Sorry, STJ Armen, The Judge With a Heart, it didn’t look close to me.

At the end of a banner day in Tax Court (five, count ‘em, five posts today, a new personal best), as with the card at Aqueduct, we end with a small claimer as the dusk settles in.

This one is Gary W. Andersen and Linda C. Andersen, 2013 T. C. Sum. Op. 100, filed 12/9/13. And the whole story is about $1223 accuracy penalty.

Try this as a sad story. Gary and Linda have a 50 year unbroken record of timely filings, with not a single exam (or even a math correction). But their returns are complicated; they have some farmland they’ve rented, and they each have pension income and employment income from various employers.

So they go to their trusty CPA, with every scrap of paper that could have anything to do with income and deductions, just as they’ve been doing for the five years preceding the year at issue.

And he isn’t just your ordinary CPA (sorry, all you CPAs out there who read my blog, I know you’re all extraordinary because you do read my blog). No, this is Curtis Trader, CPA, MA in Accountancy from Brigham Young U., 20-year veteran of tax preparation and chair, as at the time of trial,  of the Utah Tax Review Committee, to which exalted post he was appointed by the Governor.

Now Curt knew Linda was thinking of hanging up her scrubs (she was a RN), so when she didn’t hand him a W-2 for the year at issue, but a 1099-R for her showed up in the shopping bag he gets from the Andersens, he reckons Linda has finally done it.

Except she hasn’t. Her employer has gone digital, so Linda gets the digit, but not the paper. And her employer doesn’t tell her to check the website, pick a password and download her W-2. So she has no idea she had a W-2.

And when they check out the return Curt prepared, it comes within $1K of the previous year’s numbers (or 0.67%), so nobody is the wiser.

Except IRS, which got the digit that Linda didn’t get, and which fires off a SNOD. That same day they get the SNOD, Gary and Linda send a check for the entire amount of underpayment as stated by IRS.

Now IRS wants the five-and-ten, substantial underpayment. Technically correct, but on these facts?

STJ Armen: “Admittedly, this is an exceptionally close case. However, after weighing all the evidence, and in particular the testimony of the witnesses, we think the balance shifts in petitioners’ favor.” 2013 T. C. Sum. Op. 100, at p. 9.

“Exceptionally close”? Give me a break, Judge!

You state that Gary and Linda are credible witnesses, that Curt is a top-of-the-line expert, that the mistake was honest, that Gary and Linda obviously made a good faith effort to assess their tax liability as they had done every year for the preceding fifty (count ‘em, fifty) years, and that they corrected it the minute they got the SNOD.

How about ol’ Raul Salvagno and his next friend, young Alex Salvagno, the haunter of law libraries, who fiddle around for six years before Judge Kerrigan finally loses patience? See my blogpost “With Friends Like Him”, 2/26/13. And what price  all the other wiseguys and sharpshooters, many of whom have shown up on my blogposts, of whom the accounts of their delictions litter the files at 400 Second Street, NW?

So I’m glad that, at the end, STJ Armen shows he’s still A Judge With A Heart: “Clearly, petitioners made a mistake. But we think it was an honest mistake and not of a type that should justify the imposition of the accuracy-related penalty. In short, we think that petitioners’ diligent efforts to keep track of their tax information, hiring a C.P.A. to prepare their tax return, reviewing their return with the C.P.A. when it was completed, and prompt payment of the deficiency upon receipt of the notice of deficiency, together with the other facts and circumstances discussed above, represent a good-faith attempt to assess their proper tax liability.” 2013 T. C. Sum. Op. 100, at p. 12.

That’s the holiday spirit, Judge.

And no good deed goes unpunished, as Oscar Wilde put it. Lourdes Puente learns this from Judge Haines in her eponymous Tax Court case, 2013 T. C. Memo. 277, filed 12/9/13.

The story is sad but simple. Lourdes’ brother Benny buys a house. He’s the only one on the deed and on the mortgage. Lourdes moves in; at some point down the road Benny loses his job and Lourdes, good sister that she is, steps in and pays some $28K in mortgage interest to keep the roof over her head and Benny’s investment from going south.

