Two 501(c)(3)s today, August 26, both Section 7428 declaratory judgments, as Tax Court releases a bushelbasketful of opinions.

First up, Partners in Charity, Inc., (“PIC”) 141 T. C. 2, filed 8/26/13. IRS revoked PIC’s exempt status retroactive to day one.

PIC was the brainchild of Chicago real estater Charlie Konkus. He claimed PIC was going to raise money to provide poor would-be homeowners with downpayments, if they could get mortgages.

What Charlie did was to get the sellers to front the downpayments, by paying Charlie the downpayments plus a little on the side, whereupon Charlie would use PIC to give the downpayment money (directly into escrow) for the buyers, and then funnel it back to the seller through the escrow at closing, thus permitting sellers to give the purchasers the downpayment, something prohibited by FHA regulations. And let the sellers charge more for their houses (as Charlie pointed out in his promotional materials). But FHA regulations allow charities to fund downpayments for the poor.

Of course, Charlie did not restrict his pseudo-largesse to the poor: anyone, rich or poor or in-between, could avail themselves; and, since Charlie had no controls to make sure his beneficence would only aid the poor, they did. Charlie hired his wife’s company to promote the business, and in two years racked up $3 million in profit.

Judge Gustafson, usually so obliging, is not amused: “Indiscriminately giving money away to anyone who will take it is not a charitable purpose, even if some of the recipients are poor people. Section 501(c)(3) requires more; it requires that the money be given away in such a way that it furthers a purpose of reducing poverty, promoting education, science, or religion, or promoting another public good. We conclude that… PIC’s DPA program did not operate for a charitable purpose.” 141 T. C. 2, at pp. 28-29.

It’s what you do, not what you say you will do.

PIC was a broker, not a charity. And IRS has discretion to revoke a 501(c)(3) exemption retroactive to day one, and here that discretion was not abused.

Next up, Judge Gustafson examines the gymnastics of Capital Gymnastics Booster Club, Inc., in 2013 T. C. Memo. 193, filed 8/26/13. Here the question is did the exempt income inure to the private benefit of insiders, and Judge Gustafson finds that it did.

The Capitalists, a 501(c)(3) athletic outfit, required member-parents to front the money for their children’s competitive efforts, in training and in competitions. Alternatively, the parents could “fund-raise”, that is solicit contributions to the Capitalists, receiving  a formulaic credit against the not-inconsequential annual membership dues and assessments for concomitant expenses connected with their offsprings’ handsprings.

“Capital Gymnastics computed the assessment at the beginning of each season by consulting with meet sponsors. Capital Gymnastics did not allow athletes to compete unless their assessment was paid in full, including any late fees. The record shows no conferring of ‘scholarships’ nor any other relaxation of this requirement.” 2013 T. C. Memo. 193, at p. 6.

But there was an out; fund-raisers and other special friends of the Capitalists didn’t pay the full freight. “For the families that chose to fundraise, Capital Gymnastics awarded points in proportion to the fundraising profit that each family generated. Each point was worth $10. The chairperson of each fundraiser also received a small number of points as an incentive to manage the fundraisers. Parents could earn additional points by filling certain board positions on Capital Gymnastics. Capital Gymnastics’ financial manager periodically tallied the points for each family and reduced the family’s unpaid assessment in dollars, according to the number of points that the family had earned.” 2013 T. C. Memo. 193, at p. 8.

The fundraisers got big discounts, the non-fundraisers (described by the Capitalists as “moochers” or “freeloaders”) got nothing.

Now fostering amateur sport competitions is a valid Section 501(c)(3) purpose, so the Capitalists’ aims are legit. What sinks them is the benefits to the fundraisers.

Exempts can’t benefit insiders or private parties. The Capitalists argue that the kids are the beneficiaries. IRS says no, it’s the fundraising parents, who are members, who are getting the benefit.

Judge Gustafson: “Applying the law to Capital Gymnastics’ facts and circumstances, we find that, in violation of section 501(c)(3), Capital Gymnastics allowed substantial private inurement to the parent-member-insiders who fundraised (by providing to those insiders relief from an economic burden in the form of ‘points’ applied to their assessments) and thereby conferred an impermissible substantial private benefit on the child-athletes of those parents only (as opposed to its child-athletes generally). Capital Gymnastics authorized parent-members to raise funds for their own benefit but under the name of Capital Gymnastics and trading on its tax-exemption ruling. Capital Gymnastics rigorously assured that its fundraising did not generally benefit all the child-athletes in its programs but rather benefited only the children of parents who did the fundraising.” 2013 T. C. Memo. 193, at pp. 19-20.

