No, not Nat Hawthorne’s 1850 New England morality play. Today, Judge Laro has more bad news for Bradley C. Reifler and Nancy Reifler, 2015 T. C. Memo. 199, filed 10/13/15.

The facts are a replay of 2013 T. C. Memo. 258, filed 11/13/13. I didn’t blog that case then, and I can’t claim clairvoyance that it would resurface today. Judge Halpern bounced Brad’s and Nan’s SOL defense on equitable estoppel grounds.

Brad and Nan cave on the deficiencies they tried to erase back in 2013, but want to fight the late-filing chop on grounds of substantial compliance and tacit consent. Judge Halpern only mentioned them then, so that’s dicta, but Judge Laro isn’t buying either.

As regards substantial compliance, Nan never signed the original joint return their trusty accountant prepared. Brad did, didn’t date the return and mailed it in.

IRS bounced the return with a large red “S” on page two, hence the title of the blogpost. Now the bounced return was supposed to be accompanied by other documentation, which Brad and Nan don’t remember getting. Howbeit, Brad never mentioned the bounce to the trusty accountant, but years later whited out the scarlet letter, copied the page, had Nan sign, and sent it in.

Brad and Nan claim the first iteration of the return was substantial compliance. No, says Judge Laro, signing under penalty of perjury is an essential element of an honest attempt to comply with law, the basis of all substantial compliance. The only exceptions are sick or disabled spouse, or properly filed POA.

“Tax law is complex and confusing to most of us. Sometimes it is appropriate for the courts to clarify the subtleties of statutory and regulatory provisions. The requirement of a signature on a tax return, however, is not one of those issues. It would be inappropriate for this Court to use its power to create a potentially unlimited exception to a well-established and fairly simple rule. “ 2015 T. C. Memo. 199, at p. 17.

Ya gotta sign it for it to be a return. And joint means both spouses. Judge Laro has a bushelbasketful of cases saying so.

As for tacit consent, that’s only where joint and several liability is at issue, and here it isn’t.

Whether a spouse who didn’t sign a return nevertheless consented to it raises too many questions.

“Petitioners’ argument that it is the intent of the spouses that counts when it comes to filing tax returns is somewhat tempting in that it would allow us to resolve the case before us easily. However, as discussed above, a signature under penalty of perjury has additional significance when it comes to determining the issue of liability for any unpaid taxes or related penalties. It would be unfair to expose a nonsigning spouse who never intended to sign a joint tax return to the burdens of litigation that could span many years when that spouse did not in fact attest to the veracity of the statements on the tax return. We believe the intent to file a joint return is different from signing a document under penalty of perjury, and the two do not supplement or replace each other. Using the tacit consent doctrine in cases when a tax return is rejected by the Commissioner for lack of compliance with the most basic requirements would only create chaos.” 2015 T. C. Memo. 199, at p. 26.

IRS claims administrative regularity as regards mailing the explanatory documents with the bounced return, but Judge Laro needn’t go there. Brad is a sophisticated businessperson who never had a return bounced before, and who has always consulted his trusty accountant on tax matters. Here he did nothing, and his trial testimony was vague and unconvincing.

But the ultimate fact is he whited out The Scarlet Letter before submitting the return late.

For the backstory on this title, see my blogpost “A Klug Zu Columbus’n,” 10/13/14.

But here, as I’m sitting in the lobby of the Hotel Beethoven in Vienna, trying to get Sir Andrew acclimatized to the Austrian Internet while listening to selections from Fidelio (a blessed relief from the nonstop elevator music in Germany and the Czech Republic), I forgot that Tax Court is off for the Columbus Day (or Indigenous Peoples’ Day) holiday.

Wherefore, there will be no discussion today of the foibles of taxpayers and the IRS. Just a reminder that Tax Court is recruiting for a Clerk of the Court and for some STJs. So if you’re off for the holiday and looking for something to do, head for the Tax Court homepage (ustaxcourt.gov) and fire off your resume. But remember: “Exceptionally well-qualified persons will be considered for these positions.” The rest of us duffers need not apply.

No, not a religious discussion; this blog deals with taxes, and that’s a sufficient source of argument and dissension.

Today’s story is about a corporation who (not which; remember, corporations are people) loses its powers but revives them.

It takes place in LaLa Land, and who better to tell the tale than The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a the Irrefragable, Indefatigable, Illustrious, Imperturbable and Implacable Foe of the Partitive Genitive, Judge Mark V. Holmes?

Here’s Kerio Solutions, Inc., Docket No. 15966-14, filed 10/9/15.

