Off Topic

I very much regret the death of Charles Edward Anderson (“Chuck”) Berry. A monumental figure, a true original.

Walt Whitman, thou should’st be living at this hour! Tax Court has an e-blast for all who enter there.

“Effective March 20, 2017, all practitioners who have registered for Practitioner Access will generally receive only electronic service from the Court. Practitioners agree to log on regularly to Practitioner Access to view served documents. The Court will not monitor emails that bounce back to the Court and will not generally provide paper service to registered practitioners.”

“Generally,” my favorite word. Usually followed by several thousand words of exceptions.

Howbeit, practitioner, be aware that the judges, clerks, intakers and flailing date-stampers at the Glasshouse at 400 Second Street, NW adjure you to recollect Walt’s immortal words: “They will not let me off till I go with them, respond to them.”

Edited to add: But y’all can’t get on until 0200 tomorrow morning 3/20/17, because e-Access is down for maintenance.

As this my blog is totally non-political, I will not comment on the possible survival of the Summer Work Travel Program (SWTP), which is part of the US Department of State’s Exchange Visitor Program, in its post-2015 iteration. I am concerned today with its earlier variant, as explained by Judge Laro in Richard Liljeberg, et al, 148 T. C. 6, filed 3/16/17.

This case is an anomaly for several reasons. The deficiencies are three-figure amounts (under $200 each); each petitioner (there are three of them) seems to have his or her own lawyer, against only one for IRS; and the fact pattern sounds like a joke: A Finn, a Russian and an Irishman walk into Tax Court….

OK, getting down to business. The three are all full-time students, post-secondary. They come to the US of A on “J” visas (“A J visa is issued to ‘an alien having a residence in a foreign country which he has no intention of abandoning’ and who meets certain other criteria.  8 U.S.C. sec. 1101(a)(15)(J).” 148 T. C. 6, at p. 5).

The idea is a summer in America for full-time foreign students, theoretically doing paying jobs otherwise unfilled, to help defray their educational expenses back home. They’re all on four-month deployments, working and soaking up American culture. They have to pay US income tax, and their three homelands’ tax treaties are off the table here. And when their tours are up, they go back home, where they live and move and have their being.

They claim Section 162 unreimbursed employee expenses, like airfare, visa expense, program cost (undefined; maybe an application or processing fee), and health insurance. The Irishman went one better and claimed meals and entertainment, but that crashes without the need for examination.

Their point is they’re away from home for temporary work.

That’s not good enough for Judge Laro, because when it comes to deducting traveling work expenses, we’re back to “home” being one’s principal place of employment, not where one chooses to reside. All three are students, and studying is not a job. The lead petitioner did work in Finland, but quit that job to come here and didn’t go back to it when he left.

Moreover, the need to maintain two residences must be tied to a business exigency, rather than to personal considerations. The three were students in their home countries, thus not engaged in trade or business there. No business exigency drove them here.

And the fact they have to go back to their native lands after four months doesn’t mean they need to have a permanent residence there; just leave. And immigration law and tax law are not the same.

Thus, their tax home is right here in the USA for the year in question.

IRS concedes the visa expense and the program expense.

Judge Laro is apparently dubious about the program expense, but lets it ride.

“We note that our ‘acceptance of a concession does not mean that the Court has evaluated and accepted the underlying substantive issues or legal principles supporting the concession.’  Fazi v. Commissioner, 105 T.C. 436, 444 (1995).  In practice, the Court will accept concessions of law in the interests of judicial economy unless justice requires otherwise.  Id.  Since petitioners do not oppose respondent’s concession, cf. McGowan v. Commissioner, 67 T.C. 599, 601, 605 (1976) (refusing to accept the Commissioner’s unilateral offer of concession opposed by the taxpayer on the grounds that ‘the interests of justice will be best served by a rejection of such concession’), we will accept it in the interest of judicial economy without expressing an opinion as to its correctness.” 148 T. C. 6, at p. 23.

In plain English, don’t press your luck on this one.

As for health insurance, while it’s included at no extra charge in their countries, they claim paying it here is a business expense because they had to pay to keep their jobs. IRS will let them have the deduction on the same terms as locals: subject to the Section 213(a) AGI limitation. And Judge Laro perforce is down with that.

