Whether it’s taking a loss on your 1040, or getting your litigation costs, timing is everything.

Judge Morrison elucidates the first mistiming in Jeffrey J. Evans, 2016 T. C. Memo. 7, filed 1/11/16. Jeff claims the loss is ordinary, as the real estate he lost to a foreclosure sale was stuff he was meaning to fix up and sell. He fails to prove that he was in the business of buying, fixing up and selling, so he gets a capital loss.

But the point of Jeff’s sad story (his daughter was shot and killed by a police officer, an event that devastated him, as happens all too often) is that the foreclosure sale took place in one year, but Jeff didn’t get the surplus money from the foreclosure until the next year.

Surplus money is what’s left over after the lienholders get paid and all costs and fees of sale are recovered.

Jeff says he’s a cash-basis taxpayer, and so the loss follows the cash.

A foreclosure sale isn’t final if the foreclosed-upon owner has a right of redemption (Jeff didn’t under local law), or there’s an ongoing dispute about the foreclosure. For the latter, see my blopost “It Ain’t Over Till It’s Over,” 5/20/14.

Jeff argues that the trustee (the local equivalent of what we here in the Empire State call the referee) didn’t tell him about the surplus (although he admits he could have asked), and demanded a heavy-duty release and indemnification before he handed Jeff the loot.

But there was no fight with the lienholder about what was due, and Jeff testified nobody else made any claims. And local law required the trustee to unload the cash. “The mere fact that the trustee continued to hold those funds…and paid them after receiving a release from Evans does not show that there was any dispute about whether the proceeds were distributable to Evans or the amount of proceeds so distributable.” 2016 T. C. Memo. 7, at p. 20.

But what about the cash-basis taxpayer argument? Well, that may hold for cash items, but losses like depreciation and foreclosure have the Section 165(a) rules. And Jeff has no counter to that. He does have a loss, but not for the year at issue.

As for the trustee, he was right not to hand over money without a release and indemnity. I wouldn’t.

Now for the litigation costs. This is the story of Silvia L. Repetto, Docket No. 15570-14S, filed 1/11/16, a designated hitter from The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Imperturbable, Ineluctable, Irrefragable, Illustrious and Indefatigable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes.

Silvia went down to Birmingham. But unlike The Wabash Cannonball it wasn’t “just the other day.” Judge Holmes gifted the parties with an off-the-bencher, they agreed on the numbers, and Silvia asks for litigation costs.

Well, actually she asked for “litigation or administrative costs,” but as she only asked for post-petition costs, that’s litigation costs per Reg. 301.7430-4(c)(3)(ii).

Silvia did have a loss on the $50K she put into an oil well. But she also has another problem.

“The problem for her is that the Court actually ruled against her on this issue for the year before the Court. As we explained in the opinion, we do think this is a timing issue, but 2010 wasn’t the right time. As the Commissioner points out, this means that he won on about 80% of the dollars at stake in the case. And we agree with him and Ms. Repetto that the $50,000 was the most significant issue in the case.” Order, at pp. 1-2. (Emphasis by the Court).

$50K is pretty significant to me too, Judge.

I certainly wasn’t mentioned in dispatches in those long-ago days, when my wardrobe largely consisted of green fatigues (into which I could not now fit). But Forbes.com’s ace tax blogger, Peter Reilly, CPA, has lately undertaken to redress that omission by soliciting an extensive quote from me.

You can read it at http://www.forbes.com/sites/peterjreilly/2016/01/09/poor-return-preparation-kills-facade-easement-tax-deduction/

I omitted to blog the Gemperle opinion (2016 T. C. Memo. 1, filed 1/4/16), because it really said nothing new. Mr. Reilly seemed upset that the Gemperles were barred from offering into evidence their appraisal, which document apparently never got attached to their return. And of course the appraiser who authored that document wasn’t around to be cross-examined on the trial.

