Abroad at Home

That Obliging Jurist, Judge David Gustafson, gets to pull into the Chevron station, and doesn’t hold the Mayo. And he needn’t invoke the canon expressio unius exclusio Altera. No, Congress clearly gave IRS the authority to make regulations about the Foreign Earned Income Exclusion (FEIE), and Nancy McDonald falls foul thereof in 2015 T. C. Memo. 169, filed 8/25/15.

I’m a wee bit late with my post tonight, getting used to the fresh air of the Berkshires, so I’ll get to the point.

Nancy failed to file for the year at issue, so IRS gave her a SFR and a SNOD gratis and for free. Nancy ripostes after the SOL has run on that year with a 1040 claiming the FEIE, and paying the balance due giving effect thereto. IRS closes the SNOD.

But Nancy isn’t home free, because IRS audits her and disallows the FEIE, claiming Nancy blew the Reg. Section 1.911-7(a)(2) requirement for electing to exclude. Nancy petitions, claiming the Reg is invalid as contradicting Section 911.

The basic test for the FEIE, like ancient Gaul, is divided into three parts: “(1) the taxpayer must be a U.S. citizen who is a bona fide resident of a foreign country for an entire taxable year or physically present in a foreign country during at least 330 days out of a 12-month period, (2) the taxpayer must have earned income from personal services rendered in a foreign country; and (3) the taxpayer’s tax home for the period must be outside of the United States.” 2015 T. C. Memo. 169, at p. 6. (Citations omitted).

IRS claims Nancy flunks the tests, but Judge Gustafson doesn’t have to go there.

The issue is whether Congress gave Treasury general or specific authority to regulate. The statute says the taxpayer must elect to take the FEIE. The statute gives Treasury authority. And Section 7805 gives authority to make regulartions concerning timeliness.

There is no specific deadline for election in the statute, but the Reg states election must be made on a timely filed return before IRS audits them.

And that’s reasonable. So Mayo and Altera are satisfied.

Nancy is too late. And the Reg stands.

Happy Felix Guralnik might just get his one-day late petition accepted as timely, if Tax Court goes with The Judge With a Heart, STJ Armen, with an assist from the winter wind aforementioned.

It’s Felix Guralnick, Docket No. 4358-15L, filed 8/24/15, a Rule 183 Recommended Findings of Fact and Conclusions of Law.

I didn’t know what that was either, until I looked. Rule 183 lets the small judges of the small court make suggestions to the Big Judges of the small court, to which the parties can object or which the Big Judges can grant or disallow.

STJ Armen suggests that, as Tax Court was closed on the last day for Happy Felix to get his petition to 400 Second Street, NW (which he did next day when the Court was open, by a then-impermissible but later blessed iteration of FedEx) and since Tax Court had no “drop-box,” nor permitted e-filing of petitions, Happy Felix is OK, despite IRS’s objections.

Happy Felix wasn’t happy when Appeals hit him with a NOD off a NFTL. But Happy Felix used FedEx First Overnight, which wasn’t blessed until after he sent in his petition; he should have used Priority Overnight, which was blessed by IRS under the provisions of Section 7502 when Happy Felix sent in his petition.

Practitioners, get the blessed list and tack it up on every wall you can find. And check for updates.

Happy Felix is out, right?

No, the last day was a Sunday, the Monday in this case was a holiday in the District of Columbia, but IRS claims Happy Felix stumbles at the last fence, because Tax Court was closed on the Tuesday because of Winter Storm Octavia. STJ Armen says no.

There is no Tax Court rule about what happens when Tax Court is closed. FRCP 6(a)(3)(A) says when clerks’ offices are closed, for whatever reason, service is complete the next open day not a Saturday, Sunday or legal holiday.

And Section 7503 comes to the rescue, although STJ Armen has to stretch a little to get there, going back to 1926 for Sunday closing language, and 1934 for Saturday closing language, in the reports of the respective revenue acts of those long-ago years.

So Winter Storm Octavia mutates into a legal holiday, and if the Big Judge assigned to this jumpball has a heart, Happy Felix is indeed happy.

Neither Is Hearing, When It Comes to TEFRA

So Judge Laro instructs us in Green Gas Delaware Statutory Trust, Methane Bio, LLC, Tax Matters Partner, 2015 T. C. Memo. 168, filed 8/24/15.

