Go With The Flow, and The Check’s Not the Thing

This blogpost has nothing to do with the immigration or naturalization law in this or any other country.

Rather, the question is, when the SOL is at issue in a passthrough, is it the return of the passer or the return of the receiver that triggers the SOL.

Judge Paris will tell us, in Neil L. Whitesell and Tracy L. Whitesell, 2017 T. C. Memo. 83, filed 5/18/17. It’s Neil’s story.

His Sub Ss kicked off the parade, and IRS hit Neil with a SNOD, to which Neil riposted with an OIC and a check for $3 million, with conditions, which sets up the second of the subtitles hereinabove set forth, as my colleagues with Cadillac health plans would say.

Don’t ask. I just got back from the orthopedic surgeon, and though the knife isn’t on the menu, some minor immobility is.

Well, Judge Paris lays it out.

“This Court has consistently held that the relevant ‘return’ for determining whether the period for assessment has expired under section 6501(a) is that of the taxpayer with respect to whom the Commissioner seeks to determine a deficiency. See Robinson v. Commissioner, 117 T.C. at 313; Lardas v. Commissioner, 99 T.C. 490, 493 (1992) (and cases cited thereat). The Court has reached that conclusion irrespective of whether the adjustment concerned the transactions of another entity or whether that entity was taxable. See Lardas v. Commissioner, 99 T.C. at 493.” 2017 T. C. Memo. 83, at p. 8.

Neil relied upon a now-demolished conflict between Circuits that the Supremes squashed, and Congress double-squashed, twenty-five years ago. Collectors of accounts of ancient battles can check out 2017 T. C. Memo. 83, at pp. 8-10.

Neil claims his $3 million check, which IRS cashed, was an accord and satisfaction, because IRS didn’t bang it back to Neil within 90 days.

Negatory, good buddy, says Judge Paris. The sovereign isn’t bound by State law enactments like the Uniform Commercial Code. And IRS did bang the OIC and check back to Neil in sufficient time to satisfy Judge Paris.

Takeaway- It’s the receiver, not the passer, whose return governs. And an OIC is nothing until IRS blesses it.

Today I echo the famous cry of the great French warrior Louis des Balbes de Berton de Crillon, the bravest of the brave, after the famous reproach of Le Vert Galant.

Turns out Ch J L Paige (“Iron Fist”) Marvel is sending Association for Honest Attorneys, Docket No. 14562-15X, filed 5/18/17, to trial on 9/18/17, in Oklahoma City, and I won’t be there.

I’m hurt.

It’s not like I was ignoring this organization. See my blogpost “Why Didn’t She Ask Me?” 4/20/15.

The improperly-signed SNOD is an old rounder’s gambit, and Leroy Muncy, dodge-flogger and dodger, played it well. See my blogpost “Delegati Non Potest Delegare,” 5/9/16, where Eighth Cir. vacated Judge Nega’s whang to Leroy’s pate because Judge Nega failed to address the delegation order allowing Janet A. Miller, IRS Technical Services Territory Manager, to sign the SNOD that brought down Leroy.

Well, “We afforded the parties the opportunity to supplement the record on remand.  Accordingly respondent filed with the Court Delegation Order 4-8.” Leroy Muncy, 2017 T. C. Memo. 83, filed 5/17/17, at p. 2.

And, surprise, surprise, “The notice of deficiency was signed on behalf of the Commissioner by Ms. Miller, Technical Services Territory Manager, pursuant to Delegation Order 4-8, set forth in Internal Revenue Manual (IRM) 1.2.43.9 (Feb. 10, 2004).  In the notice respondent calculated petitioner’s total corrected tax liability for each year.  For each of the tax years 2000 through 2002 petitioner’s deficiency amount was his total corrected tax liability.  For each of the tax years 2003 through 2005 respondent reduced petitioner’s total corrected tax liability by the amounts of criminal restitution ordered for that year to come up with the deficiency amount.  On September 30, 2013, respondent made assessments of the restitution in his internal records.  On June 13, 2014, respondent filed a first amendment to answer stating that petitioner’s deficiency for each of the tax years 2003 through 2005 should be petitioner’s total corrected tax liability for that year unreduced by the amount of criminal restitution for that year.” 2017 T. C. Memo. 83, at pp. 7-8.

