Robert Talbot, 2016 T. C. Memo. 191, filed 10/17/16, didn’t bother with tax returns for seven (count ‘em, seven) years. IRS helped Bob out with SFRs for all seven, and then gave him SNODs for the front four, and another batch for the back three.

Then came NITLs, first for the front four again, and later for the back three.

Bob petitions the lot, and loses on the front four. It’s the usual no-information-submitted for them.

The back three is another story, and Judge Kerrigan tells it.

“Petitioner resided at three different addresses within the same ZIP Code in Wasilla, Alaska.” 2016 T. C. Memo. 191, at p. 2.

IRS nailed the right address for the front four SNODs, and the NITLs that followed, so Bob is out on those. He had his chance to contest liability, had unfiled years and offered no collection alternative.

On the back three, IRS mailed the SNODs for those years to the right address, maybe, but inverted the street number on the USPS3877 Proof of Mailing. The same inversion shows up on the case activity report. The 3877 and the case activity report both show “425” when the right number is “452.” And thereby hangs the cliché.

None of the SNODs were returned. Bob, of course, claims he never got any of them, so never petitioned, and wants to fight about his liability.

Bob never put in any evidence at any time about his liabilities for any of the seven years at issue, even when he got the chance at Appeals. So liability is not at issue.

But IRS flunks the abuse-of-discretion test for the back three.

“Respondent [IRS] asserts that respondent may rely on a presumption of official regularity to verify that a notice of deficiency was duly mailed to petitioner’s last known address before assessment.  We have held that exact compliance with PS Form 3877 or equivalent mailing procedures raises a presumption of official regularity in favor of the Commissioner and is sufficient, absent evidence to the contrary, to establish that a notice of deficiency was properly mailed.” 2016 T. C. Memo. 191, at p. 15 (Citations omitted).

That doesn’t go for the back three.

“In the notice of determination the settlement officer noted that ‘Appeals has review[ed] the [IRS] [c]ertified mailing list to confirm’ that the notice of deficiency for tax years [back three] was sent by certified mail to petitioner’s last known address.  The IRS certified mailing list incorrectly lists petitioner’s address as 425…..  The defective IRS certified mailing list does not therefore entitle respondent to a presumption of mailing.” 2016 T. C. Memo. 191, at p. 20. (Citation omitted).

IRS goes down fighting. “Respondent argues that a typographical error should not invalidate the assessment.  Respondent contends that the IRS generally issues notices in windowed envelopes so that the address on a notice of deficiency is the address where the USPS would attempt to deliver the notice.  Specifically, an IRS field internal revenue agent group manager for Alaska and Tacoma, Washington, testified that ‘the window on the envelope is designed to fit where the address comes out on specific letters or on specific reports so that nobody has to retype an envelope.’” 2016 T. C. Memo. 191, at p. 20.

So the SNODs apparently got there despite the inverted numbers on the 3877 and the case activity report.

But that’s not good enough for Section 6330(c)(1) nor for Judge Kerrigan.

“At a CDP hearing, however, the settlement officer ‘shall’ verify that the requirements of all applicable law and administrative procedure have been followed.  Sec. 6330(c)(1).  One requirement of applicable law is the mandate of section 6213(a) that a notice of deficiency be duly mailed to the taxpayer’s last known address before a deficiency may be assessed.  If the Commissioner has not mailed a notice of deficiency, no collection of an assessment of the deficiency may proceed.” 2016 T. C. Memo. 191, at pp. 20-21.

“The settlement officer relied solely on the IRS certified mailing list to determine whether the notice was sent to petitioner’s last known address.  There is no evidence that the settlement officer reviewed any other documentation or information to verify the validity of the assessments.  The address on the certified mailing list is wrong.  It is therefore unclear whether a notice was sent to petitioner’s…address.  The incorrect address was also included in the IRS case activity report and several other places in the record, including the notices of determination.  If the settlement officer had reviewed a copy of the notice of deficiency, she might have noticed the address discrepancy.” 2106 T. C. Memo. 191, at p. 21.

No levy on Bob for the back three.

Anybody old enough to remember Justice Benjamin Nathan Cardozo’s remark that “the constable blundered”?

Maybe He Even Reads My Blog

I’m delighted to see that Judge Lauber decides that a Power of Attorney (POA) is a piece of paper. The party designated to act for the principal in most of the uniform POAs I’ve seen is called the “agent.”