Tax Court is sometimes more about what the Court lacks than what it has.

Joanna Jessica McKenna, Docket No. 6935-14S, filed 3/16/17, says she had excess withholding. Judge Kerrigan says she can’t decide that.

JJ McK had her withholding on her return adjusted by IRS. After the adjustment, concessions and the trial, it turns out JJ McK neither owed tax nor was due a refund.

JJ McK says IRS adjusted her withholding improperly.

Judge Kerrigan: “The Court lacks jurisdiction to consider the amount of federal income tax withheld, because under section 6211 a deficiency is determined without regard to the amount of tax withheld on a taxpayer’s income. Redcay v. Commissioner, 12 T.C. 806, 809-810 (1949), section 301.6211-1(b), Proced. & Admin. Regs. The Court would only have jurisdiction if petitioner had overpaid her 2011 Federal income taxes, and she did not. See section 6512 (b).” Order, at pp. 4-5.

Judge Kerrigan orders a 155 beancount, but exactly why there needs to be dueling computations, if withholding is off the table and JJ McK neither owes tax nor gets a refund, is beyond me.

So we have the anomaly where JJ McK may have been overwithheld above what IRS adjusted, but her only recourse would be a claim for refund followed by a suit in USDC or USCFC. And there aren’t any small-claimers there.

Time to fix Section 6211?

Judge Gale is impervious to the pleas so well expressed by The King in his second great hit (even if pieces of two takes had to be spliced together, a daring move in 1956).

So away he walks from Konkhor Enterprises, Inc., et al, Docket No. 21248-13, filed 3/15/17.

“…the parties filed a Joint Motion for Continuance seeking a postponement of the … trial date in view of the fact that respondent’s primary examination agent will not be available at that time and the fact that the parties have made significant progress in narrowing the issues for trial and, with additional time, may be able to further narrow the issues or reach a settlement. The parties’ Motion requests that these cases be continued from the…trial session; that jurisdiction be retained by the undersigned… The parties also filed a Joint Stipulation of Settled Issues.” Order, at p. 1.

Sounds like the parties are working and playing well with each other. And they want Judge Gale to stand by them on the case.

Judge Gale agrees, in part.

“The parties’ filing of the Joint Stipulation of Settled Issues persuades the Court that they have been diligent in their efforts to narrow the issues for trial, and that a continuance would be in the best interests of the parties and the Court in order to afford the parties additional time to narrow, and possibly resolve, the remaining issues.” Order, at p. 1.

But Judge Gale, unpersuaded even by Elvis, bids the parties farewell.

“We are not persuaded, however, that having the undersigned retain jurisdiction is necessary or appropriate to foster that goal. Instead, the Court will order periodic status reports, which will have the effect of postponing the calendaring of these cases for trial until an appropriate time.” Order, at p. 1.

Heartbreak Hotel, anyone?

Serious Takeaway- Don’t expect a judge to sit with a case if it looks like trial will be put off, and the likelihood of immediate motion practice is small. Even if the judge is helping.

William Cavallaro, Donor, Docket No. 3300-11, filed 3/15/17, should have remembered the lesson learned from that obliging jurist, Judge David Gustafson back on 8/22/12. See my blogpost “Ask Politely,” 8/22/12.

So William got slugged in 2014 T. C. Memo. 189, filed 9/17/14 (see my blogpost “For Whom the (Telephone) Bell Tolls,” 9/17/14).

But William got unslugged by 1st Cir. in William Cavallaro, 15-1368, 11/18/16, which I didn’t blog. The Firsters sent William back to Judge Gustafson, because Judge Gustafson misapplied the elements of the burden of proof. Note that he didn’t misstate where it lay. But he said that William had to prove the correct amount of tax, and that is wrong.

“…the Supreme Court made it clear that once the taxpayer shows the Commissioner’s determination to be ‘arbitrary and excessive,’ the taxpayer cannot be made to pay the amount assessed against him — even if he fails to prove the correct amount of liability he owes. “ 15-1368, at p. 22 (Citation omitted).