Apparently Leroy didn’t pay the restitution, so we’re back to the distinction between  “as if” and “as.” See 2017 T. C. Memo. 83 at pp. 15-18 if lexicographical hyper-subtleties float your boat.

At the end of the day, IRS’ numbers are sustained.

But as the curtain falls, Leroy pulls one last dodge. He avoids the Section 6673 frivolity chop.

No, this is not about athletic prowess. This is yet another instance of imperfectly guided Congressional largesse.

Hear now the story of Xing F. Wang and Kathleen P. Lee, 2017 T. C. Memo. 81, filed 5/15/17. It’s all, or substantially all, Xing’s story, as Kat is aboard only for some SE she got from Xing’s non-corporation.

Xing is a bioengineer with a Ph.D., like my son-in-law the Texan. Only Xing is a fellow of the American Heart Association, because he developed “a multiparameter method of screening for atherosclerosis-related coronary artery disease or stroke.” 2017 T. C.Memo. 81, at p. 3.

Xing took advantage of the controversial Patient Protection and Affordable Health Care Act, specifically that part or portion of which engrafted Section 48D onto the IRC, providing small businesses with the aforesaid largesse if they engaged in qualifying therapeutic discovery projects.

This Xing did with gusto, through an entity employing himself, his engineer wife and their Harvard Ph.D. candidate son. But Xing never incorporated or otherwise manifested the creation of said entity, nor filed Form 1128. But he reported on a fiscal year.

That of course goes down. You don’t get to pick your tax reporting year, unless Treasury blesses same.

Xing doesn’t spend a sufficient part of the largesse in the appropriate year, nor does he amend his MFJ return for that year to reduce his claimed expense deductions by half per Section 48D(e)(2), and recapture excess largesse.

Xing does get to depreciate his car. IRS doesn’t play the Section 274 card, conceding the business use thereof, but not allowing a Section 179 credit because Xing had no gross income from his scientific endeavors.

Xing’s patent amortization, computer and home office deductions evaporate for want of documentation or corroboration. His attempted offset of a short-term capital gain  with an undocumented capital loss carryforward fares no better.

And though the Section 48D grant may not be taxable, compensation paid to employees isn’t, and is subject either to withholding or SE. Xing and Kat paid neither.

As for the title of this blogpost, here’s Judge Nega to tell you all about it.

“Although respondent determined in the notice that petitioners were liable for a QTDP recapture tax for 2009, respondent now contends that petitioners are liable for the recapture tax for the 2010 taxable year as a result of our holding in Silver Med., Inc. v. Commissioner, 147 T.C. at __ (slip op. at 11-15), where we held that a taxpayer was liable for the recapture tax in the taxable year the grant funds were disbursed. Petitioners received the grant funds in 2010, and therefore, if petitioners are liable for the recapture tax, they are liable for the 2010 tax year.” 2017 T. C. Memo. 81, at p. 23 (Footnote omitted).

They are and they are.

As for Silver, see my blogpost “Going Short to Go Long,” 12/19/16.

Whatever the fate of the Patient Protection and Affordable Health Care Act, I look forward to plenty of good blogfodder therefrom.

Mae Izzedin Asad, Petitioner, and Sam Akel, Intervenor, 2017 T. C. Memo. 80, filed 5/15/17, play a variation on a theme. Each is willing to split the liabilities in their unpetitioned SNOD 50-50.

But they’re in front of Judge Morrison on a stand-alone 6015 innocent spousery. Each of them filed a stand-alone, and IRS agrees to split.

It’s just not 50-50. Sam and Mae offer the 50-50 at the trial, not in their divorce decree, but that doesn’t matter.

Since Sam and Mae didn’t petition the SNOD, their good faith defense to the chops was off the table. You can’t litigate the chops at a stand-alone, only who gets hit with them.