So Judge Lauber uses the correct terminology in Vincent J. Fumo, Docket No. 17754-13, filed 10/14/16; and for that I’ll even forgive him for not designating this order.

Vincent J. is in the unhappy situation of being about to depart the free world for durance vile. So he opens a joint bank account with his son, who soon proves the truth of the old adage about “sharper than a serpent’s tooth.”

Vincent J. pours nearly $1 million of his money in, and goes off to spend 61 months as a guest of a certain State.

“The powers granted to petitioner’s son, referred to in the POA as his ‘agent,’ included the powers to ‘draw and sign checks for me and in my name, including any accounts opened by my agent in my name at any bank or banks’; and to ‘prepare, sign and file tax returns of all kinds.’ Petitioner explicitly stated in the POA that ‘[m]y agent does not have the authority to make gifts.’ In accepting these powers, petitioner’s son promised: ‘I shall exercise the powers for the benefit of the principal’ and “I shall keep the assets of the principal separate from my assets.’” Order, at pp. 2-3.

You can guess the rest; son transfers money from joint account to a different bank from where the joint account was held, and uses some of the cash to buy real estate in his own name.

When Vincent J. breathes free air again, he sues son and they settle.

IRS, with breath-bereaving coolness, claims gift tax on everything above the annual exclusion, and slams Vincent J with a $300K deficiency.

Now IRS wants summary J.

Might there be a question of fact or two? Judge Lauber thinks so.

“A gift is a transfer by a donor that is motivated by ‘a detached and disinterested generosity’ toward the donee. Commissioner v. Duberstein, 363 U.S. 278, 285 (1960). To determine whether a gift has been completed and is thus subject to gift tax, we must determine (among other things) whether the donor has parted with dominion and control over the property so as to leave him no power to change the disposition of the gift. Treas. Reg. § 25.2511-2(b).

“Several disputes of fact [sic; probably “several disputed facts”] must be resolved before we can determine whether the $920,000 transferred from [A] Bank account to the [B Bank] account constituted completed gifts from petitioner to his son. First, the record does not conclusively establish in whose name the [B Bank] account was titled. [Bank B] reported to petitioner the interest earned on that amount; this creates an inference that his name was listed on the account. As respondent recognizes, the transfer of money into a joint account does not, in and of itself, establish a completed gift to the other account-holder.

“Second, factual disputes exist as to whether petitioner intended to make a gift of $920,000 to his son. Petitioner’s son effected these transfers pursuant to the powers granted him by the POA. But the POA prohibited petitioner’s son, in his agency capacity, from making gifts. And petitioner’s son, in accepting his role as agent, pledged to keep petitioner’s assets separate from his own. By virtue of his imprisonment, petitioner lacked power to control the actions his son took pursuant to the POA. But the fact of imprisonment, without more, does not establish that petitioner made a gift to his son of the assets over which his son possessed fiduciary powers.” Order, at p. 3.(Names omitted).

The present uniform State law POA, which has a separate rider when gifts by the agent are to be permitted, owes much to New York’s Matter of Ferrara, 7 NY 3d 244 (2006).

Powers of Attorney may be only pieces of paper, but they can do a lot of damage.

It’s a refresher from Ch J L. Paige (“Iron Fist”) Marvel; sometimes an Appeals hearing yields jurisdiction at 400 Second Street, NW, and sometimes it doesn’t. The hapless pro se (that’s self-represented for you Anglophones) is often unaware of the difference. And that can get expensive.

Just ask Chris A. Changras, Docket No. 11994-16L, filed 10/14/16. And I wish Ch J Iron Fist would designate some orders. There were 150 on tap today, and digging for blogfodder is tough enough.

Anyway, Chris is hit with a bushelbasketful of TFRPs. She goes to Appeals, which gives her a NOD on all but two of the quarters at issue. For those two, she gets a decision letter.

Chris never picked up the certified letter with the NITL for the two outliers. She did pick up the one for the other eight or so, and there was some further epistolary back-and-forth, but finally Chris filed a 12153 for the whole shebang.

Chris was timely as to the eight, so she gets a NOD.

But all she gets is a decision letter for the outliers. “A decision letter was issued to petitioner with respect to the [outliers] levy notice because petitioner did not timely request a hearing within 30 days of the mailing of that notice….” Order, at p. 3.

Here’s the refresher from Ch J Iron Fist: “A late or untimely request for a hearing that is made within a one-year period calculated with reference to one of the notices of lien or levy just described results only in a so-called equivalent hearing and a corresponding decision letter, which is not a notice of determination sufficient to confer jurisdiction upon this Court under Internal Revenue Code section 6320 or 6330.” Order, at p. 2 (Citation omitted).

