No, not Stobie Creek, but John Hancock Life Insurance Company (U.S.A.), as Successor in Interest to John Hancock Life Insurance Company (f.k.a. John Hancock Mutual Life Insurance Company) and Subsidiaries, et al., is up a different creek, leading off 141 T.C. in 141 T. C. 1, filed 8/5/13.

And the reason this blogpost is a day late (but hopefully not a dollar short) is that I wanted to reflect on the 244 pages of Judge Haines’ prose before leaping onto the internet.

Remember the “synthetic leases” of the 1980s? No? Take a look at FAS 13, the accounting guide to leveraged leases and off-balance-sheet finagling. The idea was to put up 20% of the deal, borrow 80% nonrecourse, lease and lease back (later buy and lease back, when IRS blew up the lease and lease back deals (called LILOs) under Section 467) from a tax-indifferent, take heavy depreciation and interest deductions, when in fact all the cash you were going to owe was put in secure accounts, so that all payments were made out of those accounts. Your transaction costs were the broker’s commission and the tax-indifferent’s vigorish for doing the deal.

And the nonrecourse debt was off-balance-sheet per FAS 13.

I remember a CLE program given at that time, run by a now-defunct abstract company, where these were extolled. I denounced them publicly as a fraud. As usual, nobody listened.

The American Jobs Creation Act of 2004 put paid to the whole game, but prospectively only; those deals then in place, to the extent compliant with pre-existing law, were unaffected.

John Hancock, needing to offset investment gains, found itself besieged by various brokers peddling this dodge. So it did deals with the Austrian State Railways, the Belgian State Railways, the City of Dortmund in Germany, and some Austrian and German public utilities.

IRS first claims that these aren’t leases at all but financing arrangements, so John Hancock’s depreciation and loan interest deductions are out, but they do get some other interest income and minor deductions. None of the other deductions IRS gives John Hancock comes close to the roughly $560 million in deficiencies, not counting interest and penalties (which Judge Haines doesn’t discuss, but which will surely surface after the Rule 155 beancount he orders).

So we have the trial. “The Court held a five-week special trial session in Boston, Massachusetts. The record in these cases includes the testimony of 53 witnesses, over 3,600 exhibits, over 4,000 pages of trial transcripts, and over 1,000 pages of briefing.” 141 T. C. 1, at p. 76.

Bottom line is that IRS wins. If international wheeling-dealing  sings your song, you can read all about it.

But the point I want to make here is why IRS wins. IRS’ initial attack is substance over form: John Hancock never had benefits and burdens of a net lessor or of an owner. It only had cash at risk in two deals, and even those were financing deals, not leases. For the rest, it was a roundy-round with the cash, with John Hancock getting the write-offs, and, though it wasn’t 100% certain that the indifferents would buy out of the leases at the bail-out date, it was probable enough to satisfy Judge Haines that John Hancock would not be buying electric power in Austria or running high-speed expresses from Brussels to Paris. And that’s what carries the day.

Now IRS got cute at the pre-trial memorandum stage. IRS wild-carded in an economic substance argument, that they hadn’t raised in the SNODs or in their answer.

John Hancock moved to preclude any evidence IRS might offer on that score from the 53 witnesses or the 3600 exhibits, but Judge Haines let it all in. However, IRS had the burden of proof, and the Health Care Reform Act codification plays no part.

IRS relies on its expert, Dr. Thomas Lys, who, Judge Haines notes, “has previously testified for the Government in other Federal leasing cases.” 141 T. C. 1, at p. 82. Professional witness, maybe?

But the Prof lets the IRS down, and IRS loses on economic substance, because IRS can’t carry the burden of proof.

“Having found that a net present value analysis may be useful in these cases, we turn to respondent’s argument that the ABC reports do not provide reliable pretax economic returns and thus that Dr. Lys’ net present value calculations should control. We disagree. If, as Dr. Lys opined, the proper test of profitability requires an investor to accumulate a return on an investment and discount the return back at the same rate and over the same period, any investment with transaction costs would always produce a pretax loss. In fact, Dr. Lys stated at trial that the actual pretax cashflows from the test transactions were ‘irrelevant’.

