That’s the sad plight of Steven N. Levi & Cristina Levi, Docket No. 10903-13, filed 7/6/15. Now I’ll bet you thought their troubles were over after you read my blogpost “Utterly Powerless,” 6/29/15, wherein Judge Dawson wiped out the MFJ 1040 filed by Ms. S., the attorney for Steve & Cris, which neither Steve nor Chris signed.

But wait, there’s more! Judge Dawson isn’t finished with Steve and Cris, because IRS isn’t finished with them either.

IRS asked for info on Steve’s health insurance and dog-breeding business, not one word of which appeared in the SNOD, or in the Answer or Amended answer.

So what is left to decide? A lot, says Judge Dawson. Even though the return isn’t valid, there is still a deficiency. A deficiency, remember, is the difference between what the taxpayer owes and what the taxpayer paid, not the difference between what’s on the return and what the taxpayer owes; that’s another issue, which can encompass, inter alia, as my white-shoe-wearing colleagues would say, fraud, underwithholding, and self-assessed-but-unpaid chops.

Judge Dawson goes back to 1956 to find that Fourth Circuit said Tax Court can determine a deficiency even where the return is invalid, and even when Tax Court thought it couldn’t. And Judge Dawson marches down the sands of time to the present, strewing “copious citations of precedent” over two pages to establish that Tax Court has jurisdiction to inflict other and further pain on Steve & Cris.

But the only deficiency before the Court is what IRS put in the SNOD, before the health insurance and dog-and-pony show.

So IRS should file a motion to amend the amended answer, and lodge (that is, submit) their proposed amendment to the amendment to the answer.

And remember, IRS, “Rule 41, Tax Court Rules of Practice and Procedure, governs amended and supplemental pleadings. Rule 41(a) covers amendments generally and provides in effect that after a responsive pleading is served or after 30 days if no responsive pleading is permitted, ‘a party may amend a pleading only by leave of the Court or by written consent of the adverse party’. Whether to grant leave to file an amendment to answer is a matter within the sound discretion of the Court, and the disposition of such a motion turns largely on whether the matter is raised timely so as not to unfairly surprise, disadvantage, or unduly prejudice the taxpayer.” Order, at p. 3.

So, IRS, if you want to do it, get on your bike, and Steve & Cris, have your opposition ready.

Of course, Judge Dawson did not designate this order. Heaven forfend that valuable practical information should ever find its way to the in-the-trenches preparer and adviser.

But have no fear, gang: Taishoff is here!

No, Everybody Not Named Kisha.

Before heading home for the day off, there’s a designated hitter from the Obliging Judge David Gustafson.

Judge Gustafson gets a lot of badly-prepared motions, it would seem. Here’s Kisha C. Rose-Wiley, Docket No. 27562-14L, filed 7/2/15.

Kisha got a SNOD, didn’t petition, got a NITL, and did petition.

“Ms. Rose-Wiley alleged, ‘I am not liable for taxes. I have not had income’, thus challenging the underlying liability, pursuant to section 6330(c)(2)(B). She did not check the box requesting ‘innocent spouse’ relief. The Commissioner alleges that, during the CDP hearing, IRS Appeals solicited from her an innocent spouse claim on Form 8857, but that she did not submit such a claim. Appeals therefore sustained the proposed collection.

“Ms. Rose-Wiley then filed a petition with this Court, in which she again alleges that ‘I have no earned income’ and that ‘I … have not been employed in the last 10 years.’ Perhaps as a result of Appeals’ characterization of her claim, she also asserts “Innocent spouse” status, but her assertion is ‘Innocent spouse due to non employment’. Order, at p. 1 (Emphasis in original).

Well, that’s a nonstarter for Section 6015 relief.

But IRS’s counsel missed something.

Filing for summary J, IRS claims Kisha and hubby Mario filed jointly for the year at issue. Now what do you need to attach to your motion papers?

“However, the Commissioner’s submission does not include a copy of the income tax return showing Ms. Rose-Wiley’s signature, and his motion does not cite any other evidence to support the proposition that Ms. Rose-Wiley joined in the filing of this return.” Order, at p. 2.

