No, not another consequence of Hurricane Sandy. This is the story of Frank & Suzanne Cardamone, Docket No. 22935-12 (filed 11/2/12). Frank and Suzy didn’t bother to sign their Tax Court petition, but they did get an attorney, A.S., who files notice of appearance and proffers a decision document.

Unfortunately, A.S. notices her appearance after the purported filing of the unsigned petition. She can’t sign on behalf of her clients, says Chief Judge Thornton.

“On September 25, 2012, the Court issued an Order directing petitioners to file, on or before October 15, 2012, an Amendment to Petition ratifying and affirming the petition filed to commence this case. On October 3, 2012, A. S. entered an appearance on behalf of petitioners. On October 22, 2012, the Court received a proposed decision document signed by Ms. S. on behalf of petitioners. That decision cannot be entered, however, until the petition filed to commence this case is properly ratified by petitioners; petitioners’ counsel, having entered her appearance after the date the petition was filed to commence this case, cannot ratify the petition on petitioners’ behalf.” Order, p. 1. (Emphasis in original.)

I do not see why A.S. cannot sign the amended petition nunc pro tunc (“now for then”, as the high-priced lawyers say). She has authority from the Cardamones. Chief Judge Thornton cites no Rule or decision in support of his conclusion. Neither Rule 23 nor Rule 33, as amended this past July, expressly states that a subsequent signature to a pleading is invalid.

Going through this additional step of having the Cardamones sign the “amendment”, rather than letting A.S. sign it and get the decision document entered, just delays matters and wastes resources.

Of course, A.S. should have reviewed the September 25 Order and had her clients sign the amendment in the first place.

Takeaway for attorneys– Check the papers your prospective client gives you and search the Tax Court websites for orders; if you find any, make sure your prospective client complies.

The usual Friday no-decision day at Tax Court, so here’s an order keeping two whistleblowers’ names shrouded in secrecy, Anonymous 1 and Anonymous 2, Docket No. 12472-11W, Judge Foley drawing the veil.

Need I add that in a separate order Judge Foley gives the whistleblowers nothing, because IRS claims they got no money out of the equally anonymous Company X? Of course, the Anonymous Duo allege IRS started its own proceedings after blowing them off, but Judge Foley ducks that one, because the statute says “no cash to IRS, no cash to whistleblower”, and Tax Court has no jurisdiction to look behind IRS’ statement.

The Anonymous Duo are ex-employees of Company X. They fear retaliation, stigma and inability to find future employment, if it becomes known that they blew the whistle.

Judge Foley: “Petitioners contend that revealing their identity will result in professional stigma and will prevent them from obtaining employment in the future….

“In general, trial courts balance a number of factors to determine whether litigants should be allowed to proceed anonymously, including. (1) social interests; (2) whether the case involves highly sensitive personal information; (3) whether disclosure of the party’s identity will pose a credible risk of physical harm; (4) whether disclosing the party’s identity will cause “other significant harm” (e.g., professional stigma or economic retaliation); and (5) whether the party is a confidential informant. See Whistleblower 14106-10W v. Commissioner, 137 T.C. 183, 195-203 (2011). Tax whistleblowers are especially vulnerable to professional stigma, retaliation, and economic duress. See id. at 203.

“In determining whether a whistleblower may proceed anonymously, the Court must consider whether the need for anonymity outweighs the prejudice to the opposing party and the general presumption that the parties’ identities are public information. See id. at 192. Anonymity for whistleblowers is specifically contemplated by Rule 345(b) which became effective July 6, 2012.

“Petitioners have demonstrated that they are of an age and station in life which necessitates continued employment and that revealing their identity would harm their future employment prospects. See id. at 203. The fact that petitioners are no longer employed by Company X does not immunize petitioners from possible retaliation. See id. at 204. Petitioners have demonstrated that the risk of harm to them exceeds mere embarrassment or annoyance. See id. In addition, respondent [IRS] knows petitioners’ identity and will not be prejudiced if they proceed anonymously.” Order, at pp. 1-2.