And as this case involves valuation of corporate assets, for each valuer there must be “method in his madness.” And, if not, Tax Court must decide the correct tax its own self.

So back to you, Judge Gustafson, and oblige the Firsters by letting William shows IRS’ Expert’s valuation methodology was flawed, creating an “arbitrary and excessive” assessment of gift tax when William (and wife ) gave their sons the business (or part of it).

And if IRS’ number is “arbitrary and excessive,” tell us the right number. And you can retry the case, if you like. You got lots of discretion.

Now William wants to retry the case (why not? He lost the first time. Like love, trials may be better the second time around).

IRS says “OK, but our expert’s opinion is the only one on valuation. William never put in valuation evidence and only argued about who owned what IP, which he lost when his creative attorneys tried to ‘squeeze a few embarrassing facts into the suitcase by force.’” 2014 T. C. Memo. 189, at p. 29, cited in my blogpost hereinabove.

Well, there’ll be no retrial.

Judge Gustafson: “At trial, petitioners had every opportunity to put on evidence on all the valuation issues and on all the defects in Mr. [IRS Expert]s conclusions. This Court’s legal error that the Court of Appeals identified (‘the Tax Court did not misallocate the burden of proof at trial’ but ‘misstated the content of that burden’, Ct. App. slip op. at 21) occurred after trial in the Tax Court’s opinion, not in any ruling before or during trial that could have limited petitioners’ ability to put on evidence. Anything omitted from petitioners’ critique of Mr. [IRS Expert] was the result of their own choices. Petitioners have not suggested otherwise.

“The Court of Appeals agreed with us that the taxpayer has the burden of proof, and the court clarified that in a case like this that burden is met only when ‘the taxpayer shows the Commissioner’s determination to be ‘arbitrary and excessive‘. Id. at 22 (emphasis added). Thus, the petitioners must show not only that there are flaws in Mr. [IRS Expert]’s report but also that they are of a nature and magnitude that they cause his conclusion of a $29.6 million gift to be arbitrary and excessive. (And proving an error whose correction would increase the amount of the gift would obviously not show that his conclusion was ‘excessive.). Order, at p. 5. (Name omitted). (Emphasis by the Court).

In short, William, y’all had your chance, and you blew it.

So let the parties schedule a briefing schedule, and brief the issue whether Mr IRS Expert’s methodology is so flawed that it resulted in an “arbitrary and excessive” amount of tax. And if William can do that, Judge Gustafson will oblige him with whatever proceedings are necessary to arrive at a correct tax.

I understand Judge Gustafson’s impatience with prior gameplaying, and his chagrin at having been reversed, even if only in part. I’ve won below and lost on appeal, and it smarts real good. And I understand wanting to end this overlong angelic pin-dance.

But exactly how William is supposed to demolish Mr IRS Expert without putting in expert testimony of his own is left to the creative imagination of his already too-creative attorneys.

If no evidence is taken, be prepared for a trip back to the Firsters.

No, neither John Keats’ “bird thou never wert” nor Noel Coward’s long-running 1941 comedy. Rather this blithe spirit hangs out at 400 Second Street, NW, dissenting and dispensing, but “blithe” nonetheless, if he says so himself.

It’s The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Immutable, Irrefragable, Incontrovertible, Ineluctable, Indefatigable, Illustrious and Ineffable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes.

But take it from me, he’s blithe.

Here’s an offer of proof, Estate of Charles H. Rosenquist, Deceased, Donor, Margaret R. Rosenquist, Executrix, Docket No. 28519-13, filed 3/15/17.

“This case was one of a cluster on the Court’s…trial calendar for Phoenix, Arizona. The parties settled but realized that they had committed a clerical error in the decision document that the Court blithely signed.” Order, at p. 1.

So Judge Holmes vacates the decision. Blithely, I trust.

For this snowy day’s sermonette, I take my text from Alan Paton’s 1953 novel of “terror and remorse,” emotions that sometimes accompany Tax Court opinions and orders.

Y’all recall the blessed communion, fellowship divine, of private delivery services given the Commissionorial nod by Com’r John (“Kosy”) Koskinen, apparently the still-unimpeached honcho at snow-blanketed 1111 Constitution Ave, NW.