Kerio got a SNOD, timely petitioned, and then CA revoked its privileges, whereupon IRS moved to dismiss.

But Kerio got itself reinstated as soon as it got IRS’ motion to dismiss.

I wish we could reinstate so fast in NY; our Sec’y of State seems to delight in playing put-and-take with Taxation & Finance over past franchise and corporate taxes, interest and penalties, so that the wannabe reviver feels like the ones addressed by a much more exalted personage thus: “Truly I tell you, you will not get out until you have paid the last penny.”

Howbeit, here’s Judge Holmes: “We’ve previously dismissed a case where the suspended California corporation couldn’t continue to litigate. Nt, Inc. v. Commissioner, 126 T.C. 191 (2006). When we dismissed Nt, Inc.’s case, however, it was still suspended. Id. Kerio in contrast moved quickly to get itself unsuspended once the Commissioner moved to dismiss its case. Because Kerio has been reinstated by the Board and the respondent makes no other arguments for dismissal, we hold that Kerio can continue to prosecute this case.” Order, at p. 2.

Judge Holmes didn’t pick up on John Hom’s predicament; see my blogpost “Being and Nothingness,” 5/7/13.

John got revived on the eve of trial, but Judge Cohen dumped him because his defunct corporation wasn’t revived when he petitioned.

Takeaway– Check your State’s corporation laws, and get revived if you need to. Before you petition.

The BeeGees described their thus-entitled 1977 hit (number 189 on Rolling Stone’s top 500) as “a victory just to survive. But when you climb back on top and win bigger than ever before, well that’s something everybody reacts to everybody.”

Well, that’s Kenneth William Kasper’s song. Ya gotta remember Kenneth William for sure. What, you don’t? Get with the program, as we used to say many years ago.

And to help you out therewith, check out my blogposts “IRS Loses a Double Header,” 7/12/11, and “Cain’t Say No,” 8/19/14.

Now that y’all are up to speed, Kenneth William is battling on, and IRS is tied in knots, going for summary J and losing in Kenneth William Kasper, Docket No. 6748-13W, filed 10/8/15, The Judge With a Heart, STJ Armen, doing the tying.

IRS moves for summary J, as aforesaid.

“Respondent’s [IRS’] motion includes numbered paragraphs making various factual assertions. These paragraphs include references to various documents identified as exhibits and attached to respondent’s motion. However, the factual assertions in the numbered paragraphs of respondent’s motion are not supported by a declaration of the type described in Rule 121(d), Tax Court Rules of Practice and Procedure. Statements in briefs do not constitute evidence. See Rule 143(c), Tax Court Rules of Practice and Procedure. Similarly, the exhibits attached to respondent’s motion have not been properly authenticated as required by Rule 901 of the Federal Rules of Evidence. In addition, those exhibits would appear to be hearsay under Rule 801, Federal Rules of Evidence, and respondent has failed to show that they qualify as an exception under Rule 803(6) or (8), Federal Rules of Evidence, or any other exception. Therefore, neither the factual assertions in the numbered paragraphs nor the attached exhibits are admissible evidence, and they cannot be relied on by this Court in considering respondent’s motion. It follows that respondent’s motion is not ‘supported’ as required by Rule 121(d), Tax Court Rules of Practice and Procedure.” Order, at pp. 1-2.

It looks like a bad day for the 1111 Constitution Ave NW gang. And it doesn’t get better.

“Even if the Court were to consider respondent’s documents identified as exhibits, the Court would nevertheless deny respondent’s motion. Drawing factual inferences against respondent as the moving party, the Court concludes that there are material issues of fact in dispute. In particular, with respect to what respondent’s documents refer to as claim numbers 20013-003164 [sic], 2013-003165, 2013-003176, 2013-003196, 2013-003197, and 2013-003198, questions remain as to whether respondent undertook an administrative examination of the taxpayers, whether such examination was initiated on the basis of or aided by the information provided by petitioner, and whether any proceeds were collected as a result of the examination. See I.R.C. sec. 7623(b). Further, the attachment to the Form 11369, Confidential Evaluation Report On Claim For Award, is irrelevant. It references claim number 2013-003163; however, no determination appears to have been issued with respect to that claim. As follows from the foregoing, summary adjudication is not appropriate.” Order, at p. 2.

Throwing paper at STJ Armen doesn’t work unless the paper is authenticated and says something to the point.

Motion denied, with prejudice. For you civilians, that means IRS can’t try summary J again.

They have to try the case. That means the Ogden Sunseteers gotta dish, and dish good.

Pro se Kenneth William gets a Taishoff “well done, first class.”