“At trial petitioners presented Dr. Lys with a simple example to illustrate this point.

“Q:            So my simple example is: Assume that you walk into your stockbroker and you have $101,000 in your pocket.

“A:            Uh-huh.

“Q:            And you buy a $100,000 bond – –

“A:            101 or –

“Q:            A $100,000 bond, because there are going to be some transaction costs.

“A:            Okay.

“Q:            The broker is going to charge you $1,000 for that transaction.

“A:            That’s correct.

“Q:            Using your methodology, assume my bond is 4 percent – – you would calculate the present value today of that bond at maturity, you would take the $100,000 and accumulate it forward at 4 percent, and then you would discount it back at 4 percent. Am I right?

“A:            Correct.

“Q:            So on a present-value basis, the value of my investment is [$]100,000.

“A:            That’s correct.

“Q:            But I have [$]101,000 invested.

“A:            That’s correct.

“Q:            Is that a value-destroying investment?

“A:            Yeah. But may I specify, Your Honor? But I get a service. What the broker did is – – I had a problem. I had $100,000 today, and I didn’t want to have $100,000 today, I wanted to have $100,000 tomorrow, or whenever that period is. The $1,000 transaction fee is something that I voluntarily paid for getting $100,000 tomorrow.” 141 T. C.1, at pp. 136-137.

Judge Haines isn’t buying. “Neither Dr. Lys nor respondent [IRS] has provided a logical explanation to support a real world application of his method and calculations. As a result, the record does not include a credible net present value calculation.” 141 T. C. 1, at p. 139.

There’s more, enough to knock Dr. Lys completely out of the box, but this is enough.

Let’s go back to my blogpost “Woodshedding Your Experts – Stobie Creek Part Deux”, 1/10/11, wherein I said “(T)he takeaway for counsel? As with currency trades, every litigated case has a ‘sweet spot’, the one disputed point your side must prove to win.  Before choosing experts, ask what you want your experts to establish to hit the ‘sweet spot’. Work with them. Learn their craft, so far as possible. And sweat them good, both in preparation of their reports and in preparation for depositions. And if they can’t properly opine, it’s time for a major heart-to-heart with the taxpayer-client.”

I would add that if, after the time has run for you to amend your pleadings, you have a bright idea, make sure your expert is on board.

And that what your expert tells you and the judge bears some relation to reality, not just to what you want to hear.

As I stated in my blogpost “Whoso Would Intervene, Though He Were Dead”, 8/2/13, “I called chambers and left a message. Let’s see what reply, if any, I get. Following.”

Well, I got a telephone call today from Ross Sharkey, Esq., Judge Gale’s law clerk, who stated that I got Section 6015(e)(1)(A) wrong in that blogpost, and that the earlier date for filing the petition in Lesley A. Hudson was May 22, 2012, notwithstanding that it was eight months after Lesley filed her Form 8857 request for innocent spouse relief (September 23, 2011).

And, he said, the prospective intervenors in the non-designated order were the late Mark’s children, and not those of the late Mark and Lesley (as there apparently weren’t any of the latter).

I told Mr. Sharkey I would promptly post a clarification to correct any misstatements I made.

So I went to my trusty online source for Federal law, the Cornell Law Institute, my alma mater’s gift to us practitioners.

And I was wrong, and Mr. Sharkey is right. Section 6015(e)(1)(A) gives IRS a six month leeway to deal with a Form 8857. The innocence-seeker has to wait the six months to let IRS decide what to do. If IRS does nothing, then the petition is timely if filed. But if IRS (or Appeals) has mailed a NOD denying the innocence-seeker’s plea, then the petition is timely if filed within ninety days thereafter.

Second error (I really had a bad day on 8/2/13): the heirs-at-law who could intervene in the non-designated Lesley A. Hudson case were the late Mark’s kids, who weren’t the children of both the late Mark and Lesley, as I erroneously stated. Heirs-at-law, of course, get their status as such under State law, and can include children of the decedent by blood or adoption, as State law may permit.