Well, Frank Squillo, Jr., Docket No. 2186-17S, filed 3/14/17, used one of the right ones.

IRS wants to toss Frank Jr. for late filing. And IRS’ counsel seems to think that Ch J L Paige (“Iron Fist”) Marvel or one of her minions told him that Frank Jr’s petition hit 400 Second Street, NW in an envelope with a USPS postmark a day late and more than a dollar short.

Negatory, responds Ch J Iron Fist.

“Contrary to respondent’s suggestion in paragraph 4. of his motion, the Court did not inform respondent that the shipping envelope bearing the petition bears a U.S. Postal Service postmark dated January 26, 2017.” Order, at p. 1.

That’s because Frank Jr used UPS Next Day Air Saver, one of the blessed.

So he was saved. Or maybe not.

In today’s episode, Ch J Iron Fist tells IRS’ counsel to supplement his motion to toss with the electronic printout info from UPS showing when they got their paws on the magic envelope.

See Notice 2016-30, 2016-18 I.R.B. 676, which gives the latest hot tips on the blessed ones and how to track these stars in their courses.

Moreover, Ch J Iron Fist obligingly gives IRS’ counsel the UPS tracking number.

Well, I tried it just now my own self. If I got it right, it don’t look too good for Frank Jr.

As I await the celebrated blizzard promised us in the Apple by the National Weather Service, I turn my attention to anti-freeze assisted by Judge Vasquez in Michael Howard Dalton, 2017 T. C. Memo. 43, filed 3/13/17.

No, this is not the anti-freeze one has in one’s automobile. I mean the kind that a partner, member or shareholder in a pass-through needs when s/he doesn’t call the shots, and therefore is at risk of being frozen out by unfriendly colleagues. Remember, tax is not imposed at entity level, but all tax incidents, the good, the bad and the ugly, pass through to the partner, member or shareholder.

I’ve dealt with this and related issues before. See my blogposts “The Big Freeze,” 8/13/13, and “Don’t Get Yourself Into a State,” 5/11/11.

In today’s entry, Mike and Brother John fell out figuratively, and Mike fell out literally, of their construction company, a Sub S. Mike departed after settling the litigation that followed the break-up, transferring his shares to Brother John.

Judge Vasquez doesn’t tell us whether Mike sold his shares or just handed them over, but that’s not the issue.

The Sub S reported for tax purposes on the completed contract method.  This means that the Sub S recognized taxable income in the year when each contract was completed, even if payments were received or accrued, and costs paid or incurred, in a prior year. None thereof showed up on the 1120-S or the K-1s until the year of completion.

So in the year of the break-up, the Sub S filed a short year for the period January 1 through Mike’s exit date. The same CPA firm prepared both the short-year 1120-S and K-1s, and Mike’s and Anna’s 1040. And Mike’s 1040 showed a bunch of income from the Sub S for the short year.

Mike hand-wrote on the 1040 “(LINE 17 IS INCORRECT * * * WILL FILE AMENDED RETURN)”. 2017 T. C. Memo. 43, at p. 4. Line 17 on the 1040 is the bottom line for items on Schedule E (all that other income stuff, like rents, royalties, and pass-throughs).

Except he didn’t. And he and Anna signed the return, with the usual “under penalty of perjury” language. And Mike didn’t pay the tax shown on the return.

IRS assessed (no SNOD necessary for a self-assessed tax). Mike claimed on the 12153 he filed when he got the NITL “…TAX CALCULATED INCORRECTLY.  ACCOUNTANT USED CREDIT LINE TRANSACTION AS INCOME.” 2017 T. C. Memo. 43, at p. 5. Mike likes capital letters. And Mike didn’t ask for any collection alternative.

The SO suggested a doubt as to liability OIC, but Mike’s number was way low, so NOD.

Mike claimed he got no cash from the Sub S, but Judge Vasquez puts Mike wise.

