That phrase always puzzled me. I’d always thought you could have profits, whether earned or unearned, if you took in more than you paid out. Earnings meant something you worked for. Many years ago I heard the phrase “money you had to get up in the morning for.” That sounded like earnings to me.

Anyway, Gregory Alan Brown, 2017 T. C. Sum. Op. 24, filed 4/25/17, had a C Corp electrical contracting operation that had a profitable year for the year in question. The C Corp isn’t a party to this case, so we don’t know what its tax posture might have been, but there was enough cash in the till for Gregory to write a $5K check for his mortgage interest, among other things not itemized by Judge Colvin. Maybe the unitemized personal expenses paid by the C Corp were conceded.

Now title to the home in question was shared by Gregory with a person to whom Gregory wasn’t married. That person paid some mortgage interest, was the primary obligor on the mortgage, so got the 1099-INT for the whole enchilada.

Gregory gets to deduct his share, as State law (MD) says he has equitable title. What the co-owner actually deducted, and whether the SOL has run on her, thereby whipsawing IRS, is not mentioned.

IRS claims constructive dividend for the $5K post-trial. Judge Colvin gives IRS an amendment to the answer, with the burden of proof thrown in. But that’s easy, because C Corp had no interest in the home, and Gregory himself testified that the C Corp was profitable.

Hence earnings and profits, hence an undeclared, but nevertheless taxable, dividend, to Gregory; but he gets the $5K mortgage interest deduction, so it’s a wash.

Just when you thought it was simple, we find the former owner bows out, and Gregory marries someone else.

The someone else had children, whom she wanted to keep in school and therefore didn’t move in with Gregory for a while.

Gregory filed HOH. IRS says he should have filed MFS.

Judge Colvin: “Generally, to qualify as a head of household, a taxpayer, among other requirements, may not be married at the close of the taxable year.  Sec. 2(b). Petitioner agrees that he was married throughout [year at issue].  However, an individual is not considered married for the purpose of determining head of household filing status if he or she is legally separated from his or her spouse under a decree of divorce, if his or her spouse is a nonresident alien, or if (inter alia) he or she lives apart from his or her spouse for the last six months of the taxable year.  Secs. 2(b)(3), (c), 7703(b).  As relevant here, petitioner testified that Mrs. Brown lived with him for at least part of the second half of [year at issue].  Thus, petitioner’s correct filing status is married filing separately, not head of household.” 2017 T. C. Sum. Op. 24, at pp. 8-9.

Takeaway- Residence rules are technical, and they cover more than one tax issue. Good planning may mean camping out for a while. See my blogpost “Old Tax Credits Never Die,” 11/6/12.

Here’s the end of a story I began three-and-a-half years ago. Stock that IRS claimed was vested (not subject to substantial risk of forfeiture) turns out to be unvested, but the moment the risk dropped away by its own terms, the vested stock was taxable, and the shuck-and-jive surrender and repurchase deal the stockholders pulled goes down in no-business-purpose flames.

Here’s the end of the trail for Larry E. Austin and Belinda Austin, 2017 T. C. Memo. 69, filed 4/24/17, as told by Judge Lauber.

Judge Lauber denied partial summary J to IRS back on 12/16/13. See my blogpost “Cause Celèbre,” 12/16/13, for the backstory.

Now, after the trial, it turns out that even though Larry and his late fellow-shareholder Art Kechijian ran the show, their economic interests were so aligned that they couldn’t agree to kill the restrictions on their shares (the five-year earn-out) without doing themselves serious economic hurt. Larry was Mr Outside, finding deals; Art was Mr Inside, making what Larry brought in work. Each couldn’t go solo; each lacked the skillset the other possessed. Thus, the restriction was real, so the stock didn’t vest until the five years were up.

Using a now-obsolete provision allowing ESOPs to hold S Corp stock, Larry and Art let their ESOP buy a 5% stake. When the provision sunset, the ESOP was terminated, there was a fair-value opinion and an independent vote by the beneficiaries on the buyout.