Of course, having now been permitted to proceed anonymously, the Anonymous Duo are permitted to proceed out the Tax Court door, as IRS gets summary judgment.

I know it’s a waste of time asking Congress to do anything; they can’t stop the country from falling off the fiscal cliff they created, much less clean up the whistleblower provisions of the Internal Revenue Code. But this charade really has to stop.

From a blogpost by Sir Richard Branson, 10/2/12, on starting a successful business, forwarded by my colleague Michele Peters, Esq.:

“If you aren’t having fun, you are doing it wrong. If you feel like getting up in the morning to work on your business is a chore, then it’s time to try something else. If you are having a good time, there is a far greater chance a positive, innovative atmosphere will be nurtured and your business will fluorish [sic]. A smile and a joke can go a long way, so be quick to see the lighter side of life.”

If the deal where you acquired the money is a sham, using proceeds in a legitimate deal doesn’t give business purpose to the sham. Thus Judge Jacobs to Don Kipnis and Larry Kibler, the golden boys of the Florida construction industry, in Donald J. Kipnis, 2012 T. C. Memo. 306, filed 11/1/12. Don and Larry are consolidated for briefing, trial and disposition.

Don and Larry need more net quick. This is not chocolate milk, but working capital to allow them to get bonded for bigger construction deals. Having taken a big hit on a recent job, their net quick has the bonding companies worried, they say, so they can’t bid the big lucrative jobs where contractors must be bonded.

So Don and Larry enter into a CARDS deal, one of the phony mix-and-matches with an offshore tax indifferent, where a phony loan is floated by a German bank (later the subject of a fraud investigation) with strings attached that guarantee that no one takes a loss or makes a profit (except the promoter of the deal and the bank), but a big tax loss is generated.

Some cash does get thrown off to Don and Larry, which they put into their contracting sub S (M&S), thereby giving them more of the desirable net quick. This, they claim, legitimizes the deal, as everyone agrees M&S is a leading Florida contractor, and net quick gets you bonded.

“The other CARDS transactions are essentially the same as the transaction in this case, with one exception. In the other cases the taxpayers did not use the proceeds arising from the CARDS transaction to actually make an investment. Petitioners assert this difference is significant and mandates a holding that they are entitled to the loss deductions claimed because they, in fact, used the proceeds from the CARDS transaction to increase M&S’ net quick.” 2012 T. C. Memo. 306, at p. 25.

IRS says no: “Respondent [IRS] posits that to look to the use of the proceeds from the CARDS transaction would permit taxpayers to legitimize sham transactions by grafting them onto legitimate business transactions. Continuing, respondent argues that petitioners had no business purpose in entering into the CARDS transaction per se. In sum, respondent asserts that after all was said and done, petitioners’ primary intent was to offset their significant business income with the losses arising from their involvement in the CARDS transaction.” 2012 T. C. Memo. 306, at pp. 25-26.

Don and Larry agree that the CARDS deal had no economic substance, but they needed what little cash they got to build up the net quick. But cash-on-cash, the deal was negative; it cost Don and Larry $1.2 million to net $423K.

“Petitioners were unequivocal about one thing: Any contribution to M&S had to be in the form of a loan. Contributing their own money to M&S was not an option. Both petitioners and their witnesses explained that the construction industry was built on leverage. Moreover, Mr. Kipnis was emphatic that personal considerations prevented him from putting his own money into M&S. And yet, after all was said and done, Messrs. Kipnis and Kibler spent nearly $1.2 million of their own money in order for $423,000 to ultimately reach M&S. No genuine leveraging arose from the CARDS transaction.” 2012 T. C. Memo. 306, at pp. 32-33.

So what Don and Larry did with the money doesn’t matter. They took a huge tax loss. See my blogpost “It Ain’t What You Do With What You Got”, 8/11/11.

A bona fide expenditure won’t save a phony deal.