Chris didn’t know that (after all, why should she?).

“In her opposition to respondent’s motion to dismiss, petitioner does not directly address the jurisdictional issues with respect to the 2009 levy notice. Rather, petitioner suggests that there might be confusion over the issue of jurisdiction resulting from the manner in which she filed her petition. However, as discussed above, because a decision letter, rather than a notice of determination, was issued to petitioner with respect to the [outlier] levy notice, the Court has no jurisdiction to review that decision.” Order, at p. 3 (Citation omitted).

Pick up those letters from IRS, guys. And, of course, watch out for the latest scams; the crooks have started mailing phony letters.

Unfortunately for Harvey C. Hubbell Trust, Harry J. Finke, IV, Trustee, 2016 T. C. Sum. Op. 67, filed 10/13/16, for the year at issue Clarence E. Caesar and Frances Cleveland were, in the words Buck Ram’s ginormous 1956 hit for The Platters (of glorious memory), still around.

And they got a munificent $1500 between them for the year at issue from the trust aforesaid. The late Harve Hub left $2 million in 1960, when the $125 per month that was the aggregate limit the trustees could give Clarence and Frances could actually buy something. If I had $125 per month in 1960 I would have lived like a king.

Poor Finke IV gets nailed by IRS for making charitable contributions unauthorized by the will which created the trust.

The language that sinks Finke IV is the termination of the trust, Item V (the individual beneficiaries are dealt with in Item IV). The trust “…shall terminate upon the death of the last person receiving benefits therefrom, except that if in the judgment of the then Trustees it is advisable to continue the trust, it may be continued for not longer than ten (10) years after such death. All unused income and the remainder of the principal shall be used and distributed, in such proportion as the Trustees deem best, for such purpose or purposes, to be selected by them as the time of each distribution, as will make such uses and distributions exempt from Ohio inheritance and Federal estate taxes and for no other purpose.” 2016 T. C. Sum. Op. 67, at p. 4.

Finke IV says that for years his predecessor trustees made charitable gifts after they paid the individual beneficiaries what the late Harve Hub said to give them.

Judge Whelan says that isn’t good enough. Our old chum Section 642(c)(1) requires that a charitable donation made by a trust, to be tax deductible, must be made “pursuant to the terms of the governing instrument.” 2016 T. C. Sum. Op. 67, at p. 12.

Finke IV claims the will is ambiguous. And they have a State Court decision saying the will does authorize the charitables.

Not good enough for Judge Whelan, even though caselaw says that giving the trustee discretion doesn’t mean that a charitable isn’t made “pursuant to the governing document.”

“It is not until after the death of the last annuitant, when the trust terminates…, that the trustees are permitted to continue the trust, and to use and distribute unused income and the remainder of the principal for a purpose ‘exempt from Ohio inheritance and Federal estate taxes and for no other purpose’.  Thus, items IV and V conserve the assets of the trust by authorizing only the annual annuity payments required by item IV until after the annuities have been paid in full.

“This conservative approach is consistent with the fact that Mr. Hubbell’s will provides not only for the creation of the trust, but also for the creation of a marital trust for his wife, and directs in item II that the marital trust be given one half of his property after the payment of his debts.  If the marital trust had come into existence, then the trust would have received less than one-half of the amount it actually received.  Representatives of the trust fail to take the marital trust into consideration in their argument.  We also note that item IV provides that the trustees shall make the annual annuity payments ‘out of net income if available, otherwise out of principal’ and thereby suggests a concern about whether the assets of the trust would be sufficient to generate enough net income to pay the annual annuities.” 2016 T. C. Sum. Op. 67, at pp. 19-20.

If the late Harve Hub wanted the trustees to be charitable without impairing the payments to the individual beneficiaries, he could have said so, and there’s learning from the Supremes that tells the drafter of a will or trust instrument exactly how to do it.

The late Harve Hub didn’t. Finke IV wants Judge Whelan to rewrite the will. That’s a nonstarter, so IRS wins.

The problem, of course, is that the dollar caps for distributions to the individual beneficiaries became laughable. As inflation took over, the trust was rolling in taxable money. And the explicit dollar limits kept the individual beneficiaries from suing.

Goes to show that micromanaging from the grave doesn’t work, especially over decades. The micromanager is not “still around.”

