Unlike that Obliging Judge, Judge David Gustafson (see my blogposts “We’ll Come To You“, 9/18/12, and “We’ll Come To you – Part Deux”, 10/12/12), Ch Judge Michael B. (“Iron Mike”) Thornton has a limit as to how far he will go.

So Balan Sadasivam & Ramya Umashankar, Docket No. 8005-14, filed 5/30/14, have to mix-and-match, or else get to Washington, D. C. somehow.

Ch J Iron Mike told Bal and Ram to pick a trial venue. But Bal and Ram claim they’re in India, and can’t travel to the Land of the Free.

So Ch J Iron Mike, unwilling to travel outside the USA because Tax Court doesn’t hold trials outside the USA, suggests the following:

“Because petitioners have not properly designated a place of trial, the Court will designate Washington, D.C., as the place of trial in this matter. If travel is difficult, petitioners may wish to consider the possibility of submitting their case for decision under Rule 122, Tax Court Rules of Practice and Procedure. A copy of Rule 122 may be accessed at the Tax Court’s website at http://www.ustaxcourt.gov. Furthermore, petitioners may wish to contact the IRS attorney assigned to their case to discuss further options. On May 8, 2014, respondent filed an Answer in this case. The Answer contains the name, address, and telephone number of the attorney from the IRS whom petitioners may contact about their case.” Order, at p.1.

Meantime, Bal and Ram, trial will take place at 400 Second Street, N.W.

Julia, Maggie and Dotty and their numerous descendants are heirs of Grandpa Dick Reynolds, a primordial rapper, but spelled with a “w”. Dick invented Reynolds Wrap, a trusted ally in my kitchen and those of millions of others. He parked the C Corp stock in a PHC (of course), basis bupkiss (as we say), FMV astronomical, especially after Reynolds Aluminum merged with Alcoa fifteen years ago.

Dick’s son Dave put the PHC stock into family trusts, run by Dave’s daughters Julia, Maggie and Dotty. Julia, Maggie and Dotty, of course, followed Grandpa’s deathbed advice “Never sell nothing never”, until their trusted attorneys were approached by Seidman BDO, well-known accounting firm (full disclosure: they even did work for me thirty years ago, but not the dirty work hereinbelow set forth), with a wonderful deal: move your stock into an LLC, and sell it to our “financial buyers”.

You pay capital gains, and the buyer is stuck with the BICG. They buyer, of course, is anonymous and will borrow the money to pay you, and deal with the BICG.

Sound familiar?

See my blogpost “A Good Day for Taxpayers”, 3/15/11. But here innocence once more saves the innocent transferees of a Bialystok roundy-rounder, in Julia R. Swords Trust, Transferee, Margaret R. Mackell, Dorothy R. Brotherton, and Julia R. Swords, Co-Trustees, et al., 142 T. C. 19, filed 5/29/14.

IRS wants to use Federal law to collapse the sale of the stock into a liquidation of the PHC, distribution of the assets to Julia, Maggie and Dotty as trustees, and then a sale of the assets to the “financial buyer”, thereby rendering the PHC insolvent, and setting up a State law fraudulent transfer set-aside.

Nope, says Judge Marvel, writing for a unanimous Court.

“This Court has previously never explicitly adopted or rejected respondent’s proposed two-step analysis to decide whether a transaction should be recast under the Federal substance over form (or similar) doctrine when analyzing whether a transferee is liable under section 6901. Our approach, however, has been to require that State law allow such a transaction to be recast under a substance over form (or similar) doctrine before doing so.” 142 T. C. 19, at p. 38.

But Tax Court has always acted as if State law rules. Federal law decides if someone is a transferee, but State law decides if they should be liable for the unpaid tax. And Tax Court’s not changing now.

