But It Does Save the Chop

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In any event, decision affirmed.

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

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

Not a reprise of Erik McBride Thompson’s voyage of discovery, for which see my blogpost “Can Tax Court Be Habit-Forming?” 12/20/11.

Have I really been doing this for more than six years?

No, today’s seeker after wisdom and truth is Andrew Lee Stinson, 2016 T. C. Sum. Op. 82, filed 12/13/16.

Andrew Lee has a master’s degree in information science. But apparently in his part of North Carolina all he could find during the year at issue was indoor and outdoor odd jobs for an old acquaintance, ranging from dumping compost to editing Photoshop. This got him a big $13K, on which he paid tax but no SE.

IRS goes for the SE.

Judge Cohen tells it all in one paragraph.

“The petition alleged only petitioner’s dire financial circumstances and cited no error in respondent’s determination.  At trial petitioner stated that he was present ‘because I spent the $60 [filing fee] and for that amount of money I’d like to see how things work.’  Petitioner’s candor and credible testimony are appreciated but do not change the legal effect of the facts.”

It’s a shame Andrew Lee didn’t show up for a calendar call and maybe a trial. A trial in what the late lamented Professor Siegel called “S.E.C.” Someone Else’s Case. It’s a lot cheaper.

Well, not actually. It’s just that Tax Court again deals with farmers and the Section 263A capitalization rules, in Wasco Real Properties I, LLC, Gardiner Family Trust, Tax Matters Partner, et al., 2016 T. C. Memo. 224, filed 12/13/16.

I don’t know Judge Buch’s background for dealing with nuts, but in this case it’s an almond farm or two or three, that the Wasco gang picked up from the rose growers who were there before. Saying “nuts” to flowers, they borrowed the money to buy the parcels, planted almond trees, and wanted to deduct currently loan interest payments and real estate taxes.

Now trees aren’t row crops, like carrots, roses, corn and wheat. “Row crops are nonpermanent crops that have a specific growing season.” 2016 T. C. Memo. 224, at p. 11. And Judge Buch has a great deal to say about why trees are one with the land whereon they grow, and thus expenses of the land must be capitalized, and recovered accordingly, against income when the nuts are sold.

There’s no question the taxes and interest are deductible, even the interest for some intrafamily loans. The only question is when to deduct these.

And what would a T. C. Memo. be, without a quick flip through the digital dictionary?

“The entities’ growing of the almond trees is a production of those trees within the reach of section 263A.  The uniform capitalization rules apply to ‘[r]eal * * * property produced by the taxpayer’ for the taxpayer’s use in a trade or business or in an activity conducted for profit.  Sec. 263A(b)(1), (c)(1).  While the statute does not define the term “real property” for purposes of section 263A, section 1.263A-8(c)(1) and (2), Income Tax Regs., defines the term to include ‘land’ and ‘unsevered natural products of land’ and states further that ‘unsevered natural products of land’ generally include ‘[g]rowing crops and plants’ where the preproductive period of the crop or plant exceeds two years.  That definition, although included in the regulations explicitly made applicable to the capitalization of interest but not included in the regulations explicitly made applicable to the capitalization of other costs, is consistent with the term’s ‘ordinary meaning.’  See Nw. Forest Res. Council v. Glickman, 82 F.3d 825, 833 (9th Cir. 1996) (observing that a statutory term that the statute does not define may be construed in accordance with its ‘ordinary meaning’).  The ordinary meaning of the term ‘real property’ includes ‘property consisting of land, buildings, crops, or other resources still attached to or within the land’.  Merriam-Webster’s Online Dictionary, http://www.merriam-webster.com/dictionary/property (last visited Nov. 15, 2016); see also Black’s Law Dictionary 1412 (10th ed. 2014) (defining the term ‘real property’ to include ‘[l]and and anything growing on, attached to, or erected on it, excluding anything that may be severed without injury to the land’).  In that the almond trees grow on the land and otherwise fit within the ordinary meaning of the term ‘real property’, we conclude that the almond trees are “real property” for all purposes of section 263A.” 2016 T. C. Memo. 224, at pp. 25-26. (Footnote omitted).

See my blogpost “Raspberries, Strawberries,” 2/22/13. Almonds didn’t make the Notice 2013-18 cut.

Joyce Kilmer may be right that “only God can make a tree,” but IRS can sure capitalize it.

So the Wasco gang gets a Section 481 adjustment, and must capitalize the taxes and interest.

No, not the TV cops-‘n’-robbers. Today it finally became clear to me why there cannot be refunds of the sixty buck filing fee.

