Ready to Pitch? Maybe Not

It’s rare that I see two contradictory orders, especially one day apart. See my blogpost “Come In From The Bullpen”, 9/26/13, wherein Judge Wherry greeted the relief attorney for Jere and Neva Jefcoat with a stern admonition to start pitching.

But today, The Judge With A Heart, STJ Armen, “(A)fter due consideration, and for cause more fully appearing in the transcripts of the proceedings” (which transcripts we don’t get to see), gives the relief attorney for pro se Donald R. McWeeney a bye and continues (that is, adjourns) Don’s trial.

Frank Agostino, Esq., is the reliever, and both he and Don stand before STJ Armen and ask for the bye. IRS objects, but STJ Armen both gives Don and Frank the bye, and denies IRS’ motion to sanction Don, apparently for not playing show-and-tell with documents (but denied without prejudice, so IRS can try again if Don and Frank don’t play nice).

Apparently Don and Frank’s respective tales of woe suitably impressed STJ Armen enough to let Frank take some warm-up pitches while he does a Branerton with IRS.

The whole story is found in Donald R. McWeeney, Docket No. 15453-12S, filed 9/27/13.

And she’ll get HOH, dependency, child and Earned Income credits, even without a Form 8332. That’s the good word for pro se Mom Jennifer D. White, 2013 T. C. Sum. Op. 77, filed 9/26/13, from The Judge With A Heart, STJ Armen.

Jen and ex Randy produced two children before they severed the tie. Their separation agreement provided for joint legal custody and for all sorts of visitation, but said nothing about who got the tax deductions or credits for the kids. More important to IRS, the agreement stated that Randy was the “custodial parent”.

When Jen claimed the parental panoply, IRS gave her a SNOD, stating that ex Randy got the tax breaks as custodial parent.

No, says Jen, the kids lived with me for more than half of each of the years at issue, and only the elder turned the magic age in the second year. And Jen provided more than half the support of one child in each such year, and the other for one year.

Right you are, Jen, says STJ Armen: “The provisions of section 152(e) identify circumstances where the noncustodial parent may claim a child. Pursuant to section 152(e)(4)(A) and (B), the term ‘custodial parent’ means the parent having custody for the greater portion of the calendar year, and the term ‘noncustodial parent’ means the parent who is not the custodial parent. Section 1.152-4(d), Income Tax Regs., defines custody as follows: ‘[t]he custodial parent is the parent with whom the child resides for the greater number of nights during the calendar year, and the noncustodial parent is the parent who is not the custodial parent.’”  2013 T. C. Sum. Op. 27, at pp. 7-8. (Footnote omitted).

No dispute that the kids lived with Jen more than half of each year, she provided more than one-half the support of one in each year, and that she provided one half the support of the other for one year. One was the right age for both years, and the other for one year.

Jen gets the whole enchilada, even without Form 8332.

Remember, the other “paid but got no tax breaks” cases I’ve blogged were those where the children didn’t live with the payor parent for more than half of any of the years at issue in those cases, and the payor parent never got Form 8332 for each year they claimed.

Ready to Pitch

That’s Judge Wherry’s (the Whimsical Judge) word to the attorney for Jere D. & Neva C. Jefcoat, Docket No. 7772-11, filed 9/26/13.

I’m taking my text from another Jeffcoat, the late Harold Bentley (“Hal”) Jeffcoat, who pitched for the Cubs, Redlegs and Cards many years ago.

Jere and Neva’s present attorneys move to withdraw, IRS waves bye-bye to them, and Jere’s and Neva’s new attorney is walking in from the bullpen.

Judge Wherry welcomes him with the news that he won’t get time to warm up. “…the parties are cautioned that the Court will not grant a continuance just because the two attorneys are withdrawn and a new attorney for petitioners has recently entered his appearance. The parties are to be ready for trial in accordance with the Court’s May 3, 2013, order.” Order, at p. 1.

