No, not a tale of the exposition of sacred scriptures. This is The Judge Who Writes Like a Human Being, a/k/a The Great Dissenter, s/a/k/a The Implacable, Indefatigable Foe of the Partitive Genitive, Mark V. Holmes, expounding on the difference between a deficiency (statutory notice of which is the “ticket to Tax Court”) and a liability (which mostly isn’t).

The designated hitter is Charles Williams a.k.a. C. Williams, DDS and Mary Williams, Docket No. 7614-13, filed 11/13/14.

Doc Charlie and Ms Mary have settled with IRS, but they have a problem crafting the decision document.

Doc Charlie claims he gave at the office for part of what he owes, when Social Security docked him for some money.

Judge Holmes strides into the breach, with his usual down-to-earth people-talk, rather than taxbabble.

“The dispute is a good illustration of the tricky distinction between a deficiency and a liability. A deficiency is the difference between the tax owed and the tax shown on a taxpayer’s return, plus any amount previously assessed or collected without assessment as a deficiency, and less any rebates. IRC § 6211(a). A tax liability is the amount a taxpayer actually owes. IRC § 26(b). (Someone whose return is perfect but encloses a bad check has no deficiency but has a liability. Somebody who overwithholds but makes a small mistake on his return may have a deficiency but no liability.)

“The Commissioner’s view is that our jurisdiction is generally limited to determining whether a taxpayer has a deficiency, and in this case he agrees that petitioners do not have a deficiency. See IRC § 6214(a). We generally do not have jurisdiction to restrain or review credits or refunds made by the Commissioner.” Order, at pp. 1-2.

But Doc Charlie is afraid IRS may try to collect twice.

So IRS will check government records to see if Doc Charlie is right.

Howbeit, motions for entry of decision due New Year’s Eve.

No, I’m not leaving. I’m just telling how Agent Chan of the IRS reconstructed the tax postures of Frank Kenneth Worth, a.k.a. Frank K. Worth, a.k.a. Frank Worth and Helen Laura Worth, a.k.a. Helen L. Worth, a.k.a. Helen Worth, et al., 2014 T. C. Memo. 232, filed 11/13/14, a Judge Lauber opus.

Frank and family followed the lead of the Beach Boys and went surfin’. But instead of hitting the curls they opened a bunch of stores selling boards, both surf and skate.

Trouble was, they were underreporting income, not keeping records, trying the $8K-$9K dodge (cash deposits just below the $10K radar), and telling different stories about just who exactly owned the White Sands chain that sold the boards aforesaid.

Tracked down by Criminal, Frank, Donnie and Marie all pled to various charges. But as we know, that doesn’t established civil fraud penalties, although it weighs heavily against them.

No, enter the dragon, a/k/a Revenue Agent Helen Chan, who reconstructs the tax history of the Worthies by use of the net worth and personal expenditures method.

Cash method doesn’t work, as the Worthies distributed the boodle in many banks and dealt extensively in what certain former clients of mine called “blatter”; no, not album pages, Ludwig, but rather green leaves that don’t grow on trees.

Judge Lauber spends a lot of time on methodology, but Agent Chan went by-the-book, IRM pt. 4.10.4.6.7 (June 1, 2004).

Now comes the dash. The idea behind net worth and personal expenditures is that one can measure year-to-year accretions to wealth. But to do so means assuming that cash on hand remains relatively stable year-to-year.

Judge Lauber expatiates: “Instead of trying to calculate annual cash balances, Agent Chan assumed that the amounts of cash petitioners kept on hand for use in their business were relatively constant from year to year. In her net worth calculations, she accordingly placed a dash, or zero, in the column labeled ‘cash on hand.’ As a result the annual change in petitioners’ net worths was not affected, positively or negatively, by the undeposited cash they held. Because it is impossible to ascertain, in unreported income situations, precisely how much cash a taxpayer has at any particular time, courts have consistently approved the use of the ‘dash method.’” 2014 T. C. Memo. 232, at p. 35. (Citations omitted).

