“The payment of taxes has seldom proved the most soothing thing for doubtful tempers.” Chapter 153 of the Saga of Olaf the Holy,  Heimskringla of Snorri Sturluson, c. 1230, translated from the Old Icelandic by William Morris and Eiríkr Magnússon.

CSTJ Peter Panuthos has some (qualified) good news for Georgette M. Klat-Ginex, Docket No. 17275-13S, filed 6/18/14.

Georgette was in bankruptcy when she filed her petition, but IRS didn’t know about it (either someone obviously messed up the creditor matrix, or decided Georgette’s tax debts weren’t dischargeable so didn’t list them, and in either case didn’t tell IRS). So when the case got to trial, the bankruptcy proceeding was over and the extended time to petition after dismissal or discharge was also over.

So no valid petition, and no jurisdiction.

CSTJ Panuthos: “There is no doubt that it would have been helpful to this pro se petitioner if respondent had filed his motion to dismiss at some earlier point in time thus permitting petitioner to file a petition after the automatic stay had been lifted but within the extended period provided by section 6213(f). However, our jurisdiction can be questioned by either party at any time, and the failure to do so by a certain point in time does not constitute a waiver of this right.” Order, at p. 1. (Citations omitted).

But CSTJ Panuthos has a thin rope to throw Georgette: “Given the circumstances of the timing of the filing of respondent’s motion and the fact that petitioner did not have an opportunity to have a judicial review of the adjustments set forth in the notice of deficiency the Court encouraged petitioner to pursue an audit reconsideration. Counsel for respondent advised that the Commissioner would be receptive to such reconsideration.” Order, at p. 2.

Judge Ruwe reminds us of the exceptions to the draconian and much-reviled provisions of Section 274 for business truckers, per Section 280F(d)(4)(C), which “… provides that listed property under section 280F(d)(4)(A)(ii) does not include ‘property substantially all of the use of which is in a trade or business of providing to unrelated persons services consisting of the transportation of persons or property for compensation or hire.’” 2014 T. C. Memo. 122, at p. 6.

The whole cite is Lee Anthony Baker, 2014 T. C. Memo. 122, filed 6/18/14.

Now Lee Anthony Baker did run his Mack tractor and pull trailers he didn’t own, for Advantage Tank Lines, which he didn’t own, and he did work for others, so he’s an IC and can deduct based upon his less-than-perfect numbers (in fact he had nothing but some credible testimony).

Of course, he gets a lot less than he would have gotten if he had good numbers, like George M. (“Give My Regards to Broadway”) Cohan teaches us, plus the substantial understatement, non-filing, non-payment and non-withholding chops.

I’m giving the late great Edward R. Murrow’s signature sign-off to Judge Diane Kroupa, whose retirement from Tax Court on 6/16/14 was announced this date. I echo the comment of the gang at 400 Second Street, November Whiskey (as we used to say): “The Court is deeply grateful for the excellent judicial service that Judge Kroupa has rendered in her eleven years on the Court.”

Echoing the words of a former President of the United States of America, I know just how David H. Garza, starring in 2014 T. C. Memo. 121, filed 6/17/14, feels.

Dave traveled far and wide in his truck, at the behest of his employer, Time Warner Cable. And he did have a calendar planner, wherein he jotted down odometer readings at least monthly during the year at issue. Now he did use the aforesaid truck for his own use, and concedes about 10% of his recorded mileage was personal use. But Time Warner Cable did not reimburse Dave for his vehicular expenses.

So Dave took unreimbursed employee business expense deduction on his 1040.

Judge Cohen believes Dave did drive a lot of miles for business. But that isn’t good enough for Section 274(d)’s strict substantiation.

“Petitioner’s calendar planner, while contemporaneous, is not reliable substantiation for the claimed expenses because petitioner failed to meet the criteria set out in section 1.274-5T(b)(6), Temporary Income Tax Regs., supra. Petitioner did not record the amount, the time, or the business purpose of each business use of his truck because, in his words, ‘it was just too much to do.’ Accordingly, his deduction must be disallowed.” 2014 T. C. Memo. 121, at pp. 6-7.

While I recognize people were, and are, playing games with vehicle, and travel and entertainment, expenses, I stopped claiming most of mine because I agree with Dave: keeping track is too much to do. It was all very well when I was in a law firm, whether large or small, which had billing programs and reimbursement policies. Keeping track was someone else’s job.

But when I went solo six years ago, I decided I was a lawyer, full-time, not a bookkeeper, not even part-time. No thanks; if I wanted to be a bookkeeper, I would be.

