And a Sequel

I promised no personal comments; this is a blog designed for the in-the-trenches tax preparer, and they have little time for “True Confessions”.

But I have to celebrate the rebirth of my old computer, Sir Andrew (I’ll explain the name infra, as the law review writers say).

In my most recent blogpost “A Sad Goodbye”, 7/5/13, I lamented his passing. Happily, like Mark Twain, the report of his death was an exaggeration. I removed the defective battery, pounded his back with my fists (CPR to the rescue!), and howled imprecations and invocations.

Sir Andrew returned to life. I backed up his innards, and here he is.

As the old Scots ballad put it:

“‘Fight on, my men,’ says Sir Andrew Barton,
‘I am hurt, but I am not slain;
I’ll lay me down and bleed a while,
And then I’ll rise and fight again.’”

Sir Andrew’s fighting again. Just in time for my 500th blogpost.

And now the sequel. I do get feedback from practitioners, and their replies wind up in the “Responses” to the blogpost at issue.

Very rarely do I get feedback from the taxpayer him/herself. And those I don’t post, as almost invariably they add nothing to the principles discussed.

But here’s a comment from the taxpayer’s spouse, a co-petitioner, that rounds out the facts of the case. See my blogpost “No Good Deed”, 4/18/13, for background.

“There’s a postscript to this story and it goes something like this — karma is a harsh mistress . . . Ruth died in April 2012, and the IRS chief Steven Miller was ousted in May 2013. To paraphrase Hamlet, “There are more things in heaven and earth, Mr. Taishoff, than are dreamt of in your philosophy.”  P.S.   Haven’t yet heard about the US Tax Court, but won’t be surprised when I do.” –Christina Martin

Ms. Martin, there are those who would agree with you. As for me, I need material for this blog.

I do not interject personal notes here, but I must make an exception just this once.

Today I bade farewell to my trusty MacBook 13.3, vintage 2007. His hard drive crashed catastrophically. The repairers at the shop I’ve used since 1993 informed me that, while they could install a replacement for not very much, all my data was recoverable only at ruinous cost.

I remember reading Ernie Pyle’s lament when his typewriter broke while he was covering the Italian campaign. While my writing isn’t within a mile of the finest reporter to come out of World War II (although Ernie didn’t; he was killed on Ie Shima in the Ryukyus, during the Okinawa campaign), I felt his pain.

What to do? I could have installed a “new” hard drive (which Apple Corp hasn’t made in years, but apparently my repairers have a few hidden beneath old pizza boxes) at a nominal cost, and recover my data on the “old” hard drive for the aforesaid ruinous cost, and have a rebuilt and restored, but still obsolete, device, for half the cost of the latest product of The House That Jobs Built, or spring for a new friend with the latest and greatest.

Helps to have a family member who works for The Real Big Apple. Looks like I’m going to acquire a new friend.

Rest in peace, old buddy: it’s been a great trip, lots of laughs. I hope when I go, I go as fast and with few regrets.

Oh yes, I’m writing this blogpost on a computer at work; it’s an HP tower, but it works.

I spent yesterday on my computer (of which more in a subsequent blogpost) and at the television screen, watching the racing at Beautiful Belmont Park. Of course there was mention of a horse named Read the Footnotes; but I’d like to suggest a name for a potential Triple Crown winner – Read The Rules.

Ch J Colvin has that lesson for an attorney who shall remain nameless in Howard E. & Judith A. May, Docket No. 14545-12L, filed 7/5/13.

Howdy and Judy file a motion for leave to amend their petition, embodying in the motion their proposed amended petition. This is the way we do things in State court (or at least in the State where I practice), but the problem here is that the motion, with the amended petition therein embodied, was e-filed.

First, per Rule 41, amended petitions cannot be embodied in a motion to amend, but must be separately filed. And, per Rule 26(b), all petitions and amendments thereto must be paper-filed and manually-signed by the petitioner or their USTC-admitted representative.

So Howdy’s and Judy’s motion for leave is denied, even though IRS doesn’t object to the amendment.

Judge Colvin does object, so go back and do it right.

