A sequel of sorts to the 1976 Woody Allen – Zero Mostel movie now generally forgotten is Jason Chai, 2015 T. C. Memo. 42, filed 3/11/15. It’s a reprise for Jason on this blog, as he featured in my blogpost “The Silt We Stir”, 2/13/15, jousting about whether an incomplete TEFRA partnership jumpball knocks out IRS’s tenfold boost in Jason’s deficiency.

Jason won that one, but was it a Pyhrric victory? Stay tuned.

Judge Cohen relegated Jason and IRS to fight about whether the $2 million Jason got from buddy Andrew Beer via Delta Currency Trading, LLC, was nonemployee compensation and subject to SE tax.

Jason was a Harvard MA in architecture. Andrew was a Harvard BA and MBA. You can see what is coming.

Andrew manufactured phony shelters using the marriage of high-gain taxpayers with currency straddles. These are all variations on son-of-BOSS, offsetting huge gains with recognized losses offset by unrecognized gains, without an economic substance in sight.

Andrew married Jason’s cousin, and Jason camped out with Andrew for a while. Andrew needed someone to act as counterparty to his shenanigans, and Jason was his man.

Jason was frequently a visitor to Andrew’s office, signing away his life, fortune and sacred honor as partner in any number of fiddles, and receiving a piece of the bounty bestowed on Andrew by his tax-dodging clientele.

IRS ended the party with Notice 2002-50, 2002-2 C.B. 98, and Notice 2002-65, 2002-2 C.B. 690. These made Andrew’s little fiddles into listed transactions, non-reportage of which invoked monumental penalties, and reportage of which invoked the Audit From Heck.

IRS tried to stick Jason with deficiencies for the monumental phony losses he claimed, but, as shown in my blogpost aforementioned, that was a nonstarter in this case.

Delta Currency Trading, LLC, Andrew’s flagship, told Jason that the $2 million bonus he got was going to be reported on a 1099-MISC. This is the electronic equivalent of having a large bull’s-eye painted on a tender portion of your anatomy.

Jason never bothered to tell his trusty CPA, Stephen Ellspermann, about the 1099-MISC, but instead claimed it was all on the K-1 Jason got from Delta. Except it wasn’t. So it never got reported.

Jason played the Section 6201(d) gambit. When income is reported on a third-party form, a taxpayer may challenge it, and then IRS “bears the burden of producing reasonable and probative evidence, in addition to the information return, concerning the deficiency attributable to that item.” 2015 T. C. Memo. 42, at p. 13.

IRS has the reasonable and probative evidence, because the Delta traders are rolling on Andrew, and spilling every legume they can find. And their hearsay e-mails get admitted, to show Jason knew about the 1099-MISC.

Jason claims return of capital (but can’t show he invested Penny One in Delta or any of its progeny) or gift, because his role in all the goings-on was minimal.

His buddy Andrew nails down that coffin lid. “Although petitioner attempts to minimize his role in the tax shelters and describes his activities as investments, the record reflects that he provided services to Delta to facilitate the tax shelter transactions. Beer testified that petitioner’s role in the tax shelters was a critical component of the transactions and the tax shelters could not have functioned as planned without petitioner’s participation. Delta could not have allocated noneconomic losses to its clients without petitioner’s acting as the accommodating party. The allocation of $3.2 billion of noneconomic income to petitioner enabled Delta’s clients to reap the benefits of an almost equal amount of noneconomic losses to offset their taxable income. Petitioner’s role was far from nominal.” 2105 T. C. Memo. 42, at p. 15.

And that Jason let the captive LLC that Andrew formed do the signing doesn’t take him off the hook, as he was the one providing the front.

Besides, Jason has been getting bonuses and salary from Andrew before this payment.

Jason’s claim that the $2 million was a gift was characterized by his own counsel as “somewhat far-fetched.” 2015 T. C. Memo. 42, at p.15.

Judge Cohen: “We agree with petitioner’s characterization of his suggestion and the necessity of deciding the case on the evidence, but we reject his conclusion. A gift results from a detached and disinterested generosity motivated by affection, respect, admiration, charity, or the like. Commissioner v. Duberstein, 363 U.S. 278, 285 (1960). The record is devoid of any evidence suggesting that the payment resulted from detached and disinterested generosity. Rather, the evidence establishes that the payor, Delta, intended the payment as compensation.” 2015 T. C. Memo. 42, at p. 24.

