But a Good Try

A multi-million-dollar estate and GSTT case turns out to be a lot less when Judge Morrison boils it down, in Estate of John F. Koons III, Deceased, A. Manuel Zapata, Personal Representative, 2013 T.C. Memo. 94, filed 4/8/13.

I was hoping for some hot news on GSTT, but only got the usual battle of the appraisers. The only interesting part was worthy of a Taishoff “good try”, when A. Manuel borrowed $10,750,000, but claimed an interest deduction north of $71 million.

The late Koons was a Cincinnati beer brewer who transitioned to bottling Pepsi-Cola; he really hit the spot, and got bought out by Pepsi for telephone numbers. He dies in the middle of the buy-out, and the estate needs cash to pay the estate tax.

Of course, no such deal as this is complete without LLCs, trusts, children, grandchildren, ex-spouses and the whole corps de ballet. So here’s Judge Morrison with the story: “On February 27, 2006, CI LLC’s Board of Managers executed a consent resolving that ‘it is in the best interests of the Company to loan the * * * [Revocable Trust] the principal amount of $10,750,000.’

“On February 28, 2006, CI LLC lent the Revocable Trust $10,750,000 in exchange for a term promissory note in the principal amount of $10,750,000 at 9.5% per year interest with principal and interest due in 14 equal installments of  approximately $5.9 million each between August 31, 2024, and February 28, 2031. The terms of the loan prohibited prepayment. The total interest component of the 14 installments is $71,419,497. The proceeds of the loan would be used to make a payment toward the estate and gift tax liabilities.” 2013 T.C. Memo. 94, at pp. 30-31.

CI LLC is the buyer-out, and the Revocable Trust is the vehicle of the estate.

Good try, guys. Interest on a loan to pay estate taxes is deductible as an administrative expense, right?

Not twentyfive years’ worth.

In the first place, CI LLC was loaded with cash, and the Revocable Trust could force it to distribute, so no need to sell assets. Lending the money depletes CI LLC’s cash hoard as much as a distribution, and the Revocable Trust has almost no operating assets to protect from a forced sale to pay estate tax.

Finally, this deal keeps the estate alive for 25 years after the Late Koons became the Late Koons. Too long. But a good try, even though no deduction.

I’m quoting an old blogpost, “Thoroughness”, 10/27/11, and am about to reiterate, but gently, a very old rant. Adelbert Moot delivered a lecture at my alma mater in 1914 (and no, I wasn’t in attendance then) in which he spoke of thoroughness as being that which “settles the question in more cases than any other one thing as to whether or not a person will be successful.”

Well, Judge Buch encounters a lawyer who isn’t, but gives the client a break, in Swanson-Flosystems Co., Docket No. 27975-11.

It’s three weeks before trial (and remember Judge Buch gets peevish if attorneys aren’t ready to roll three weeks before trial; see my blogpost “Throwing the Buch,” 3/5/13), and SwanFlo’s attorney is begging for a continuance (that’s called an adjournment whence I come).

This is a monumental no-no under Rule 133; if you don’t have “exceptional circumstances” (like a death certificate), move to continue thirty days or more before the date, time and place certain, or be denied as dilatory.

Here’s SwanFlo’s attorney’s sad tale: “Petitioner’s various arguments in favor of a continuance, distilled to their essence, are all premised on a lack of preparation: the case appeared headed for settlement, and thus it was not adequately prepared; the case was more complex than counsel anticipated, and thus it was not adequately prepared; a flurry of procedural motions by respondent created a significant burden, and thus the case was not adequately prepared; respondent provided inadequate discovery responses, and thus the case was not adequately prepared.” Order, p. 1 (Footnote omitted, but Judge Buch notes that if SwanFlo’s attorney wasn’t happy with IRS’ discovery responses, s/he never made a motion to compel proper responses.)

Automatic admittee to Tax Court, ya think?

SwanFlo’s attorney admits in the motion for a continuance that s/he is outclassed and wants to add counsel. That’s not a reason for continuance, and IRS yelps they’ll have to start from scratch when new counsel (or supplementary counsel) waltzes in.