And Dave is a cable guy, and I assume not a bookkeeper either. Full or part-time.

A heartwarmer for an elderly chap like me comes from Liz Wallace at KPMG (thanks, Liz) and the Sixth Circuit. Sixth Circuit revisits their sixtysix year old decision in Cleveland Allerton Hotel, Inc. v. Comm’r, 166 F.2d 805 (6th Cir. 1948), and finds it’s just as good today as it ever was.

I won’t ask if you remember Cleveland Allerton, because I sure don’t. It involved a hotel operator enmeshed in a disastrous lease. CA could buy the hotel for way less than it would be paying over the remaining lease term, and negotiated a buyout. Of course, the owner-lessor charged CA well above the odds, to compensate for the lost income stream.

IRS claimed that the entire buyout price was acquisition cost of the hotel, and must be capitalized. But, back in the day, Sixth Circuit agreed with CA, saying that the purchase price was FMV (which CA backed up with an appraisal), and the overage was a currently deductible business expense, to be rid of the nettlesome lease.

Well, IRS is back, and this time its target is ABC Beverage Corporation, No. 13-1701, decided 6/13/14, while I was flying back from the Magnolia City. Note that the full caption is ABC Beverage Corporation v. United States of America, because ABC stumped up the tax and sued for a refund; USDC Western District of Michigan gave ABC a “thumbs up”, and IRS appealed.

IRS loses. CA may be old, but it’s good, and intervening learning from the Supremes, and an amendment to Section 167(c) don’t change Sixth Circuit’s mind.

IRS claims four (count ‘em, four) Supreme decisions wipe out CA.

The first, Millinery Center Building Corp. v. Commissioner, 350 U.S. 456 (1956), doesn’t apply because the Milliners didn’t prove that the lease they bought was burdensome. So essentially they paid FMV, as there was no burdensome lease to get out of.

The second, Woodward v. Commissioner, 397 U.S. 572 (1970), involved legal, brokerage, accounting and appraising fees for a dissident stockholder buyout. But there the issue was whether these costs were part and parcel of the acquisition of the dissenters’ shares, and the Supremes said they were. The test is not the taxpayer’s primary purpose, but rather the claim originated in the acquisition of the asset.

Next is Commissioner v. Idaho Power Co., 418 U.S. 1 (1974). The Idahoans wanted to depreciate construction equipment they bought to build a new facility. The Supremes said that buying and operating that equipment in building the facility was again part and parcel of the construction cost , but to the extent the Idahoans used the construction equipment for operations, they could depreciate that part.

And, finally, our old friend INDOPCO, Inc. v. Commissioner, 503 U.S. 79,(1992), a Tax Court favorite vying with Neonatology Associates as the most-cited case in Tax Court’s canned opinions. After usual deference to facts and circumstances, the Supremes held that the expenditures INDOPCO made to be acquired by a friendly fellow company, (a) benefitted INDOPCO beyond the year paid or incurred, and (b) “bear the indicia” of a capital rather than an ordinary expenditure. And deductions must be construed narrowly.

That’s not the case here, says Sixth Circuit. Getting rid of the lease is deductible, and IRS concedes that, but fights about the acquisition of the hotel.

So the origin of the claim, a la Woodward, is ABC’s desire to get out of the lease, not to buy the hotel. And while INDOPCO teaches us that deductions are to be narrowly-construed, IRS already conceded that the lease buyout would be currently deductible. And Idaho Power allows a capital item to be capitalized and depreciated in different tranches, depending upon facts and circumstances.

IRS then claims Section 167(c)(2) bars adding leasehold basis to property acquired subject to lease for depreciation purposes. But Sixth Circuit says the exact language is ambiguous: does it mean only “while the property remains subject to a lease after acquired” or does it mean “if the property was subject to a lease at the moment of acquisition, whatever happens later”?

Legislative history says the provision was enacted to prevent taxpayers from using the Section 197 quick-kick depreciation while including in basis the leasehold interest in the property. Not the case here. And “subject to” is a phrase with much judicial glossing, all of which says “ongoing”, as in “subject to a mortgage”.

So Judge Cole concludes: “Because § 167(c)(2) does not prohibit ABC from deducting the lease expense at issue, and because no decision of the Supreme Court requires us to modify our prior decision, Cleveland Allerton remains in full effect, controls the outcome of this case, and permits ABC to deduct the lease expense.” Decision, at p. 12.

Us old guys keep going on and on and on….