So it’s not a question of innocence, but liability in the first place.

“If in fact Ms. Rose-Wiley did not join with her husband in filing the return, then she would apparently prevail in her challenge to underlying liability—not pursuant to section 6015 as an ‘innocent spouse’, but because a return filed solely by her husband would apparently not support an assessment of tax against Ms. Rose-Wiley.” Order, at p. 2.

But obliging as always, Judge Gustafson sends IRS’s counsel on a paper chase—find the return or something that looks like evidence that Kisha signed a joint return.

Comment is superfluous.

It’s not a parlor game for Qinetiq U.S. Holdings, Inc. & Subsidiaries, as they lose a heavy-duty salary-and-wages deduction but gain a $13 million deficiency thereby, in 2015 T. C. Memo. 123, filed 7/2/15.

The case is also notable for Judge Goeke’s retirement from the partitive genitive war, as he apparently has abandoned his former alliance with Judge Mark V. Holmes; see my blogpost “Tax Court’s War on the Partitive Genitive,” 1/3/14, where Judge Goeke, dealing with the same case, enlisted in that war.

Back to taxes. Qineteq bought out a sub S started by two consultants. The outfit started with Consultant 1 and spouse, but spouse dropped out in favor of Consultant 2, and Consultants 1 and 2 renamed the sub S. The Consultants threw $1000 into a bank account and got all the stock in the renamed sub S.

Throughout the subsequent sub S’s career, the Consultants took distributions from the sub S but paid no SE. Though the stock was restricted, they never transferred any, or entered into employment agreements with the sub S.

They did have employment agreements with employees, to whom they issued restricted non-voting stock. This ordinarily would have torpedoed the S election, but Consultants got a Section 1362(f) whoops PLR, which put them back on the straight-and-narrow.

Qineteq buys out the Consultants for $123 million. Qineteq claims the stock was issued for continuous services, was subject to substantial forfeiture, and therefore was payment for services per Section 83. Thus ordinary income to Consultants and deductible by Qineteq.

No, says IRS, capital gains to Consultants, no substantial risk of forfeiture, and no deduction to Qineteq.

Judge Goeke: “We acknowledge there are cases suggesting that a broad reading of the applicability of section 83 is appropriate. See, e.g., Alves v. Commissioner, 79 T.C. at 876 (‘Congress * * * has clearly expressed the intention that section 83 is to have the broadest application’); Montelepre Systemed, Inc. v. Commissioner, T.C. Memo. 1991-46, 1991 Tax Ct. Memo LEXIS 65, at *19 (‘[T]he statute only envisions some sort of relationship between the services performed and the property transferred.’). However, on the facts and circumstances of this case, we conclude that petitioner has failed to prove the … stock was transferred in connection with the performance of services pursuant to section 83. Nonetheless, in this matter we believe the crux of our section 83 analysis is whether the… stock was subject to a substantial risk of forfeiture.” 2015 T. C. Memo. 123, at pp. 23-24.

It’s OK if you were somehow working there when you got the stock; but were you at serious risk of losing the stock?

There’s a five-way test for holders of substantial portions of voting stock, and Consultants 1 and 2 certainly did.

“Those factors are: (i) the employee’s relationship to other stockholders and the extent of their control, potential control and possible loss of control of the corporation; (ii) the employee’s position in the corporation and the extent to which he is subordinate to other employees; (iii) the employee’s relationship to the officers and directors of the corporation; (iv) the person who must approve the employee’s discharge; and (v) the employer’s prior actions in enforcing the provisions of the restrictions.” 2015 T. C. Memo. 123, at p. 25.

Nobody but the Consultants ran the shop, and their class of stock was only issued to them and no one else. Their stock was never transferred. But the decision seems to go off on the fact that the sub S ran very well, and neither Consultant wanted to oust the other.

And the Consultants stipulated that they always told the same story for tax purposes. They did; they never said they were getting stock for services, and whatever they got was dividends and not salary and wages.

I see an appeal coming. It’s not so clear-cut as Judge Goeke makes it out. We’ve all seen partners who really got on a treat taking up the battleaxes and using every move in the book when things turn sour. And that forfeiture never happened before doesn’t mean it’s so remote as to be negligible.