I’ve often praised Judge Gustafson’s solicitude for the petitioners-taxpayers who find themselves in, or approaching, or unable to reach, his courtroom. See my blogpost “We’ll Come To You”, 9/18/12, for example, where he offers to visit John Carter in the Stony Lonesome to hear John’s case. And he gives free lessons on the law; see my blogpost “We’ll Help You”, 3/20/13, where he helps out George and Rosalie Lovell who ran into the 90-day SNOD barrier.

So it’s no surprise that, fresh from the Independence Day barbecue and fireworks, Judge Gustafson is on the case of Eugene M. & Mary K. Bond, Docket No. 29706-11, filed 7/5/13.

Message to IRS: don’t ambush the energetic.

The issue here is the $1500 residential energy credit under Section 25D. Euge and Mary K claimed it, but IRS merely put “0” in the SNOD, and the explanation of the changes to Euge’s and Mary K’s MFJ 1040 said nothing about energy.

Judge Gustafson sustained IRS’ numbers over those of Euge and Mary K on everything but the energy credit.

Euge and Mary K claim they were ambushed, as the IRS didn’t properly raise the disallowance until computation time. IRS says “if you didn’t litigate it, you waived it.”

Judge Gustafson: “The disallowance of the credit appears at page 4 of the NOD–but it does so simply as a zero entry on line 8a in a computation. As far as we can tell, no other reference to or comment on the energy credit is made in the notice. For example, the ‘Explanation of Items’ (pages 12-13) explains the other adjustments but not the disallowance of the energy credit. Petitioners attached to their petition some of their pre-NOD correspondence with the IRS, but as far as we can tell none of it mentioned the residential energy credit. It appears that the IRS’s examiners never addressed the residential energy credit.” Order, at p. 1.

Note that when Judge Gustafson uses the abbreviation “NOD”, he means Notice of Deficiency. To prevent confusion with Notice of Determination, I use the abbreviation “SNOD” for Statutory Notice of Deficiency, the so-called 90-day letter, reserving the abbreviation “NOD” for Notice of Determination at Appeals.

Anyway, Judge Gustafson is troubled by IRS’ card-up-the-sleeve approach to Euge’s and Mary K’s energy credit.

“Thus, we are not completely certain that the isolated and unexplained zero entry in the NOD actually reflects a determination to disallow the claimed energy credit. Moreover, assuming that it does, it appears that the petitioners did not realize that the energy credit had been disallowed but believed instead that the deficiency determined by the IRS resulted entirely from the explained adjustments. It appears that respondent’s counsel believed the same, since the pretrial memorandum filed October 2, 2012, stated (at 4), ‘The deficiency was based on adjustments to medical and dental expenses, charitable contributions, and miscellaneous itemized deductions in the amounts of $13,929.00, $3,057.00, and $11,630.00.’ Our review of the file in this case seems to show that neither petitioner nor respondent ever made any reference to the energy credit in any filing nor in any oral statement at trial or elsewhere. The Court has sympathy for petitioners’ manifestly genuine surprise on this issue and is concerned that an injustice may be done if decision is entered on the current record.” Order, at p. 2.

But stay cool, Euge and Mary K; you still have a ways to go. First, confer with IRS, do a show-and-tell and play nice. If you can settle the credit issue among yourselves, go to it, but keep Judge Gustafson in the status report loop.

If you can’t, here’s Judge Gustafson’s solution: “Petitioners may file a motion for reconsideration and for a further trial, to which they shall attach as exhibits the documents on which they rely to show their entitlement to the residential energy credit, and in which they shall make any argument that they intend to rely on to the effect that no determination was made as to the disallowance of the energy credit. Petitioners should note that the extraordinary remedy of a further trial will not be granted if petitioners fail to show that they have evidence sufficient to make a showing of their entitlement, since the Court will not reconsider the opinion and address this credit issue if petitioners have no documentary evidence that might carry their burden of proof; in that event, a further trial would apparently be futile.” Order, at p. 2.

In other words, Euge and Mary K, Judge Gustafson will help you if you help yourselves; but he’s not spinning wheels.