Thanks, Mr. Sharkey.

I live on a tiny island off the coast of North America, a mere 22.96 square miles (that’s 59.5 square kilometers, for you metrologists) in area. For years I have bemoaned the scarcity hereabouts of one of life’s pleasures, which hails from an even smaller locale, deep in the heart of Texas.

I have brought the same home in airline checked baggage, on buses, and in the back of rented cars, from Texas, Pennsylvania, the District of Columbia and Delaware.

I was delighted when, some months ago, the other signer of our joint return discovered the magic potion at a barbecue restaurant accessible by public transport. On draft, yet.

But something even better followed. One of our island’s better-known gastronomic-organic supermarkets was pleased to become the local dispenser of the same. The proper way, in longnecks.

Shiner Bock has come to New York City. You are invited to join me in a chorus of “Rock Around the Bock.”

If I may misquote a much more significant statement, “whoso would intervene, though he were dead, yet shall his heirs”. That’s Judge Gale’s message in Lesley A. Hudson, Docket No. 13256-12S, filed 8/2/13, but not the designated hitter of the same name and number. I’ll get to that one further along.

Lesley gets hit with two SNODs, claims innocence for both per Section 6015, but notes that the other taxpayer on the returns for those years was the late Mark, her husband, now three years dead. Two years’ worth of deficiencies were at issue, 2008 and 2009, but Lesley is timely as to only the second.

When two persons file a return, each is entitled to have his or her tax liability separately determined as to him or her. But just because a party entitled to have that liability determined isn’t properly before Tax Court, the petition can’t be dismissed unless that absent party is given a reasonable chance to come in.

Obviously the late Mark can’t intervene. But Lesley was pro se, didn’t have a lawyer before, and so she catches a break.

Judge Gale: “We accordingly construe Lesley Hudson as having filed the petition in this case on behalf of herself and Mark Hudson. Because he is deceased, Mark Hudson is not a proper party to these proceedings. The interest of Mark Hudson’s estate in this litigation can be represented by any individual with capacity under Rule 60(c), and the Court is authorized by Rule 63 to order substitution of such individual as a party. Local law is applied to determine who has the capacity to be substituted as a party.” Order, at p. 2.

So, since this is a California case, Judge Gale checks California law, decides Mark’s and Lesley’s kids are apparently heirs at law, and on filing the requisite California affidavit can pursue whatever remedies the late Mark might have had. So they get a thirty-day window to show up, both to contest the deficiency, and also to oppose or support Lesley’s request for Section 6015 relief.

Now for the designated hitter, same petitioner, same docket number. Here Judge Gale got his dates wrong, but he allows Lesley to fight her innocent spouse claim as to the first of the two years at issue, even though her petition isn’t timely as to the deficiency for that year.

Lesley filed her petition May 29, 2012, bearing legible USPS postmark May 22, 2012. IRS first can’t find the 2008 deficiency, but when they do, it was mailed October 26, 2011, so while Lesley is timely for the 2009 deficiency, she’s too late for 2008.

Judge Gale: “However, we will not dismiss the case at it relates to 2008 entirely, because we construe the petition as also seeking our review of petitioner’s request for innocent spouse relief for that year. See sec. 6015(e). All claims in a petition should be broadly construed so as to do substantial justice, and a petition filed by a pro se litigant should be liberally construed. In the petition, petitioner references her filing of a request for innocent spouse relief for 2008 and 2009, and articulates reasons why she believes she should not be jointly and severally liable for the deficiencies asserted for those years. Respondent attached to the answer a copy of the Form 8857, Request for Innocent Spouse Relief, petitioner filed with respect to 2008 and 2009, which was stamped ‘received’ by respondent’s Innocent Spouse Cincinnati Service Center on September 23, 2011.” Order, at p. 2. (Citations omitted).

OK, so Lesley is in as to her innocence, if she’s Section 6015 timely, even if she’s blown the Section 6213 deadline.