Stay tuned.

My readers, few in number but stout in digestion, will testify, I am sure, that irony is my mainstay.

Well, here’s a juicy morsel, straight from the Irony Mine at 400 Second Street, NW, snug inside the Beltway.

It’s the doleful tale of Jerry L. Vandagriff, Deceased, Docket No. 10437-13, filed 7/2/15, told straight-faced by Judge Paris.

Here’s the whole story: “The Court having been informed that petitioner is now deceased, it is

ORDERED that petitioner’s e-filing privileges are revoked.” Order, at p. 1.

But Incompetence Isn’t Frivolous

Two for the price of one to open the July meet at Tax Court.

First we have Robert L. Porter, 2015 T. C. Memo. 118, filed 7/1/15. A self-employed cement subcontractor, Rob fell in with We The People, the Patriot Network, and Richard Cornforth. He liked what they sold him (the usual protester stuff), so he ditched his records, stopped filing returns and paying taxes, and when IRS handed him some SFRs, bombarded the RA with protester jive and irrelevant Forms 12153.

Then Rob tried to quash the subpoena for his bank records. When the USDCMDF tossed his motion, all Rob’s unreported income came tumbling down, and Rob saw the light.

Repentant Rob petitions the SNOD, hires a CPA, works with IRS and gets some deductions allowed, with the usual Cohan chops for inexactitude of his own making.

IRS wants the 75% fraud chop, and Rob has enough badges to become an Eagle Scout of Tax Fraud.

But Rob claims he came clean, albeit on the eve of trial.

Judge Marvel: “While we commend petitioner for his efforts to reconstruct his income and expenses for the years at issue and later years, later repentant behavior does not absolve a taxpayer of his antecedent fraud.” 2015 T. C. Memo. 118, at p. 53. (Citations omitted).

Rob’s previous misdoings are not absolved, at least for tax purposes, unlike another repentant sinner on “a green hill far away, outside the city wall,” in a much more exalted context.

Now Judge David Gustafson, that most Obliging Jurist, has an off-the-bencher that shows a good tactical move by a pro se, which we practitioners may wish to consider.

It’s Barbara Kupersmit, and she’s survived Judge Gustafson’s octopus juggling from last month. Remember Barb and Judge Gustafson’s multi-faceted strategic analysis? No?

Then see my blogpost “Judge Gustafson’s Conundrums,” 6/2/15.

Barb, faced with a menu that would tax (pun intended) the strategic wiles of the best amongst us, elects not to give Appeals “two bites at the apple” (Order, at p. 5).

Oh yes, the order in question is Barbara A. Kupersmit, Docket No. 13428-14L, filed 7/1/15.

So Barb goes for de novo review of her Section 6702 frivolous return chop at her Philadelphia trial. Judge Gustafson tossed IRS’s motion for continuance and remand back on 6/2/15, more particularly set forth in my blogpost abovecited, as my already-drinking-the-second-Grey-Goose-Gibson colleagues would say.

So Barb and IRS go at it, and the return at issue, filed by Barb and hubby Harold, don’t look so good.

Judge Gustafson: “The Kupersmits’ return reported taxable interest on line 8a as ‘Est 1,400’. On line 13 (‘Capital gain or (loss)’), it reported ‘LOSS 201,387’, but no Schedule D was attached. On Line 14 (‘Other gains or (losses)’), it reported ‘RACE TRACK GAMBLING LOSS 0′. On line 40 (‘Itemized deductions’) it reported ‘EST 12,500’. In the payments section it included two figures–3408 and 9125.76–that it appears to identify as ‘PRIOR YEAR UNCLAIMED REFUND’, and that are apparently added to yield the amount of 12,525.76, which as written straddles the line between line 73 (the amount overpaid) and line 74a (the amount to be refunded). That computation of the overpayment ignores the entries on line 64 (‘Federal income tax withheld’) and line 65 (‘2007 estimated tax payments’) that presumably should have increased the claimed overpayment. To the return were attached (1) a blank Form 1040 for the year 2011, and (2) five pages of copies of filings in a lawsuit brought against the Kupersmits by Citizens Bank of Pennsylvania, some of which appear to assert that the IRS should be enjoined from taking action against the Kupersmits.” Order, at pp. 3-4.

