Remember Donald R. Fitch and Brenda T. Fitch, now playing in 2013 T. C. Memo. 244, filed 10/28/13? No? Neither did I, until I looked them up; there they were, or at least The Donald was, in my blogpost “Practicing Accountancy Can Be Hazardous to Your Health”, 12/26/12. There, IRS accused The Donald and his colleague Mark of playing give-and-go with The Donald’s CPA practice, but Judge Vasquez gave them a bye, saying The Donald couldn’t have manufactured a brain aneurysm and Mark a seizure, just to get a 15-year life to depreciate intangibles.

But The Donald’s and Brenda’s real estate wheeling and dealing were left for the Rule 155 beancount. So back they go to Judge Vasquez, as The Donald and Brenda claim their separate businesses should be aggregated for SE purposes.

Ordinarily, when spouses each have their own business, each files a separate 1040-SE for each business, and they cannot net profit and loss between their businesses for that purpose. But The Donald and Brenda are residents of The Bear Republic, and that’s community property country.

However, since the Social Security Protection Act of 2004, even in community property jurisdictions, if one spouse runs the show, then the income may be community property, but the SE tax falls to the operating spouse, and there’s no sharing with the other.

Brenda ran a real estate brokerage, and that’s the key to the case. She held the licenses, kept her own books (even though The Donald set up her website and maintained her Quicken software), ran around to find listings and make deals; and the fact they discussed business at the dinner table doesn’t help. Though The Donald and Brenda want a hearing on what she did, that’s not necessary.

Remember The Donald was recuperating from the brain aneurysm, and playing put-and-take with Mark, during the years at issue, so he could only work part-time, and that’s murderous for a single-shingle, so his accountancy practice lost a ton of money.

Brenda was keeping the ship afloat, so she had real income. And real SE tax to pay.

It’s easy to second-guess. That activity is on the Top Ten Indoor Sports List. And we’ve all messed up, sometimes really big. So I’m not naming names when it comes to the attorney who gets this footnote in Kathleen S. Simpson and George T. Simpson, 140 T. C. 10, filed 10/28/13: “We do not express any opinion as to whether Mr. X’s assessment was supported by the facts and the law underlying Ms. Simpson’s FEHA claims.” 2013 T. C. 10, at p. 8, footnote 3. (Name omitted). FEHA is California’s Fair Employment and Housing Act. And the Judge here is Judge Laro.

This case is noteworthy in that it applies the revised Section 104(a)(2) physical injury exclusion from income to a settlement otherwise than one arising from a tort or tort-like claim. Here, the claim is in the nature of a Workers’ Comp award, although it fails characterization as a Workers’ Comp for want of statutory compliance.

But in any event, whatever was settled (and it’s by no means clear what the payor thought they were settling, and that’s the test), it wasn’t the classic slip-and-fall or pedestrian-knock-down. Lost wages were in the mix, as were emotional harm, counsel fees and court costs (the latter two items being deductible but not excludable).

The problem is that Kathleen testified she had real physical problems arising directly from work. She had become a turnaround specialist for Sears, who sent her to manage a problem store that was three hours from her home, where the whole staff had been fired and replacements had less than a year of experience. She was working 60-hour weeks and lifting merchandise, to help out. She hurt her shoulder, she says, but the best the medical evidence she could produce claimed clinical depression, irritable bowel syndrome, and fibromyalgia.

Though she complained and asked for a transfer, Sears did nothing except fire her.

Catherine sues, but Sears gets summary judgment on two causes of action (neither of which mentions direct physical injuries), and based on the surviving third cause of action, her attorney, Mr X, negotiates a settlement based on Sears’ failure to give Kathleen a Workers’ Comp claim form when they can her. Though the settlement might qualify for treatment as a Workers’ Comp claim, Mr X doesn’t file or get it signed-off by the CA Workers’ Comp Board, so it fails the Section 104(a)(1) test. “Ms. Simpson never filed a workers’ compensation claim, and Sears and Ms. Simpson never submitted the settlement agreement to the California Workers’ Compensation Appeals Board (WCAB) for the approval required under Cal. Lab. Code sec. 5001 (West 2011). Mr. X was not aware of the approval requirement.” 2013 T. C. 10, at p. 10 (Name omitted).

