Now all of us senior citizens (I hate that phrase, but what will you? We’re stuck with it) know that when confronted with a computer wardrobe malfunction, younger is better. It’s the old phrase made famous by the Berkeley Free Speech Movement (and if any of this makes sense to you, you probably should heed it when dealing with a computer): “Don’t trust anyone over thirty.”

Well, Javad Bigdeli and Ashraf Bigdeli took that advice in 2013 T. C. Memo. 148, filed 6/11/13, but Judge Morrison wasn’t impressed.

Javad was a traveling dentist who tried to write off his commute and stayovers. And Ashraf defaults at the trial. It’s the usual Section 162 meets Section 274; nothing to long detain the tourist here.

Here’s the rub: “The Bigdelis’ daughter, who did not have experience in tax, accounting, or any related fields, helped them prepare their tax returns using TurboTax computer software for both tax years 2008 and 2009.” 2013 T. C. Memo. 148, at p. 4.

So even though IRS argues the Bigdelis conceded the Section 6662(b)(1) penalties by not addressing same in their petition (see Rule 34(b)(4), and my blogpost of even date herewith, “An Interest(ing) Question – Or Two”), Judge Morrison says he’ll assume but not decide that the Bigdelis did say something about penalties somewhere. Howbeit, they were still negligent.

Judge Morrison: “In preparing their tax returns, they relied entirely on their daughter and on TurboTax. They attempted to deduct personal expenditures without doing any research or consulting any expert to decide whether the deductions were proper. A reasonable and prudent person would not have tried to claim the deductions they claimed without making at least a minimal effort to ensure that they had some legal basis for doing so.” 2013 T. C. Memo. 148, at p. 13.

A young computer whiz with no tax background doesn’t cut it in Tax Court.

Tax masochists who follow my blog will remember that we left John Crimi and his family, at the end of my blogpost “Stick It”, 2/14/13, with “their deduction (or at least some of it).”

Well, John and family went through the Section 155 bean-count, and at the end they and IRS agreed as to some, but not as to all. Specifically, three of the nine consolidated cases were hung up on Section 6404(g) interest suspension.

You’ll remember that Section 6404(g) is the “you didn’t tell me I owed you for 36 months”. You didn’t remember? Well, neither did I, so I looked it up. And you should look it up, too, and thereupon please send a few dollars to the Cornell Law Institute, my alma mater’s on-line fount of all knowledge.

You’ll find this tale in John Crimi, Docket No.13252-09, filed 6/11/13.

Well, the Crimi clan claim the IRS didn’t tell them. But Judge Laro says IRS coldly responds thus: “‘[I]t is a long-standing principle that this Court generally lacks jurisdiction over issues involving interest.” Goode v. Commissioner, T.C. Memo. 2006-48, 91 T.C.M. (CCH) 901, 905-906 (2006). Further, it does not appear petitioner has made interest an issue in his petition, at trial, or on brief.” Order, p. 2.

Now remember Rule 31(c): “A party may state as many separate claims or defenses as the party has regardless of consistency or the grounds on which based.”

And Rule 34(b)(4), which requires that the petition contain: “Clear and concise assignments of each and every error which the petitioner alleges to have been committed by the Commissioner in the determination of the deficiency or liability. The assignments of error shall include issues in respect of which the burden of proof is on the Commissioner. Any issue not raised in the assignments of error shall be deemed to be conceded.”

So Judge Laro gives the Crimis homework. They must file, within a week, “a Memorandum of Points and Authorities, not to exceed 10 pages, addressing (1) whether we have jurisdiction over petitioner’s claim under section 6404(g) and (2) in any event why petitioner should not be deemed to have waived any issues relating to interest.” Order, p. 2.

And their lawyers should write on the blackboard 100 times: “I will raise every error I can possibly conceive of in every petition I file.”

Special Trial Judge Lewis (The Right Spelling) R. Carluzzo, that is. He gets some real doozies, and here’s an offer of proof, a designated hitter, Benjamin Whitfield, Docket No. 25987-12.