State law decides the form-over-substance jump-ball in a Section 6901 transferee liability case. “The Commissioner may collect the transferor’s unpaid tax from the transferee if an independent basis exists under applicable State law or State equity principles for holding the transferee liable for the transferor’s debts. Sec. 6901(a);Commissioner v. Stern, 357 U.S. at 45; Hagaman v. Commissioner, 100 T.C. 180, 183 (1993); Starnes v. Commissioner, T.C. Memo. 2011-63, slip op. at 15. State law determines the elements of liability, and section 6901 provides the remedy or procedure to be employed by the Commissioner as the means of enforcing that liability. Ginsberg v. Commissioner, 305 F.2d 664, 667 (2d Cir. 1962), aff’g 35 T.C. 1148 (1961); Starnes v. Commissioner, T.C. Memo. 2011-63, slip op. at 15. The applicable State law is the law of the State where the transfer occurred. See Commissioner v. Stern, 357 U.S. at 45; Starnes v. Commissioner, 680 F.3d at 426.” 142 T. C. 19, at p. 31.

There are three legs to the Section 6901 stool: transferor must owe unpaid tax, transferee must be a transferee as defined in Section 6901 (briefly one who got the boodle from the deadbeat taxpayer), and there must be independent State law or State equity basis for holding the transferee liable.

Judge Marvel chronicles all the losses IRS took trying to nail transferees in the roundy-rounders of Mid-Coast Financial and its imitators. And this is another one.

So no Federal form-over-substance here. State law doesn’t help, first because the only State (here the Commonwealth of Virginia) law has to do with a broker’s commission, and second because Virginia has its own fraudulent conveyance statute (doesn’t have the Uniform).

And Julia, Maggie and Dotty relied on their attorneys and accountants, as they had been doing for years, didn’t have a clue about the post-closing shenanigans of the “financial buyer” (of whose identity they were unaware pre-closing), and testified credibly on the trial as to their utter good faith.

Note that this may save Billyhawk and the hawklings when they go to trial. See my blogpost “Game Ends In No Score”, 5/30/12. There, Judge Wells wouldn’t buy Mrs Billyhawk’s affidavit and the hawklings’ paper averments that they knew nothing of Mid-Coast Financial and their skullduggery. But the trial may save them.

So the rappers’ tale has a happy ending–for the wrappers.

How many times has an in-the-trenches, battle-weary, preparer heard that line? And how many times has that preparer replied, “no, you need a record of the people or firm involved and your business purpose, made at the time you paid the expense you’re claiming”?

True, you don’t need a logbook, but you do need an appointment book or some record not made up after the fact, connecting the expense to the ordinary and necessary requirements of your business.

Another telling of the many-times-told-tale is Judge Chiechi and Richard A. Canatella, in 2014 T. C. Memo. 102, filed 5/28/14.

I blog this case only because nothing else, and I mean nothing else, worthy of the slightest consideration emerged from 400 Second Street, N.W., today.

Richard is an attorney. No, I’m not going to harp on automatic Tax Court admission, notwithstanding that the Tax Court admissions exam is coming in November for everyone but attorneys. But here’s something from Richard’s trial testimony that makes my point better than I could.

“THE COURT: Okay, let’s move on to each of the expenses, and I’ll tell you what they are, just in the order in which they were in the statutory notice of deficiency. Meals and entertainment of $2,436, what do you have to tell me in support of your position that that entire amount is deductible?

“THE WITNESS: As far as I’m concerned, every expense is allowable, and if the examiner didn’t allow it, it’s because he didn’t accept cancelled checks, bank statements, and documentation that prove under, I believe, 7491 of the probate — I mean, of the revenue code that we’re entitled to the allowance.

“THE COURT: So you believe that having a cancelled check or a credit card [statement] entitles you to each of the deductions, is that right?

“THE WITNESS: Yes.” 2014 T. C. Memo. 102, at pp. 8-9.

Judge Chiechi blows that one off, and hardly bothers with Section 274, throwing it away with a footnote (footnote 7 at p. 11).

How ‘bout it, Tax Court? Want to let us all take the exam?

Though I never served in the British Army engineers (one Army engineers is enough, thanks), I remember hearing the famous bugle call “You can be a defaulter as long as you like, as long as you answer your name”. Well, Judge James S. (“Big Jim”) Halpern is sounding that call with a vengeance today, 5/27/14, as he deals with various defaulters.