Gotta give Jason’s attorneys credit, they’re trying. They play the Section 6751(b) gambit on the penalties. Who signed off on the penalties? See my blogpost “Penalty Kick”, 7/17/14, for more about this.

Doesn’t help, as they raise this on post-trial brief, ambushing IRS. Too bad, guys, it would have gotten you a Taishoff “good try” if you’d raised it sooner.

Anyway, the penalties are sustained, as Jason didn’t level with his trusty CPA Stephen Ellspermann, so no good-faith reliance.

There’s a problem with being the front man; walking point can be hazardous to your tax health.

No, not the Harry Watt 1941 classic reality show starring Perc Pickard and Speedy Powell, both later killed in action with the RAF. No, this is about New York State’s carefully-guided largesse to those who bring investment, development and jobs to the impoverished corners of The Empire State. Our State’s Constitution prohibits direct gifts to corporations or individuals from the State treasury. But politicians, like love, will find a way.

And who better to explicate the bounty targeted by The Capital District to those who bear the goodies to the ruined counties of Our Fair State than The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a the Implacable, Irrefragable, Irrepressible, Indefatigable, Indispensable Foe of the Partitive Genitive, Judge Mark V. Holmes?

Today’s bearers of goodies (and recipients of the not-insubstantial-but-Constitutionally-indirect largesse) are David J. Maines and Tami L. Maines, 144 T. C. 8, filed 3/11/15. And as in my recent blogpost “Nothing Succeeds”, 2/26/15, State law collides with the IRC, and, unlike the Texans, the NYers come off second best.

Judge Holmes here confronts the EZ Investment Credits, the EZ Wage Credits and the even-more-cutesy QEZE Real Property Tax Credit. NYS calls them “credits”, but like EITC, these are refundable. In Dave’s and Tami’s case, as they are partners and S Corp shareholders, the tax benefits flow through to them. The benefits are initially allocated at the entity level, but the K-1s reflect each partner’s (shareholder’s) piece, which can offset their personal State income tax.

But there’s a catch. While the Investment Credit and Wage Credit are solely income tax items, the Real Property Tax credit allows real estate taxes paid by the entity to flow through as income tax credits to the partners (shareholders).

Now TEFRA raises its head, but Judge Holmes pushes it back. The real estate taxes are “affected items”, don’t need any partnership-level slice-and-dice so long as IRS buys the 1065, which it does. So no FPAA, and straight to Dave’s and Tami’s personal return. As a result of the targeted largesse, Dave and Tami wiped out three years’ worth of NYS income taxes. In one year, only half the wipe-out was largesse, the other half nonrefundable credits not at issue here. The other two were all wipe-outs.

“But having done just what New York wanted, the Maineses reaped a bountiful harvest of the New York EZ credits for this period. And because they had little to no state income-tax liability in these years for the credits to offset, the refundable credits led to large ‘refund’ payments from New York to the Maineses.” 144 T. C. 8, at p. 10.

So IRS claims the “refunds” are income, and not refund of NYS income taxes now or formerly paid by Dave and Tami. Enter our old friend the tax benefit rule. If you got a deduction in one year, but the deductible item is reimbursed in another, the reimbursement is taxable, because it wasn’t taxed the first time. Judge Holmes’ example is the bad debt deduction (taken quite properly) in Year One, but in Year Two the formerly deadbeat debtor hits the lottery and pays off the debt. The payback, even though ordinarily not income (repayment of loan principal isn’t income), is taxable because the lender got the Year One tax break. So if you got no tax break (either because you didn’t or couldn’t) in Year One, no income to you in Year Two.

And getting back to Dave and Tami, they never took the itemized deduction for NYS income tax. Judge Holmes: “We have to agree with the Maineses in part. They are correct that New York calls these payments ‘credits’ and that New York says these “credits” are ‘overpayments’ of state income tax. But in truth the Maineses didn’t pay this amount in state income tax.” 144 T. C. 8, at pp. 14-15.

So the key question in this case becomes whether a federal court applying federal law has to go along with New York’s definition. “The Maineses understand the importance of this question, and they argue that if New York State tax law calls these payments ‘overpayments’ we have no power to call them something different.” 144 T. C. 8, at p. 15.

Summarizing all sorts of decisions from the Supremes, “…state law creates legal rights and interests; federal law designates how those rights or interests will be taxed.” 144 T. C. 8, at p. 15.