Come in from the bullpen ready to pitch.

The immortal words of Starfleet Surgeon Commander Leonard (“Bones”) McCoy to Starfleet Captain James T. Kirk echo in Promissory Note Acquisition Company, LLC, Jack D. & Lisa J. Traeger, Partners Other Than The Tax Matters Partner, Docket No. 27468-12, filed 9/25/13.

Apparently the tax matterer in Jack and Lisa’s deal is dead, so according to Judge Paris, “is, therefore, no longer eligible to serve as tax matter partner. Section 301.6231(a)(7)-1(1)(1)(i), 301.6231(a)(7)-2(a), Proced. & Admin. Regs.” Order, at p. 1.

No successor has been chosen, so Jack and Lisa want a time out.

Judge Paris examines the role of the tax matterer: “Under the statutory provisions set forth in I.R.C. section 6221 et seq., the presence of a tax matters partner during litigation before this Court is essential to the fair, efficient, and consistent disposition of partnership proceedings. The tax matters partner must keep each partner informed of all proceedings relating to the adjustments of partnership items at the partnership level. Computer Programs Lambda, Ltd. v. Commissioner, 90 T.C. 1124, 1126 (1998). It therefore follows that to continue with this litigation, it is essential that a tax matters partner be appointed.” Order, at p. 1.

Remember poor Beverly Bernice Bang? See my blogpost “Bang – A Warning to Tax Matters Partners (and their advisors)”, 1/5/11. Tax matterers have to tell all their partners what’s happening with the litigation, and stay on top of it.

So Judge Paris gives Jack and Lisa a time out, during which Jack and Lisa must “file a Motion to Appoint Tax Matters Partners, either setting forth the name and address of the successor tax matters partner, or, if one has not been chosen by the partnership, setting forth the names, addresses, and members who can be designated managers and who are eligible to be appointed tax matters partner.” Order, at p. 2.

And check out the cited Regulation for how to do it.

Of course IRS gets a chance to respond or object to the motion.

Taking his lead from Paul Simon’s 1966 hit, that’s Judge Lauber’s direction to the SO in Thomas Szekely, 2013 T. C. Memo. 227, filed 9/24/13.

Tom filed his returns but couldn’t pay his taxes. The Taxpayer Advocate suggested Tom be placed in not currently collectible, but IRS said no, filed an NFTL, and Tom filed for a CDP, attaching all the documentation he had compiled.

Although Tom filed well within the thirty-day limit for a CDP, it took IRS four months to acknowledge Tom’s request.

Judge Lauber: “Finally… a settlement officer (SO) from the IRS Appeals Office acknowledged receipt of petitioner’s Form 12153 and notified him that she had scheduled a telephone CDP hearing for February 23, 2012. In the letter, the SO informed petitioner that, if he wished her to consider an offer-in-compromise (OIC) or other collection alternative, he should submit, before the scheduled CDP hearing, a completed Form 433-A together with supporting documentation and three months of bank statements. The letter made clear that the SO could not consider collection alternatives without receiving these documents. The SO gave petitioner 14 days from the date of her letter to provide the required information.

“Petitioner timely complied with the SO’s request and submitted all of the required documentation by letter…. In that letter, petitioner clearly outlined his financial situation. He informed the SO that he could not stay current on his… obligations without a compromise of his [past] tax obligations.” 2013 T. C. Memo. 227, at p. 4.

Tom called the SO, left a message, got a callback and was told to submit a Form 433-A(OIC). The SO said she would mail Tom an instruction packet.

She did, but her letter said nothing about 14 days or what would happen if Tom didn’t provide the Form 433-A(OIC).

Tom didn’t reply by day 14, so the SO recommended confirming the Lien on Day 15 and her manager confirmed it a week later.

Tom testified that if he’d been told the SO had to have the From 433-A(OIC) on Day 14, she would have. Anyway, Tom sent everything in on day 24.

