So ends the saga of Robert Jacobson, Docket No. 8447-13W, filed 9/4/14, as CSTJ Peter Panuthos shows Robert to the door, as IRS claims they collected no money from the various skullduggers Robert claims to have unearthed.

Robert avers he attached a list of skullduggers, their aiders and abettors to various documents he furnished the Ogden, UT gang, but they claim they never got them. Interestingly, the Ogden Sunseteers never mentioned that lacuna when CSTJ Pete denied them summary judgment back on 3/13/14, as to which see my blogpost “Summary Judgment – A Causerie”, 3/13/14.

Remember what I said back then: “But, as usual, the motion cuts multiple ways. Uncle Bob has told IRS what his case consists of. CSTJ Panuthos has told IRS what they need to do to meet, and maybe beat, Uncle Bob’s case. And Uncle Bob now knows something of what CSTJ Panuthos thinks of the case, if CSTJ Panuthos gets to try it, of course; he was only assigned the case to deal with the IRS’ motion.”

And deal with it he does: IRS claims they never got the list of alternate or additional skullduggery (apparently forgetting to mention that fact when they moved for summary judgment back in the Spring), never got any money, so Section 7623 says, paraphrasing that Goddess of the Runway, “you’re auf’d”.

Summary judgment for IRS.

Torgeir Mantor and his business partner Alan Smith needed a cash transfusion into their start-up LLC, as the venture capitalists were threatening to pull the plug on Visionmonitor Software, LLC, Torgeir Mantor, Tax Matters Partner, the subject of 2014 T. C. Memo. 182, filed 9/3/14.

Unable themselves to pump the cash, Tor and Al signed various sloppy, unnotarized, internally-contradictory and otherwise potentially defective promissory notes in favor of the foundering LLC, claiming thereby to have guaranteed payment and performance of the obligations of same to the vendors and other creditors thereof.

The VC types (venture capital, not Viet Cong, although in these times, who knows?), satisfied that Tor and Al have placed their anatomies on the table, fund the LLC, so that it actually makes money, eventually.

But Tor and Al want to take losses personally for the lean years. For that, as the LLC is box-checked as a partnership, they need basis in their membership interests, and claim the promissory notes give them that.

IRS claims they had zero basis in the notes, because the notes weren’t guarantees of the LLC’s debts, such as would have given Tor and Al basis.

This is a FPAA, so these are partnership-level issues post-Woods, as are the 20% chops for understated tax.

And who better to explicate the truth that promissory notes to the partnership butter no basis, than The Great Dissenter, a/k/a The Judge Who Writes Like A Human Being, s/a/k/a The Relentless, Implacable Foe of the Partitive Genitive, Judge Mark V. Holmes?

Setting the stage: “The value of what a partner contributes to his partnership can be tricky when he contributes something other than cash–like the notes at issue here. VisionMonitor argues that the contribution of the promissory notes increased Mantor’s and Smith’s outside bases in amounts equivalent to their face value. But a partnership’s basis in property contributed by a partner is the adjusted basis of that property in the hands of the contributing partner at the time of the contribution. Sec. 723. The Commissioner argues that the company’s basis in the notes is zero because Mantor’s and Smith’s bases in them were each zero.” 2014 T. C. Memo. 182, at p. 10.

And the Commissioner wins. There’s much caselaw to back up the Commish, and Tor and Al’s one case has to do with a direct guarantee by the partner. The partner has to step up to the creditors directly, placing the aforementioned anatomy on the creditor’s table, not the partnership’s.

And the “at-risk” rules aren’t relevant here. Judge Holmes blows them off in a footnote.

