Taking my headline from an exalted source, I bring to the attention of my readers IRS Notice 2016-66, coming soon to an IRB near you.

IRS has fought with alleged micro-captive insurance companies with mixed results. The Rent-A-Center case was a major win for the captive S Corp siblings; see my blogpost “Insurance – Are You Sure?” 1/14/14.

But the captors have also taken some tough hits. See, e.g., my blogpost “No Insurance? Go Pound Sand,” 5/28/13.

Well, IRS has a checklist of phony insurance deals where there is no shifting of risk, no economic substance, no adherence to generally-accepted industry-wide practices, and a roundy-round with money to dodge taxes.

These are now “transactions of interest,” and I’ll bet they’re going to get a lot of interest.

Should be some good litigation and blogfodder coming up.

Usually the Rule 155 bean count is just arithmetic, and of interest only to the parties to the case. Today, however, CSTJ Panuthos (in an unwonted burst of modesty signing himself simply as “STJ”) has a different take, as IRS, in a moment of candor, gives an assist to Djamal Mameri, Docket No. 16403-15S, filed 11/4/16.

Djam had his deduction bounced for “…the computer for his English 5 class at Berkeley City College. Since a computer is not tuition or a fee charged by an educational institution, it would have to qualify under ‘books, supplies, and equipment’. See sec. 1.25A-2(d)(2)(ii), Income Regs. There is no evidence that petitioner was required to purchase the computer directly from Berkeley City College. Instead petitioner was able to and in fact did purchase the computer from a third party. Thus the cost of the computer is not an expense that qualifies for the education credit. See id. subpara. (6), Example (2).” Order, at p. 1.

As the parties went into the beancount, IRS came up with a save for Djam.

IRS tipped off Djam and CSTJ Panuthos that IRS had “…proposed regulation section 1.25A-1(d)(3) issued August 2, 2016. The proposed regulation interprets the meaning of ‘required for enrollment or attendance’ as set forth in section 25A(f)(1)(A) and (i)(3) to mean that ‘the course materials are needed for meaningful attendance or enrollment in course of study, regardless of whether the course materials are purchased from the institution’. Respondent proposes to concede that petitioner is entitled to an education credit for the purchase of the laptop computer since petitioner satisfies the requirements of the proposed regulation.” Order, at p. 1.

IRS did the right thing.

It seems that every day is Rounders’ Day at 400 Second Street, NW. And Judge Gustafson certainly gets his share.

See my blogpost “Rounders’ Day – A Holiday?”, 9/9/16. Well, even though I’ve had a great day at the PwC International Tax forum and visiting family in the Magnolia City, I must chronicle the return of two rounders.

First is Frances M. Scott & Galen M. Anderson, Docket No. 26717-14, filed 11/3/16. Fran & Galen gave that Obliging Jurist Judge David Gustafson a chance to blow off some attempted rounderdom, culminating with Fran & Galen attempting to dismiss their petition, which falls into the “own goal” category, in the abovecited blogpost.

Thereafter, Judge Gustafson granted IRS’ motion to dismiss for want of prosecution. After that order, Fran & Galen file an objection. In today’s action, Judge Gustafson, obliging as always, gives Fran & Galen a two-for-one: he treats that as a motion to vacate, which he grants and a motion to reconsider, which he denies.

Fran & Galen, nowise daunted, attempt to stall everything by filing a notice of appeal to CCA 10. But since no decision had then been entered, there is only an interlocutory appeal available. And unless Judge Gustafson orders a stay, the interlocutory appeal stays nothing in Tax Court.

Judge Gustafson is not so obliging as to grant Fran & Galen a stay.

But he does vacate the order dismissing their petition for want of prosecution. Why?

“However, we will not yet re-enter decision in this case, because we now will consider whether to include in that decision the imposition of a penalty under section 6673(a)–something about which we warned petitioners in our order dated September 8, 2016. Section 6673(a)(1) provides that where proceedings are ‘instituted or maintained by the taxpayer primarily for delay’ or where ‘the taxpayer’s position … is frivolous or groundless, … the Tax Court, in its decision, may require the taxpayer to pay to the United States a penalty not in excess of $25,000.” Order, at p. 5.

So Fran & Galen can show cause why Judge Gustafson should not unload a $25K frivolity chop.

Next in line is Rodney W. Gattie, Docket No. 7077-15, filed 11/3/16. Rod was the number two player in my abovecited blogpost, and here he is again.

Rod was a Methodist minister and an insurance salesman. Whatever parallels one might draw therefrom, Rod drew money from both and got an SFR, to which he responded with a 1040EZ showing all zeros except for the withholding he wanted refunded.