“Almost six months later…the IRS informed petitioner that it was unable to process the OIC that he had submitted on [Day 24]. The reason given was that petitioner had failed to provide a Form 433-A (OIC) as requested. The IRS accordingly closed its file on petitioner’s OIC request.” 2013 T. C. Memo. 227, at p. 6.

Judge Lauber goes through the NFTL litany, the litany for the standard of review when liability for the tax is not an issue, and concludes: “Superficially, the SO would not appear to have abused her discretion under these circumstances.” 2013 T. C. Memo. 227, at p. 9.

Hold off the righteous anger, readers. Let’s welcome Judge Lauber (see my blogpost “Acceuillons, Let’s Welcome, Judge Albert G. Lauber”, 2/5/13).

Judge Lauber is troubled. IRS’ counsel says that for CDP the Section 7502 “timely mailed is timely filed” is not the rule. That means if it took a few days for Tom to get the package and a few days for his reply to hit the SO’s desk, Tom had three or four days to deal with a complex form. Presumably Tom was also working for a living at the same time.

While Tax Court has approved of the 14-day limit to provide information, there has to be a rule of reason. Surely Tom should get an extra couple of days.

Judge Lauber again: “…we are troubled by the contrast between the IRS’s sluggishness in responding to petitioner’s request for a CDP hearing and its alacrity in closing the case. It took the IRS four months to acknowledge receipt of petitioner’s request for a hearing, yet only one day for the SO to conclude that his case should be closed because he had missed a deadline. This strikes us as a double standard.” 2013 T. C. Memo. 227, at p. 10.

I cannot say how it strikes me, if I am limited to using language fit for a blog meant for family reading at the dinner table.

“…in exercising her discretion, a settlement officer should take into consideration the entire context of the case. Until his final footfault, petitioner had manifested timeliness and good faith in all his dealings with the IRS….. The SO knew that petitioner’s liabilities were properly reported; that he had previously worked with TAS to receive assistance; that he was eager to work out a compromise of his tax liabilities; that he was current on his [current] tax liability; and that he had responded timely to her previous requests for documents and information. Armed with this knowledge, the SO should not have lightly assumed, when petitioner’s OIC package did not arrive on [Day 14], that he had decided to walk away from his efforts to secure a compromise. We would hope that the IRS would reach out to a taxpayer in these circumstances and assist him in his tax compliance efforts, rather than proceed to close his case the day after a deadline passes. All that was required was a two-minute phone call to inquire whether petitioner needed a little more time.” 2013 T. C. Memo. 227, at pp. 10-11. (Footnote omitted, but read it; failing to grant a reasonable extension of time “would be an abuse of discretion”).

Judge Lauber to the rescue: “Although we cannot substitute our judgment for that of the SO… our review of the overall record leaves us with a firm sense that petitioner has not been treated in a fair and rational manner. We will therefore remand the case for a supplemental CDP hearing to consider petitioner’s OIC. Before the supplemental hearing, petitioner may submit a revised OIC on Form 656 accompanied by a Form 433-A (OIC) with current financial information. If petitioner is dissatisfied with the outcome of the supplemental hearing, he may pursue further review in this Court.” 2013 T. C. Memo. 227, at pp. 11-12. (Citations omitted).

Way to go, Judge Lauber.

No, not the memorable saying of  baseball immortal Leroy Robert (“Satchel”) Paige, to whom is ascribed “Don’t look back, they might be gainin’ on you”, but rather Tom Reed, 141 T. C. 7, filed 9/23/13.

Tom wants IRS to consider an OIC he put in years before the CDP from which he now petitions. He argues IRS should consider the old, returned OIC. IRS says (a) they don’t have to and (b) Tax Court has no jurisdiction to decide whether they have to or not, because Tax Court can only review a new OIC, not an old one that was never petitioned.

