable law requiring notice to or permission of a tribunal when terminating a representation. When ordered to do so by a tribunal, a lawyer shall continue representation notwithstanding good cause for terminating the representation.’” Order, at pp. 1-2. (Citations omitted, but the Model Rules are online and the citations easily found.)

See my blogpost “A Bad Day for Lawyers,” 12/11/14, where I discuss what happens when a lawyer leaves a firm and the Rules are disregarded. I hope heads did roll in that case.

Whereas today is a holiday in my country, which “honors the American labor movement and the power of collective action by laborers, who are essential for the workings of society,” and

Whereas, I do as little work as possible, even when it is not a holiday, and

Whereas, there has arisen considerable doubt this blog is “essential for the workings of society,”

Therefore, be it resolved, there will be no blogpost today.

Honor to the laborers.

Once again it’s all about timing, and Judge James S (“Big Jim”) Halpern is on the case in a designated hitter, Sheila Ann Smith. Docket No. 1312-16L, filed 8/30/19.

Thanks to the Glasshouse Gang and Judge Big Jim for posting this before the usual 3:30 p.m., EDT release. Even bloggers deserve an early out before a three-day weekend.

Judge Big Jim tried this one in May two years ago, and briefing was complete. But Sheila Ann made a motion to reopen the record to make sure IRS had gotten the essential Section 6751(b) Boss Hoss sign-offs for each and every one of the six (count ‘em, six) Section 6702 frivolity chops they laid on Sheila Ann.

“These submissions were either (1) original filings, (2), a copy of the original filing, or (3) purported copies of an original filing for which respondent claims he possesses no record of receiving. Additionally, petitioner submitted an original Form 1040X, Amended U.S. Individual Tax Return…. In total, six discrete submissions were received by respondent in [year at issue].” Order, at pp. 1-2.

Feels like it just happened yesterday?  Well, of course it did. See my blogpost “From the Serious to the Frivolous,” 8/29/19.

Judge Big Jim allows Sheila Ann is right to challenge the Boss Hosses. But IRS already put the Forms 8278 in on the trial. So Sheila Ann’s “…motion to compel discovery (motion) requesting that we order respondent ‘to provide evidence that proper approval was made related to all § 6702 penalties that have been asserted upon Petitioner, showing that an Immediate Supervisor approved them in writing prior to penalties being asserted upon Petitioner,’” Order, at p. 2, gets denied.

Nevertheless, Sheila Ann’s trial happened before all the Graev silt and Clay got stirred. Fans of the evolution of Boss Hossery should read Judge Big Jim’s exposition at p. 3 to be brought up to date on timing.

Nonetheless, Judge Big Jim orders supplementary briefing on the Kalin Twins’ 1959 hit, “When.” And he gives Sheila Ann a couple pointers (hi, Judge Holmes, enjoy the weekend).

“Her motion is unwarranted, however, as the evidence that she seeks is presently in the record. She may find respondent’s citations to the record in his opening seriatim brief particularly helpful in that regard. But because briefing in this case concluded before the recent developments in our case law concerning by when supervisory approval of penalties must be obtained. We wish to extend to the parties the opportunity for additional briefing addressing whether the supervisory approvals of the six section 6702 penalties assessed in this case were timely.” Order, at p. 3.

At least Judge Big Jim doesn’t ask for briefs (if any) sooner than the week after next.

Enjoy the weekend, everybody.

The Thursday afternoon of that Obliging Jurist, Judge David Gustafson, certainly ran the gamut. First there was a 56-page designated hitter examining and exagminating the Section 45 clean coal credit. Now there’s a full-dress T. C., exploring the Section 6702 frivolous return chop, continuing the saga of Gwendolyn L. Kestin, 153 T. C. 2, filed 8/29/18.

Gwen’s been on my blog before now. See my blogpost “What More Can I Say,” 6/7/18, wherein I catalogue Gwen’s trips to Judge Gustafson’s wordprocessor.

Now the question is whether any or all of the six (count ‘em, six) photocopies of the original frivolous 1040X that Gwen unloaded on IRS was itself (or themselves) separate frivolous returns, each incurring its very own Section 6702 $5K frivolity chop.

IRS got partial summary J a year ago May on the original 1040X. It was a classic zero-income Section 3401 FICA/FUTA phony of the sort protesters routinely file. So Gwen is short-stacked going into the trial. The trial sorts out whether the remaining six copies are returns sufficient to get the chop, and whether the Boss Hoss Section 6751(b) sign-off was well and truly delivered (if indeed it needs to be).

IRS first hit Gwen with Letter 3176C, which said “If not immediately corrected, the Internal Revenue Service will assess a $5,000 penalty against you. * * * As stated above, we are proposing to assess a $5,000 penalty against you for each frivolous tax return or purported tax return that you filed. * * * If you send us corrected returns, we will disregard the previous documents that you filed and not assess the frivolous return penalty * * *.  [Emphasis added.].” 153 T. C. 2, at p. 6.

The IRS examiner sent up a Form 8278 “Assessment and Abatement of Miscellaneous Civil Penalties,” proposing to hit Gwen with the $5K chop, but her boss changed it to $10K, because Gwen in the meantime sent in a copy of her first 1040X.