A Taishoff “good try” to Dave’s and Tami’s attorney. “The Maineses contend that New York’s tax-law label of these excess EZ Credits as overpayments is a legal interest that binds the Commissioner and us when we analyze their taxability under federal law. The Commissioner warns that if this were true, a state could undermine federal tax law simply by including certain descriptive language in its statute. To use Lincoln’s famous example, if New York called a tail a leg, we’d have to conclude that a dog has five legs in New York as a matter of federal law.” 144 T. C. 8, at p. 16. (Citation omitted).

You can see where this is going. Lincoln’s five-legged dog wins best-in-show. “Our precedents establish that a particular label given to a legal relationship or transaction under state law is not necessarily controlling for federal tax purposes.. Federal tax law looks instead to the substance (rather than the form) of the legal interests and relationships established by state law.” 144 T. C. 8, at p. 16. (Citations omitted).

Looking at substance, at least as to the Wage Credit and the Investment Credit, “Neither credit is, in substance, a refund of previously paid state taxes deducted under federal law. They are just transfers from New York to the taxpayer–subsidies essentially.” 144 T. C. 8, at p. 18. The credits never offset tax due from Dave and Tami. For a credit to be nontaxable, it must be used to offset or reduce a tax liability. In these two cases, it wasn’t, entirely.

So whatever didn’t offset Dave’s and Tami’s tax liability is income, and taxable accordingly. And it doesn’t matter whether the State or anyone else paid it. And although Dave and Tami claim exemption on the grounds that the “refunds” were “general welfare payments”, and thus not taxable, they weren’t based on need, so not general welfare, although, as Judge Holmes suggests, critics might call it “corporate welfare”. Anyway, give Dave’s and Tami’s counsel a Taishoff “Oh please”.

But the Real Estate Tax Credit is another story. Those taxes were actually paid, even though the giveback is by way of income tax and not real estate tax. Footnote- in NYS, real estate taxes are paid to municipalities, while State income tax is paid to the State. Here in the Big Apple we also have City income tax. Don’t ask.

But the Sub S Corp got a deduction for those taxes, passed through a lesser distribution to Dave and Tami, who therefore paid less tax. So to the extent Dave and Tami benefited from the deduction of real estate taxes on their 1065, which flowed through to them on their K-1s, any Real Estate Tax Credit is taxable now to that extent. “It is of no consequence that it was [the S Corp] that paid and deducted the property taxes while it is the Maineses who are receiving the refundable credit. The Maineses needn’t have been the ones that personally claimed the earlier deduction if their tax-free receipt of the credit is fundamentally inconsistent with the earlier tax treatment.” 144 T. C. 8, at p. 28.

Judge Holmes is a New Yorker, according to the Tax Court website.

Life insurance fiddles were the fiddles du jour back in the ‘90s. The game was either split-dollar (company paid for insurance on “key” person, and took business deduction), or employee benefit plan claimed to be qualified (thus tax-exempt) but wasn’t.

Playing lead fiddle was Benjamin B. Lecompte III and Cathleen B. Lecompte, 2015 T. C. Memo. 39, filed 3/10/15, but Cathy was just along for the ride, as she appears pro se, while Doc Ben has a few lawyers for backup.

This fiddle was orchestrated by Tracy Sunderlage. Judge Halpern explains: “The plan (and, presumably, others like it) were promoted, organized, and administered by Tracy L. Sunderlage, against whom the United States obtained a permanent injunction in 2012, presumably enjoining him from promoting such plans. Mr. Sunderlage operated through Professional Benefit Trust, Ltd. (PBT), of which he was the chief executive officer.” 2015 T. C. memo. 39, at p. 4.

Doc Ben stashed his $7.8 million life insurance policy in a multi-employer (10 or more) pension and benefit plan in 1990 or 1991 (and it may not matter which year), but switched around 2002 to a single employer plan.

You may remember that around 2002 IRS blew up the split-dollar and similar life insurance fiddles. See my blogpost “The Split”, 8/29/12. But Doc Ben always claimed that, whatever plan he was in, it was always tax-exempt.

IRS said, no, the plans were disqualified and therefore taxable to Doc Ben under Section 402(b)(1) from the get-go.

But, says Doc Ben if that’s so, then the money was mine back in the ‘90s, and those are all closed years.

No, says Judge Halpern, you extended the SOL for the 2002 and forward years, and the IRS never asserted in Court that you got income from the life insurance deal in the ‘90s, so no equitable estoppel.