Tax Court has often been described as the “People’s Court”, the cheap home of justice for the overtaxed. But its jurisdiction is so limited, counterintuitive and labyrinthine that the people often get lost.

Ben doesn’t get lost, at least not physically; he’s in the slammer in FL.

But his refund check for 2010 doesn’t reach him; IRS sent it to his home, but it was forwarded to the Stony Lonesome, whereat the warders returned it to IRS.

So Ben petitions IRS in Tax Court.

STJ Lew gets this one. And deals with it as follows: “We are neither familiar with, nor have any jurisdiction with respect to the procedures for the receipt of mail applicable to a person incarcerated in the State of Florida.

“Correspondence between Florida prison officials and respondent is described in petitioner’s submissions, but copies of any such correspondence have not been provided. Furthermore, we are satisfied that the correspondence, as described, does not constitute a notice of deficiency for 2010 as petitioner argues. Consequently, and as noted in respondent’s motion [for dismissal], because respondent has not issued a notice of deficiency for 2010 to petitioner, we have no jurisdiction over his claim for a refund for that year. See sec. 6512(a).” Order, p. 1.

Ben should sue in US District Court or Court of Federal Claims.

And for sure, neither of  those is a place to find cheap justice.

That is, abandon hope of taking an ordinary loss if you abandon property subject to a mortgage, recourse or non-recourse.

That’s Judge Gerber’s take on Drucella T. Malonzo, 2013 T. C. Sum Op. 47, filed 6/10/13, a “don’t quote me” that furnishes a good refresher on FMV-exceeds-basis situations.

Drucella bought a house in Sacramento, CA, resided there for a while, moved to San Francisco and rented out the house, earning income and taking depreciation. But when her tenant left and no new tenant appeared, Drucella stopped paying her mortgage. The lender foreclosed and sent Drucella a 1099-A, Acquisition or Abandonment of Secured Property.

Drucella claimed ordinary loss, IRS claimed capital gain. They’re fighting over a $737 deficiency in tax, but Drucella’s loss would be well into six figures, if she can get it.

She can’t.

Judge Gerber: “Petitioner purchased the property, depreciated it, and, after her inability to rent it out, walked away when her mortgage obligation was in excess of the value of the property and also in excess of her adjusted basis in the property. Here, like the taxpayer in Crane [Crane v. Com’r, 337 U. S. 1(1947)], petitioner claimed depreciation based on her basis or cost. Even though she walked away from the property with the intention of no longer making payments on the mortgage, the subsequent foreclosure of the mortgage loan securing the property constituted a ‘sale or exchange’. See sec. 1.1001-2(a)(1), Income Tax Regs.” 2013 T. C. Sum. Op. 47, at p. 6.

Drucella’s position ignores the mortgage indebtedness, and Judge Gerber won’t. When Drucella walked, she’s deemed to have sold even though the mortgage exceeded the FMV of the property. She took depreciation, which IRS adds back to her basis, and calculates the gain. See page 4 of the opinion for the arithmetic.

As hockey fans know, certain acts by coaches and players can send an unoffending player off the ice, to serve two minutes in the penalty box for the sins of others.

Leslie A. Byrne, Docket No. 9242-10, filed 6/7/13, was sent off for keeps due to failure to prosecute, but it was her attorney who delayed the game and caused Leslie to be tossed. Her attorney ran to Second Circuit and threw himself on the mercy of that esteemed tribunal.

The Second Circuiteers reversed and remanded, reinstating Leslie and sending her attorney (whom I won’t name here, although Judge Kroupa is not so reticent as I) to face the music. And IRS gives Leslie, who claims to be an innocent spouse, a bonus for her trouble.

Judge Kroupa: “The Court held a telephone conference with the parties. Respondent indicated that he would reevaluate petitioner’s innocent spouse claim in accordance with the new standards promulgated in Notice 2012-8, 2012-4 I.R.B. 309. The parties agreed to remand the innocent spouse claim to the Cincinnati Centralized Innocent Spouse Operation (CCISO).

“The Court also discussed sanctions against petitioner’s counsel. We find it appropriate to sanction petitioner’s counsel for failing to obey the Pretrial Order. See Rule 104(c)(4). Petitioner’s counsel acknowledged his conduct unnecessarily delayed this matter.” Order, at p. 1.

