Ch J Michael B. (“Iron Mike”) Thornton wants suggestions, pointers, hints and tips from the Tax Court cognoscenti concerning proposed rule changes.

Here’s the dinkum:

“As part of its ongoing efforts to improve and modernize its rules and procedures, the Court invites practitioners and the interested public to submit for consideration any comments, concerns and proposals regarding the Court’s Rules of Practice and Procedure. The Court would appreciate submissions in writing by November 1, 2015, addressed to Chief Judge Michael B. Thornton, United States Tax Court, 400 Second Street, NW, Washington, DC 20217.”

I’ll offer one I offered several times before. Require that the Request for Place of Trial (TC Form 5) state a substantial nexus between the place requested and one or more of the following: location of taxpayer, location of physical evidence, location of taxpayer’s counsel, location of witnesses or similar matters.”

After an epistolary exchange with my opposite number at Forbes.com, Peter Reilly CPA, which I thought about blogging but decided to leave in my inbox and “sent” folder, I was idly traversing today’s post-Papal Tax Court orders, when I spied a familiar name.

Any of y’all remember Barbara Jane Knudsen? No? Maybe you might remember her battling but unpaid attorney, Jan Pierce? Still no takers? Well, check out my blogpost “Concession Equals Settlement,” 4/1/13.

Now you’re on board? Cool. Well Barbara Jean and battling husband Kurt H. are back before Ch J Michael B. (“Iron Mike”) Thornton, because the Left Coasters at Ninth Circuit gave Ch J Iron Mike R&R. No, that’s not rest and recreation, that’s reversed and remanded.

Iron Mike asks IRS and Barbara Jean “whatever shall we do,” now that the Coasters have tossed him back the bundle.

I’ll bet Jan Pierce, Esq., echoes the words indited by Lydia Parrish in 1942 from the stevedores of the Georgia Sea Islands: “Pay me, pay me, pay me my money down.”

Turns out the concession by IRS, sparked by a Chief Counsel backdown memo, wasn’t a settlement after all.

You can read all about it in Barbara Jane Knudsen v Com’r., No. 13–72077, decided: July 15, 2015.

Here’s Senior District Judge Don (“The Donald”) Walter, a designated sitter: “A settlement is a contract, and its enforceability is governed by familiar principles of contract law. The formation of a contract generally requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration. Here, there was no exchange, and it is undisputed that there were no negotiations regarding settlement. Instead, Knudsen made a qualified offer to settle her tax liability for $50 per year for each of the four years at issue, which expired after ninety days when the IRS failed to respond. See 26 U.S.C. § 7430(g)(1)(D). Much later, and only after the case had been submitted to the Tax Court fully stipulated, did the IRS unilaterally concede the case. Even then, the parties never entered into a supplemental stipulation of settled issues, despite the fact that Knudsen had then succeeded on both the merits and the timeliness of her claim for equitable relief.

“Knudsen’s position is most similar to that of the taxpayer in Estate of Lippitz v. CIR, 94 T.C.M. (CCH) 330 (2007). In Lippitz, the IRS denied the taxpayer’s right to section 6015 innocent spouse relief, despite the CCISO having previously determined the taxpayer’s entitlement thereto. After the IRS refused the taxpayer’s qualified offer, the taxpayer moved for partial summary judgment, prompting the IRS to concede that the taxpayer was entitled to the requested relief. The Lippitz court held that the IRS’s concession was not a ‘settlement’ under section 7430. Because the IRS waited to concede the case until after the taxpayer had actively litigated to the point of filing a dispositive motion, the Lippitz court found this akin to a concession after trial. The court explained that it did ‘not believe Congress intended to grant [the IRS] the latitude to wait until just before the resolution of a dispositive motion, or the end of a trial to concede a matter and still benefit from the settlement exclusion of section 7430(c)(4)(E).’ Decision, at p. 2. (Some citations omitted).

So Ch J Iron Mike orders the parties to send him a joint report on what to do. It’s all in Barbara Jane Knudsen, Petitioner, and Kurt H. Knudsen, Intervenor, Docket No. 18048-09, filed 9/25/15.