Howbeit, to foist the life insurance plan income on Doc Ben, IRS needs to assert more than that the plan was a phony shelter; IRS needs to show the Section 83 vested-and-not-subject-to-forfeiture and “set aside and exempt from creditors” stuff. None of that is in evidence (neither Doc Ben nor IRS put in the actual plan text).

So Doc Ben’s try at summary J on the SOL issue fails.

Now Doc Ben’s lawyers make a second stab at summary J (partial, this time) in the same motion. That’s a Rule 54 no-no: one and only one motion at a time. That’s a rock on which many lawyers, used to omnibus motions in State and most Federal Courts, run aground.

But Judge Halpern wants to cut to the cliché, so he goes for it.

Doc Ben’s lawyers want Judge Halpern to absolve them of the duty of consistency. That rule says that when a taxpayer takes a position in a closed year, they can’t reverse themselves in an open year to IRS’s detriment. In other words, you chose it, you’re stuck with it; sort of son-of-estoppel.

There is, however, an exception. What would tax law be without exceptions?

“An exception exists, however, in that the doctrine is not applicable to pure questions of law, as opposed to questions of fact and mixed questions of fact and law.” 2015 T. C. Memo. 39, at p. 17.

And what exactly are Doc Ben’s attorneys asserting? Even IRS is confused.

Judge Halpern clarifies: “Respondent is not quite correct where, in the answer, he avers that petitioners now allege that any income received pursuant to the plan was received in 1990. That is not their allegation. Petitioners aver that, if the plan constituted an illegal tax shelter, as respondent now admits, ‘then under IRC Section 61 the life insurance policy owned by the Plan should have been income to Petitioners in 1990, * * * [when the] insurance was first acquired.’ Petitioners, however, dispute that the plan constituted an illegal tax shelter. They have constantly taken the position that the acquisition of the life insurance policy by the plan and payment of premiums did not cause them to realize income. Unless and until petitioners contradict that position, there is no inconsistency that they may be dutybound to forgo.” 2015 T. C. Memo. 39, at p. 17.

Hey, whatever, says Judge Halpern, I’m not making that call.

“…we have insufficient information about the plan to determine whether, assuming petitioners should have reported plan-related income for 1990, their failure to do so was a mistake of law or, maybe, a mistake of fact or a mistake with respect to a mixed question of law and fact.” 2015 T. C. Memo. 39, at p. 18.

So let’s have a trial. Or maybe put in the necessary papers on yet another motion for summary J.

Remember the first-year law school summary J rule. Put in all your evidence; marshal and lay bare your proofs. Don’t count on your inferences, however brilliant you think they are at three o’clock in the morning, to get your clients summary J.

Enmeshed in the toils of a lack of a Grade 12 RO at a location near him to deal with his Form 941 problems, a lack of response by an IRS employee, and befuddled by the difference between Form 2504 and Form 9456 (the magic carpet to an installment agreement), Lonesome Charlie King, Esq., finds himself owing excessive interest on his unpaid (but now paid) Forms 941.

Judge Paris generously knocks off about two months’ worth, in Charles W. King, 2015 T. C. Memo. 36, filed 3/9/15.

I bestow the “Lonesome Charlie” sobriquet on Mr. King, because for upwards of 40 years he has been a single-shingle in a small Illinois town. I have a fellow-feeling for single-shingles, as I am one myself, albeit in a highly-urbanized environment.

Charlie doesn’t bother with some 941s, IRS gets testy, and Charlie tries to work it out, but the friendly examiner he first works with disappears after Charlie files the missing 941s and agrees with the examiner as to the bottom line. Of course, Charlie hasn’t got the cash to pay on the spot the tax plus additions, penalties and interest.

Charlie wants installment treatment, but the examiner is gone and successor IRS employee says “We have considered the information that you have submitted and will be happy to honor your request for an installment payment plan. However, before we process your installment agreement request it will be necessary for you to sign, date and return the revised Forms 2504 we sent to you…within ten days.” 2105 T. C. Memo. 36, at p. 5.

Charlie sends the Forms 2504 and nothing happens for two months, at which time NITLs rain down on Lonesome Charlie.

Charlie calls IRS, who sends him to TAS, Nina (“The Big O”) Olson’s sanctuary for the overwhelmed, who finally get a Form 9456 filed.