“VisionMonitor argues that the notes should be included in outside basis because Mantor and Smith were ‘at risk’ under section 465. It argues that the substance of the transaction made Mantor and Smith ultimately responsible for a fixed and definite obligation, that nothing in the Code or caselaw makes any explicit preclusion of partnership debts made to the partners themselves, and that the promissory notes constituted ‘genuine indebtedness.’ The Commissioner retorts that the ‘at risk’ limitation isn’t a partnership-level determination, and isn’t something we can determine here. It’s also an issue that we don’t have to decide because the relevant question isn’t whether the notes were a debt owed by the partners to VisionMonitor but whether the partners had basis in the notes.” 2014 T. C. Memo.182, at p. 13, footnote 6.

But while the applicability of the Section 6662 accuracy penalties can be decided at partnership-level (with a tip of the hat to Judge Marvel, and although the partners may individually have a shot at fighting them in a CDP, which is another story), Tor and Al dodge the bullet, relying on their trusty tax lawyer, who, although he did a dodgy job here, still impresses with his credentials and the guys’ transparent good faith. They let it all hang out, and their expert had credentials.

Good stuff here, guys. Read and heed.

Now comes the defender of the taxpayers’ wallet at the sixty-buck-palace-of-justice, The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable Unrelenting Foe of the Partitive Genitive, Judge Mark V. Holmes, who strides into the breach and stifles IRS’ deposition demand in Caylor Land & Development, Inc., et al., Docket No.17204-13, filed 9/2/14.

There are Seven Little Caylors, but I’ll just deal with this one. First day back from a three-day weekend is tiring.

IRS wants to depose both Robert II and Paula. They both say “no.”

Judge Holmes: “The change to our Rules to allow depositions of parties is fairly recent, and we still treat them as ‘an extraordinary method of discovery.’ Rule 74(c)(1)(B). What this division of the Court looks for is the general state of informal discovery, the stakes involved, and whether the depositions would materially aid the trial and possible settlement of the cases.” Order, at p. 1.

While the course of discovery hasn’t been of the smoothest, the Caylors haven’t scorched the earth (yet).

And though the issue (captive insurer of private business meets estate planning) is an IRS hotpot, the money on the table in this case isn’t huge.

“But even though the issue may be large, the Court continues to be reluctant to have the major costs of extensive discovery and pretrial-motion practice borne by the petitioners in relatively small cases. See Rule 70(c)(1)(C). And because this type of case has not yet been settling, it seems likely that the Caylors’ depositions would only be a rehearsal for very similar trial testimony.” Order, at pp. 1-2.

No-go, IRS. Ya should’a read my blogpost “Don’t Suppose You Can Depose”, 12/2/13. 

This is the story of Charles T. Bruce and Mary A. Bruce, 2014 T. C. Memo. 178, filed 9/2/14, by Judge Wherry. Cap’n Charlie is a seafarer, fisherman and tugboat captain. But like his counterpart tugmeister Jac Baker (see my blogpost “Home Is Where The Heart Is”, 7/21/11), he runs aground in Tax Court.

Cap’n Charlie wants to quit the sea and provide for his two daughters, by selling off his tugging operation and the pride of the fleet, the Sarah Jane, namesake of one of his little princesses and worth a cool $5 million as-is, where-is.

But his basis is zero and the gain astronomical. Cap’n Charlie only finished high school before attending that ultimate academy, The Sea, where he earned his degree with high distinction.To help him out he turns to friend and loyal employee, Wade A. Rousse, who got his M.B.A. while working for Cap’n Charlie, and walked ashore to a M.A. and Ph.D. and a job with the Fed, encouraged by Cap’n Charlie.

Seeking to do his old boss a favor, Wade puts Cap’n Charlie into the hands of as slick a crew of crooks as one might find in a crimp’s establishment on the waterfront. See 2014 T. C. Memo. 178, at p. 9, footnote 3, for the relevant rap sheets.

The crimps shanghai Cap’n Charlie for six figures, while putting him into the usual roundy-round of phony basis builders, promissory notes for which no money is advanced or repaid, and trusts whose sole purpose is to disguise the foregoing.