Well, what price Joseph Mohamed, Jr. and Shirley Mohamed, 2012 T. C. Memo. 152, blogged by me under the caption “Pay Me Now or Pay Me Later,” 5/29/12. Joe’s and Shirl’s $20 million charitable land donation got bounced because no appraisal was attached to their return. Why not? Joe and Shirl were following the misleading instructions in that year’s iteration of Form 8283, that’s why not. And this, notwithstanding the land was clearly worth at least what Joe and Shirl claimed on the trial it was worth.

Of course, Joe and Shirl prepared their own return. One can only wonder, with that much moolah on the cliché, why Joe and Shirl didn’t have a brigade of CPAs and an armored division of appraisers on the deal.

Granted, the Gemperles were small stuff. And maybe the CPA who prepared their return was dead when the trial came on.

For my rant about the landmarkers leading property owners down the proverbial by promising tax breaks to pay off the property owners, so that the landmarkers don’t have to pay, see Mr. Reilly’s blogpost abovecited.

This is a steadfastly non-political blog.

I was never a Boy Scout, so I cannot state of my own knowledge that the title of this blogpost is, or was at any time, the motto of that organization. I can state, however, that Professor Tom Lehrer wrote what was, long ago, a raunchy but humorous song by that name.

But STJ Armen, The Judge With a Heart, finds no humor in IRS’ motion for summary J in James J. Lewis, Docket No. 10742-15L, filed 1/8/16, a designated hitter. I presume STJ Armen designated this opinion so practitioners on both sides of the counsel table would read and heed.

I will not name IRS’ counsel here, as is my custom. Having the light of publicity shone upon one’s train wrecks is bad enough without a picture of the engineer.

STJ Armen: “…in the absence of a Form 4340 or an equivalent certified transcript of account, respondent has failed to demonstrate that there is any outstanding liability that would justify the issuance of a levy. But assuming that there is a liability, then in the absence of any transcript respondent has failed to demonstrate what that liability relates to. Thus, respondent’s reliance on I.R.C. section 6330(c)(2)(B) to preclude any challenge to the existence or amount of the underlying liability is not supported.” Order, at p. 1.

Remember the old first-year law school mantra. For summary judgment, marshal and lay bare your proofs.

It gets worse. “…petitioner expressed a desire for, inter alia, a collection alternative based on inability to pay. In support of such collection alternative petitioner submitted Form 433-A, Collection Information Statement. The Form 433-A was considered by a settlement officer to be sufficient to entitle petitioner to a face-to-face hearing rather than a correspondence hearing (and a face-to-face hearing was in fact conducted). Notably the Form 433-A, as completed and certified by petitioner under penalties of perjury, shows monthly living expenses in excess of monthly income. The settlement officer concluded, however, that ‘info shows taxpayer’s ability to meet necessary living expenses and make payment towards past due amount(s)’, yet the record reveals no reasoned analysis to support such conclusion.” Order, at pp. 1-2.

If a petitioner gets a face-to-face after putting in a facially compliant 433-A, it might be well for trial counsel to review the file a wee bit and possibly have a word with the SO about how she did the numbers. Maybe even editing or expanding the declaration by the SO, elaborating on her lucubrations might not have been amiss.

STJ Armen is as kind and gentle as can be, however. “Under these circumstances it cannot be said that respondent has demonstrated that no genuine issue or dispute as to material fact exists in this case and that a decision may be rendered as a matter of law.” Order, at p. 2.

But still he states that the motion is denied. Emphasis by the Court.

Lucky that James J. is pro se.

No, this is not about the time 2nd Lieutenant King, all five foot one of him, fresh from ROTC at some Pennsylvania hick school, heel-stomped the barrackroom floor we’d just spent two hours polishing on our hands and knees. Of course I’m not bitter; it was nearly fifty years ago. That’s not to say I wouldn’t seek out his name on a certain wall not far from 400 Second Street, NW, where are graven the names of too many better men.

