My patient readers will remember my blogpost “Smiling ‘Til It Hurts”, 4/19/12, recounting Judge Kroupa’s docudrama Lee Storey and William Storey, 2012 T. C. Memo. 115, filed 4/19/12.

Well, Bill departed this life thereafter, I hope smiling ‘til the end, but Lee, having won in Tax Court, wants her legal and administrative costs and fees, so Judge Kroupa is back at it in Lee Storey and William Storey, Deceased, 2013 T. C. Memo. 59, filed 2/25/13.

When Bill and Lee’s counsel told Judge Kroupa that Bill had departed this vale of tears, counsel didn’t bother to say if an estate proceeding had, or will be, commenced. Thus the changed caption, although Tax Court frowns upon dead people appearing without an executor or administrator having been duly appointed. Practice tip– Get your executor or administrator on deck, or if not yet official, state that proceedings to appoint have been commenced.

Well, having won last April, Lee was in good shape, except she bypassed Appeals, even though Appeals gave her a shot in the 30-day letter. But Lee wanted no part of Appeals.

Judge Kroupa: “It is unclear exactly why petitioners chose to forgo the Appeals process. Petitioner’s affidavit reflects that she believed respondent [IRS] was intransigent in his position with respect to the film activity. Her affidavit also reflects that she believed that if she did not wage a major counter-attack at the administrative level, she would face ‘a life sentence of IRS audits.’ It appears that petitioners elected to bypass Appeals as part of their litigation strategy. This does not relieve them of the requirement to exhaust all available administrative remedies before filing the petition if they wish to preserve their right to seek litigation costs. See Haas & Assocs. Accountancy Corp. v. Commissioner, 117 T.C. 48, 62 (2001), aff’d, 55 Fed. Appx. 476 (9th Cir. 2003).” 2013 T. C. Memo. 58, at p. 7, footnote 8.

Section 7430 says that not only must you win, but you must exhaust administrative remedies, that is, go up the chain-of-command (as we used to say).

And the issue in Lee’s case, the Section 183 business-vs-hobby calculus, is fact-specific, with a cruise through nine factors, no one of which is controlling and all of which must be weighed, considered, and balanced.

Judge Kroupa: “Notwithstanding our conclusion regarding the merits, respondent presented facts supporting his position that petitioner’s primary objective in conducting her film activity was not to make a profit. And respondent’s arguments with respect to this highly fact-intensive issue were reasonable. Although we did not ultimately agree with respondent’s legal conclusion, respondent has persuaded us that his position had a reasonable basis in fact and law. We hold, therefore, that respondent’s administrative position regarding the for-profit issue was substantially justified and that petitioner is not entitled to an award of administrative costs under section 7430.” 2013 T. C. Memo. 59, at p. 11.

So Lee is out on legal fees because she didn’t exhaust her administrative remedies, and out on administrative fees because IRS was substantially justified.

End of Storey.

Not quite the Kingston Trio’s 1959 hit of that name, from their album “Stereo Concert”, but IRS has decided to drop blackberries, raspberries and papayas from the over-two-year list that requires capitalizing costs, both direct and indirect, under Section 263A.

So all you old men who used to grow the stuff but whose dreams have turned to dust, as the KT sang it fifty-five years ago, see Section 263A(d)(1)(A)(ii), and look out for Notice 2013-18, which will appear in IRB 2013-14, on April 1, a special day in my family.

The IRS has a present for you. “Notice 2013-18 supersedes Notice 2000-45 to remove blackberry, raspberry, and papaya plants from the list of plants with a preproductive period in excess of two years, for purposes of determining the applicability of section 263A to taxpayers engaged in the farming business.

“Notice 2013-18 will be published in Internal Revenue Bulletin 2013-14, dated April 1, 2013.”

So join me in the chorus: “Blackberries, strawberries, the good wines we brew, pass me a papaya and I’ll share some wine with you.”

That’s the word from Judge Lewis (right way to spell it, Judge) Carluzzo, in a designated hit on Henry J. Langer, Docket No. 24035-11L, filed 2/22/13, a day when Tax Court issued no decisions.

Henry J’s problems started when he lost a deficiency case in Tax Court back in 2005 and appealed to Eighth Circuit. Big Eight bounced Henry J in 378 Fed. Appx. 598 (2010), aff’g 2008 T. C. Memo. 255.

Meantime, IRS assessed the deficiency and proposed a levy before Big Eight nailed Henry J’s appeal. Henry J filed a CDP, contesting the underlying tax liability and claiming the levy was premature.

Judge Lew:  “The petition filed in this case challenges the determination made in the notice of determination upon two grounds. (1) the decision in the deficiency case is erroneous; and (2) The underlying liability was improperly assessed while petitioner’s appeal of the decision in the deficiency case was pending.