Now there are two ways IRS can bounce an OIC: one is to reject it, the other is to return it. Returns are unprocessable, here because Tom wasn’t current with his taxes when submitted, and that bounces an OIC regardless of liability, collectibility, or effective tax administration issues. Rejections are based on consideration of the OIC on the substantive grounds just mentioned. “Briefly, a taxpayer has the right to administratively appeal the Commissioner’s rejecting an OIC but has no right to appeal the Commissioner’s returning an OIC.” 141 T. C. 7, at p. 6, footnote 5.

Tom made two offers. The first, in 2004, was rejected because Tom dissipated assets. Tom tried again, in 2008.

Here’s Judge Kroupa: “The offer unit returned the 2008 offer to petitioner as unprocessable. Petitioner then exchanged several letters with the offer unit. Petitioner attempted through the letter exchange to have the offer unit reconsider its returning the 2008 offer. To this end, petitioner argued that he was in fact in compliance with his Federal income tax obligations at the time he submitted the 2008 offer. Petitioner also argued in the letter exchange that he should be given the opportunity to become compliant if, in fact, he was not at the time he submitted the 2008 offer. Petitioner continued to make payments during the pendency of the letter exchange consistent with the 2008 offer. The letter exchange ultimately failed, however, to convince the offer unit to alter its decision to return the 2008 offer to petitioner.” 141 T. C. 7, at p. 6 (Footnote omitted).

Judge Kroupa blows off the IRS’ jurisdictional arguments: “Respondent argues this Court lacks jurisdiction because petitioner proposed no new OIC during the collection hearing and the Court therefore has nothing to consider. Respondent also argues this Court lacks jurisdiction because petitioner has no right of judicial review of respondent’s rejecting the 2004 offer or returning the 2008 offer. We are perplexed by the arguments that respondent raises as they appear to miss the thrust of the theories petitioner advances. Moreover, it is fundamental that we have jurisdiction in collection matters if the Commissioner issues a determination notice and a taxpayer timely files a petition. Both conditions apply here. Accordingly, we have jurisdiction to review the determination….” 141 T. C. 7, at pp. 8-9 (Citations omitted).

OK, let’s cut to the chase.

Tom says the AO must consider the 2008 OIC based on the facts then existing. IRS says no; while Section 7122(a) gives IRS discretion to compromise taxes due, IRS still has to collect all taxes due. A taxpayer has a right to a CDP before IRS can levy to collect, but has to propose an acceptable alternative to the levy.

Tom wants IRS to consider a three-year-old alternative today. That would impermissibly expand IRS’ statutory authority; caselaw holds taxpayers must submit current financial data at a CDP. See also IRM 5.15.1.1(4), Oct. 2, 2012). Numbers must be no older than six months.

What Tom wants is review of a returned OIC, and that’s off the table. “Taxpayers may currently seek administrative review of the Commissioner’s rejecting an OIC. Sec. 7122(e). Taxpayers currently have no right, however, to seek review of the Commissioner’s returning an OIC. Sec. 301.7122-1(f)(5)(ii), Proced. & Admin. Regs. The theory petitioner advances would, in effect, create additional layers of administrative and judicial review of the Commissioner’s returning an OIC before a collection hearing commences. See sec. 6330(d). Petitioner’s theory would not create analogous layers of review, however, for the Commissioner’s returning an OIC after a collection hearing concludes. See id. Whether a taxpayer may access these new layers of review would therefore depend on when the Commissioner returns an OIC. Petitioner offers no, and we can find no, reasonable explanation for such disparate treatment based only on when the Commissioner returns an OIC.” 141 T. C. 7, at p. 13.

Tom dissipated assets, so the 2004 OIC is out, and he hadn’t paid his estimateds when he put in the 2008 OIC, so that’s out.

Tom, you’re out.

But Even If You Do, You Can Deduct The Interest

Too many players on the ice, when Bank of New York Mellon Corporation, As Successor In Interest To The Bank of New York Company, Inc., 2013 T. C. Memo. 225, filed 9/23/13, fields fifteen (count ‘em, fifteen!) lawyers against only six for the IRS. Guess that sequester really hurts, guys. But six of those fifteen Mellon lawyers leave after the trial.