And Judge Gustafson makes clear the contrast between the occasional fundraiser (bake sale, car wash) and the Capitalists’ all-out drive. “…this is not a circumstance (like, say, a school band’s sale of candy or a church youth group’s carwash for a once-a-year event) in which the fundraising is a tiny fraction of the organization’s overall function; here, the fundraising is, instead, the admitted ‘primary function’ of the organization. This is not a circumstance in which the individual’s contribution of his share of the cost is optional or where scholarships are made available for those who cannot afford the cost. Nor is this a circumstance in which every member is required to perform fundraising and no one can buy his way out; rather, the fundraising was an option chosen by those who wanted to earn their assessments. The assessments at issue were not arguably de minimis charges that might be covered by a child’s paper route or babysitting, but rather were serious parental obligations….” 2013 T. C. Memo. 193, at p. 20.

In short, the money wasn’t spread around. No exemption.

No, not into R. M. Crawford’s 1938 “wild blue yonder”, but rather to imbibe taxational wisdom and CPE hours at the IRS Nationwide Tax Forum at National Harbor, MD, the situs I love to hate. Still, gotta get the hours. Again I’m lobbying to have the Big Show brought back to New York City.

Can’t leave out the Big Apple.

The subtitle of my blogpost “Give It Your Best Number”, 4/9/12, should serve as a warning to taxpayers who get hit with a deficiency; even before the SNOD, prepare to settle.

John V. Black, Docket No. 2260-12, filed 8/23/13 is an object lesson.

CSTJ Panuthos administers the lesson. First, the background: “…respondent [IRS] filed a Motion for Leave To File Amendment to Answer, lodging the corresponding Amendment to Answer. Respondent’s motion states that the notice of deficiency that forms the basis of this case was prepared using information returns provided by third parties. Thereafter, respondent performed a bank deposit analysis and determined that… petitioner received additional unreported taxable income from his business activity, which was not reported by third parties and therefore was not included in the original notice of deficiency. Respondent’s Amendment to Answer seeks an increased deficiency of $11,683 and additions to tax resulting from this alleged additional unreported income.” Order, at p. 1.

Sound familiar? See my blogpost “Pay The Man”, 7/31/12.

John objects to IRS’ proposed Amendment: “…petitioner alleges that he wants to settle his case and allowing respondent to amend his answer will result in ‘added costs, hassles and delay.’” Order, at p. 1.

But Rule 41, like FRCP Rule 51, is in favor of amendments.

CSTJ Panuthos: “Whether to permit such an amendment is a matter within the sound discretion of the Court. The touchstone in evaluating whether to allow an amendment is the existence of unfair surprise or prejudice to the nonmoving party. Such surprise or prejudice, in turn, rests largely on evidentiary and other considerations bearing on the nonmovant’s opportunity to respond. For instance, this and other courts may take into account whether the nonmovant would be prevented from presenting evidence that might have been introduced if the matter had been raised earlier and whether the movant delayed unduly in raising the matter.” Order, at p. 2. (Citations omitted).

In short, as we’ve seen before, the question is whether the Amendment is an ambush.

Not here, says CSTJ Panuthos: “Petitioner’s generalized allegations of hassles and delays lack persuasive specifics or value. Furthermore, we cannot find any undue delay, bad faith or dilatory motive on the part of respondent when the existence of this alleged additional unreported income was not known to respondent until respondent obtained petitioner’s bank records… in preparation for trial.”  Order, at p. 2.

Finally, CSTJ Panuthos understands what John wants, but “(W)hile we understand petitioner’s desire to settle this case based on the notice of deficiency as issued, Tax Court precedent is clear that ‘[w]e acquire jurisdiction when a taxpayer files with the Court and that jurisdiction extends to the entire subject matter of the correct tax for the taxable year.’” Order, at p.2. (Citation omitted).

Or in simple terms, once you file a petition, everything in every tax year in your petition is up for grabs.

So IRS gets its Amendment, to which John must respond.

That obliging jurist Judge Gustafson contradicts the title of my blogpost “You Can Have One Without The Other”, 7/31/13, but this designated hitter is not about spouses. It’s about an opportunity to contest a deficiency at the CDP stage.

The order is Albert Sofian, Docket No. 17960-12L, filed 8/22/13.