Oh, by the way, this return was filed five (count ‘em, five) years late.

Look like a Section 6702 frivolous return to you?

Well, not to Judge David Gustafson.

As you’ll remember from my aforesaid blogpost, Appeals never gave Barb the chance to challenge the 6702 chop, although she’d never had a chance to challenge it before. Then IRS’s counsel never put in evidence the IRS’s file imposing the penalty in the first place, thus impeding judicial review.

Section 6702 chops aren’t assessable, so no SNOD and no prior opportunity before Collections shows up, breathing fire and slaughter. And Section 7491(c) lays burden of going forward squarely on IRS’s shoulder, when penalty shots are on the line.

So IRS’s counsel is in the unhappy Michael Corleone position.

“Only if the Commissioner met that burden did the burden then shift to Ms. Kupersmit to convince us otherwise. Because the penalty liability was the only issue in the case, the Court instructed the Commissioner to proceed first at trial, in order to attempt to carry his burden of production to show that the return was subject to penalty under section 6702(a). The only evidence he put on was the tax return (which the parties had stipulated) and testimony of Mr. and Mrs. Kupersmit.” Order, at pp. 7-8.

Not good enough.

There’s an accuracy penalty, but that’s a Section 6662(a) chop, not Section 6702. There’s no showing that the return was intended to espouse an identified frivolous position. The items shown on the return aren’t facially frivolous, nor are there 1099s or any other third-party info in the record to show intentional misstatements or contradict what Barb and hubby Harold put down.

Mere slop doesn’t equal chop.

IRS tries a finesse on the post-trial brief, but it’s a loser. IRS contends that the return is an attempt to delay or impede tax administration, per Section 6702(a)(2)(b). But the record was closed at that point, that position was never argued pre-trial or during trial, and IRS put in no evidence of delay or impedance, so it’s a total nonstarter.

“Counsel seemed to suggest that the most confounding irregularity on the Kupersmits’ return was its omission of Schedule D to itemize the capital loss reported on line 13. That is indeed a serious irregularity; but such an omission is explicitly characterized by the Code not as a frivolous position but as a ‘mathematical or clerical error’, sec.  6213(g)(2)(D), for which the Code gives the Commissioner a decisive solution, see sec. 6213(b)(1). Against the Commissioner’ s argument that the return ‘reflects a desire to delay or impede the administration of Federal tax laws’, a contrary argument that is more persuasive to us, particularly after observing the Kupersmits’ testimony and demeanor, is that the return simply reflects a lack of competence. We do not think that the penalty of section 6702(a) was intended to penalize that defect.” Order, at pp. 10-11.

IRS’s counsel has suffered enough, so I won’t name him. But why not mention every basis for a Section 6702 chop in your answer? Why not get the file, or have someone able to testify to its absence, and get the RA and the AO to testify?

But for those of us on the other side of the table, think about taking a remand. Is it always a good idea? Go over Judge Gustafson’s conundrums. Think about this case. Then take a deep breath before asking for, taking, or declining a remand to Appeals.

And tell ‘em Barb and David sent you.

If You Want to be Taxed Thereon

 No, this is not The Weavers’ classic injunction to the union miners; au contraire, this is the story of a Harvard-Stanford trained venture-capitalist who sought to keep his hand upon the dollars locked up in his super-successful start-ups. And gets taxed therefor.

Come along with me, if you will (in the words of the late W. David Curtiss, Esq., from long ago and Far Above), as we follow the trail of Jeffrey T. Webber, 144 T. C. 17, filed 6/30/15, with Judge Lauber as our guide.

JT got a Cayman Island insurer to write two variable life policies on elderly relatives. Variable life means no fixed premium and no fixed benefit; the policyholder puts up cash or securities. These are investments, whose success or failure fund the policies. If the investments make money, the benefit goes up. If they lose, the policyholder stumps up enough cash to cover the mortality risk (actuarially-derived) of the insured life departing this vale of tears, and the benefit is whatever is left.

