Or, “Tell The Judge I’m Busy – Twice”

Apparently partner other than tax matters partner Bruce Eileff doesn’t read my blog, but I don’t feel like the Lone Ranger, because he apparently doesn’t read Judge Chiechi’s orders, either.

For the backstory on Bruce and his counsel, see my blogpost “Tell The Judge I’m Busy,”11/15/16.

Well, did Bruce and counsel bestir themselves, do the numbers, and hand in the result of their lucubrations at their Rule 155 beancount?

Negatory, good buddy.

Here’s Judge Chiechi, patient as Job, although her patience is wearing a wee bit thin. The case is still Taishan Investments, LLC, Bruce Elieff, Partner Other Than The Tax Matters Partner, Docket No. 8404-13, filed 12/20/16.

The parties report their status, in part, thus:

“5. Petitioner Elieff informed his counsel today that he has been tied up with three arbitrations in the past month and will start reviewing the proposed closing agreement this week.

“6. Petitioner’s counsel contacted Petitioner Elieff’s CPA on December 16, and December 19, 2016. The CPA estimates that he will probably finish reviewing the closing agreement by this week, and he will be on vacation next week.

“7. The CPA expects to work with Respondent when he returns to work to review the numbers in the closing agreement.

“8. Petitioner’s counsel expects that the review of the closing agreement can be finished sometime in late January, 2017, absent any disagreements on the terms.” Order, at p. 1.

“It appears to the Court that neither petitioner or petitioner’s counsel places a priority on finalizing the closing agreement. As far as the Court is concerned, petitioner should have spent his time reviewing the closing agreement sent to him, instead of spending his time on three arbitrations. Moreover, the Court does not understand why it will take almost a month for the CPA, petitioner, and respondent’s counsel to verify the computations relating to the closing agreement.” Order, at pp. 1-2..

Now as for the CPA going on vacation, I don’t fault him/her, as shortly I will be going on an extended vacation. I’ve thoroughly cleared my desk in anticipation thereof, and propose to be incommunicado for a couple weeks (hi, Judge Holmes, I’m going to miss your colloquialisms).

But as for Bruce and counsel, it would behoove them to put the pedal to the cliché.

Judge Chiechi wants a status report a week from today in her hands, and the latest excuses don’t cut it.

“…petitioner’s counsel shall explain in detail why the closing agreement will not be finalized before the end of January 2017. In this connection, the Court will not accept as good cause the reasons set forth in the joint status report that the parties filed….” Order, at p. 2.

Lest anyone mistake my view, I firmly believe in continuing professional education. I want to learn something of use, both professionally and personally, every day; I hope that in some cases my readers will take the will for the deed.

Howbeit, as this year draws to its cliché, I am bombarded by pitches from alleged CPE providers, intimating dire consequences if I don’t cough up.

I sent off an e-mail to Office of Enrollment to request clarification, after trying their phone number, which is useless.

I would make a political remark about IRS funding, but this is a non-political blog; there are enough toxic waste sites, and I am sure there will be a lot more without any additions from me.

How much of the stuff the CPE-floggers put out is of use? A few are valuable; without naming names, education tax credits and tax issues in divorce have helped. But the tenth course in “choosing an entity for the small business” is neither instructive nor amusing.

But obviously there’s money in it. Hence the title of this rant.

Getting it wrong is bad enough, when you can correct it. But when you can’t, things get much worse.

Suzanne D. Oster Ozimkoski, 2016 T. C. Memo. 228, filed 12/19/16, lets Judge Paris show us how bad it can get.

Suzanne’s husband dies, leaving an IRA with $235K in it. Suzanne is ex’r and beneficiary named in simple will done by a “small, local ‘full service law firm.’” (2016 T. C. Memo. 228, at p. 3, footnote 4).

I’m sure my ultra-sophisticated readers have just asked “and who was the beneficiary of the IRA?” We all know that wills can’t change IRA beneficiaries.

Well, Suzanne isn’t. So when a fracas arises between Suzanne and Junior (son of deceased spouse), trustee freezes the IRA, until the litigation is settled. Then trustee rolls IRA over to Suzanne, who draws down to pay Junior the settlement (cash plus a Harley), and draws again for herself.