As more fully set forth in my abovecited blogpost, Rod got the Section 6673 yellow card.

On the trial before Judge Gustafson, Rod kept up the frivolity, despite warnings.

Judge Gustafson, aweary of these tactics, unloads in this off-the-bencher.

“Mr. Gattie has raised frivolous arguments in prior proceedings before this Court and is thus a ’repeat offender’. He was warned that his arguments were frivolous and that raising such arguments could lead to the imposition of penalties–warned not only by the IRS but also by this Court in his prior case and in this very case; but he ignored or defied those warnings. He did not raise any non-frivolous arguments in addition to his frivolous arguments. His conduct imposed on the IRS and the Court a substantial undue burden to adjudicate his case. Until the 11th hour he refused to stipulate facts that in fact he could not dispute. And he has made no pretense of intending to comply with tax laws in the future.

“Taking into account all the facts and circumstances, we impose a penalty of $12,500–half of the maximum possible penalty–and we warn Mr. Gattie that if he should repeat this conduct in the future, the penalty can go up to $25,000.” Order, at p. 10.

As Christina M. Fitzpatrick was taking care of her desperately-ill son (and developing spinal stenosis by lifting him unaided), her husband imitated the man going to Jericho, and became an investor in a wine bar called Grape.

Although supposedly an equal partner, husband was supposed to be a passive investor. Christina, who finished high school and had minor business experience, opened the corporate bank account, signed checks when told, and delivered them when received from the payroll company.

Husband’s partner hires hotshot operator who runs Grape into the terroir, of course neglecting the quarterlies.

IRS’ bulldog, doing a cursory examination (relying on dubious e-mails from hotshot; no this is a non-political blog) and figuring Christina might have a few shekels, hits her with TFRPs.

The case is Christina M. Fitzpatrick, 2016 T. C. Memo. 199, filed 11/2/16.

Judge Vasquez has heard Christina and husband, and partner and hotshot. He reverts to his favorite saying:”… the process of distilling truth from the testimony of witnesses, whose demeanor we observe and whose credibility we evaluate, is the daily grist of judicial life.  We are not required to accept testimony if it is improbable, unreasonable, or questionable.  MacGuire v. Commissioner, 450 F.2d 1239, 1244-1245 (5th Cir. 1971), aff’g T.C. Memo. 1970-89.” 2016 T. C. Memo. 199, at pp. 20-21.

Judge Vasquez is surprised that partner and hotshot escaped unscathed at the administrative level, but the RO on the case was less than thorough. “RO W determined during this phase that petitioner was a responsible person (1) because of her alleged status as secretary of the corporation, (2) because she signed checks, and (3) because a ‘review of her financial statements shows equity in assets reflecting collection potential’.  However, we believe RO W did not conduct a thorough investigation.  For instance, RO W made her determination before she received and reviewed the relevant bank records.  She also failed to interview (or summon) Mr. partner, the president of the corporation. See Robert E. McKenzie, Representation before the Collection Division of the IRS, sec. 5.66 (2016) (‘The IRS normally begins its investigation of the * * * [TFRP] by interviewing corporate officers.’).  After reviewing the administrative record, we also believe that RO W was actively misled by Mr. hotshot regarding petitioner’s role at the business.” 2016 T. C. Memo. 199, at p. 24, footnote 24 (Names omitted).

There’s more, but that’s enough for now.

Why IRS was persuaded to take this case to trial, and put three (count ‘em, three) of their trial attorneys on this, eludes me. Did anybody bother to sweat the witnesses, or examine the documents?

Despite its cutesy name, the so-called PATH Act has given rise to many changes, and today Ch J L. Paige (“Iron Fist”) Marvel has a reminder for IRS. Counsel should read the rules.

It’s Robert Watson, Sr., Docket No. 21516-16S, filed 11/1/16.

RW wants interest abated, but IRS says “we don’t got no NOD.” Or words to that effect.

Ch J Iron Fist issues her suggestion aforesaid thus:

“The Court’s Explanation to Rule 280, as amended on an interim basis, states as follows:

Explanation

Section 421 of the Protecting Americans from Tax Hikes Act of 2015, Pub. L. 114-113, Stat., amended Code section 6404(h) to provide that a taxpayer may petition the Court for an abatement of interest if the taxpayer files a claim for interest abatement with the Internal Revenue Service and the Commissioner fails to issue a final determination on the claim within 180 days after the claim was filed. This amendment is applicable to claims for abatement of interest filed with the Internal Revenue Service after Dec. 18, 2015. Rule 280 is amended on an interim basis to reflect the amendment to Code section 6404(h).” Order, at p. 2.