Now of course the Worthies claim they got a wad of untaxed USD from Donnie’s papa Fred. There’s a wee snag, though. “According to SSA records Fred’s total income during the 40-year period ending in 1977 was $185,430. Fred retired in 1985 and moved into a federally subsidized housing unit for low-income seniors. By 1986 his income consisted solely of Social Security and retirement payments totaling about $1,000 a month. This evidence was clearly sufficient to support the inference that Fred lacked the wherewithal to make a $200,000 cash gift to Donald and Marie.” 2014 T. C. Memo. 232, at pp. 32-33.

Frank claimed Donnie and Marie lent him money that he repaid, but of course he had zero proof, except for his own testimony, which Judge Lauber decided wasn’t Worth much (sorry, guys).

Give the Worth lawyers credit, they tried. They claimed Agent Chan was an expert who hadn’t followed the Rule 143(g) expert testimony rules, or the amended FRE 702 rules. But Agent Chan wasn’t testifying as to any scientific, technical or other arcane matters. Her two-day spiel was strictly what she did and how she did it.

The Worthies’ hopes are dashed. Civil fraud penalties rain down.

The 400 Second Street Northwest Mounties are on the Tax Court website’s case. They’re performing “major upgrades” (cain’t hardly wait to see ‘em).

In the interim, however, eAccess, Status, Docket, Opinions past and present, and law clerk applications are going down “from  5:00 p.m. Eastern time on Friday, November 14 until 7:00 a.m. Monday, November 17. No documents may be eFiled through Petitioner Access or Practitioner Access during this time. NOTE: Petitions and notices of appeal may NOT be eFiled and this does NOT apply to petitions and notices of appeal. We regret any inconvenience this may cause.”

Get those documents in, guys.

I’ve pointed out many times that this is not a political blog, so Sarah Kurko’s problems aren’t political. No, Sarah needs mental and emotional help, and that Obliging Jurist, Judge David Gustafson, is just the man for the job, as proven by Sarah Kurko, Docket No. 24040-13L, filed 11/12/14, a designated hitter.

Sarah was in an accident, unable to work, became depressed and unemployed, sought SSDI, was denied, reapplied (case pending), and in the interim was behind in her income tax filings.

IRS handed her a SFR for one year, but Sarah filed a belated 1040, showing a credit, and IRS agreed she overpaid. However, when Sarah tried to claim a credit elect per Reg. 301.6402-3(a)(5) for the next year, as to which she was again tardy in filing, IRS claimed she still owed them money, and  claimed she was too late for the credit.

See my blogpost “Lookback In Anger”, 12/12/11, wherein I go over the rules on refunds.

But Sarah has an out. She claims she was “financially disabled”, thus tolling the lookback period for the time she was “too long in that condition”, as they say in the Highlands.

And Appeals didn’t consider that wrinkle at Sarah’s CDP, although Sarah claimed thereat that she needed legal help, psychiatric help, and couldn’t handle paperwork.

I know plenty of people who can’t handle tax paperwork even without the additional ills that plagued Sarah.

Sarah’s claims at the CDP are enough to establish that she did raise liability for tax issues, and the credit elect claim is enough to give Tax Court jurisdiction.

Now Sarah might have been late with her claim, but Judge Gustafson lays out the Section 6511(h) escape hatch. Briefly, any time periods are suspended (tolled) if the taxpayer is”… unable to manage his financial affairs by reason of a medically determinable physical or mental impairment of the individual … which has lasted or can be expected to last for a continuous period of not less than 12 months….” Order, at p. 6.

So if Sarah can proffer a doctor’s note that complies with Rev. Proc. 99-21,  for the 14 months at issue, she might slide under the tag; and her credit elect would therefore be timely and she wouldn’t owe IRS.

In any event, Appeals never considered the financially-disabled status Sarah claimed, and that might be abuse of discretion. So maybe so there should be a remand.

Wherefore, let IRS decide if there should be a remand, or whatever else they want to do, and tell Judge Gustafson and Sarah. Sarah must answer IRS promptly and clue in Judge Gustafson. To that end, since Sarah has no lawyer and is clearly under some kind of disability, maybe she should get a “next friend” on the case.

A Taishoff  “good going” to  Judge Gustafson.