At the close of play,  the point of Judge Kroupa’s Supplemental Memorandum Opinion is about borrowing, and the consequences of a deal lacking in economic substance. You may remember Mellon got slugged when they played Barclays Bank’s famous STARS game. See my blogpost “STARS Fell”, 2/11/13, for particulars.

My comment at the time was that coupling a legitimate transaction with a phony tax dodge doesn’t legitimatize the tax dodge.

But Mellon’s fifteen lawyers claim that decoupling the legitimate from the illegitimate still means Mellon should get whatever deductions the legitimate part of the deal threw off. IRS says no, so Judge Kroupa is dealing with a Rule 161 reconsideration.

The Mellon 15 agree that the STARS deal was a sham.  And Judge Kroupa found back in February that when you collapse the phony trusts and imaginary sales agreements and credit default swaps, you get a $1.5 billion loan from Barclays to Mellon at one-month LIBOR plus 20 bps.

Barclays, of course, was one of the prime manipulators of LIBOR.

The Mellon 15 say they want a deduction for that interest, because Mellon really borrowed the money and really paid interest at that rate.

Judge Kroupa: “We held in BNY I [the February sham case] that the STARS transaction should be bifurcated into the STARS structure and the loan for purposes of determining whether the economic substance doctrine barred petitioner from claiming the foreign tax credits and the foreign tax expense deductions for the years at issue. Accordingly, we analyzed the economic substance of the STARS structure separately from the loan. We held that the STARS structure lacks economic substance and that petitioner was not entitled to the interest deductions it had effectively taken on the loan because the interest expense was incurred in furtherance of a transaction lacking economic substance.” 2013 T. C. Memo. 255, at p. 6.

Now we all know that Rule 161 isn’t a free chance to rehash old arguments, and Mellon did have a chance to make at least some of the arguments they’re making here. But although reluctant, Judge Kroupa feels the need to discuss the non-phony part of the deal.

The Mellon 15 argue that Mellon actually got the money, it was available for Mellon to lend out, and Mellon actually paid interest. Therefore said interest should be deductible under Section 163(a). In fact, Tax Court has held that a real debt to finance a phony deal gives rise to an interest deduction; but since this case gets appealed to Second Circuit, that won’t fly, as Second Circuit has shot that one down.

However, in this case, say the Mellon 15, the loan proceeds weren’t used to fund the phony deal. IRS says no, you were going for two tax benefits, and the phony one (the UK tax credits) taints the whole deal.

No, says Judge Kroupa: “Petitioner did not use the loan proceeds to finance, secure or carry out the STARS structure. The loan was not necessary for the STARS structure to produce the disallowed foreign tax credits. Rather, the loan proceeds were available for petitioner to use in its banking business throughout the STARS transaction. Accordingly, the loan served a purpose beyond the creation of tax benefits….” 2013 T. C. Memo. 255, at p. 11.

But the interest is inflated, says IRS; Mellon could have borrowed cheaper in the open market.

So what, asks Judge Kroupa: “Respondent also argues that because petitioner could have obtained a loan at a lower cost in the market place, the loan interest deductions must be denied. We disagree. We have held that a grossly mispriced asset or negative cashflow can contribute to the overall picture of an economic sham. Nevertheless, interest accruing on a real loan that is used for economically substantive activity is deductible under section 163(a) even if the borrower is also motivated by favorable tax consequences. Despite being overpriced, the loan proceeds were available for use in petitioner’s banking business. Accordingly, we hold that petitioner is entitled to deduct the interest that accrued on the loan for the years at issue.” 2103 T. C. Memo. 255, at pp. 11-12. (Citations omitted).