In signing aboard the pirate ship, Cap’n Charlie consults his trusty lawyer, who has an LL.M. in tax from NYU and has represented Cap’n Charlie for years. Trusty lawyer meets with the pirates and is taken in.

Honest Cap’n Charlie sells the Sarah Jane to his old pal Wiley Falgout, who believed Cap’n Charlie was still the owner, notwithstanding the phony transactions aforesaid.

IRS rains deficiency and 40% chop upon Cap’n Charlie. Because of his trusty lawyer, plain-sailing honesty and lack of advanced landlubber education, Cap’n Charlie is spared the chop.

Let’s heave-to for a moment, and consider the title hereof. Cap’n Charlie’s trial counsel don’t raise the 3SOL until opening brief time, and admit this is “problematic”.

IRS claims Cap’n Charlie signed some extensions of the 3SOL, but doesn’t produce them for trial, because Cap’n Charlie’s trial counsel didn’t raise the issue in their petition.

Aye-aye, says Judge Wherry: “Petitioners recognize that judicial jurisprudence holds that the applicability of the limitations period is not properly before the Court where the taxpayer failed to plead that matter in the petition.” 2014 T. C. Memo. 178, at pp. 33.

SOL is an affirmative defense, me hearties, not a jurisdictional defect. As such, it can be waived.

“Our Rules require that a taxpayer specifically allege as an affirmative defense in the petition that the limitations period has run in order to properly raise the applicability of the limitations period as an issue. Petitioners acknowledge that they did not make such an allegation in the petition. We accordingly conclude that petitioners have waived any dispute that they now have as to the applicability of the three-year limitations period by not timely raising the issue.” 2014 T. C. Memo. 178, at pp. 34-35. (Citations and footnote omitted).

And Judge Wherry gives today’s takeaway better than I could, so I’ll step off the quarterdeck and hand him the loudhailer.

“Further, we do not agree with petitioners’ argument that section 7491(a)(1) requires that we decide the issue even though it was not raised in the pleadings. The pleadings serve a vital role in litigation in this Court. While many issues could theoretically be in dispute in a given case, the pleadings specify the issues which are actually in dispute, as well as the parties’ respective positions with respect thereto, and they allow the parties to efficiently and effectively litigate the case accordingly. See Rule 31(a).” 2104 T. C. Memo. 178, at p. 36.

Make waves or make waiver.

 So No Penalty

That’s Judge Goeke’s lesson for IRS in Frank Sawyer Trust of May 1992, Transferee, Carol S. Parks, Trustee, Docket No. 5526-07, filed 8/29/14.

And it’s a good thing I’m not out on my yacht or in my house in the Hamptons at the start of the Labor Day weekend, like my $1200-per-hour colleagues, because I don’t have either a yacht or a house in the Hamptons, so that I can dig through seven (count ‘em, seven) pages of Tax Court orders to bring my now-118 followers the latest Tax Court skinny.

Remember Frank and Carol? No? Then refresh your recollection with my blogpost “Little Deuce Coup”, 6/25/14. Frank and Carol dodged the penalty there, but IRS is back with a Rule 161 try-again.

And it doesn’t work.

Judge Goeke: “The transfer to petitioner was not actually fraudulent as we found in the Court’s Memorandum Findings of Fact and Opinion (T.C. Memo. 2011-298) and was accepted as such by the United States Court of Appeals for the First Circuit. For a transfer to be constructively fraudulent, the transferor must receive less than reasonably equivalent value for it. The trust gave value for the transfer, but it was not reasonably equivalent value, so the transfer was constructively fraudulent. However, only the portion of the transfer that exceeds the value of the assets transferred was constructively fraudulent. Therefore, only that portion is subject to the Mass. UFTA and transferee liability….. In other words, a transferee’s liability is capped at the amount of the constructively fraudulent transfer it received.” Order, at p. 1 (Citations omitted).

State law (here Massachusetts) only lets the defrauded creditor get what they should have gotten, not a windfall.

