A common misunderstanding among Tax Court petitioners is who decides what is a small claims case. The $50K number is easy enough, but of what is it comprised?

Well, Section 7463(a) teaches us that it’s the amount of tax and penalties stated in the SNOD, less any concessions made by the petitioner.

So IRS sets the bar for what is a small-claimer, and what is a full-dress Tax Court case.

In John M. Germano & Carol J. Germano, Docket No. 12100-13S, filed 8/1/13, Ch J Colvin elaborates. IRS made a motion to drop the small-claims “S” from the docket number, because the deficiency was $65K. John & Carol answered “no amount Due [sic] in excess of 50,000″, Order, at p. 1.

IRS responded by saying that John & Carol had a loss on a stock sale in the year at issue, and IRS and John & Carol were trying to reach an agreed decision.

OK, says Ch J Colvin, but John & Carol conceded nothing, and IRS claimed $65K, so that’s the amount in dispute, and once the amount in dispute is over $50K, no small-claims treatment.

All is not lost, John & Carol: “We note that removing the small tax case designation does not preclude settlement of this case and that, if for any reason, the case should proceed to trial, petitioners could, prior to trial, move to convert this case to a small tax case upon demonstration that the amount in dispute does not exceed $50,000.” Order, at pp. 1-2.

But until then, it’s not a small-claimer.

Judge Paris cuts the corner close with a distinction between Section 6664 reasonable reliance and Section 6662 negligence in Donald L. Rogers and Vyon M. Rogers, 2013 T. C. Memo. 177, filed 8/1/13.

It’s another tale from the parsonage (see my blogpost “Tales from the Parsonage”, 7/22/13), except once again it isn’t a parsonage because Pastor Don’s group, Pentecostals of Wisconsin (PoW), never did the Section 107 mambo as to the $35K in mortgage and utility payments Pastor Don received for the home he and Vyon owned.

But PoW did incorporate Pastor Don in Nevada, as a “corporation sole”, and Pastor Don did sign a “Vow of Poverty, Statement of Faith”.

Now of course none of this exempts Pastor Don from income tax or self-employment tax (as he never timely filed Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, and the time limit is strictly enforced).

I’ll leave the legalistic unpacking to Judge Paris. Simply put, the poverty gig would work if the clergyperson was paid by a third party, the pay was assigned by the clergyperson to the religious order, and the order fed, housed and clothed the clergyperson.

Judge Paris: “Here, petitioners did not receive a salary from a third party and did not remit any income to PoW by assignment. Mr. Rogers provided services to PoW and received compensation for those services in the form of payments PoW made on petitioners’ behalf. The critical difference is that, in this case, there was no income transferred to PoW from petitioners pursuant to their vow of poverty. The mortgage payments PoW made were applied toward a house owned solely by petitioners and titled in petitioners’ names. Similarly, the credit card payments and utility payments PoW made on behalf of petitioners served only to benefit petitioners in meeting their basic living expenses. It would be a mischaracterization of the facts to state that petitioners were paid a ‘salary’ as agents of PoW and that this salary was assigned for the benefit of PoW when, in fact, no such salary was paid and all income issued to petitioners was used solely for their benefit. Accordingly, the authorities cited by petitioners are inapplicable in this particular case.” 2013 T. C. Memo 177, at p. 9.

OK, income tax and SE are off the table. How about penalties?

Well, Pastor Don and the PoWs didn’t rely on advice from the Nevada outfit they hired to incorporate Pastor Don; they had the plan in place and just hired the Nevadans to make it happen. Besides, trying the corporation sole dodge while not even applying for exemption from SE tax does not show good faith reliance. So Section 6664(c)(1) is also off the table.

But how about the negligence penalty? If there is a substantial understatement of tax due (the five-and-ten, $5000 or 10%) after the Rule 155 bean-count, then the penalty will apply.

But Judge Paris is generous: “While the Court finds that petitioners’ mistake of law in this instance was not reasonable for the purposes of establishing reasonable cause, the Court will not go so far as to say that petitioners acted with negligence or disregard of rules and regulations in the preparation of their 2007 return. Accordingly, if petitioners’ understatement of income tax for tax year 2007 does not exceed $5,000 (i.e., it is not a ‘substantial’ understatement), petitioners will not be liable for the accuracy-related penalty for an underpayment of tax attributable to negligence under section 6662(b)(1).” 2013 T. C. Memo. 177, at pp. 13-14.