Judge Paris finds under FL law that, where there is no beneficiary, or where the estate is the beneficiary, the IRA goes to the estate. Trustee had no basis for freezing the IRA, which should have gone to the ex’r. Especially since trustee couldn’t find the beneficiary designation.

The trustee (Wells Fargo’s predecessor Wachovia) had other problems, but we’ll skip those.

Since apparently spouse died before distributions were required to be taken, IRA must be distributed within five years to estate, as there is no beneficiary. As surviving spouse Suzanne wasn’t named beneficiary, distributions are taxable.

And the 10% thingy is on the table as well, Suzanne being under 59-1/2 years of age at the time.

“Under Florida law Wachovia should have distributed the IRA assets to Mr. Ozimkoski, Sr.’s estate because either it was named as the beneficiary or there was no named beneficiary and because the settlement agreement makes no direction as to the disposition of the IRA.  Although the Court finds that Wachovia incorrectly rolled over Mr. Ozimkoski, Sr.’s IRA to petitioner’s IRA, the Court has no jurisdiction to unwind that transaction and must decide petitioner’s tax liability on the basis of Wachovia’s erroneous transfer of Mr. Ozimkoski, Sr.’s IRA assets to her IRA and the subsequent distributions from her IRA.” 2016 T. C. Memo. 228, at pp. 11-12.

It’s real bad for Suzanne, but for the “small, local full service law firm,” supra, it gets worse. The attorney knew there would be taxes to pay. “Wachovia’s employee journal notes state that petitioner’s probate attorney understood that someone would have to pay income tax on the $110,000 allocated to Mr. Ozimkoski, Jr., under the terms of the settlement agreement. “ 2016 T. C. Memo. 228, at p. 12 (Footnote omitted, but Judge Paris says it’s unclear if the attorney included the estate as being liable.)

“It is unclear from the record before the Court how petitioner’s probate attorney counseled her to comply with the payment obligation under the settlement agreement–as the personal representative of Mr. Ozimkoski, Sr.’s estate, as an IRA beneficiary, or as a surviving spouse.  What is clear from the record before the Court is that petitioner’s probate attorney failed to counsel her on the full tax ramifications of paying Mr. Ozimkoski, Jr., $110,000 from her own IRA.  While the Court is sympathetic to petitioner’s argument, the distributions she received were from her own IRA and therefore are considered taxable income to her….” 228 T. C. Memo. 228, at pp. 13-14. (Footnote omitted, but all Suzanne was arguing about was the $110K to Junior, so she waived the draws she took for herself.)

Maybe she wouldn’t have been better off if the estate paid the $110K and the tax, but for the passage of time.

Suzanne beats the 20% accuracy penalty on the tax on the $110K because she had limited education and relied on Wachovia and her lawyer. Her own draws are her problem.

But the takeaway is essential: make sure there’s a named beneficiary for every IRA and update it. And watch rollovers and distributions. Really carefully.

This is a sad story. A partnership made money and this partner had a distributive share. But rather than take it and pay tax, he chose to let the partnership use the money to pay expenses. He claimed NY partnership law required him as a fiduciary to advance the interests of his fellow partners and not abandon them.

His tax advisers told him that, although unfair, he owed the tax. He said he was prepared to face the consequences.

Judge Gustafson can’t oblige as to letting him off the tax, but can oblige by letting him face the consequences.

He owes the tax and the five-and-ten chop. The capital contribution to the partnership adds to his basis, but isn’t deductible.

His attempt to shield his spouse is not on the table, as it’s for her to file innocent spousery.

Curious why, if the partnership was in such dire straits, he didn’t get his share of offsetting deductions. But there’s a Section 155 beancount to follow, so maybe there’s a silver lining.

And maybe if the partnership goes under he has a capital loss.

The case is Walter S. Mack, Jr. and Consuelo C. Mack, 2016 T. C. Memo. 229, filed 12/19/16.

No, not a Dash Riprock “Liars’ Poker” ploy from Michael Lewis’classic.

Today we look at Silver Medical, Inc., 148 T. C. 18, filed 12/19/16. Silver wanted a triple-dip on some unguided Congressional largesse to inventors of therapeutic devices from Section 48D, a section added by  Affordable Care Act of 2010 (which itself needs some therapeutic devices, but this is a non-political blog).