Mr X, while stating he is not a tax attorney, does tell Kathleen “(D)ue to the nature of the claim that was settled, although I am not Ms. Simpson’s tax adviser, I understand that the settlement proceeds should not be considered taxable.” 2013 T. C. 10, at p. 11.

So Kathleen didn’t, but IRS said she should have, and gave her a SNOD for the whole $250K settlement (actually $262,500, but the $12,500 for lost wages she did report).

Kathleen and Mr X both credibly testify they meant to settle something to do with physical injury Kathleen sustained on the job. But noncompliance with the filing and sign-off requirement means that the settlement wasn’t a Workers’ Comp settlement. You have to fulfill the requirements, as I said in an eponymous blogpost, and Section 104(a)(1) requires statutory compliance.

But the 2012 amendment to Reg. 1.104-c comes to the rescue. As long as the injury is physical, it need not be based on tort or-tort-like conduct, or be statutorily-based.

Catherine gets her physical injury exclusion, based on 10% of her net award. The Court can’t do better than that “‘(B)ecause the record before us is not susceptible of any precisely accurate determination’ of the extent to which the settlement was attributable to Ms. Simpson’s personal physical injuries and sickness, we use our best judgment and find that 10% of the settlement payment of $98,000 was made on account of those physical injuries and physical sickness (other than emotional distress).” 2012 T. C. 10, at p. 27.

So Kathleen can exclude $9800, owes tax on the remaining $88,200, but can deduct the $152,000 in legal fees and court costs she paid to get it. IRS concedes the Section 62(a)(20) discrimination legal fees deduction, quibbles about the court costs, but Kathleen’s and Mr X’s candid testimony carry the day.

I won’t comment here on the proportion of fees and expenses to Catherine’s ultimate recovery.

Take away for PI lawyers– Please please please read and re-read Section 104 and the regulations. When you draft your settlement stip, beware of the Scylla of ambiguity and the Charybdis of unsupportable precision found in Healthpoint Ltd. (see my blogpost “An Unsettling Settlement,” 10/3/11). And don’t give tax advice, unless, of course, you’re competent to do so.

Indefatigable readers of my blog will remember the Unsinkable Virginia V. Kite, star of 2013 T. C. Memo. 43, filed 2/7/13, whose annuity sale to her three kids got a stellar review from Judge Elizabeth Crewson Paris; see my blogpost “No’ Deid Yet”, 2/7/13, for more about the canny Virginia’s unloading of the income interest from her late husband Petroleum Jim’s QTIP trust to the three Kite Kids.

But while the Kite Kids were celebrating their win, along comes IRS and rains on the victory parade with a Section 2519 gift tax assessment on the remainder, triggering $816K of gift tax due. You remember my blogpost abovecited ended as follows: “The Estate does owe some tax on whatever wasn’t an income interest, but that’s for the technicians and a Rule 155 beancount.”

Well, came the beancounters, and IRS comes in with the $816K for the non-income interest, while the Kite Kids claim zero. They claim Judge Paris decided that Virginia got paid for whatever she relinquished.

No, says IRS, and “no” says Judge Elizabeth Crewson Paris, in Estate of Virginia V. Kite, Donor, Deceased, Bank Of Oklahoma, N.A., Executor/Trustee, Docket No. 6772-08, a designated hitter filed 10/25/13.

Section 2519 says if the donee of a QTIP trust relinquishes all or any part of their interest in the trust, they relinquish all. And Virginia couldn’t sell the remainder interest, which is what the non-income interest is, because it didn’t belong to her. And it wasn’t a gift from Petroleum Jim to the remainder beneficiaries when created, because it was a future interest. Therefore, it only gets taxed at the time the donee spouse’s estate is taxed, because the spousal “exemption” from estate tax is not really an exemption, but a deferral. First spouse to die can bequeath property in trust or directly to survivor, but when survivor dies, the property gets taxed.

Allowing the sale deal here takes the non-income property out of the survivor’s estate, so it never gets taxed, and that doesn’t go.

