In the words of the late great William James Basie, here’s Ch J Michael B. (“Iron Mike”) Thornton taking on the obliging role hitherto assigned to Judge David Gustafson, the prisoners’ friend, in Andrew F. Capoccia, Docket No. 2669-07, filed 6/17/15.

That’s no typo; this is a case from 2007.

Andy hasn’t been dismissed for want of prosecution because he has a good excuse. “…petitioner is incarcerated in a Federal prison camp in Pennsylvania.” Order, at p. 1.

As I remarked in my blogpost “We’ll Come To You,” 9/18/12, “Tough to try a case when you’re in the Stony Lonesome.”

Moreover, Andy has a logistical problem akin to that of a certain candidate for public office. “Respondent [IRS] is now in possession of ‘almost 80 boxes of materials’, which presumably include the business records that had previously been in possession of the United States Attorney in Burlington, Vermont, the office which prosecuted petitioner’s criminal case.” Order, at p. 1.

Andy might need some of the stuff in those “almost 80 boxes” to prove a case. Ch J Iron Mike tells IRS to identify “…a procedure by which respondent proposes to provide petitioner access to or copies of his records and thus move this case forward toward resolution, by settlement or otherwise.” Order, at p. 1.

So get on your bike, IRS, and bring those boxes round.

STJ Lewis (“His Name is His Fame”) Carluzzo has four iterations of the latest lore on the Section 6707A nondisclosure chop. For brevity’s sake, I’ll reference just one, Christopher A. Iames, Docket No. 10306-14L, filed 6/16/15.

And likewise, as a refresher, because Chris’ and his fellow-sufferers’ cases pivot thereon, check out my blogpost “The $100,000 Misunderstanding,” 9/15/14.

Now that you remember the case of Steven Yari, we can look at Chris and the others.

Chris petitions a NOD about a Section 6707A nondisclosure-of-listed-transaction chop, but only disputes underlying liability and offers no collection alternative, either at Appeals or in his petition.

Here’s the beef and counter-beef. Chris claims “…the underlying liability should be abated because, ‘the assessment is based upon, including but not limited to, an unexplained determination that the related transaction is a listed transaction and a provision of the Internal Revenue Code that is unconstitutional as a deprivation of due process.’ According to respondent’s motion, petitioner is precluded from challenging the existence or the amount of the underlying liability in this proceeding because he had a prior opportunity to do so. See sec. 6330(c)(2)(B).” Order, at p. 2.

Constitutional arguments in Tax Court are nonstarters: no jurisdiction. Pay and fight it out in USDC.

“The underlying liability was assessed… following a conference with respondent’s Appeals Office (Appeals). Relying upon section 6330(c)(2)(B), section 301.6320-1(e)(3), Q&A-E2, Proced. & Admin. Regs., and Lewis v. Commissioner, 128 T.C. 48 (2007), which upheld the validity of that regulation, respondent argues that because Appeals had considered the underlying liability prior to petitioner’s request for section 6330 review, petitioner may not in this proceeding challenge the existence or the amount of that liability.” Order, at p. 2.

Anyway, Chris tries the Yari gambit. He argues “…Lewis is not controlling because: (1) the case was superseded, if not overturned, by Yari v. Commissioner, 143 T.C. __ (Sept. 15, 2014); and (2) the version of section 301.6320-1(e)(3), Q&A-E2, Proced. & Admin. Regs. considered in Lewis has since been amended, and the version in effect here is invalid. For the following reasons, we disagree with petitioner on both points.” Order, at p. 2.

Yari went off on the proper method for computing the chop, not challenging it. Congress amended Section 6707A while Yari was percolating through Tax Court, so Tax Court had to consider a recalculation based on change in law. And because of the audible at the line of scrimmage, Appeals never got the chance to deal with the revised computation.

STJ Lew: “Here, there was no intervening change to the statute giving rise to the underlying liability. That liability was considered by Appeals prior to the section 6330 proceedings, and therefore, consistent with section 301.6320-1(e)(3), Q&AE2, Proced. & Admin. Regs., as construed in Lewis, petitioner has had a prior opportunity to challenge the existence or the amount of the underlying liability and he may not do so here.” Order, at p. 2.