“Allowing respondent to collect penalties would subject petitioner to transferee liability in excess of the amount of the fraudulent transfer it received, and consequently in excess of the maximum recovery provided by the UFTA.” Order, at p. 2.

IRS, you were wrong before and you’re wrong now.

And another tip of the Taishoff baseball cap to David R. Andelman, Esq., and the team at Lourie & Cutler, counsel for taxpayer.

No, not the 1982 Star Trek baddie (different spelling, he) nor yet the late actress and comedienne Madeline (and her performance in the 1974 Mel Brooks cult classic Blazing Saddles is a fond memory). No, this is Kathleen Kahn, Docket No. 1517-13L, filed 8/29/14, a designated hitter off the bat of STJ Lewis (“Our Name Is Our Fame”) Carluzzo, a walk-off hit before the last weekend of summer.

Kathleen is wroth because Appeals done her wrong, she says, and wants summary judgment in Tax Court. And she won’t go back to Appeals, even though IRS wants a remand.

Appeals has taken its lumps lately, mostly at the hands of that hard-charging but low-billing attorney-at-law Honest Eric William (EW) Johnson. In witness whereof, see my blogposts “Abate, Don’t Debate”, 8/25/14, and “Honest tax representation at reasonable rates”, 8/28/14). But Kathleen is on her own here.

And her objections to IRS’ remand request and her written statement in lieu of appearance at the argument of her summary judgment motion didn’t hit STJ Lew’s radar until after the hearing.

“During the hearing, however, it was clear that the Court intended to deny petitioner’s motion and, subject to conditions discussed at the hearing, grant respondent’s [IRS’] motion. Concerned that the remand would unnecessarily delay the matter further, the Court was persuaded by respondent’s argument that a remand would be beneficial because it would allow for respondent to review the administrative process giving rise to the underlying liabilities in dispute in this matter. Although it would seem that a remand could only work to petitioner’s favor, in her objection petitioner opposes the remand because: (1) it would cause further delay; and (2) she did not expect that the matter would be given fair consideration by respondent’s settlement officer.” Order, at pp. 2-3.

That’s something of a riposte to Judge David Gustafson’s sermonette to Barb and Wel Delon in my blogpost “I’m From the Government and I’m Here to Help”, 8/20/14.

So STJ Lew finds questions of fact and jurisdiction in Tax Court to review Kathleen’s liabilities de novo.

“It is clear from petitioner’s submissions that she does not want to participate in further administrative proceedings. Mindful that we have jurisdiction in this matter to review, de novo, the underlying liabilities here in dispute, we weigh the likely benefits of a remand against petitioner’s (and the Court’s) concerns about any additional delay that a remand might cause. In so doing, we find that the scale tips ever so slightly in petitioner’s favor.” Order, at p. 2.

So no summary judgment, no remand, let IRS answer or amend its answer, and Kathleen need not reply, as any allegations in an amended IRS answer will be deemed denied.

Takeaway 1- Note Rule 50(c). You can make a written statement in lieu of showing up for a hearing on a motion. This saves shlep time (and money).

Takeaway 2- Note that skipping a remand may be good tactics. Don’t always take the bait without thinking. IRS may be using the remand to clean up its act, as seen in my blogposts aforesaid.

No, this is not an advertising pitch from me. This is a direct quotation from the webpage of that hard-charging hero of my blogpost “Abate, Don’t Debate”, 8/25/14, Eric William (EW) Johnson, now or formerly of St. Paul, MN.

And EW again shows his stuff in Eladio Duarte and Azucena Bailon-Rivas, 2014 T. C. Memo. 176, filed 8/28/14.

It’s really Eladi’s story. He’s a roofer with a somewhat peripatetic career and sporadic income, who got behind on his filings. He tries to buy a house, discovers he hasn’t filed some years, and sends in his returns. But he still owes money, and IRS hits him with a NITL.