Lourdes claims the interest deduction. Benny gets the 1098. Lourdes gets the SNOD. IRS gets the win.

Lourdes doesn’t have legal title, so half the Section 163 toehold for the principal residence deduction is gone (everyone agrees it’s Lourdes’ principal residence).

Now for beneficial ownership: “The Court considers certain factors to determine whether a taxpayer has assumed the benefits and burdens of ownership, including: (1) whether the taxpayer had the right to possess the property and to enjoy the use, rents, and profits thereof; (2) whether the taxpayer had the duty to maintain the property; (3) whether the taxpayer was responsible for insuring the property; (4) whether the taxpayer bore the risk of loss of the property; (5) whether the taxpayer was obligated to pay taxes, assessments, and charges against the property; (6) whether the taxpayer had the right to improve the property; and (7) whether the taxpayer had the right to obtain legal title at any time by paying the balance of the purchase price.” 2103 T. C. Memo. 277, at pp. 5-6.

Lourdes has none of the above. There’s no agreement between her and Benny that lets Lourdes do anything, get anything, risk anything or pay anything.

No deduction. Probably, though, there’s a gift tax implication. But see my blogpost “Economic Substance – A Taxpayer Win”, 12/31/10, for a case where the gift tax didn’t apply.

Unless You Want to Foot(e) The Legal Bill Yourself

 Bill and Liz Foote really got the boot from IRS, and wound up settling eight years’ of claimed underpayments (which IRS claimed at one point was over $120 million) for $310K plus $64K in additions.

But they never asked for admins and litigations, the Section 7430 paybacks, until it was too late.

Read the sad story in William D. Foote and Elizabeth R. Foote, 2013 T. C. Memo. 276, filed 12/9/13, as told by Judge Wherry, not in the least whimsical today.

Although Bill and Liz sent letters to IRS claiming 7430s, they never timely sought to include the admins and litigations in the settlement stip, or moved to vacate the decision so as to litigate the admins and litigations.

Though the case never went to trial, there was certainly trial prep. In fact, Bill and Liz ran up $734K in claimed admins and litigations.

No dice, says Judge Wherry. The doctrine of res judicata controls, and he gives IRS summary judgment tossing Bill and Liz. Once the stipulated decision is entered, and you didn’t stip with IRS about the admins and litigations, you either move to vacate it and fight about the 7430 allowance of admins and litigations, or lose the claim forever.

And it doesn’t matter that IRS was, to put it charitably, a wee bit aggressive here. “Petitioners attach to their opposition to summary judgment exhibits rife with allegations of improper behavior on the part of the revenue agent. As illustration, petitioners contend that the revenue agent refused to consider proffered and documented explanations and that she made numerous adjustments without any credible factual basis or justification.” 2013 T. C. Memo. 276, at p. 4, footnote 4.

And while he says he isn’t finding facts here, Judge Wherry did note earlier that: … the facts, as alleged by petitioners, do not cast respondent [IRS] in a positive light. These facts, if true, are indicators of intemperate actions by respondent’s revenue agent and group manager. However, these facts do not help petitioners because, as discussed infra, the law dictates summary judgment for respondent.” 2013 T. C. Memo. 276, at p. 2, footnote 2.

Read the Tax Court Rules. “They specify that if the parties agree on a settlement of all issues including administrative and litigation costs, the parties must include in the stipulated decision documents the award of those costs. Rule 231(a); Manchester Grp. v. Commissioner, T.C. Memo. 1994-604, 1994 WL 692750, at *7, rev’d on other grounds, 113 F.3d 1087 (9th Cir. 1997). If the parties have not settled the reasonable administrative and litigation cost issues, the taxpayer must file a motion for costs within 30 days of service of a written opinion determining the issues in the case or service of the pages of the transcript that contain findings of fact or opinion stated orally pursuant to Rule 152. Rule 231(a)(2)(A) and (B). If the parties have settled all issues but the claim for costs, the taxpayer must also file a motion along with the stipulation of settled issues. Rule 231(b) and (c).” 2013 T. C. Memo. 276, at p. 9 (Footnote omitted, but read it; it gives some illustrations of other occasions to ask for 7430 relief).