“Petitioner’s objection to respondent’s [IRS] motion advances only his claim that respondent’s motion should be denied because the decision in the deficiency case is ‘in error’. Nevertheless, we consider both challenges to the proposed collection action as contained in the petition and find neither has merit.” Order, p. 2.

Henry J can’t collaterally attack the decision of Tax Court in a Tax Court proceeding; he could, and did, appeal, and whatever Big Eight decided would bind him and IRS.

But Henry J didn’t post a bond. Section 7485(a) says if you appeal from a decision that you owe IRS money, you must post a bond for the money. If you don’t bond, IRS can lien or levy, and if you win your appeal, you get unliened or refunded the levy.

But if you appeal while unbonded, ask Henry J what happens.

Two cases from Tax Court today (2/21/13) get entered in  the  “nice try, but no prize” stakes.

First up is Thomas A. Wagoner, 2013 T.C. Sum. Op.14, filed 2/21/13, Judge Vasquez fielding this one. Tom claims that because his seven years’ worth of unpaid income taxes, penalties and interest gave rise to a lien on his principal residence, the interest and penalties were deductible as qualified residence interest under Section 163(h)(3)(A). Would you be surprised if I told you Tom was a lawyer?

Judge Vasquez: “However, his argument is erroneous insofar as neither a Federal tax lien nor the filing of a notice of Federal tax lien caused his tax indebtedness to be secured by a qualified residence. See sec. 1.163-10T(o)(1) (flush language), Temporary Income Tax Regs.,  supra. Furthermore, section 1.163-9T(b)(2)(i)(A), Temporary Income Tax Regs., 52 Fed. Reg. 48409 (Dec. 22, 1987), specifically provides that interest paid on income tax liabilities of individuals, regardless of the source of the income or other adjustments to which the tax liabilities relate, is to be treated as personal interest.” 2013 T. C. Sum. Op. 14, at pp. 9-10. (Footnotes omitted).

So Tom gets some more penalties and interest. Still, nice try, Tom.

Next entry is Philip C. Smoker, star of 2013 T. C. Memo. 56, filed 2/21/13. Smokin’ Phil has a variable rate mortgage on his principal residence, but the monthly payment has a ceiling. If the rate breaks the ceiling, the excess interest is capitalized.

Phil tries to deduct the capitalized interest currently, even though he is a cash-basis taxpayer like the rest of us. No go; the interest may be secured, but it wasn’t paid.

Smokin’ Phil tries the “paid or accrued” language in Section 163(h), but Judge Laro isn’t buying. He deluges Smokin’ Phil with all the “if you didn’t pay it you can’t deduct it” cases, and smothers Smokin’ Phil’s only authority, which is based on an accrual-basis taxpayer. I’ll spare you the welter of citations.

Smokin’ Phil goes down in flames, but joins Tom in the “nice try, but no prize” stakes.

Two ClassicStar cases today from Judge Goeke, William G. Pederson and Jamie K. Pederson, 2013 T. C. Memo. 54, filed 2/20/13, and William T. Romanowski and Julie I. Romanowski, 2013 T. C. Memo. 55, filed 2/20/13.

For particulars of the ClassicStar scam, see my blogpost “Horsing Around?”, 8/15/11.

I therefore merely mention these cases, as they are cookie-cutter Section 183s, with same counsel for taxpayer and substantially similar facts in both. Romanowski dodges the penalties based on good faith reliance, but Pederson knows too much and thereby gets nailed.

Romanowski was a long-time NFL linebacker with Niners, Eagles, Broncs and Raiders over 16 years in the bigs, but taxes weren’t his thing.

The sad part of Romanowski is how his attorney, the “tax guru” at a highly-regarded law firm, was getting backhanders from ClassicStar while supposedly representing Romanowski. He denied it, but Judge Goeke wasn’t buying it.

The Isle of Man, a/k/a Mann, has done it again. Made a deal with Her Majesty’s Revenooers, that is, as of 19 Feb, mimicking the Liechtensteiner Facility deal.

I am advised, however, that there are some key differences, including, but not limited to, the fact that there will be no guarantee against criminal investigation for tax related offences.

So, to repeat the parting shot from my earlier blogpost “Man, Dig That Island”, 12/8/12: “Have the dodgers been voted off the island? Stay tuned.”

But unfortunately Steve Jarvis doesn’t get that far, in Steven L. Jarvis and Estate of Cynthia S. Jarvis, Deceased, Steven L. Jarvis, Special Administrator, 2013 T. C. Sum. Op. 11, filed 2/19/13. Judge Kerrigan has this one, but Steve really didn’t make any showing here, unlike Ronald Webster Moore, the star of 2012 T. C. Sum. Op. 83, filed 8/23/12, and my blogpost “Ambiguity Is the Best Policy”, of even date therewith, as the high-priced lawyers say.