“An S corporation is not subject to Federal income tax at the entity level.  Sec. 1363(a); see also Taproot Admin. Servs., Inc. v. Commissioner, 133 T.C. 202, 204 (2009), aff’d, 679 F.3d 1109 (9th Cir. 2012).  Instead, an S corporation’s items of income, gain, loss, deduction, and credit–whether or not distributed—flow through to the shareholders, who must report their pro rata shares of such items on their individual income tax returns for the shareholder taxable year within which] the S corporation’s taxable year ends.  Sec. 1366(a); Mourad v. Commissioner, 121 T.C. 1, 3 (2003), aff’d, 387 F.3d 27 (1st Cir. 2004); see, e.g., Dunne v. Commissioner, T.C. Memo. 2008-63; sec. 1.1366-1(a), Income Tax Regs.” 2017 T. C. Memo. 43, at pp. 9-10.

And the lucky shareholder must pay tax, whether s/he got anything or not. I include citations here so that when you break the bad news to the client, you can prove you didn’t make this stuff up.

Mike claims the Sub S’s 1120-S was wrong, but can’t prove it.

Takeaway- When negotiating a buyout, break-up, shareholder’s agreement, operating agreement, partnership agreement or any other deal that gives rise to passthrough tax, require distribution of cash sufficient to pay tax for all passcatchers. And tell ‘em Mike sent you.

No, this is not another rap on the fallout from an unfortunate moment at a major motion picture event. Rather, this is the tale of the latest rounder ploy.

And Judge Pugh tells us all about it in Bonny Goselin, Docket No. 6293-14L, filed 3/10/17.

The Tax Court website was down for an hour this afternoon, seriously disrupting my blogging schedule, to say nothing of my office routine. I really wish I could have done my blogpost without waiting out the outage.

Bonny fought about her tax liabilities for seven (count ‘em, seven) years. She lost on one of them in a decision three-plus years ago, and IRS concedes three of the remainder for want of proofs that copies of the SNODs for those years were mailed to Bonny’s last known address.

So Bonny was fighting about the last three, claiming at her CDP that she never got the SNODs.

IRS produced USPS Forms 3877 proofs of mailing, Bonny claimed they were defective, and they were, enough to overcome the presumption of regularity. But that doesn’t help Bonny.

“In this case, petitioner relies on various uncompleted blanks in the Forms 3877. Although she claims to have identified errors and inconsistencies, they do not rebut the evidence of mailing. She does not give us any reason to believe that the statutory notices now in the record and the matching Forms 3877 are not authentic. Her arguments would require us to accept, without evidence, improbable failures in procedure over multiple separate mailings to what she has confirmed is her last known address. Respondent’s concessions as to earlier years, based on inability to locate records, apparently due to the passage of time, do not affect the adequacy of documentation produced for the later years. Other than petitioner’s unsworn but repeated assertion that she did not receive the notices, she has offered no evidence that they were not mailed.” Order, at p. 5.

“Just say no” doesn’t cut it, and Bonny wanted summary J.

But Bonny got inventive.

“Petitioner also objects that the envelopes themselves are not in the record; the envelopes would be in the record only if petitioner introduced them or if they had been returned to respondent as undeliverable or unclaimed (in which case they should appear in the administrative record, see Snodgrass v. Commissioner, T.C. Memo. 2016-235, at *3).” Order, at pp. 3-4.

Moreover, Bonny apparently resorted to “drag-and-drop” (or maybe “copy-and-paste”) without reading what she submitted.

Judge Pugh is not amused.

“The language of the amended petition appears to have been copied from similar proceedings in that petitioner used the masculine ‘his rights’ in her allegations. Petitioner’s petition, amended petition, and motion for summary judgment incorporate identical language and are substantially similar to those in Docket No. 28049-14L, discussed in Garrett v. Commissioner, T.C. Memo. 2015-228 and T.C. Memo. 2016-179. The proliferation of similar cases involving multiple years of unfiled tax returns may suggest that common sources have urged certain tactics to accomplish delay in collection matters. When the record does not reflect an individual’s sincere efforts to determine correct liability and collection alternatives, we may conclude that the claims are not made in good faith. See sec. 6673.” Order at p. 2, footnote 2.

Takeaway 1- Save envelopes in any contested matter. Very handy.

Takeaway 2- If you’re going to cut-and-paste, read the document again before you send it. To paraphrase an ancient Japanese saying, “A word once spoken, all the Emperor’s horsemen cannot recall it.”