But here’s the date problem: “Section 6015(e) provides an individual taxpayer the right to petition the Tax Court to determine the appropriate relief available to the taxpayer under section 6015, if such petition is filed at any time after the earlier of: (1) the date the Secretary mails a notice of determination with respect to a taxpayer’s request for innocent spouse relief (so long as the petition is filed before the close of the 90th day after the date such a determination is mailed); or (2) the date which is 6 months after the date the taxpayer requests innocent spouse relief from the Secretary. Sec. 6015(e)(1)(A). Here, the parties agree that respondent has not issued a notice of determination with respect to petitioner’s request for innocent spouse relief. Six months after September 23, 2011, was March 23, 2012; accordingly, the petition timely invoked our jurisdiction to determine whether innocent spouse relief is available to petitioner for 2008.” Order, at p. 3.

Yes, if the petition had been filed March 22, 2012. But it wasn’t, was it? It was filed May 22, 2012, and that’s eight months, not six months.

I called chambers and left a message. Let’s see what reply, if any, I get. Following.

A common misunderstanding among Tax Court petitioners is who decides what is a small claims case. The $50K number is easy enough, but of what is it comprised?

Well, Section 7463(a) teaches us that it’s the amount of tax and penalties stated in the SNOD, less any concessions made by the petitioner.

So IRS sets the bar for what is a small-claimer, and what is a full-dress Tax Court case.

In John M. Germano & Carol J. Germano, Docket No. 12100-13S, filed 8/1/13, Ch J Colvin elaborates. IRS made a motion to drop the small-claims “S” from the docket number, because the deficiency was $65K. John & Carol answered “no amount Due [sic] in excess of 50,000″, Order, at p. 1.

IRS responded by saying that John & Carol had a loss on a stock sale in the year at issue, and IRS and John & Carol were trying to reach an agreed decision.

OK, says Ch J Colvin, but John & Carol conceded nothing, and IRS claimed $65K, so that’s the amount in dispute, and once the amount in dispute is over $50K, no small-claims treatment.

All is not lost, John & Carol: “We note that removing the small tax case designation does not preclude settlement of this case and that, if for any reason, the case should proceed to trial, petitioners could, prior to trial, move to convert this case to a small tax case upon demonstration that the amount in dispute does not exceed $50,000.” Order, at pp. 1-2.

But until then, it’s not a small-claimer.

Judge Paris cuts the corner close with a distinction between Section 6664 reasonable reliance and Section 6662 negligence in Donald L. Rogers and Vyon M. Rogers, 2013 T. C. Memo. 177, filed 8/1/13.

It’s another tale from the parsonage (see my blogpost “Tales from the Parsonage”, 7/22/13), except once again it isn’t a parsonage because Pastor Don’s group, Pentecostals of Wisconsin (PoW), never did the Section 107 mambo as to the $35K in mortgage and utility payments Pastor Don received for the home he and Vyon owned.

But PoW did incorporate Pastor Don in Nevada, as a “corporation sole”, and Pastor Don did sign a “Vow of Poverty, Statement of Faith”.

Now of course none of this exempts Pastor Don from income tax or self-employment tax (as he never timely filed Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners, and the time limit is strictly enforced).

I’ll leave the legalistic unpacking to Judge Paris. Simply put, the poverty gig would work if the clergyperson was paid by a third party, the pay was assigned by the clergyperson to the religious order, and the order fed, housed and clothed the clergyperson.

Judge Paris: “Here, petitioners did not receive a salary from a third party and did not remit any income to PoW by assignment. Mr. Rogers provided services to PoW and received compensation for those services in the form of payments PoW made on petitioners’ behalf. The critical difference is that, in this case, there was no income transferred to PoW from petitioners pursuant to their vow of poverty. The mortgage payments PoW made were applied toward a house owned solely by petitioners and titled in petitioners’ names. Similarly, the credit card payments and utility payments PoW made on behalf of petitioners served only to benefit petitioners in meeting their basic living expenses. It would be a mischaracterization of the facts to state that petitioners were paid a ‘salary’ as agents of PoW and that this salary was assigned for the benefit of PoW when, in fact, no such salary was paid and all income issued to petitioners was used solely for their benefit. Accordingly, the authorities cited by petitioners are inapplicable in this particular case.” 2013 T. C. Memo 177, at p. 9.