Maybe yes, maybe no (I vote “yes”), but today is definitely a day without Tax Court, as Pope Francis’ visit to Our Nation’s Capital has interdicted the opinion and order posters and flailing datestampers at 400 Second Street, NW.

See my blogpost “Habemus Papa!” 9/21/15.

So all I can do is lament a wasted blogday.

He likes to propound conundrums, but is no fan of dilatory fiddling; he’s always ready to help or oblige, however, with timely hints and practical suggestions.

And he designates his guidance freely.

He’s that Obliging Jurist, the open-handed and many-handed, the blogger’s friend, the pride of Bob Jones University–(drumroll)– Judge David Gustafson.

And Judge Gustafson has one for the books in Estate of Blanche L. Howard, Deceased, Mary L. Howard, Executor, Docket No. 30306-13, filed 9/23/15.

Mary L. (hereinafter “Ex’r”) wants a continuance. She’s shedding one lawyer and picking up another. Oh yes, and her expert witnesses all work for the ex-lawyer, so she needs time to get a replacement.

And she’s asking thirty-one (count ‘em, thirty-one) days prior to trial.

Judge Gustafson, patient and obliging as always, is not amused.

He entitles his disquisition a “tentative discussion.” State Court judges of my acquaintance would not be so douce.

“The September 18 motion for a continuance was filed 31 days before our October 19 calendar call. Such a motion filed 30 days ahead would be presumptively dilatory, since Rule 133 provides–

“A motion for continuance, filed 30 days or less prior to the date to which it is directed, … ordinarily will be deemed dilatory and will be denied unless the ground therefor arose during that period or there was good reason for not making the motion sooner.

“–but of course it does not follow that a motion filed at least 31 days prior will necessarily be deemed not dilatory. We do not yet perceive here any ’good reason for [petitioner’s] not making the motion sooner’ than September 18.” Order, at p. 3.

Ya know, I forgot to mention that Ex’r is the target of a grand jury investigation, along with an outfit called Nu-Way, the valuation of whose promissory note is the main issue in this case.

Now while it is difficult for the same party to bear the burden of proof in civil litigation with one branch of government while defending herself in a criminal proceeding against another, nonetheless that unhappy circumstance cannot be manipulated to delay the scales of justice.

Ever since last December, Ex’r was dawdling, ignoring discovery and causing the usually punctilious Judge Gustafson to get a date wrong. No, Judge, Ex’r couldn’t have ignored a motion made in December, 2011, in a case with a 2013 docket number. See Order, p. 2, bullet point 3.

Ex’r knew in March of this year about the grand jury, never told the Court until last week, and while Counsel One was on the way out, Counsel One held a teleconference with IRS and Judge Gustafson and assured everyone that the expert’s report would be filed timely. It was filed, but late.

Three days after said teleconference, Counsel Two shows up and moves to continue.

I love it! Takes me back down memory lane, to what we called in the days of our youth “Court Street tactics.” This referred to certain attorneys and counsellors at law who inhabited offices on Court Street in Brooklyn. They made litigation gameplaying into an art form.

By the way, the “employed” expert witness sounds like a Kovel ploy, to give the witness Section 7525 cover as an employee of Ex’r’s counsel.

IRS says mox nix, we’re concerned with Nu-Way’s financial health and the worth of the promissory note back when the late Blanche laid hold of it. Ex’r’s subsequent shenanigans are nothing to the point, even though Ex’r, as an officer of Nu-Way, tried to cookie jar some earnings to make the note look less good and thus confer a gift upon the late Blanche. That part of the story is for the criminal case.

And most of the valuation will be based upon documentary evidence, says IRS.

Great, says Judge Gustafson, but lest IRS figure they might play Perry Mason and call Ex’r, “…if respondent were to attempt to call the executor (or any other grand jury target) as witness at the trial, the Court would not expect to draw any negative inferences from an invocation of the Fifth Amendment unless respondent had first given to petitioner a detailed statement of the facts that respondent expects to elicit during testimony. This either would make it possible for the parties to stipulate those facts (rendering testimony unnecessary) or would disclose the subjects (if any) as to which it is not true that (as respondent has asserted) the facts ‘will necessarily be reflected in transactional documentation’. To the extent the executor’s testimony might be helpful simply ‘to give context to documents’ (Obj. at 14), the Court would expect respondent to be especially cooperative in the stipulation process in order to enter those contextual facts into the record without testimony, wherever that is possible.” Order, at pp. 4-5.