Still, I think a Taishoff “good try, second class” should go to Chris’ attorney, Allen James White, Esq.

See my blogpost “We Don’t Need No Stinkin’ Factors,” 5/15/12. Today, Judge Haines follows Judge Goeke’s earlier deconstruction of a debt-vs-equity deal with a similar nonchalant waltz through eleven (count ‘em, eleven) supposed factors, and finds that MBA Real Estate, Inc., 2015 T. C. Memo. 111, filed 6/15/15, didn’t buy a bunch of contracts for brokerage commissions from J. Michael Bell and Sandra L. Bell.

No, J. Mike and Sandy 351’d the contracts to MBA in exchange for all the stock of MBA. For the purists among us, Section 351 is the tax-free incorporation freebie. If you give property (tangible or intangible) to a corporation in exchange for at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation, no tax to corporation or to shareholder-contributor. And carryover basis in all transferred property.

J. Mike and Sandy were servicers and sellers for distressed bank-owned real estate in the last California real estate meltdown (2008, for those with short memories).

J. Mike and Sandy ran their business under an assumed name, but decided to sell 40 contracts they had to MBA, a corporation they formed. Their purchase agreement with MBA did have interest payments and fixed date of final payment, and they claimed they wanted an income stream to shield them from the vicissitudes of the California crapshoot (I mean real estate market).

J. Mike and Sandy are Golsenized to Ninth Circuit. “That Court of Appeals applies an 11-factor test to determine whether a shareholder’s transfer to a corporation is a sale or a capital contribution. No single factor is controlling, and the facts and circumstances of each case must be taken into consideration. The primary purpose of the factors is to help the Court determine the parties’ intent ‘through their objective and subjective expressions.’” 2015 T. C. Memo. 111, at p. 10 (Citations omitted).

In other words, pick the result you want and you’ll find the factors you need. Or better still, which factors to ignore.

Well, although it sure looks like J. Mike and Sandy wanted to sell the contracts to MBA, MBA had no assets except $500 in cash that J. Mike and Sandy threw in after the fact (2015 T. C. Memo. 111, at p. 15). So whatever cash J. Mike and Sandy were to get had to come from MBA’s E&P, and MBA had a bushelbasketful.

No third-party lender would lend MBA the quarter-million it needed to pay off J. Mike and Sandy until the loot from the contracts came in, if ever.

So however well J. Mike and Sandy papered the deal, they’re out of luck.

Here’s the result Judge Haines finds: “In substance, in order to incorporate Mr. Bell’s existing business, the Bells transferred $500 in cash and all of the sole proprietorship’s assets to MBA solely in exchange for MBA’s stock. The Bells were in control of MBA immediately after the transfer of cash because they became MBA’s sole shareholders. Thus, section 351 governs the tax consequences of this transaction.” 2015 T. C. Memo. 111, at p. 18.

Are you convulsed with shock? I’m not.

Of course, if no sale, then no capital gain on transfer of the contracts, everything paid to J. Mike and Sandy are dividends and taxable at ordinary, and, by the way, IRS beat the SOL on the SNODs.

Oh, and MBA has no basis in the transferred contracts or in J. Mike’s and Sandy’s goodwill in their old business, so no depreciation deduction for MBA.

Who needs factors?

No, not what you need for your next memo of law.

I’ll let Judge Mark V. Holmes mansplain. “…petitioners filed a request for an answer to the question of their Virgin Island residency with the so-called ‘competent authority’ – an office within the IRS whose agents can meet with their counterparts in the VI BIR to try to settle this issue.” Order, at p. 1.

So the competent authority is a person, not a hornbook or a string-cite of cases. Sort of the maven di tutti mavonnim, when it comes to offshore tax conundra.

And who else should be worried about their Virginity (in the Section 932 sense, of course), but Renee Vento and Gail Vento, with a string of Docket numbers, but we’ll use 23527-08, filed 6/15/15, for now.

In these cases, competent authority is thinking about it, so Gail and Renee can stay on report-status track for now.

If you’re interested, I’ve blogged the Vento saga beginning with “The Non-Virgin Islanders”, 3/13/11, to “Catching Up,” 9/30/13.