No, this is the story of the exploration by The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Indefatigable, Ineluctable, Illustrious, and Imperturbable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes, of The Gig Economy.

See Jorge Quintanilla, 2016 T. C. Memo. 5, filed 1/7/16, at p. 14.

There’s no politico-economic discussion in the opinion, and, this being a non-political blog, there won’t be any here.

Jorge works at various arcane technical posts in the movie business, but it’s not The Force Awakens kind of stuff; rather, Jorge works designing, building and dealing with sets and props for TV commercials. And he does well, even though most of his viewers doubtless hit the “mute” button and head for the bathroom as soon as the epic in which Jorge figures hits the small screen.

Jorge is a true freelancer IC, flitting from job to job, turning off the phone when he wants a vacation, hauling two forty-foot toolboxes crammed with four-figure sanders and power tools in his own truck, working from producers’ sketches or just building what he thought would work. And though he joined a union, he got no jobs from the union call board, nor did he get vacation pay or sick pay; and he could cut his own deal for payment. He did get health insurance, and that’s why he joined.

Judge Holmes checks out the facts and factors in the EE-IC scrimmage, and Jorge, pro se, defeats five (count ‘em, five) lawyers for IRS.

“So what?” you’ll say. “My clients aren’t Hollywood set-builders, gaffers, or best boys. This is another fact-driven case. YMMV.”

Yes, but, dear reader, those who operate with gig economy workers also outsource their payroll and HR functions. There were recently a bunch of ads in the dear old NYC subways that I ride every day, claiming to take all that tedious back-office stuff off the entrepreneurs’ cluttered desks. And some of these outsourcerers cut payroll checks on their accounts and issue W-2s to the out-ensourcelled, because the decision between 1099-MISC non-employee compensation and W-2 salary-and-wages is above their pay grades.

IRS thought Jorge was an EE playing the IC game, and nailed him. It looked good until they got to trial.

So the takeaway, patient reader, is that your client who hands you some W-2s but claims he works freelance may be telling the truth. Just check out the websites of the parties who issued those W-2s. The issuers may be issuing for dozens of outfits and issuing one W-2.

OK, But Don’t Give It Away

I’m not citing Hazem Garada and Noha Elghosein, 2016 T. C. Sum. Op. 1, filed 1/7/16 for the the issue of the Dubai bank account that never made it onto their return but for which Haz and No wanted deductions for travel expenses. Neither am I going into Judge Buch’s analysis that real estate taxes paid by a Sub S are passed through to the shareholders thereof as a distribution from the S Corp., whether taxable or not, and are deductible by them on their personal return.

Rather, I’m going straight to the penalty kicks, of one of which IRS gets a “maybe,” and the other two go over the net.

The “maybe” depends upon whether, after the Rule 155 beancount, the deficiency as finally determined for one of the three years at issue jumps the five-and-ten barrier.

Here’s the story on the over-the-net kicks.

For the other two years at issue, “…because the threshold for a substantial understatement of income tax is not met, the Commissioner instead argues that Mr. Garada and Ms. Elghosein were negligent or disregarded rules or regulations. The term ‘negligence’ includes any failure to make a reasonable attempt to comply with the provisions of the Code, and the term ‘disregard’ includes any careless, reckless, or intentional disregard.

“The Commissioner did not provide any evidence that the imposition of the penalty was justified…. The Commissioner did not show that Mr. Garada and Ms. Elghosein failed to keep adequate books and records or failed to properly substantiate the items in question for those years. Instead, the Commissioner argues that because Mr. Garada and Ms. Elghosein conceded and paid their deficiencies…, they are liable for section 6662(a) accuracy-related penalties for negligence or disregard of rules or regulations.” 2016 T. C. Sum. Op. 1, at p.19. (Footnotes omitted).

Now before anyone gets their Calvin Kleins in a Carrick Bend, no one is saying that if you pay to cut off the running of interest, you’ve conceded a 20% chop. Note, Haz and No did concede they owed some tax for both years.