Note that Section 6662 distinguishes between negligence or disregard, and substantial understatement; even if taxpayer isn’t negligent or disregardant, if you’re over the five-and-ten, you’re penalized.

Jimmy Van Heusen and Sammy Cahn (to say nothing of Ol’ Blue Eyes) to the contrary notwithstanding (as the expensive lawyers say), you can have one without the other, when one spouse is out of the country, even if the other is right here. That is, you can have the 150-day extended window for filing a petition.

You may remember my blogpost “Inside, Outside”, 2/28/13, when Deb Smith got the extender from Judge Foley, even though the whereabouts of her (presumptive) spouse were unknown. And apparently Deb’s spouse wasn’t named in the SNOD.

STJ Daniel A. (“Yuda”) Guy, Jr., has one where both spouses are named in the SNOD, and gives us a designated hitter on a day when not much else is doing around 400 Second Street, NW, in the District.

The order is Hichem Tounsi & Rita Tounsi, Docket No. 28674-12S, filed 7/31/13.

Hichem might or might not have been around (STJ Guy isn’t sure), but no doubt the petition arrived on Day 105, too late for the 90-day cutoff but timely for the 150.

STJ Guy: “Mrs. Tounsi was outside the United States in Costa Rica at the time the notice of deficiency was mailed, and she experienced a delay in receipt of the notice. Although we are uncertain as to Mr. Tounsi’s whereabouts at the time the notice of deficiency was mailed, where a joint notice of deficiency is sent to a husband and wife, and either of them is outside the United States, the 150-day rule applies to both.” Order, at p. 1 (Citations omitted, but STJ Guy earlier cited Judge Foley’s opinion in Deb Smith’s case).

They might go together like a horse and carriage, but either one can trigger the 150-day extender.

It’s an old family joke that dates back to a high school choral presentation, wherein one of my nearest and dearest performed a song of that name, but I’ll spare the participants any further elaboration. As there were no Tax Court opinions or designated orders today, July 31, I decided to blog David Franklin & Ronda Ching Day, Docket No. 1770-12L, filed 7/30/13, at which the old memories came flooding back.

Getting to the order, when Dave agrees to move the trial of his CDP from Honolulu, so as to “have petitioners’ case tried in any west coast city”, Judge Gale relents and doesn’t toss Dave and Ronda for failure to prosecute.

Apparently, Dave and Ronda actually live in Hawaii. Dave claims he skipped his trial date (even though he knew about it six months in advance), because he had to teach an MBA course, given by the University of Hawaii, in Vietnam, and couldn’t get any substitute professor in time.

When I was scheduled to go to Vietnam I couldn’t find a substitute either. But my trip was under rather different circumstances. And there weren’t a lot of MBA students around at the time.

Dave sought a continuance (that’s an adjournment) by fax, but he sent the fax on the eve of his departure to the fax number reserved for Final Status Reports. Dave claimed IRS counsel told him to use that number, even though the Pre-Trial Order expressly stated that any other faxes would be tossed unread.  Judge Gale said it wasn’t IRS counsel’s job to teach Dave what to do.  And of course the time difference between Honolulu and 400 Second Street, NW, in Our Nation’s Capital, means his fax was too late anyway.

Moreover, Dave never participated in the pre-trial stipulation process nor did he file a pre-trial memorandum. Dave was a trifle nonchalant in his litigation techniques.

Judge Gale has little patience for Dave’s tactics, and is about to deny his motion to vacate the order dismissing his petition for want of prosecution, when Dave agrees to move the place of trial to any West Coast city.

Judge Gale: “Nevertheless, dismissal of a case is a harsh sanction and trial courts should consider less drastic sanctions than dismissal when they are available. See eg, Edelson v. Commissioner, 829 F.2d 828, 831 (9th Cir. 1987); Henderson v. Duncan, 779 F.2d 1421, 1434 (9th Cir. 1986); Nevijel v. North Coast Life Ins. Co., 651 F.2d 671, 674 (9th Cir. 1981). While petitioner’s conduct of this litigation thus far is not flawless, we are now satisfied that his (and his co-petitioner’s) failure to appear for trial on June 10 did not evidence a disregard of their obligations to pursue their claims. We are also satisfied that an alternative to dismissal exists. Petitioner–recognizing that his failure to appear at the trial set for June 10 could postpone a trial in this case for an additional year if the trial were to be held in Honolulu–offered in his June 7, 2013 letter, and reiterates in his Motion to Vacate Decision, a willingness to have petitioners’ case tried in any west coast city. As this is a collection case where prompt resolution is especially important, petitioner’s suggestion of an alternate place of trial offers a means to minimize the delays that would otherwise arise from his untimely disclosure of his commitments conflicting with the original trial date. In these circumstances, the Court will vacate its decision of dismissal and, as a less drastic alternative to dismissal, set this case for trial at the Court’s trial session in Los Angeles, California….” Order, at p. 3.