What’s the difference between a default and a failure to prosecute? Turns out the difference is no big difference for Peter H. Jones, 2014 T. C. Memo. 101, filed 5/27/14, although procedurally it might make a difference in S. E. C. (Someone Else’s Case).

Here’s Judge Big Jim’s exegesis: “At least with respect to the deficiencies in tax that he determined, respondent [IRS] states that dismissal of petitioner’s cases pursuant to Rule 123(b) on account of his failure to properly prosecute would reach the same result that would be reached if we hold him in default under Rule 123(a). That is true. We have said: ‘A Rule 123(b) dismissal, as a sanction against petitioner, is available as to those issues for which petitioner bears the burden of proof. A Rule 123(a) default would be the proper sanction against petitioner as to those issues for which respondent bears the burden of proof.’ Lopez v. Commissioner, T.C. Memo. 2001-93, 2001 WL 388758, at *4 (citing Smith v. Commissioner, 926 F.2d 1470, 1476 (6th Cir. 1991), aff’g 91 T.C. 1049 (1988)). Petitioner bears the burden of proof with respect to the determined deficiencies. See Rule 142(a). Nevertheless, respondent has moved that we hold petitioner in default and dismiss under Rule 123(a), and we will do so.” 2014 T. C. Memo. 101, at p. 13, footnote 4.

Pete is a graduate of the Air Force College and a thirty-year contractor, but also a long-time non-filer and frivolity merchant. So he gets a bushelbasketful of chops.

But Judge Big Jim isn’t finished defaulting people. He even tells the IRS to default itself, and they do. Check out Jose Vega, Docket No. 10713-13, filed 5/27/14.

IRS got an order and decision against Jose on default back at the end of April, hitting Jose for $5K tax and a $700 Section 6662(a) penalty, but either IRS changed its mind or Jose paid up (Judge Big Jim doesn’t say which), so IRS makes a Rule 162 motion to vacate or revise.

Judge Big Jim’s order is such a gem that I cannot do better than print it in extenso:

“This case was called from the calendar…. There was no appearance by or on behalf of petitioner. Respondent [IRS] orally moved for default judgment against respondent at the suggestion of the Court. It is

“ORDERED that respondent’s motion to vacate or revise pursuant to Rule 162 is granted, in that the Court’s Order and Decision entered on April 30, 2014, is hereby vacated and set aside. It is further

“ORDERED that respondent’s oral motion for default judgment against respondent is granted. It is further

“ORDERED AND DECIDED that there is no deficiency in income tax or penalty pursuant to I.R.C. section 6662(a) due from petitioner for the taxable year 2010.” Order, at p. 1.

So IRS, with its counsel present in Court, declares itself in default, therefore its motion is granted, and Jose, who isn’t there and didn’t show up for either Court appearance, wins.

Ya can’t make this up.

Now you know why I love this stuff so much.

IRS has decided to let some disbarred or suspended tax pros get PTINs, and go back to preparing and filing returns.

But as someone said in a much more solemn circumstance, not all of you are clean.

“Individuals who have been enjoined by a court from return preparation are not affected by this action. And individuals under suspension or disbarment will not be entitled to represent their clients before the IRS for any purpose during their disciplinary period.” This from an announcement from OPR, 5/23/14.

You’ll remember Sabrina Loving and her chums, who threw Dave Williams and Dougie Shulman for a loss over the RTRP maneuver. No? How quickly they forget! See my blogposts “Chevron, Mayo–I’m Loving It”, 1/21/13, “Modified Loving”, 2/4/13, and “Loving Conquers All”, 2/12/14.

Well, since IRS can’t treat preparers as Circular 230 types, because they aren’t “practicing” before IRS, they can’t keep people from being preparers even if they flunk the Circular 230 tests for adherence to Truth, Justice and The American Way.