So far, so good. No tax due from Larry and Art until the five years was up, the ESOP got IRS clearance until termination, and Larry and the late Art’s estate are leading IRS as they near the wire.

Ah, but how many tickets have I torn up on horses that were leading in the stretch, but never made it ahead to the wire.

Well, the coupled entry of Larry and Art can join the unhappy list. As the five year earn-out ends, they claim they surrendered their stock and bought it back, for a note yet, to avoid SE.

That’s tax avoidance with no economic substance or business purpose. So in Year Five the guys get nailed for $45 million in tax, plus 20% chop.

Remember Darrell Royal

I’ve remarked often enough on the public nature of Tax Court proceedings. Beginning with the mandate of Section 7461(a) that all reports, evidence and transcripts be made public except where the Court itself orders otherwise, we get periodic Judge ‘splainin’s like this one from Judge Cohen.

The order is Shenae A. Outerbridge, Docket No. 7907-08, filed 4/24/17.

Shenae got hit back in 2009, appealed to 4th Cir. in 2010, and got her hit affirmed in an unpublished per.cur. For you civilians, a per. cur. is a by-the-Court memo, usually stating that the lower court’s decision is affirmed without need for comment.

Now Shenae wants her entire record sealed, including without in any way limiting the generality the T. C. Memo. from 2009, which has been hanging out on the Tax Court website and the public media for more than seven (count ’em, seven) years.

“In her motion, petitioner states that ‘the Court issued an opinion holding that most of the expenses claimed as business expenses were personal in nature’ and ‘In that opinion, the Court incorrectly infers that petitioner should have known better as a CPA.’ In her affidavit in support of her motion, petitioner claims that the Court’s purported inference that she was a certified public accountant ‘is grossly misleading’.

“Petitioner further claims that the ‘stigma and perception’ from her Tax Court case and the Court’s opinion has made potential employers question her ‘ability to provide sound financial management and accounting services’ and she has lost at least two employment opportunities as a result. Petitioner asserts that this situation can only be remedied by making petitioner’s Tax Court case, including the Court’s opinion, inaccessible to the public.” Order, at pp. 1-2.

Prospective and current Tax Court litigants, please mark, learn and inwardly digest Judge Cohen’s remarks, which follow.

“The determination of whether to seal evidence in a case requires a balancing of privacy interests against the probative value of the confidential information. See I.R.C. sec. 7461(b)(1); Rule 103(a), Tax Court Rules of Practice and Procedure. Pursuant to Rule 103(a), the Court may make any order ‘which justice requires’, upon a motion by a party for ‘good cause’, to protect a party or other person from “annoyance, embarrassment, oppression, or undue burden or expense”. Section 7461(b) and Rule 103(a) authorize the Court to weigh the competing interests and to grant protection that justice requires. See Willie Nelson Music Co. v. Commissioner, 85 T.C. at 920. The party seeking protection first has the burden of proving that the material is the type of information protected by the courts, e.g., patents, trade secrets, privileged documents or other confidential or sensitive information. Willie Nelson Music Co. v. Commissioner, 85 T.C. at 920-921. A showing that the information would harm a party’s reputation is generally not sufficient to overcome the strong common law presumption in favor of access to court records. Willie Nelson Music Co. v. Commissioner, 85 T.C. at 921. Secondly, the party must show that there is good cause for protection, i.e., specific harm will result if the order is not granted. Willie Nelson Music Co, v. Commissioner, 85 T.C. at 920-921.” Order, at p. 2.

I include the citations to Willie Nelson’s case to show that (a) I don’t make this stuff up, and (2) no matter what your reputation or how essential it is, you’d better have better cause than that to get sealed.

So what Shenae claims is not protectable.

If you go into Tax Court and you think you need something sealed, ask up front. And follow Rule 103, keeping within the bounds of Section 7461(b). Because once it’s public, it’s always public.