No, not insurance. In this case Ch J Michael B (“Iron Mike”) Thornton has no time for IRS’ underwriting in W. A. Payne, Jr., Docket No. 1070-09, filed 10/7/15, today’s designated hitter.

W. A. was a Virgin Islander. When he settled with IRS six years ago, and the stipulated decision was signed by Ch J. Iron Mike (a decision in Tax Court is what we State-courtiers would call a judgment), a paragraph or two was written into the decision below Ch J Iron Mike’s signature, a practice that does not sit well with Ch J Iron Mike.

In the stipulated decision above Ch J Iron Mike’s signature, W. A. and IRS stipulated that W. A. had a $91K overpayment of tax.

In the underwriting, the parties agree W. A. got a $91K refund from the USVI even though his US withholding of $131K was never transferred from IRS to the USVI BIR. But nevertheless IRS will credit W. A. with the $131K withholding, and W. A. is entitled to nothing else for that year.

IRS never refunded the $91K, but first credited the $91K to W. A., and later moved it to an Excess Collection Account. So W. A. never got a break on his taxes or a refund.

But the underwriting is IRS’ ace in the hole.

IRS claims W. A. got paid by USVI, and so US owes W. A. nothing.

Ch J Iron Mike: “In the first place, the stipulations appearing below the undersigned’s signature on the decision document are not part of the Court’s decision and do not alter the Court’s determination that petitioner has a $91,995 overpayment….” Order, at p. 2.

The takeaway is so obvious that I will not mention it. This blogpost’s title says it all.

But Ch J Iron Mike isn’t finished. Here’s why the underwriting is defective, no matter where it shows up.

“In any event, the stipulations do not compel the result respondent seeks. In arguing that this transfer was made pursuant to the authority granted to respondent by section 6402, respondent speculates that the United States Virgin Islands could, hypothetically, request that the funds be remitted as ‘cover over’ under section 6402(e), in which event this Court would have no jurisdiction to restrain or review any such credit or reduction. See sec. 6512(b)(4). But respondent concedes that there has in fact been no credit or reduction of petitioner’s overpayment pursuant to section 6402. Accordingly, respondent’s speculations do not affect this Court’s jurisdiction over this matter pursuant to section 6512(b)(1), nor do they affect our determination in the stipulated decision that petitioner has a $91,995 overpayment….” Order, at pp. 2-3.

And IRS’ reliance on the “nothing else” language in the underwriting must be read with IRS’ agreeing that W. A. had the $131K withholding but never got credit for $91K.

So, IRS: “Respondent has offered no meaningful reason for now refusing to give petitioner credit for the $91,995 balance of his …withholding, consistent with the Court’s decision and the parties’ stipulation. Pursuant to section 6512(b)(2) this Court has jurisdiction to order the refund of such overpayment and interest.” Order, at p. 3.

So, notwithstanding Judge Gustafson’s statement in my blogpost “We Don’t Need No Stinkin’ Badges,” 4/2/14, that “the undersigned judge is unaware of any grant to the Tax Court of jurisdiction to compel any agency to cut a check or to give it directions in doing so”, not only does Ch J Iron Mike have jurisdiction, but he orders IRS to process the refund “immediately.” With interest.

That’s the lesson Judge Goeke has for William J. Kardash, Sr., Transferee, 2015 T. C. Memo. 197, filed 10/6/15. Bill and his pal Chas. Robb are fighting old battles o’er again, on a Rule 161.

Will and Chas. lost back on March 18 this year on a Section 6091, to do with a deferred (or maybe not deferred) compensation plan, so they’re trying reconsideration.

And they get reconsideration, but all that gives them is a Rule 155 beancount, because even though they’re right to an extent, all that does is massage the numbers.

Judge Goeke: “Petitioners contend that the Court erred in valuing FECP’s [the corporate vehicle] solvency by relying on petitioners’ expert’s high estimates of FECP’s tax liabilities instead of the Federal income tax liabilities as stipulated by the parties. Although petitioners did not initially agree to and stipulate the liabilities that respondent’s expert determined, we agree with petitioners that respondent’s estimates should have been used. Moreover, petitioners point out that the Court erred when stating Dr. Shaked’s business enterprise value for the valuation date December 28, 2005.” 2015 T. C. Memo. 197, at pp. 7-8.

You remember Dr. Israel (“Bring Home the Bacon”) Shaked, the star of my blogpost “The Scottish Play,” 6/19./12.

If Dr. Israel Shaked’s too high valuation is scrapped, the corporate vehicle wasn’t insolvent in the year at issue.

But that’s not the point, says Judge Goeke, although it’s the point of this blogpost.