The Green Gassers claimed a ton of Non-Conventional Source Fuel Credits, IRS issued an NBAP and ten days later issued a FPAA, which kicked out most of the credits.

The Green Gassers yell “foul!”, claiming IRS didn’t wait the 120 days Section 6223(d) requires before issuing the FPAA, and never let the Green Gassers put in any information before slugging them with the FPAA, from which they now petition, claiming no jurisdiction.

Well, says Judge Laro, the 120 days isn’t a jurisdictional predicate.

“Section 6223(d) provides that the Commissioner shall mail the FPAA at least 120 days after the NBAP is issued. Both parties in this case agree that the NBAP was not issued 120 days before the FPAA. Petitioner argues that because the NBAP was untimely, the resultant FPAA was fatally defective. The NBAP was indeed untimely, but the issuance of an FPAA shortly after an untimely NBAP does not invalidate the FPAA. Wind Energy Tech. Assocs. III v. Commissioner, 94 T.C. 787, 791-794 (1990); see also Bedrosian v. Commissioner, 143 T.C. 83, 95 (2014) (stating that the Commissioner’s failure to adhere to the 120-day timeframe means that the NBAP is untimely but does not invalidate either notice); sec. 301.6223(e)-2(a), Proced. & Admin. Regs. (failure to issue either notice within the 120-day timeframe does not invalidate either notice).” 2015 T. C. Memo. 168, at pp. 8-9.

So neither wind nor gas will prevail against a premature FPAA.

Next is the Green Gassers’ claim they were shut out of participation or interaction with IRS before the FPAA boom was dropped on them.

Your remedy, says Judge Laro, is the Section 6223(e) opt-out, whereby the nonparticipants can elect to treat partnership items as nonpartnership (that is, individual) items, and duke it out with IRS their own selves.

And if the Green Gassers don’t like that, let them take their woes to Congress. Tax Court isn’t rewriting the Code.

“If Congress wanted the Commissioner to conduct a meeting between or among the parties, it would have included such a requirement in the legislation. Instead, petitioner requests this Court to create a new prerequisite that the Commissioner must adhere to before issuing an FPAA. It is Congress’ prerogative to establish such requirements. Congress has not done so.” 2015 t. c. Memo. 168, at p. 10.

IRS issued a proper FPAA here. They looked at the Green Gassers’ return and amended return, and allowed the Green Gassers some of the credit they claimed. It’s not a completely made-up deficiency.

And the Green Gassers’ SOL argument is also out. It’s an affirmative defense, not a jurisdictional bar.

So time is not of the essence.

As a breachee, IRS shows some compassion to those suffering from breaches of data bases other than IRS’ own.

So we now have guidance that IRS won’t assert tax liability for credit monitoring and anti-fraud services furnished to those caught with their breaches down.

Read all about it in Notice 2015-22.

“Questions have been raised concerning the taxability of identity protection services provided at no cost to customers, employees, or other individuals whose personal information may have been compromised in a data breach. Existing guidance does not specifically address these questions.

“The IRS will not assert that an individual whose personal information may have been compromised in a data breach must include in gross income the value of the identity protection services provided by the organization that experienced the data breach. Additionally, the IRS will not assert that an employer providing identity protection services to employees whose personal information may have been compromised in a data breach of the employer’s (or employer’s agent or service provider’s) recordkeeping system must include the value of the identity protection services in the employees’ gross income and wages. The IRS will also not assert that these amounts must be reported on an information return (such as Form W-2 or Form 1099-MISC) filed with respect to such individuals.” Notice, at p. 2.

But before the breached get too elated, let them note well the following.

“This announcement does not apply to cash received in lieu of identity protection services, or to identity protection services received for reasons other than as a result of a data breach, such as identity protection services received in connection with an employee’s compensation benefit package. This announcement also does not apply to proceeds received under an identity theft insurance policy; the treatment of insurance recoveries is governed by existing law.” Notice, at p. 2.

And organizations providing identity protection otherwise than after a breach have until October 13 to dish on the subject at notice.comments@irscounsel.treas.gov.

We all know the old saw about a SNOD (statutory notice of deficiency or 90-day letter) being the ticket to the Tax Court. But Jose Diaz and Frances Diaz, Docket No. 22620-13L, filed 8/21/15, remind us, with some help from Judge Gale, that it’s also the ticket to a refund.