IRS’s split stands.

“A committee report discussing the Taxpayer Bill of Rights 2 (in proposed form) observed:  ‘In some cases, a couple addresses the responsibility for tax liability as part of their divorce decree.  However, these agreements are not binding on the IRS because the IRS was not a party to the divorce proceeding.  Thus, if a former spouse violates the tax responsibilities assigned to him or her in a divorce decree, the other spouse may not rely on the decree in dealing with the IRS.’  H.R. Rept. No. 104-506, at 30 (1996), 1996U.S.C.C.A.N. 1143, 1153.  The resulting report from the Department of the Treasury similarly observed:  ‘Many taxpayers are apparently surprised to learn that under current law their divorce decree’s allocation of liabilities is not binding on creditors (including the IRS) who do not participate in the divorce proceedings.’  U.S. Dep’t of the Treasury, Report to the Congress on Joint Liability and Innocent Spouse Issues 44 (1998), https://www.treasury.gov/resource-center/tax-policy/Documents/Report-Joint-Liability-Innocent-Spouse1998.pdf.  (The report suggested that binding the IRS to the results of a divorce decree was impractical.  Id. at 41-44.)” 2017 T.C.Memo. 80., at pp. 6-7.

There’s more, but you get the idea.

If you want to bind IRS to your divorce decree, serve them. If you can.

Don’t know how I missed this on Friday (even though I had an emergency visit to the local urgent care storefront after a trip-and-fall).

CSTJ Peter (“Modesty”) Panuthos is stepping down as Boss of the small judges of the small court, effective 9/1/17. He has served for twenty-five (count ‘em, twenty-five) glorious years as Chief, out of a total of thirty-four years on the USTC bench.

And his successor?

Blow the bugle, beat the drum.

None other than STJ Lewis (“His Name Is My Name Too”) R. Carluzzo.

Loud cheers from the assembled multitudes.

Sexual harassment cases have been much in the news. High-profile individuals in the broadcast media, whether entertainers, or others before the cameras or behind them, have been mulcted in big ticket damages.

Chanelle S. Coleman, Docket No. 11752-16, filed 5/12/17, received a settlement in such a case, which apparently made no headlines but points a useful lesson both to the headliners and those whose cases never reach the public eye. And their legal advisers would do well to read and heed.

Judge Kerrigan deals with this case in an off-the-bencher.

Half of what Chanelle got was designated as separation pay and future wages. The other half was designated in the confidential settlement agreement with her former employer as “compensatory damages, including emotional distress.” Transcript, at p. 4.

And Chanelle got a Form 1099-MISC for that half, but didn’t include it on her 1040.

Judge Kerrigan: “Damages (other than punitive damages) received on account of personal injuries or physical sickness may generally be excluded from income. Sec. 104(a)(2). For damages to be excluded under this provision, the underlying cause of action must be based in tort or tort-type rights, and the proceeds must be damages received on account of personal injury or sickness When damages are received pursuant to a settlement agreement, the nature of the claim that was the actual basis for settlement controls whether those damages are excludable pursuant to section 104(a) (2).” Transcript, at p. 5 (Citations omitted).

I’ve blogged enough of this sort of case for the rest to come as no surprise, either to my readers or myself.

“Petitioner contends that the sexual harassment caused physical ailments. She further contends that the settlement proceeds should not be taxable because of the physical effects of the harassment. Petitioner did not provide any evidence to show that any portion of the settlement proceeds were used for amounts paid for medical care attributable to emotional distress.

”Pursuant to the settlement agreement, the lump sum that petitioner received was for compensatory damages, including emotional distress. Accordingly, the lump sum payment of $35,675 that petitioner received in 2013 is not excludable from her gross income pursuant to section 104(a) (2).” Transcript, at p. 6.

The warning here applies as well to practitioners who advise victims of sexual harassment, both in structuring and documenting settlements, and advising their clients of the consequences.

Channeling Chanelle can be detrimental to happy client-attorney relationships.

These might get you into Tax Court, but once you’re there, you’d better have paper as well.