Economic substance (a/k/a sham transaction) is all of a piece. “We have held that the economic substance doctrine cannot be applied selectively to certain consequences of a transaction. Instead, we have given effect either to both the cost and income functions of a transaction or to neither when applying the economic substance doctrine.” 2012 T. C. Memo. 255, at p. 15.

So some consequences of the bogus STARS deal are removed from Mellon’s tax return.

A Taishoff “good try” to the Mellon 15. But I’d like to see what Second Circuit does with this, if IRS elects to appeal. No one disputes the loan was made at an above-market rate. While one might bifurcate the loan and the tax dodge to analyze them, I’d argue one cannot divorce them entirely. The loan was an integral part of the dodge; but for the dodge, Mellon would never have made that loan deal with Barclays. I doubt Mellon’s credit was so poor they had to pay above the odds. I’d argue the above-market interest rate was additional compensation to Barclays for facilitating the dodge. If a colorably legitimate transaction is made to facilitate a dodge, even though not to finance it directly, is the colorably legitimate portion of the deal thereby rendered completely legitimate?

The burden of proof, the US Attorney, and Mr  James Haber are all shifty, as Judge Halpern weaves his way through a designated hitter, AD Investment 2000 Fund LLC, Community Media, Inc., A Partner Other Than The Tax Matters Partner, Et Al., Docket No. 9177-08, filed 9/20/13.

Long-suffering readers of my blog will remember Mr Haber, the Fifth Amendment specialist, a featured player in my blogpost “Ironbridge Over Troubled Water”, 6/5/12. Once again Mr Haber faces the hot seat, and invokes his sacred Constitutional privilege.

This is another one of the FPAA-TEFRA cases arising out of Mr Haber’s tax mattering for several partnerships that might or might not be partnerships, and might or might not have engaged in transactions lacking economic substance, but throwing off heavy-duty deductions. Howbeit, “Petitioners represent, and respondent does not contradict, that the principal witness having knowledge of these issues is James Haber, the President of The Diversified Group Incorporated. Diversified is the Tax Matters Partner of AD Investment and AD Global.” Order, at p. 1.

Judge Halpern grilled Haber in camera, and concluded Haber was right to invoke his sacred Constitutional privilege. Haber said he would do just that, whenever and wherever asked about anything.

The non-matterers claim they can’t prove a thing without Haber, and IRS doesn’t say no. So why not give Haber immunity from prosecution and let him speak his speech trippingly on the tongue?

Well, the U. S. Attorney was being cagy (or maybe shifty). “Petitioners blame respondent for being unable to prosecute their case with the testimony of Mr. Haber. They point to an October 25, 2011, letter from the United States Attorney, Southern District ofNew York, stating that Mr. Haber had been the subject of criminal investigations by the United States Attorney’s office and Internal Revenue Service’s Criminal Investigation Division New York field office into his and his companies’ tax shelter transactions. A letter of September 11, 2009, from the United States Attorney states that he has no present intention of seeking criminal charges against Mr. Haber. In our order dated November 20, 2012, we reported that, in response to the Court’s suggestion, respondent’s counsel had again inquired whether the United States Attorney would be willing to grant Mr. Haber immunity in connection with his tax shelter activities. Respondent’s counsel was informed that the United States Attorney would not do so ‘and would not explain why.’” Order, at p. 2.

The non-matterers argue that IRS and the US Attorney are both on the same team, and there’s much caselaw to support this. The IRS can’t claim it’s separate from the US Attorney. So the burden of proof should be shifted to IRS.

IRS says there’s much caselaw against a petitioner who takes the Fifth. True, says Judge Halpern, but Haber isn’t the petitioner here.

IRS says that Haber, by taking the Fifth, takes himself out as a witness for IRS as well as the non-matterers. OK, says Judge Halpern, but the facts of this case are what they are.