You remember that Ch J L. Paige (“Iron Fist”) Marvel really wrong-footed me in Harold B. Rhoney, Docket No. 30518-15S. back on 9/27/16. You don’t remember? Well, check out my blog post “Now I’m Really Confused,” 9/27/16.

Ch J Iron Fist has now Judgesplained Harold’s situation, in Harold B. Rhoney, Docket No. 19150-16S, filed 10/13/16. Harold’s $60, which Ch J Iron Fist bagged for the Tax Court, got applied to the bounced 30518-15S case. But Harold filed a new petition, the 19150-16S case, duplicative of the 30518-15S case, without telling Ch J Iron Fist that it was a reprise of his earlier effort.

So, once clued-in, Ch J Iron Fist resuscitates the 30518-15S case, closes the 19150-16S case, applies the $60, and tells IRS to answer.

Now I’m only left wondering what would have happened to Harold’s $60 if he hadn’t filed the later petition.

I’ve said it before, but a certain attorney, whom I’ll hereinafter designate as DK, does it right.

The order is in Howard Lapensohn, Docket No. 30335-13, filed 10/13/16, but it’s DK’s story.

Late last August Judge Chiechi unsorted two petitions in this case, gave them different docket numbers, and bifurcated the two trials. Judge Chiechi told DK to file his Entry of Appearance in the case with a different docket number from that set forth hereinabove in the immediately preceding paragraph (as my high-priced colleagues would say).

DK does the ton. He files two Entries of Appearance in this case and one in the other.

Judge Chiechi strikes the two in this case.

This proves DK knows what every Little League catcher learns in her/his first game, and carries through life like a torch in flame: when you’re lying in the dirt at home plate, tag ‘em all; tag the runner, the batter, the umpire and yourself. That way you know you got ‘em.

The umpire (or the judge) is paid to sort it out.

Not in Tax Court

Rarely, I get an e-mail from someone who wants me to take down a post about their case. Mostly, I won’t do it.

Threats of fire and slaughter do not move me. I’ve been rocketed by the Viet Cong, fired on by the US Air Force (they were only having fun, but stopped when I threatened to shoot back), been bawled out by clients, adversaries, clerks and judges, threatened with disciplinary action (never happened), and sued more times than I can remember.

Nathan Detroit has nothing on me.

But before the next one who’s worried about their innermost legumes being distributed abroad wastes electrons howling at me, take a look at Anthony Caruso & Maria Caruso, Docket No. 20714-15, filed 10/13/16.

And have a word with Judge Nega. Anything you tell Tax Court not under seal (and the judge decides what’s sealed) is public record.

Coming back from a three-day layover, Tax Court is remarkably quiet. No opinions, and three of the four designated hitters are ho-hums.

But count on that Obliging Jurist, Judge David Gustafson, to reprise Jack Lawrence’s immortal words in the Frank Sinatra 1939 hit. Here’s Anthony Sean Martinez, Docket No. 14383-15, filed 10/12/16.

The issue is Anthony Sean’s medical condition: is it combat-related? Check out Section 112 and the regs. It could mean real money.

Well, trial ended this past May. Judge Gustafson asked Anthony Sean if he wanted to put in any more evidence, whether witnesses or papers. “No, Your Honor, I do not.” Order, at p. 1.

Of course the pretrial standing order is “swap all documents you will put in on the trial at D minus 14 days.” Or forever hold whatever.

Four months post-trial, Anthony Sean’s post-trial brief featured exhibits. These were documents he hadn’t put in on the trial.

Judge Gustafson treats the post-trial brief as a motion to reopen the record, and asks IRS to weigh in. IRS, of course, asserts untimeliness and prejudice.

So Judge Gustafson has a phone-a-thon. And he tells Anthony Sean the words Jack Lawrence wrote so many years ago.

“During the conference call, petitioner explained that the new documents are selected pages from his 600-page medical file, which includes personal, medical information irrelevant to this case. The Court explained to petitioner that, if the Court were to allow him to rely on the new documents, the Court would require him to provide the entire file to his opponent, would order a supplemental trial session during which petitioner would be subject to cross-examination on the new documents, and would allow respondent to offer into evidence any additional relevant pages from the file.” Order, at pp. 1-2.

In other words, the Rule of Completeness. If you want to draw the Court’s attention to one part of a document, the whole document goes in, and the other side gets to read in the nasty parts. And if you put any part of your physical or mental condition at issue, the other side gets to check out all of it, not just the part you want.