Even though Bill and Liz have some good equitable arguments, it doesn’t help. Judge Wherry goes with res judicata; once it’s over, it’s over. Move timely or lose.

Finally, a word to the wise advocate: “As alleged by petitioners, the actions of the revenue agent, abetted by the group manager, may have been inappropriate, and we in no way condone inappropriate or un-called-for actions. However, those actions, while significantly contributing to petitioners’ lengthy audit and substantial legal bills, are not the proximate cause of petitioners’ inability to obtain an award of reasonable administrative and litigation costs. Rather, it was the unfamiliarity of petitioners and their advisers with our Rules or their inadvertent failure to follow them.” 2013 T. C. Memo. 276, at pp. 15-16. (Emphasis added).

Read the Rules, guys. If you’re going to practice in Tax Court, or before the IRS, read the Rules.

Seems that delay of the game is in the air today, 12/9/13, as Judge Lauber deals with a claim by the Viacom King Sumner M. Redstone that IRS is prevented by the equitable doctrine of laches (delay) from nailing the aforesaid Redstone for gift taxes on gifts he made in 1972, about which he never told IRS and never bothered filing returns.

Too bad, Sumner, laches doesn’t fly. See Sumner Redstone, Docket 8097-13, filed 12/9/13.

Judge Lauber gives Sumner the unwelcome news: “It is well settled that the United States is not subject to the defense of laches in enforcing its rights. The inapplicability of the laches doctrine is especially clear where (as here) the Government seeks to enforce tax claims that are governed by an express statute of limitations. In such cases, the ‘timeliness of Government claims is governed by the statute of limitations enacted by Congress.’ Fein v. United States, 22 F.3d 631, 634 (5th Cir. 1994). Accord, Kohler v. Commissioner, T.C. Memo. 2008-127, 95 T.C.M. (CCH) 1494, 1496-97; Wright v. Commissioner, 89 T.C.M. at 666.” Order, at p. 2 (Some citations omitted).

When a Judge begins with “it is well-settled”, start packing your briefcase, counselor, it’s game over and walk home.

Although there some dicta lying around that maybe, just maybe, laches might apply against the US of A in an off-the-wall circumstance, Judge Lauber isn’t going there.

“In the instant case, the Government seeks to enforce a public right, in the form of a federal tax claim, that is governed by an express statute of limitations enacted by Congress. Petitioner has cited no case, and we have discovered none, in which a court has applied laches against the United States in a situation such as this.” Order, at pp. 2-3.

Anyhow, if he could wriggle in some argument for laches to apply, Sumner “would need to demonstrate, for example, that the IRS was aware of the 1972 gifts and sat on its rights; that petitioner has suffered ‘undue prejudice’ because of this delay; and that petitioner ‘comes into equity with clean hands.’  See, Fridovich v. Commissioner, T.C. Memo. 2001-32, 81 T.C.M. (CCH) 1143, 1146. Because there are material factual disputes concerning each of these points, disposing of the laches issue via motion for judgment on the pleadings would be wholly inappropriate in any event.” Order, at p. 3 (Footnotes omitted).

But one of the omitted footnotes is worth a passing glance. Sumner raised a Fifth Amendment due process issue, but he’ll get a chance to litigate his claims in Court, so no due process problem.

No, not a two-minute bench minor, but rather the start of the action at 400 Second Street, NW, in Our Nation’s Capital.

Here’s a clip from the Tax Court website:

“Operating Status: Washington, DC, Area
“Applies to: December 9, 2013
“Status: Open – 2 hours Delayed Arrival – With Option for Unscheduled Leave or Unscheduled Telework

“Federal agencies in the Washington, DC, area are OPEN under 2 hours DELAYED ARRIVAL and employees have the OPTION FOR UNSCHEDULED LEAVE OR UNSCHEDULED TELEWORK. Employees should plan to arrive for work no more than 2 hours later than they would be expected to arrive.”

But I was at 26 Federal Plaza, Room 206, in the Big Apple today, and things were right on time, as Judge Laro was driving the litigants through the calendar call. No slowdown here.