Judge Buch is much kinder than I would be, which is why I’m not a judge. I’m too sardonic, I expect.

“Although we may take concessions into account in determining whether the Commissioner has carried his burden, the Commissioner’s argument here is too broad. Conceding that a position is not allowable is not the same as conceding that it was taken negligently or with disregard of rules or regulations.” 2016 T. C. Sum. Op. 1, at p. 19-20 (Footnote omitted).

Takeaway-  Practitioner, if you tell the client to pay, remember to stipulate you’re conceding nothing.

I thought that, aside from the calendar call program and the LITCs, there was no system for assignment of counsel in Tax Court. See my blogpost “With Friends Like Him,” 2/26/13.

So I’m asking for help in figuring out whence came Olena Ruth, Esq., of the CO Bar, who nobly agrees to intercede pro bono for Linda J. Abramson-Schmeiler in Joachim P. Schmeiler & Linda J. Abramson-Schmeiler, Docket No. 17187-12, filed 1/6/16.

His Honor Judge Big Julie, more formally His Honor Judge Julian I Jacobs, hereinafter HHBJJJIJ, is somewhat elliptical in said order.

“… the undersigned held a conference call with Linda J. Abramson-Schmeiler (Ms. Abramson), and counsel for respondent. It became apparent that Ms. Abramson required the advice of counsel. The conference call was ended, and a member of the Colorado Bar, Olena Ruth, was contacted. Ms. Ruth agreed to review Ms. Abramson’s situation, and possibly assist her, on a pro bono basis. Another conference call was held and with the permission of both Ms. Abramson and respondent’s counsel, Ms. Ruth joined that call. A continuance was jointly requested by Ms. Abramson and respondent’s counsel.” Order, at p. 1.

Who contacted Ms Ruth? Was it IRS or the Court? I cannot think Ms. A had a list of CO pro bono Tax Court admitted attorneys at her fingertips or in her smartphone.

The case was on for trial, and a previous attorney, apparently representing both Schmeilers, bailed the year before last. And the trial had been continued last year.

But HHBJJJIJ continues it yet again, so Ms Ruth can delve into Ms. A’s situation.

But I’m left wondering: is there some sort of attorney referral program in Tax Court other than the two abovementioned?

Readers, please enlighten me.

No doubt Christopher Isa Muhammad is a Virgin (Islander), and self-employed, but he really shouldn’t have ducked Judge David Gustafson’s gracious and obliging suggestion, more particularly bounded and described in my blogpost “The Self-Employed Virgin,” 11/12/15, to which your attention, dear reader, is most respectfully directed.

Judge Gustafson’s plea for enlightenment drew nothing from Chris and a motion to dismiss for want of prosecution from IRS.

What a shame. I was hoping for a series of learned exegeses on the subject of SE as an income tax, and the interplay thereof with the unguided Congressional largesse bestowed upon our Insolvent Islands in the Sun. And in fact IRS did a pretrial brief and a supplementary pretrial brief, neither of which is available for the perusal of the poor blogger without a trip to Our Nation’s Capital, which I decline to undertake unless well-compensated. Nevah hoppen, GI!

Well, though I and my readers are left in ignorance, IRS gets Chris tossed with a decision setting forth the deficiency, without penalty. The order is Christopher Isa Muhammad, filed 1/6/15.

No, not that wonderful recording from the Coles (father and daughter), which has so much meaning for one of my nearest and dearest, but rather a much different tale from the annals of The Glasshouse at 400 Second Street, NW, viz., namely and to wit, James Elbert Aldridge, Jr. & Shirley Lorraine Aldridge, Docket No. 13742-10, filed 1/5/16.

It wasn’t until five (count ‘em, five) years after the answer was served that IRS moves for leave to amend said answer for the first time. Of course, there was much ado in the mean time, but little to the point of moving the case forward.