Now the one overwhelmed is the only friendly neighborhood Grade 12 RO in the neighborhood, who is the only one capable to dealing with business 941s of the magnitude of Charlie’s. Unhappily for Charlie, unavailability of IRS personnel is not grounds for finding the IRS acted unreasonably.

And while the IRS employee who shunted Charlie off to TAS may have been off-loading his own error, Judge Paris likes TAS: “Although respondent may have shuffled petitioner to TAS to resolve his own mistakes, TAS is an independent body, see sec. 7803(c), and was not under obligation to assist petitioner with his case, see IRM pt. 13.1.7.1 (July 23, 2007) (stating that TAS may identify its own criteria that qualify taxpayers for TAS assistance). Further, TAS is not a substitute for regular IRS procedures. Petitioner has not shown that, but for a particular action that TAS took, his employment tax obligations would have been paid sooner. Rather, TAS facilitated petitioner’s working toward a collection alternative by providing information about collection alternatives and forwarding his case to a qualified RO. Accordingly, the interest that accrued while TAS worked on petitioner’s case was not excessive and respondent did not abuse his discretion in failing to abate it.” 2105 T. C. Memo. 36, at p. 29.

And in any case, Tax Court has no jurisdiction to abate interest with respect to employment taxes.

So is Lonesome Charlie out there on his lonesome?

No, because the two months between when Charlie sent in the 2504s and the rain of NITLs caused excessive interest to accrue.

To the rescue, Section 6404(a): “Section 6404(a) provides: ‘The Secretary is authorized to abate the unpaid portion of the assessment of any tax or any liability in respect thereof, which–(1) is excessive in amount, or (2) is assessed after the expiration of the period of limitation properly applicable thereto, or (3) is erroneously or illegally assessed.’ The term ‘any liability in respect thereof’ includes interest that has accrued on the underlying tax. H & H Trim & Upholstery Co. v. Commissioner, T.C. Memo. 2003-9.” 29015 T. C. Memo. 36, at p. 19.

Everybody agrees that the interest wasn’t barred by SOL or illegal; Charlie says it was “erroneous”, but Judge Paris says “excessive.”

The test is “but for” IRS employee sitting for two months on Charlie’s Forms 2504 without asking him for more info, would the interest have accrued?

IRS claims H&H, abovecited, was wrongly decided, but that cuts no ice. And although the IRM isn’t law, the IRS employee was supposed to ask for more info than Charlie provided. “Excessive” means  “unfair”, says Judge Paris, and it would be unfair to stick Lonesome Charlie for that interest.

Everything else, though, stands.

I’m not talking about traveling through the Snows of Yesterday here in The Big Apple, I’m fast-forwarding to today, 3/6/15, wherein various of my fellow-craft at the Bar ain’t doin’ so hot.

First up, William P. Rafferty & Carol A. Rafferty, Docket No. 13104-13, filed 3/6/15. Carole settled as to her beef, and Will wants innocence, but that’s not the issue.

Carole and Will have the same attorney.

Judge Ashford, new to Tax Court but wise in the ways of legal ethics, isn’t amused. But she has a great legal vocabulary.

In a teleconference, “…petitioners’ counsel stated that… petitioner Carol A. Rafferty and respondent filed a Stipulation of Settled Issues as to petitioner Carol A. Rafferty, and that petitioner William P. Rafferty planned to file for Innocent Spouse Relief under Section 6015. Petitioners’ counsel also noted that he recently filed petitions, one on behalf of each petitioner, for petitioners’ 2011 tax year (Docket Nos. 17621-14, 18233-14). In Docket No. 18233-14, petitioner William P. Rafferty similarly claims that he is entitled to Innocent Spouse Relief. In addition to a continuance, petitioners’ counsel and respondent would like the above-captioned case to be consolidated with the recently-filed cases. This Division, however, does not have jursidication [sic, but I love it!] over the recently-filed cases and, under Rule 24(g) of the Tax Court Rules of Practice & Procedure, it appears that petitioners’ counsel has a conflict of interest representing both petitioners. Thus, it is in fact premature for the Court to consolidate the cases. Pursuant to Rule 24(g), in order to obviate the potential conflict or other violation of the ABA Model Rules of Professional Conduct, petitioners’ counsel should take whatever remedy necessary prior to filing a Motion to Consolidate.” Order, at p. 1.

Judge, I look forward to many more examples of jursidication.

Next is Southland Spine and Rehabilitation Medical Center, Inc., Docket No. 9021-14, filed 3/6/15. I’ll spare you the “they’ve got your back” pun–no, I won’t. I said it was a tough day for lawyers.

