But If It’s Not a Return, It Doesn’t Count

There is much in the saga of Karl Gregg Weatherly and Jinny H.S. Weatherly, 2012 T. C. Memo. 320, filed 11/19/12, and Judge Morrison deals with it all, but I’ll confine my comment to the single point: if a filed document isn’t a return, it can’t be a frivolous return.

Instead of the usual Form 1040 with schedules for Karl’s photography endeavors, Karl filed a document styled “Notice of Affidavit Statement in Rebuttal to Internal Revenue Code Section 6011 For Year Period Ending December 31, 2003” (“Notice of Affidavit”), 2012 T. C. Memo. 320, at p. 2, footnote 2. Eventually Karl filed a Form 1040 for the year at issue. IRS issued a SNOD that appears untimely, but Karl never raises SOL, and so Judge Morrison deems it waived. Practice tip–unless patently erroneous, raise SOL every time.

“The Notice of Affidavit could qualify as a valid tax return, thereby relieving Karl Weatherly of liability for the addition to tax, only if it meets all four requirements of the test set forth in Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986). See Oman v. Commissioner, T.C. Memo. 2010-276, slip op. at 16-24 (explaining why the Beard test determines whether a return was filed for the purpose of the addition to tax under section 6651(a)(1) in cases appealable to the Court of Appeals for the Ninth Circuit). The four requirements are that the document must (1) contain sufficient data to calculate the correct liability; (2) purport to be a return; (3) be an honest and reasonable attempt to follow the tax laws, and (4) be executed under penalty of perjury. Beard v. Commissioner, 82 T.C. at 777. The Notice of Affidavit is a 40-page list of spurious pseudolegal arguments. It does not contain sufficient data to calculate Karl Weatherly’s correct tax liability for 2003. It does not purport to be a return. And it is not an honest and reasonable attempt to follow the tax laws. Therefore, the Notice of Affidavit fails the first, second, and third Beard requirements. It is not a valid return.” 2012 T. C. Memo. 320, at pp. 17-18. (Footnote omitted, but read it. Karl tries to save the day by claiming his screed is a “notice”, but that doesn’t fly.)

See Section 6702(a)(1). That section imposes a penalty for filing a frivolous return. Karl’s return wasn’t a return. Because he eventually filed a proper return (late), he gets the late-filing and late-paying additions to tax.

But Karl escapes the Section 6673 frivolous proceedings penalty, as he makes a last-gasp repentance. “The Weatherlys’ arguments that they are entitled to deductions for legal expenses (for 2003 and 2004), a theft-loss deduction (for 2003), and a net operating-loss-carryforward deduction (for 2004) were advanced by Karl Weatherly’s testimony. We did not reach the question whether his testimony was sufficient to secure the deductions because the Weatherlys abandoned their claims on brief. Nonetheless, their initial claims were not frivolous. We do not want to discourage taxpayers from litigating colorable claims. Moreover, we note that while the arguments Karl Weatherly made in his Notice of Affidavit were frivolous, the Weatherlys did not pursue any of those arguments in their briefs or testimony to this Court. Thus, we decline to impose a penalty.

“However, we emphasize to the Weatherlys that they should expect to be penalized if they make frivolous and groundless arguments in the future.” 2012 T. C. Memo. 320, at pp. 21-22.

So beware, Weatherlys. You engage in frivolity at your peril.

I’d been running a little contest for the best excuse for not filing a tax return (see my blogpost “Whose Line Is It, Anyway?”, 2/8/12), which I expanded to cover best excuse for not providing documents and records (see my blogpost “A Good Excuse”, 9/28/12). But today’s entry falls far short, and Judge Goeke gives the excuse short shrift in Fred Deutsch, 2012 T. C. Memo. 319, filed 11/15/12.