Remember, going into Tax Court is putting the football in the air.

Even though the late great Darrell Royal said he didn’t invent the phrase, it is an indelible part of his legacy: “Three things can happen when you pass, and two of them are bad.”

Although I called this one back in October, I am not taking credit (well, not much anyway) for the call; it was truly obvious.

The order to which I refer is Guidant LLC f.k.a. Guidant Corporation, and Subsidiaries, et al., Docket No. 5989-11, filed 4/24/17.

If you want the backstory, see my blogpost “This One Settles,” 10/3/16.

Today’s order speaks for itself.

No, not a comment about our National Anthem. As a member of the American Legion, it matters much to me that appropriate respect be given. But my views on that point will be, and have been, expressed elsewhere.

The IRS has now released some sample questions for the benefit of those studying for the SEE, the Special Enrollment Examination, whereby aspirants can attain a place at the Exam and Appeals tables, even if they did not prepare the return at issue.

So try these out, guys, and best of luck.

https://www.irs.gov/tax-professionals/enrolled-agents/special-enrollment-examination-questions-and-official-answers

I posted a Very Much Off-Topic musical rant today, thinking Tax Court would be dull. But Judge Goeke, although unaware of my perceived plight, has an off-the-bencher that reminds me of a recent exchange between two of my nearest and dearest.

“K: I’m not going to ask you the question, because I know what you’re going to say.

“Me: Really? What am I going to say?

“K: No.”

No, “Me” is not I.  I suggested asking the question anyway, and when the expected answer was received, negotiate. I was rebuked.

Well, here’s the story of Mark Glenn Hexum, Docket No. 13994-16, filed 4/21/17. Mark Glenn didn’t ask his trusty preparer, and it cost him.

Mark Glenn was tussling with the IRS over some amortization he paid on the mortgage encumbering the marital residence, after divorce decree but before said residence was sold and the proceeds split between Mark Glenn and his loved-once. Mark Glenn claimed he should get credit therefor, dollar for dollar, but that didn’t play in Peoria, and the Circuit Court for Peoria County, IL just split the proceeds.

Mark took the amortization as an alimony payment. IRS said “No,” and Judge Goeke agrees. It’s the old Section 71(b)(1)(D) liability to make any such payment for any period after the death of the payee spouse issue, and Mark Glenn agrees that if loved-once had left this vale of tears before the sale closed, he’s still on the hook for the net proceeds split.

So game over on the deficiency.

But how about the 20% chop?

“In the present case the Petitioner did not ask his return preparer whether, in fact, the [amortization] should be treated as deductible. We believe a tax professional would have instructed him that he should make an inquiry whether the payment in question would have been a continuing obligation even upon the death of his spouse, in which case it would not have been deductible as alimony expense. The fact that Petitioner did not make this inquiry we believe makes a reasonable cause defense inapplicable to him under section 6662(a) and section 6664(c)(1). Therefore, we believe that the statutory additions to tax is applicable and we sustain the Government’s determine of the addition to tax.” Order, transcript, a pp. 10-11.

Note to my nearest and dearest: Ask.

Full disclosure: not only is this blogpost not about law or tax, but I have not written musical criticism for publication in more than fifty years. That occasion came during a newspaper strike in Our Fair City, where my review of Rudolph Firkusny’s New York recital in our college’s newspaper was read with interest by the performer himself, or so I was told. It was the only review published.

So I return.

Last night at Carnegie Hall I was very disappointed. The Orchestra of St Luke, a well-respected local group, promised all-Mozart. What I got was all-Norrington, the knighted (or rather, benighted) Sir Roger.

After informing us from the stage that to grow old was a license to stop behaving properly, he put this dictum to the test. Remarking that classical music in the eighteenth-century was entertainment and not “kulchah,” he noted that audiences applauded between movements, a thing since contemned.

It was rightly contemned, but even if it was not, turning to the audience after every movement and waving his hands to invite applause went beyond self-indulgence.