Unfortunately, Judge Goeke must deny Attorney Daniel Layton the relief that we all so many times have desired but of which we were likewise deprived.

“…Daniel Layton filed a Motion for Continuance and a Motion to Withdraw Counsel Pietro E. Canestrelli and Erik K. Dodd. Petitioner’s counsel is advised that the motion to withdraw is improper as one counsel cannot withdraw another counsel.” Order, at p. 1.

You can throw your fellow-sufferers under the bus, or kick them to the curb, but you can’t withdraw them. Oh, Mr. Layton, how I wish you’d won that one.

But Still, Try Chutzpah

My loyal readers (that dwindling but stalwart band) are respectfully directed to turn their collective attention to my blogpost “When All Else Fails”, 4/4/13. I won’t comment beyond the title thereof, because de mortuis nihil nisi et cetera.

But it does give me a segue into a designated hitter from STJ Lew (“His Name Is His Fame”) Carluzzo, wherein Kerry Adolphson, Docket No. 21816-14 L, filed 3/6/15, demonstrates adherence to the aforementioned title.

STJ Lew isn’t buying Kerry any more than Judge Ruwe bought the star of said aforementioned blogpost.

Kerry wants to vacate an order of dismissal that IRS got. IRS claimed there never was a NOD from which Kerry petitioned. So no jurisdiction.

Kerry says OK, no jurisdiction, but not because there was no NOD, but rather because IRS never sent a NOD to my last known address, so I never got it.

STJ Lew is used to petitioners like Kerry. Cf. (as my expensive colleagues say) my blogpost “See What We Have To Deal With”, 1/28/15.

So here’s STJ Lew: “As pointed out by respondent, petitioner has not in this proceeding established what address should have been treated as his last known address for purposes of the relevant notices. Furthermore, nothing submitted by petitioner takes exception to respondent’s claim that petitioner is a ‘serial nonfiler’ who did not file Federal income tax returns for the years 2003, 2004, 2005, 2010, 2011, 2012 or 2013. Petitioner has not alleged, much less shown, that he had given respondent clear and concise notice of what address should be considered as his last known address independent of any address that he might have shown on a Federal income return he might have filed. Under those circumstances he is hardly in a position to dispute whether various notices sent to him by respondent were mailed to his last known address. See Gyorgy v. Commissioner, F.3d , 2015 U.S. App. Lexis 3100 (7th Cir. Feb. 27, 2015).” Order, at p. 1.

Blogging this stuff is like eating CrackerJacks–I just can’t get enough. And you can’t make this up.

Well, maybe not. Tax Court can dismiss a petition brought for declaratory judgment (DJ), says Ch J Michael B. (“Iron Mike”) Thornton, if the parties agree there is no longer a controversy between them.

And although I thought that if the parties agree, there should be a declaration as to what they agree, Ch J Iron Mike lets IRS and Leone Pizzini & Sons, Inc. Profit Sharing Plan, Docket No. 2144-14R, filed 3/4/15, off the hook.

Remember Leone and offspring? I’m not surprised, I barely remembered them my own self and only because I mentioned them just in passing. See my blogpost “All Those Old, Familiar Faces – Redivivus”, 4/8/14, wherein I said “Now I don’t know Leone Pizzini, and to my knowledge I never met his sons, either jointly or severally.”

But their counsel Jeff A. Schnepper, Esq., was a name from the past.

Now Jeff and IRS have settled the Sec. 501(a) qualification of his client, the Leone profiteers.

“The parties agree that there is now no actual controversy regarding the qualification of petitioner as an exempt trust under I.R.C. section 501(a), that neither party will be prejudiced by dismissing this case, and that we may exercise our discretion and dismiss this case pursuant to Wagner v. Commissioner, 118 T.C. 330 (2002).” Order, at p. 1.

OK, Wagner is the catch-all citation for dropping petitions from NODs. You remember, of course, that petitions from SNODs don’t go away (other than from want of jurisdiction) without decision in favor of IRS sustaining the deficiency.

But DJs are supposed to declare the parties’ rights, if any. So if the parties agree, why not a motion to enter decision? Then let the decision document state what rights the parties have, if any. After all, parties routinely submit decision documents to Tax Court when they agree.

It’s easy to second-guess. Everybody is as wise as a tree full of owls in someone else’s case.