But Judge Buch has a heart. There’s $2 million at stake, Swan-Flo will be seriously prejudiced if they can’t go to the bullpen, and it doesn’t look like Swan-Flo or their attorney was playing tactical games. And even though Swan-Flo’s attorney didn’t mention it in his/her motion papers, the bullpen responded and the additional counsel has filed their notice of appearance, so “(T)he hiring of additional counsel, however, provides some assurance to the Court that, if a continuance were to be granted, this case would be adequately prepared.” Order, p. 2, footnote 2.

Hope springs eternal, eh Judge?

Now IRS will be inconvenienced, it’s true, and won’t have the advantage of an inept adversary (as they usually do, encountering the self-represented and the usual run of automatic admittees; rather like shooting very large fish in a very small barrel), but that’s not prejudice.

So time out, Swan-Flo, let your relief pitcher warm up, and to move things along, here’s a pretrial scheduling order for your reading pleasure. Follow it.

I missed this while I was packing to go to Texas last week, but DC Circuit shot down IRS’ attempt to stay Judge Boasberg’s decision in Loving v. IRS  on March 27 last.

If you missed the kerfuffle, see my blogposts “Chevron, Mayo – I’m Loving It”, 1/21/13, and “Modified Loving”, 2/4/13.

And best of all, see my blogpost “A Rant – Part Deux”, 4/3/13.

DC Circuit was unimpressed with IRS’ arguments that the RTRP program should go forward in its entirety.

The per cur reads like this: “ORDERED that the motion for stay be denied. Appellants have not satisfied the stringent requirements for a stay pending appeal. See Winter v. Natural Res. Def. Council, 555 U.S. 7, 129 S. Ct. 365, 374 (2008); D.C. Circuit Handbook of Practice and Internal Procedures 33 (2011).”

While this doesn’t mean, of course, that Sabrina and her pals have a slam-dunk winner, it is a sign that Doug’s and Dave’s legacy shines a wee bit less bright.

Stay tuned.

Try Chutzpah

I won’t give Blonde Grayson Hall, 2013 T. C. Memo. 93, filed 4/4/13, a Taishoff “good try”, because it wasn’t. I must admit Blonde showed a high level of chutzpah, first by not bothering to file four years’ worth of tax returns (like a certain former mayor of Our Fair City), second by copping a plea to three counts of willful failure to file (Section 7203), in which copping she agreed to sign and did sign a Form 4549, agreeing to the tax assessed and interest and penalties, after a proper allocution by the US District Judge; third by paying the tax but not the interest and penalties (about $322K worth), and fourth, when IRS filed a NFTL, by claiming she signed the 4549 under duress.

She never appealed the sentence (a year hard), but her husband did, and Third Circuit (Blonde was a PA resident) affirmed.

I won’t go through Judge Ruwe’s lengthy (I won’t say over-lengthy) review of the law of duress, except to say that when offered a plea by the US Attorney’s Office, you can always take your chances with a jury. If you choose to forgo that course of action, it’s not duress. And complying with law, when there’s serious hurt if you don’t, is by definition not duress.

So the NFTL is sustained as to Blonde.

Careful observers will note that this opinion is captioned Blonde Grayson Hall and Neal E. Hall, giving rise to the question “so what’s Neal’s story”?

Well, first there’s a NOD from Appeals sustaining IRS’ filing against Blonde for her four years. But she and Neal also didn’t bother paying taxes for four more years after that, so there was a NOD for those. These two are quite a pair.

Blonde plays the “duress” card, so IRS moves to sever Blonde from Neal, to consider Blonde’s claim. See Rule 141(b), which provides “(T)he Court, in furtherance of convenience or to avoid prejudice, or when separate trials will be conducive to expedition or economy, may order a separate trial of any one or more claims, defenses, or issues, or of the tax liability of any party or parties.”

I note in passing that Blonde was a lawyer, admitted in Our Fair State in 1985, but currently under suspension until she straightens out her tax issues. See Matter of Hall, 67 AD3d 32 (AD 1, 2009), and 2012 NY Slip Op. 65645(U), (AD 1, 2012).

I should also note that Blonde told the NY App Div that her tax problems stemmed from being “exhausted”, and not from venality.

I can testify from my personal knowledge and experience that lawyers are often exhausted; but some of us actually file returns and pay taxes. And if we sign a 4549, that’s it.