I don’t want to be accused of being a conspiracy theorist, or of ascribing to IRS a Machiavellian cunning that may just be the result of sheer happenstance, but there’s a Thoreauvian trout-in-the-milk quality to two recent Tax Court items.

For the first, see my blogpost “Another Taishoff ‘Oh Please””, 9/24/14.

There, IRS moved to close for duplication a timely petition, where taxpayer submitted duplicates by two different means on the last day for petitioning. This left the untimely petition as the last man standing, whereupon IRS could dismiss for want of jurisdiction. Ch J Michael B. (“Iron Mike”) Thornton didn’t let that move get past him.

Now for the latest. See my blogpost “Beat the Clock”, 11/11/14, which I posted when nearly unconscious upon my return from the Magnolia City.

There, the Judge With a Heart, STJ Armen, sustained the timeliness of a Tax Court petition that just beat a bankruptcy petition to the courthouse door. The 11 USC §362(a)(8) bar doesn’t fall until the bankruptcy petition is filed.

So what else is new?

Well, IRS moves to dismiss the Tax Court petition. And it just so happens that they move right after the bar is lifted. But “the law’s delay” means that STJ Armen’s order comes at the point where, if he had ruled the other way, taxpayer would have had exactly one day to file a new petition.

And of course if taxpayer missed the cutoff, or the order bouncing the petition had come a day later, too late, petitioner, you’re auf’d, as they say on the runway.

Takeaway–Practitioner, watch the clock and the calendar. Closely.

And that’s what happens when Tax Court is closed. I just go on posting.

That is, when you’re seeking to deduct rental real estate losses, size matters. I mean the size of the non-rental real estate income and the size of the rental real estate losses. Add imperfect contemporaneous (or near-contemporaneous) recordkeeping,  dash in many hours worked at non-rental real estate activities, and you have the perfect mixture for an audit, and an unsuccessful Tax Court litigation.

Now I’ve discussed this many times before, and won’t even try to dig out the blogposts wherein I did so.

But since school’s out today at 400 Second Street, NW, to honor us veterans, I thought I’d venture once more into the cliché.

My colleague Peter Reilly, CPA, over at Forbes.com (he’s in the big leagues), asked me if I had any thoughts about Howard C. Cantor and Patricia M. Allen, 2014 T. C. Sum. Op. 103, filed 11/6/14. And it’s a STJ Lew (The Right Spelling) Carluzzo opinion.

I hadn’t, because when I read it on 11/6/14, it looked like the many-times-told tale of someone deeply immersed in a non-rental real estate activity, who had some rental properties “on the side”, and wanted to deduct depreciation losses against ordinary operating income from the money-maker.

But Mr Reilly had an interesting take, which I’ll mention even though I disagree with it.

Mr. Reilly: “The NAICS code on his Schedule C was 811120, which stands for ‘Automotive, Paint, Interior, and Glass Repair’.

“Would we have had a different outcome or maybe no audit at all, if the code had been 28150 Glass & Glazing Contractors?”

“I don’t think preparers pay much attention to those codes.  Here is an instance where it just might have made a difference.

“Any thoughts?”

I answered that I thought most unregistered preparers probably think that NAICS is a television show about Navy cops-and-robbers. But that’s more than a trifle glib and condescending; it might could be that even registered or enrolled or otherwise Circ 230 preparers might fare no better.

After all, Howard’s returns were prepared by a CPA, and IRS did not assert either Section 6652 negligence or substantial understatement penalties, just a Section 6651(a)(1) late-filing addition to tax. 2014 T. C. Sum. Op 103, at p. 2 and at p. 5.

No, the bottom line is that Howard had north of $45K real estate type losses in each year at issue. And his gross receipts from his glass business were almost or better than $700K in each such year. Worse, he had no records to prove allocation of his hours (admittedly well north of the magic 750 hours) between real estate and non-real estate.

No, Mr Reilly, I think the numbers on Howard’s return that triggered the audit and the litigation weren’t NAICS, but rather dollars received and dollar losses claimed. And no hard numbers on hours spent.

 Personal Reflections

 Tax Court is closed, of course. So here are a few personal reflections. If you want some of my tax thoughts, skip to my next blogpost.

To my brothers and sisters on active duty, good luck, Godspeed and may you all arrive home safe, and all’s well.