OK, income tax and SE are off the table. How about penalties?

Well, Pastor Don and the PoWs didn’t rely on advice from the Nevada outfit they hired to incorporate Pastor Don; they had the plan in place and just hired the Nevadans to make it happen. Besides, trying the corporation sole dodge while not even applying for exemption from SE tax does not show good faith reliance. So Section 6664(c)(1) is also off the table.

But how about the negligence penalty? If there is a substantial understatement of tax due (the five-and-ten, $5000 or 10%) after the Rule 155 bean-count, then the penalty will apply.

But Judge Paris is generous: “While the Court finds that petitioners’ mistake of law in this instance was not reasonable for the purposes of establishing reasonable cause, the Court will not go so far as to say that petitioners acted with negligence or disregard of rules and regulations in the preparation of their 2007 return. Accordingly, if petitioners’ understatement of income tax for tax year 2007 does not exceed $5,000 (i.e., it is not a ‘substantial’ understatement), petitioners will not be liable for the accuracy-related penalty for an underpayment of tax attributable to negligence under section 6662(b)(1).” 2013 T. C. Memo. 177, at pp. 13-14.

Note that Section 6662 distinguishes between negligence or disregard, and substantial understatement; even if taxpayer isn’t negligent or disregardant, if you’re over the five-and-ten, you’re penalized.

Jimmy Van Heusen and Sammy Cahn (to say nothing of Ol’ Blue Eyes) to the contrary notwithstanding (as the expensive lawyers say), you can have one without the other, when one spouse is out of the country, even if the other is right here. That is, you can have the 150-day extended window for filing a petition.

You may remember my blogpost “Inside, Outside”, 2/28/13, when Deb Smith got the extender from Judge Foley, even though the whereabouts of her (presumptive) spouse were unknown. And apparently Deb’s spouse wasn’t named in the SNOD.

STJ Daniel A. (“Yuda”) Guy, Jr., has one where both spouses are named in the SNOD, and gives us a designated hitter on a day when not much else is doing around 400 Second Street, NW, in the District.

The order is Hichem Tounsi & Rita Tounsi, Docket No. 28674-12S, filed 7/31/13.

Hichem might or might not have been around (STJ Guy isn’t sure), but no doubt the petition arrived on Day 105, too late for the 90-day cutoff but timely for the 150.

STJ Guy: “Mrs. Tounsi was outside the United States in Costa Rica at the time the notice of deficiency was mailed, and she experienced a delay in receipt of the notice. Although we are uncertain as to Mr. Tounsi’s whereabouts at the time the notice of deficiency was mailed, where a joint notice of deficiency is sent to a husband and wife, and either of them is outside the United States, the 150-day rule applies to both.” Order, at p. 1 (Citations omitted, but STJ Guy earlier cited Judge Foley’s opinion in Deb Smith’s case).

They might go together like a horse and carriage, but either one can trigger the 150-day extender.

It’s an old family joke that dates back to a high school choral presentation, wherein one of my nearest and dearest performed a song of that name, but I’ll spare the participants any further elaboration. As there were no Tax Court opinions or designated orders today, July 31, I decided to blog David Franklin & Ronda Ching Day, Docket No. 1770-12L, filed 7/30/13, at which the old memories came flooding back.

Getting to the order, when Dave agrees to move the trial of his CDP from Honolulu, so as to “have petitioners’ case tried in any west coast city”, Judge Gale relents and doesn’t toss Dave and Ronda for failure to prosecute.

Apparently, Dave and Ronda actually live in Hawaii. Dave claims he skipped his trial date (even though he knew about it six months in advance), because he had to teach an MBA course, given by the University of Hawaii, in Vietnam, and couldn’t get any substitute professor in time.

When I was scheduled to go to Vietnam I couldn’t find a substitute either. But my trip was under rather different circumstances. And there weren’t a lot of MBA students around at the time.