Anthony Sean decides that discretion is the better part.

“Petitioner stated that he is not willing to disclose the entire file to the IRS, and he seemed to indicate that he is not willing to incur the risk that additional pages might become part of the record in this case.” Order, at p. 2.

So the record remains shut, and the new documents are out. “…it would be unfair to allow petitioner to offer cherry-picked documents from his file in order to prove the medical facts he seeks to prove, without allowing respondent to explore his medical file to test the correctness of petitioner’s contentions.” Order, at p. 2.

I expect that will be the response of counsel for PBBM-Rose Hill, Ltd., PBBM Corporation, Tax Matters Partner, Docket No. 26096-14, filed 10/11/16.

Judge Morrison comes off the bench to sustain compliance with the Section 170 regs of PBBM’s somewhat casually-assembled appraisal of the $15 million claimed scenic and environmental giveaway of their bankrupt golf course that PBBM handed out after it emerged from Ch 11.

And though theoretically the Bankruptcy Court (or bankruptcy trustee) could have thrown the easement out, or maybe it was an invalid encroachment upon the bankruptcy estate, Judge Morrison needn’t go there, because the easement craters on shortchanging the environmental beneficiary in case of extinguishment and also on public benefit. Since most of the servient tenement (that’s the land subject to the easement) is off-limits to the public (they must go through a gatehouse, and have to play golf or tennis, not wander lonely as a cloud through the aforesaid servient tenement), that also kills the deduction.

IRS’s expert ecologist and appraiser shred PBBM’s. The worth of the easement is not $15 million, or even the $13 million that PBBM’s trial expert trotted out.

Judge Morrison finds that, even if the easement were sustained under Section 170, which it isn’t, the worth of the easement is a mere $100K.

As the 40% undervaluation chop is in play, PBBM plays the Section 6751 Boss Hoss gambit. But IRS, schooled by the adroit employment thereof by The Jersey Boys (see my blogpost “Back from the Graev – Part Deux,” 7/9/15), makes sure that both pre-and post-audit recommendations for the 40% chop were signed off by the appropriate supervisor. So IRS’ claim that the 40% chop can only be imposed after the FPAA is finally determined, though it may be valid, still depends upon a valid initial determination, whenever the 40% chop is imposed. Whichever was the initial determination, pre or post, it was signed off by the right Boss Hoss.

So the 40% chop is in the cards, and IRS pled the 20% substantial understatement as well.

So Judge Morrison applies both.

“The amounts of these underpayments are of two types. First, there are the amounts of underpayments resulting from PBBM’s  reporting of a $15,160,000 deduction instead of a $100,000 deduction. Second, there are additional amounts of underpayments that correspond to the difference between a $100,000 deduction and a $0 deduction. The amounts corresponding to the first type of underpayment are attributable to a gross valuation misstatement. These amounts are subject to the 40 percent penalty. The amounts corresponding to the second type of underpayment, the IRS concedes, are not subject to the 40 percent penalty. Respondent contends that the amounts corresponding to the second type of underpayment are subject to the 20 percent penalty.” Order, at pp. 27-28.

But Judge Morrison lets PBBM off the 20% chop on the difference between $100K and zero. PBBM’s guy Brad Ayres really tried. The extinguishment formula might work in some circumstances, so it was a good faith try. It’s a toss-up whether the bankruptcy trustee could have avoided the easement post-plan confirmation, thus blowing up the easement, so Brad didn’t show bad faith by disregarding the possibility. And though the easement failed to meet the conservation standard, Brad tried in good faith.

Great. So instead of at best a multi-million dollar plus $20K chop, it’s only a multimillion dollar chop.

See the title of this blogpost.

And I’ll doubledown on it. Judge Morrison wrote 30 pages, well worth reading, and didn’t bother to designate the order. Today’s T. C. Memo. is another unsubstantiated Form 2106  unreimbursed employee expenses, and the two designated orders are trivial. His Honor Big Julie, Judge Julian I Jacobs, s/a/k/a HHBJJJIJ, designates everything. Most judges designate nothing.

C’mon, Judges, if it’s worth a few pages of substance, it’s worth designating.

This is a nonpolitical blog. I therefore do not want to risk offending anyone’s sensibilities (to say nothing of sense) in this politically-supercharged season by naming this Federal holiday in a manner that might conceivably offend anyone.

But the United States Tax Court is resting today, and my office is closed,  so I wish everyone a happy X Day.