Jose and Frances petition from a NOD. That’s nothing special, except that Appeals refused to sustain the NFTL against Jose and Frances. So Jose and Frances won. So why the beef?

Jose and Frances want a refund. IRS says they’ll concede no NFTL based on SOL considerations, but they want the assessments upheld and that Jose and Frances get no refund.

Judge Gale agrees.

Jose and Frances never got SNODs for any of the years at issue, because though they self-reported their liabilities, they just didn’t pay them. Thus no SNOD, because no variation between taxes reported on returns and tax actually owed.

And Jose and Frances signed off on Form 4549, admitting what they owed, and IRS showed they assessed tax within the three-year timeframe.

Judge Gale instructs us as follows. “While the Secretary must generally issue a notice of deficiency before assessing an income tax that is greater than that shown as due by the taxpayer on his return, see secs. 6212(a) and 6213(a), no such notice is necessary for the assessment of amounts reported as due on the return, sec. 6201(a). Similarly, no deficiency notice is required for income taxes covered by Forms 4549, which authorize the Commissioner to assess and collect the taxes reflected thereon…..Respondent is therefore entitled to a decision as a matter of law, and we so hold, that the assessments at issue in this case were timely and validly made. Petitioners having suggested no other infirmity in the assessment process or other failure by the Appeals officer to verify that the requirements of any applicable law or administrative procedure were satisfied, respondent is likewise entitled to a decision as a matter of law, and we so hold, that the Appeals officer satisfied the verification requirement of section 6330(c)(1).” Order, at pp. 5-6. (Footnotes and citations omitted).

No refund without a SNOD.

Except, Of Course, Taxes

Among other things. No, I won’t discuss Ashley Madison and others similarly situated; we should be seeing a bushelbasketful of 6015s, 215s and 71s as that unhappy tale unwinds.

But on a day without opinions or designated orders, after a lengthy CPE/CLE that brought me fresh insights into tactics and which require much somber reasoning, and a mad rush to get out an amended offering statement, I thought something on the lighter side might serve to toll the knell of parting day.

So here’s a short round from that long-suffering correcter of misspellings, mischaracterizations and the generality of Tax Court mishaps, Ch J Michael B. (“Iron Mike”) Thornton.

Dianalee Waterman, Docket No. 19708-15, filed 8/20/15,* provides today’s grist for the blogmill.

Dianalee hit the 400 Second Street, NW, gang with an imperfect petition. Ch J Iron Mike, cast again in the role of snapper-up of unconsidered trifles, told Dianalee to get it right.

Dianalee unloaded the following: “petitioner filed a document entitled ‘Request for Motion Terminating IRC Chapter 24 Withholding Per 26 USC 6013(G)(4)(A)’. That document opened with the following: “For the record, Petitioner’s REQUEST is provided as a ‘position statement’. In no manner, form, or intent does Petitioner’s REQUEST grant the United States Tax Court (USTC) jurisdiction over the Petitioner who is domiciled ‘without the geo/legislative (^) United States jurisdiction”. The document went on to emphasize, inter alia, that Clark County, Nevada, is not in the statutory ‘United States’, and that petitioner ‘is now permanently free from participation in the federal income tax scheme’.” Order, at p. 1.

Well, Dianalee, what happens in Vegas (or Clark County generally) may stay in Vegas (or Clark County generally), but I wouldn’t wager large bucks that Federal income tax stops at the county line.

Ch J Iron Mike, clearly not in the mood for somber reasoning and copious citation of precedent, cuts to the chase: “…it appearing that petitioner does not intend to file an amended petition and pay the filing fee as directed in the Court’s Order…on the Court’s own motion, this case is dismissed for lack of jurisdiction.” Order, at p. 1.

*Dianalee Waterman 19708-15 8 20 15

Tax Court aficionados rarely see a Section 7491(a) burden-of-proof shift attempt that succeeds. Even when that rara avis alights at the Glasshouse at 400 Second Street, NW, IRS almost always wins.

The garden variety shift attempt ends with the Judge blowing off the shift, deciding on the preponderance of evidence, and petitioner loses anyway.

But today we have a protester playing the shift, and winning a dependency exemption deduction on account of the cohabitant of his little grass shack in Elele, Hawaii.