But just to keep everybody on their clichés, everybody has until Friday to read, mark, learn and inwardly digest Judge Gustafson’s lucubrations, get hold of the Chambers Administrator, and get on the horn on Friday. And e-file their motions and supplements on Friday, too.

Who says taxes are dull?

Ya gotta feel for Bill and Liz Foote. They got their legals and admins denied by Judge Wherry (not a bit whimsical that time); see my blogpost “Ask Early, Ask Often,” 12/9/13.

Then they try for Section 6404(e)(1)(A) interest abatement, but Judge Goeke tells them that none of IRS’ delictions are “ministerial” (the magic word; means “mechanical,” not requiring discretion or judgment). While IRS didn’t cover itself with glory, the RA who gave the Footes such grief was misinterpreting statutes, which by definition isn’t ministerial.

The Footes’ claim that the RA acted in bad faith doesn’t cut it, either.

It’s all in 2015 T. C. Memo. 187, filed 9/22/15.

Judge Goeke lays out the ground rules: “…for petitioners’ tax years 1992, 1993, and 1996 abatement of interest is available only if a ministerial error occurred, while for tax years 1999 and 2000 relief is available if an unreasonable ministerial or managerial error is shown.

“A ‘ministerial act’ is a procedural or mechanical act that does not involve the exercise of judgment or discretion and occurs during the processing of a taxpayer’s case after all the prerequisites to the act, such as conferences and review by supervisors, have taken place. In contrast, a decision concerning the proper application of Federal tax law, or other applicable Federal or State law, is not a ministerial act. The mere passage of time does not establish error or delay in performing a ministerial act.” 2015 T. C. Memo. 187, at pp. 13-14 (Citations and footnote omitted).

As to “managerial” acts, here’s the story.

“A ‘managerial’ act is an administrative act that occurs during the processing of a taxpayer’s case and that involves the temporary or permanent loss of records or the exercise of judgment or discretion relating to personnel management.” 2015 T. C. Memo. 187, at pp. 14-15. (Citaitons omitted).

In any event, “(T)o qualify for abatement of interest under section 6404(e), the taxpayer must: (1) identify an error or delay by the IRS in performing a ministerial or managerial act; (2) establish a correlation between the error or delay by the IRS and a specific period for which interest should be abated; (3) show that the taxpayer would have paid his or her tax liability earlier but for such error or delay.” 2015 T. C. Memo. 187, at p. 15.

Tax Court reviews for abuse of discretion after IRS issues a NOD denying abatement. But for four (count ‘em, four) years of the Footes’ beef, there never was a NOD, so no jurisdiction.

As for the rest, that the RA allegedly failed to follow the plain meaning of the statute, that’s obviously discretion. Then, while IRS caved on a ton of deficiencies, they did that when the Footes came up with substantiation. It didn’t help that the Footes had to change CPAs when their first one got busted for some unrelated miscues.

The Footes fall back on the “widely perceived as grossly unfair” language in Section 6404(e), but that doesn’t offer plenary indulgence. There still has to be ministerial or managerial act, and here there isn’t.

“Petitioners argue that ‘[w]ithout question, this is such a case’ where failure to abate interest would be widely perceived as grossly unfair. However, we must abide by the fundamental tenets of statutory construction, and, in addition, the facts of the case at hand fall short of supporting an argument for a ‘grossly unfair’ exception. As is evidenced by the record, petitioners significantly contributed to any error or delay that occurred by failing to adequately maintain and supply records as requested.” 2015 T. C. Memo. 187, at p. 22.

Finally, the Footes claim the RA was a rogue agent who thought she was uncovering a massive tax cheat. But the Footes had a multiplex chain of entities and incomplete records. They were at least in part responsible for the mess that followed.

And while it took five years for the case to wind its way through Tax Court, all that was discretion and not ministerial.

So is Section 6404(e) a toothless tiger? Maybe so, but only Congress can fix it.

Best of luck with that one.