Who better to prove the truth of the foregoing than Barry Leonard Bulakites, 2017 T. C. Memo. 79, filed 5/11/17?

You must remember Barry. How could you not remember the man who outfoxed IRS’ crafty but sleazy maneuver in seeking dismissal of Barry’s timely served petition and substituting in its place and stead that which was delivered by an unblessed PDS, and thus ripe for dismissal?

Well, if you insist, see my blogpost “Another Taishoff ‘Oh Please’,” 9/24/14.

So Barry got in the door, but the result hardly justifies the effort. Here’s The Great Dissenter, a/k/a The Judge Who Writes Like a Human being, s/a/k/a The Foe of the Partitive Genitive, Old China Hand and Ace Silt Stirrer, Judge Mark V. Holmes, to tell the story.

Barry was an expert in life insurance and annuities, but got slugged for $500K when the outfit he worked for blew a 401(k) and the beneficiaries thereof sued. Barry borrowed against his home, hoping to sell and pay off within the year, but came the meltdown of 2008 and torpedoed that. Then he got divorced, and was going to pay his loved-once out of the same proceeds. That having tanked, he paid an override on the alimony that was less than the required post-sale amount, but more than the decree required.

Problem in both instances: No paper.

As for the loan, Judge Holmes: “The evidence does show Bulakites made payments to his lender, but the amounts do not match those that he claimed on his tax returns, and he did not explain this discrepancy at trial.  Bulakites also did not provide us with any business records regarding the loan, any loan statements, or any loan-repayment schedules.  Without this type of documentation we are unable to tell whether these payments were made on the original 2007 loan.  Remember that the note for that loan says it should have been paid in full by October 2008.  We understand that it might have been his plan to pay the note with proceeds from the sale of his home, and that that sale didn’t happen.  The problem is that we can’t figure out what happened to the note–was it refinanced?  Was it extended?  Without any paperwork (in a situation where there should have been lots of paperwork) we are left only with his testimony about the total amounts of the payments and the allocation of those payments between principal and interest.  We do not find his testimony credible on this issue, and so sustain the Commissioner’s determination.” 2017 T. C. Memo. 79, at pp. 6-7.

Should’a been a ton of paper. Most home mortgages seem to be graded on the weight (in kilograms) of the paper generated.

Now as for the increased alimony. Barry didn’t read my blog, or maybe he missed my blogpost “The Magic Paper Saves the Deduction,” 4/7/11, when Tim Micek saved his deduction in a small-claimer by producing a spousal support affidavit sufficient to satisfy Section 71(b)(2). All that’s needed is a written separation agreement, and, like a SNOD, there’s no standard or required form therefor.

So, alas and alack, even though Barry did the right thing, he doesn’t get the deduction.

“Bulakites’ oral modification of his written separation agreement doesn’t work–it’s well settled that an oral modification of a written instrument does not meet section 71’s requirements.  Sec. 71(b)(2); Gordon v. Commissioner, 70 T.C. 525, 529-30 (1978); Larievy v. Commissioner, T.C. Memo. 2012-247; Ellis v. Commissioner, T.C. Memo. 1990-456; sec. 1.71-1(c), Income Tax Regs. We do find his motivation sincere, and he did prove that he paid his ex well over the $2,000 a month required by his separation agreement, but we have to hold that the law does not allow him to deduct those excess amounts as alimony.  We therefore find for the Commissioner on this issue.” 2017 T. C. Memo. 79, at pp. 5-6.

Barry claims a big NOL, but loses, again because of want of substantiation. See Section 172(a), and Section 172(b)(2).

“A taxpayer substantiates his claim to such a deduction by filing with his return ‘a concise statement setting forth the amount of the net operating loss deduction claimed and all material and pertinent facts relative thereto, including a detailed schedule showing the computation of the net operating loss deduction.’  Sec. 1.172-1(c), Income Tax Regs.  Bulakites filed no such documentation.  During trial he did turn in a tax return for a previous year (though not the one that generated the net operating loss), but even with his testimony, that is not enough to substantiate his entitlement to a loss carryforward.” 2017 T. C. Memo. 79, at p. 8. (Citations and footnote omitted, but the footnote says though IRS consumed an idle hour trying to figure out how Barry got the NOL, Judge Holmes need not go there).