The pro se shifter is Steven Arthur Shimanek, 205 T. C. Memo. 165, filed 8/19/15.

Steve starts off claiming that the $31K he earned on the Garden Isle wasn’t taxable because he wasn’t an employee of the US of A. He admits earning the money on brief, but throws in the old protester jive. Of course, Judge Swift blows this off without even citing Cain v. Com’r.

Steven Arthur has another string to his bow. He claims IRS disallowed his dependency exemption deduction for his commonlaw spouse, Ms. Aleta T. J. Napoleone. He claims Ms. Aleta T. J. lived with him more than half the year at issue, had gross income less than $3500 that year, and that Steven Arthur himself provided more than half of Ms. Aleta T. J.’s support.

Judge Swift likes Section 152(d)(1)(A)-(C), (2)(H). And IRS doesn’t play the Section 152(f)(3) “violation of local law” gambit, although maybe that’s not a winner in The Aloha State, even if, as I am told but do not guarantee or warrant, The Aloha State doesn’t recognize commonlaw marriage.

After all, Steven Arthur wanders around. When this case was tried he was in American Samoa; maybe he found Ms. Aleta T. J. in a state where commonlaw marriages are recognized before arriving on the Garden Isle (and I can attest from personal knowledge that it is beautiful).

Howbeit, IRS claims Steven Arthur has no evidence of his assertions re: Ms. Aleta T. J.

“In support of his entitlement to a dependency exemption deduction for Ms. Napoleone, petitioner has produced and respondent has stipulated into evidence a document entitled ‘Affidavit of Dependency’ signed by Ms. Napoleone in which she states that during [year at issue] she lived in petitioner’s home, she had gross income of less than $3,500, and petitioner provided more than half of her support.

“Respondent notes that under Rule 143(c) ‘Ex parte affidavits or declarations * * * do not constitute evidence.’ However, in the preamble to the stipulation relating to the above document, respondent expressly waives all evidentiary objections relating thereto except relevancy and materiality. Accordingly, Ms. Napoleone’s statement will be considered as evidence in support of the claimed dependency exemption deduction.” 2015 T. C. Memo. 165, at p. 5.

So Steven Arthur has jumped the Section 7491(a) hedge by providing “credible evidence” of his assertion. Ms. Aleta T. J.’s ex parte affidavit is clearly material and relevant.

Now for the win. IRS faces the Michael Corleone situation.

IRS has no evidence that Ms. Aleta T. J. has told anything but the truth, the whole truth and nothing but the truth.

Having failed to sustain their burden of proof, IRS loses.

Steven Arthur, albeit shifty, has won.

Summer doldrums have their day in Tax Court. We have a T. C. Memo. about a lawyer (and ex-CPA) who claims the capital loss his wife took when she sold securities to buy an annuity should offset the early withdrawal he took. No go, of course. They took the $3K per year writedown for years before.

And our designated hitter is a comedy of errors, petitioner claiming her bankruptcy discharge wiped out the taxes for which IRS filed NFTLs (which it didn’t, as the returns were filed after the bankruptcy petition), but IRS lifted the NFTLs in question years before, so The Judge With a Heart, STJ Armen, tosses the whole show.

So I was stuck with banalities, until there swam into my ken Rhoda B. Cahill, Docket No. 10005-15S, filed 8/18/15.

And I again quote the taxi dispatcher of the Marne, General Joseph Simon Galieni: “Eh bien, voilà au moins qui n’est pas banal!” See my blogpost “Fact-Oid? No, Fraud-Oid,” 2/2/15.

IRS hit Rhoda with a SNOD, but she’d paid the balance due before IRS hit her. IRS agrees she did, and moves to dismiss her petition as moot.

Rhoda agrees, but wants back her sixty bucks.

And Ch J Michael B. (“Iron Mike”) Thornton, perhaps as bored by the summer doldrums as the humble blogger, plays along.

He orders IRS to “… file a response to this Order setting forth respondent’s position as to (1) whether respondent agrees to reimburse petitioner for the filing fee, and (2) whether the Court should issue as part of its decision an order awarding petitioner litigation costs in the amount of $60.00 pursuant to I.R.C. section 7430.” Order, at p. 1.