 But Some Can

I was at the Bureau of National Affairs Advisory Committee meeting October 25, talking to my old friend Joel E. Miller, Esq., about the recent spate of scenic easement cases, and the Whitehouse decision, 139 T. C. 13, filed 10/23/12 (see my blogpost “Chipping Away the Facade – Part Deux”, 10/24/12).

Between the Coca Cola and Cracker Jack that preceded the meeting, Joel mentioned that he had brought to Judge Halpern’s attention an arithmetic flub in the decision. Taxpayer had overstated the valuation by 400%, not that the taxpayer’s valuation exceeded the actual valuation by 400%.

I had missed the arithmetic error when I blogged the decision, and said so. I told Joel that lawyers can’t add, so I wasn’t surprised.

But conscientious Judge Halpern has amended his decision to correct the errors in an Order, Docket No. 12104-03, filed 10/31/12. He doesn’t credit Joel, so I’ll take the liberty of doing so now.

Loren G. Rice, as Trustee of what looks like a self-settled trust, wants IRS to stay away and mail her a timely NFTL, but she gets neither from Judge Wells in Loren G. Rice Trust, Loren Georgette Rice, Trustee, 2012 T. C. Memo. 301, filed 10/31/12, as Tax Court comes back on stream after the Sandy-induced layoff.

Loren claimed her trust had a $90K refund coming and got the check, but IRS determined an overstatement of withholding and gave Loren a Form 3552 Notice of Tax Due, hand-delivered to her at her place of employment, and on the same day filed a NFTL. Loren didn’t get her five-day notice; that didn’t show up for two weeks.

Loren claims the NFTL is invalid because she didn’t get the five-day notice mandated by Section 6320. Judge Wells: “‘The validity and priority of a NFTL is not conditioned on notification to the taxpayer pursuant to section 6320. Therefore, the failure to notify the taxpayer concerning the filing of a NFTL does not affect the validity or priority of the NFTL.’ See sec. 301.6320-1(a)(2), Q&A-A12, Proced. & Admin. Regs. Ms. Rice has not challenged the validity of this regulation. Accordingly, we conclude that respondent’s failure to provide notice within the five-day period after filing the NFTL does not affect its validity.” 2012 T. C. Memo. 301, at p. 11. Maybe she should have; or maybe, with $90K on the table, she should have hired a lawyer. See my blogposts “Hire A Lawyer”, 8/13/12, and “Heavy Weather – for Weatherly”, 8/26/11.

But Loren grouses about the visitation from the revenue agent to drop off the Form 3552 Notice of Tax Due at her place of employment. She claims Section 6304(a)(2) prohibits IRS from coming to her workplace if her employer objects.

True, but IRS has to know that visits to the taxpayer’s workplace are out of bounds. Judge Wells: “There is no evidence that Ms. Rice provided respondent [IRS] with notice not to visit her at work or that her employer prohibits such visits. Accordingly, the revenue agent’s decision to deliver the Form 3552 to Ms. Rice at her place of employment was consistent with both section 6304(a) and section 6303(a), which states that a notice and demand for payment may be delivered to the taxpayer’s usual place of business.” 2012 T. C. Memo. 301, at p. 11.

So let IRS know they can’t come knockin’, or be prepared for them to come to you.

Well, Hurricane Sandy, Anyway

 No decisions out of Tax Court today, 10/26/12, or any interesting orders, and the Baltimore MD calendar session scheduled for Monday, 10/29, at 10 a.m., has been postponed to Wednesday, 10/31, at 2:30 p.m., in deference to the much-ballyhooed “Frankenstorm”. Tax Court’s man in Baltimore, Special Trial Judge Daniel A. (“Yuda”) Guy, has been busy clearing the calendar.

Oh, and the title of this post is a quotation from Macbeth, Act 5, Scene 5.

Stay dry and safe, everyone.

Tax Court just can’t get enough of those Section 170(h) cases, the delivery system for unguided Congressional largesse to the scenic and the historic. Yesterday it was Whitehouse Hotel Limited Partners (see my blogpost “Chipping Away the Facade – Part Deux”, 10/24/12). Now it’s Charles R. Irby and Irene Irby, et al., 139 T. C. 14, filed 10/25/12.