To my brothers and sisters, fellow veterans, thank you again. It was an honor to be among you today.

It was great to see the turnout on Fifth Avenue and hear the cheers and thanks. I wish those not present could have heard them.

It’s all too easy for me to quote Kipling or Yeats and be cynical; it’s even easier to quote Shakespeare. Ol’ Will wrote a great speech that proves to me that he was a soldier, and not an officer.

It is the most condescending, patronizing effusion I can think of. And it’s just what one would expect from a higher-up who is sending other people to be maimed (in body, mind or spirit) or killed in a war that shouldn’t have been fought.

I’ll spare you what little erudition I have.

God bless America.

No, this is not the story of a romantic breakup. This is a brief review of ordinary-and-necessary, the Section 162 mantra, as told by Judge Gale.

Specifically, this is the story of Melanie L. Thomas-Kozak, as told in 2014 T. C. Sum. Op. 104, filed 11/10/14.

Melanie is an engineer for Sunoco, the oil company. Melanie claims all sorts of employee unreimbursed business expenses, the vast majority of which bite the unsubstantiated dust. Sunoco is mostly generous in its reimbursement policy.

I’m focusing here on Melanie’s boots. Now Sunoco’s reimbursement policy covered “clothing needed for weather or safety conditions”, 2014 T. C. Sum. Op. 104, at p. 4. So Melanie bought a pair of boots to wear on the jobsites she visited as part of her job.

“Petitioner testified that $280 of the disputed amount pertained to steel-reinforced metatarsal boots that Sunoco required all personnel to wear on jobsites. She produced a receipt to substantiate the purchase…. Petitioner testified that the steel reinforcement in the boots ran above the ankle and that the boots were required for safety on jobsites. She testified that she requested reimbursement from Sunoco but was denied it because the company believed reimbursing her would require it to reimburse all contractors at its jobsites as well. Sunoco’s reimbursement policy, however, stated that the cost of work-related clothing needed for ‘weather/safety conditions’ was reimbursable.” 2014 T. C. Sum. Op 104, at pp. 21-22.

“The cost of clothing is deductible as an employee business expense only if the clothing is required for the taxpayer’s employment, unsuitable for general wear, and not worn for personal use. The clothing must be unsuitable for use outside of the taxpayer’s work environment and not actually used outside of that environment.” 2104 T. C. Sum. Op. 104, at p. 22. (Citations omitted).

But Judge Gale is generous, even if Sunoco is not.

“We are satisfied that petitioner has shown entitlement to deduct the cost of the boots. We readily accept the boots’ safety purpose and their required use on job sites as plausible. It is clear the boots are not suitable for other purposes, and we accept petitioner’s plausible testimony that Sunoco refused reimbursement out of concern that it not incur an obligation to purchase similar boots for others (notwithstanding the formal terms of Sunoco’s reimbursement policy for safety-related clothing).” 2014 T. C. Sum. Op. 104, at pp. 22-23.

So despite tossing 82% of Melanie’s deductions in one year, and 35% in the other, Judge Gale does give Melanie the boot.

No, not the 1950’s quiz show, rather this is the story of Janetta Lee Perry, as told by The Judge With a Heart, STJ Armen, in the eponymous 2014 T. C. Memo. 231, filed 11/10/14.

This greeted me on my return from the Magnolia City and the Steel Magnolias resident therein, after a splendid visit with my nearest and dearest, punctuated by discussions of the infinite complexity of our tax law.

The clock plays the lead role in Janetta’s case. She started with a petition to reconsider the deficiency and penalty IRS bestowed upon her. Then, in a moment, in the twinkling of an eye, Janetta files bankruptcy.

STJ Armen: “On June 6, 2014, at 1:48 p.m. EDT, petitioner filed a petition for redetermination with this Court, which petition served to commence the instant case. See Rule 20(a). Later that same day, at 2:11 p.m. PDT, petitioner filed a voluntary petition with the U.S. Bankruptcy Court for the Northern District of California, which petition served to commence a bankruptcy case under chapter 7 of the Bankruptcy Code, 11 U.S.C. Thus, petitioner’s bankruptcy petition was filed approximately 3½ hours after petitioner’s Tax Court petition.” 2014 T. C. Memo. 231, at p. 3.