Al’s beef has to do with gains on securities sales. Al claims he never got the final notice of intent to levy, which claim Judge Gustafson says defeats IRS’ summary judgment motion to sustain Appeals’ NOD. IRS says Al had a prior opportunity to dispute. Al says no.

Al never raised non-receipt at his CDP, so IRS says he waived any chance to do so, whether or not he got the final notice of intent to levy.

Judge Gustafson says no: “On the record before us, we cannot fault Mr. Sofian for failing to effectively challenge liability at his CDP hearing. IRS Appeals’ letter… explicitly told Mr. Sofian, ‘You are not able to dispute the liability because our records indicate that you had a previous opportunity to challenge the liability under IRC 6330 when you were issued a Notice of Intent to Levy…. Therefore, you are precluded from raising the liability during this CDP hearing request.’ Appeals cannot announce such preclusions to the taxpayer and then support taxpayer-adverse outcomes by saying that the taxpayer failed to dispute the liability.

“We acknowledge that Appeals’ letter went on to say, ‘However, we will consider your original Form 1040 for the tax year… under general authority if you submit a completed and signed tax return to me within 21 days of the date of this letter’; and we have no doubt that Appeals made this offer in good faith. However, the letter made it clear that, for purposes of his CDP rights (which would include judicial review thereof) Mr. Sofian was precluded. Appeals cannot have it both ways–on the one hand telling the taxpayer that his submissions will not count for CDP purposes, but on the other hand arguing that the taxpayer’s nonsubmissions should count against him in the Tax Court’s review of the CDP hearing.” Order, at pp. 1-2. (Emphasis by the Court).

So Al will get his day in court.

However, lest Al should feel too elated, Judge Gustafson warns him that he has a double-barreled burden of proof: he has to prove he didn’t get the final notice of intent to levy, and, if he does so, then he has to prove that his liability was less than IRS said it was. Just saying “no” won’t get it.

Al seemed to think IRS has the burden of proof on his tax liability, but he is wrong, and Judge Gustafson makes it clear.

And Al and IRS must do their document exchange soon, and will be precluded from introducing anything they didn’t exchange.

Appeals may have to revise their form letter.

In the past I’ve awarded what I call a “Taishoff good try” for a novel, if unsuccessful, argument made in Tax Court, and one for an argument that succeeded. In substantiation of the foregoing, I offer my blogposts “Whose Line Is It, Anyway?”, 2/8/12, and “A Good Excuse”, 9/28/12.

But there are arguments that fall into a different category, and one of those I shall blog today in the category of “Oh Please!”, as in “you are joking, aren’t you?”. More to come, if time permits.

Today’s recipient is Pauline T. Golit, starring in 2013 T. C. Memo. 191, filed 8/21/13. Aside from the charitable donation to an out-of-country entity (barred by Section 170(c)), some unreported income, and the usual unsubstantiated employee business deductions (although Judge Halpern generously allows her more than IRS did), none of which is noteworthy, Pauline does come up with a reporting position worthy of a Taishoff “Oh Please!”.

Pauline claims HOH filing status and a dependency deduction for Albert Salako.

After the usual walk through Section 152, Judge Halpern deals with Albert: “Petitioner has failed to show that she is entitled to the dependency exemption deduction for Mr. Salako. Petitioner claimed on her 2008 return that Mr. Salako was her son. Mr. Salako was born on January 12, 1961, and was thus 47 years old at the close of 2008. Petitioner, born in 1959, is only two years older than Mr. Salako. Thus, he cannot be her biological son, and we do not find credible petitioner’s unsubstantiated testimony that Mr. Salako is her adopted son. Petitioner does not contend, and there is no evidence to find, that she bears any other familial relationship to Mr. Salako.

“Nor has petitioner shown that Mr. Salako was a member of her household during 2008. In order for an individual to be considered a member of a taxpayer’s household, both the taxpayer and the individual must occupy the household for the entire taxable year. Sec. 1.152-1(b), Income Tax Regs. Petitioner testified that Mr. Salako lived with her only ‘temporarily’ during 2008 and with a friend for the rest of that year. Although a temporary absence from the household will not prevent an individual from being considered as living with the taxpayer for the entire year, see id., there is no evidence as to the actual length of time Mr. Salako lived with petitioner during 2008. Consequently, petitioner has not shown that Mr. Salako satisfied the relationship requirements to be considered either a qualifying child or a qualifying relative.” 2013 T. C. Memo. 191, at pp. 9-10. (Footnote omitted).