Just back from a visit to daughters and granddaughter in the Magnolia City, celebrating first birthday of granddaughter Kathryn, I find that Tax Court has provided me with an opinion worth a rant.

To begin, I agree with Judge Boasberg that Doug Shulman and Dave Williams went from first to third without touching second (it’s baseball season and I already have my first set of tickets) by roping in the unregistered preparers to Circular 230. See my blogposts “Chevron, Mayo – I’m Loving It”, 1/21/13, and “Modified Loving”, 2/4/13.

IRS took an 1884 statute to do with phony Civil War claims for requisitioned cavalry mounts, and tried to make it fit for-pay preparers of income tax returns. Congress already has passed preparer penalties, and evinced no intent at any time to require registration (although they should have). Moreover, by 1884 the idea of a Federal income tax was just that – an idea. You’ll remember that Abe Lincoln got a Revenue Act through Congress in August, 1861, imposing a flat 3% tax on income, which lasted for ten years until Congress repealed it. But by 1884 all that was history.

Though Judge Boasberg got it right on the law, in the field the situation is still out of control. And as Congress is the only body that can try to get things straightened out, then it’s time.

Case in Point: Thornell Johnson and Nicole Smith, 2013 T. C. Memo. 90, filed 4/2/13. The facts are not particularly novel. Both Thornell and Nicole (married during the year at issue but divorced afterwards) failed to report salary and wage income in small amounts. Nicole gets innocent spouse except as to what her couple of grand in wages adds to the tax bill at the Rule 155.

But Thornell is a for-pay preparer.

Thornell’s case involves the Schedule C panoply of unsubstantiated home office deduction, unsubstantiated Section 274 expenses, and the usual trial of dubious testimony and no reliable records. We’ve seen this before; see my blogpost “The Preparer – Unprepared”, 11/8/11.

It’s Thornell’s Section 6662 penalty argument that gets me into rant mode.

Judge Morrison: “Johnson did not specifically discuss the penalty in his arguments at trial. We ordered posttrial briefs, but Johnson failed to file one. We can, however, interpret some of his arguments at trial as assertions that he should not be penalized because he meets the requirements of reasonable cause and good faith under the terms of the section 6664(c)(1) exception.” 2013 T. C. Memo. 90, at p. 20.

OK, Thornell, lay it on us. “Johnson asserted that he did not file his returns accurately because he did not fully understand the ‘complex’ tax code. But Johnson worked as a tax preparer. He claimed that he prepared the third-highest number of tax returns of any tax preparer on the East Coast of the United States. He testified that he prepared returns for taxpayers who ran businesses and filed Schedule C with their returns. He claimed to be familiar with reporting and substantiation requirements. Thus, his purported ignorance of the rules, even if it were enough to qualify for a reasonable cause exception, is not credible. We hold that Johnson does not qualify for the reasonable cause and good faith exception under section 6664(c)(1).” 2013 T. C. Memo. 90, at pp. 20-21.

However onerous a $60 registration fee, $100 to take a test on Form 1040, and a 15-hour annual CPE requirement might be, if the self-styled preparer of “the third-highest number of tax returns of any tax preparer on the East Coast of the United States” is, as he swears, totally clueless, then how can Congress, in the face of a series of budget deficits and a national debt beyond imagining, continue to permit Thornell and his unregistered colleagues to hold themselves out to unsuspecting taxpayers as competent?

Now granted, competency does not come only from registering, passing tests and taking CPE classes. But it is a start, and registration provides a simpler means of imposing discipline on preparers than hit-or-miss audits (and I’m sure many of Thornell’s customers are in for a surprise).

But until Congress acts, Thornell is free to remain blissfully ignorant–and keep charging for preparing all those returns.

Maybe so, but that doesn’t let you contest your underlying tax liability in a CDP, if you got a SNOD and didn’t timely petition. Even Paul Simon’s 1975 hit avails you not, as we learn in Judge Lewis (the Right Way) Carluzzo’s designated hitter, Sarunas Vincas Abraitis, Docket No. 4985-12L, filed 4/1/13.

SVA petitions from a NOD at Appeals, contesting his underlying liability on the ground that his mental condition precluded him from petitioning when he got the SNOD, and opposing IRS’ summary judgment motion because the administrative record doesn’t include all the documents SVA submitted.