If the device made the cut with Treasury and HHS, one got either cash or credit to the extent of 50% of allowable expenditures in each of 2009 and 2010. There were clawbacks if too many applicants asked for the goodies, or if there were disallowances of goodies previously granted because applications were due and had to be processed before end of 2010, so no one knew final numbers. The clawbacks were treated as tax.

Silver was cute. They took a short year in 2010, so that they had three tax years in 2009 and 2010; 2009 was one year; 2010 short and 2010 long were the others, and the magic language in Section 48D(b)(5) talks of tax years beginning in 2009 and 2010. Thus, by shorting 2010, Silver had two years beginning in 2010, so they could use almost all of 2011 to grab more.

Aside from being a case of first impression as to a statute that has timed out, this is an example of gameplaying that doesn’t get it with Judge Vasquez.

Silver got certified for its expenditures before choosing to go short. When it got its short approved, it tried to get recertified. IRS didn’t certify. Instead, it hit Silver with a SNOD.

Silver claims “tax years beginning” means “tax years beginning.” Plain language, giving effect to every word, and all that jazz.

Judge Vasquez cuts to the chase. “We need not and will not address petitioner’s argument in resolving the instant case.  We focus on respondent’s alternative argument and recognize that even if Congress did intend to allow taxpayers like petitioner to make qualified investments over three tax years (an issue we decline to decide), petitioner did not actually receive certification to do so.” 147 T. C. 18, at p. 10.

Administrative nullification? IRS can thwart what seems to be someone taking advantage of sloppy language in the famous 3200-page enactment by doing nothing.

Judge Vasquez is down with that.

Now as for when the clawback of overpaid largesse happens, that happens immediately after the grant was made, as if it had never been made.

OK, says Silver, the grant was made in 2010, therefore the clawback applies to that year.

No, says Judge Vasquez.

“In determining that the grants were made on separate dates, we focus primarily on the fact that the grant funds attributable to each year were paid on separate dates.  The terms of the QTDP program provide that grants for tax years beginning in 2009 will generally be paid no later than October 29, 2010, and that grants for tax years beginning in 2010 will generally be paid within 30 days of the last day of the 2010 taxable year.  See Notice 2010-45, sec. 8.02(6) and (7), 2010 23 I.R.B. at 738.  We believe that the payments for each tax year are sufficiently distinct to warrant a finding that the underlying grants are separately ‘made’ in each year when paid.” 147 T. C. 18, at p.13.

The letter granting certification mentioned the clawback, so nothing was final until after year-end. Applications were due in July, 2010 and IRS had to accept or reject by October. Approving the grant did not result in an unrestricted right to a fixed grant amount. So the final grant became effective at the beginning of 2010, and the 2011 items are off the table.

I give Silver a Taishoff “Good try, First Class.”

Howard Feinberg & Gail Feinberg are in Tax Court today, having been tossed for failing to cough up the sixty bucks but now having raised the cash.

A quick docket search reveals that Howard & Gail are pro se. OK, most TC petitioners go pro se. There’s no requirement for them to retain counsel, and Tax Court certainly can’t appoint counsel (except sometimes; see my blogposts “Assigned Counsel?” 1/6/16 and “Assigned Counsel? – Part Deux,” 1/28/16).

But here’s the twist. Having reached a “no change” deal with IRS, having the sixty bucks ready to send in to Ch J L Paige (“Iron Fist”) Marvel, and wanting to submit a stipulated decision, they need a vacation…of Ch J Iron Fist’s earlier order tossing them for nonpayment. And they do it in this wise: “…a Letter… by Terry R. Fyffe on Behalf of Petitioners. In that letter, petitioners (1) state that they and the IRS have reached a “no change” agreement and (2) request that this case be reopened so that the parties’ stipulated decision may be submitted for the Court’s consideration. The letter was accompanied by payment of the Court’s filing fee.” Order, at p. 1.

Sound like a motion per Rule 162 to you? Well, it sure did to me. And Ch J Iron Fist agrees, and recharacterizes the Letter as a 162 motion.

The order doesn’t state whether Howard & Gail signed the letter. If they did, why mention who wrote it?

But if they didn’t, how do non-USTCPs or admitted attorneys go making motions?