Albert is too old for qualifying child and no evidence he is disabled (although Pauline claims he is), and no evidence as to whether Pauline or Albert provided more than one-half of Albert’s support in the year at issue.

So no HOH filing status or dependent’s deduction for Pauline, but she is the first recipient of a Taishoff “Oh Please!”.

 I remember a colleague being confronted, many years ago, by a particularly persnickety probate court clerk whose invariable incantation was “You have to fulfill the requirements.”

Well, Judge Kathleen Kerrigan isn’t particularly persnickety, but Eric Onyango didn’t, and neither did brother Maurice, so both of Eric’s cases get tossed in Eric Onyango, Docket No. 21922-11, filed 8/20/13.

First Eric petitions, but IRS claims they never sent him a SNOD, so petition number one gets dismissed. Then Eric petitions again, for the same years, and it turns out IRS did send him a SNOD after all. So petition one gets reinstated, but IRS claims Eric was late both times.

Eric says he didn’t get the SNOD until long after the ninetieth day after mailing, and anyway he designated brother Maurice as his fiduciary before day ninety, so the SNOD should have been mailed to brother Maurice in Nairobi, Kenya.

Wrong, says Judge Kerrigan. Eric didn’t get the designation right, and brother Maurice’s later correspondence didn’t cure the defect.

The Section 6903 regulations govern.

“Section 301.6903-1, Proced. & Admin. Regs., prescribes the manner in which the notice of fiduciary relationship must be filed. First, the notice must be given by the fiduciary. See sec. 301.6903-1(a), Proced. & Admin. Regs. (‘Every person acting for another person in a fiduciary capacity shall give notice thereof * * *’). Second, the notice must be signed by the fiduciary and must be filed with the I.R.S.Center where the return of the person for whom the fiduciary is acting is required to be filed. See sec. 301.6903-2(b)(2), Proced. & Admin. Regs. Third, the notice must state the name and address of the person for whom the fiduciary is acting and describe the nature of the liability, including the type of tax and the years involved.

“Section 301.6903-2(c), Proced. & Admin. Regs., provides that if the notice of the fiduciary relationship is not filed before the sending of the notice of a deficiency to the last known address of the taxpayer, no notice of the deficiency will be sent to the fiduciary. ‘In such a case the sending of the notice to the last known address of the taxpayer * * * will be a sufficient compliance with the requirements of the Code, even though such taxpayer * * * is under a legal disability * * *’. Id.” Order, at  pp. 4-5.

Neither Eric nor brother Maurice can furnish certified mailings of the correspondence they claim gave notice, and IRS claims what they did furnish doesn’t fulfill the requirements. Judge Kerrigan agrees.

So Eric is out, and his motion to restrain collection falls because there is no appeal from the SNOD nor valid petition before Tax Court to invoke the Section 6330(c) restraint.

But Eric does get his medical evidence sealed.

Takeaway– You have to fulfill the requirements.

A reminder to preparers from that obliging jurist Judge Gustafson: a house on wheels is still a house, and may suffice as a qualified personal residence for Section 280A (if you can show exclusive business use) and Section 163 purposes. The case is Keith Dunford and Ena Dunford, 2013 T. C. Memo. 189, filed 8/20/13.

Keith and Ena traveled a lot, and claimed it was for business, but their recordkeeping didn’t substantiate their claims. And they already had a house, rooted firmly to the soil of Quincy, Illinois.

I’ll spare you Judge Gustafson’s bean-count through the claimed deductions and NOL. Even though IRS unaccountably allowed Keith and Ena to deduct expenses for which they were reimbursed, nothing is new here.

Section 163 allows qualified principal residence mortgage interest deduction for principal residence plus one other elected by taxpayer, but neither the statute nor the regulations prescribe when and how to elect, and the caselaw permits election even during litigation.

So Keith and Ena’s Beaver Contessa (great name!) motor home, encumbered by a Bank of America mortgage on which Keith and Ena paid interest, qualifies for the deduction.