And Ch J Iron Fist obligingly prints the interim rule in extenso, so all hands can do a Habakkuk 2:2. And IRS can tell Ch J Iron Fist if he did.

Meantime, RW, dig through your files and see what you did. And when.

Everybody else, update your forms of pleading.

Howard Bruce Coates echoes Meredith Willson’s 1957 Best Broadway Musical words in Howard Bruce Coates and Tandi A. Coates, 2016 T. C. Memo. 197, filed 10/31/16, that send Judge Morrison into algebraic contortions.

Howard and Tandi are fighting over their casualty loss when “the wind came sweeping down the plain” in Seminole County, Oklahoma, leveling homestead, standing timber and happy hunting grounds. It was a tornado, and a bad one.

Howard has a problem with basis in one parcel, and gets a zero, as the deed stamps show no consideration, intrafamily, presumably gift. I never knew OK has a transfer tax of 1.5%; makes our Empire State 0.4% look cheap (but wait until you see the NYC taxes).

But his numbers trump his appraiser’s numbers. And IRS’s skepticism. Judge Morrison buys Howard’s numbers on Parcel A.

“As the IRS recognizes, it is permissible for the Court to consider the opinion of the landowner as to the value of land.  Harmon v. Commissioner, 13 T.C. 373, 385 (1949).  The owner has unique knowledge of the land.  Id.  Although the relevant fair market values before and after a casualty must generally be ascertained by a competent appraisal, sec. 1.165-7(a)(2)(i), Income Tax Regs., this does not mean that the appraisal must be done by a professional appraiser.  It is therefore permissible for the before-and-after values in a casualty-loss situation to be determined by a court on the basis of the landowner’s opinion of these values.

“Here we give Coates’s views special weight.  He owned property A before and after the tornado.  Furthermore, he has substantial experience working with timberland, farmland, and pastureland.  For 30 years, Coates has been handling various tasks on the ranch.  Coates has also bought and sold various properties in Seminole County.  Some of the land Coates bought had been damaged by fire or was overgrown.  In those instances, he had to restore the land to workable farmland or grazing land before reselling it.  In our view, Coates was credible and knowledgeable about the before-and-after values of property A.” 2016 T. C. Memo. 197, at p. 15. (Footnote omitted).

And Howard’s numbers work for Parcel B.

“As for the value of property B after the tornado, we find that the evidence supports Coates’s claim that the value was $440,000.  First, Coates testified that the best use of property B after the tornado was to convert it to grazing land.  His views are credible because he is experienced in converting land from one use to another to make it more valuable.  Furthermore, he has already partially converted property B to grazing land, thus proving by expenditure of his own money the genuineness of his view that property B is most valuable as grazing land.” 2016 T. C. Memo. 197, at p. 23.

Even better, here’s Judge Morrison’s ascent to “such rarefied heights of pure mathematics that it is said that there was no man in the scientific press capable of criticizing it,” as the “best and wisest man” John H. Watson ever knew put it.

“Let V be the value of the land after the tornado.  Let V_g be the value of the land after conversion to grazing land.  Let C be the cost of converting the land from tornado-damaged land to grazing land.  The three propositions can be expressed as: (1)  V_t = V_g – C  (2 ) V_g < 528,000 (3) C >88,000 Rearranging the first proposition (V_t = V_g = C) yields V_g = V_t + C. Combining this with the second proposition (V < 528,000), it follows that V_t + C < 528,000. This equation becomes 528,000 – V_t > C.  Combining this equation with the third proposition (C >88,000), it follows that:  528,000 – V_t > C.  And 528,000 – V_t > 88,000. Rearranged, this equation is 440,000 >  V_t. So the value of property B after the tornado is $440,000 or less.” 2016 T. C. Memo. 197, at p. 25, footnote 9.

Judge, I’ll take your word for it. I could’a had a V8.

I’m totally, utterly and completely confused. Ch J L. Paige (“Iron Fist”) Marvel has struck again. Today it’s Charles L. Kiefer, Docket No. 6782-16, filed 10/31/16.

And this is no Halloween trick-or-treat.

Chas gets his petition bounced for no SNOD, so he petitions to vacate or revise (Rule 162).

“The Court dismissed this case for jurisdiction because petitioner failed to identify or provide any specific notice upon which jurisdiction in this case could be based. Because this case is closed, the Court lacks jurisdiction to hold a hearing. Filing fees are the cost of filing a case with the Tax Court and are not refundable.” Order, at p. 1.