Ronnie had Judge Goeke deconstruct the automatic premium loan payment option provisions in Ronnie’s youthful indiscretion with Nationwide Insurance (the company that’s On Your Side), which got Ronnie off the hook, but Judge Kerrigan doesn’t do that for Connecticut General or for their successor-in-interest, Lincoln National Insurance Co., upon whose side, if anyone’s, they are to be found is nowhere specified. So Steve gets deficiency and penalty when he failed to report the payoff of the $83K loan he had automatically racked up.

Judge Kerrigan appears to surmise that the premium loans were all timely made over the 18 years the automatic premium loan payment option was in effect. And Steve didn’t try for a burden-of-proof shift, which Ronnie did and got, nor claim he tossed the annual loan statements unread as sales pitches.

Steve claimed he never got the 1099-R from Lincoln National, showing the taxable amount of the automatic payment unwinding. Judge Kerrigan: “Petitioners contend that they did not receive the information regarding the taxable income, but Lincoln National Insurance Co. mailed the Form 1099-R to petitioners’ correct address, and they have not provided any evidentiary basis for a factual finding that they did not receive it.” 2013 T. C. Sum. Op. 11, at p. 8.

So Steve winds up like Jimmy Ledger, in my blogpost “The Wrong Side of the Ledger”, 8/2/11.

Steve’s testimony does not appear in the opinion, so I doubt he had much. And for the $6K in tax and the $1K in penalty it wasn’t worth getting a Tax Court admittee. Too bad, because a defense like Ronnie’s might have saved the day here.

The appraisal, I mean, to your Form 8832. And make sure it comports with Section 170 and the regulations thereunder. But if it doesn’t, and you reasonably relied on experts who said that it did, you’re OK.

That’s Judge Laro’s message for John Crimi, et al., 2013 T. C. Memo. 51, filed 2/14/13, a Valentine’s Day gift to the taxpayers.

This was another charitable land gift case, with dueling experts testifying concurrently about development rights, environmental legislation and appraisal methodology, featuring a “statistical model using polynomial regression to correlate a relationship between the number of lots into which an undeveloped parcel of land may be subdivided and the sale price per lot. The regression analysis shows a relationship of a diminishing rate of return.” 2013 T. C. Memo. 51, at p. 74. So does my comprehension of this stuff show a severely diminished rate of return.

A word about expert testimony is in season here. “An expert qualified to testify in a judicial proceeding owes a duty to the Court that transcends the duty to his or her client insofar as the expert must present his or her opinion, as well as the facts, data, and analysis on which he or she relied, neutrally and candidly. Experts who breach their duty to the Court in order to advance their client’s litigating position compromise their usefulness.” 2013 T. C. Memo. 51, at p. 41. (Citations omitted). So, kids, play nice.

Judge Laro laments that, notwithstanding that the experts testified concurrently (“…we cannot overstate the importance of concurrent witness testimony in these cases.” 2013 T. C. Memo. 51, at p. 34), here, alas, “(O)n brief, as with cross-examination, each party aims more to discredit the opposing party’s appraiser than to prove the reliability and accuracy of their own expert appraiser.” 2013 T. C. Memo. 51, at p. 57.

Wherefore, “we decline to accept either expert’s conclusion as to the subject property’s fair market value because, as the concurrent testimony highlighted, each suffers from critical errors in analysis and application. Accordingly, we shall reconstruct the subject property’s fair market value aided by common sense, the experts’ reports, and the benefit of their concurrent testimony.” 2013 T. C. Memo. 51, at pp. 59-60.

So we’re back to the usual mix-and-match.

But even if the appraisal you attach to your Form 8832 is flawed, all is not lost. “We need not decide whether the 2000 appraisal substantially complied with the requirements for a qualified appraisal because we agree with petitioners that their noncompliance would be in any event excused for reasonable cause because they reasonably and in good faith relied on Mr. X’s advice that the 2000 appraisal met all legal requirements to claim the deduction.” 2013 T. C. Memo. 51, at p. 98. (Name omitted).

Judge Laro analogizes to the penalty situations (how nice to see Neonatology Associates cited yet again; if Neonatology Associates got a royalty every time that case was cited, they’d be rolling in it). Crimi relied upon Mr. X, who was an accountant and an attorney, and was with the firm that for twenty years had done all Crimi’s taxes without a hitch. Mr. X blessed the outdated appraisal, and Crimi had no reason to doubt his trusted adviser (although now Crimi might be a wee bit more cautious).