JT had a bushelbasketful of startups, a messy divorce, a couple kids (hi, Judge Holmes) and an allergy to income taxes.

His trusty lawyer puts him into these deals, warning him of the risks of “investor control.”

If JT lets the independent investment advisors furnished by the Cayman Islanders choose the investments and keeps his hands off same, all the accretion on the accounts is tax-free to JT, and when the old folks head to the last round-up, death benefits are tax-free to JT.

JT follows the paths of many clients: his lawyer can say what he likes, and JT does what he likes.

Though a set of trusts, from Alaska to the Bahamas to Delaware, and investment managers and banks, create an illusion of independent management, JT, via trusty lawyer, pays the piper and calls the tune.

Every investment is in one of the startups wherein JT already has a substantial stake. The advisers do whatever trusty lawyer tells them to do (of course with JT’s blessing on each and every act or forbearance), exchanging e-mails in which they call the biggest trust, fetchingly named “Boiler Riffle,” “Jeff’s Wallet.” Oh, those cutesy names. And, oh those e-mails, more than 70,000 discoverable ones.

Judge Lauber decides that Skidmore deference is due Rev. Rul. 77-85, 1977-1 C.B. 12.

You remember that “Skidmore deference…is the lowest. If Mayo deference is the equivalent of ‘Aye aye, sir’ and salute the quarterdeck, then Skidmore is the equivalent of ‘yeah, ok’, ranking just above ‘meh’.” This is from my blogpost “The Junk Mailer Gets Trashed,” 10/24/13.

And even though Rev. Rul. 77-85 had to do with annuities, and even though a USDCDC case threw it out, the Circuit Court of Appeals reversed the case for want of jurisdiction. And IRS has been telling the same story time out of mind.

If your hand is on the dollar, or the means whereby the dollar is realized, it’s your money for income tax purposes.

So JT gets nailed.

But trusty lawyer wasn’t an enabler; he didn’t get more than his usual hourly rate. And relayed JT’s orders to the Caymans. But he did do some due diligence, had credentials, knew the whole story, and JT didn’t understand variable life insurance and its anfractuousities.

JT beats the 20% chop.

Once again we visit Form 2848, to see what it cannot do. That Steven N. Levi and Cristina Levi learn the hard way; thereby hangs the tale of 2015 T. C. Memo. 118, filed 6/29/15.

And it is a cautionary tale, both for preparers and their clients. The form doesn’t solve all your problems. In fact, it can be a landmine. Read the instructions, then the Regs therein cited, and govern yourselves accordingly.

Judge Dawson: “…petitioners hired Florida attorney S to prepare their Form 1040, U.S. Individual Income Tax Return…. …petitioners executed Form 2848, Power of Attorney and Declaration of Representative, appointing Ms. M and her assistant, Misty…, as their representatives. Ms. M prepared, signed, and timely submitted petitioners’ … return on their behalf, attaching thereto Form 2848, which states in relevant part: ‘Acts authorized. * * * the authority does not include * * * the power to sign certain returns’.” 2015 T. C. Memo. 118, at p. 2. (Names omitted).

In fact, an agent (not a power of attorney; a power of attorney is a piece of paper. An agent is one who acts by virtue of a POA) cannot sign a 1040 or other return except as set forth in Reg. 1.6012-1(a)(5).

Check out that Reg. And make sure you remember it. If you want the “good cause” exception, spell it out and file it in the right place (and attach it to the POA as well, for good measure), and get clearance as stated in the Reg, before you file the return. Ms. M may be getting The Phone Call; don’t y’all get it.

Steve’s and Cris’ attorney appears, disappears and asked to be restored. This is done, but none of Steve nor Cris nor attorney reply to IRS’s request for admissions. These track Reg. 6012-1(a)(5).