Has Rule 200 been superseded? Or is Terry R. Fyffe an unusually modest USTCP or admitted attorney, who hides his light under a cliché? A quick on-line search turns up a website for a firm of CPAs, in which one Terry R. Fyffe is stated to be a founding member. But the site doesn’t state that Terry R. is a USTCP or an admitted attorney.

Ch J Iron Fist sidesteps the issue, holds the letter-cum-motion in abeyance until she sees the stipulated decision, and then will “take appropriate action.”

So people pay a fee, undergo a brutal examination, with an infinitesimal passing rate, and get sponsors, to become USTCPs. And the rest of us lawyers send in the thirty bucks, and take no exam. But if we appear without having filed Entry of Appearance, we get a smart right-about-face and get told to file one.

However, CPAs apparently need do none of the above. Section 7452 provides that “(N)o qualified person shall be denied admission to practice before the Tax Court because of his failure to be a member of any profession or calling.” But the immediately preceding sentence in Section 7452 says Tax Court can make rules about representation of petitioners.

I must have missed that one.

In my young day, traveling on Canadian Pacific Rail, I heard a no-doubt-apocryphal tale of a traveler who encountered a bedbug in a CP sleeper. In response to his furious letter to the high command, he received an abject apology, in the most fulsome terms. But the typist (I told you this was in my young day) left in the envelope the High Commander’s note: “Send this dope the bedbug letter.”

I bear the admonition in mind like the famous “torch in flame.” The form file is not infallible. Read the document carefully before you sign it, send it, file it, mail it or deliver it.

Today we see what happens when one doesn’t.

Jeffrey S. Monaghan is apparently deceased, and Martha J. Monaghan, co-petitioner, is asked to provide letters testamentary, letters of administration, or some kind of judicial decree appointing an executor, personal representative or fiduciary to represent the late Jeffrey’s interests.

Ch J L. Paige (“Iron Fist”) Marvel warns what will happen if Martha doesn’t do so.

“Failure to comply with this Order may result in the granting of respondent’s motion and dismissal of the instant case in part as to X [sic], Deceased, or other appropriate action by this Court.” Jeffrey S. Monaghan & Martha J. Monaghan, Docket No. 22063-15, filed 12/16/16, at p. 1.

And STJ Daniel A. (“Yuda”) Guy has another one for us. Morris Gaines and Madeline Gaines, Deceased, Docket No. 5597-16S, filed 12/16/16. And this time IRS’ counsel goes astray. “… respondent filed a document titled ‘Motion to Appoint Tax Matters Partner’. This motion is incorrectly titled and is in the nature of a motion to substitute parties and change caption.” Order, at p. 1.

While Morris and the late Madeline may have been partners in life, TEFRA has nothing to do with it.

Takeaway—There but for the grace of you-know-Whom goes any of us.

But It Does Save the Chop

Unlike that lizard of the television advertisements, Form 5329 doesn’t save Bilal Ahmed, Docket No. 23807-15, filed 12/15/16, 15% or even 10%. The latter is the Section 72(t) tax or addition to tax or whatever it is, when what he claims is a QDRO (Qualified Domestic Relations Order) permitting him a tax-free takeaway from his IRA fails to convince IRS or Judge Goeke.

But it does save Bilal the 20% substantial understatement chop on the 10% early withdrawal thingy, in this off-the-bencher, which Judge Goeke, modest as always, doesn’t bother to designate.

Bilal is ordered by CA Sup Ct to draw down his IRA to pay off the credit card debt that burden Bilal and his community-property soon-to-be-ex. Of course, they’re supposed to split the taxes, but neither IRS nor Tax Court enforces State Court decrees.

Judge Goeke notes that Bilal filed the Form 5329 discussing the claimed exemption from tax based on a claimed QDRO. But Bilal’s decree utterly crashes on Section 414(p)(2), none of whose tests the decree satisfied. And Bilal never tipped off the plan administrator, thus falling foul of Section 414(p)(6).

Judge Goeke: “It’s undisputed that the Petitioner did not provide the order in question to the administrator of his IRA and it is also clear from the order, itself, that it does not meet the requirements of Subsection 414(p)(2) as described above.

“Respondent [IRS] correctly points out that Petitioner was required to submit the order to the plan administrator in order to be subject to the statutory exception under Section 72(t)(2)(C). Given this and other inadequacies of the order in question, there’s no question that the Petitioner’s position that he was exempt from the application of Section 72(t) is incorrect.