Notwithstanding the numerous protestations by Tax Court that Notice 2012-8 is under review and won’t be followed there until final (cf. Sriram v. Commissioner, T.C. Memo. 2012-91, slip op. at 9 n.7), IRS said that they would apply the new procedures even though not final. See my blogpost “Innocence is Bliss”, 1/6/12. And Judge Kroupa lets it go, for now; but if Leslie loses at the Cincinnati injury clinic and comes back to Tax Court, Sriram may rise to bite her. See my blogpost “Diehl or No Diehl”, 6/21/12.

Meanwhile, back at the whipping post, Judge Kroupa hits Leslie’s dilatory attorney with a $500 sanction. And let us all remember Voltaire’s immortal words anent poor Admiral Byng, R.N., in a not totally dissimilar situation: “Dans ce pays-ci, il est bon de tuer de temps en temps un amiral pour encourager les autres .”

I need not, of course, translate.

No, not the 1935 Arthur Schwartz-Howard Dietz revue that introduced “What A Wonderful World” to the standard repertoire, nor yet the late Anthony Lewis’ Pulitzer-Prize-winning column so styled, but today it’s the story of James F. Daly and Candace H. Daly, 2013 T. C. Memo. 147, filed 6/6/13.

Or rather, it’s Jim’s story, as Sandy is safe in Utah, working full-time as a lobbyist, while Jim is off in Iraq and Afghanistan, working for L3 Communications.

Judge Kerrigan: “He was employed by L3 during the years in issue.

“During the years in issue L3 maintained its principal place of business in Salt Lake City, Utah. L3 contracted with the Department of Defense. Part of petitioner’s work for L3 involved L3’s contract with the Department of Defense.

“During the years in issue petitioner husband performed services for L3 in Afghanistan and Iraq. L3 compensated petitioner husband for those services. When petitioner husband was working overseas, he was unable to choose where he would be working or for how long he would be there. He was informed of his departure date only one month in advance. He was informed of his return date only two weeks in advance. Petitioner husband, however, was aware in advance that his assignments in Afghanistan and/or Iraq would last approximately three months. The Department of the Air Force provided L3 with an official travel authorization for petitioner husband for travel from August 10, 2007, to August 31, 2008.” 2013 T. C. Memo. 147, at p. 3.

Jim was confined to base (Kandahar or Ballard) during his hundred-day tours, was flown in and out by the US Air Force, couldn’t bring family with him nor could he leave the base. Jim worked 12-hour shifts every day, weekends included.

Jim claimed Section 911(a) foreign earned income credit. No doubt he earned the money via personal services. And he prorated his earnings based upon time in-country, and requested a waiver of the 330-day out-of-USA requirement.

But he wasn’t foreign and wasn’t waivable, said IRS, and Judge Kerrigan agrees. See Section 911(d)(4). Jim had to be a bona fide resident who would have satisfied the 330-day requirement except that Treasury, after consultation with State, decided that USA nationals had to leave because of war or civil unrest.

But Jim wasn’t a bona fide resident. Judge Kerrigan: “Petitioner husband maintained strong ties to his home in Utah. He lived on U.S. Air Force bases when he was in Iraq and Afghanistan and was not allowed to leave the bases. His family did not go with him, and he did not travel. He did not open a bank account in Iraq or Afghanistan. … petitioner husband had ties to Iraq and Afghanistan that were severely limited and transitory during the years in issue.

“Petitioners contend that even if petitioner wife had been allowed to join petitioner husband in Iraq or Afghanistan, she nevertheless would have been unable to go because of her separate career. Petitioners also contend that petitioner husband maintained a residence in Utah because of petitioner wife’s business. Even if these contentions were true, they would not outweigh petitioner husband’s limited ties to Iraq and Afghanistan.” 2013 T. C. Memo. 147, at p. 12-13.

I can understand Judge Kerrigan, except for bit about the bank account in Iraq or Afghanistan; is it possible to have a bank account there, in a bank that hasn’t been blown up?