That’s Judge Gustafson – obliging and energetic.

While celebrating the birth of the American Republic (and remembering Ben Franklin’s famous caution: “A republic, madam, if you can keep it”), the blogger cannot rest from his labors if there’s a case to talk about.

So see my blogpost “Ignorance Is Bliss?”, 10/10/11, taking note of the subtitle “Gude faith, he maunna’ fau’ that”, in the words of Scotland’s greatest.

It’s not ignorance, but good faith that gives a win to Charles William & Charlotte Ann Ewing, Docket No. 22485-11S, a small-claimer filed 7/3/13.

As school is out at Tax Court today, I went back to yesterday’s crop for my holiday post, and Chas & Charly catch a break from STJ Daniel A. (“Yuda”) Guy, Jr., when Citibank drops a Form 1099-C after Chas settles with them on a teaser-rate credit card dispute.

And STJ Yuda gives us his conclusions via an off-the-bencher as a bonus.

STJ Yuda: “… Mr. Ewing received an offer from Citibank to borrow funds and pay low interest charges of 3.9% on the borrowed amounts. The ‘fine print’ at the bottom of the offer stated in relevant part: ‘However, if you default under any Card Agreement that you have with us, we may immediately increase the Annual Percentage Rate on all balances (including any promotional balances) to a variable default rate of 24.74%.’ Mr. Ewing testified that he accepted this offer….” Opinion, at p. 4.

Chas also testified he had problems making timely electronic payments on Citibank’s website, so Citibank sent him a letter jacking his APR to extortion, whereupon he protested and kept paying at the teaser rate until Citibank stopped taking his payments and sued him.

Chas went on defense, and the case settled with Chas paying the balance at the teaser rate. But neither party admitted liability in the settlement stipulation, and Citibank reserved the right to send Chas a 1099-C, which they did.

Chas never reported the COD, IRS send him a SNOD, and again Chas goes on defense.

IRS SNODs are presumed correct, of course.

STJ Yuda: “Petitioners rely on Zarin v. Commissioner, 23 916 F.2d 110, 115-116 (3d Cir. 1990), rev’g 92 T.C. 1084 (1989), for the proposition that a good faith dispute between a lender and borrower would cause a settlement not to give rise to an accession to income from cancellation of indebtedness. See Rood v.  Commissioner, T.C. Memo. 1996-248, n.13, aff’d without published opinion, 122 F.3d 1078 (11th Cir. 1997).” Opinion, at pp. 8-9.

While Chas’ records “leave something to be desired”, as STJ Yuda puts it, he did pay what was due under the teaser-rate deal, and he and Citibank had a good faith dispute about whether he defaulted. If there was a default, Chas claimed it was Citibank’s defective online payment system that caused it.

Anyway, the stipulation of settlement in State court didn’t expressly resolve any disputed issue (STJ Yuda calls it “an agreement to disagree”) and even though it expressly reserved to Citibank the option of filing a Form 1099-C, still Chas paid the balance per the teaser-rate term and Citibank accepted that.

STJ Yuda: “In sum, Mr. Ewing engaged Citibank in a legitimate dispute regarding the amount of debt, and in the light of the settlement the parties entered into we are unable to conclude that Mr. Ewing paid any more or any less to Citibank than he owed.” Opinion, at p. 11.

Chas wins it. Happy Fourth of July, Chas & Charly.

The IRS has sent a heads-up today to all tax pros as follows:

“This is a reminder that due to the current budget situation, the IRS plans to be closed on July 5, July 22 and August 30. The MeF system (Production and ATS) will not be available from 10:00 p.m., Eastern of the prior day until 10:00 a.m., Eastern of the following day, on these dates. For example, when the closure falls on a Friday, the system will be unavailable from 10:00 p.m., Eastern on Thursday until 10:00 a.m., Eastern on Saturday.”

Note- MeF is Modernized e-File.