So Crimi gets their deduction (or at least some of it).

Once again, I’m looking for a source for a quotation; this one was ascribed to the sixteenth-century English jurist Lord Coke. As usual, no prize for the correct answer.

The quotation: “Law, logic and the Swiss will fight for any cause if well-paid.”

Well, even if only indirectly paid, by avoiding fierce penalties on their US banking operations, the Swiss have decided to fight for the cause of ending offshore tax evasion, by signing Model 2 of the FATCA Intergovernmental Agreement propounded by Treasury. And they did it today, February 14, a Valentine’s Day present to the gang at 1111 Constitution Avenue, N.W.

So Treasury felt entitled to a wee gloat: “Today’s announcement marks a significant step forward in our efforts to work collaboratively to combat offshore tax evasion,” said Acting Secretary of the Treasury Neal S. Wolin. “We are pleased that Switzerland has signed a bilateral agreement with us, and we look forward to quickly concluding agreements based on this model with other jurisdictions.”

If Switzerland has signed, can Italy be far behind? Treasury says the Italian government and Treasury initialed an IGA on January 24.

Now let’s get the Caymans, the Cooks and Luxembourg on the roster.

The only opinion out of Tax Court in the last two days is a fact-specific Section 6404 abatement of interest decision, which doesn’t much enlighten the in-the-trenches practitioner, except as a reminder that Section 6404(e) applies to income taxes, not employment taxes. See my blogpost “A Case of Interest”, 8/9/12, for more about this subject than you probably want to know.

The reminder about the non-applicability of Section 6404(e) to employment taxes is to be found in Jorge Paneque and Leobigilda Paneque, 2013 T. C. Memo. 48, filed 2/13/13, Judge Gale providing the reminder at p. 21: “Mr. Paneque contends that respondent abused his discretion in disallowing his request for abatement of the interest that accrued on his unpaid employment tax liabilities during the period October 21, 2005, through August 3, 2007. Respondent contends that assessments of interest on employment tax liabilities are not eligible for abatement under section 6404(e)(1). We agree.

“Respondent lacked authority to abate interest under section 6404(e), and his failure to do so could not constitute an abuse of discretion. See Woodral v. Commissioner, 112 T.C. at 25; see also Scanlon White, Inc. v. Commissioner, 472 F.3d 1173, 1177 (10th Cir. 2006), aff’g T.C. Memo. 2005-282; Miller v. Commissioner, 310 F.3d 640, 645 (9th Cir. 2002), aff’g T.C. Memo. 2000-196.”

Now that we’ve gotten that out of the way, here’s the real news from Tax Court.

Y’all will remember the Estate of Ileana Sonnabend, Docket No. 649-12. This was the $65 million misunderstanding, involving the late Bob Rauschenberg’s masterpiece “Canyon”, a 1959 masterpiece of post-modern something-or-other, starring a stuffed bald eagle, that was part of the late Ileana’s billion-dollar art collection.

Now we all know that since 1918, or maybe 1940, it’s been a one-way get-into-jail-free (do not pass “Go”) card to possess, sell, barter, import or export any part of a bald eagle, dead or alive.

So the executors valued the collage at zero, because it can’t be sold, bartered, etc., without the seller or barterer heading for the hoosegow, but IRS claimed you could sell it surreptitiously to a hypothetical collector beyond the grasp of the Federales, and didi-mao (an arcane technical term) with the boodle.

The art world gasped, the bloggers got weaving, and the New York Times, Forbes magazine, et hoc genus omne joined the fray, all excoriating IRS for their extreme position.

And of course the executors girded their loins for battle, with the whole art world watching.

Well, looks like we’re going to miss the trial, guys. Judge Wells, whether relieved or regretful he doesn’t say, has issued the following Order of Continuance, served 2/13/13:

“This case was called from the calendar for the Trial Session of the Court at New York, New York on January 28, 2013. There was no appearance by or on behalf of petitioner. Counsel for respondent appeared and was heard. A case conference call with counsel for both parties was held on January 29, 2013 in which counsel indicated that a basis of settlement had been reached between the parties and that additional time was needed to prepare the stipulated decision. The counsel agreed that a continuance of this case would be in order. After due consideration, it is

“ORDERED that this case is continued pending further direction by this Division of the Court. It is further

“ORDERED that on or before February 28, 2013, the parties shall submit to the Court a stipulated decision for this case or file with the Court written status reports as to the then present status of this case. It is further

“ORDERED that jurisdiction of this case is retained by Judge Thomas B. Wells.” Docket No. 649-12, at p. 1.

Tough luck. The opinion would have made a red-hot blogpost. And so, maybe, the eagle sleeps tonight. You could write a song….