Dave is saved.

Interestingly, on this same date we have another order in a case set for trial in Honolulu, Adina & Haim Shechter, Docket No. 23677-12, filed 7/30/13. But trial didn’t take place when the case was called. The parties had reached a stipulated decision, said IRS counsel, and had exchanged a copy by fax, but needed more time to get a signed original, because petitioners live in Israel.

Sound familiar? See my blogpost “Delay of the Game”, 7/12/13. Petitioners were going to try the case in Honolulu, presumably bringing themselves, counsel, witnesses, physical and documentary evidence from Israel or wherever to Hawaii, but couldn’t overnight a stipulated decision?

As Judge Gale noted above, petitioner’s failure to appear in Honolulu could result in a year’s delay of the trial.

Maybe it’s time to reconsider Rule 140(a), which provides in pertinent part (as the expensive lawyers say) that “The petitioner, at the time of filing the petition, shall file a request for place of trial showing the place at which the petitioner would prefer the trial to be held…. The Court will make reasonable efforts to conduct the trial at the location most convenient to that requested where suitable facilities are available.”

If by choosing a place for trial as far distant from one’s own location as possible, not showing up and providing some lame excuse based on one’s own actions, one can get a year’s delay, why not delay the game, as there’s no appreciable sanction?

How about requiring that the taxpayer-petitioner show minimal nexus between the place of trial and the location of petitioner, counsel, witnesses or evidence, before giving petitioner a one-year free adjournment?

 I want to thank Mr. Patrick Temple-West of Thomson-Reuters for an interesting discussion of the politics surrounding Tax Court. As this is a strictly non-political blog, I’ll eschew any “summarization”, to use STJ Lew Carluzzo’s neologism (see my blogpost “Incomprehensible?”, 6/4/13), or commentary.

Our conversation was enlightening. The professors who have written on the subject (including but without in any way limiting the generality of the foregoing, as the high-priced lawyers say) Prof. Cords of Albany Law School, seem to think that all, or at least many, Tax Court cases are decided otherwise than on the law.

I think at best the conclusion is the old Scots’ verdict, “not proven.” But our telephone talk was a good excuse to delay going to the gym on a Sunday afternoon.

I pointed out in a previous blogpost that Constitutional arguments in Tax Court get a slightly polite version of the tramp’s toss; see my blogpost “Losing My Religion”, 1/17/13, where I noted that such arguments are usually found in protester cases and usually get blown away.

And I pointed out in a more recent blogpost how partners and tax matterers are supposed to tell the IRS where they are, when they change addresses or otherwise move around and about.  See my blogpost  “Wait Just A Minute, Mr Postma”, 7/23/13.

Now if this were just an ordinary mailing address case, I wouldn’t blog it, but it’s a twofer from Judge Thornton, with a recap of partnership-level due process notice and how it’s supposed to be done.

So let’s take a brief look at Estate of Albert Simon, Deceased, Ellen S. Simon, Personal Representative And Ellen S. Simon, 2013 T. C. Memo. 174, filed 7/29/13.

The facts are the usual; the Late Al, before he was late, got himself and Ellen into a son-of-BOSS, a Section 752 mix-and-match of unrecognized gains and recognized losses in a pair of digital option trades. For some quick background, see my blogpost “Woodshedding Your Experts – Stobie Creek Part Deux”, 1/10/11.

Except for a 1% partner, who is nameless and apparently blameless, all the players are alter egos of the Late Al. But when IRS goes hunting for someone to nail with the NBAP, Al isn’t listed as tax matterer (nobody is), so there follows a series of letters, some from Al but most from IRS.

Ellen claims IRS knew about the Late Al, and should have sent the NBAP and FPAA to him. She claims she wasn’t given proper notice.