IRS claims you can’t raise these issues in a Rule 155 beancount, and Judge Elizabeth Crewson Paris agrees. But “Respondent [IRS] argues that petitioner’s objections are all new issues and are therefore waived. Notwithstanding respondent’s position, the Court will address petitioner’s objections without making a determination as to whether petitioner raised new issues in order to resolve any misunderstanding of the Memorandum Findings of Fact and Opinion.” Order, at p. 5, footnote 4.

But just to make sure, and notwithstanding the foregoing, Judge Elizabeth Crewson Paris drives the lesson home: “Generally, new issues may not be raised in a Rule 155 proceeding. Rule 155(c); Harris v. Commissioner, 99 T.C. 121, 123 (1992), aff’d, 16 F.3d 75 (5th Cir. 1994). Rather, issues raised in a Rule 155 proceeding are limited to ‘purely mathematically generated computational items’. Id. (quoting The Home Group, Inc. v. Commissioner, 91 T.C. 265, 269 (1988), aff’d, 875 F.2d 377 (2d Cir 1989)). The Court has considered the parties’ arguments and, to the extent the parties raised new issues, the Court finds that they are precluded by Rule 155(c).” Order, at p. 11.

Sec. 199’s largesse to producers, manufacturers, extractors and growers who do their several things in the USA gets a thorough going-over from that formerly-whimsical judge, Judge Wherry (apparently duly chastened by the acerbic remarks of Judge Posner in the Seventh Circuit; see my blogpost “There Goes The Neighborhood”, 9/3/13, for details).

The taxpayer is ADVO Inc. & Subsidiaries, 141 T. C. 9, filed 10/24/13. ADVO is a junk mailer, who solicits businesses for advertising, creates (or takes the businesses’ own) advertising, fiddles with it some, and sends it to contract printers, gets it back, stuffs it in packages, and drops it on the USPS, who in turn drops it on you.

If you want to learn a lot more about computer-generated advertising, web-offset printing,  and how junk mail is packaged and winds up in your trashbarrel (with a side trip to your mailbox) than you ever wanted to know, read Judge Wherry’s guide.

The bottom line, of course, is who gets the Section 199 3% tax break. And that depends upon who owns the thing produced, manufactured, grown or extracted. And that depends upon who has the benefits and burdens that accompany ownership, whatever the papers say.

And that in turn depends upon Treasury guidance, IRS preambles, regulations and Mayo deference vs. Skidmore deference. You remember Mayo deference right now is the top: regulations made pursuant to Congressional statutory authorization directed to the proper twig on the Executive Branch. Skidmore deference (citation omitted, but Judge Wherry has much to say about it) is the lowest. If Mayo deference is the equivalent of “Aye aye, sir” and salute the quarterdeck, then Skidmore is the equivalent of “yeah, ok”, ranking just above “meh”.

So there follows the faceoff between the 263A benefits and burdens test, which IRS discountenances here and Judge Wherry agrees, and the stricter Section 199 test. You remember Section 263A requires capitalization of production costs, and in such production (or manufacturing, extracting or growing) there may be more than one party incurring such costs and bearing the burdens (and getting the benefits) of its role in the process.

But IRS says though there may be many claimants to Section 199 largesse, only one gets the prize. And it’s all facts and circumstances, as Sir Eddie Elgar might say.

At last, after unpacking each phase of the process, from idea on the back of a paper napkin to the “clunk” of junk in your mailbox, ADVO’s contracts with the printers, and noting that one of ADVO’s contract printers testifies he already took a Section 199 deduction (and I’ll bet someone suggested to him strongly that his testimony might help with the audit), Judge Wherry trashes ADVO. And the amici curiæ who plead the Section 263A test are left holding the bag.

STJ Daniel A. (“Yuda”) Guy has an example of inventive ambiguity in a small-claimer, Jeffrey J. Furnish, 2013 T. C. Sum. Op. 81, filed 10/23/13. For a similar tale, see my blogpost “Ambiguity Is The Best Policy”, 8/23/12.