Jim claimed his USAF travel warrant was for more than a year, but that cuts no sand (forget about ice) with Judge Kerrigan: “Petitioners contend that petitioner husband’s residence was in Iraq or Afghanistan or both during the years in issue. They claim that his primary place of business was in Afghanistan and/or Iraq because he was ‘ordered to be present in these countries for an entire 12 months’. Petitioners refer to the travel authorization that L3 received from the Department of the Air Force, which authorized petitioner husband to travel from August 2007 to August 2008. Travel authorization alone is not proof that petitioner husband’s primary place of business (and therefore tax home) was in a foreign country. Petitioner husband’s temporary location in Afghanistan and Iraq does not change the fact that petitioners’ tax home was in the United States. Petitioners have failed to show that petitioner husband established a residence in a real or substantial sense in Afghanistan and/or Iraq in the years in issue.” 2013 T.C. Memo. 147, at pp. 13-14.

But finally, get this: “Petitioners failed to meet the requirements under section 911(d)(4)(B) because they failed to show that the Secretary determined that individuals were required to leave Afghanistan and/or Iraq because of war, civil unrest, or similar adverse conditions. The Secretary publishes a list of foreign countries where war, civil unrest, or similar adverse conditions exist for purposes of section 911(d)(4)(B). Sec. 1.911-2(f), Income Tax Regs. No list was published for 2007. The list that was published for 2008 does not include Iraq or Afghanistan. See Rev. Proc. 2009-22, sec. 2.04, 2009-16 I.R.B. 862, 863.” 2013 T. C. Memo. 157, at p. 16.

Oh yeah? There was no war or civil unrest in Iraq or Afghanistan in 2007 or 2008, according to the Secretary of the Treasury?

Anyway, Jim loses.

And for more about tax homes, see my blogpost “Home Is Where The Heart Is”, 7/21/11.

That’s STJ Robert N. Armen. And even confronted with frivolity merchant Guy Decker, Docket No. 30559-12, filed 6/6/13, STJ Armen cuts Guy some slack.

It’s the typical failure-to-report-wages, with protester overlay and the obligatory quote from Crain v. Commissioner, 737 F.2d 1417 (5th Cir. 1984). Apparently Guy sent in a 1040 with zeros, so IRS hits Guy for tax, interest and failure-to-pay addition.

IRS gets summary judgment, as Guy disputes no facts. But only for tax and interest.

STJ Armen: “Although petitioner did not raise the issue in either his petition or his Objection to respondent’s motion to dismiss, the record indicates that respondent erroneously determined the addition to tax under section 6651(a)(2) based on petitioner’s ‘total corrected tax liability’ of $18,451, less allowable payments of $405. (Emphasis added.) However, the addition to tax under section 6651(a)(2) is based on a taxpayer’s failure to pay the amount shown as tax by the taxpayer on the taxpayer’s return. Form 4549, which is an integral part of the September 26, 2012 notice of deficiency, indicates that the ‘total tax shown on return’ was zero. Thus, as a matter of law it cannot be said that petitioner failed to pay the amount shown as tax by him on his return.” Order, p. 2.

After all, Guy said zero and paid zero.

STJ Armen has a heart.

Those of us who loved to play Parker Bros.’ Depression-era anodyne will remember drawing that card, with the inevitable agony or ecstasy. If our younger sibling had houses and hotels, it was game-over, followed by weeping, wailing and gnashing of teeth. If Boardwalk were still no-one’s-land, and we could afford the trophy property, we jumped on it. If neutral and we could not, we knew that relief was around the corner, as on our next turn we would we pass “GO” and collect our $200.

Oh those days, “gone alas like our youth, too soon.”

But the Supremes handed that ticket to Historic Boardwalk Hall, LLC, New Jersey Sports and Exposition Authority, Tax Matters Partner, Docket No. 11273-07, telling the taxpayer to take a walk (where not specified).

So Judge Goeke gets to push the parties around (in an old-fashioned Atlantic City boardwalk rolling chair, I mean; although an alternative meaning is entirely possible). The Order in this case was filed 6/5/13.