The Irby clan were members of an LLC that made bargain sales of wide-open Colorado spaces to Colorado Open Lands (COL), a 501(c)(3) that qualifies under Section 170(h)(3); bargain sales are below-market sales, in this case to charities. The portion of the purchase price paid by the charity results in gain to the seller, the below-market portion is a contribution (see Reg. Sec. 1.170A-4(c)(2)(ii)).

IRS claims the grant wasn’t protected in perpetuity, because government agencies that funded COL’s purchase are entitled to recapture out of the award if the land is condemned and the easement extinguished, so that all proceeds won’t go to COL in such event. But see my blogpost “’A Joy Forever?’ – Maybe Not”, 7/20/12. IRS also claims that the appraisal wasn’t qualified because it didn’t state it was made for income tax purposes. Finally, IRS claims there wasn’t a contemporaneous written acknowledgment of the gift from COL.

IRS loses all the way.

Judge Jacobs cites Kaufman v. Shulman, 687 F.3d 21, 26 (1st Cir. 2012): “paragraph (g)(6) appears designed in case of extinguishment both (1) to prevent taxpayers from reaping a windfall if the property is destroyed or condemned and they get the proceeds from insurance or condemnation and (2) to assure that the donee organization can use its proportionate share of the proceeds to advance the cause of historic preservation elsewhere.”

COL gets its share of proceeds after the government funders (all Section 170(c)(1) entities and all dedicated to preservation) get repaid. Thus no windfall to the Irbys, or diversion of funds from conservation purposes.

As to the appraisal: “Section 1.170A-13(c)(3)(ii), Income Tax Regs., provides that a qualified appraisal must include 11 categories of information to be a valid qualified appraisal. Respondent [IRS] challenges only one such category; respondent asserts that the appraisal petitioners rely upon does not meet the requirement of section 1.170A-13(c)(3)(ii)(G), Income Tax Regs., that the appraisal contain ‘A statement that the appraisal was prepared for income tax purposes’. Respondent argues that the appraisal and addenda to appraisal Mr. Butler drafted do not include such a statement and consequently they are unreliable because there is no assurance that Mr. Butler applied the proper standards of care to ensure that the reports conformed to Internal Revenue Service (IRS) standards.” 139 T. C. 14, at pp. 25-26. (Footnote omitted).

Judge Jacobs tosses out this far-fetched argument: “…the appraisal report in this case included all of the required information either in the appraisal or in the appraisal summaries attached to petitioners’ respective returns–it included a discussion of the purpose of the transaction (i.e., that the purpose of the appraisal was to value the donation of a conservation easement pursuant to the terms of section 170(h))…; it stated that fair market valuation was to be used in determining the value of the property; and Form 8283 was properly filed with petitioners’ respective returns. The IRS has not provided to the public a specific form for the tax purpose statement, and respondent has not proffered any instance where a suboptimal tax purpose statement, by itself, invalidated an otherwise qualified appraisal.” 139 T. C. 14, at p. 27 (Footnote omitted).

Finally, as to the contemporaneous acknowledgment by the donee, the Irbys introduce correspondence with COL and the funders, signed agreements and deeds, and the settlement statement for the transfers. IRS says that no single document satisfies Section 170(f)(8) acknowledgment. Judge Jacobs: “However, respondent does not assert, and we have found no authority to indicate, that the contemporaneous written acknowledgment may not be made up of a series of documents. We thus find that, collectively, the documents petitioners provided constitute a contemporaneous written acknowledgment.” 139 T. C. 14, at p. 31.

Takeaway–Do it right, and you get the deduction.

While the Cobblestoners avoided penalties when their facade easement got blown up (see my blogpost “Chipping Away the Facade”, 5/2/2012), the Whitehousers weren’t so lucky when Fifth Circuit sent them back to Tax Court. The case is Whitehouse Hotel Limited Partnership, QHR Holdings–New Orleans, Ltd., Tax Matters Partner, 139 T.C. 13, filed 10/23/12.