The music? Well, I sprang for a ticket to hear Mozart’s thirty-third symphony, his most underrated. Tradition says all we know about Mozart is that he was very exacting in point of expression, and could not get his musicians to play his allegros fast enough to please him.

Sir Roger went for speed. The most expressive forte in the first movement, for me the high point of the symphony, was tossed thoughtlessly away. The four basses were given a wholly undeserved prominence, so that growling was substituted for substance.

Not until well into the minuet, nearly at the trio, was there anything that might pass for expression.

I felt cheated even before Benjamin Grosvenor, touted as “the boy lord of the piano,” displayed massive technique and no understanding in the twentieth piano concerto. He certainly can play swiftly enough, and with a better conductor could do better. Surely in the second movement he showed himself capable of expression, albeit with a hesitancy that should only be found in one less skillful.  But I suggest he eschew nineteenth-century Romantic interpolations as cadenzas. These may impress audiences invited to applaud; they distracted me.

I will say the performance of the Linz symphony was best of the lot. There was more expression, and the speed was suited to the work. The finale was well-played, although repentance came too late to save the evening.

In playing Mozart, performers, whether old or young, are best advised not to “do first, ask forgiveness afterward.”

Sir Roger promised us a treat at the end, if we pleased him and remained.

I left.

Not the William Gibson 1958 two-person drama, but rather two Tax Court Judges who saw things from different directions before, and seem to be seeing them again.

Here’s ex-Ch J Michael B (“Iron Mike”) Thornton and that Obliging Jurist Judge David Gustafson, on different sides again, only not in the same case.

You’ll recall their joust, more particularly bounded and described in my blogpost “Money-Back Guarantee Meets The Boss Hoss,” 11/30/16.

Well, today they’re at it again. First, see my blogpost “Principles,” 4/13/17. Though he ultimately didn’t have to go there, Judge David Gustafson had a problem reviewing IRS discretion in granting or denying a hardship late-rollover waiver to poor polyglotaly-challenged Lifang Wang.

And I agreed, thinking that jurisdiction was an issue.

Well, ex-Ch J Iron Mike saw no problem at all today in granting the same hardship waiver to John C. Trimmer, even though IRS had blown off poor depressed John C.

See my blogpost “The Guys From the Hood,” 4/20/17.

Strangely, the Trimmer case, discussed in the immediately-preceding blogpost, is a full-dress T. C. with no dissent. Did ex-Ch J Iron Mike convince Obliging Judge David Gustafson that Tax Court does have jurisdiction and can grant the hardship waiver?

Cain’t hardly wait to see who is right. Stay tuned.

It’s getting to be near that time. I see Judge Lauber is serving up The Rounder’s Cocktail. And Sean M. Murray, 2017 T. C. Memo. 67. Filed 4/20/17, has concocted one for the books…or at least for the blog.

Sean doesn’t bother with returns, but gets a trio of 1099-dashes, sufficient for IRS to give him a SNOD for $15K plus chops. Judge Lauber gives Sean another $1500 in 6673 frivolity at no extra charge.

Sean petitions. He claims he’s executor for his own estate, although alive and well. The caption of his case gets amended accordingly, and then amended back. Sean claims IRS violated Federal criminal statutes. Sean asks for trial in SF CA, although apparently resident in NY, while later claiming residence in Costa Rica. Then he asks for Albany, NY, but that’s for small-claimers only (which he didn’t request). Then back to NYC. Hey, ABA Tax Section, I wasn’t kidding when I said the Request for Place of Trial, Form 5, should be amended to state nexus for place of trial. Does he read my blog, I wonder? Or does he get the materials put out by the ABA Tax Section? See my blogpost “Same Time, Next Year,” 3/3/17.

Nice move, Sean, claiming Costa Rican domicile; I really liked the little I saw of Costa Rica, although climbing through the mountains at my age is a trifle rough.