The cast of characters and mise-en-scene brought back memories. Petitioner Fred was a wheeler-dealer thirty years ago, but in this case he was collateral damage in the great savings & loan meltdown in the early 1990s, when the Resolution Trust Company was engineering Real Estate and Bank Bailout No. 1 (the first of many). He claimed to be what we used to call a “hard-money lender”, one who lent quickly and without the paperwork a bank or institution would require. One of the loans he made was to an architect I knew and worked with years ago (around 1990). He claimed the loans he made tanked, with huge losses, and he took a big hit on loans he personally guaranteed for his own deals.

Fred was represented by a colleague I respect, who drew a miserable fact pattern in this case.

Fred’s problem was he claimed NOLs from these defaulted loans and personal guarantees, but didn’t have documents. Fred claimed that long ago an IRS Special Agent went through his records, took them, and never gave them back, but the Special Agent did help the US Attorney give Fred a felony information, to which Fred pled guilty, specifically to signing a false return (see Section 7206(1)).

At Fred’s current trial, the Special Agent testified he gave them back ten years ago, either to Fred’s trial counsel or tax accountant, neither of whom testified.

Fred tried to shift the burden of proof to IRS because of the unreturned documents. “Petitioner submits that he has satisfied all requirements to shift the burden of proof as to the propriety of his claimed NOL deduction to respondent. In particular, petitioner refers the Court to respondent’s revenue agent report, prepared by Revenue Agent C at the conclusion of his examination of petitioner’s 1997 NOL claim, to demonstrate that credible transactional records were maintained and that he is entitled to an NOL deduction as a matter of law. Alternatively, he avers that, but for respondent’s alleged failure to return business records that were submitted for purposes of respondent’s criminal investigation into petitioner’s taxable year 1997, he would have been able to fully substantiate his NOL with supporting primary documentation. Petitioner, in essence, asserts that respondent’s supposed error should not be used against him in this case.” 2012 T. C. Memo. 319, at p. 10 (Name omitted; footnote omitted, but read it; as Judge Goeke is interested in the scope of Tax Court’s discretion to shift the burden. This isn’t the case, however.)

Nice try by my colleague, but hard-hearted Judge Goeke isn’t buying. “Logically, for petitioner to even proceed with this novel argument it was incumbent upon him to, at minimum, establish the chain of custody of the supposed evidence to demonstrate that the pertinent documents were never returned. At trial petitioner merely testified that he sent the documents to his criminal attorneys, who thereafter delivered the documents to respondent. Petitioner did not call Mr. Criminal Attorney or Mr. Tax Accountant at trial to verify this assertion. Special Agent C, however, testified that he returned petitioner’s documents to petitioner’s attorneys several months after the conclusion of the criminal case in 2002 or 2003. While Special Agent C was unable to specify whether he gave the documents to Mr. Criminal Attorney or Mr. Tax Accountant, he convincingly recalled that he personally returned those documents to one of their offices. This was the only credible testimony offered at trial concerning the present location of the documents.” 2012 T. C. Memo. 319, at pp. 12-13. (Names omitted.)

Even worse, “(P)etitioner never filed a motion to compel respondent to produce the records he allegedly possessed nor made any effort to inform the Court that all reasonable attempts to locate the relevant documents were exhausted. Instead, petitioner demonstrated that he was content to proceed in this case with an indeterminate record; however, we find this clearly insufficient to shift the burden of proof.” 2012 T. C. Memo. 319, at p.14.

Compare and contrast with Andrew M. Ross, the star of my blogpost “A Good Excuse”, supra as the high-priced lawyers say. Of course, Andy drew STJ Armen, The Judge With a Heart, who buys Andy’s tale (backed up with copies of a search warrant and an FBI inventory) that his documents were grabbed by the Federales, and that Andy’s attorney strove mightily to get the documents back, to no avail.

But here Fred was content to rely on his own testimony alone, a broken reed. And absent papers, Fred’s case goes south, just like his loans, guarantees and NOLs.

See my blogpost “Passive Aggressive”, 8/8/12, for the story of Joe Veriha.

And now Part Deux, the story of Francis J. Dirico and Jennifer Dirico, 139 T. C. 16, filed 11/13/12, and Frank’s self-rented land and radiophone towers.