Turning to State law (FL), “(A)lthough we now find that FECP was solvent during 2005, the transfers were still constructively fraudulent because they were part of a series of transactions that led to the insolvency of FECP. Therefore, we find that the transfers beginning in 2005 were fraudulent because the transfers were not for reasonably equivalent value and FECP became insolvent as a result of the series of transfers.” 2015 T. C. Memo. 197, at p. 10.

Will argues he paid income tax on some of what he got, so it’s unfair to hit him for the full liability. Maybe so, says, Judge Goeke, but that’s your problem, not mine.

“Mr. Kardash alleges that he is entitled to credits against his transferee liability for taxes paid on transfers as reported dividends. Mr. Kardash argues that the Government would receive an inequitable windfall if we refused to credit him with the amounts of tax he paid on the transferred amounts in 2005, 2006, and 2007. Reconsideration under Rule 161 is not the proper avenue; section 1341 is the appropriate remedy for Mr. Kardash in this situation.” 2015 T. C. Memo. 197, at p. 11.

Bottom line: Insolvency goes step by step.

I chose a small-claimer, Richard Irwin Wideman and Kristina Novak, 2015 T. C. Sum. Op. 61, filed 10/5/15, over a T.C. Memo of even date therewith, because of the way STJ Lewis (“Spell It Right”) Carluzzo deals with the Section 6662(a) accuracy penalty.

Here, both sides made substantial concessions post-deficiency and pre-trial, but IRS wanted the 20% chop computed using the entire deficiency (pre-concession).

“In his pretrial memorandum respondent [IRS] argues that petitioners ‘have failed to present respondent with sufficient information or documentation to substantiate reasonable cause or show that the understatement of tax… was not the result of negligence or disregard of rules of regulations.’ Respondent’s pretrial memorandum goes on to acknowledge his burden of production under section 7491(c) and argues that his burden has been satisfied because petitioners ‘have not complied with all substantiation requirements or maintained all records under the Code’.” 2015 T. C. Sum. Op. 61, at p. 14.

And Richard Irwin’s records were scanty at best on the points in dispute, and maybe even not so great on the conceded ones.

But IRS did concede a lot, so on those points how bad could Richard Irwin’s records be? True, Richard Irwin’s telephone deduction is not greater than IRS allowed because of the one-line-for-home-office rule, his miscellaneous expense deduction is shot down as entirely unexplained, and his casualty loss (or as mutated by Richard Irwin, a lawyer not admitted in Tax Court, into a loss of property used in a trade or business) is rejected on the law.

Shouldn’t the items Richard Irwin conceded be the only ones in the base for computing his accuracy (negligence) chop?

STJ Lew agrees.

“We are mindful that the failure to keep adequate records to substantiate expenses underlying claimed deductions can support the imposition of the section 6662(a) accuracy-related penalty on the ground of negligence, see sec. 1.6662- 3(b)(1), Income Tax Regs., but, for the most part, we agree with respondent only with respect to those adjustments petitioners conceded. With the exception of the deduction for miscellaneous expenses, the disallowances of the deductions addressed in this opinion are based upon technical reasons rather than lack of substantiation. We can envision a case where the mere disallowance of a deduction on a technical ground, in and of itself, could give rise to the taxpayer’s liability for a negligence penalty, but this is not that case. Petitioners are liable for a section 6662(a) penalty, but only with respect to the underpayment of tax attributable to: (1) the adjustments they otherwise conceded and (2) the disallowance of the deduction for miscellaneous expenses.” 2015 T. C. Sum. Op. 671, at pp. 14-15.

Takeaway– Concessions can reduce penalties. So can disallowances based upon the law alone.

And Then There Are Motions

IRS can dream up some good motions, but here’s one that really sets a high bar. It involves an old acquaintance, Marvel Thompson.

Remember Marv? Well, if not, check out my blogpost “Holding?”, 12/8/14. Now you remember Marv was fighting a levy for interest IRS claims he owed, but he claims he couldn’t pay the underlying tax timely because the US Marshals Service grabbed all his cash.

Marv was serving a 45-year stretch in the Fed pen. And he’s still there, and likely to be going no place soon.

Well, IRS, denying that the US Marshals’ grab in any way causes an abatement of interest, has a new twist, and it’s a beauty. The case is on for trial later this month.

I’ll let that Obliging Jurist, Judge David Gustafson, tell the story.