Specifically to Mr. J. P. Finet, now or formerly legal editor of BNA Daily Tax Report (n/k/a Bloomberg BNA, as our Mayor’s corporate octopus has entangled BNA), who brought the Coffey case to my attention back in December, 2011. See my blogpost “Somebody Does Read This Blog”, 12/4/11.

Well, my comment on Coffey may have been short-lived, but not the case, as witness Melissa Coffey Hulett a.k.a. Melissa Coffey, Et Al., Docket No. 30676-09, filed 7/3/13, a designated hitter. And who is more fit to wade through the silt stirred up by this latest tale from our insolvent Islands in the Sun but The Great Dissenter, a.k.a The Judge Who Writes Like a Human Being, His Honor Mark V. Holmes?

Yes, it’s back to the Virgin Islands and Section 932. You’ll remember my exegesis anent Arthur I. Appleton, Jr., Petitioner, and The Government of The United States Virgin Islands, Intervenor, 140 T. C. 14, filed 5/22/13, when IRS lost on SOL grounds.

Mr Finet thought back in December, 2011, that Coffey’s case differed from Appleton’s in point of the Virgin Islands government’s right to intervention. It didn’t, but Judge Holmes says it differs based on whether la famille Coffey were bona fide residents of the VI.

See my blogpost “The Non-Virgin Islanders”, 3/13/11, the tale of la famille Vento, whose plight was confirmed by Third Circuit earlier this year.

Judge Holmes, once again disdaining the partitive genitive: “A very considerable chunk of the stack of motion papers from the Coffeys, the Commissioner, the Government of the Virgin Islands, and a couple amici curiae is made up of arguments about whether the Coffeys fit within the exception of section 932(c) that would let them file with the Virgin Islands alone. That argument focuses on section 932(c)(4)–the Commissioner contends that 932(c) makes a taxpayer who fails to perfectly report her income tax liability or fully pay her income-tax bill or correctly conclude that she’s a bona fide Virgin Islands resident have to file with both the IRS and the Virgin Islands, just as she would if she wasn’t a Virgin Islander at all. Everybody else who filed papers disagrees with the Commissioner, and just over a month ago, so did we. In Appleton v. Commissioner, 140 T.C.__,__(slip op. at 31-32)(May 22, 2013), we held that although the Commissioner was correct in arguing that a taxpayer who doesn’t meet all the requirements of section 932(c)(4) ‘falls back into the Federal reporting and payment regime,’ that regime directs him to file his return with the Virgin Islands Bureau of Internal Revenue, not the IRS.

“There’s one big difference between Appleton and the Coffeys’ cases: Everyone agreed that Appleton was a bona fide Virgin Islands resident. That is not true here: The Commissioner specifically determined in the notice of deficiency that Judith Coffey was not a bona fide resident for the 2003 and 2004 tax year.” Order, at p. 2 (Footnote omitted, but it says that since Judy has the higher AGI, her residence is the one that counts for tax residence on a joint return).

Since the Form 1040 instructions for the years at issue told the Coffeys to file both with IRS and BIV if not bona fide VI residents, SOL hasn’t run against IRS if Judy wasn’t bona fide.

But bona fide depends, as Vento teaches us, upon an eleven-factor test, divided into four groups, which said groups are “taxpayer’s intent; taxpayer’s physical presence; taxpayer’s social, family, and professional relationships; and taxpayer’s own representations; see also Appleton, slip op. at 11 n.9 (citing Vento); cf Huff v. Commissioner, 135 T.C. 222, 227 n.1.” Order, at p. 3.

But neither the Coffeys nor IRS put anything about Judy’s bona fides in their moving papers. Now that’s not their fault, as they were fighting the Appleton battle before Appleton was decided, so they couldn’t know.

But since summary judgment, which is what the parties are asking for, is issue-finding and not issue-determination, there is a big materially-factual issue. Was Judy a bona fide VI resident during the years at issue? So it’s time for the drivers’ licenses, the library cards, the club memberships and all that jazz.

Mr Finet, please copy.

Some of us who were born in the first half of the last century of the previous millennium may remember reading of “the Regiment in ‘ollow square”  as the Rogues’ March was played and the soon-to-be dishonorably discharged were marched in to be degraded. And which of us can forget José Ferrer’s impassioned cries in the 1958 film classic “I Accuse!”, as “France degrades an innocent man!”?