Judge Boasberg let IRS continue the PTIN program (see my blogpost “Modified Loving”, supra, as my already-out-on-their-yachts colleagues would say), because unlike the Dave-and-Dougie show, there was actual statutory authority for the PTIN program, so IRS could collect fees and hand out PTINs, notwithstanding they could do nothing else to the holders thereof, irrespective of their sins, negligences or ignorances.

Of course, if a Court determined that someone is unworthy of filing returns, that’s another story.

To This Situation

I am reminded of G. B. Shaw’s story of the celebrated swearer who, seeing his worldly goods fall off the back of a wagon and roll down a hill, said “I find I cannot do justice to this situation”, by today’s designated hitter from STJ Lewis (“Sweet Lew the Spelling Champ”) Carluzzo.

The case involves a nonassessible penalty (thus no SNOD necessary). It’s the Section 6699 $125-per-shareholder of a Sub S when the required return is not filed. And the S Corp owes the penalty.

Appeals denied the S Corp’s request for abatement, and told them to pay, then apply for a refund, and sue if they don’t get it.

And I never had to deal with a Section 6699 penalty either.

The S Corp petitions, but of course the letter from Appeals isn’t a SNOD, because Section 6699(d) expressly excluded the penalty from deficiency procedures.

And it isn’t a NOD, because IRS hasn’t issued a NFTL or a notice of intent to levy. STJ Lew says the letter doesn’t say anything about liens or levies or what to do if there is one.

So the S Corp can wait for the NFTL or the notice of intent to levy and ask for a CDP. And if they’re unhappy, then petition Tax Court.

Simple, right? Nothing here that, in Baedecker’s immortal words, “need long detain the tourist.”

The S Corp is out.

But the S Corp’s name creates the situation to which I cannot, in a blog meant for family reading, do justice: Inland Empire Colon & Rectal Surgeons, Docket No.3624-13S, filed 5/23/14.

I’ve been running this blog since December, 2010. The blog and I have had our ups and downs, high points and low points.

The only reason I’m waxing nostalgic, and even a trifle wistful, this cloudy morning, is that today, May 23, 2014, I expect to reach the thirty-thousandth view on this blog.

Now I know the popular blogs, the “influencer” blogs touted by the social media, to say nothing of the unending tweets of the rich and famous, get that many views in a second or less.

But I make Tom Hardy’s guy Jude the Obscure look notorious.

After all, aficionados of the United States Tax Court are rather fewer than any other group I can think of. And I can’t think anyone else is blogging the opinions, orders, press releases and miscellanea therefrom on a daily basis (or almost so).

So it’s a milestone for me to hit thirty thousand (count ’em) views, however long it took me to get there.

Thanks to my stouthearted readers.

Judge Halpern has to untangle a charitable deduction that feels wrong–but is it a sham? And if it is, so what?

The case is RERI Holdings I, LLC, Harold Levine, Tax Matters Partner, 2014 T. C. Memo. 99, filed 5/22/14.

Hal the Tax Matterer (hereinafter just “Hal”) wants partial summary judgment that the concepts of “sham” and “lack of economic substance” don’t apply to charitable gifts. IRS vigorously opposes.

RERI was organized to set up a give-and-go with the remainder interest in a triple-net lease of California real estate. And there was a charitable donation thereof, although IRS claims it was zero and Hal claims $33 million.

Judge Halpern doesn’t give either side partial summary judgment.

First, if a desire for a tax break invalidates a charitable gift deduction, no charitable gift would be deductible. Second, if RERI is a sham, then any deduction would flow through to its partners (RERI having elected to be taxed as a partnership). And that would happen anyway.

A charitable gift doesn’t need a nontax purpose to be deductible, but the amount of the deduction is the FMV of the property. And that means deflated of any give-and-go shenanigans. And any entity formed for the sole purpose of augmenting the supposed FMV of the donated property will be disregarded.

But we don’t know enough just yet. “Whether RERI was organized solely for tax avoidance purposes and lacked economic substance may be a relevant issue in determining whether its contribution… entitled its members to charitable contribution deductions on account thereof. It remains to be seen whether that is the case. Therefore, as stated, we will deny the motion.” 2014 T. C. Memo. 99, at p. 23.