Leaving aside the grammatical quibble that the case was dismissed for want or lack of jurisdiction, and not “for jurisdiction”, see my blogpost “Worth A Try,” 10/21/16, wherein I cite to two other cases where there were refunds, notwithstanding that the petitioners filed something with Tax Court that at least generated an order.

And I’ve blogged cases where a letter, or even one page of a SNOD (see my blogpost “Now I’m Really Confused,” 9/27/16), or a money order (see my blogpost “Show Me The Money,” 11/13/13), is deemed an imperfect petition and commences a proceeding. And in the “Now I’m Really Confused” blogpost, op. cit., the petitioner never filed a proper petition, but got her money back.

So what’s the story?

But That Won’t Save The Petition

We’re all fully familiar with the dog in the night-time. That dog was the star of Broadway and Hollywood, with or without the World’s Greatest Consulting Detective.

But in the sad tale of Joyce G. Springfield, Docket No. 8172-16L, filed 10/28/16, the dog’s misdoings led to Joyce being unhorsed in Tax Court.

Joyce is a wee bit late with her petition from the NOD. Tax Court gets it on Day 61, when “generally” (I love “generally,” the mother of exceptions) the petition has to show up by Day Thirty. And all it takes is for IRS to send the NOD to last-known-address; whether Joyce got it or not is irrelevant.

Joyce claims she told USPS she was bailing four (count ‘em, four) days before the NOD was mailed.

“…petitioner filed a Letter …stating that her family was forced to move when their family dog bit the manager of their apartment building…. She states that she changed her address with the United States Post Office (USPS) when she found a new home close to her prior address…. Petitioner stated in the petition that she moved to her new residence and changed her address with the USPS… four days before respondent mailed the notice of determination.” Order, at p. 2.

It’s the “United States Postal Service,” Ch. J L. Paige (“Iron Fist”) Marvel.

Whatever, the four-day notice doesn’t cut it. “In section 301.62122(b)(3) Example (2), Proced. & Admin. Regs., the taxpayer changed his address with the USPS six days before the notice was mailed. In the Example, the taxpayer’s last known address was the address on his most recently filed tax return because the taxpayer did not inform the USPS of his change of address in sufficient time for the IRS to process and post the new address before the notice was mailed. Id.; see also Graham v. Commissioner, T.C. Memo. 2008-129. Similarly, the four days between petitioner’s notification to the USPS of her change of address and issuance of the notice in this case was not sufficient time for the IRS to process and post the new address before the notice of determination was mailed to her. Accordingly, the notice of determination was mailed to petitioner’s last known address.” Order, at p. 3.

Whatever your dog did, day or night, won’t help.

Note to those who object to having their Tax Court cases discussed, from Judge Nega: “It is the goal of this Court to provide a public record and an open court, and to serve the legitimate interests of the public….” Kenneth William Kasper, Docket No. 6748-13W, filed 10/28/16, at p. 1..

Moreover, “Section 7458 provides that ‘[h]earings before the Tax Court and its divisions shall be open to the public’. Section 7461(a) similarly provides that ‘all evidence received by the Tax Court and its divisions, including a transcript of the stenographic report of the hearings, shall be public records open to the inspection of the public.’” Order, at p. 1.

If you want it sealed, better ask the Judge from the getgo. And have a good reason.

Justice must be seen to be done.

Unless you absolutely have to, that is.

Judge Nega’s order in Ellen F. Campbell, Docket No. 10290-13, filed 10/27/16, makes me doubt whether this is such a circumstance.

Ellen moved for partial summary J, IRS responded, whereupon Ellen moved for all-in summary J. While all this was happening, Judge Nega wanted Ellen and IRS to discuss Ellen filing a joint return with her spouse and the negligence penalty.

IRS agreed to stip to the joint return, but Ellen wanted IRS to agree about all items of income and deduction before filing the joint return.

Judge Nega is not amused.

“We find that petitioner’s failure to work cooperatively with respondent in the stipulation process has delayed the resolution of this case. Petitioner is demanding by her refusal to stipulate that respondent and the Court address a matter that is moot in view of respondent’s willingness to accept a joint return from petitioner and her spouse. Neither the Court nor respondent is required to engage in academic exercises that serve no purpose in the case before us.” Order, at p. 1.

Then Judge Nega berates Ellen’s attorneys, brandishing the Section 6673 delay-of-game chop. And bounces both of Ellen’s motions.

I understand the desire to take an extra base if you can. Just choose your spots carefully.