It’s probably been clear to y’all from the getgo, so I’m waiting for the choir to sing the “Amen” from Messiah.

Every day the Tax Court is open, even when there are no opinions or designated hitters, there are dozens of orders telling petitioners to cough or cop.

Either cough up the sixty bucks or cop a waiver.  I don’t have the statistics on how many do neither, but intuition seasoned with plowing through this stuff says better than 90% do neither.

I wish the hard-laboring intake clerks and flailing datestampers would provide valid statistics.  I know it’s tangential to TAS’ mission at best, but the numbers could be part of Nina E. (“The Big O”) Olson’s annual weep to Congress.

Howbeit, each of those nonstarters takes the same amount of work to log in and create a file as a multi-billion-dollar deficiency filed by a trillion-dollar multinational, featuring white shoes in divisional strength, which takes ten years to get to trial with no time off for good behavior.  And the trillion-dollar multinational pays the same sixty bucks.

So the relatively few who cough or cop subsidize the rest.

No, don’t draw any political analogies. Not here.

Hit it, choir!

The Judge With a Heart, STJ Armen, has before him the revocation of the 501(c)(3) of Community Education Foundation, 2016 T. C. Memo. 223, filed 12/12/16.

CEF was formerly known as “ABF Educational Foundation, Inc., but since its incorporation has operated under the names Congressional Education Foundation, Congressional Education Foundation for Public Policy, and most recently Community Education Foundation.” 2016 T. C. Memo. 223, at p.  2.

The sole officer, director and representative of CEF timely petitioned, but did not engage fully thereafter, and did not file a brief when directed by STJ Armen.

Judges do get peeved when ignored, but STJ Armen, exercising his hearty discretion, elects not to toss CEF on that ground.

CEF did nothing for the first seven years of its life, but then tried to run a Veterans’ Inaugural Ball, which fizzled.

There’s a jumpball over why the fizzle. CEF’s sole officer, director and representative stiped to the administrative record.

The record contains an “…article in the Army Times stating that ‘sponsors, entertainers and ticketholders [were left] in the lurch when the Veterans’ Inaugural Ball was not held.  The article further stated that the Baltimore, Maryland, Department of Recreation and Parks did not have a permit request regarding petitioner’s promotion of a ‘star studded benefit concert’ at Carroll Park in Baltimore, nor were the featured entertainers officially scheduled to perform at any such concert. According to petitioner’s version of the events, the Veterans’ Inaugural Ball fell through because Mr. H found his cosponsor to be misleading and other unnamed cosponsors ‘could not get past the fact that’ (1) ‘we were all Republicans, supported President George W. Bush, and the war in Afghanistan and Iraqi [sic]” and (2) the ‘CEF [Community Education Foundation] former President * * * was indicted in Colorado on issues relating to money and the Kuwaiti Government’.  With respect to petitioner’s contemplated events for [the next year] it contends that it was not able to find corporate sponsors for those events because of an unflattering article in the Washington Post, as well as the… article in the Army Times.” 2016 T. C. Memo. 223, at p. 6, footnote 3.(Name omitted).

As this is a nonpolitical blog, I can only reiterate: Stipulate, don’t capitulate. Especially don’t stipulate to hearsay.

Howbeit, STJ Armen sees no need to figure out why CEF didn’t bring off the Veterans’ Inaugural Ball.

“Instead, the Court focuses on petitioner’s exempt purpose and the activities that it engaged in, or, more to the point, failed to engage in, with respect to that purpose.

“According to its application petitioner intended to further its exempt purpose by organizing monthly town hall meetings, 20 national workshops yearly, and quarterly congressional forums in addition to a nationwide media campaign.  The application allocates petitioner’s time and resources as follows:  (1) 25% to town hall meetings…; (2) 55% to national workshops…; (3) 10% to congressional forums…; and (4) 10% to its nationwide media campaign.  Notably, petitioner did not over time meaningfully organize or allocate resources to any of the aforementioned activities.  Accordingly, on the basis of the record before us, the Court concludes that petitioner failed to satisfy the operational test because it did not engage in any activity that accomplished one or more of the exempt purposes in section 501(c)(3).  The Court therefore holds that regardless of the applicable standard of review, see supra note 5, respondent properly revoked petitioner’s tax-exempt status… because it was not operated exclusively for an exempt purpose.” 2016 T. C. Memo. 223, at pp. 11-12.

Remember, in the 501(c)3 context, “operated exclusively” means operated primarily, with only an insubstantial noncharitable activity. STJ Armen has lots of cases cited for your brief file.

But To Whom Is It Due?