Well, today Tax Court’s Committee on Admissions, Ethics, and Discipline suspends or disbars nine attorneys, all of them on reciprocals from Federal or State Courts.

And only one of them, a many-times-decreed vexatious litigant, proclaims his innocence, and it falls flat.

So there but for the grace of you-know-Whom go any of us. And may none of my readers ever hear the Rogues’ March played for them or any of their colleagues.

If you’re interested, here the link to these sad tales.

Or rather, closing the book on Securitas Holdings, Inc. and Subsidiaries, Docket No. 21206-10, this iteration filed 7/2/13, Judge Buch confirming the conclusion of STJ Lew (What a Great Name!) Carluzzo back on 5/29/13 that Securitas, for itself, its holdings and its subsidiaries, waived its Section 7525 privilege, and must lay down all its communications with its tax adviser.

For the run-up, see my blogpost “Privilege Lost”, 5/29/13.

STJ Lew was in only to decide the evidentiary question: were the documents privileged per Section 7525, and, if so, had Securitas waived the privilege by spilling some of the beans to the Illinois State Department of Insurance? STJ Lew said yes, you’ll recall, the documents were privileged but the Illinois letter waived subject matter privilege, that is, every document dealing with the subject matter was unprivileged.

Judge Buch gets the reconsideration motion because he’s going to try the main case later on this month.

Judge Buch: “Subject matter waiver occurs when a party discloses privileged information to its advantage, such that fairness dictates that other privileged information concerning the same subject matter should fairly be considered to place the disclosed information in context.” Order, at p. 1, footnote 2.

Securitas, obviously less than convulsed with delight at STJ Lew’s stripping of the veil over their hush-hush discussions with said adviser, moves for reconsideration.

They lose.

Securitas argues that FRE Section 502 would keep the documents privileged. No it wouldn’t, says Judge Buch, and anyway Securitas never raised Section 502 before, and reconsideration is not the place to argue what you should have argued before.

Section 502 only protects disclosures made in state proceedings. But the letter that made the disclosure wasn’t part of any proceeding, that is, “‘the regular and orderly progression of a lawsuit, including all acts and events between the time of commencement and the entry of judgment’. Black’s Law Dictionary 1324 (9th ed. 2009).” Order, at p. 6, footnote 12. The letter was part of an application required by Illinois law whether or not there was a proceeding.

Centaur, the Securitas subsidiary in question, was in a rehabilitation proceeding, a species of insolvency proceeding, but the letter would have had to have been written, proceeding or no proceeding, if Centaur wanted to do whatever it was asking Illinois for permission to do.

Frankly, I don’t think much of this argument. There was a proceeding, akin to a bankruptcy, and it involved rehabilitating Centaur. And even though the Committee report on Section 502 says it wasn’t intended to change settled law on waiver of privilege, it does speak to the waiver in the State proceeding context, so I suppose it merely repeats the settled law. Whether the letter would have been required without a proceeding is beside the point, as if there hadn’t been a proceeding there never would have been a letter.

Finally, Securitas claims STJ Lew didn’t have authority to render a “decision” per Section 7443A)(c), as Section 7443A(b)(7) only gives him the right to hear, not decide, a case other than those specifically listed in Section 7443A(b)(1) through (6), not the catch-all provision (7). And this is a (b)(7) case.

Judge Buch: “Securitas correctly observes that section 7443A(c) limits the authority of a special trial judge to make a decision of the court in matters assigned under section 7443A(b)(7); however, in this instance, Special Trial Judge Carluzzo did not make a ‘decision’ as that term is used in section 7443A.

“In the Tax Court, ‘decision’ is a term of art. In a deficiency proceeding such as this, the ‘decision’ is the document that is entered showing the amount of the deficiency (if any) that the Court has determined. Special Trial Judge Carluzzo issued an interlocutory order, not a decision.” Order, p. 7.