Frank was a tinkerer with radios, and in the early cellphone days he ran what was called SMR, “…a pre-cellular-telephone-technology, push-to-talk radio system with some telephone capabilities.  Before the cellular telephone industry matured, SMR was an attractive technology, offering party-line or intercom-like services to such users as security companies, plumbers, electricians, construction companies, and tow-truck and rubbish companies.” 139 T. C. 16, at p. 5. SMR was a good business until cellphones took over, and Frank had to give up some frequencies to the cellphone providers.

Frank had a wholly-owned Sub S, that leased land and communications towers that Frank owned and built, to various SMR and cellphone operators. Frank had some losses and some profits from leases of towers, and some losses from leases of raw land with no towers.

Frank’s Sub S ICE, “is liable for repairs except those ‘required because of the fault or negligence of * * * [the licensee] or its designated maintenance company’, in which event the ‘licensee’ becomes responsible for the repairs.  ICE, as lessor or ‘licensor’, generally maintained each tower, made sure that it was painted and that the lights were working, picked up papers and other debris, plowed snow, etc.” 139 T. C. 16, at p. 8.

At first Frank worked a six-day week on the tower business, but subsequently slacked off. He reported the rents he got from his Sub S as passive, but the Sub S reported all its income as “ordinary business income”. IRS, using Section 469, recharacterized all Frank’s profitable rental activity as non-passive, but left his losses as passive.

It’s the old story: income from rental of tangible personal property is passive, regardless of material participation, and that applies to income from a Sub S passed through to the taxpayer. But the self-rental rule, Reg. 1.469-2(f)(6), would make the income active if the operation of the towers by the Sub S was a “trade or business.”

Judge Halpern finds the tower operations were not a trade or business. “…the fundamental fact that ICE’s leasing of towers and land to unrelated third parties was a rental activity within the meaning of section 469(j)(8) and section 1.469-1T(e)(3)(i), Temporary Income Tax Regs., supra. The few services that ICE provided in connection with its rentals (e.g., painting the towers, making sure the lights worked, plowing the snow around the towers) were equivalent to the services routinely provided by any lessor or landlord in order to make premises habitable by a lessee.  They were no more than supportive of ICE’s rental activities and did not turn those activities into trade or business activities as defined in section 1.469-4(b)(1), Income Tax Regs.  More importantly, ICE’s performance of those services did not bring its tower leasing activities within any of the exceptions to the definition of a rental activity that are described in section 1.469-1T(e)(3)(ii)(A)-(F), Temporary Income Tax Regs., supra.” 139 T. C. 16, at pp. 22-23.

So since all of Frank’s income from the tower leases is passive, he can offset his losses against his gains, as he was in no trade or business, either individually or through his Sub S.

As for the land-only leases, IRS claims that the 30% test of Reg. 1.469-2T(f)(3), that rental of property less than 30% of whose unadjusted basis is subject to depreciation per IRC 167 cannot be passive, knocks Frank out on the land leases, as land cannot be depreciated.

Frank says IRS raised this on brief, and therefore is untimely. He thought that since all his properties were grouped, more than 30% of the whole unadjusted basis of all his properties was subject to depreciation, so he put in no evidence on the land-only leases.

Judge Halpern: “…petitioners may have been surprised by respondent’s argument, but they were not prejudiced.  The issue respondent raises (application of the 30% test to the land-only rentals) presents an issue of law.  The fact that there were three land-only rentals in each of the years in issue is not in dispute.  Therefore, we fail to see what additional evidence petitioners were prevented from introducing in refutation of respondent’s argument (i.e., it is beyond dispute that 100% of each of those rentals consisted of nondepreciable land).  Moreover, any surprise to petitioners was mitigated by their ability to address the merits of respondent’s argument in their reply brief, which, in fact, they did.” 139 T. C. 16, at pp. 34-35.

So it’s a question of law, and both sides got an opportunity to argue the law.

And the law is you can’t mix-and-match rentals of land with personal property and rentals of land only. So IRS wins that one.