No, not the 1969 Coca Cola slogan of advertising fame, but the Regency Plaza Associates of New Jersey, which was a real partnership that did actual business before it lost its only asset to mortgage foreclosure and thus ended its existence.

This is the story of two of its partners, Israel Greenwald and Ruth Greenwald, as told by Judge Buch in 142 T. C. 18, filed 5/21/14.

Once again, it’s the TEFRA-related (and some might say TEFRA-conflated) story of inside basis (partnership’s basis in the assets contributed by each partner) and outside basis (each partner’s basis in his/her partnership interest).

After the dissolution of Regency, there was a partnership-level proceeding years ago, that settled.

Now the partners petition IRS’ partner-level deficiencies arising out of the “affected items” that were settled in the partnership-level proceeding.

But the partners change their minds, and claim Tax Court has no jurisdiction, as the “affected items” involve outside basis, and that had to be determined at partnership-level. IRS claims Tax Court does have jurisdiction, because outside basis that gives rise to “affected items” gets determined at partner-level.

Judge Buch: “Both parties, however, miss the mark. In these partner-level affected items proceedings, we have jurisdiction to redetermine the amounts of any deficiencies attributable to affected items that require partner-level determinations. Because partner-level determinations are required, we have jurisdiction to redetermine the deficiencies at issue.” 142 T. C. 18, at p. 3.

You remember the rule: if the partnership-level redetermination results only in arithmetic to the partner, no deficiency needed, but if it requires partner-level factual determinations, then IRS must follow deficiency procedures.

A partnership item is one the partnership must decide (but if it doesn’t, it’s still a partnership item).

“Partnerships do not keep track of the partners’ outside bases, but they may be required to take a partner’s outside basis into account in some situations. For example, when a partner purchases an interest in a partnership, the partnership may elect under section 754 to make optional adjustments to the basis of partnership property. If such an election is made, the partner’s initial basis in the partnership is a partnership item. However, if the election is not made, the partnership is not required to determine the partner’s initial outside basis. Accordingly, a partner’s outside basis generally would be an affected item.” 142 T. C. 18, at p. 10 (Citations omitted).

The partners cite Tiger Eye and Woods for the proposition that outside basis is a partnership-level item, but those were sham partnership cases. You can’t have any basis greater than zero in a non-existent asset. So once the “partnership” is shown to be a sham, there’s no need to compute outside basis.

Here, there was a real partnership. And there may be necessary fact questions to ascertain in order to compute partners’ gains or losses. And to do that, we need to know each partner’s outside basis.

“To ignore potential partner-level determinations by assessing without following deficiency procedures would have the effect of depriving partners of a prepayment forum where there is a dispute as to the amount or existence of partner-level determinations that could affect the amount of the assessment. Section 6230(a)(2)(A)(i) is specifically intended to give partners that prepayment forum.” 142 T. C. 18, at pp. 14-15.

So, Regency ex-partners, you’ve got your chance to fight about your deficiencies, whether you wanted to or not.

And see my blogpost “The Great Dissenter”, 12/28/11, where Judge Holmes tells the story much better than I do.

It’s Not As Remote As You’d Think

 Warning- this is a rant.

Two whistleblowers get to keep their anonymity, as Judge Kroupa casts the Cloak of Invisibility upon Whistleblower 10949-13W, 2014 T. C. Memo. 94, 5/20/14, and Whistleblower 11332-13W, 2014 T. C. Memo. 92, filed 5/20/14.

There’s a third whistleblower similarly protected by Judge Kroupa today, but the facts there differ sufficiently from the other two cases that I want to concentrate on those.

You sure you want to blow the whistle? It might be seriously hazardous to your health.