Barry gets the understatement chop, because his trial testimony gave the game away, which often disadvantages the honest litigant.

Today’s designated hitter marks the end of a source of blogfodder I could really use, now that Big Banging has become de rigueur at The Glasshouse at 400 Second Street, NW. And it’s The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Inveterate, Ineluctable, Indefatigable, Illustrious, Ineffable, Imperturbable, Insurmountable, and Incontrovertible Foe of the Partitive Genitive, Old China Hand and Ace Silt Stirrer, Judge Mark V. Holmes.

Here’s the end of the road for Eugenio Espinoza Martinez, Docket No. 29472-12, filed 5/10/17. Remember Eugenio, a former contestant in the Taishoff no-prize “best excuse” competition? Well,, in case it slipped your mind, here’s some light refreshment for your recollection.

“Hitting the Superfecta,” 3/26/15; “Hitting the Superfecta – Part Deux,” 3/16/16; and “The Prisoner’s Friend,” 8/18/16.

With refreshed recollections, you now recall that Eugenio was hanging ten in a correctional facility in The Lone Star State, and unlikely to emerge therefrom any time soon.

Helpful Judge Holmes tries “to develop and resolve” Eugenio’s tax beeves, rather than wait until Eugenio returns from the Stony Lonesome.

But it’s no go.

“After slowly working through the stipulation and summary-judgment process, the Court ordered Mr. Martinez to file written testimony stating why he disagrees with the notice of deficiency as to his 2009 tax year. We gave him a deadline of March 13, 2017. A check of the docket shows that he has not filed such testimony….” Order, at p. 2.

Judge Holmes laments that subpoenas ad testificandum from Federal Courts directed to State correctional institutions present procedural, and more to the point, financial, difficulties. And the amounts at issue are small. The two years at issue here involve little more than $5K.

So Eugenio is done, and IRS gets a Rule 123(a) default for the deficiencies.

And I get to find some more blogfodder. This is one tough gig, let me tell you.

Today’s designated hitter from STJ Daniel A. (“Yuda”) Guy revives the old cliché. In the case of Steven Schwartz & Wendy Schwartz, Docket No. 4354-16L, filed 5/9/17, it really pours.

First, Steve & Wendy late-filed their return for the year at issue, reported hefty tax due but didn’t pay, either with the return or after notice and demand from IRS. And IRS threw in late-filing, nonpayment, and no estimateds chops.

Steve & Wendy don’t pay, the NITL follows, and Steve & Wendy drop a 12153 into the Appeals hopper. They give Appeals a Form 433-A but with no back-ups, and a Form 656. Appeals bounces their CDP, but during all the back-and-forthing, IRS gives Steve & Wendy a SNOD.

IRS claims their self-reported tax was $7K low. But they can have a further late filing  and negligence chops.

Steve & Wendy don’t petition the SNOD.

To begin with STJ Yuda says the $7K is off the table, along with the chops thereto appurtenant. No petition from SNOD, no jurisdiction.

As for the chops arising from the unpaid self-reported tax, while Steve & Wendy said they wanted to dispute those in their 12153, they had a chance to dispute those at Appeals, but didn’t.

“Petitioners stated in their petition that they wish to dispute penalties for the [year at issue]. The record shows, however, that petitioners failed to place those penalties in dispute during the administrative hearing. Consequently, they are precluded from disputing their liability for penalties in this proceeding. See Thompson v. Commissioner, 140 T.C. 173, 178 (2013) (‘A taxpayer is precluded from disputing the underlying liability if it was not properly raised in the CDP hearing.’); sec. 301.6330-1(f)(2), Q&A-F3, Proced. & Admin. Regs.” Order, at p. 4.

As for the OIC, by not producing back-ups for their Form 433-A, that’s off the table.

IRS can levy, but only for the self-reported and chops.