I had to take a nap before dealing with Tax Court’s opinions today, as there was a lot to mark, read and digest, but Estate of John D. DiMarco, Deceased, Laurence Agnes, Executor, 2015 T. C. Memo. 184, filed 9/21/15, troubled me.

I don’t like second-guessing. Everybody’s wise after the fact. But here goes, anyway.

This is a busted-charitable, Section 642 “so remote as to be negligible” case. If the foregoing sounds like gibberish, see my blogpost “Back From The Graev,”, 2/19/15, the sad story of the late but generous Eileen S. Belmont and her obstreperous brother.

In fact, Judge Laro cites Eileen’s case in torpedoing John D.’s charitable inclinations.

John D.’s will gets a going-over from a platoon of heirs-at-law and their high-priced counsel, with our State’s diligent Attorney General protecting the charity (and incidentally protecting the charity out of everything its owns).

I won’t go over the facts, as they’re pretty much the usual: no separate stash for the charitable cash, prospect of heavy-duty litigation (having high-test counsel seems to blow away remote negligibility), and the cash getting spent on settlements, with the balance going to IRS.

As for surcharging the executor, that might be looming over the horizon, but that’s not my point here.

John D.’s will was executed in 1983, and John D. didn’t leave this vale of tears until 2008. The Form 1041 for the year at issue was filed late, but I mention that just to let you know that one good way to get audited is to file late.

No, my point (and I can hear my readers saying, “Is there one?”) is why not a self-settled trust. True, it’s disregarded for income tax purposes, and it’s by no means a cure-all, but it does do what Norm Dacey’s 1960s best-seller suggested: avoid probate.

And the probate proceedings really sank John D.’s charitable intentions. Here, they took on a certain Jarndyce aspect.

Hint for trusts and estates practitioners–When it comes to income in respect of a decedent, mandate separate accounts for the charitables. Whether or not there’s a trust.

Not the Heavy Dragoon, as compounded by Sir W. S. Gilbert’s Patience, rather this is another of IRS’ failed attempts at dealing with insurance. This insurer (and Judge Lauber says it is an insurer) deals with residual value insurance.

And that’s its name, R.V.I. Guaranty Co., Ltd. & Subsidiaries, 145 T. C. 9, filed 9/21/15.

The question: is residual value insurance truly insurance? Or is it a hedge against an investment risk?

Judge Lauber: “A simple example may illustrate the mechanics of a typical RVI policy. Assume that an automobile with an initial purchase price of $20,000 is leased for three years and that its expected residual value upon lease termination is $10,000. RVIA [the US sub] might insure that automobile for 90% of the expected residual value, yielding an insured value of $9,000. If, at lease termination, the automobile had an actual residual value of $8,500, the RVI policy would indemnify the lessor for $500, assuming the lessor satisfied all terms and conditions of coverage. The lessor would bear the $1,000 initial layer of loss.” 145 T. C. 9, at p. 6.

In short, if the lessor guesses wrong about the residual value, the sum of rental payments plus residual value won’t cover its acquisition, administrative and financing costs. So it will lose.

R.V.I., domiciled in (where else?) Bermuda, insures lessors and lenders against bad guesses of the value of the property at lease expiry. But one of its subs is a US on-shore, and they report consolidated.

IRS claims R.V.I. covers an investment risk, not an insurance risk, so R.V.I. can’t use the Section 832 accounting rules that real insurers use.

The difference? $55 million deficiency.

R.V.I.’s policies read like real insurance. States regulated R.V. I. like an insurer, and R.V.I. reported to the regulators like an insurer. And Fitch, Moody’s and S&P rated R.V.I. like an insurer.

IRS didn’t care, and said R.V.I. had to use Sections 451 and 461 to compute income, not Section 832, because R.V.I. flunks the Section 832(c) test. And IRS buttressed its position with T.A.M. 201149021 (Aug. 30, 2011).

R.V.I. proffers expert testimony that it insures against “low frequency/high severity” risks, like earthquakes or floods. That there may be systemic risk does not negate pooling of risk. Mortgage guaranty insurers got killed in the subprime meltdown, but that didn’t mean they weren’t writing insurance.

IRS’ expert says the policies weren’t policies, because risk was illusory. In the year at issue, R.V.I. lost little or nothing.