Now if IRS caved before trial Rhoda is probably out of luck, but they’ll spend far more than sixty bucks in time and taxpayer money fighting Rhoda.

Whipsaw and Reverse Whipsaw

No, not a pun on the 1958 William Gibson play about a seesaw (which I saw on Broadway with the second-string cast, Fonda and Bancroft having departed), nor yet the 1962 Mitchum-MacLaine variation (which I did not see, then or now), but rather two opinions out of Tax Court today, showing how the law tilts, sometimes.

A whipsaw is when two (or maybe more) people might owe tax, and IRS wants to grab them all, but IRS can only collect once.

First up, the reverse whipsaw, which will be explained infra, as my Hanger-Ten-Gibson-drinking colleagues would say.

Esther B. Crabtree, 2015 T. C. Memo. 163, filed 8/17/15. Esther cast off all lines from Dr. Anthony Girard, effectuating same by means of an “informally drafted” (Judge Lauber’s words) divorce agreement, wherein appears the following: ““Dr. Girard will continue to tender unallocated alimony/child support in the monthly sum of $5,232.00 for a continued 8 year period with the provision as long as Mrs. Girard should not remarry or cohabitate.” 2015 T. C. Memo. 163, at p. 3.

“Informally” is right. Start with unallocated, although Judge Lauber doesn’t have to go there. Child support isn’t deductible and isn’t income to recipient, but alimony is and is. So which is it? State law supplies the answer, and State law is all over the place. Your answer and mileage may well vary.

Eschewing that particular sandtrap, Judge Lauber goes off on dear old Section 71(b)(1)(D). What happens if Dr Anthony or Esther B. checks out before the continued 8 year period runs out?

You know the drill. Check State law, but Tax Court doesn’t get Talmudic or Thomistical; if it isn’t plain, read the agreement and decide.

Well, the Delaware divorce decree is unhelpful. Although the Delaware Court stamped the agreement, “(T)he Divorce Agreement was a voluntary alimony agreement without a judicial determination. Although it was stamped as an ‘order’ of the Family Court, that order explicitly states that it was entered ‘[w]ithout a hearing, without passing upon the substance, form, and/or fairness of the agreement, and without knowledge by the Court of the facts and circumstances concerning the negotiations of the parties.’” 2015 T. C. Memo. 163, at p. 7.

Delaware does have a provision for these informal agreements that says “(U)nless otherwise agreed by the parties in writing and expressly provided in the decree, the obligation to pay future alimony is terminated upon the death of either party or the remarriage of the party receiving alimony.” 2015 T. C. Memo. 163, at p. 8.

Delaware doesn’t say how two splitters must “otherwise agree,” but Judge Lauber finds a California case (and where would we be without LaLa Land law?) that requires “specific and express” agreement in writing.

So finding Delaware ambiguous (and any lawyer who can’t find an ambiguity in anything should turn in her/his license and consider a career at Amazon), Judge Lauber reverts to good old-time contract law, dusts off contra proferentem, and finds that, assuming without saying so that Dr Anthony did the informal drafting, if Dr Anthony or Esther B meant his death or Esther B’s to terminate the payments, they could have said so, but didn’t.

So the payments to Esther B aren’t alimony, and therefore not income to her.

“OK,” you’ll say, “you blogged the Section 71(b)(1)(D) death knell at least five (count ‘em, five) times before. We got the message. So whassup wit’ dis?”

Well, the year at issue is 2010, and if Dr Anthony filed timely and took the alimony deduction (and as we’re talking about $62K, I’ll bet he did), unless IRS hit Dr Anthony with a timely SNOD, it’s a closed year now.

So IRS can’t hit up Dr Anthony or Esther B. Reverse whipsaw.

Next, forward whipsaw.

Ethel Miriam Putnam, 2015 T. C. Memo. 160, filed 8/17/15, never bothered filing 1040s since 1989. She was also good at protester/defier stuff, but Judge Ruwe, patient to the last, finally wearied of Ethel Miriam’s disregard of his orders and threatened sanctions, and nails her for the whole enchilada. Plus nonfiling, non-estimateds, and the 75% fraud chops.

However, Ethel Miriam and hubby Mr. Putnam (nameless here forevermore) played put-and-take with bank accounts and dummy entities. IRS hit Mr. Putnam with a SNOD for the same amounts, but he didn’t petition.