Keith’s claim that he used a countertop in the Beaver Contessa for his business operations doesn’t get it: “The Dunfords did not prove that there was an identifiable portion of their motor home that was used exclusively for business purposes. The area they seemed to put forward as the home office was the countertop that Mr. Dunford used as a desk; but (1) they did not make any showing of the percentage of the vehicle that constituted this area (it would be a very small percentage), and (2) it is implausible to suggest that, in the cramped quarters of a motor home, an unclosed area like the countertop would somehow be exclusively reserved to business activity. Accordingly, all deductions (other than deductions for interest expenses) the Dunfords claimed ‘with respect to the use of’ their motor home are disallowed under section 280A(a).” 2013 T. C. Memo. 189, at p. 17

IRS also claimed that, inasmuch as Keith and Ena lived in the motor home, their claimed Section 162 travel expenses weren’t for travel, because they were never away from their tax home. See my blogpost “Home Is Where the Heart Is’, 7/21/12. But IRS had allowed some expenses during examination, and didn’t change position in the litigation, so Judge Gustafson blows off that argument in a footnote.

“The Commissioner’s principal contention as to travel expenses is that the Dunfords have not substantiated them, beyond what the Commissioner has conceded. In response to a question raised by the Court, the Commissioner contended after trial that, for tax purposes, the Dunfords had no ‘home’ … (other than the motor home, from which they were not ‘away’ while traveling), so that ‘Petitioners are not entitled to deduct expenses arising from their travels… in amounts greater than already allowed by respondent.’ (Emphasis added.) Logically, the Commissioner should ‘allow’ zero away-from-home travel expense amounts if petitioners had no ‘tax home’; but he does not retract his prior concession. Since we uphold the Commissioner’s primary contention (lack of substantiation), and since the Commissioner continues to concede the deductibility of the amounts that were substantiated, none of the amounts in dispute turn on the ‘tax home’ issue, so we do not address it.” 2013 T. C. Memo. 189, at pp. 24-25, footnote 11.

But taxpayers using motor homes in their trade or business should beware: this issue will arise again.

But Judge Morrison Is On the Case

The few readers who have struggled through the summer doldrums might vaguely remember my blogpost “Delay of the Game”, 7/12/13, and its not-quite-sequel “Yonder Come Day”, 7/30/13, wherein I discussed the various delaying maneuvers of inventive taxpayers.

Judge Morrison, however, has no patience. He deals with one such in Clarence William & Susan M. Speer, Docket No. 581-12, filed 8/19/13.

C.W. and Sue are on for trial in LA next month, and Judge Morrison told them so back in April.

Less than two weeks ago, a little more than thirty days before trial, CW and Sue move for a continuance (that’s an adjournment in these parts), claiming they have plane tickets and can’t show for the trial.

Could be, but Judge Morrison is a follower of the Great Communicator: “Trust, but verify.”

Judge Morrison: “…(p)etitioners shall, on or before September 3, 2013, file a supplement to their motion for continuance. Petitioners’ supplement shall include an attachment with copies of petitioners’ airplane tickets referred to in petitioners’ motion, along with documents showing the airplane tickets were purchased prior to receiving the April 18, 2013 notice of trial.” Order, p. 1.

Should be an interesting supplement.

No, not another essay on parenting, but Ch J. Michael Thornton’s announcement of the latest improvements to Tax Court paperwork and procedures, which was released today, August 19, on Tax Court’s website, are worthy of comment.

Here’s the whole story. What follows is a digest.

Counsels’ rooms in select locations, where practitioners and clients can meet to discuss their cases before showing up for calendar call, will be made available to Bar-sponsored calendar call programs and low-income tax clinics. Certainly a welcome accommodation  to the assisters of those unable to afford the highly-credentialed and even more highly-paid practitioners who take their ease therein.

Judge Thornton also announces a new line of stuffers. These are not the products of Mr. Frank Perdue’s massive operation, but rather enclosures to accompany various Tax Court mailings to the self-represented, informing them in simple terms of some of the numerous twists and turns in the Tax Court path.

There’s also a kinder, gentler application for waiver of the $60 filing fee, and new requirements for academic and non-academic clinics. But the volunteers should show up an hour before calendar call (that is, 8 a.m., as the new stuffer tells the petitioners to show up at 9 a.m.).

These improvements are the outcome of practitioner, volunteer and government input. It’s always a good thing when stakeholders collaborate to ease the process for all parties.

It’s mid-August, and while it’s not a “blazing hot day in August”, and “a depleted bank account”, while depleted, still has enough so I can take a three-day holiday, nevertheless I sympathize with Dr. Watson, as he tells the story in “The Adventure of the Cardboard Box”: “But the morning paper was uninteresting. Parliament had risen. Everybody was out of town, and I yearned for the glades of the New Forest or the shingle of Southsea.”

Congress isn’t around, and my equivalent of the “morning paper”, the Tax Court website, is really uninteresting today.

Nothing new, so relax and enjoy.