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.

As Saturdays are off-days for Tax Court, and thus for me, the last thing I was thinking of was a subject for a blogpost today. Just the usual big breakfast and a few chores would do, or so I thought.

Lo and behold, as a late and much-lamented colleague used to say, into my e-inbox falls the shadow.

It’s an e-mail concerning a spinoff of Loving v. IRS, 917 F. Supp.2d 67 (DCDC, 2013) aff’d. 742 F.3d 1014 (CCADC, 2014).

You remember Sabrina Loving unhorsing Doug Shulman and Dave Williams, when they tried the RTRP gambit? Sure you do. Here are my blogposts “Chevon, Mayo — I’m Loving It,” 1/21/13, and “Loving Conquers All,” 2/12/14, which I’m sure you’ve read.

Well, comes now Adam Steele, Brittany Montrois, and their henchman Joseph, heading the class who want their $64.50, $63.00 and $50.00 back, because they claim IRS has no right to mulct us PTINers for that amount (or if they do, it’s too much).

The case is Steele v. USA, Case No. 14-01523RCL. Judge Royce C. Lamberth is on the case in DC Circuit, where Judge Boasberg first put the slug on Doug and Dave.

Though the practitioners filed a year ago August, it took the Court until this past August to sort out the jurisdictional issues, so only now do I get the class action notice.

Check your inbox, practitioner, and join the Motley crew.

Just be aware that if we win,  IRS will tax any recovery if we took the Section 162 deduction for any PTIN fees we paid in past years. Tax benefit rule, y’know, with the mitigation variation.

The words of the late great Janis Joplin, heretofore in these blogposts furnishing advice regarding returns and petitions, now spirals on to OICs, as we look at Leslie J. Prins & Denise D. Westing-Prins, Docket No. 25969-15SL, filed 10/7/16, a designated hitter from The Judge With a Heart, STJ Armen.

You know IRS need not negotiate an OIC. If the taxpayer comes in too low, Appeals can bounce the collection alternative and send the taxpayer to 400 Second Street, NW.

But Les & Den caught a break. The SO told them to up the ante. Les & Den said they would, but didn’t.

Just to make sure they (and we) get the point: “It is not an abuse of discretion for a Settlement Officer to sustain a proposed collection action and not consider collection alternatives when the taxpayer has proposed none. Kendricks v. Commissioner, 124 T.C. 69, 79 (2005); O’Neil v. Commissioner, T.C. Memo. 2009-183 (taxpayer discussed an offer in compromise with settlement officer on multiple occasions but failed to submit one in writing); see also Treas. Reg. § 301.7122-1(d)(1) (offer must be made in writing and must contain all the information requested by the Internal Revenue Service). Here, petitioners initially submitted an OIC but it was found wanting, petitioners were told why and were provided an opportunity to submit an amended Form 656 in order to cure the problem, but they failed to do so. Under these circumstances it was not be an abuse of discretion to deny petitioners a collection alternative.” Order, at p. 2.

When you’re thrown a rope, make amends.

But Doesn’t Avoid a Bawling-Out

That Obliging Jurist, Judge David Gustafson, enters his decision (that’s a judgment for you State-courtiers) in Jeffrey A. Wolf, Docket No. 13980-13L, today, but I want to discuss the opinion he filed yesterday.

It was an off-the-bencher, same docket number. Jeff had run up a bunch of unpaid and unfiled years, plus additions for nonfiling and nonpayment in respect thereof. He filed, IRS assessed, Jeff wanted an IA and IRS sent him a NITL.

“Mr. Wolf’s father died in March 2006. Mr. Wolf contends, and the IRS concedes, that the resulting emotional devastation impeded his ability to timely file his returns and pay his taxes for 2006 and 2007; but that sorrowful event does not explain the earlier and later years.” Order, at p. 4.

Jeff also went down in Our Fair State for tax evasion for some of those years, but Judge Gustafson didn’t go there.

“The Commissioner evoked testimony at trial about this conviction, apparently to explain the decisions and conduct of IRS collection personal before the CDP request and hearing; but since we review only the action of the Office of Appeals in the CDP process, and since Appeals’ determination that we review here makes no mention of the State tax issues, we need not discuss this criminal issue in more detail.” Order, at p. 5.

The SO told Jeff to realize the equity he had in a lot of real estate to get the IA he wanted. And the IRM says so. Jeff still wants the IA, claiming he can’t sell his real estate so fast.

Judge Gustafson administers the bawling-out: “Mr. Wolf’s development of his substantial portfolio was improperly enhanced or facilitated by his non-payment of millions of dollars of Federal income tax liability over seven years. The IRS may well reckon that a taxpayer should not be permitted to default on his tax obligations, tie up in investments the money that should have paid his taxes, and then be entitled to forbearance in collection because the investments are not liquid. We sustain Appeals’ determination to deny the IA.” Order, at p. 18.

Now the IRS transcript here shows an assessment correcting a math error. Did the SO properly consult only the transcript to verify that all the right steps were taken in confirming the NITL? Should the SO maybe have done the numbers herself?

Judge Gustafson has a practice tip: “An argument not advanced by Mr. Wolf is the question of verification under section 6330(c) (3) (A), which in the CDP hearing is an obligation of IRS Appeals without regard to the taxpayer’s raising it. Perhaps in the right case one could contend that Appeals’ consultation of transcripts, without more, constitutes a failure to obtain adequate verification that the requirements of any applicable law and administrative procedure were met, for purposes of section 6330(c) (3) (A), in the case of an assessment arising from the correction of a math error. However, ‘the taxpayer must adequately raise the verification issue in his petition in order for this Court to consider it.’” Order, at pp. 19-20. (Citations omitted).