Again I echo the words of the late great Jimmy Doohan to William Shatner, as the Starship Enterprise once more is becalmed in The Silence That’s Eternal. They’ll always be On Patrol, in my heart and in those of their numberless fans.

But now it’s not Tax Court losing power (see my blogpost “Captain, We’re Losing Power, 5/12/15), but rather the taxpayer representatives of various sorts and degrees who have lost, or will lose, power.

Here’s IRS’s list of how the chosen become powerless. Read and heed, m’lads and lasses.

(POA) Rejection

Form 2848

• Missing Representative and/or Taxpayer signatures or signature dates.  (Page 5 of Form 2848 Instructions gives requirement for the signature and date.)
• Line 3. Acts authorized – Non-specific identification of tax periods (tax matters), i.e. generalizations. Example: All Years, All future periods
  Page 3 of the instructions outlines several acceptable entries for the Acts authorized, description of tax matters field.
  Example: 2012 through 2014 or 2012 – 2014 or 2012, 2013, 2014
• If the Box on Line 6, Retention/Revocation of Prior Power(s) of Attorney, is checked and no copy of the power of attorney is attached to identify the representative that is being retained.
• Missing designation and/or jurisdiction state
• Missing bar license, certification, registration or enrollment number when applicable
• Title of business taxpayer signing the POA not indicated.

Form 8821

• Missing taxpayer signature and/or date. (Page 5 of Form 8821 Instructions provides the requirement for the signature and date.)
• Non- specific identification of tax periods (tax matters), generalizations.
  Example: All Years, All future periods
• Incorrect EIN/SSN for taxpayer.

Form 706

• No representative signature and/or date.

Here’s Judge Ashford with a designated hitter, the rookie showing the old pros how to do it. The case is Roderick M. Campbell & Sandra Campbell, Docket No. 30224-12, filed 6/12/15.

IRS wants partial summary J against Rod and Sandy on the issue of the noncash charitable deduction they want to carry over, as apparently they couldn’t exhaust the deduction previously. And maybe the earlier years are now closed, but the carryover is still on the table.

Howbeit, Judge Ashford tells IRS to follow, in substance, the advice I gave John Crimi and the et als in my blogpost “Stick It,” 2/14/13. More about Crimi infra, as my expensive colleagues say.

IRS claims Rod and Sandy’s appraisal was non-complaint with the Section 170 rules of engagement.

“In particular, respondent [IRS] asserts that the appraisal suffered from at least three defects: (1) the appraisal failed to adequately describe the physical condition of the appraised property (section 1.170A-13(c)(3)(ii)(B), Income Tax Regs.); (2) the appraisal failed to describe the appraised property in sufficient detail to link the appraisal with the property donated by petitioners (section 1.170A-13(c)(3)(ii)(A), Income Tax Regs.); and (3) the appraisal failed to include the taxpayer identification number of the appraiser (section 1.170A-13(c)(ii)(E), Income Tax Regs.).” Order, at pp. 1-2.

Now remember, summary J is issue-finding, not issue determination. So Rod and Sandy get to spill.

“…petitioners argue that they have substantially complied with those requirements, and assuming arguendo, they have not substantially complied, petitioners argue, relying on section 170(f)(11)(A)(ii)(II) and Crimi v. Commissioner, T.C. Memo 2013-51, that their noncompliance was due to reasonable cause and not to willful neglect. Respondent’s motion, as amended, is silent as to these points.” Order, at p. 2.

That’s enough to defeat partial summary J.

But since trial is approaching, let Rod and Sandy, and IRS, put in their facts and then brief substantial compliance and all that other good stuff.

Better Have Evidence and Reasons

As my elder granddaughter has been heard to remark, “because reasons.”

Two out of Tax Court on June 11, 2015, to show that picking up the burden of proof (or showing legally acceptable bases for action) can be more than IRS (or Appeals) can handle.

First up, Denise Celeste McMillan, 2015 T. C. Memo. 109, filed 6/11/15. DC is a horsey type, dressage being her thing, but doesn’t make any money at it.

IRS originally sticks DC with a $457 deficiency based on a retirement account distribution DC took. DC petitions, but later concedes. Meanwhile, IRS unloads $6700 worth of additional deficiency, some of it based on her horsey losses and the rest on her legal fight with her HOA.