Judge Lew agrees about the record, so no summary judgment for IRS, but SVA can’t challenge the underlying tax liability, whatever his mental state was when he got the SNOD.

Judge Lew: “We agree with respondent [IRS] that petitioner is not entitled to challenge the existence or the amounts of the underlying liabilities in this proceeding. Petitioner’s position on the point is unsupported in fact and in law. Information showing petitioner suffers certain health issues hardly establishes that he suffers from any mental disease or defect, and as noted in U.S. v. Davis, __ F. Supp. 2d __, 2013 WL 796655, at *2 (D. Or. March 4, 2013) neither do the frivolous positions he advanced in correspondence with respondent that preceded this action. Furthermore, even if he did so suffer, petitioner has provided no authority, and we have found none, that suggests that an individual who did not petition this Court in response to a notice of deficiency because of some mental disease or defect could later challenge the income tax liability that results from the assessment of that deficiency in a section 6330(d) proceeding.” Order, p. 2 (Footnote omitted.).

And here’s the omitted footnote: “In any event, petitioner’s claim with respect to his lack of capacity to have petitioned the Court in response to the deficiency notices would appear to be undermined by his unchallenged, and so far presumed capacity to have authorized the commencement of this proceeding. See Rule 60.” Order, p. 2, footnote 2.

The relevant portion of Rule 60 is found in Rule 60(d): “Where a party attempts to represent himself or herself and, in the opinion of the Court there is a serious question as to such party’s competence to do so, the Court, if it deems justice so requires, may continue the case until appropriate steps have been taken to obtain an adjudication of the question by a court having jurisdiction to do so, or may take such other action as it deems proper.”

Apparently SVA wasn’t still crazy after all these years.

No, not the European colonies in China in the last century, but the story of Barbara Jane Knudsen, Petitioner, and Kurt H. Knudsen, Intervenor, 2013 T. C. Memo. 87, filed 4/1/13, and no, it’s not an April Fool’s Day joke either.

BJ and ex-spouse Kurt Hans (an attorney, natch) ran up $155K in tax delinquencies over a four-year stretch, but Kurt Hans gets a bankruptcy discharge, and, though offered a chance to participate, bows out. BJ of course wants Section 6015 equity, but is stymied by the old two-year rule (cf. Lantz, 132 T.C. 131 (2009), rev’d, 607 F.3d 479 (7th Cir. 2010), and its progeny, wherein Tax Court shot down IRS’ two-year rule for Section 6015(f) equitable relief in 1.6015-5(b)(1) and three separate Circuit Courts of Appeals shot down Tax Court. Thereupon, IRS decided to reconsider the two-year rule via Chief Counsel Notice CC-2009-012 (Apr. 17, 2009), amplified and clarified by Chief Counsel Notice CC-2010-005 (Mar. 12, 2010).

But while IRS was amplifying, clarifying and reconsidering,  BJ offered IRS $200, $50 for each of the four years at issue, and claimed it was a qualifying offer for Section 7430 purposes. BJ had meanwhile run up $50K in legal fees, claimed she had no money, and Jan Pierce, Esq., her redoubtable barrister, needed the cash.

On the eve of trial, and notwithstanding IRS was three-for-three in the CCAs, “…IRS announced as a policy directive that the Department of the Treasury would expand the two-year deadline ‘in the interest of tax administration and * * * not reflective of any doubt concerning the authority of the Service to impose the two-year deadline’ and that the two-year deadline would no longer be enforced in cases docketed in this Court. Chief Counsel Notice CC-2011-017 (July 25, 2011); see also Notice 2011-70, 2011-32 I.R.B. 135.” 2013 T. C. Memo. 87, at p. 5.

When IRS folded and gave BJ equitable innocent spouse relief, meaning BJ paid zero, Jan played the Section 7430 card.

Judge Thornton trumps BJ’s ace. Although IRS yelps that Jan’s fees are unreasonable, Judge Thornton doesn’t go there, holding that BJ didn’t prevail (and where have we heard that song before?).