The Whitehousers claimed a $7 million facade easement on the Maison Blanche in the Big Easy. They were beaten in Tax Court first time around (131 T. C. 112 (2008)), but Fifth Circuit vacated that decision and sent them back to determine the value of the easement and whether the Section 6662(h) gross overstatement of value 40% penalty should apply. And again the Whitehousers collapse, both as to the value and the double whammy on the penalty.

The Whitehousers’ expert witness does them no good. He tries the replacement cost method of valuation but that doesn’t work for historic structures, because it is usually uneconomic to try to reproduce them. The income method doesn’t work here, because the building is a shell when the donation takes place, and there are just too many variables for the expert’s income projections to be accurate. And on comparables, Whitehousers’ expert wants to use comparables from other locales, claiming a national market for historic structures waiting to be turned into luxury hotels, but IRS’ expert finds enough local comparables to establish IRS’ figures. Remember, in real estate it’s location, location and location.

And the Whitehousers’ initial appraisal (prepared by someone else, but acknowledged by IRS to be an appraisal by a qualified expert) is too good to be true; their property did not appreciate 970% in three years.

And thereby hangs this tale.

Although there was an appraisal prepared by a qualified expert, the taxpayer must do more than rely upon it to avoid the Section 6662(h) gross overstatement of value. “In the case of a substantial or gross valuation misstatement with respect to charitable deduction property, however, the reasonable-cause-and-good-faith exception does not apply unless the taxpayer can show that (1) ‘the claimed value of the property was based on a qualified appraisal made by a qualified appraiser’, sec. 6664(c)(2)(A); and (2) ‘in addition to obtaining such appraisal, the taxpayer made a good-faith investigation of the value of the contributed property’, sec. 6664(c)(2) (B). The pertinent regulations, section 1.6664-4(g)(1), Income Tax Regs. (1977), make clear that the qualified-appraisal and good-faith-investigation requirements imposed by section 6664(c)(2) ‘apply in addition to the generally applicable rules concerning reasonable cause and good faith’.” 139 T.C.13, at p. 76. (Footnotes omitted).

Well, the appraisal they got was a qualified appraisal made by a qualified appraiser, even though IRS disagrees with the appraiser’s conclusion. See my blogpost “Method to His Madness”, 6/18/12.

But that’s not enough. The taxpayer must make a reasonable good-faith investigation to determine the value of the easement, even though the IRS concedes the Whitehousers got a qualified appraisal from a qualified appraiser.

The Whitehousers did nothing but attach the appraisal to their Form 8283. They didn’t ask how their appraiser determined that what they’d paid $9 million for could appraise for $96 million, or how the donated facade easement could reduce the worth of what they paid for by $7.45 million. They didn’t produce any evidence about what they discussed with their accountants and attorneys in preparing the Form 1065 with the huge deduction.

Thus the 40% penalty.

Takeaway– If it seems too good to be true, it usually is.

Ya gotta like Judge Gustafson, the obliging judge. As the old Jerry Lieber-Mike Stoller 1957 Coasters hit said “No matter where she’s hiding, she’s gonna see me coming, I’m gonna walk right down that street like Bulldog Drummon’. Gonna find her….”

Except it’s a “he”, not a “she”, but Judge Gustafson is searchin’ for Thomas John Babcock, Docket No. 21863-11, Order filed 10/19/12.

Tom was supposed to do some things, but he didn’t, and Judge Gustafson is concerned that Tom didn’t get the message, so Judge Gustafson orders his Chambers Administrator to hunt Tom down. “Petitioner Thomas John Babcock failed to comply with the Court’s order of September 24, 2012, failed to respond to the IRS’s motion to dismiss for failure to prosecute, and failed to appear for trial on October 15, 2012, at the Court’s Boston trial session. The Court is concerned that mail is somehow not reaching Mr. Babcock. An email address for him appears in the Court’s records, so the undersigned judge directed his Chambers Administrator to send the email attached hereto.” Order, p. 1.

Now that’s an obliging judge.