Dave sought a continuance (that’s an adjournment) by fax, but he sent the fax on the eve of his departure to the fax number reserved for Final Status Reports. Dave claimed IRS counsel told him to use that number, even though the Pre-Trial Order expressly stated that any other faxes would be tossed unread.  Judge Gale said it wasn’t IRS counsel’s job to teach Dave what to do.  And of course the time difference between Honolulu and 400 Second Street, NW, in Our Nation’s Capital, means his fax was too late anyway.

Moreover, Dave never participated in the pre-trial stipulation process nor did he file a pre-trial memorandum. Dave was a trifle nonchalant in his litigation techniques.

Judge Gale has little patience for Dave’s tactics, and is about to deny his motion to vacate the order dismissing his petition for want of prosecution, when Dave agrees to move the place of trial to any West Coast city.

Judge Gale: “Nevertheless, dismissal of a case is a harsh sanction and trial courts should consider less drastic sanctions than dismissal when they are available. See eg, Edelson v. Commissioner, 829 F.2d 828, 831 (9th Cir. 1987); Henderson v. Duncan, 779 F.2d 1421, 1434 (9th Cir. 1986); Nevijel v. North Coast Life Ins. Co., 651 F.2d 671, 674 (9th Cir. 1981). While petitioner’s conduct of this litigation thus far is not flawless, we are now satisfied that his (and his co-petitioner’s) failure to appear for trial on June 10 did not evidence a disregard of their obligations to pursue their claims. We are also satisfied that an alternative to dismissal exists. Petitioner–recognizing that his failure to appear at the trial set for June 10 could postpone a trial in this case for an additional year if the trial were to be held in Honolulu–offered in his June 7, 2013 letter, and reiterates in his Motion to Vacate Decision, a willingness to have petitioners’ case tried in any west coast city. As this is a collection case where prompt resolution is especially important, petitioner’s suggestion of an alternate place of trial offers a means to minimize the delays that would otherwise arise from his untimely disclosure of his commitments conflicting with the original trial date. In these circumstances, the Court will vacate its decision of dismissal and, as a less drastic alternative to dismissal, set this case for trial at the Court’s trial session in Los Angeles, California….” Order, at p. 3.

Dave is saved.

Interestingly, on this same date we have another order in a case set for trial in Honolulu, Adina & Haim Shechter, Docket No. 23677-12, filed 7/30/13. But trial didn’t take place when the case was called. The parties had reached a stipulated decision, said IRS counsel, and had exchanged a copy by fax, but needed more time to get a signed original, because petitioners live in Israel.

Sound familiar? See my blogpost “Delay of the Game”, 7/12/13. Petitioners were going to try the case in Honolulu, presumably bringing themselves, counsel, witnesses, physical and documentary evidence from Israel or wherever to Hawaii, but couldn’t overnight a stipulated decision?

As Judge Gale noted above, petitioner’s failure to appear in Honolulu could result in a year’s delay of the trial.

Maybe it’s time to reconsider Rule 140(a), which provides in pertinent part (as the expensive lawyers say) that “The petitioner, at the time of filing the petition, shall file a request for place of trial showing the place at which the petitioner would prefer the trial to be held…. The Court will make reasonable efforts to conduct the trial at the location most convenient to that requested where suitable facilities are available.”

If by choosing a place for trial as far distant from one’s own location as possible, not showing up and providing some lame excuse based on one’s own actions, one can get a year’s delay, why not delay the game, as there’s no appreciable sanction?

How about requiring that the taxpayer-petitioner show minimal nexus between the place of trial and the location of petitioner, counsel, witnesses or evidence, before giving petitioner a one-year free adjournment?

 I want to thank Mr. Patrick Temple-West of Thomson-Reuters for an interesting discussion of the politics surrounding Tax Court. As this is a strictly non-political blog, I’ll eschew any “summarization”, to use STJ Lew Carluzzo’s neologism (see my blogpost “Incomprehensible?”, 6/4/13), or commentary.