But what was the personal property Frank was renting? Was it the cellphone tower? If so, why did Frank’s lawyers not introduce evidence, if such is the case, that the towers were so affixed to the realty that they could not be removed without damaging the realty? If, as I suspect, at common law the towers would be fixtures (and therefore real property), why not group all the real property leases as one passive activity?

But Wait For the Trial

That’s Judge Halpern’s message for Teflon Jr., John A. Gotti, in JAG Brokerage, Inc., 2012 T. C. Memo. 315, filed 11/13/12.

The only issue the corporate petitioner (miscaptioned as JAG Brokerage, Inc., but probably really J. A. G. Brokerage Corp., 2012 T. C. Memo. 315, at p. 11, footnote 2) raises in its petition after losing the CDP is the amount of its tax liabilities, which the AO threw out, claiming petitioner got a SNOD and didn’t petition in the 90 days. IRS claims they mailed JAG a SNOD to its last known address more than 90 days pre-petition, and wants summary judgment dismissing the petition.

IRS also mailed notices to Mrs. Teflon Jr. (Kim) and to John hisself, but John claims he was in jail, and in solitary to boot, so had limited means of communication. IRS says they knew John was in the Metropolitan Detention Center, Brooklyn, New York, but didn’t know he was in solitary.

Besides, “… a copy of a Postal Service Form 3877 attached to the declaration evidences the mailing to petitioner at what we presume to be its last known address of a deficiency notice for the years in issue, and a copy of a Postal Service Track & Confirm statement confirms its subsequent delivery to that address.  The Postal Service Form 3877 also evidences the mailing to the Gottis of six ‘notices of claim disallowance’ (not ‘notices of deficiency’) for 2004 and 2005, but not 2006, with two of them, for 2004 and 2005, addressed to Mr. Gotti at the detention center and the rest addressed to one or the other of the Gottis at the presumed last known address.  There is no evidence that any of the notices of claim disallowance were delivered.”

IRS trots out the old “mailbox rule” that, absent direct evidence of receipt, proof of mailing presumes official regularity and delivery. That’s fine for individuals, but here we have a corporate petitioner, so we have to ask whether an individual employed by, or acting for, the corporation, received the SNOD. Judge Halpern canvasses the legislative history, and Congress seems to want someone to receive the SNOD to trigger the 90-day time limit to file, but doesn’t say who or how if the SNOD is directed to a corporation.

Judge Halpern: “Both our own analysis and respondent’s position with respect to the adequacy of receipt of the deficiency notice by Mr. Gotti suggest that there is an unresolved question of law as to whether a corporate taxpayer has actually received a deficiency notice for purposes of section 6330(c)(2)(B) if it can show that the notice was not timely received by an individual authorized to act for the corporation.  And while the inference of receipt to be drawn from the mailbox rule may, if unrebutted, be sufficient to carry respondent’s burden of showing receipt by petitioner of the deficiency notice, we do have the fact, admitted by respondent, that Mr. Gotti was incarcerated when the notice was mailed.  He is an officer of petitioner, and we assume that he could have acted for petitioner.  Petitioner did not respond to the motion and has not established that (1) Mr. Gotti lacked timely knowledge of the notice (and was, therefore, precluded from acting on it) and (2) there was no one else knowledgeable of the notice and able to act on it. While for those reasons we might conclude that petitioner has failed to rebut the inference to be drawn from the mailbox rule (and, thus, has failed to show a dispute as to a material issue of fact), given the uncertainty as to the relevance of receipt by someone authorized to act for the corporation, we are hesitant to, and will not, grant the motion.  If the case proceeds to trial, the parties can assist us in resolving the uncertainties.” 2012 T. C. Memo. 315, at pp. 11-12 (Footnote omitted).

The omitted footnote says Kim Gotti signed the petition, but doesn’t indicate whether she is an owner, officer or employee of JAG. 2012 T. C. Memo. 315, at p. 11, footnote 2.

So John, you can assist Judge Halpern in resolving the uncertainties.