JJ furnished himself (sorry, guys) with two life insurance policies 40 years ago, while a 20-year old college student, from The Quiet Company, Northwestern Mutual Life Insurance Company (NML).

Of course, these had the usual premium loan from accumulated cash values rider. And JJ stopped paying long ago. But the loans just kept on coming quietly, until finally The Quiet Company bangs JJ with about $50K in deemed distributions, when the cash value is finally exhausted and Section 72(e)(1)(a) kicks in.

JJ spars with The Quiet Folks, gets endless series of numbers, but they don’t tie in. He asks for the whole set of calculations from the get-go, but those go back 40 years and The Quiet Guys won’t provide them.

JJ files two 1040s for the year at issue, one with the deemed distribution, one without, and includes a written statement of his fight with Northwestern. He then tries to deal with Appeals, gets neither a hearing nor relief, invokes the Taxpayer Advocate, ditto, and finally winds up petitioning the SNOD laid on him by virtue of his not paying tax on the $50K.

STJ Yuda: “When NML determined that petitioner’s insurance policies had lapsed, it applied the cash values of the policies to the outstanding balances on petitioner’s loans. As we have explained in numerous cases, the act of applying the cash value of a life insurance policy against an outstanding loan is not different from distributing the proceeds to the taxpayer (including the untaxed inside buildup) to permit the taxpayer to use the proceeds to pay off the loan.” 2013 T. C. Sum. Op. 81, at p. 11.

And the taxpayer has the burden of proof for most arithmetic issues, except that here NML blew the numbers when it gave JJ the 1099-R. Where there is a reasonable dispute with information furnished by a third party, and the taxpayer cooperates with IRS, the burden shifts to IRS per Section 6201(d).

JJ may be hairsplitting, but there’s enough hair to cause STJ Yuda to throw the ball into IRS’ court. “Although petitioner points to relatively minor discrepancies in NML’s records, we agree with petitioner that the discrepancies are of such a nature that their cumulative effect, compounded over the extended terms of the policies in question, would likely be significant and could very well alter the dates that the insurance policies lapsed.” 2013 T. C. Sum. Op. 81, at pp. 14-15.

Well, what about cooperation, asks IRS. IRS claims JJ raised this stuff on the eve of trial.

No, says STJ Yuda, y’all knew about this long ago. “Respondent [IRS] did not present any evidence that petitioner failed to respond to reasonable requests for information. Considering petitioner’s detailed communications with IRS personnel before and after the notice of deficiency was issued and the fact that he apparently was not given the opportunity to discuss the matter with the Appeals Office, we conclude that petitioner fully cooperated with respondent within the meaning of section 6201(d).” 2013 T. C. Sum. Op. 81, at p. 15.

IRS claimed they produced reasonable and probative evidence of the date when the policies lapsed and the deemed distribution was made, but all they had was the same stuff JJ claimed was erroneous, and unlike prior cases, IRS never produced the whole detailed loan history from Day One to the present.

Thus, insufficient evidence to sustain the tax on the deemed distribution.

Takeaway- If you ever get one of these, practitioner, go over the numbers from the insurance company. Then go over them again. Have you got the whole history? What should you do if you don’t?

No, not a rerun of Kalyn Carpenter’s scenic easement problems (see my blogpost “Together Forever”, 7/25/13), but the one bright light in a welter of Tax Court Memoranda and Orders 10/22/13, none of which was particularly instructive or amusing. In fact, I wonder at the waste of high-powered judicial talent on run-of-the-mill cases that, in Michelin’s words, “need not long detain the tourist.”

But here’s an order to bring a grin even to my battered old face. It’s Carl W. Cox & Vicki S. Cox, Docket No. 9630-13, filed 10/22/13.

Carl and Vicki are Mr. & Mrs., obviously. Carl got the SNOD and Vicki got nothing. Both petition.

IRS, of course, moves to dismiss as to Vicki: no SNOD, no ticket to Tax Court.

Carl and Vicki object. Ch J Thornton: “…the Court received correspondence from petitioners…, objecting to the granting of the motion because petitioners ‘have the right to file a joint return and share the debt if any is owed’.” Order, at p. 1.