Our conversation was enlightening. The professors who have written on the subject (including but without in any way limiting the generality of the foregoing, as the high-priced lawyers say) Prof. Cords of Albany Law School, seem to think that all, or at least many, Tax Court cases are decided otherwise than on the law.

I think at best the conclusion is the old Scots’ verdict, “not proven.” But our telephone talk was a good excuse to delay going to the gym on a Sunday afternoon.

I pointed out in a previous blogpost that Constitutional arguments in Tax Court get a slightly polite version of the tramp’s toss; see my blogpost “Losing My Religion”, 1/17/13, where I noted that such arguments are usually found in protester cases and usually get blown away.

And I pointed out in a more recent blogpost how partners and tax matterers are supposed to tell the IRS where they are, when they change addresses or otherwise move around and about.  See my blogpost  “Wait Just A Minute, Mr Postma”, 7/23/13.

Now if this were just an ordinary mailing address case, I wouldn’t blog it, but it’s a twofer from Judge Thornton, with a recap of partnership-level due process notice and how it’s supposed to be done.

So let’s take a brief look at Estate of Albert Simon, Deceased, Ellen S. Simon, Personal Representative And Ellen S. Simon, 2013 T. C. Memo. 174, filed 7/29/13.

The facts are the usual; the Late Al, before he was late, got himself and Ellen into a son-of-BOSS, a Section 752 mix-and-match of unrecognized gains and recognized losses in a pair of digital option trades. For some quick background, see my blogpost “Woodshedding Your Experts – Stobie Creek Part Deux”, 1/10/11.

Except for a 1% partner, who is nameless and apparently blameless, all the players are alter egos of the Late Al. But when IRS goes hunting for someone to nail with the NBAP, Al isn’t listed as tax matterer (nobody is), so there follows a series of letters, some from Al but most from IRS.

Ellen claims IRS knew about the Late Al, and should have sent the NBAP and FPAA to him. She claims she wasn’t given proper notice.

But IRS cites the then-temporary, subsequently permanent, regulations for letting IRS know partners’ whereabouts. Judge Thiornton: “The IRS’ duty to give a direct or indirect partner notice under section 6223(a) arises only to the extent that the IRS is furnished with readily available information containing the name, address, and profits interest of the partner in either or both of two ways. See Murphy v. Commissioner, 129 T.C. 82, 86 (2007). First, the IRS may be furnished the referenced information through the tax return of the partnership under audit. See id. at 86-87; see also sec. 6223(c)(1). Second, the IRS may be furnished the referenced information through a written statement that meets the requirements of section 301.6223(c)-1T, Temporary Proced. & Admin. Regs., 52 Fed. Reg. 6784 (Mar. 5, 1987).” 2013 T. C. memo. 174, at p. 15 (Footnote omitted, but I covered this in my blogpost “Wait Just a Minute, Mr Postma”, op. cit., as the high-priced lawyers say.)

Ellen says she got a packet of stuff from IRS during the pre-trial show-and-tell that shows IRS knew right well where she and the Late Al were.

So what, says Judge Thornton. You never sent in the magic paper with the Big Five required points.

“Due process requires that notice be ‘reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.’ Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950); see also Byrd Invs. v. Commissioner, 89 T.C. 1, 6-7 (1987), aff’d without published opinion, 853 F.2d 928 (11th Cir. 1988). The Secretary, in part through specific congressionally delegated authority, has provided a reasonable regulatory procedure to meet that requirement.” 2013 T. C. Memo. 174, at p. 21.

Most important, Ellen never explained why she and the Late Al never sent in the magic statement, or why the Late Al put the old, invalid address on the tax return for the year at issue, when he filed it long after he, Ellen and the partnership had moved away.

The case has an interesting discussion of how penalties are to be dealt with in TEFRA partnership-level adjustments, but those are not often met with by the in-the-trenches preparer, for whom this blog is written. If you do encounter such a situation, where the Section 6662(h) 40% hammer and the Section 6651(a) negligence hammer are about to descend upon your partner-client, read Judge Thornton’s explanation.