“It may be true, as respondent argues, that, by invoking his Fifth Amendment privilege not to testify, Mr. Haber is unavailable to both sides. Yet, we cannot overcome the particular facts of this case. Apparently, Mr. Haber is no longer the subject of a criminal investigation by the Internal Revenue Service and the United States Attorney’s office, and the transactions that may have given rise to the suspicion of criminal activities are long past, yet the Unites States Attorney’s office will not categorically relieve Mr. Haber of his fear of prosecution and will not explain why.” (Emphasis by the Court.) Order, at p. 3.

Anyway, Judge Halpern reverts to the old baseball umpire’s rule: “Some is balls and some is strikes, but they ain’t nuthin’ ‘til I calls ‘em.”

Or more elegantly: “Rule 142 addresses the burden of proof. In relevant part, Rule 142(a)(1) provides: ‘The burden of proof shall be upon the petitioner, except as otherwise provided by statute or determined by the Court’ (emphasis added). We think that, given the central role that Mr. Haber played in the transactions in question and his importance to petitioners’ case, the interests of justice will be served if we grant the motion.” Order, at p. 3.

IRS, go talk to the US Attorney, or go try the case. Without Mr Haber.

No, not the Impalas’ 1959 hit “Sorry (I Ran All the Way Home)”, but rather Gregory Scott Savoy’s reprise of his beef with IRS.

You remember Greg claimed he hadn’t gotten a fair shake at Appeals because he is disabled, so back to Appeals he went last summer. For particulars, see my blogpost “Disabled But Rehabilitated”, 7/16/13.

Now Appeals issued a NOD that “determines that his tax accounts are currently uncollectible (not only for the 2007 year at issue here but for all years) and leaves him free to file amended returns with no defined schedule. The Court therefore directed the parties, by order dated August 15, 2013, to ‘either submit a stipulated decision document, or file a status report proposing a schedule for further proceedings, or file an appropriate motion.’” Gregory Scott Savoy, Docket No. 12316-12L, filed 9/20/13, Order, at p. 1.

Looks like Greg is a winner, right? But Greg isn’t finished; like certain other characters who show up in my blogposts, Greg is a Tax Court hobbyist. Some mothers have them, and that Obliging Jurist, Judge David Gustafson, seems to get more than his share of them.

Judge Gustafson: “…Mr. Savoy filed a 17-page status report, complaining that ‘[t]he only thing that was missing from the Respondent’s version of a stipulated decision document was an apology’ as to ‘the appropriateness of the collection actions’. The undersigned judge is unaware of any authority or rationale that would give the Court jurisdiction under section 6330(d)(1) to require an apology from the IRS, as opposed to sustaining or overruling a collection determination.” Order, at p. 1.

I don’t know of any basis for that order either, Judge.

IRS, unemotional as always, files a motion for summary judgment, affirming Appeals’ NOD letting Greg off the hook.

Judge Gustafson, rather like an indulgent but slightly out-of-patience parent, tells Greg to “…file a response to respondent’s motion for summary judgment. Mr. Savoy need not duplicate in that response the narrative in his recent status report but may instead incorporate by reference any portions of the report that he intends as responsive to the IRS’s motion.” (Emphasis by the Court). Order, at p. 2.

Judge Gustafson, be prepared for another 17 pages. I’ll bet Greg isn’t the kind that takes the hint.

Clarifying the substantial underpayment 20% hammer, Judge Ruwe delves into Section 6664, and answers more questions than anybody really had, in Glenn Lee Snow, 141 T. C. 6, filed 9/19/13.

Blogging Tax Court is a real tour d’horizon; every day brings a different view. Yesterday it was a $13 million deficiency for BMC Software, Inc., which got a lot of chatter in the financial press. Apparently the reporters thought it was a transfer pricing case, which is the big buzz nowadays. It was, but only tangentially. You can get the real story here. See my blogpost “Stipulate, Don’t Capitulate – Redivivus”, 9/19/13.

But today we’re back in the world of the in-the-trenches preparer, as Glenn Lee is fighting about the $5567 he overstated as his withholding (he treated his FICA and Medicare/Medicaid as withheld, rather than as taxes he owed and paid). This triggers the $3K substantial understatement penalty that is at issue here.