For background, see my blogposts “Social Engineering Trumps the Code”, 1/3/11, and “Honor Your Partner?”, 9/3/12.

To summarize, HBH was a team-up by NJSEA and Pitney-Bowes, the postage meterer, to rehab an historic structure on the Boardwalk in Atlantic City and give P-B big Section 47 tax credits. But unlike the ditty made famous in the June Haver and George Montgomery 1946 classic, life wasn’t peaches and cream. IRS blew up the deal, Tax Court found for P-B in 136 T. C. 1, filed 1/3/11, but the mean ol’ Third Circuit reversed and remanded.

So now for a quick Rule 155, no?

Not so fast. When Judge Goeke asked for supplemental briefs, P-B said they filed for certiorari with the High Court. “On May 28, 2013, the Supreme Court denied certiorari to petitioner (2013 WL 249846, 81 USLW 3431 (May 28, 2013)). The parties telephonically contacted the Court stating that because the parties could not agree upon the scope of the mandate, a joint written status report would not be filed and requested a telephonic conference call. That conference call took place on June 4, 2013.” Order, p.1.

So Judge Goeke wants each side to set forth what they think Third Circuit wanted Tax Court to do.

But Judge Goeke skips the hundred-year-old admonition from the Supremes anent remands: “That [lower] court cannot vary it, or examine it for any other purpose than execution; or give any other or further relief; or review it, even for apparent error, upon any matter decided upon appeal; or intermeddle with it, further than to settle so much as has been remanded.” In re Sanford Fork & Tool Co., 160 U.S. 247, 255 (1895). Depending, of course, upon what actually was remanded.

So again we  take a walk on the Boardwalk.

But Judge Marvel Hangs Up

IRS tries to play telephone tag with Pamela Lynn Brooks in 2013 T. C. Memo. 141, filed 6/4/13.

Pammy is an IRS tax compliance officer, a reviewer of returns who messed up her own returns for the years at issue.

Her case is also interesting for the capital loss argument, which I’ll briefly summarize before getting to the telephone story. Pammy made some improvements at her own expense to mother-in-law Beulah’s residence, based on m-i-l Beulah’s promise to give her a cut of the profits when she sold. Though Pammy lived in the place for a short while, she vacated prior to sale. M-i-l Beulah died, the property was sold, and of course Pammy got nothing until Pammy sued, and settled for about half what she had spent to make the improvements.

That’s enough for Judge Marvel to allow the loss, even though Pammy had no ownership interest in, and no other enforceable legal right to, the house. Judge Marvel says “joint venture” and that can be an oral agreement under State law (CA, where else?). Investment was made with expectation of profit, had economic substance and an enforceable agreement.

Could also be constructive trust: family relationship, action taken in reliance.

Now for the telephone. You remember the Section 4251 telephone excise tax was trimmed by the courts and IRS offered refunds per Notice 2006-50, ultimately tacking a line onto the 2006 Form 1040 to let taxpayers take the telephone excise tax as if it were income tax paid. Well, Pammy claimed $768 in credit, and IRS said no.

Judge Marvel passes: “Although neither party contends that we lack jurisdiction to decide whether petitioner claimed an excessive telephone excise tax credit, we may question our jurisdiction sua sponte. The Tax Court is a court of limited jurisdiction, and we may exercise our jurisdiction only to the extent authorized by Congress. Section 6213(a) of subchapter B authorizes the Tax Court to redetermine a deficiency provided a timely petition is filed. Section 6211 defines a deficiency as the amount by which the tax imposed by subtitle A or B or chapter 41, 42, 43, or 44 of the Code exceeds the amount of such tax shown on the taxpayer’s return and the amount of such tax previously assessed.

“Section 4251 imposes the telephone excise tax and section 6415 allows a taxpayer to claim a telephone excise tax credit. See also Notice 2006-50, supra. Thus the excise tax and credit are not properly part of an income tax deficiency determination. See sec. 6211(a). Accordingly, we do not have jurisdiction to determine the proper amount of petitioner’s telephone excise tax credit.” 2013 T. . Memo. 143, at pp. 37-38. (Citations and footnote omitted).