But IRS raises the increased deficiency via its answer to DC’s petition. And thereby hangs the tale.

By upping the ante by way of its answer, IRS takes up the burden of proof.

DC spent over $26K tussling with her HOA over misbehaving dogs, and defending herself against criminal charges in connection therewith. And she got off cheap; I’ve seen such fights cost a lot more, even without the criminal charges.

Judge Halpern gives DC half the legals. DC claims 50% home office use of her condo unit (DC is running an IT business that does make money), and IRS didn’t challenge that. And the dog wars did impact DC’s use of the condo unit both for living and working.

IRS wins on the horse, but it’s a squeaker. IRS bested DC in prior years, but can’t use collateral estoppel, as the burden of proof has shifted from DC to IRS. Failure of one side’s proof in a prior case doesn’t give the other side a win in a subsequent case.

I won’t weary you (or me) with Judge Halpern’s trudge through the Section 183 hobby loss factors. Most are neutral, because IRS can’t tip the scales with the evidence it has. Judge Halpern seems to go with DC’s substantial income from her IT business coupled with how much she loves horses. See my blogpost “Too Much Fun, “ 12/31/13.

Next is Quality Software Systems, Inc, 2015 T. C. Memo. 107, filed 6/11/15.

QSS had an OIC that it potentially breached a few times, and finally breached to the extent of a late Form 941 filing, and late payment of a $344 penalty, in the last year of its five-year term.

The OIC was based on collectibility, and IRS took a $208K hit. The deal was that QSS remained current for five years on all 941 filings and payments.

Except QSS didn’t. Judge Halpern has a table showing various QSS miscues over the years, that earn QSS various types of  “default letters”.

Judge Halpern expatiates: “With respect to OICs, the IRS uses the term in two different ways: (1) as modified by the adjective ‘potential’, to signify that a taxpayer is not in compliance with his obligations under an accepted OIC but that the IRS is not ready to terminate the agreement, see, e.g., Internal Revenue Manual (IRM) pt. 5.8.9.3(1)(b) (Jan. 1, 2015), and (2) to signify the termination of the agreement, see, e.g., id. pt. 5.8.9-4 (Sept. 23, 2008) (Default Letter).” 2015 T. C. Memo. 107, at p. 4, footnote 1.

Finally, IRS pulls the plug on QSS’s OIC, and hits QSS with a NFTL for the $208K.

QSS claims it didn’t get the default letter that triggers the NFTL. QSS later comes clean with the Form 941 it missed and the $344 penalty associated therewith, after the NFTL and their CDP request.

The only issue at the CDP was whether nonfiling one quarter and late paying a $344 penalty should torpedo the OIC.

The SO found that all technical requirements were met, but thought it excessive to cancel the OIC just because of the one quarter and the penalty.

QSS says it’s an abuse of discretion to dump the OIC for one little misstep.

IRS says they and Appeals have a consistent policy that once an OIC is breached, they won’t reinstate. Even though they could as a matter of contract law, they don’t have to.

And the OIC says it can be terminated without notice, so whether QSS got notice is immaterial.

QSS breached four times before, and got qualified default letters. Five times is enough.

Judge Halpern agrees. IRS was within its rights to terminate the OIC.

OK, but what about reinstatement?

“The notice of determination states only: ‘Your request for reinstatement of your offer in compromise has been denied. It was determined that you did not comply with the compliance terms and provisions of Form 656, Offer in Compromise.’ The [SO] attachment to the notice offers no further explanation. Mr. [SO] ‘s case activity record, part of the administrative file, indicates his sympathy for reinstating the agreement. …he recorded: ‘I agree that a reinstatement of the TP’s offer is a viable resolution’. Shortly thereafter, on the basis of a discussion with someone in the COIC Unit, he recorded his conclusion that, because the agreement had been terminated, there was no procedural basis for reinstatement.” 2015 T. C. Memo. 107, at p. 18.