But IRS cites the then-temporary, subsequently permanent, regulations for letting IRS know partners’ whereabouts. Judge Thiornton: “The IRS’ duty to give a direct or indirect partner notice under section 6223(a) arises only to the extent that the IRS is furnished with readily available information containing the name, address, and profits interest of the partner in either or both of two ways. See Murphy v. Commissioner, 129 T.C. 82, 86 (2007). First, the IRS may be furnished the referenced information through the tax return of the partnership under audit. See id. at 86-87; see also sec. 6223(c)(1). Second, the IRS may be furnished the referenced information through a written statement that meets the requirements of section 301.6223(c)-1T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6784 (Mar. 5, 1987).” 2013 T. C. memo. 174, at p. 15 (Footnote omitted, but I covered this in my blogpost “Wait Just a Minute, Mr Postma”, op. cit., as the high-priced lawyers say.)

Ellen says she got a packet of stuff from IRS during the pre-trial show-and-tell that shows IRS knew right well where she and the Late Al were.

So what, says Judge Thornton. You never sent in the magic paper with the Big Five required points.

“Due process requires that notice be ‘reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.’ Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950); see also Byrd Invs. v. Commissioner, 89 T.C. 1, 6-7 (1987), aff’d without published opinion, 853 F.2d 928 (11th Cir. 1988). The Secretary, in part through specific congressionally delegated authority, has provided a reasonable regulatory procedure to meet that requirement.” 2013 T. C. Memo. 174, at p. 21.

Most important, Ellen never explained why she and the Late Al never sent in the magic statement, or why the Late Al put the old, invalid address on the tax return for the year at issue, when he filed it long after he, Ellen and the partnership had moved away.

The case has an interesting discussion of how penalties are to be dealt with in TEFRA partnership-level adjustments, but those are not often met with by the in-the-trenches preparer, for whom this blog is written. If you do encounter such a situation, where the Section 6662(h) 40% hammer and the Section 6651(a) negligence hammer are about to descend upon your partner-client, read Judge Thornton’s explanation.

The Judge Who Writes Like A Human Being, a/k/a The Great Dissenter, His Honor Mark V. Holmes, has written an Order that should be entitled “Summary Judgment Made Simple”. Though perhaps too simple for the in-the-trenches preparer, it might serve as a handout to clients to explain what to do when they get a Rule 121, and what will happen if they don’t do it.

The Order is Daniel Joseph Vanhook (sic), Docket No. 13284-12SL, filed 7/26/13, although Dan’s surname more properly should be set forth as “Van Hook”, as Judge Holmes does.

Judge Holmes remanded Dan’s NFTL case to Appeals, and when our story opens, Appeals revised its earlier disposition. Here’s the whole story, and I can do no better than quote Judge Holmes in extenso.

“After considering the case again, the IRS was willing to reduce, but not eliminate, Mr. Van Hook’s tax bill and decided that it would keep a lien on Mr. Van Hook’s property until he paid.

“The next step in this process is for the Court to review the IRS’s work, which it does through summary-judgment motions. The IRS will file papers in which the IRS lawyer will argue that no trial is necessary in this case, because (the IRS says) no relevant facts are in dispute — everything is in the record that the IRS Appeals Officer already looked at (and which is called the ‘administrative record’). That motion will argue that, on the basis of these undisputed facts, the Court has to rule in the IRS’s favor.

“The Court will also want to hear from Mr. Van Hook. He will have to file a response to the IRS’s motion. If he disagrees with the facts set out in the IRS’s motion — e.g., there’s something in the record that shouldn’t be there, or something that is missing from the record that should be there — then his response should point out the specific facts in dispute. If he disagrees with the IRS’s argument as to the law, then his response should also set out his position on the disputed legal issues.

“He should label this response ‘Petitioner’s Cross-Motion for Summary Judgment and Response to Respondent’s Motion for Summary Judgment’ on the first page so that it gets filed as soon as the Court receives it.” Order, at pp. 1-2.

Judge Holmes refers Dan to the FAQs found on the taxpayer information link on the Tax Court website.

But Judge Holmes warns Dan that if he doesn’t respond, then, “if appropriate”, he will lose.

Can’t be clearer than that.

Not the Rick Astley 1988 hit, but rather a reiteration of the essential elements of a scenic easement, as Judge Haines deals with a Rule 161 reargument in Kayln M. Carpenter, et al., 2013 T.C. Memo. 172, filed 7/25/13.