But it’s the “gibberish commonly appearing on tax protestor websites” (2017 T. C. Memo. 67, at p. 4) that really does Sean in.

“Petitioner has repeatedly advanced numerous frivolous positions in this Court.  These include assertions that he has no obligation to file Federal income tax returns, that he is the executor of the estate of an artificial person, and that respondent’s counsel has violated criminal provisions of the United States Code. He has also engaged in tactics patently designed to delay the final determination of his Federal income tax liability, including filing documents with misleading captions, making multiple unjustified requests to change the place of trial, and submitting documents containing obvious falsehoods and laced with tax-protester gibberish.  He has repeatedly wasted the resources of respondent’s counsel and this Court.  We will accordingly require that he pay to the United States under section 6673(a) a penalty of $1,500.  This opinion will serve as a warning to petitioner that he risks a much larger penalty if he engages in similar tactics in any future appearance before this Court.” 2017 T. C. Memo. 67, at p. 15.

Shake, strain and serve.

The hood in this blogpost being Lincoln Center on the Upper West Side of the Minor US Outlying Island off the Coast of North America, whereon I reside. The guys are student members the Federal Tax Clinic at the Fordham Law School, under the able guidance of Prof. Elizabeth (“Prof Liz”) Maresca.

And I’m giving the guys and Prof. Liz a shout-out, and a Taishoff “Good Job,” for John C. Trimmer and Susan Trimmer, 2017 T. C. 14, filed 4/20/17. The guys manage to cop a win from ex-Ch J. Michael B. (“Iron Mike”) Thornton, no small feat even for battle-hardened TC vets.

John C. was a NYC police officer who retired to take a job on Wall Street. No, not as a hedge-fund manager or dodge-flogger; John C. was going to be a security guard. But the job fell through and John C. fell into serious depression.

There’s beaucoup evidence of John C.’s disorientation and sad condition, which I won’t rehash here. The guys built a good record, notwithstanding IRS’ beat-down on their expert, of which more hereinafter.

John C. got a couple draws (hi, Judge Holmes) from his pension, let the checks sit on his dresser for a month, deposited them in his checking account, and was late getting the family’s 1040 together. This was usually his job, and Susan thought he was doing it.

When the family’s trusty preparer saw the 1099-Rs with Box 1 (early, no known exception) checked, he told John C. to get the cash into an IRA. John C. did, but IRS hits him with deficiency and 10% Section 72(t) chop.

John C. sent a pathetic letter describing his former and current troubles. Three days after getting the letter, IRS Exam bounced John’s plea, without considering hardship waivers.

IRS, being all heart, argues Exam hasn’t authority to grant hardship waivers, and anyway Tax Court hasn’t jurisdiction to review denials of hardship waivers.

“Respondent [IRS] contends that the hardship waiver provision of section 402(c)(3)(B) is ‘inapplicable’ because Mr. Trimmer failed to apply for relief pursuant to the terms of Rev. Proc. 2003-16, 2003-1 C.B. 359.  Respondent also contends that there has been no final administrative determination denying petitioners relief, and that even if there had been, it would not be subject to judicial review. Furthermore, respondent contends, there was no abuse of discretion in denying petitioners the requested waiver, because petitioners have failed to establish that Mr. Trimmer was unable to complete the rollovers within 60 days of the two distributions.” 148 T. C. 14, at p. 12, footnote omitted, but you gotta read this.

“Both before and after trial the Court encouraged the parties to explore further administrative consideration of petitioners’ claim for a hardship waiver, but respondent declined.” 148 T. C. 14, at p. 12, footnote 4.

Word to IRS counsel: When ex-Ch J Iron Mike, not conspicuously friendly to petitioners, tells you to play nice, don’t play the clown. Prof Liz and her guys may just be going for Section 7430 legals, even if they don’t get them. More about that later.