“For better or for worse, for richer or for poorer”–you know the rest, but that’s Carl and Vicki’s story, and they’re sticking to it.

Ch J Thornton can’t be a defender of marriage; Congress won’t let him.

“The Tax Court is a court of limited jurisdiction, and we may exercise that jurisdiction only to the extent authorized by Congress. This Court’s jurisdiction to redetermine a deficiency depends on the issuance of a valid notice of deficiency and a timely filed petition. The fact that petitioners may be eligible to elect a joint filing status when submitting Federal income tax returns does not change this requirement.” Order, at p. 1 (Citations omitted, but they’re the usual, off-the-rack).

No dice, Vicki. Carl’s on his own.

 Dashiell Hammett’s words, spoken by Sam Spade (and the sound is pure Bogart).

“It depends.”

“It depends on–?”

“If I knew what it depends on I could say yes or no.”

That’s the story in two small-claimers from 10/21/13, a day when the floodgates opened at Tax Court, inundating us bloggers, so I’m a day late but hopefully not short.

Two very different stories, though, one from STJ Lew (“Spell It Right”) Carluzzo, the other from STJ Daniel A. (“Yuda”) Guy. Both involve the usual unsubstantiated deductions with paid preparers, so I’ll skip the particulars.

In Kingsley O. Ofoegbu and Anthonia Ofoegbu, 2013 T. C. Sum. Op. 79, filed 10/21/13, STJ Lew lets K.O. and Anthonia off the penalty hook thus: “Petitioners’ 2007 Federal income tax return was prepared by a paid income tax return preparer. Under the circumstances, we find that petitioners reasonably relied upon their return preparer to properly calculate and report their 2007 Federal income tax liability. See sec. 6664(c); United States v. Boyle, 469 U.S. 241, 251 (1985); Higbee v. Commissioner, 116 T.C. 438, 448 (2001); Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002); sec. 1.6664-4(b)(1), Income Tax Regs. Therefore, we hold that petitioners are not liable for a section 6662(a) accuracy-related penalty for 2007.” 2013 T. C. Sum. Op. 79, at pp. 12-13.

Huh? What circumstances? Was the paid preparer an attorney, CPA, EA, RTRP, or an experienced if unregistered type? Did K. O. and Anthonia meet the three-point test of providing full info, checking out credentials and relying in good faith on expert advice, and if they did, how? STJ Lew doesn’t say. So it depends.

On the other hand, STJ Yuda gives us the whole story in Mark Anthony Rael , 2013 T. C. Sum. Op. 78, filed 10/21/13. STJ Yuda buries Mark Anthony and does not praise him for his unsubstantiated employee business expenses (car and phone, mostly), and then comes to the penalties.

“Petitioner’s tax return for 2007 was prepared by Charlene M., an employee of H&R Block. Petitioner testified that he provided Ms. M. with calculations of the miles that he drove for business purposes. He further testified that, after Ms. M. prepared the return, he did not review the document in any detail before it was electronically filed. Ms. M. is not a certified public accountant.” 2013 T. C. Memo. 78, at pp. 6-7. (Name omitted).

Leaving aside the fact that the CPA qualification is not the only indicium of expertise in income tax, Mark Anthony fails the three-part test despite whatever credentials Ms. M. might have.

But at least STJ Yuda gives a basis for disallowing Mark Anthony’s reliance defense to the Section 6662 accuracy and understatement slams: “Although petitioner relied on a paid tax preparer, there is no evidence in the record regarding the return preparer’s experience or qualifications that would support the conclusion that petitioner’s reliance on the preparer was reasonable. Petitioner admitted that he did not carefully review the return before filing it. Taxpayers have a duty to review their tax returns before signing and filing them, and the duty of filing accurate returns cannot be avoided by placing responsibility on a tax return preparer. Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987); Magill v. Commissioner, 70 T.C. 465, 479-480 (1978), aff’d, 651 F.2d1233 (6th Cir. 1981). In sum, on the record presented, petitioner failed to show that he acted with reasonable cause and in good faith within the meaning of section 6664(c)(1).” 2013 T. C. Sum. Op. 78, at pp. 15.