But rather than just a handshake and a dismissal, if I were the Leone profiteers I’d want a Tax Court decision memorializing the handshake.

To paraphrase a former President, “trust, but memorialize”.

No, not the NBC giveway show from the 1950s, neither is this about the pop-culture name for certain religious beliefs. No, this is the story of Ruth A. Lobs, 2015 T. C. Sum. Op. 17, filed 3/3/15, as told by The Judge With A Heart, STJ Armen.

Ruth and former spouse had savings bonds that they split when they split. Former spouse bought them, but titled them “either-or”, a not uncommon (and permissible) approach. See 31CFR§353.7.

When they split, Ruth and former wanted her share to go to son Joe. But Ruth never retitled the bonds.

In the year at issue, son Joe needed money, as is often the case with children, even grown children like son Joe. So Ruth headed over to the credit union, cashed in the bonds, and had the cashier draw a check for net proceeds directly to son Joe.

The record doesn’t reflect whether son Joe paid income tax on the accrued interest, but Ruth sure didn’t, and that’s why she’s in Tax Court.

Ruth testifies she and former always treated the bonds she had as “Joe’s bonds.” She intended him to have them, but never got around to changing the names on the bonds.

“Registration of series EE U. S. savings bonds is generally conclusive of actual ownership of, and interest in, such bonds. 31 C. F. R. sec. 353(a)(2010). Generally, saving bonds are not transferable and are payable only to the owner(s) named on the bonds. Id. sec. 353.15; see id. sec. 353.35(a). Savings bonds registered in coownership form will be paid to either coowner upon request of either coowner and surrender of the bonds. Id. sec. 353.37; see id. 353.39.” 2015 T. C. Sum. Op. 17, at p. 6 (Footnote omitted).

Ruth claims the bonds really were Joe’s, and should have been so registered.

Mox nix, says STJ Armen.

“The fact that the…bonds could have been registered in some other manner is of no moment. As the U. S. Supreme Court instructs, we give effect to what actually happened and not what might have happened.” 2015 T. C. Sum. Op. 17, at p. 7 (Emphasis by the Court; citations omitted).

Ruth’s name was on the bonds, she told the cashier how to make out the check, and so it was as if Ruth got the money and gifted it to son Joe.

Takeaway- Get those bonds out of the shoebox under the bed, go to the Treasury website, and get them titled right.

There was a recent debate on a message board I follow about whether, when stiffed by a client, an attorney can file Form 1099-C on the deadbeat.

The proponent of the tactic was strongly rebuked, as 1099-Cs are to be filed only by governments and applicable financial entities. See Section 6050P and the regs.

But IRS can file them, and does. One result is that they get shot down, as shown in my blogpost “Sunk By The Navy?”, 9/28/11.

And today we have another example in a small-claimer, Suzanne Moore Bacon, 2015 T. C. Sum. Op. 15, filed 3/2/15, from The Judge With A Heart, STJ Armen.

Suzanne is no angel; she claimed FEMA money from the Northridge CA earthquake for what she said was her primary residence, except FEMA later claimed it wasn’t and sent Sue dunning letters for two years. Sue did nothing, of course, so FEMA bucked Sue’s file to DOJ so they could sue Sue for the $3450 of unguided largesse, with a billet doux stating the date when the SOL ran.

You can imagine what DOJ did. And Sue did the same.

The 28USC§2415 six-year SOL clock had long since run down while DOJ was doing other stuff. Nothing daunted, IRS dropped a 1099-C on Sue for the $3450 plus interest (which she ignored), asserting that sending the 1099-C was the “identifiable event” that Section 6050P requires to establish uncollectibility and therefore cancellation of debt.

Nope, says STJ Armen. “The Court recognizes that, in general, the expiration of a period of limitations on collection of indebtedness does not extinguish an underlying debt obligation but simply provides an affirmative defense for the debtor in an action by the creditor. Miller Trust v. Commissioner, 76 T.C. 191, 195 (1981). This is confirmed by section 1.6050P-1(b)(2)(ii), Income Tax Regs. However, the instant case deals with the second clause of the subdivision, ‘expiration of a statutory period for filing a claim’. Sec. 1.6050P-1(b)(2)(i)(C), Income Tax Regs. That clause is not so limited.”

So, even though the theoretical right remains (without a legal remedy), the end of the remediation period extinguishes the debt for tax purposes.

And the SOL ran six years before IRS dropped the 1099-C on Sue. So no cancellation of debt in that year, and no deficiency.