IRS has promulgated what is called the “Taxpayers’ Bill of Rights”, a noble document that, one devoutly wishes, will actually have results, although I beg leave to doubt it.

You can read all about it in IR-2014-72, 6/10/14, which I missed while visiting the Bayou City, wherein reside my children and grandchildren.

Some things are so much more important than taxes.

Now back to business.

I would draw my readers’, all 101 of them, attention to Right Number Five, which provides as follows:

“The Right to Appeal an IRS Decision in an Independent Forum

“Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals’ decision. Taxpayers generally have the right to take their cases to court.” http://www.irs.gov/Taxpayer-Bill-of-Rights

While IRS admits that taxpayers now “generally” (oh, how I love that word! Keeps us all eating and putting many Huggies on a darling little person) have the right to take their cases to Court, IRS has systematically obstructed taxpayers, by misleading and confusing them.

Case in point, Yisroel Goldstein & Temi Goldstein, Docket No. 6373-14S, filed 6/13/14, from Ch J Michael B. (“Iron Mike”) Thornton.

Yis is trying, really he is, to resolve his differences with IRS. In responding to the usual IRS boilerplate you’re-too-late (108 days after SNOD) motion to dismiss, Yis says he is late, but details his “…efforts to resolve their tax matters administratively within the Internal Revenue Service (IRS) and detailed multiple attempts to submit information, explanation, and documentation. Petitioners further suggested that they should not be ‘penalized’ for the late petition when, given their prior submissions to the IRS and the merits of their substantive position, the need to instigate a court case should never have arisen.” Order, at p. 2.

Ch J Iron Mike well understands Yis’ plight: “The law is well settled, however, that once a notice of deficiency has been issued, further administrative consideration does not alter or suspend the running of the 90-day period. Even confusing correspondence, written or verbal, during the administrative process cannot override the clearly stated deadline in the statutory notice of deficiency. Such confusion is not uncommon given that the IRS frequently treats as separate processes or proceedings what taxpayers view as a single dispute. Taxpayers not infrequently have also conflated this Court with an IRS unit, but the IRS is a completely separate and independent entity from the Tax Court.” Order, at p. 2.

So, Yis, you have a right, but no one will explain this to you or tell you how and when to use it. And IRS has a license to mislead you or confuse you.

Forget rights. The law is well-settled. And it is settled wrong.

Mr. J. P. Finet, now or formerly legal editor of BNA Daily Tax Report, a periodical subsequently subsumed by the Bloomberg octopus, asked me for my views on Coffey v. Com’r, No. 11-1362, decided 12/2/11 by the Eighth Circuit, back on 12/2/11, and why anyone other than a VI practitioner should care.

See my blogpost “Somebody Does Read This Blog”, 12/4/11.

I responded thus: “So my reply to Mr. Finet’s request for ‘a sentence or two why practitioners should care’ is ‘All practitioners should care because it matters that taxpayers, and people, should know that when it’s over according to law, it’s over.’”

So now, only two-and-a-half years late, IRS has clambered onto the bandwagon (at long last), with the “Taxpayers’ Bill of Rights”, wherein Right Number Seven reads as follows:

“The Right to Finality

“Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit.” http://www.irs.gov/Taxpayer-Bill-of-Rights

I’ll have more to say about this document in another blogpost, coming soon to a screen near you.

Nope

First year law school class in contracts, and we’re discussing the case of the stenographer’s error in taking down the price of potatoes. Scrivener’s error, so no contract, says the Court. Meeting of parties’ minds not reflected in erroneous letter (it was a long time ago, pre e-mail, texting, etc.).

Well, now Hank Black, the legal dictionarian, calls it “clerical error”, but whichever it is, that’s not going to help Adrio Michael Baur, 2014 T. C. 117, filed 6/12/14.

Adrio wants to claim that the emancipation proclamation in favor of his child, set forth in his divorce Marital Settlement Agreement, is a “scrivener’s error”, which State court retroactively removed from the judgment of divorce (after Adrio got the SNOD) but Judge Chiechi isn’t buying it.

Remember, Section 71(c)(2) makes any contingency to do with children into child support and not alimony.

“We must determine what, if any, effect we should give to that purported nunc pro tunc order. In making that determination, we have in mind that ‘the definition of alimony for Federal income tax purposes turns on a fulfillment of the statutory test [in section 71] and not on the intent of the parties to a divorce proceeding or of the court overseeing that proceeding’. Okerson v. Commissioner, 123 T.C. 258, 266 (2004). We also have in mind what we stated in Gordon v. Commissioner, 70 T.C. 525, 530 (1978):

“‘State court adjudications retroactively redesignating divorce- related payments as alimony and not child support (or vice versa) are generally disregarded for Federal income tax purposes if the order retroactively changes the rights of the parties or the legal status of the payments. An exception to this rule is made when a retroactive judgment corrects a divorce decree that mistakenly failed to reflect the true intention of the court at the time the decree was rendered. * * * [Citations omitted.]”. 2014 T. C. Memo. 117, at p. 12.