“The order was not a qualified domestic relations order and the inadequacies of the order are not mere technical failures. The order is intended to ensure the credit card debt of the marital community of Petitioner and his former spouse is satisfied and he was ordered to receive the money initially himself, not to transfer the money to his spouse.

“He testified that remaining amounts after the satisfaction of the credit card debt, which was to his benefit as well as to his former spouse, were used to pay obligations of himself as well as his former spouse in legal fees [sic]. Use of the funds in this manner is not consistent with a statutory exception as a policy matter in addition to the technical inadequacies of the order and Petitioner’s failure to provide the order to the plan administrator.” Order, at p. 9-10.

So Bilal’s IRA draw is taxable all the way, he’s under 59-1/2 on the draw date so the 10% thingy applies, and he’s in the zone for the five-and-ten ($5K or 10%) chop. IRS has burden of production, and has satisfied it.

But here comes the Magic Paper to save whatever is left of the day for Bilal.

“In this regard, we believe it is important that the Petitioner filed the appropriate form with respect to the early withdrawal from the IRA. While the Petitioner incorrectly claimed that the withdrawal was exempt, his assertion that the withdrawal was exempt we believe was in good faith given the rather complex nature of the law regarding the treatment of qualified domestic relations orders.” Order, at pp. 11-12.

Takeaway—When in doubt on an IRA draw, at least on a QDRO, send in the Form 5329. Yes, I know, it’s an invitation to Examination, but the 1099-R will set off bells anyway if it doesn’t show up on the 1040. And if the petitioner looks honest but bewildered, it might save the chop.

Second takeaway—Family lawyers, beware. Watch out for the QDRO trap when detaching IRAs from spouses. Re-read Section 414(p)(2) and the regs.

No, this is neither political commentary, nor a retelling of what the ancient Greeks told much better. Rather, Jerald L. Carmody, 2016 T. C. Memo. 226, filed 12/14/16, fails to convince Ch J L. Paige (“Iron Fist”) Marvel that his Hercules imitation sufficiently transmutes his horseracing hobby into a business. He stumbles at the usual Section 183 fence.

“During the years at issue petitioner spent time every day on his horse racing activity.  In addition to entering horses in races, he researched on the Internet horses that would be racing during the current week, researched the performances of horses in which he had previously owned an interest, and also searched for other horses in which to purchase interests.  On the weekends petitioner cleaned stalls and pastures, attended races at the racetracks, helped Mr. P care for the horses during the evenings, and watched videos of the races during the nights.  Because the racing seasons at the racetracks span most of the year, petitioner engaged in these activities throughout the entire year.” 2016 T. C. Memo. 226, at pp. 7-8. (Name omitted).

But no business plan, sketchy books and records, continuous losses over twenty years, no consultations with experts or successful operators, avid horseracing enjoyment, and lots of other income from flogging parts and services for helicopters, causes Jerald to become unhorsed taxwise.

Jerald should check out my blogpost “I’ve Got The Horse Right Here,” 4/9/14, for how Stefan A. Tolin beat IRS in a photo finish.

A defective resume causes Judge James S. (“Big Jim”) Halpern to revisit AD Investment 2000 Fund LLC, Community Media, Inc., A Partner Other Than the Tax Matters Partner, 2016 T. C. Memo. 226, filed 12/14/16.

The visit and its results can be found in my blogpost “Harmless Error,” 11/19/15. Turns out Murph had fibbed a wee bit on his curriculum vitæ. Enough to get his expert witness testimony tossed.

And the Community Mediators have told enough of a tale to convince Judge Big Jim to allow a late Rule 162 vacation, to reconsider the case without Murph’s contributions thereto.

Murph had been tossed once before from a different case on the same grounds.

In any event, decision affirmed.

It was worth a try, however feeble, but the one salient fact is not rejected, even minus Murph’s exegesis thereupon. And IRS consents, which should have given the movants pause.

Lehman Brothers was the sole arbiter on the deal, owed nobody any duty to look out for their interests, and could guarantee the currency Bialystok that threw off the recognized loss but unrecognized offsetting gain by picking a price outside the sweet spot.