I finally got around to sending in my comments to the proposed Section 230 regulations on http://www.regulations.gov (see my blogpost “The Rule of Reason – Circular 230 Revisited”, 9/15/12). Comments are due no later than this Friday, 11/16/12, so send them in, guys.

At all events, here are mine:

As to 31 CFR §10.35: I agree that the “cigarette pack” warnings of 10.35(e)(3) and 10.35(e)(4) should be eliminated. These warnings were grafted onto everyone’s e-mail stationery, so that they appear even in a social message to a colleague or client.

However, the required disclosure for a marketed opinion should be retained. The entire deletion of 10.35 in its current form is too extreme. I have written hundreds of marketed opinions; our State’s securities laws treat sales of cooperative and condominium apartments to the public as securities, and the relevant regulations require offering statements to contain a counsel’s tax opinion on deductibility of real estate taxes and mortgage interest by apartment owners.

While it is extremely unlikely that the primary aim of such transactions is evasion or avoidance of tax, the public is entitled to the warnings currently provided for in 10.35(e)(1) and 10.35(e)(2). The language of the current regulation furnishes an excellent template, and should be retained as a guide for practitioners.

The marketed opinion, unlike most opinions, is directed at taxpayers other than the practitioner’s client. Those taxpayers need the warnings of the current regulation. And practitioners need the guidance the current regulations afford to draft the appropriate warnings.

As to 31 CFR §10.82: There is an extreme disconnect between immediate disciplinary action against a practitioner who, in the first instance, fails to file returns required to be filed annually for four of the five preceding years, and in the second instance, one who fails to file returns required more often than annually for five out of seven periods when such returns are required to be filed.

In the first instance, at least four years must elapse before immediate disciplinary action may be commenced. In the second, fewer than two years need elapse in the case of returns required to be filed quarterly, such as Form 941.

Of course, the rule must be different if the returns involved require remittances of trust funds, such as FICA or FUTA withholdings.

But if a practitioner believes an employee to be an independent contractor, and fails to file Forms 941 for 28 months (but files Forms 1099-MISC and provides the later-determined employee with a copy annually), that practitioner is liable to immediate disciplinary action.

The practitioner’s competitor across the street who fails to file Form 1040 for three years is not so liable.

Imposing the proposed penalty in the first instance is Draconian, excessive and unwarranted.

I suggest that non-filing of returns required more often than annually serve as a basis for immediate disciplinary action (a) only if trust funds actually withheld from employees and others and required to be remitted with such returns are not remitted for five out of the previous seven filing periods, and (b) in all other cases, if non-filing persists for ten out of the previous twelve periods.

Such a provision places practitioners on an equal footing, and does not impose a penalty greater than the offense deserves.

Treasury has held out the hand of fellowship to even more countries, in its never-ending effort to pursue defaulting taxpayers and assist other nations to do likewise, and is pleased to report the results in a press release  dated 11/8/12.

The UK is already on board (see my blogpost “You Wash My Back – Part Deux”, 7/27/12). Next up by year-end are France, Germany, Italy, Spain, Japan, Switzerland, Canada, Denmark, Finland, Guernsey, Ireland, Isle of Man, Jersey, Mexico, the Netherlands, and Norway, so Treasury hopes.

Meantime, in what the Wall Street gang calls a forward-looking statement, Treasury is actively engaged in dialogue towards concluding an intergovernmental agreement with Argentina, Australia, Belgium, the Cayman Islands, Cyprus, Estonia, Hungary, Israel, Korea, Liechtenstein, Malaysia, Malta, New Zealand, the Slovak Republic, Singapore, and Sweden.

And Treasury is heading for a meeting hosted by the Qatar Central Bank in early December to provide information about FATCA and the intergovernmental agreements to invited senior government officials and financial institutions in the Gulf Cooperation Council.

Of course, Treasury would be pleased to talk to any interested jurisdictions that wish to consider an intergovernmental approach to implementing FATCA.

Soon, nowhere will be safe. Tax dodgers, pack up the boodle in your old kitbag and flee, flee, flee.

