I take my text for today’s sermonette (a Friday when nothing much happens at Tax Court) from Neil Diamond’s 1970 serenade to a vinous by-product that has never appeared upon my table (and hopefully never shall).

Here’s the story of Steven L. Ertelt, Docket No. 10739-14L, filed 5/19/17.

Steve wants to play the Leroy Muncy gambit, but ex-Ch J Michael B (“Iron Mike”) Thornton upbraids Steve for waiting too long.

And ex-Ch J Iron Mike throws in a $1K Section 6673 chop for lagniappe.

It seems like only yesterday I mentioned the Leroy Muncy gambit. But it wasn’t; it was the day before yesterday. See my blogpost “Delegati Non Potest Delegare, – Part Deux” 5/17/17.

Steve waited until he had run out the clock on his “I never got the SNOD so I can contest liability de novo” opener. He went the Rule 122 route, but that got bounced. Then there was a remand to Appeals to see if the SNOD was mailed to last known address.

The supplemental NOD said it was. Trial was set, IRS moved for summary J, but that was denied because of issues with the PS3877.

Trial was finally held. Steve wanted another remand, but didn’t get it.

Tax Court sustained IRS.

Steve now wants a vacation, to put in the Muncy Eighth Circuit remand discussed in my above-referenced blogpost.

Too late, Steve. Vacations (Rule 161 or Rule 162 variations) aren’t for coming up with could’a would’a should’a theories. As the title of this blogpost says, play it now, play it now, play it now.

That is, if you can.

“Unlike the taxpayer in Muncy, petitioner did not raise in his pleadings, at trial, or on brief the issue he has raised in these motions. Petitioner’s case was before the Court on a notice of determination concerning collection action and in his amended petition petitioner alleged he never received of [sic] a notice of deficiency for the years in issue and ‘therefore has never had a chance to challenge the liability of the proposed tax.’ At trial and in his brief, petitioner’s only argument was that respondent could not prove that he received the notice of deficiency, not that the notice of deficiency was improperly issued. See Rule 331(b)(4) (‘Any issue not raised in the assignments of error shall be deemed to be conceded.’).

“Moreover, petitioner had multiple opportunities to raise the delegation of authority issue presented in Muncy and he failed to do so. The Eighth Circuit decided Muncy on March 2, 2016, and through and until the date of the decision in this case on March 1, 2017, petitioner filed several documents including an objection to respondent’s motion for summary judgment, a motion to remand, a post-trail [sic] brief, and a motion to reopen the record, in addition to a trial that was held on June 20, 2016.” Order, at p. 5.

Anyway, says ex-Ch J Iron Mike, these delegation arguments are frivolous.

Well, if they’re so frivolous, how come Eighth Cir reversed and remanded in Muncy?

Steve’s problem is that, even if he had timely raised the delegation issue, he’s a Californian, and Ninth Cir blew off that argument in Banister v. Commissioner, T.C. Memo. 2015-10, at *9, aff’d, 664 F. App’x 673 (9th Cir. 2016).

“In Banister, T.C. Memo. 2015-10, at *7, the taxpayer argued, among other things, that the notice of deficiency was invalid because it was not signed by an authorized person; the Court dismissed the taxpayer’s arguments as frivolous and imposed a penalty under section 6673. On November 16, 2016, the Ninth Circuit, Banister, 664 F. App’x 673, affirmed the Court’s decision and imposed an additional penalty under section 6673.” Order, at p. 6.

And of course Steve the Californian is Golsenized to Ninth Cir. Ex-Ch J Iron Mike blows off Eighth Cir’s learning in a footnote. True, Ninth Cir themselves gave Banister the brush-off in a memorandum opinion, of which the Court said “This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3.” Banister, at p. 1, footnote 2.

Now ex-Ch J Iron Mike might argue that the Ninth Cir Rule 36-3(c)(ii) “sanctionable conduct” exception lets Banister in. But it’s a really thin twig upon which to hang, compared to what Eighth Cir did in Muncy.

Granted, Steve may be every bit as great an obstructionist as ex-Ch J Iron Mike says he is. And maybe Ninth Cir is right and Eighth Cir is wrong, although why this point should depend on arbitrary lines on a map eludes me. We’re dealing with a national tax code, that affects all American taxpayers, and a lot of people and entities who aren’t Americans or aren’t taxpayers. Is it so much to ask for a forum to interpret one uniform rule, right or wrong, for all the aforementioned? And isn’t Federal tax law sufficiently complex to require disputes thereunder to be appealed to a national bench with the requisite expertise, rather than the multiplex-cinema approach that has served us so ill up to now?

All that said, IRS’ counsel certainly didn’t cover themselves with glory, either.

The right paper in the hands of ex’r Jeff would have saved the day for Estate of Nancy H. Powell, Deceased, Jeffrey J. Powell, Executor, 148 T. C. 18, filed 5/18/17.

But once again, the power of attorney is useless if it fails to empower the agent to do what is needful.

The late Nancy put $10 million in cash and stock into a limited partnership, in which she had a 99% limited partner’s interest. Judge Halpern is down with ex’r Jeff’s position, that the three-year clawback into the late Nancy’s estate is only the difference between the worth of the cash and stock over the worth of what the late Nancy got for the same, namely the 99% limited partner’s interest.

And the clawback does cover that value, because all the partners, limited and general, could elect to terminate the LP and divvy up the goodies, thus qualifying for Section 2036(a)(2) “possess or enjoy” treatment.

But ex’r Jeff hands the late Nancy’s 99% limited partner’s interest to a charitable lead annuity trust a week before the late Nancy departs this vale of tears. For no consideration.

No one says there wasn’t a power of attorney (springing variety, which springs to life when principal is incompetent), or that the late Nancy wasn’t incompetent a week before she died. Two doctors certified the late Nancy was incompetent.

Problem: CA law requires a grant of explicit authority in the POA to permit the making of gifts by the agent.

Ex’r Jeff claims general authority to deal with principal’s property, but that’s a nonstarter.

See my blogpost “Good Job, Judge Lauber,” 10/14/16.

Takeaway- Draft that POA with utmost care. Especially when you’re under time pressure.

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.