But the SO really wasn’t happy about dumping the OIC. “It had been terminated during the last year of petitioner’s five-year compliance term because petitioner had been assessed a Federal tax deposit penalty of $344, which it had paid, and it had not timely filed Form 941, for one quarter, which it had subsequently filed. He recorded his concerns that those breaches of the agreement were de minimis and had been rectified. He worried that, for those reasons, the Tax Court would find that Appeals had abused its discretion in not reinstating the agreement. He concluded his [case activity summary]… entry with a rhetorical question (which he answered): ‘Essentially, would it be fair to reinstate the TP’s offer? In this instance I believe it would be.’ On further consultation with an Appeals colleague, he concluded that reinstating the agreement was not an option since the agreement had properly been terminated. The determination followed.” 2015 T. C. Memo. 107, at p. 19.

You can see where this is going.

“While there may be good reason for Appeals’ blanket rejection of the reinstatement of OIC agreements in cases of breach, we cannot tell that from the record or from respondent’s argument. It is not even clear such a policy exists despite Mr. [SO]’s determination and respondent’s contentions on brief. Cf. Trout v. Commissioner, 131 T.C. at 255 (‘The Appeals officer understood * * * that he had the discretion to excuse the breach of the express condition and reinstate the OIC. He chose not to.’).

“If such a policy does exist, it is not readily apparent what reasons or principles justify the lack of an exception to reinstatement in all circumstances of breach, especially given the individualized analysis afforded the initial termination decisions of breached OIC agreements. See, e.g., IRM pt. 5.8.9.3 (Jan. 1, 2015) (procedures for handling breached but not yet terminated OIC agreements, referred to as ‘Potential Default Cases’); supra pp. 4-5 (petitioner breached several times yet respondent did not terminate the agreement). And if there are no reasons or principles justifying the policy, we point out that one definition of ‘arbitrary’ is, ‘determined by chance, whim, or impulse, and not by necessity, reason, or principle’. The American Heritage Dictionary of the English Language 91 (5th ed. 2011). By having discretion to reinstate OIC agreements, but choosing never to exercise that discretion, without providing any sort of justification, Appeals may be abusing its discretion. In this instance, Appeals has excused itself from stating facts and reasons that respond to the evidence and arguments of petitioner and has deprived us of the opportunity for thoughtful judicial review.” 2015 T. C. Memo. 107, at pp. 20-21.

So, Appeals, it’s back to you. Tell us why you have an inflexible rule, or why this case deserves the treatment it got.

Oh, by the way, didn’t the SO talk to COIC? Isn’t that a prohibited communication per Rev. Proc. 2000-43, sec. 3, Q&A-6, 2000-2 C.B. 404, 406, amplified, modified, and superseded by Rev. Proc. 2012-18, sec. 2.03(10)(a), 2012-10 I.R.B. 455, 460?

Clearly today is a one-off in Tax Court.

Just as Ch J Michael B. (“Iron Mike”) Thornton deals with Rhonda D. Harrell’s amendments (to her untimely petition and her 1040), q.v. my blogpost “I Must Make Amends,” 6/10/15, here’s The Great Dissenter (honorifics omitted as it’s been a long day), His Honor Judge Mark V. Holmes, with Scott Kimrey Goldsmith, et al., Docket No. 13335-12, filed 6/10/15, a designated hitter also dealing with an amendment.

Scott Kim is just as far out of luck as poor Rhonda, although Scott Kim’s medical situation is not at issue.

Trial is set for June 15. Scott Kim moves to dismiss and to amend (there are two companion cases by the way, involving Scott Kim and his company).

“The proposed amended petitions are very similar to the current petition. Respondent [IRS] points out that they add no new issues, but do change some of the amounts that petitioners claim that they can prove. Tax Court Rule 41(a) provides that when more than 30 days have passed after an answer has been served, ‘a party may amend a pleading only by leave of Court or by written consent of the adverse party, and leave shall be given freely when justice so requires.’ Respondent points out that granting the motion would restart the clock on another answer – requiring yet another continuance in these thrice-continued cases. He also states that the amended petitions raise no new issues, so the failure to allow the amendment will in no way impede petitioners from presenting their cases. The Court will therefore deny this motion.” Order, at p. 1.

Any thought to post-trial motion conforming pleadings to proof, if the only issue is the numbers? If IRS admits it’s not so ambushed by the new numbers as to be unable to defend, go for it. And remember Rule 41(b) tried-by-consent.

As for the motion to dismiss, that’s a head-scratcher. Nothing new here.