We all know that  Rev. Proc. 2003-4, 2003-1 C.B. 123 provides the means for obtaining the waiver, and Rev Proc 2003-8, 2003-1 C.B. 236 sets out the user fee for getting one (if you can find it; the thing is nearly incomprehensible. How a depressed retired patrolman is supposed to find this out is nowhere stated).

Well, John C. didn’t, so IRS says he’s out.

Moreover, IRS says Rev Proc 2016-47, 2016-37 I.R.B., which allows hardship consideration during Exam wasn’t in effect when John C. was under examination, so it doesn’t apply.

Ex-Ch J Iron Mike blows IRS away.

“We are not persuaded.  Nothing in Rev. Proc. 2003-16, supra, purports to limit or constrain an IRS examiner’s ability to consider a hardship waiver during the course of an examination.  Certainly no such constraint is found in section 402(c)(3)(B).  Moreover, respondent’s position appears to be at odds with Internal Revenue Manual (IRM) pt. 4.10.7.4(2) (Jan. 1, 2006), which states:  ‘Examiners are given the authority to recommend the proper disposition of all identified issues, as well as any issues raised by the taxpayer.’

“Consequently, the purpose and effect of the 2016 modification of Rev. Proc.  2003-16, supra, we believe, was not to create some new authority that had not previously existed for IRS examiners to consider hardship waivers during examinations, but rather to make clear the existence of that authority.  This conclusion is reinforced by careful consideration of the substantive coordination between the two revenue procedures.” 148 T. C. 14, at pp. 14-15. (Emphasis by the Court.)(Footnote omitted, but ex-Ch J Iron Mike asked the parties to brief the impact of Rev Proc 2016-47).

The two Rev Procs are coordinated very carefully, the old self-certification procedure being modified, while the examiner’s (auditor’s) ability to consider any request remains the same.

“Furthermore, the examining agent’s authority to consider a hardship waiver during the examination strongly implies, we believe, that the taxpayer may request the waiver.  It would be anomalous if the examining agent could consider the relief only if the taxpayer had not requested it.” 148 T. C. 14, at p. 16.

Only three (count ‘em, three) days after John C.’s pitiable plea, Exam responded with an incomplete legal analysis.

IRS has some cases where failure to apply for hardship waiver for IRA rollovers sank the taxpayer (John C.’s miscue arose from a pension plan, not an IRA). I blogged more than one such; by way of illustration of the foregoing, as my Grey Goose Gibson-gulping high-priced colleagues say, see my blogpost “The Case of the Reluctant Trustee,” 6/6/14. But in none thereof did the petitioner seek the waiver at Exam, by PLR per the Rev Proc, or anywhere else. John C did.

IRS finally claims that the three-day rejection letter said John C could write and tell them if he disagreed, and he didn’t so either there was no final determination or he waived objection.

Ex-Ch J Iron Mike treats that argument with more consideration than it deserves.

“Considering that Mr. Trimmer’s letter had resulted in the IRS’ summarily denying his request on legal grounds that seemed to admit of no possibility of administrative relief, without even acknowledging the specific facts and circumstances spelled out in Mr. Trimmer’s letter, the invitation for petitioners to respond yet again if they disagreed strikes us as an empty gesture or mere boilerplate.” 148 T. C. 14, at p. 19.

As for arguing Tax Court has no jurisdiction to consider the hardship waiver, ex-Ch J Iron Mike blows them off with a laundry list of cases where a SNOD and petition put everything in play.

IRS challenges the guys’ expert witness on credentials and local law. Ex-Ch J Iron Mike, truly in his element, tears up both statutes, regs and dictionary to flatten that attack. True, the expert’s report was eight days beyond the thirty-day deadline, but IRS’ counsel gave the expert a good going-over on cross, so no prejudice.

And it would be against “equity and good conscience” to deny John C the waiver.

Now what may be the saver, when Prof Liz and the guys go for legals. John C failed to disclose $40 in dividends on stock he claimed he bought for his son’s education, but can’t show any proof. So maybe so IRS was partly justified.