James Elbert and Shirley Lorraine do not consent.

Why?

IRS wants to add an affirmative defense of collateral estoppel, namely, “According to respondent, petitioners’ convictions under section 7206(1) estop them from denying their liability for the section 6663 penalties here in dispute.” Order, at p. 1 (Footnote omitted, but don’t bother reading it, it’s the usual “Statutory references are to 1986 and all that”).

Now this criminal-convictions-as-preclusive gambit is a slippery slope; sometimes it works and sometimes it doesn’t, and I’ve blogged an instance of each. See my blogposts “Orders in the Court,” 3/9/12, and “Collateral Estoppel Checklist,” 6/9/15.

But STJ Lewis (“It’s That Name Again”) Carluzzo lets IRS play the gambit.

“…(T)he fact of the convictions of the petitioners, alluded to in respondent’s answer, would hardly unfairly surprise, disadvantage, or prejudice them….” Order, at p. 1.

Now for the title of this blogpost.

It’s true that James Elbert went down all the way back in 2007 for one of the phony trust tax dodges, but getting nailed in Federal Court is hardly something you’d easily forget. Especially when you got, as did James Elbert, nine years’ hard time. And Shirley Lorraine got five years and change, also hard.

Edited to add, 2/22/24: For the latest installment in this saga, see James Elbert Aldridge, Jr. and Shirley Lorraine Aldridge, T. C. Memo. 2024-24, filed 2/21/24, wherein Judge Elizabeth Crewson Paris hands James Elbert and Shirley Lorraine a bunch Section 6663 fraud chops (hi, Judge Holmes).

Misquoting the 1968 Lennon opus, I refer my readers to Wayne Rebuck, 2016 T. C. Memo. 3, filed 1/5/16.

Even before his case gets to Judge Ruwe, Wayne’s got problems.

“… a grand jury in the Eastern District of Pennsylvania filed an indictment against petitioner along with 10 codefendants on one count of conspiring to defraud the United States pursuant to 18 U.S.C. sec. 371. The grand jury charged that petitioner and 10 codefendants were involved in an organization that conducted sales seminars throughout the United States and solicited clients for fraudulent offshore and domestic trust packages by falsely representing that taxpayers could lawfully avoid paying Federal income tax by placing income and assets into the organization’s trust packages.” 2016 T. C Memo. 3, at p. 2.

Judge Ruwe is scanty with the details, but Wayne walked out of USDCEDPA with a conviction for conspiring as aforesaid, and a $!6 million joint and several liability with his co-defendants for restitution.

Wayne tries to get clean with some of his own tax liabilities. First he tried an OIC, but that got bounced because Wayne was still paying restitution. Apparently though Wayne gave some, neither he nor his codefendants gave all.

Then a new SO got the case, and offered Wayne an installment agreement, which Wayne claimed he couldn’t pay. But the IA was conditioned on Wayne paying the restitution, which he hadn’t paid in full.

Wayne claims he shouldn’t be required to pay restitution to get a collection alternative.

No dice, says Judge Ruwe.

“When a taxpayer owing restitution submits an OIC to the IRS, IRM pt. 5.1.5.24.5 requires that the offer provide for the full payment of the restitution amount. Petitioner’s OIC did not address his outstanding criminal restitution as required by the IRM. Generally, an Appeals officer does not abuse his or her discretion in rejecting an OIC when following guidelines set forth in the IRM.” 2016 T. C. Memo. 3, at p. 13.

And it doesn’t matter whether the years Wayne sought to compromise included or didn’t include the “nonrestitution” years. Wayne wanted doubt as to collectability, and that never works when restitution is outstanding.

Wayne argues that the SO should have come back with another offer after he rejected the IA, but that’s a loser, as we all know.