Had he not played the clown, Glenn’s withholding of $11K was close enough for jazz (Glenn Lee is a musician), as his tax bill was under $13K. But Glenn Lee got hit with an $8K Section 6673 frivolity (that he doesn’t contest), and he agrees with the $13K tax.

I didn’t drop a blogpost when Glenn Lee got nailed by Judge Ruwe back on 4/22/13, in 2013 T. C. Memo. 114. It was a run-of-the-mill protester case, so Judge Ruwe sent IRS and Glenn Lee off for a Rule 155.

And that’s when the fight started.

IRS wants to treat the $5567 overstated withholding, for which Glenn Lee got a refund, as part of a substantial underpayment, as Glenn Lee got the $11K in withholding refunded to him too. So Glenn Lee’s understatement of tax was north of $18K, per IRS’ arithmetic.

Glenn says no, it was the $13K I should have paid, but didn’t.

The magic language is Section 6664(a), which defines “underpayment” as the amount shown on the return the taxpayer filed, plus “amounts not so shown previously assessed (or collected without assessment)”, over the amount of rebates made. Rebates means “so much of an abatement, credit, refund, or other repayment, as was made on the ground that tax imposed was less” than the excess of the amount shown on the return plus the amounts not shown but previously assessed or collected without assessment.

Clear? Thought not.

The idea is that overstated withholding equals underpayment of tax, and Judge Ruwe has caselaw that says so, upholding Reg. 1.6664-2(c)(1), which also says so.

Glenn Lee claimed his tax due was zero, hence the Section 6673 $8K dopeslap.

Glenn Lee did have $11K withheld, and Judge Ruwe says that might be “collected without assessment”, but “…petitioner received a refund of $16,684.65. Section 1.6664-2(d), Income Tax Regs., provides that the excess of credits allowable over the tax shown on the return is an amount ‘collected without assessment’ if the excess has not been refunded to the taxpayer. The excess of the amount of credits allowable under section 31 ($11,117.65) over the tax shown on the return (negative $5,567) was refunded to petitioner ($11,117.65 + $5,567 = $16,684.65), therefore, petitioner had $0 of collections without assessment. Therefore, under section 1.6664-2(a)(1)(ii), Income Tax Regs., petitioner had $0 amounts collected without assessment.” 141 T. C. 6, at pp. 10-11. (Footnotes omitted, but Judge Ruwe goes through the Regs in great detail).

Judge Ruwe has another problem: “Section 1.6664-2(e)(2), Income Tax Regs., requires us to determine ‘rebates previously made’. The regulation does not define rebates previously made. The regulation provides that rebates previously made is a component of calculating rebates. The use of the phrase ‘previously made’ implies that there is a point in time in which a ‘rebate’ must be determined to have been made so that ‘rebates previously made’ were made prior to the ‘rebate’. The regulation does not explicitly state the point in time.

“The logical cutoff point in time to determine a ‘rebate’ would be at the time the return that claims a refund is filed. Therefore, we would interpret ‘rebates previously made’ to mean rebates made before the return was filed.” 141 T. C. 6, at p. 14.

Ditto as to rebates.

“No rebates were made to petitioner before he filed his return.” 141 T. C. 6, at p. 14-15.

So the final number is that Glenn Lee understated his tax by including the overstated withholding. There were no “rebates previously made”,  and no “rebates”, because Glenn Lee took back all his withholding, tax, FICA and Medicare/Medicaid.

Judge Ruwe says this “produces a result that bases the section 6662 penalty on an ‘underpayment’ amount that represents the amount of revenue that the Government was deprived of as a result of amounts actually shown on petitioner’s return.” 141 T. C. 6, at p. 16.

IRS wins. Glenn Lee, see my blogpost “Pay The Man”, 7/31/12; ya shoulda paid the man.