“The return of income may be made by an agent if, by reason of disease or injury, the person liable for the making of the return is unable to make it. The return may also be made by an agent if the taxpayer is unable to make the return by reason of continuous absence from the United States (including Puerto Rico as if a part of the United States) for a period of at least 60 days prior to the date prescribed by law for making the return. In addition, a return may be made by an agent if the taxpayer requests permission, in writing, of the district director for the internal revenue district in which is located the legal residence or principal place of business of the person liable for the making of the return, and such district director determines that good cause exists for permitting the return to be so made.” Re. 1-6012-1(a)(5).

That’s it, guys.

So the return Ms. M filed is no return at all. Even if IRS processed it, that doesn’t make it a return. So nonfiling chop follows, and if underpayment of withholding or ES, that follows too.

The ongoing love affair between Tax Court and Chenery I and Chenery II (see my blogposts “Chen-Chenery,” 8/21/14, “He Loves Chenery,” 12/17/14, and “Chenery on the Roof,” 2/4/15) hits a snag when STJ Lewis (“Oh What a Name”) Carluzzo confronts Chenery meeting a SNOD.

All the cited blogposts and cases referred to therein involved abuse-of-discretion challenges to NODs after CDPs.

Today, it’s a SNOD (claimed to be invalid) in Jeremy Edwin Porter & Ruth Ann Porter, Docket No. 16966-14, filed 6/29/5.

Jer & Ruth claim the SNOD is invalid, so toss their petition.

One asserted ground for invalidity is that the SNOD they got doesn’t have all the pages that were found in the administrative record. So what, says STJ Lew. It says you owe $X for Year A. A SNOD need not take a prescribed form, or list every reason for assertion thereof. If it has the amount and the tax year, that’s enough.

And a SNOD may be factually erroneous, but that doesn’t invalidate it.

Besides, Chenery applies to abuse-of-discretion.

“While this Court has applied Chenery in reviewing notices of determination concerning collection action in collection proceedings brought under section 6330(d), we have never applied Chenery in the context of a deficiency case. It is well established that deficiency cases are reviewed de novo, and, except in limited circumstances, the Court does not look behind the notice of deficiency. In a deficiency case, the Court’s ‘determination as to a petitioner’s tax liability must be based on the merits of the case and not any previous record developed at the administrative level.’ Consequently, Chenery is inapplicable here.” Order, at p. 3. (Citations omitted).

Jer & Ruth try the Administrative Procedures Act, but STJ Lew blows that one off. “To the contrary, this Court has held that the APA does not modify provisions of the Internal Revenue Code. (‘[T]he APA does not limit or repeal our de novo review procedures.’)….In this respect, the specific procedures that Congress has prescribed for this Court in the Internal Revenue Code may differ from the more general rules embodied in the APA.” Order, at p 4. (Citations omitted).

And the IRM doesn’t help Jer & Ruth, because IRS needn’t follow it, and anyway it gives no rights to taxpayers.

https://search.yahoo.com/yhs/search?p=clip+art+rainbow&ei=UTF-8&hspart=mozilla&hsimp=yhs-001

No, I am not going to discuss recent decisions from the Supremes, that is to say, not on this blog. My personal political views are well-expressed elsewhere, so no philippics, polemics or preaching here.

It’s bad so far today, and getting worse, for Mark T. Obermeyer, Docket No. 2626-15, filed 6/26/15, as STJ Lewis (“The Name That Sings in My Heart”) Carluzzo bounces Mark’s petition for a Rule 34(b) failure to state a claim.

Mark’s upset about the 10% youth chop on his retirement fund drawdown, and his disallowed student loan interest deduction.

OK, but why should either thereof be overturned?

Well, Mark has a rant, but no reasons: “…he disagrees with the IRS determination because of: (1) in light of the Economic Stabilization Act of 2008, he needs a bailout himself; (2) alleged discrimination against conservatives and others who regularly pay their taxes; and (3) alleged IRS misconduct (a) in paying bonuses to IRS employees who failed to pay their taxes, (b) in not properly administering tax credit programs used by others, and (c) wasting money in making certain Obama Care payments.” Order, at p. 1.

Mark, I feel your pain, as a certain ex-President remarked. Maybe you should run for Congress. But Tax Court is not the place to start.

And see my blogpost “Add A Zero,” 6/26/15. An $8800 hit may be a lot worse for you than for some of my readers.