“During the whistleblower’s employment, the whistleblower learned of a tax structure involving the whistleblower’s employer and several related entities and subsidiary companies (targets). When the whistleblower raised concerns over the tax structure to the whistleblower’s employer, the whistleblower’s employer used physical force and armed men to intimidate the whistleblower and prevent disclosure. The whistleblower reported the tax scheme to the Government and for several years assisted the Government in its investigation of targets. Based partly on the whistleblower’s information, the Government eventually recovered more than $30 million in taxes, penalties and interest.” 2014 T. C. Memo. 94, at p. 2-3.

So why is the whistleblower in Tax Court? $30 million should yield him/her a nice return. Since Section 7623 allows at least a 10% bonus, $3 million bucks, even if taxable at ordinary rates, isn’t too shabby.

Except the whistleblower probably got the usual “we can’t tell you the reason to protect the privacy of the tax dodgers and their armed buddies, but the information was all public, or it didn’t help us, and anyway this isn’t a determination”. The opinion doesn’t say that, of course, but why petition for an extra couple of bucks if it means spilling your guts? And I mean literally spilling your guts.

So the whistleblower wants to test the validity of IRS’ stonewalling. But to do so, he/she needs to proceed anonymously.

Here’s why: “The whistleblower was aware that the Government investigated targets for potential ties to terrorist groups. Additionally, Department of Justice attorneys informed the whistleblower that targets were connected to organized crime and terrorism and could resort to physical force or harm in connection with their activities. The whistleblower received a death threat from one of the targets through its counsel. On one occasion the whistleblower used armed guards for safety when the whistleblower traveled abroad. Additionally, targets have lodged numerous litigation threats against the whistleblower relating to the whistleblower claims.” 2014 T. C. Memo. 94, at p. 3.

You want more? “The whistleblower asserts that revealing the whistleblower’s identity would result in the risk of retaliation, social and professional stigma, economic duress and personal safety. Specifically, the whistleblower asserts that disclosing the whistleblower’s identity will result in professional stigma and impair the whistleblower’s livelihood by alienating the whistleblower’s potential clients and business contacts. Finally, the whistleblower asserts that the whistleblower is of an age and station in life that necessitates continued employment. The whistleblower filed the motion to proceed anonymously at the same time the whistleblower filed the petition.” 2014 T. C. Memo. 94, at p. 4.

IRS filed no notice of objection to the motion. Big of them, ya think?

Judge Kroupa: “In short, the nature and severity of potential harm that could befall the whistleblower outweigh the societal interest in knowing the whistleblower’s identity.” 2014 T. C. Memo. 94, at p. 6.

2014 T. C. Memo. 92 is even more interesting.

“After learning that the whistleblower was subpoenaed to provide documents to the Government, targets filed multiple retaliatory actions against the whistleblower to determine the whistleblower’s role in the investigation and to silence the whistleblower. The whistleblower incurred significant personal expense, spent time and suffered professional reputational costs defending against these actions that were designed to intimidate and threaten the whistleblower.” 2014 T. C. Memo. 92, at pp. 3-4.

Now get this: “After learning of the individuals and entities involved, the Government offered to place the whistleblower in the witness protection program. The whistleblower declined placement in the witness protection program, but requested and was granted confidential informant status. The whistleblower was also forced to hire counterterrorism experts to advise the whistleblower’s family on safety and protect the whistleblower on trips abroad. This protection cost the whistleblower tens of thousands of dollars. Despite their efforts, targets have not discovered the identity of the whistleblower. They were aware only that the whistleblower was subpoenaed by the Government.” 2014 T. C. Memo. 92, at p. 4.

Leaving aside the fact that if the bandits are not terminally stupid, they’ve figured out who the whistleblower is from this public discussion of the case, I must ask why this person has to go to Tax Court, if he handed the IRS enough to nail these crooks for $30 million.

These opinions should have been sealed, for a start. More to the point, they should never have had to be written.

Exactly what is the Whistleblower Office doing out there, besides watching the Ogden, Utah sunset?

So what’s the point?

If you try to help the IRS collect, and your information gets them $30 million they’d have had no way of getting otherwise, and you have to tell your life story in Tax Court (so there’s an opinion for the world to read), you’re risking your life, and your family’s life, for nothing.

Great public policy, ya think?