No, not Robert Frost’s classic poem “Stopping By Woods”, but rather IRS letting us know what the standard mileage rates will be for calendar 2014.

Briefly, beginning on Jan. 1, 2014, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 56 cents per mile for business miles driven
• 23.5 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

Remember the Section 274 standard for substantiation of those business miles. And if you’re keeping a logbook for business, you might as well log in the medical, moving and charitables as well.

Fans of Douglas Adams’ Britcom classic “The Hitchhiker’s Guide to the Galaxy” will doubtless remember the Answer to the Ultimate Question of Life, the Universe, and Everything is 42.

So that should have answered my interlocutor Lee. Remember Lee? No? Well, check out my blogposts “Angst”, 11/4/13, and “We May Never Know”, 11/26/13.

The far from ultimate question posed, both by Judge Laro and by Lee, is whether Lee Ang’s immigration status (or lack thereof) has anything to do with his ability to proceed in Tax Court.

And when last heard of, it seemed that either IRS had conceded the point, or else Judge Laro wasn’t interested any more.

Well, those breathlessly awaiting an answer might be heartened to discover that Judge Laro is sending Lee and IRS to trial. You remember Judge Laro bounced IRS’ summary judgment motion right before Thanksgiving. So a trial there must be.

I cannot guarantee, warrant or represent that the answer will emerge on the trial, but those who want a ringside seat can show up in New York, New York on Thursday, December 12, 2013 at 10:00 a.m., at the Jacob K Javits Federal Office Building, 26 Federal Plaza, on that island off the coast of North America,  and ask for Judge Laro’s part, thus bewildering the security team and assuring that the diligent seekers for the answer will be led on a wild goose chase.

But it’s a date and time certain, so unless IRS and Lee Ang make a deal, it’s “Game On”.

Anybody going? If so, please let me know the answer, if any.

Nothing new out of Tax Court or anywhere else 12/5/13. So I was checking the hits on this blog, and found that, on 12/4, someone from the Peoples Democratic Republic of Vietnam landed on this blog. Now I’ve had visitors from all over the place, but that was a first. I had visited the aforesaid Peoples Democratic Republic many years ago, when it wasn’t called that, on an all-expenses-paid tour organized and paid for by the government of the Republic of the United States of America. The reception I received was hardly what one would call friendly, but then again, I didn’t expect it would be.

Still, nice that someone from over there looked me up after all these years.

 We got a T. C. Opinion today (Vidal Suriel, 141 T. C. 16, filed 12/4/13), but it’s about the tobacco settlement agreement, and therefore unlikely to occur in the world in which my readers and I practice. In short, “economic performance” means something that changes your bank balance, and Vidal’s jousting with the Master Settlement Agreement Fund didn’t get there until Vidal’s Sub S wrote the check.

But we did get an order out of Ch J Thornton, J S Karaoke, LLC and John E. Strauser, Docket No. 17867-13, filed 12/4/13, that brings out a point we ordinary practitioners might consider.

IRS moves to toss J S Karaoke, LLC, from John’s petition and from the caption of the case, because they never issued a SNOD or NOD to, about or concerning J S Karaoke, LLC.

John objects. “Although petitioners object to the motion, petitioners state in the motion that John E. Strauser is the sole owner of J S Karaoke, LLC.” Order, at p. 1.

There should be a racehorse named “readtheregulations” (wow, just 18 characters!).

Ch J Thornton: “The ‘check-the-box’ regulations contain provisions concerning a business entity’s classification for Federal tax purposes. See Medical Practice Solutions, LLC v. Commissioner, 132 T.C. 125 (2009); sec. 301.7701-3(a) and (b)(1), Proced. & Admin. Regs.” Order, at p. 1.

So IRS, read the regulations, and Ch J Thornton will give you an open-book quiz.

“…respondent [IRS] shall file a Supplement to his motion to dismiss. In that Supplement respondent shall set forth and discuss fully respondent’s position as to classification of J S Karaoke, LLC for Federal tax purposes and Mr. Strauser’s ownership interest in petitioner J S Karaoke, LLC.” Order, at p. 2.