Enter EW, sending in a timely Form 12153. As seems to befall EW’s clients, Appeals makes a hash of the CDP, twice. Of course IRS levies while the CDP is pending, and doesn’t release all levied funds despite EW’s protestations.

Then EW asks for an OIC, sends in the money per Form 656, which get applied to another open year, and the AO says she can process the OIC, as Eladi appears compliant.

Nothing happens, an SO gets assigned and schedules a face-to-face a year later. EW asks for more time and a face-to-face because his client has language problems and has some ‘splainin’ to do.

You’re gonna love this: “Mr. Diamantopoulos stated that no extension or face-to-face hearing would be provided because Mr. Duarte had previously had a face-to-face hearing and because Mr. Diamantopoulos did not speak Spanish. Mr. Diamantopoulos summarily stated that the offer-in-compromise would be rejected based on his calculation that Mr. Duarte could fully pay the liabilities. Further, and despite having apparently reached the conclusion that he did not have up-to- date financial information, Mr. Diamantopoulos offered Mr. Duarte an installment agreement for $3,000 per month.

“On the day after the phone call, Mr. Diamantopoulos sent a letter to Mr. Duarte stating that, according to his calculation of the financial information Mr. Duarte had provided at the previous face-to-face hearing more than a year before, he could fully pay the liabilities and that Mr. Diamantopoulos was recommending that the offer-in-compromise be rejected. He included his worksheets with that letter and stated that a notice of determination would be issued.” 2014 T. C. Memo. 176, at pp. 7-8 (Footnote omitted).

Contrary to my usual policy of not naming names, I do so here. Judge Buch names names in this case.

And on this record Judge Buch sends Eladi back to Appeals, because he can’t conclude whether IRS abused its discretion.

Read the whole opinion. Then I leave it up to you whether IRS abused its discretion.

I hope EW gets paid his fee at his usual reasonable rates. He earned them.

Home Concrete, that is, the Supremes’ reiteration of Colony Corp. In the argot of my Outlying Island Off the Coast of North America, “Know what I’m sayin’?” No? Then see my blogpost “Colony Lives”, 4/26/12.

But Home Concrete isn’t set in concrete for G. Douglas Barkett and Rita M. Barkett, 143 T. C. 6, filed 8/28/14. IRS claims G. Doug and Rita understated their income from their toothsome C Corp, Barkett Dental Enterprises, to the extent of more than 25% of what should have been reported, thus triggering Section 6501(e)(1) 6SOL.

G. Doug and Rita aren’t fighting about the dental business. They’re claiming they reported the gross income they realized from their investment passthroughs, and that was enough to get them under the 25% limbo stick, even though their net gain was way less.

IRS says it’s the net, and Home Concrete’s overstatement-of-basis rationale doesn’t help.

Tax Court, per Judge Goeke, buys IRS’ argument. True, the Supremes in Home Concrete torpedoed so much of Reg. Sec. section 301.6501(e)-1 as dealt with overstated basis. But the issue for the Supremes was whether to include or exclude gross income, not how to figure it.

But if we’re not dealing with a trade or business (and here this is investing, not a trade or business), then gross income is amount realized less basis. And Judge Goeke says the Supremes recognized this. “(T)he general statutory definition of ‘gross income’ requires subtracting the cost from the sales price. Under such a definition of ‘gross income,’ the calculation would take (1) total revenue from sales, $40,000, minus (2) “the cost of such sales,” say, $25,000. The $10,000 of revenue would thus amount to 67% of the ‘gross income’ of $15,000. * * * Home Concrete & Supply, LLC, 566 U.S. at ___, 132 S. Ct. at 1842.” 142 T. C. 6, at p. 12.

Of course, whenever you see the word “general” or “generally”, you know what’s coming next.