But many of the insured leases had years to run at that point. Judge Lauber let in evidence of what happened later, over IRS’ objections.

“Respondent objected to 2013 as post-dating the tax year in issue and ‘irrelevant for that reason.’ The Court overruled this objection. A loss under an RVI policy is payable only at the end of a lease, and many of the insured assets were subject to very long leases. By definition, therefore, many RVI policies in existence in 2006 could not have come to a payout resolution, and could not possibly have had a loss, as of year end 2006. Yet many of these policies could (and did) experience significant losses upon lease termination. In order to display accurately RVIA’s loss experience under the policies it held during 2006, it is necessary to consider the complete terms of these contracts.” 145 T. C. 9, at p. 12, footnote 6.

IRS’ expert says there is no timing risk, because the loss occurs, not at random like an earthquake or flood, but on a fixed date, the lease expiry date. But this is like mortgage guaranty insurance, covering a lender where the borrower hasn’t sufficient cash in the deal, so that the lender has to lend more than its usual loan-to-value ratio would warrant.

True, ripostes R.V.I., the risk of borrower default is random, but the underlying issue is diminution of the value of the collateral security.

An IRS expert claims that, since the insured can make a profit if R.V.I. pays off, it isn’t risk insurance but a speculative hedge. But Judge Lauber isn’t convinced, since holders of institutional investment portfolios and municipal bonds can buy insurance against loss.

The magic formulas are risk-shifting and risk-distribution, the classic standard going back to seventeenth-century England; “the losse falleth lightlie upon the many, rather than heavilie upon the fewe”. All the R.V.I. insureds shift some of the risk to the insurer, and the risk of any great loss is covered by the premiums paid by all.

First, R.V.I. covers a real risk of loss, and the State regulators so determined.

Second, the fact that a loss is unlikely to occur doesn’t mean that there is no risk. Earthquakes are (thankfully) uncommon, but they do occur.

Third, taking only the year at issue as the sole test whether there was real risk is itself unrealistic. Loss only occurs at lease expiry, and some insured leases had 25-year terms, a classic case of “it ain’t over till the fat lady sings”.

Fourth, R.V.I. insured a lot of stuff for a lot of different persons. That’s risk distribution.

But IRS shows that never-say-die quality. “Undeterred, respondent contends that the RVI policies do not sufficiently distribute risk because some systemic risks, like major recessions, could cause insured assets to decline in value simultaneously. Like most insurers, RVIA did face certain systemic risks, but many of the risks against which it insured were uncorrelated. Examples of risks that affected different insured assets differently include regional economic downturns, rising fuel prices, over-supply of particular assets, technological improvements, vehicle recalls, regional industrial migration, acts of terrorism, high interest rates, decreased availability of financing, and regulatory changes like restrictive building codes. Indeed, even systemic risks like major recessions were mitigated by the temporal distribution of RVIA’s risks over lease terms as long as 28 years.” 145 T. C. 9, at pp. 34-35.

There need not be complete independence of risk, only meaningful distribution of risk.

IRS claimed that R.V.I. deferred some premium payments, but that doesn’t negate coverage, as the undeferred premiums were paid, and the deferred premiums were a tiny part of R.V.I.’s book.

State regulation is a key. The Federal courts have historically deferred to the States when it comes to insurance, and R.V.I. has been treated as an insurer in every State where it does business.

IRS’ hair-splitting over “speculative risk” versus “pure risk” is metaphysics.

“The insureds purchase insurance from RVIA to protect against the risk that unexpected events will wreak havoc with these lease-pricing formulas and generate an ordinary business loss instead of a profit. This is not an investment risk; it is a risk at the very heart of the lessor’s business model. In comparison with typical stock investors, therefore, the insureds under the RVI policies are at the opposite end of the bell curve.” 145 T. C. 9, at p. 58.

Ultimately, it’s the duck test. If it swims, waddles and quacks, it ain’t a kangaroo. And here the policies look like insurance. And R.V.I. will be taxed accordingly.

No, no burning of ballots, but as Pope Francis is coming to Our Nation’s Capital, Tax Court thought it appropriate to shut down.