And Securitas’ argument that Rule 183, which applies to cases “tried” by an STJ, wasn’t followed is irrelevant. There was no “trial”; there was a hearing on a motion.

Securitas loses. But if I were them, and if an appeal is possible, I’d appeal.

As always, I welcome comments from practitioners.

One of the most often requested (if not the most often requested) relief in a CDP is to contest the underlying tax liability. Taxpayers’ batting averages in Tax Court are far from encouraging in that respect.

Most often the response from Tax Court is “you didn’t petition the SNOD.” And where the amount sought to be collected comes straight from the taxpayer’s own return, the response is “you said it and you’re stuck with it.”

But here’s one where the taxpayer said it, and gets a chance to contest it. It’s George H. & Felomina F. Patton, Docket No. 16365-12L, filed 7/1/13, another Judge Laro off-the-bencher.

I am indebted to Judge Laro for printing the transcripts of the off-the-benchers. I know you can’t cite them and they aren’t precedent, but they offer a valuable insight into what Tax Court Judges think.

Anyway, George & Felomina filed their returns for the years at issue, but didn’t pay the taxes shown. IRS filed an NFTL, and George & Felomina asked for a CDP.

Here’s George’s story, in his own words, as told to Judge Laro: “I am 67 yrs. In August 2011, permanently disabled public safety officer since 1984 living on pension. paid medical insurance since retired not given credit for. Spouse paid withholding not given credit for. Government placed us in a hardship condition with its continuous trespass with water on our commercial property. it destroyed our tax record and made us unable to ascertain our deductions and correct amount of tax. File states abatement being considered. (emphasis added). “Decision, at p. 5.

George & Felomina claimed the NFTL should be withdrawn because “Responsible [sic] for correct amount of tax never ascertained.”  Decision, at p. 5.

George & Felomina got their CDP, but “(T)he settlement officer’s Case Activity Record, which would contain the settlement officer’s notes of what transpired during the CDP hearing, is not part of the record.” Decision, at p. 5. Of course, this is a motion  for summary judgment, so IRS claims George and Felomina never gave the SO the financial information requested until after the CDP, but when the SO tried to contact them with an installment offer, they didn’t respond.

Thus IRS’ position is the usual: they had their chance and they blew it, so abuse-of-discretion is the only thing to decide.

Judge Laro: “Contrary to respondent’s assertion, petitioners contested their underlying liabilities in their CDP request. The CDP request clearly stated that petitioners believed they were not given credits or deductions for certain tax withholdings and medical payments. The CDP request also claimed that petitioners’ tax records were destroyed by the ‘continuous trespass with water’, preventing petitioners from ascertaining their deductions and correct amount of tax. These statements together clearly show that petitioners believed the tax liabilities that they reported on their returns to be incorrect. Because ‘underlying tax liability’ referred to in section 6330 (c) (2) (B) encompasses self-assessed tax liability, petitioners were entitled to challenge the liabilities underlying respondent’s NFTL even though they had reported them on their own returns. Montgomery v. Commissioner, 122 T.C. 1, 7-8 (2004).

“Even when a taxpayer has made the underlying liability an issue in his CDP request, he is deemed to have abandoned the claim if he fails to pursue it in his CDP hearing. Schwartz v.  Commissioner, T.C. M:emo. 2008-117, 95 T.C.M. (CCH) 1427, 1430 n.9, aff’d, 348 Fed. Appx. 806 (3d. Cir., 2009). Here, respondent has failed to submit the Case Activity Record as an exhibit to his motion. This is problematic because the Case Activity Record would have allowed us to determine whether petitioners pursued the liability issue and presented evidence to support their claim during their CDP hearing. Viewing the facts in the light most favorable to petitioners as the nonmoving party here, we conclude petitioners properly raised the issue at their CDP hearing.”  Decision, at pp. 8-9.

Looks good for George & Felomina, right? Not quite.

They were late with their financial information and didn’t get back to the SO to discuss collection alternatives. So IRS wasn’t wrong when they refused to consider removing the NFTL or giving George & Felomina any collection alternatives. Those are off the table.

So, George & Felomina, it’s all about liability.