This is a non-rebate refund, and therefore Tax Court can’t touch it. IRS is trying to use income tax methods for non-income tax issues, and Judge Marvel hangs up on that.

Section 469 incomprehensible? Maybe to Professor George S. Jackson, who in the October 24, 2011 edition of Tax Notes “states that section 469 contains ‘almost 4,500 words’  (we did not count) and ‘exemplifies why federal tax law is incomprehensible for most citizens.’ George S. Jackson, ‘Passive Activity Limitations: Time for a New Paradigm?’, 133 Tax Notes 447, 459 (2011).”

The quote is from Peter H. Hofinga and Margaret M. Wong, 2013 T. C. Sum. Op. 43, filed 6/3/13, at p. 5.

Nothing daunted, STJ Lew (The Right Spelling) Carluzzo sails right in: “Describing section 469 as ‘incomprehensible’ is probably an overstatement; that section, however, is hardly uncomplicated. The dispute between the parties in this case, however, allows us to avoid a discussion of many of the complexities of section 469, and a summarization of the relevant provisions of that section is sufficient.” 2013 T. C. Sum Op. 43, at p. 5. (Footnote omitted).

And barring the neologism “summarization” (how about just “summary”, STJ Lew?), STJ Lew does just that.

It’s the usual “rental realty is always passive” meets material participation meets the $150K AGI limit meets real estate pro. And that’s the 750 hour barrier.

Pete and Maggie elect to treat all their rentals as a single activity: good move. If you want to be a pro, elect “all”, unless there’s some overriding reason for compartmentalizing. So Pete does materially participate, taking all the rentals together. But the $150K AGI ceiling prevents Pete from taking rental losses against ordinary income. If AGI exceeds the magic number, you’re still passive even if you participate.

So Pete’s only hope is the Section 469(c)(7) real estate pro, the 750-hour floor. You have to log (and the operative word here is “log”) a minimum of 750 hours of material participation per tax year, and at least half of all your personal services in all your trades or businesses must be in real estate.

But Pete, who really ran the show, is on the disabled list and, despite continuances, can’t make it to trial, so Maggie is on her own. And she admits she’s not a pro.

Pete did nothing but real estate, so he has the one-half test beat.

STJ Lew: “Ideally, a taxpayer who claims to be described in section 469(c)(7) would maintain a contemporaneous log or record showing with particularity the amount of time devoted to the rental real estate activity on an event-by-event basis. Ideally, the log would be detailed enough to allow for someone who reviewed it to make an informed judgment as to the accuracy of the information reported. The creation and availability of a detailed log is important, especially if that reviewing ‘someone’ is an Internal Revenue Service employee considering the log in connection with an examination of the taxpayer’s return on which rental real estate losses are deducted. Apparently, petitioners were not aware of the importance of keeping such a log and, as noted, neither kept a log during either year in issue.” 2013 T. C. Sum. Op. 43, at p. 8. (Citations omitted, but read them.)

But there is a saver. Reg. Section 1.469-5T(f)(4) provides for an “any reasonable method” test. There needn’t be a contemporaneous log, but appointment books, calendars and narrative summaries can be acceptable.

Unfortunately, what Maggie produces conflates her hours with Pete’s, and only Pete’s hours count. Also, Pete employed managing agents to do some of the work, so Maggie’s logs (and she did them twice) can’t really substantiate the requisite hours for Pete.

STJ Lew notes that Maggie’s testimony about what Pete did probably was hearsay, but as this is a small-claimer, he’ll let it in anyway. Especially as he’s going to find for IRS, which he does.

Takeaway- If you want to be a pro, get one of the timekeeping software programs (like lawyers use) and enter your hours every day as you do the work. Specify the properties (give each one a billing code), what you did and when you did it–every phone call, every e-mail. As Diana Ross and the Supremes, and the Temptations, put it in their 1968 hit, “Every minute, every hour, I’m gonna shower you” with data and more data, IRS. As Diana and the guys put it “I’m Gonna Make You Love Me,” IRS.

And tell ‘em STJ Lew made you do it.