String citations are fine when they’re tied into the facts of the case;  but as generalizations they are unhelpful as guidance to the practitioner.

Takeaway- If the taxpayer wants to know what it takes to avoid the Section 6662 slams, your best answer is Sam Spade’s abovecited.

The saga of Philip D. Long, A.K.A Phil Long, continues, in 2013 T. C. Memo. 233, filed 10/21/13. For those who tuned in late, see my blogpost “Honor Your Partner – Part Deux”, 9/5/13, where Judge Morrison turned back a late claim by IRS that Phil had been relieved of indebtedness when his alleged partner-co-venturer, an entity fetchingly named Steelervest, took $800K for an $875K loan. But the issue of a joint venture remained, and that one Phil loses.

Though Phil had a joint venture with Steelervest in another deal, here the Luna factors (see my blogpost “Substance Over Form”, 2/11/11) militate against Phil’s supposed joint venture.

Judge Morrison: “1. The August 2006 agreement provided only that Steelervest would receive a share of Long’s profits from LOT. Neither this agreement nor any prior agreements purported to create a joint venture.

“2. Steelervest did contribute money.

“3. Besides its profit share, Steelervest had no right to control LOT’s assets or to receive money from LOT.

“4. Steelervest’s interest in LOT’s profits was capped at $875,000 and it had no liability for LOT’s losses.

“5. Neither Long’s ownership of LOT nor LOT’s operations were conducted in Steelervest’s name.

“6. Long and Steelervest did not file partnership returns or otherwise represent to the IRS or others that there was a joint venture.

“7. No evidence shows that separate books of account of any joint venture were maintained.

“8. Long possessed all control over his ownership interest in LOT and over LOT’s operations; there was no control by Steelervest.” 2013 T. C. Memo. 233, at p. 18.

It turns out, contrary to my query in my earlier blogpost “Honor Your Partner – Part Deux” abovecited (as the high-priced lawyers say), Phil did sell a lawsuit for $5.75 million. And he claims capital gains, at least on the portion of gain he did report.

No, says Judge Morrison, ordinary income. The lawsuit arose out of a busted condominium development deal, and Phil is in the condominium development business. IRS says Phil was going to build and sell condominium units, and had gotten zoning approvals, prepared sales literature, hired architects, and gotten deposits for 20% of the putative units from purchasers.

This is a business, and that the lawsuit caused Phil (he says) to change his mind and try to sell the land to a developer to build out the job doesn’t change the fact that Phil is a real estate developer.

No capital gains, Phil.

This is a far easier scenario than that appearing in my blogpost “Deal(er) Or No Deal(er)”, 8/28/12.

Quoting me quoting Ralph Waldo Emerson, from my blogpost “Foolish Consistency?”, 5/5/11, ‘A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.’ Ralph Waldo Emerson, 1803-1882.”

But The Great Dissenter, a/k/a The Judge Who Writes Like A Human Being, Judge Mark V. Holmes, invokes the principle with great force in Brett Van Alen and Kimberlee Van Alen, and its sibling (and Brett’s), Brandon D. Tomlinson and Shana C. Tomlinson, 2013 T. C. Memo. 235, filed 10/21/13.

Brett and Shana are the grandbabies of the redoubtable Joseph “Pop” Preuschoff, who fared forth from the Old World to 2345 acres of California ranch land, thirteen-sixteenths of the which went to Brett and Shana via their Daddy’s first wife, daughter of the aforesaid “Pop”.

But when their Daddy shuffled off this mortal coil, Brett and Shana got the ranch. Brett was a mere youth, and Shana not much older, so Brett was represented by his guardian ad litem, natural Mom, the daughter of “Pop”. The executor of “Pop”’s estate, third wife Bonnie, set up the estate tax return.

Even though Bonnie had the ranch valued by the County probate referee (as required by California law), she put down a lower number and claimed the Section 2032A(d)(2) write-down. And Brett’s Mommy and Shana signed aboard.