Notwithstanding anything to the contrary elsewhere set forth herein, or at variance with the foregoing, IRS can’t figure out whether to nail Ethel Miriam or Nameless Putnam for all or part.

This is the forward whipsaw. Judge Ruwe expatiates: “Although Mr. Putnam did not file a petition in this Court, he is not precluded from paying the determined amounts and filing an administrative claim for refund with the IRS. Once the IRS acts upon the administrative refund claim (or after six months pass from the date of filing) Mr. Putnam can file a refund suit in the appropriate District Court or in the U.S. Court of Federal Claims. Thus, respondent’s [IRS] whipsaw position protects the public fisc in the event that Mr. Putnam prevails in a refund suit by establishing that the income at issue belongs to petitioner. In situations such as this the Commissioner is entitled to defend against inconsistent results by determining in separate notices of deficiency that two parties are liable for the same deficiency.” 2015 T. C. Memo. 160, at pp. 25-26. (Citations omitted).

IRS hastens to add, in the style of the late great Conrad Veidt, “we haf vays of protecting against dupple collection.”

“Internal Revenue Manual pt. 5.20.6.1.3(1) (Sept. 21, 2005) provides that ‘related case(s) should be controlled by a single revenue officer to monitor payments and prevent over-collection of the liability.’ If more than one revenue officer is assigned to the cases because of the localities of the taxpayers, the revenue officers are to closely coordinate their collection efforts to ensure that the liability is collected only once. Id. Therefore, the IRS has safeguards in place to ensure that a whipsaw assessment against both petitioner and Mr. Putnam will not ultimately result in collecting tax from two separate individual taxpayers on the same income.” 2015 T. C. Memo. 160, at pp. 26-27.

I’m sure Ethel Miriam is just thrilled to bits.

And Undesignated As Well

On a summer Friday, with a couple of cold Ourobouros just two hours away, l wish Judge Laro would designate his orders. That would save me from plowing through six (count ‘em, six) pages of “pay the $60,” “file a status report,” and “give me a copy of the SNOD,” which comprise the bulk of Tax Court orders.

By the way, an Ourobouro has no relation to Eric R. Eddison’s 1922 fantasy novel about a worm. Rather, this is a delightful concoction, a piña colada made with Ypioca Ouro cachaça, “aged for 2 years in Brazilian Balsamo barrels, acquiring a distinctive flavour, bouquet and golden colour”. Try it, you’ll like it. And after two of them, you’ll like it even if you didn’t to begin with.

Back to taxes.

Judge Laro has a bushelbasketful of motions in limine amongst the battling experts in Exelon Corporation, As Successor By Merger To Unicom Corporation And Subsidiaries, et al., Docket No. 29183-13, filed 8/14/15. There’s about a dozen more of such motions, but I chose this one because it seemed the most relevant.

The joust concerns nonlawyer experts discussing clauses in contracts.

Judges get testy when “experts” try to interpret the law.

“Petitioners move to exclude the respective paragraphs and associated footnotes and citations therein, from these reports on the grounds that respondent’s expert, Professor X, interpreted contractual provisions as a basis for his opinion that the leases pose a risk of loss to petitioners. Petitioners argue that if this Court does not permit petitioners’ expert to interpret contract provisions as a basis for his opinion that the leases pose a risk of loss to petitioners, this Court should not permit respondent’s experts to interpret contract provisions as a basis for their opinions that the leases pose no risk of loss to petitioners. Petitioners do not object to experts applying their understanding of contractual agreements to form their opinions.” Order, at p. 2. (Name omitted).

How interpreting differs from applying one’s understanding I fail to understand, but Judge Laro does.

“Opinions on law are superfluous and inadmissible, since the court can determine the law equally as well. The Court can exclude an expert’s testimony and report where such expert and report make legal opinions as to the meaning of contractual terms at issue which they believe governs a party’s conduct. Expert opinions, however, that are tangentially based on the expert’s understanding of the contract may be permitted.” Order, at p. 4. (Citations omitted, but save them for your next memo of law).

And Judge Laro is satisfied that all the expert reports and testimony are off on a sufficient tangent, so he’ll let in their understanding of what the contract says, as it impacts their expertise.

If face-offs about expert testimony are your thing, there’s good reading today. If not, try an Ourobouro.