Judge Thornton: “Section 7430 generally provides that a taxpayer may qualify as a prevailing party only if either (1) the taxpayer has made a qualified offer in certain circumstances (qualified offer rule) or (2) the Commissioner’s position is not substantially justified. See sec. 7430(c)(4); see also Haas & Assocs. Accountancy Corp. v. Commissioner, 117 T.C. 48, 59 (2001) (stating that the qualified offer rule may apply even where the Commissioner’s position was substantially justified), aff’d, 55 Fed. Appx. 476 (9th Cir. 2003). Petitioner relies exclusively upon the qualified offer rule, which is implicated where ‘the liability of the taxpayer pursuant to the judgment in the proceeding (determined without regard to interest) is equal to or less than the liability of the taxpayer which would have been so determined if the United States had accepted a qualified offer of the party’. Sec. 7430(c)(4)(E)(i). The qualified offer rule may not apply, however, where the ‘judgment [is] issued pursuant to a settlement’. Sec.7430(c)(4)(E)(ii)(I).” 2013 T. C. Memo. 87, at pp. 9-10 (Footnote omitted, but read it. Jan never argues whether IRS was substantially justified, and rightly so, as IRS had won the pick-three in the CCAs; but the $200 offer was a nice move, and merits a Taishoff “good try” for clever Jan).

Alas for Jan and BJ, Judge Thornton declines to consider whether the $200 offer was  bona fide, and dumps Jan’s argument that the parties never agreed to a written setttlement, because BJ offered to pay $200 and the IRS refused that and gave BJ a free pass.

Ya gotta like Jan; moves like that should have gotten the dude something, ya think?

But Judge Thornton says “…respondent [IRS] did not ultimately concede that he was wrong on the merits given the facts or law that existed when he first took a position in the case. Respondent’s concession that petitioner was entitled to her requested relief resulted from an administratively promulgated policy directive to cease enforcing the two-year deadline in the interests of tax administration. Respondent conceded this case shortly after that policy change.” 2013 T. C. Memo., at p. 12. (Footnote omitted.)

IRS had won all along the line to date, had no fear of an adverse result upon appeal, decided to give the late-filing spouses a break, and so IRS was substantially justified and then some.

And stipulations needn’t be written: the parties’ actions speak louder than words. And the aim of Section 7430 is to make parties settle pre-trial. BJ got everything she wanted–innocent spouse relief.

No payday for Jan. Too bad.

Runs Hard Aground

A reprise, but not our friend Erik McBride Thompson, the Truker who found Tax Court habit-forming (see my blogpost of that name, 12/20/11), but rather Joe Insinga, who recently graced my blogposts “Did Nothing”, 3/13/13, and “Perpetual Discovery”, 3/23/13, and who comes back yet again before The Obliging Judge, David Gustafson, in yet another designated hitter, Docket No. 004609-12W, filed 3/29/13.

Joe is at it again; dropping his Rule 81 motion to depose Robert B. Gardner, outgoing Whistleblower Program Operations Manager, as Judge Gustafson suggested he do back on March 23, Joe couples his motion for leave to withdraw same with a motion to request production of documents.

This is a triple-barrel no-no. First, Rule 54(b) requires motions be separately stated. Unlike most courts where, in my experience, omnibus motions, or motions seeking alternative forms of relief, are generally made to speed things up, in Tax Court it’s “one size fits one”.

Second, Tax Court discovery is informal, repeat, informal. See Branerton v. Com’r, 61 T. C. 691 (1974), one of the most, if not actually the-most, cited cases in Tax Court lore. Before anything, you have to play show-and-tell. Motions are only acceptable where “play nice” has failed.

Judge Gustafson: “Petitioner’s motions make no allegation of any prior attempt at informal consultation but rather appear to indicate that the motions are Petitioner’s initial attempts. The Court instructs respondent to treat petitioner’s application filed March 18, 2013, and petitioner’s motion for leave filed March 25, 2013, as informal requests for information and to respond with reasonable promptness. Treated as informal requests, these documents may be an adequate informal predicate for later formal document requests or interrogatories. But until the informal process has been attempted, we cannot tell whether any formal discovery must be attempted or compelled. (Petitioner should also note that Rule 74(c) requires first the service (not the filing) of a notice and an objection, and only then the filing of a motion for an order compelling the deposition.).” Order, pp. 1-2.