While I’ve said before that lawyers can’t add, it might be well to get out that dust-covered adding machine that prints out a tape when you scope out the assessment.

For Mary L. Hatcher, it was both. Though the $430K she parted with might have been for love, it wasn’t for business, and it didn’t go south in the right year, so Judge Lauber  dumps her bad debt deduction and NOL carryback in Mary L. Hatcher and Bradley J. Hatcher, 2016 T. C. Memo. 188, filed 10/6/16.

There was a note from her ex-boyfriend, but the parties hardly treated it in a businesslike way. Though they amended the note a couple times (hi, Judge Holmes), the ex never paid more than a tiny fraction of the interest (which Mary never reported), and finally threw in the cliché when he sent Mary an e-mail saying “I have no money.” 2016 T. C. Memo. 188, at p. 6.

Eventually Mary threw the note into her LLC (of which she was sole member and manager, and which she had formed the day before she threw in the note). The LLC did no business, and Judge Lauber concluded it was just window-dressing to try to give a business cover to her business bad debt claim.

Mary wasn’t in the loan business, she hadn’t checked out ex’s ability to pay, creditworthiness, or anything else. And Mary had an MBA in corporate finance (from which school not stated).

Anyway, she sued her ex on the note the year after she claimed it had become worthless, got a judgment the next year and tried post-judgment discovery (what we used to call a supp pro) and negotiations with ex into the year after that. Nobody wastes time and money chasing a worthless debtor, says Judge Lauber.

Judge, I’m going to suggest that it might could be that the heart has its reasons, even when the wallet does not. But that’s not enough to unworthify a note. For tax reasons, anyway.

Brad claimed to be a real estate pro, and he had originated mortgage loans in the past (but not in the year at issue), and his own testimony shows only 450 hours, short of the magic 750.

Mary claims a big NOL based on the worthless note and tries a carryback thereof. This gets her a 20% substantial understatement chop.

“In the case of an NOL carryback, the penalty for negligence applies to any portion of an underpayment for the carryback year that is attributable to negligence in the year in which the NOL arose (loss year).  Sec. 1.6662-3(d)(1), Income Tax Regs.  Similarly, the substantial understatement penalty applies to any portion of an underpayment in the carryback year that is attributable to a ‘tainted item’ in the loss year.  Sec. 1.6662-4(c)(1), Income Tax Regs.  The determination of whether an understatement is ‘substantial’ for a carryback year is made with respect to the return for that year.  Ibid.  A ‘tainted item’ is any item for which there is neither substantial authority nor adequate disclosure with respect to the loss year.  Id. subpara. (3)(i).” 2016 T. C. Memo. 188, at p. 22.

MBA Mary flunks the five-and-ten test (greater of $5K or 10% of tax due) for her NOL because her claimed bad debt is clearly tainted; she prepared her own returns, and the IRS pub she relies on tells her to look at another pub, that she didn’t rely on.

But Brad escapes in part on his real estate; he lost his Sched E $25K substantial participation deduction and got penalized on the SE arising therefrom only because of Mary’s bad debt shenanigans. So Brad’s deduction gets saved from the 20% understatement chop.

Following up on my earlier blogpost, I find this news clipping.

http://www.msn.com/en-us/money/companies/fake-call-centers-in-india-scam-americans-of-millions/ar-BBx4xsM?li=BBnb7Kz&ocid=mailsignout

It was going on for at least a year. Doubtless there are others, and soon will be more.

Like the heroine of the 2005 Bowling for Soup classic, Lane Alan Montz, Docket No. 23537-15S, filed 10/5/15, went to make a deposit. But he was in Ohio already, and wanted trial in Cleveland.

Even though “there’s nothing wrong with Ohio,” IRS wants to toss Lane Alan, because prior to the SNOD from which he petitions, he sent IRS a remittance, together with a letter saying he’s paying  “[i]n order to stop interest, ameliorate any penalties and show good faith…. This does not mean I am agreeing or will agree to any deficiency assessment but rather is to stop interest, etc. while we sort this out.” Order, at p. 1.

IRS says SNOD invalid because Lane Alan paid the deficiency. And it’s a payment not a deposit, because Lane Alan didn’t follow Rev. Proc. 2005-18, 2005-1 C.B. 798, and didn’t properly designate the remittance as a deposit.

The Judge With a Heart, STJ Armen, is once again too douce to give IRS a Taishoff “Oh, Please!”

Instead, he gets all legalistic. “Rev. Proc. 2005-18, 2005-1 C.B. 798, provides guidance in determining whether a remittance is considered a payment or a deposit. According to Rev. Proc. 2005-18, sec. 4.01(1), 2005-1 C.B. at 799, the taxpayer may make a deposit by remitting to the IRS a check or money order, accompanied by a written statement designating the remittance as a deposit. However, if the remittance is undesignated, i.e., is not designated as a deposit, other facts and circumstances help determine whether it is a payment or a deposit. Rev. Proc. 2005-18, secs. 4.01(2), 4.03, 4.04, 2005-1 C.B. at 799-800.” Order, at p. 3.

Well, Lane Alan’s billet doux certainly fits the “written statement designating the remittance as a deposit.”

So I’ll give IRS a Taishoff “Oh, Please, First Class.”