“…respondent (the IRS) filed a pretrial memorandum that states, ‘Respondent plans to file a Motion to Dismiss for Lack of Prosecution in the event that petitioner or his representative fail to appear at the trial calendar’, but that also states, ‘Petitioner is currently incarcerated in Federal Prison and is carrying out a 45 year sentence.’ The Court assumes that Mr. Thompson will not appear…; but without prejudging a motion not yet filed and explained, the Court considers it unlikely that it would dismiss this case on a motion filed by the Federal Government complaining that petitioner failed to appear before the Tax Court because the Federal Government is holding him in prison. It is therefore

“ORDERED that respondent consider using the available time to prepare not a motion to dismiss for failure to prosecute but rather a motion for summary judgment, since it may be that some or all of the issues in this case involve no genuine disputes of material fact and could be addressed by the parties filings, without requiring Mr. Thompson’s appearance in person.” Order, at p. 1.

Judge Gustafson is clearly a gentle human being. If I were the Judge…but no, that’s why I could never be a judge.

I almost forgot, because it’s nearly 2 a.m. here in Berlin. The order is Marvel Thompson, Docket No. 29498-12, filed 10/2/15.

The exclusions from taxable income of IRA distributions are few and narrow. There are no hardship exceptions, or medical expense exceptions except for expenses paid by taxpayer, for self, spouse or dependent, and then only to extent exceeds the 7.5% or 10% AGI limitation. And while reliance on expert may save taxpayer the penalties, it will not save the tax.

Here’s another example on a dull day, Cheryl Lynn Ireland, 2015 T. C. Sum. Op. 60, filed 10/1/15.

STJ Daniel A. (“Yuda”) Guy tells the story.

Cheryl Lynn is under the 59-1/2 plateau. Thus the Section 72(t) additional tax on her IRA distribution she used to pay her son’s medical expenses.

The problem is her son isn’t a dependent. “Likewise, section 72(t)(2)(B) limits the imposition of additional tax to the extent that retirement plan distributions do not exceed the amount allowable as a deduction under section 213 (i.e., ‘the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152 * * *)’). The record reflects that petitioner did not claim her son as a dependent for the year in issue and fails to demonstrate that her son met the definition of a dependent provided in section 152.” 2015 T.C. Sum. Op. 60, at p. 6.

Cheryl Lyn said her accountant told her it was OK to leave out the IRA distribution. That’s definitely a “no go.”

“Petitioner’s alleged reliance on the mistaken advice of her accountant does not excuse her from the obligation to include the IRA distribution in her taxable income for the year in issue or to pay the appropriate amount of Federal income tax and additional tax related thereto. See United States v. Boyle, 469 U.S. 241, 252 (1985); De Aycardi v. Commissioner, T.C. Memo. 1997-308, slip op. at 7-8 (‘Reasonable reliance on an agent may constitute a possible defense to penalties but not to the underlying tax [liability].’).

“Petitioner maintains that it would be inequitable to hold her liable for the additional tax due. We have considered similar claims in the past and have observed that there is no authority in the Code, the legislative history, or caselaw for a general financial hardship exception to the imposition of the 10% additional tax on early distributions.” 2015 T.C. Sum. Op. 60, at p. 7.

Tax Court doesn’t rewrite the law, Cheryl Lynn.

Sitting in Copenhagen Lufthavn on my way to Berlin, with another hour’s layover, I peruse a fine example of Judge Halpern’s inventiveness, as he finds jurisdiction to review a CDP where taxpayer only received the Section 6303 notice years after the nonpayment of payroll withholdings, deftly avoiding the taxpayer’s SOL defense, finds the AO blew it on additional taxes, but sustains colleciton for most of the rest.

After a night upright and cramped on a Boeing 787 Dreamliner (no dreams for me), I may misstate some of Judge Halpern’s finer points, but you can read all about it in Scott Labor, LLC. 2015 T. C. Memo. 194, filed 9/29/15.

Scott was out of business for the last year at issue, but still owes for the previous years because its managing members, Scott Borre and Mrs. Borre (apparently she has no other name) overstated advance earned income credits.

This even though the Borres were personally audited for one of those years with no change, and even though Scott Labor is a disregarded entity, and even though the NITL was sent to the disregarded entity at the wrong address.

The previous audit doesn’t estop IRS. And if a previous notice went to the wrong address, the Borres got the later notice and timely petitioned before IRS started collection proceedings.

And as to the nature and requirements of the Section 6303 notice, see my blogpost “Jet Lag?” 12/19/11. How appropriate that Judge Halpern cites the Nakano case.

The AO got confused and confounded by the separate IRS service centers and their dubious records, so the Borres duck most of the penalties and additions to tax.

But they do owe some tax, so it’s off to a Section 155 beancount.