This is a supplemental memo, as Kayln already lost in 2012 T. C. Memo. 1. But now Kayln claims Tax Court didn’t apply the learning in Gordo and Lorna Kaufman’s case. See my blogposts “A Joy Forever”, 4/4/11, and “‘A Joy Forever’–Maybe Not”, 7/20/12.

But Gordo’s and Lorna’s case had to do with termination of a scenic easement by reason of a mortgagee’s reservation of casualty insurance or condemnation proceeds, which aren’t in play here. And Gordo’s and Lorna’s deal “…stated that nothing in the conservation easement deed of trust shall be construed to limit the donee’s right to give its consent to changes in the conservation easement deed or to abandon some or all of its rights thereunder.” 2013 T. C. Memo. 172, at p. 17.

And the issue for a Rule 161 is whether there has been an intervening change in relevant law.

Kayln’s problem is the language in the grant of the easement in  her deal: “Extinguishment–If circumstances arise in the future such that render the purpose of this Conservation Easement impossible to accomplish, this Conservation Easement can be terminated or extinguished, whether in whole or in part, by judicial proceedings, or by mutual written agreement of both parties, provided no other parties will be impacted and no laws or regulations are violated by such termination. * * * [Emphasis added.]”. 2013 T. C. Memo 172, at p. 4.

Nothing in Kayln’s language limits the discretion of the parties to abrogate the easement. Gordo’s and Lorna’s deal with their donee limited the donee’s right to change the deal to changes in circumstances. Kayln and her donee could call off the deal at any time for whatever reason, change or no change in circumstances.

No good, says Judge Haines. Together forever is the deal.

In an earlier blogpost, I advised taxpayers seeking like-kind treatment of real property leases to “Go Long”, 6/24/13.

Now come Charles E. & Patti H. Bass, Docket No. 13025-12S, filed 7/25/13, who want to go small. Tax Court small claims procedure per Section 7463, that is.

But there’s a statutory $50K maximum for small-claimers, inclusive of amount of deficiency, additions to tax, penalties and any additional amounts permitted by law.

Chas and Patti have a $190K adjustment in the SNOD, with tax above $50K. So IRS moves to remove the magic letter “S” from the docket number, and it looks like a slam dunk.

But Chas and Patti answer IRS’ motion by saying they’re willing to concede $70K of that adjustment. Thus, only $43K of deficiency remains in dispute.

Good enough for Chief Judge Colvin to let Chas and Patti go small.

Takeaway–Tactically, it might be well to concede your way into a small-claimer.

June Shaw gets stung when her bad debt turns out to be neither a debt, nor bad when she claimed it was, in the eponymous 2013 T. C. Memo. 170, filed 7/24/13.

That learned jurist Judge Lauber, the star of my blogpost,  “Acceuillons, Let’s Welcome, Judge Albert B. Lauber”, 2/5/13, is the decider. And he wastes not his judicial learning on the desert air here.

June is bookkeeper and CFO of her family’s real estate business, but in her spare time she sold an apartment building she herself owned, taking away a seven-figure capital gain just before the real estate market cratered in 2008, and reporting on the installment method. Big taxable payment comes in in 2009.

Coincidentally, Brother Ken needs money for a development venture the family business is undertaking, because his money lady walked away as the real estate market headed south.

June steps in and  takes a note from the business, interest and principal accruing until the due date of the note in 2011. The note is unsecured, and evidences an open line of credit.

June funds about $900K, but claims the loan is a business bad debt and became worthless in 2009.

No, says IRS. No, says Judge Lauber. On both counts.

Interfamilial loans get close scrutiny. Even if the paper formalities are observed, what the parties did is the real test.

No arms’-length lender would have made the deal June did, and no arms’-length lender would have forborne to demand payment, give notice of default, or sue.

Moreover, the note wasn’t due until 2011, so what evidence was there in 2009 that June wouldn’t have been repaid? Merely that a business loses money, and its prospects are none too bright, doesn’t mean it couldn’t recover. June had the books and records as CFO; if she had evidence that the viability of the family business as a going concern was going down the drain, she never introduced the records, so Judge Lauber invokes our old chum Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), aff’d, 162 F.2d 513 (10th Cir. 1947). If June had evidence of worthlessness, she’d introduce it. If she doesn’t, then she loses.

The deal is more like a gift or capital contribution. It doesn’t resemble a commercial loan as to economic substance, June didn’t act like a creditor, and she never established that she had no chance of recovering her money by 2011.

No debt, but plenty of sting. Big deficiency, late payment addition, and substantial understatement of tax.