After all, as a leading tribunal for the rendering to Caesar of what is Caesar’s, it’s a nice gesture.

Here’s the skinny:

”

The Judge With a Heart, STJ Armen, takes up the tune from Sara Bareilles’ and Jack Antonoff’s 2013 digital hit “Brave,” and finds Heather Hope Jupena-Elmer, Docket No. 18172-14SL, filed 9/18/15, did just that, even though the Form 1098 for the home mortgage interest she claims she paid, and which she deducted, only names her ex-husband.

Heather Hope also claims she never got the SNOD. IRS claims they sent it, but shortly afterward Heather Hope filed her 1040, which was currently due, and it showed a different address.

IRS hit Heather Hope with a NITL. Heather Hope came back with Form 12153, asking for CNC because she was broke and was trying to get info concerning the mortgage interest from her exes: her ex-husband and ex-CPA.

The AO claims Heather Hope had prior opportunity to contest, notwithstanding Heather Hope’s protestations. “Even though petitioner’s name did not appear on the Form 1098, in her letter she stated the residence was her ‘joint home’ and she is ‘the second person on the loan, although [her] name does not show.’” Order, at p. 2.

To no avail.

“…petitioner participated in an administrative hearing with respondent’s Appeals Office. Therein, the Appeals officer asked petitioner her address on… the date the notice of deficiency was issued, and petitioner could not recall if she was using a Post Office Box or lived at the same address at which she resided as of the date of the hearing, but petitioner did state that she did not receive the notice of deficiency and that as of the date of the administrative hearing had not lived at the old address ‘for over a year plus’. Petitioner continued to dispute the underlying liability.’ Order, at p. 2.

Would it surprise you that “(T)he Appeals officer determined that the underlying liability was not properly in issue because of the previous notice of deficiency and failure to challenge the liability at that time.”? Order, at p. 2. It shouldn’t.

IRS moves for summary J. Heather Hope objects. IRS has a problem.

“There is nothing in the record establishing petitioner’s last known address as of the date that the notice of deficiency was issued…. Further, there is nothing in the record to contradict petitioner’s assertion that she did not receive the notice of deficiency. Finally in this regard, there is nothing in the record to demonstrate that petitioner may have refused to accept delivery of, or neglected to claim, the notice of deficiency.” Order, at p. 3.

But IRS isn’t through.

“Respondent argues that even if petitioner is entitled to dispute the underlying liability, she failed to do so.” Order, at p. 4.

“To dispute a liability, a taxpayer must properly raise the merits of the liability during the administrative hearing. If the taxpayer raises the underlying liability but does not provide the Appeals officer with any evidence after being given an opportunity to do so, the underlying liability is not ‘properly raised.’ Respondent argues that petitioner did not provide sufficient evidence to properly raise the underlying liability.” Order, at p. 4. (Citations omitted).

But IRS is out.

“Petitioner raised the underlying liability in her Form 12153. Later, petitioner provided the Appeals officer with a copy of a Form 1098…, which form reflected that mortgage interest had in fact been paid on the residence giving rise to the deduction for the year in issue. Concurrently with the Form 1098, petitioner stated that she was a joint owner of the home and she was listed on the loan. Throughout the administrative hearing process, petitioner continued to argue her entitlement to the mortgage interest deduction.” Order, at p. 4.

In summary J, nonmovant gets all the breaks, and Heather Hope has plenty. There are several fact questions: what was Heather Hope’s last known address when IRS mailed the SNOD; and did Heather Hope refuse or neglect to pick up the SNOD.

Takeaway– Say it. Keep saying it.

From IRS: “Maintenance on the Modernized e-File (MeF) system originally scheduled for Saturday Sept. 19 is postponed until Saturday Sept. 26. IRS will be conducting system maintenance from 7:00 a.m. until 8:00 p.m. Eastern Time on that day. Please refrain from accessing the MeF Production and ATS Systems to transmit submissions, get acknowledgements, retrieve state submissions, send state acknowledgements or submit any other service requests.”

From Tax Court: “The Court will be undergoing system maintenance upgrades on Saturday, September 19, from 9 am to 5 pm Eastern time. During that time, there may be a brief interruption in service as systems are restarted. We apologize for any inconvenience.”