I’ve often praised Judge Gustafson, a solicitous judge if ever there was one. See my blogposts “We’ll Come to You”, 9/18/12, “An Obliging Judge”, 10/8/12, and “We’ll Come to You – Part Deux”, 10/22/12. He’ll visit you when you’re in prison, answer your frivolous tax questions, and track you down when you don’t follow his orders.

Now Judge Gustafson has issued another order, this time to Travis Hawk Dickens, Docket No. 22248-11, filed 11/8/12, a Designated Order today, when no decisions have issued.

Travis Hawk is another missing person like Thomas John Babcock, the star of “We’ll Come to You – Part Deux”, op. cit. as the high-priced lawyers say.

IRS says Travis Hawk hasn’t responded to IRS’ letters or other correspondence, but Judge Gustafson “has not yet heard from Mr. Dickens and does not prejudge the case based on the IRS’s allegations. However, because of those allegations the Court would attempt to conduct a telephone pretrial conference, but does not have a working telephione [sic] number for Mr. Dickens. The Court therefore offers to Mr. Dickens these general reminders that the Court would have given in the phone conference….” Order, p. 1.

And Judge Gustafson gently but firmly suggests to Travis Hawk that he bestir himself, gird up his documentation, and exchange papers with IRS, stipulating fairly to what facts he agrees.

As I said in my blogpost “We’ll Come to You”, supra, “my kind of court”.

It’s an old legal locution when the law is clear: “It is well-settled”. Well, Sheri Beersman settled with Reggie Lopez when they fought over her mom’s estate, but because Reggie was named beneficiary both in the will Sheri wanted probated and in the one Reggie wanted probated, no deduction for the $575K she had to pay Reggie to end the ensuing litigation.

Judge Foley shows us how well settled may not be well-settled in Estate of Sylvia E. Bates, Deceased, Sheri Beersman, Executor and Trustee, 2012 T. C. Memo. 314, filed 11/7/12.

The late Sylvia was a real estate tycoon. She executed a will, which poured whatever assets weren’t needed to pay her debts and taxes into a trust created by her late husband for the benefit of Sylvia’s grandkids, with Sheri as trustee, but included a bequest of $100K to Reggie, who helped Sylvia with various matters (and was fully paid for his services). Reggie lived in a house owned by Sylvia, but timely paid her rent.

Of course, Reggie produces a later will, which gives him half of everything, the other half going to grandson Scott, at the relevant time a guest of the Show Me state at Moberly Correctional Facility, and makes Reggie the executor.

It is well-settled that, in the words of Addison Mizner, “where there’s a will, there’s a lawsuit.” See my blogpost “Where There’s a Will”, 6/20/12. So it’s off to court, where Sheri wins at trial level, but the California Supremes reverse, and send Reggie and Sheri back to duke it out over undue influence and elder abuse, without the caregiver presumption (Sylvia had Alzheimer’s).

Sheri decides to buy peace and pays Reggie $575K to go away, $300 up front and $275 when he agrees not to sue Sheri and her brother Kenneth.

Sheri wants a deduction for what she paid Reggie. Negative, says Judge Foley: “Decedent had a longstanding and extremely close relationship with Mr. Lopez, expressly provided that he would receive estate assets, and memorialized her testamentary intent in both the First Trust and the Second Trust. In addition, the superior court resolved the amount of estate assets that Mr. Lopez was entitled to receive, and the settlement payment was paid in full satisfaction of any claim relating to the First Trust or the Second Trust. Furthermore, on the estate tax return, the estate reported that Mr. Lopez was a beneficiary and the settlement payment was paid to settle title to beneficiaries. During decedent’s lifetime Mr. Lopez was paid for the services he rendered, and no part of the settlement payment related to a claim for unpaid services. In short, Mr. Lopez’s claim represented a beneficiary’s claim to a distributive share of the estate rather than a creditor’s claim against the estate.” 2012 T. C. Memo. 314, at p. 9. (Citation omitted).