Disregard the disregarded at your peril.

No, not the old Saturday Night Live crew, but rather the case of Michael D. Brown and Mary M. Brown, 2013 T. C. Memo. 275, filed 12/3/13. The problem is the bonus depreciation Mike took on his Bombardier Challenger 604 flying machine.

Mike was a flying insurance salesman, selling big-ticket multi-million-dollar policies to the very rich, to get around estate taxes. So successful was Mike that IRS generated Notice 2002-59, 2002-2 C.B. 481, just a scant three weeks after Mike trumpeted a split-dollar life insurance maneuver that, so he told the New York Times, could save $9 in tax for every $1 of premium.

Amazing how these tax maneuverers feel compelled to spill the beans at the very door of 1111 Constitution Avenue, NW. Like IRS doesn’t read the papers.

And as for the split-dollar gambit, see my blogpost “The Split”, 8/29/12, wherein it appears that Steve Neff and Brad Jensen, master builders, were blown up when IRS torpedoed Mike’s brilliant maneuver.

Back to the main story. Mike needed to jet around the country, to meet and greet his high-priced clientele. Commercial travel wasn’t convenient, and chartering meant he was at the mercy of an owner who might whisk his magic carpet away just when Mike most needed it.

So he bought his own. But he had to get it placed in service by year’s-end, and he had a very narrow timeframe to do it. Moreover, he wanted special modifications, like a $200K conference table and a couple of widescreen monitors, and extra subhydraulics (whatever those may be) and a few doodads, so the total bill was $500K, and there was no way his jet  would be completely modified before year’s-end.

Thus, he’d be back to 30% bonus depreciation and not the 50% one-time Congressional largesse special.

Mike, never taking “no” for an answer, paid for and took delivery of the plane at year’s-end, signed a post-delivery agreement with the builders to soup up the plane as Mike required. Mike testifies on the trial he absolutely has to have the conference table and the widescreens in order to wow the stratospheric highrollers he’s trying to sell (and also the CPAs and lower-echelon brokers who send him leads).

Just before the ball drops at Times Square, Mike takes the plane as unmodified, flies to Seattle and then to Chicago, and gets letters signed by a client and a fellow broker saying how they talked business.

Of course the flight logs and the fuel receipts don’t jibe. IRS busily nails Mike for tax fraud on other items, and they settle, but Mike wants to fight for the bonus depreciation. He did pay for the plane, took title and flew it.

But that intrepid unraveller of depreciation, The Judge Who Writes Like a Human Being, a/k/a The Great Dissenter, Judge Mark V. Holmes, isn’t flying with Mike.

For Judge Holmes’ disquisitions on depreciation, see my blogposts” Basis For Dummies”, 11/24/11, and “The Sum of Its Parts”, 3/12/12.

Mike did use the plane, and he claims it was ready for air transport, which it was. But that’s not the point. Placing an item of property in service means not only that it works generally, but is fit for the specific use the taxpayer intended, and is ready for that specific use on a regular, ongoing basis, unless frustrated by circumstances beyond the taxpayer’s control.

Reviewing the cases, Judge Holmes concludes: “These cases teach us that not just any use of an asset will satisfy the placed-in-service standard. An asset must instead be available for its intended use on a regular, ongoing basis before we can find it ‘placed in service’ in the tax year in question.” 2013 T. C. Memo. 275, at p. 37. (Emphasis by the Court).

Any use will not suffice. The specific intended use is what controls, and as Mike testified, without the conference table and the widescreen monitors, the plane didn’t answer Mike’s specific insurance-flogging needs.

“The problem with the Challenger was that, although it would have been, as Brown said, ‘perfect for some buyers,’ it wasn’t complete for him without the ’two business requirements that [he] needed.’ And without those two …modifications, the Challenger wasn’t ‘in a state of availability for the specific intended function in Brown’s insurance business….” 2013 T. C. Memo. 275, at p. 37.

Mike does avoid the 75% fraud chop, because, though he may have filed fraudulent returns in other years, IRS couldn’t prove he committed fraud with the Challenger. But Mike does get hit with the 20% substantial understatement.