And the Marital Settlement Agreement, incorporated in the divorce judgment years ago, said Adrio and ex “freely and voluntarily entered into this Agreement of their own volition, free from any duress or coercion and with full knowledge of each and every provision contained in this Agreement and the consequences thereof. * * *.” 2014 T. C. Memo. 117, at p. 4.

Adrio, you’re stuck with it.

And because you introduced no evidence that you acted in good faith reliance, you get the substantial understatement chop.

Takeaway- Section 71(c)(2) is a boobytrap for family law practitioners. Hopefully, if we bloggers talk it up often enough, the word will get out.

No Penalty Shot

 Fifth Circuit is Judge Halpern’s nemesis; he can’t please them. Here’s the latest, courtesy of my colleague Joel E. Miller, Esq.

I was off in the Bayou City visiting the grandchildren, so I missed Joel’s presentation to the New York State Bar Association’s Coop/Condo Committee today; too bad, because Joel always has something worth hearing, and today’s gem is Whitehouse Hotel Limited Partnership; QHR Holdings – New Orleans Limited, Tax Matters Partner, No. 13-60131, decided 6/11/14.

For past history, see my blogpost “Chipping Away The Façade – Part Deux”, 10/24/12.

Now getting the remand from Fifth Circuit, Judge Halpern, with misgivings and begrudgingly, re-evaluated the worth of the Whitehousers’ façade easement of its historic hotel, and adjusted down the claimed overvaluation thereof to a mere 401%.

I’ll spare you the appraisal mixology in which Judge Halpern engaged, and Fifth Circuit’s equally begrudging acknowledgement that Judge Halpern stopped a shaved inch short of judicial insubordination in ignoring Fifth Circuit’s mandate on remand.

So the Whitehousers have a tax hit. But what about the 40% overvaluation chop with which Judge Halpern topped them off?

The Whitehousers got two appraisals before they filed the tax return at issue, and had attorneys and CPAs prepare the tax return. IRS concedes there was one valid appraisal, although IRS disagrees with the result.

“Our review of the tax court’s decision starts with the principle that ‘[w]hen an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for a taxpayer to rely on that advice.’ United States v. Boyle, 469 U.S. 241, 251 (1985). ‘Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney.’ Id. at 251. The Court held, though, that the relevant issue in that case of meeting filing deadlines was not an area in which tax experts were necessary. Id. at 251-52. Our earlier opinion cited Boyle for the tax court to consider on remand. Whitehouse Hotel, 615 F.3d at 343.” Opinion, at pp. 20-21.

Judge Southwick went on: “We conclude that the tax court imposed an excessively high standard of proof for actual reliance on the advice of competent tax professionals with respect to this statutory defense. The tax court concluded in its remand decision that ‘the record is bare of any evidence supporting’ a conclusion that Whitehouse undertook any investigation of the amount of the deduction for the conveyance of the easement and presumed that the tax professionals also did not. Whitehouse Hotel, 139 T.C. at 361. We disagree.

“Valuation of assets is a difficult task, even with the advice and counsel of accountants, consultants, and tax attorneys. It is even more complicated when, as here, the valuation is divorced from a negotiated transaction between buyer and seller. In most transactions, presumably, the final sale price is forged from competing interests. That dynamic makes the sale price a good indicator of the fair market value of a given property. Even then, that price may be altered up or down by idiosyncratic characteristics of the parties. This is not the case here. This easement was a gratuitous transfer; the PRC did not haggle over price and did not pay a final sale price.” Opinion, at pp. 21-22.

And IRS, IRS’ expert, and Judge Halpern all reached different numbers for the worth of the easement. This was a strong factor in Fifth Circuit’s decision to throw out the 40% chop.

“Obtaining a qualified appraisal, analyzing that appraisal, commissioning another appraisal, and submitting a professionally-prepared tax return is sufficient to show a good faith investigation as required by law. See I.R.C. § 6664(c)(3)(B). The tax court’s enforcement of the gross undervaluation penalty was clearly erroneous.” Opinion, at p. 22.

The façade may crumble, but the Whitehousers are penalty-free.