And Judge Goeke doesn’t disappoint. “An exception to the general statutory definition appears in section 6501(e)(1)(B)(i), which provides that ‘[i]n the case of a trade or business, the term “gross income” means the total of the amounts received or accrued from the sale of goods or services * * * prior to diminution by the cost of such sales or services.” 143 T. C. 6, at p. 12.

But everyone agrees that the investment operation wasn’t a trade or business, so the exception doesn’t fly. So non-trade-or-business gross income is gain realized less basis. Those numbers push G. Doug and Rita into 6SOL.

And that’s set in concrete.

This is another installment in my “Win Your Case” series. There has been a bushelbasketful of these orders arising out of listed transactions lately, principally a dodge known as the Sterling Benefit Plan. This particular shenanigan is rewarded with the Section 6707A chop.

These are nonassessables, that is, there’s no SNOD, but a trip to Appeals gives the alleged miscreant a chance to chip away the chop.

The exemplar I’m picking today is a designated hitter from Judge Kerrigan, Medi-Save Pharmacy, Inc., Docket No. 30058-13L, filed 8/27/14. And Judge Kerrigan seems to have gotten a bunch of these.

Medi got the chop, Medi’s counsel went to Appeals, Appeals sustained the chop ($10K), and Medi got a NITL. Medi filed a CDP, but didn’t take the phone conference offered or submit an alternative, so Medi got a NOD.

Medi petitions, saying “…that it is entitled to abatement of the penalty based on ‘an unexplained determination that related transaction and a provision of the Internal Revenue Code that is unconstitutional as a deprivation of due process’.” Order, at p. 2.

IRS moves for summary judgment and gets it, especially since Medi’s counsel doesn’t oppose.

The issue is whether Medi had a prior opportunity to dispute the chop.

“A prior opportunity to dispute a liability includes an opportunity for a conference with the Appeals Office offered either before or after assessment of the liability. Secs. 301.6320-1(e)(3), Q&A-E2, 301.6330-1(e)(3), Q&A-E2, Proc. & Admin. Regs. This Court has upheld the validity of these regulations. Lewis v. Commissioner, 128 T.C. 48 (2007). An opportunity to dispute tax liability under section 6330(c)(2)(B) includes an opportunity to dispute taxes to which deficiency procedures do not apply with the Appeals Office. See Mason v. Commissioner, 132 T.C. 301 (2009).” Order, at p. 3.

Win your case at Appeals. Or be prepared to go to the Court of Appeals.

At Least Until He Goes

That’s the moral Judge Cohen has for Zhengnan Shi in 2014 T. C. Memo. 173, filed 8/26/14.

Zhengnan, a Chinese (PRC) national, is fighting over the interest on his tax refund. I’ll spare you all but one of his losing arguments, but the one I want may be of use to the battle-weary practitioner.

Zhengnan claims the US-PRC tax treaty taxes Chinese resident nationals at 10% of their US-source income, and IRS wants 30%. And he claims he gets the treaty rate. Except he doesn’t.

OK, says Judge Cohen. But “Article 4 indicates that to be a resident of China for purposes of the China treaty, petitioner must show that under Chinese tax statutes and laws he was liable for taxation in [the year at issue] because he resided (or was domiciled or something to that effect) in China.” 2014 T. C. Memo. 173, at p. 11.

Zhengnan didn’t introduce any Chinese law or proof he was back in the PRC.

Anyway, five years before the year at issue, Zhengnan stated he was substantially present in the US, both in his return and his amended return, which he filed as resident alien.

And Reg. Section 1.871-5 says “Loss of residence by an alien.–An alien who has acquired residence in the United States retains his status as a resident until he abandons the same and actually departs from the United States. An intention to change his residence does not change his status as a resident alien to that of a nonresident alien. Thus, an alien who has acquired a residence in the United States is taxable as a resident for the remainder of his stay in the United States.” 2014 T. C. Memo. 173, at p. 16.

Zhengnan admittedly didn’t leave the US for another three years after the year at issue.

So he’s here because he’s here. And taxable accordingly.