“Petitioners’ motion to dismiss for lack of jurisdiction is based on their assertion that ‘assessments by Respondent were made more than three (3) years after the applicable tax returns were filed,’ plus various doctrines of estoppel and preclusion. The statute of limitations and these other doctrines are all defenses to a determination of a deficiency (and oddly, defenses not pled by either petitioner), not a ground to dismiss for lack of jurisdiction.” Order, at pp. 1-2. (Citations omitted).

Bad day for Scott Kim.

Off-Topic

I’ve said often enough that this is a non-political blog. Partisan politics are so toxic that they have infected all political discourse, and I have no desire to pour more pollutants into an already filthy mix.

But I must again weary my readers with a political statement.

The assault on net neutrality goes on apace. The free and open and neutral internet is David’s slingshot against giants much more powerful than he who stood “six cubits and a span.”

We have lawsuits from those who would strangle free speech (and profit thereby), and “free trade” agreements (the most closely-guarded documents since the plans for the Normandy invasion) featuring international arbitral panels subject to no laws and no appeal (anyone remember “He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation”?).

I’m not picking on one party or bloc over another, as both major parties, and all, or almost all, blocs, are complicit.

But I am constrained to warn—those who do not defend their rights will soon have none.

No, not the last recorded words of the late great Janis Joplin from her 1970 appeal for divine transport. Rather, this is the story of Rhonda D. Harrell, Docket No. 21618-14, filed 6/10/15.

Rhonda had sent in an imperfect petition and no filing fee. When bounced for not responding to Tax Court’s order to file an amended petition and pay the sixty bucks (or get a waiver), Rhonda sent in an amended petition and the sixty bucks.

Rhonda was reinstated (the order dismissing for want of jurisdiction being vacated).

But Rhonda isn’t home-free. Though her reinstatement might be timely, her original non-petition was postmarked two days late.

Even though Rhonda said she had “a series of serious health issues involving hospitalizations and admission to a skilled nursing facility,” and even though Rhonda sent in an amended petition and a Form 1040X showing what she believed her correct tax to be, Rhonda is out of luck.

Here’s Ch J Michael B (“Iron Mike”) Thornton with the bad news.

“…while the Court is sympathetic to petitioner’s situation and understands procedural confusion that may have ensued here, and the challenges imposed by petitioner’s medical issues, the fundamental nature of the filing deadline precludes the case from going forward. As a Court of limited jurisdiction, the Court is unable to offer any remedy or assistance when a petition is filed late. Rather, the Court is barred from considering in any way petitioner’s case or the correctness of her claims. Unfortunately, governing law recognizes no reasonable cause or other applicable exception to the statutory deadline, and the allegation that the original petition… was sent two days late remains unrebutted.” Order, at pp. 2-3.

Moreover, “…the timely filing of an amended petition has no bearing on the timeliness of the original petition. While an amended petition can ratify or correct a timely but imperfect original petition, it relates back in time to the original petition. It cannot reach back farther than the original petition to some period before expiration of the statutory filing deadline. Unless that fundamental deadline is met by at least the original petition, the Court simply is unable to hear or otherwise consider the case, regardless of the timeliness of any subsequent documents filed in the matter.” Order, at p.3.

Ya can’t amend the clock back.

And while Rhonda is to be commended for trying to get right with IRS by filing an amended return, “…it must be stressed that the tax returns are required to be filed with the Internal Revenue Service (IRS) and not with the Tax Court. The Tax Court is entirely separate from the IRS, and no law grants the Court an ability to process returns. If petitioner has not already done so, she may wish to consider submitting her Form 1040X directly to the IRS.” Order, at p. 3.

So Rhonda is out.

I spoke of Tax Court practice as allowing IRS to shoot very large fish in a very small barrel. See my blogpost “Adelbert, Thou Should’st Be Living At This Hour,”4/5/13.

This is just one more instance of the sixty-buck-ticket-to-justice being anything but. What is supposed to be a court to help the small taxpayer find independent judgment turns out to be an ambush. Or, what is worse, a playground for rounders.

It’s not the Court’s fault, or IRS’s (although both take advantage of the situation). It’s Congress’s fix, if that institution is capable of any rational activity whatsoever.