Judge Holmes expatiates: “This section helps those who inherit property by letting them use an asset’s value in its actual use at the time of death, rather than in its hypothetical highest and best use. (The paradigmatic case is a family farm that otherwise might have to be sold to a developer.) Not all kinds of property, and not all kinds of heirs, qualify for this deviation from the general rule that death tax is calculated on an estate’s fair market value. And the heirs have to promise not to sell the property right away, or shift its use to something more valuable. If an estate wants to use this lower value, it has to make a section 2032A election, and there are forms that have to be filled out and sent in with the return.” 2013 T. C. Memo. 235, at p. 7.

But Bonnie did a double-dip after IRS challenged her valuation, and got away with it, to the astonishment of Judge Holmes. Thus, the basis of the ranch in the hands of Brett and Shana, when they ultimately got their hands on it, was extremely low.

Fast forward ten years. Shana is living on the ranch as a stay-at-home mom, and Brett is a true cowboy, as Judge Holmes puts it, “… in the vaquero tradition, riding horses and four-wheelers to tend cattle for other ranchers.” 2013 T. C. Memo. 235, at p. 4. But the California Rangeland Trust shows up with the proverbial fistful of dollars, and buys an easement to keep the ranch forever ranchland for $1.12 million cash.

The thrteeen-sixteenths that Shana and Brett can split comes to $910K at capital gains rates.

Of course, neither Brett nor Shana reports the gain on their tax returns, but Brett didn’t report about a grand in interest income, and Shana somehow missed reporting the $15 K she got from an outfit called Ogle Productions, Inc. (which sounds a lot more interesting than this case).

So IRS rides up with a thwacking great SNOD.

Brett tries some post-mortem tax planning. “After receiving his notice of deficiency, Brett visited local CPA Paul Simmons. Brett showed him the notice as well as his father’s estate-tax return to ask him whether the Trust properly reported the basis of the Ranch Interest that led to the long-term capital gain on the K-1s. After reviewing those papers, Simmons testified that ‘it just didn’t seem right to me that something in 1994 was worth nothing hardly.’” 2013 T. C. Memo. 235, at p. 13.

True Western style.

Shana and Brett try to disavow Bonnie’s aggressive tax position, trot out the old probate referee (but don’t introduce his field notes in evidence, so they can’t use them on the trial), who testifies that his notes show a valuation way higher than what Bonnie put on the Form 706.

Now the 2032A gambit was enacted to keep the widows and orphans on the old homestead, since otherwise the farm could be valued at its value as vacant land to a developer, and the family forced to sell to pay the estate tax. Here’s what you need to do: “To elect the special-use valuation, section 2032A requires that the decedent must have been a citizen or resident of the United States; the property must be qualified real property; the executor must elect to apply section 2032A; and–pay attention here–each person who has an interest in the property must sign and file a personal liability agreement. Sec. 2032A(a), (b), (d). The parties agree that Joseph’s estate met all the requirements to elect the special-use valuation for the Ranch Interest.” 2013 T. C. Memo. 235, at pp. 17-18.

And don’t you just love Judge Holmes’ “pay attention here”?

Brett claims he was a minor and therefore not bound by Bonnie’s valuation shenanigans, so he never consented to nuthin’. That doesn’t work, because Judge Holmes finds his Mom was his guardian ad litem and, after a lot of palaver about privity and identity of economic interests, holds his Mom could bind him. And Shana was an adult her own self. Though Brett and Shana claim Bonnie was the evil stepmother and therefore shouldn’t be allowed to bind them, they don’t prove any breach of any duty by either their Mom or Bonnie.

But what about the old Form 706? Brett and Shana rely on the venerable Rev. Rul. 54-97, which says that the valuation on a Form 706 is presumptive, but a party can get around that with clear and convincing evidence. That old cowhand Judge Holmes: “Throwing a lasso around that language, Shana and Brett try to tie up their ample evidence–clear and convincing evidence, they say–that the reported section 2032A value was wrong.” 2013 T. C. Memo. 235, at p. 21.

They have the old field notes of the probate referee’s office.

But rather than decide that jumpball, Judge Holmes goes with that hobgoblin, consistency.