Reggie had been paid for his services by Sylvia while she lived. He was named beneficiary in both wills and both trusts. He wasn’t a stranger with a claim outside the will or trust. Therefore no deduction.

Sheri tried to deduct reimbursement to Scott for Mr. O’s fees; Mr O. was the private eye Scott hired to keep watch over the litigation and the estate assets while he sojourned at Moberly. No to that, says Judge Foley: “Scott testified that Mr O was paid to monitor the trust litigation and investigate decedent’s oil and gas investments. While Mr O, in a letter demanding payment for his services, stated that he and Scott had ‘discussed’ investigating decedent’s oil and gas investments, there is insufficient evidence to establish precisely what Mr O did. We are convinced, however, that Mr. O was paid to protect Scott’s interest in the estate and monitor the trust litigation. Therefore, the estate’s payment to Scott is not deductible.” 2012 T. C. memo. 314, at pp. 11-12 (Citations and footnote omitted). Payments to preserve a beneficiary’s interest in the estate are not deductible.

Finally, Sheri got confused advice about filing the Form 706. Her initial letters of administration only permitted her to find estate assets, not take possession of them. When her tax accountant said she had to file a Form 706 timely, her litigation attorney (who had no tax credentials) told her she couldn’t file a Form 706 as she lacked authority under the letters as issued.

But Sheri did petition the probate court to authorize her to reimburse herself for certain expenses from the estate, and was successful. IRS claims a late filing and late payment penalty when Sheri does get final letters post-litigation and files and pays late. Sheri says she relied on her litigation lawyer.

No, says Judge Foley, you never went to the probate court to get authority to file the Form 706. “Sheri testified that Mr. C [her litigation attorney] advised her that she lacked authority to file the estate tax return, but Mr. C was not a tax adviser and testified that he ‘never discussed taxes with her.’ Regardless of what advice Mr. C actually provided, the estate has failed to establish that any reliance on his advice relating to filing of the estate tax return was justified. Mr. G (the tax accountant) readily acknowledges that he told Sheri that ‘the estate tax return needed to be filed.’ After speaking with Mr. C, Mr. G and Sheri concluded that she lacked authority to file the estate tax return, but she did not petition the superior court for the authority to do so, seek additional advice, or otherwise attempt to resolve the issue. See Estate of Cavenaugh v. Commissioner, 100 T.C. at 427 (holding that an estate failed to establish reasonable cause where it did not timely petition the probate court for the appointment of an authorized representative to file an estate tax return).” 2012 T. C. Memo. 314, at pp 13-14 (Citations and footnote omitted).

Takeaway- A good example of How Not To Do It.

To paraphrase the late great John Lennon’s 1968 hit, that’s what Thomas Tran wanted in his not-for- nuthin’ Section 7463 small claimer, 2012 T. C. Sum. Op.  210, filed 11/6/12. And Judge Swift gives it to him.

Tom got into trouble with his credit cards, and the banks were breathing down his proverbial. Tom found a debt resolution outfit that charged him $2400 to cut $6700 off his aggregate debt. The banks sent Tom 1099-Cs, but Tom didn’t bother reporting the cancellation of debt income. IRS remedied that defect by giving Tom a SNOD.

Tom claimed an offset of the $2400 he paid as a deduction against the income, but that doesn’t fly. “Specific statutory exclusions or offsets from gross income are provided in sections 101 through 140. Of these only section 108 could possibly apply in this case. Section 108 excludes from gross income COI in certain circumstances such as insolvency of the taxpayer. No evidence before us establishes petitioner’s insolvency, and as indicated, the parties have stipulated that the sole issue before us is the legal issue described above.

“The fees before us were paid to a third-party debt resolution company and would not qualify to be treated as some type of merchant or company discount.”  2012 T. C. Sum. Op. 210, at p. 4.