Third, a deposition of a non-party witness, like WPOM Bob G., is, as Rule 74(c)(1)(B) instructs us,  “an extraordinary method of discovery and may be used only where . . . a nonparty witness . . . can give testimony . . . which [is] discoverable within the meaning of Rule 70(b) and where such testimony . . . cannot be obtained through informal consultation or communication (Rule 70(a)(1)), [or through] interrogatories (Rule 71) ….” Cited in Order, at p. 2.

So since WPOM Bob G is still at IRS, and as Judge Gustafson says he told the parties in a phonecon on March 25, IRS will consider letting Joe’s counsel talk informally with WPOM Bob G, let’s see what happens. But even if IRS tells WPOM Bob G to clam up, there are still interrogatories; if IRS remains callous and obdurate, there are Rule 104(c) sanctions. And Judge Gustafson’s pretrial memo requires the parties to state what witnesses they propose to call and a detailed summary of such witness’ testimony on jurisdictional issues. Absent good cause, an unidentified witness will be barred.

So, that’s Tax Court discovery. It’s more like a New York State special proceeding, where most forms of discovery, absent special circumstances, are not allowed. And counsel unused to Tax Court rules, and who moreover appear not to have taken the trouble to read them and the cases construing them, will run swiftly hard aground. And perhaps they will encounter a judge less obliging than Judge Gustafson to kedge them off.

That is not going to discuss the IRS “Star Trek” video.

No, not the 2007 Celine Dion album, but rather a lesson to Stanley Cohen, in 2013 T. C. Memo. 86, filed 3/28/12, taught by Judge Halpern.

Stanley was an investor (or maybe an investment; see 2013 T. C. Memo. 86, at p. 7) in a deal called Park Leasing Assoc., P’ship, whose career came to an end in 2006. But Park Leasing’s story goes back to the 1980s, so Stanley owes about $75K in tax, and a whopping $598K in accumulated interest. See my blogpost “Bang – A Warning to Tax Matters Partners (and their advisors)”, 1/5/11.

Stanley claimed the other investors got a better deal than he was offered. He raised that at an equivalent hearing (not a CDP for the tax levy he got, because Stanley sent in his request too late), and his attorney presented evidence of disparate treatment, but Appeals didn’t buy it.

Stanley tried a petition to Tax Court, but that got dismissed for want of jurisdiction.

Now someone at IRS decided to hand Stanley a NFTL, as apparently the levy didn’t get the appropriate quantities of Stanley’s hide. Stanley files the 12153, asks for a CDP and reiterates the “unequal treatment” argument.

The SO says no, you had a chance to contest the underlying liability. Stanley says, “no, I was contesting that you denied my settlement offer, which was to settle on the same terms as the other investors.”

Judge Halpern: “[SO]’s conclusion that petitioner was attempting to raise a challenge to the amount of his underlying tax liability is understandable since, on the lien hearing request form, petitioner did not identify an offer-in-compromise or other collection alternative as his reason for disagreeing with the lien notice. He claimed only that he had not been treated the same as other partners who were offered settlements. How [SO] pigeonholed the claim, however, is unimportant. To the extent petitioner was raising a liability challenge, [SO] was correct in concluding that section 6330(c)(2)(B) precluded him from doing so, since he had the opportunity to dispute his liability in response to the levy notice. To the extent he was asking to settle his liability or to compromise the interest assessments, those were the identical issues petitioner had raised during the levy hearing, and the question is one of whether sections 6320(c) and 6330(c)(4) precluded him from again raising them during the lien hearing.” 2013 T. C. Memo. 86, at pp. 13-14.

And Judge Halpern’s answer to question no. 2 hereinabove is yes, it does.

Judge Halpern: “We have held, however, that an equivalent hearing is ‘indisputably an ‘administrative * * * proceeding’ within the meaning of section 6330(c)(4)’ (and, by inference, section 301.6320-1(e)(1), Proced. & Admin. Regs.). See West v. Commissioner, T.C. Memo. 2010-250, 2010 WL 4780323, at *4. Thus, the levy hearing was at least an administrative proceeding within the meaning of section 301.6320-1(e)(1), Proced. & Admin. Regs., and there is no doubt that petitioner claimed at the levy hearing that he had not been treated the same as other partners who were offered settlements.” 2013 T. C. Memo. 86, at pp. 13-14.

And Stanley and his attorney fully aired Stanley’s objections and introduced evidence. They materially participated, and having taken their chance, are precluded from  raising that issue again.