STJ Panuthos, again modestly omitting his Chiefdom, has to deal with giving credit. No, Tax Court is not Lending Tree. Jennifer Zuch, 25125-14L, filed 12/12/16, claims the two checks aggregating $50K she and her now-ex-spouse Patrick Gennardo paid to IRS as 1040-ES payments are hers. One was drawn on their joint account and that 1040-ES listed both of them. The other named only Pat, although the cash came from Jen.

IRS put both checks in their joint account, but each filed MFS for that year, as they parted ways. Jennifer claims she was so broken up by Pat’s bailout she filed late.

After not mentioning the $50K in either return, Jen and Pat filed 1040Xs, giving Jen the $50K credit.

Then Pat offers an OIC for that year and some unspecified other years, IRS takes him up on it, and applies the $50K to Pat’s OIC. Then IRS hits Jen with a NITL.

Now STJ Panuthos again conflates paper with person. Enter “petitioner’s POA Frank Agostino,” who files the 12153 for Jen. Petitioner’s “POA” is no paper tiger. He’s the Boss Hoss of the well-known law firm sometimes herein and elsewhere referred to as The Jersey Boys.

Judges, Chiefs or not, must remember a Form 2848 qualifies a “representative” to act for taxpayers before IRS. The Form 2848 is entitled “Power of Attorney and Declaration of Representative.” It names the representative, and most commonly does so on a piece of paper.

Back to our game. Appeals says “So sorry, applied the money to Pat’s OIC, and BTW, we’re not abating the late-filing chop despite your tearful bust-up with Pat.”

Jen petitions, and IRS, after answering, seeks summary J.

Not today, says STJ Panuthos.

Since check no. 1 was accompanied by 1040-ES with both names and both SSANs, it’s a joint payment, so how come Pat got it all?

The second check had no 1040-ES with it, and the cover letter to an IRS employee named both Jen and Pat. “It is also not clear from the record as to when petitioner and Mr. Gennardo decided to file their…Form 1040s separately.” Order, at p. 6.

And as for the OIC that covers both the year at issue “and other years,” were any payments subsumed in the OIC for joint liabilities of Jen and Pat?

As for standard of review, STJ Panuthos has a footnote worth reading: “See Freije v. Commissioner, 125 T.C. 14, 23, 26-27 (2005) (applying abuse of discretion standard where taxpayer in CDP case challenged IRS’ failure to credit overpayments). Compare Landry v. Commissioner, 116 T.C. 60, 62 (2001) (applying de novo standard where taxpayer challenged application of overpayment credits, reasoning that “the validity of the underlying tax liability, i.e., the amount unpaid after application of credits to which petitioner is entitled, [was] properly at issue”), with Kovacevich v. Commissioner, T.C. Memo. 2009-160, 98 T.C.M. (CCH) 1, 4 & n.10 (applying abuse of discretion standard where taxpayer challenged application of tax payments, reasoning that ‘questions about whether a particular check was properly credited to a particular taxpayer’s account for a particular tax year are not challenges to his underlying tax liability’), and Orian v. Commissioner, T.C. Memo. 2010-234, 100 T.C.M. (CCH) 356, 359 (same).” Order, at p. 6, footnote 7.

No need to decide now which standard to use; too many questions.

W. S. Gilbert’s immortal words certainly do not describe STJ Daniel A (“Yuda”) Guy. Although Daniel A. Colon, Docket No. 13933-16L, filed 12/9/16, has “…theories may be susceptible to summary adjudication, the current record is insufficient to support such a disposition.” Order, at p. 2.

Dan wants judgment on the pleadings. IRS says there are facts in dispute. Dan attached some documents to his motion, but with no covering affidavit.

That’s a standard pro se mistake.

IRS counsel has the affidavit and some documents of their own.

A refresher for civilians. “A judgment on the pleadings is a judgment based solely on the allegations and information contained in the pleadings and not on any outside matters. See Rule 120(a) and (b), Tax Court Rules of Practice and Procedure. The movant has the burden of showing entitlement to judgment on the pleadings. See Nis Family Trust v. Commissioner, 115 T.C. 523, 537 (2000). He must show that the pleadings do not raise a genuine issue of material fact and that he is entitled to a judgment as a matter of law. See id.” Order, at pp. 1-2.

Except Tax Court doesn’t award judgments, of course. Tax Court renders reports and issues decisions. See Section 7459.

Tonight was held the last meeting of the Bloomberg BNA Tax Advisory Committee. It was, as always, stimulating and educational.

I will miss the colleagiality, the informality, and the intellectual honesty.

Best wishes to all my fellow members for every success in their future endeavors, and thanks to BNA and its successor for the opportunity to serve the profession I love.