Tom next claims miscellaneous itemized deduction for the $2400, arguing money spent for production of income. In an example of unjustified reliance that would get a taxpayer who made that argument hanged, IRS tries to deny Tom the deduction based on a footnote. “As authority in this case for not allowing a miscellaneous itemized deduction for the $2,343 respondent erroneously relies on Melvin v. Commissioner, T.C. Memo. 2009-199. However, in that case we simply noted in a footnote that the taxpayer therein conceded any claim to a deduction under section 212(1) for fees paid to a debt resolution company because of application to the taxpayer of the alternative minimum tax. Melvin provides no support for respondent’s position herein that fees paid to a debt resolution company, as a matter of law, may not be deducted under section 212(1).” 2012 T. C. Sum. Op. 210, at p. 5.

Nobody claims the money paid to the debt resolution company was excessive, out of the ordinary or unnecessary. The debt resolutionists did get Tom $6700 in relief for his $2400 expenditure. Without their efforts, no one suggests Tom would have gotten anything.

So Tom can have his miscellaneous itemized deduction, subject to the 2% AGI floor and any AMT disallowance of miscellaneous itemized deductions.

IRS tries a last-gasp rescue of its losing case in its post-trial brief, but Judge Swift dismisses it in a footnote: “In his posttrial brief respondent suggests that petitioner has not substantiated that the fees paid to the debt resolution company were paid in 2008. However, at the hearing held on April 12, 2012, respondent conceded that the fees were paid by petitioner, and respondent and petitioner stipulated that the only remaining issue was the legal issue described above. Respondent’s attempt to raise on brief a fact issue relating to whether petitioner paid the fees in 2008 is rejected.” 2012 T. C. Sum. Op. 210, at p. 6, footnote 3.

IRS didn’t cover itself with glory in this case.

Oh, and I misquoted the 1968 Beatles hit in my blogpost “Stipulate, Don’t Capitulate”, 9/23/11.

And they don’t fade away either, unlike Gen. MacArthur’s old soldiers. They are embalmed in Tax Court opinions, which, as we are reminded by the Tax Court’s “taxpayer info” link on its website “(G)enerally… is issued in a regular case when the Tax Court believes it involves a sufficiently important legal issue or principle.”

Once again, the First Time Homebuyer Tax Credit Second Edition (FTHBTC2) presents what Tax Court deems “a sufficiently important legal issue or principle”, even though the tax credit giving rise thereto has long since faded away. But the opinion in Robert D. Packard, 139 T. C. 15, filed 11/5/12, does show that proper tax planning is as important a part of planning a wedding as the ceremony, the reception, and the Viennese dessert table.

Bob marries Marianna in November, 2008, while FTHBTC1 (the $7500, 15-year loan) is still on the books. But they don’t move in together until they buy a house on December 1, 2009, after FTHBTC2 (the $8000 credit) comes on the scene. Marianna owned her prior principal residence for more than five years before buying the new house. Bob owned no principal residence for three years preceding the purchase; he was a renter throughout.

Marianna claims she’s qualified for FTHBTC2 under the Section 36(c)(6) longtime homeowner exception (owned for five years out of the past eight), and Bob claims he’s qualified under Section 36(c), as he didn’t own a principal residence for the past three years.

IRS says no, you can’t mix-and-match, you’re both either three-year non-owners or five-out-of-eight owners.

Why not mix-and-match, asks Judge Wells: “Paragraph (6) operates to expand the scope of the first-time homebuyer credit by treating an individual who has owned and resided in the same residence for the five-consecutive-year period as if that individual were a first-time homebuyer for purposes of section 36. By its terms, it provides an exception to the definition of first-time homebuyer pursuant to section 36(c), a definition that is provided in paragraph (1). In other words, the exception pursuant to paragraph (6) expands the definition of who qualifies as a first-time homebuyer pursuant to paragraph (1).

“It is a well-established rule of statutory construction that a statute is to be construed so as to give effect to its plain and ordinary meaning unless to do so would produce absurd or futile results.” 139 T. C. 15, at pp. 6-7 (Footnote omitted).

Congress intended that no couple could get the credit unless each qualified. But Congress didn’t say that each had to qualify under the same provision. IRS concedes that Bob and Marianna individually would qualify.

So summary judgment for Bob and Marianna. Great tax planning, guys!