“Although petitioner indicated his interest in an installment agreement, he never proposed a specific amount or set forth a payment schedule. … petitioner’s representative requested that SO X propose a PPIA [partial payment installment agreement] based on petitioner’s income and expenses. Although he was not required to do so…SO X proposed a PPIA…. Petitioner, through his representative, rejected this offer. Despite arguing before this Court that SO X did not consider his medical condition and decreasing future earnings, petitioner did not make a counteroffer to the… proposal. Moreover, petitioner did not present any other persuasive evidence or arguments demonstrating that SO X abused his discretion. Accordingly, we find that SO X did not abuse his discretion in sustaining the proposed levy after proposing a PPIA….” 2016 T. C. Memo. 3, at pp. 16-17. (Name omitted).

IRS need not negotiate with itself.

Smooth or not, the course of true love doesn’t bind IRS in Diane Blagaich, 2016 T. C. Memo. 2, filed 1/4/16, with Judge Halpern firing the opening salvo in the 2016 Tax Year bombardment.

Di wants IRS estopped from denying that the $700K she got in the year at issue was partly an outright gift, and partly a rescinded gift to the extent of $400K.

She got the $700K from the late Lew Burns before he became the late Lew Burns. Lew could spell all right but his big heart led him astray. Diane was his live-in source of comfort, and received $700K from Lew during their two-year relationship, part in cash and part in the form of a $79K Corvette Lew bought her because he wanted to end her biker-babe Harley Davidson gig. But their relationship turned sour, Lew ejected her from his home, and, when he claimed she was two-timing him, sued her for the loot.

As a parting gift, Lew hit Di with a Form 1099-MISC for the $700K. Di of course reported nothing.

IRS hit Di with a SNOD for the whole $700K, Di timely petitioned, and IRS got wind of the judicial goings-on. So IRS asked for, and got, copies of pleadings, depositions, documents and decisions from State court. And Di asked for, and got, an unopposed continuance of her Tax Court case while she fought it out with Lew’s estate.

Finally, two years after the year at issue, State court decides Di owes the Late Lew’s estate $400K, and the next year the ex’rs send a revised 1099-MISC showing Di paid the $400K. The $300K remaining, including but  without in any way limiting the generality of the foregoing the ‘Vette aforesaid,  was a gift, said State court.

Di wants summary J that the most she owes is zero, as the $400K was the result of the partial rescission of the $700K, and the rest of the loot was a gift, as State court decided.

No on both counts, says Judge Halpern.

First, Di argues issue preclusion. IRS was fully aware of the State court case from overture to the Fat Lady’s cavatina. Not enough, says Judge Halpern. For summary J, parties’ interest must be aligned, so that the party can virtually represent the nonparty. Alternatively, the nonparty must participate in the litigation, although short of formal intervention, so as to be an active player.

Just sitting in the stands is not enough, however hard you root for one side or the other and look at the game with binoculars. To be bound, you have to be on the bench or on the field. IRS wasn’t.

So IRS can retry what part of the $700K was a gift in Tax Court, regardless of State court’s conclusions.

As for rescission, that has to happen in the same year that the money or money’s worth was transferred. Each year stands on its own. “Petitioner relies on Hope v. Commissioner, 55 T.C. 1020, 1030 (1971), aff’d, 471 F.2d 738 (3d Cir. 1973), which suggests that the rescission doctrine may apply even when repayment of a gain does not formally occur in the year of receipt, but only if, before the end of the year, ‘[the] taxpayer recognizes his liability under an existing and fixed obligation to repay the amount received and makes provisions for repayment.’ Nothing in the facts presented indicates petitioner recognized such a liability, much less made provision for repayment, in…the year she received the $400,000. Indeed, the record shows petitioner maintained… that she was under no obligation whatsoever to return the money paid to her under the agreement. Putting aside petitioner’s questionable analogy regarding ‘a lack of control over the rescission’, the suggestion in Hope is inapplicable to the facts of this case.” 2016 T. C. 2, at p. 14.

And Di’s equitable argument founders on the “we ain’t got no equitable jurisdiction” mantra.

Di, go try the case.