To invoke the doctrine of consistency, there must be a potential whipsaw. And Judge Holmes finds one here. There has a been a report or a representation to IRS (the old 706), the statute of limitations has run (and it has, about seven years before the year at issue), and the taxpayer is trying to get out of what they told IRS to the disadvantage of IRS (the higher valuation of the Ranch Interest, giving Shana and Brett a higher basis and therefore a lower taxable capital gain, after the estate got away with lower estate tax that IRS is now barred from contesting).

Game over. And Brett’s ex post facto tax consultation doesn’t get it, as he waited a year before he spoke to CPA Simmons. So penalties descend.

Nevertheless, Judge Holmes stresses that “(W)e are not saying that Shana and Brett engaged in any sort of ‘tax gamesmanship’… but we do reaffirm the principle that ‘a taxpayer may not, after taking a position in one year to his advantage and after correction for that year is barred, shift to a contrary position touching the same fact or transaction’”…. 2013 T. C. Memo. 235, at p. 33 (Emphasis by the Court; citations omitted).

 No, this is not a rant about the recent shutdown; that subject has been dealt with extensively elsewhere, and this is not a political blog. I want to show two designated hitters out of Tax Court today, which illustrate (as if illustration were necessary) the cost of inaction.

First, that Obliging Jurist, Judge David Gustafson, throws a lifeline to Albert A. Seifert, Docket No. 24735-12L, filed 10/18/13.

Albert claims he e-filed for the year at issue, but IRS says he didn’t. Howbeit, Albert sold $114 million in stock (he claims he has a $113 million basis, and Judge Gustafson assumes he did), but the 1099s that IRS got say zip about Albert’s basis, so Albert gets hit with a $39 million deficiency. Albert admits he got the SNOD but says it was wrong, so he didn’t petition.

Of course, Albert gets nailed when he asks for a CDP; he had his chance, and he blew it. IRS followed the book, because Albert had a chance to contest but didn’t, and he never gave Appeals a Form 433-A or a Form 656.

Judge Gustafson: “When Mr. Seifert received the notice of deficiency, he had an opportunity to challenge that liability in Tax Court. He could have presented evidence of his cost basis in the securities and, depending on his proof, could have seen his liability reduced or eliminated. But he did not do so. Consequently, the IRS’s determination went unchallenged, and the IRS therefore had the right and the responsibility to assess and collect the tax it had determined. When the IRS undertook to collect the tax, then Mr. Seifert attempted for the first time to challenge that liability–in the CDP hearing.” Order, at p. 1.

Of course, contesting liability at a CDP, when you got the SNOD and did nothing, is a nonstarter. And trying to play lawyer when there are telephone numbers at risk is even worse. Paying a lawyer a few grand the minute Albert got the SNOD would have saved him a boatload of trouble.

Nevertheless, Judge Gustafson is obliging as always: “However, Mr. Seifert is strongly encouraged to consider accepting the invitation of the Commissioner (made at pages 2-7 of his reply filed September 30, 2013) either to request audit reconsideration or to submit an Offer in Compromise based on Doubt as to Liability, outside of the CDP context.” Order, at p. 2 (emphasis by the Court).

Albert, don’t drop the lifeline this time.

Next up is Edwin Madera, Docket No. 26314-12L, filed 10/18/13. Edwin mailed a letter that STJ Lewis (“Right Spelling”) Carluzzo treated as a petition, although “…the letter does nothing more that request the Court to ‘provide the necessary forms and rules for filing a petition to contest a determination’.” Order, at p. 1.

The trouble is, the letter was four years too late for the SNOD that IRS had issued. But it was timely, assuming Edwin properly amended it to state some kind of cognizable claim, for the NOD Edwin got concerning collection.

Of course, Edwin never amended or did anything else, despite STJ Lew having given Edwin three swings at the baseball.

So Edwin is out for failure to state a claim, and IRS can lien and levy.

I know the people who should read this won’t; the self-represented in Tax Court will continue to march, or dawdle, to disaster. But I suggest there should be at least a cigarette-pack warning on every SNOD–if you don’t petition Tax Court at 400 Second St, NW, Washington, DC 20217, you’re toast.