Nothing daunted, Gwen fired a five-round salvo, all dated differently but all received by IRS at once. “The Commissioner cites his records to show that the third, fourth, fifth, and sixth of Mrs. Kestin’s submissions, though dated in November 2015, December 2015, March 2016, and May 2016, were all received by the IRS on the same day (August 17, 2016) and three of them in the same location (Kansas City, Missouri).  Mrs. Kestin does not dispute these assertions but rather, in her posttrial brief, “admits that the times, dates, and actions described in R’s Statement of Facts, ¶¶ 1 through 50 of his Seriatim Opening Brief * * * are generally accurate.” 153 T. C. 2, at p. 8, footnote 3.

That was just a warm-up. Gwen hit her stride, sending notices to KC, MA, TX, and DC, all with copies of said 1040X. IRS ripostes with The Magnificent Seven, a $35K chop.

Gwen tries a CDP, and can contest liability, but gets a NOD because she frivols.

Section 6702(b)(3) gives a statutory out; if the frivolite folds within thirty days, no chop. Of course IRS has burdens of production and proof, and the Section 6751(b) Boss Hoss is in play.

If a document flunks the Beard test (contains info to calculate tax due, claims to be a return, and shows good faith attempt to comply), it isn’t a return, but that goes only where the taxpayer claims what they sent was a return and IRS claims it isn’t, like last-known-address and trigger-SOL cases.

“Section 6702(a) is a very different context.  That statute imposes a penalty on a document that merely ‘purports to be a return’ (the second of the Beard criteria).  Thus, even if (or especially if) a document fails the other Beard criteria, the document may warrant the penalty as a ‘frivolous tax return’.  Mrs. Kestin’s original Form 1040X failed the Beard test because, although it ‘purports to be a return’, it lacks an ‘honest and reasonable attempt to satisfy the requirements of the tax law’; and it is therefore not a return.  However, because that Form 1040X purports to be a return but has the defects set out in section 6702(a), it is subject to the section 6702(a) penalty.” 153 T. C. 2, at p. 20.

OK, but what about the photocopies?

“But the photocopies require a different analysis.  No doubt they are photocopies of a document (the Form 1040X) that purports to be a return, but the question we must answer is whether the photocopies themselves purport to be returns.  She did not request action on the photocopy itself; rather, she asked the IRS to process and honor her original Form 1040X.  A photocopy so marked and so explained does not ‘purport to be a return’.

“The statute does not address whether copies might be subject to the penalty, and the Commissioner points us to no pertinent regulation on the subject.  The Commissioner cites no case law that addresses the question of copies labeled as such (or even of copies not labeled as such).  The Commissioner does cite Grunsted v. Commissioner, 136 T.C. 455, 456-457 (2011), in which two section 6702(a) penalties for each of two years were sustained against a taxpayer who, after being told that the IRS would not accept his first purported returns, ‘resubmitted substantially identical purported tax returns for those two years’. However, there is no suggestion in Grunsted that the later returns were mere copies or were labeled as such.  On the contrary, we found in that case that the later documents were ‘again seeking a refund’.  Id. at 457.  We explicitly held that ‘each purported to be an income tax return’ and that each was ‘filed to obtain tax refunds’.  Id. at 459.” 153 T. C. 2, at p. 21.

The IRM says that it doesn’t matter whether the purported return is original or a photocopy. But since each copy was labeled as such and sought no refund greater than the original, Gwen ducks $30K’s worth of chops.

As for the Boss Hoss, the Section 6702 chop is not “electronically calculated,” so it needs the Section 6751(b) imprimatur. But the Letter 3176C doesn’t need that.

“However, as to the first two penalties… we must determine whether the earlier Letter 3176C constituted a previous, unapproved ‘initial determination’.  We conclude that it did not.  Although it gave a stern warning about the IRS’s intention to impose a penalty, its purpose was actually to invite the taxpayer to make a correction that, if made, would have the result that the IRS ‘will * * * not assess the frivolous return penalty.’  At the time Letter 3176C was sent…one could not ‘determine’, initially or otherwise, the application of the penalty.  Rather, at that time it remained to be seen—depending on the Kestins’ actions–whether they would be liable for the penalty.

“Interpretation and application of the supervisory approval requirement in section 6751(b)(1) is made difficult by the ambiguity of the operative phrase- ‘initial determination of such assessment’–and by the fact that, no matter how it is interpreted, the statute will achieve only imperfectly the congressional purpose of ensuring ‘that penalties [w]ould only be imposed where appropriate and not as a bargaining chip.’  However, we know to look for a ‘determination’ of a penalty liability, not just an indication of a possibility that such a liability will be proposed.  Letter 3176C is not an unequivocal communication that advises the taxpayer that penalties will be proposed’; it is instead a contingent communication warning that a penalty will be assessed if the taxpayer’s frivolous filing is ‘not immediately corrected’ and assuring that the IRS ‘will * * * not assess’ the penalty if the taxpayer does correct her return.” 153 T. C. 2, at pp. 26-27. (Citations omitted, but read them.)

Gwen has all kinds of finger-fehler arguments about IRS’ paperwork, but none of them persuades Judge Gustafson.

It’s frivolites like Gwen who keep us bloggers in business.