Now Janetta had been discharged and her case closed when IRS moves to dismiss, but note that the 60 days to petition after discharge and close per section 6213(f)(1) ends on Monday. So if IRS wins its motion, Janetta had best get en charette.

But IRS doesn’t win. The timing is as confusing as the recent switch from Daylight Savings Time to the winter blend, but basically Janetta filed her Tax Court petition at 10:48 a.m., her local (Northern California) time, and her bankruptcy petition at 2:11 p.m., her local time.

Those hard-laboring intake clerks at 400 Second Street, NW, flailing away with their date stamps, sure have helped the diligent petitioner. See my blogpost “What a Difference a Day Makes”, 11/1/11.

STJ Armen: “Petitioner filed her petition commencing the instant case with this Court before she filed her petition with the bankruptcy court, albeit by only a few hours. Because her case in this Court was commenced before the automatic stay came into effect, the automatic stay cannot serve to preclude its antecedent commencement. See 11 U.S.C. sec. 362(a)(8). Accordingly, the petition filed herein was not filed in violation of the automatic stay, and petitioner properly invoked this Court’s jurisdiction.” 2014 T. C. Memo. 231, at pp. 4-5 (Citation omitted).

Though timely commenced, Janetta’s case was stayed from going forward pursuant to 11 USC §362(a)(8) until issuance of the discharge and closure.

That happy event having occurred, IRS’s motion to dismiss is denied. Janetta can go ahead.

Fred L. Wagner’s counsel was running out of patience, and so was Judge Cohen. Fred’s main case had been pending for four years, and five (count ‘em, five) trial dates had been set, when a stipulation for settlement was executed both by Fred’s counsel and IRS’s counsel. There’s a related case with unresolved issues consolidated with Fred’s main case, but Fred’s counsel and IRS’s counsel were working on those.

Lo and behold, as a lamented colleague was wont to say, on the last day to move to vacate the decision entered pursuant to the stipulated settlement, IRS’s counsel so moves because “Respondent’s counsel is concerned that if the decision in this case is not vacated, the Court may be forced to try and interpret the basis for the parties’ settlement for taxable year 2005 in this case in order to render an opinion for taxable years 2006 and 2007 in….” the related case. Order, at p. 2.

IRS’s counsel claims that, because she and Fred’s counsel disagree on the impact of the settlement in the main case on the related case, there was no “meeting of the minds” on the stipulation of settlement.

Didn’t we just discuss this, you may ask.

Roger that, I respond.

See my blogpost “Check the File”, 11/5/14.

Judge Cohen doesn’t even have to read Judge Morrison’s words of wisdom, much less mine, as she tosses IRS’s counsel and her motion under the proverbial.

“Respondent does not cite any direct authority for the relief sought but relies on the catchall phrase ‘any other reason justifying relief from the operation of the judgment’ in Rule 60(b) of the Federal Rules of Civil Procedure. Respondent does not address those authorities that suggest that this is not a situation where relief is justified.” Order, at p. 2.

But Judge Cohen does address them, and the result doesn’t help IRS’s counsel.

“This Court has repeatedly declined to vacate a stipulation for settlement and is even less likely to set aside a stipulated judgment incorporating the agreed upon terms. Relevant cases were summarized in Dorchester Industries Inc. v. Commissioner, 108 T.C. 320, 335 (1997), aff’d 208 F3.d 205 (3d Cir. 2000) and in Stamm International Corp. v. Commissioner, 90 T.C. 315, 321-322 (1988).” Order, at p. 2.

Unhappily, IRS’s counsel ignores those cases.

Fred’s main case has been pending for four years, the related case for two years, and “The parties and the Court expended substantial efforts in narrowing issues before trial, and counsel were well aware of the relationship between the two docketed cases. If there is doubt about the effect of the decision in this case on the issues in the related case, that question may be resolved in the later case.” Order, at p. 2.

In any case, this case is going to trial in the Spring. With the stipulated decision in place.

Oh yes, the designated hitter is Fred L. Wagner, Docket No. 24556-09, filed 11/7/14.