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.

Such is Judge Marvel’s rebuke to John Allen Hatling and Kathleen Ann Hatling, 2012 T. C. Memo. 293, filed 10/22/12. John’s the bad actor here, and Kathleen is along for the ride.

John has been a lawyer in Minnesota for 25 years; he took at least one CLE course in IRS representation, and does estate planning. He got a 45-day license suspension when he pled guilty to felony non-filing of his State income tax return in 2008. For the three years at issue here, he filed returns stating no tax due, attaching Forms 8275 and 8275-R stating he was claiming a “claim of right deduction for white citizens”, although he stipulated he knew the claimed deduction was baseless and he was only stalling paying taxes.

Now this sounds like a run-of-the-mill protester case, which, as Guide Michelin used to say, “need not long detain the tourist”; or anyone else. But John did file the Forms 8275 and 8275-R and said exactly what he was doing; if you disclose what you’re doing, are you defrauding anyone?

While John stipulated that he filed the returns with the intent to delay assessment and payment of tax, Judge Marvel doesn’t rely on that alone. John did overstate his deductions; while his recordkeeping barely passes muster, his guilty plea on State tax counts against him, and he did file a false return. And he’s a lawyer (presumably) and should know better (ditto).

And the “I told you so” defense based on the Forms 8275 and 8275-R deconstructs. As usual, the answer is in the footnotes.

“Petitioners also appear to contend the claim of right deductions were not fraudulent because the deductions clearly were impermissible and therefore Mr. Hatling could not have been attempting to conceal his income. We reject petitioners’ contention for several reasons. First, the Code provides that taxpayers may deduct from income an amount received under a claim of right. See sec. 1341. Petitioners have failed to convince us that simply by including the claim of right deductions on their returns, they disclosed that the deductions they were claiming were clearly improper. Second, while the U.S. Court of Appeals for the Eighth Circuit, to which an appeal in this case would lie absent a stipulation to the contrary, see sec. 7482(b)(1)(A), (2), has not addressed the issue of whether a taxpayer’s disclosure may preclude a finding of fraudulent intent, at least two other Courts of Appeals, as well as this Court, have held that disclosure does not preclude a finding of fraudulent intent, see Edelson v. Commissioner, 829 F.2d 828, 832-833 (9th Cir. 1987), aff’g T.C. Memo. 1986-223; Granado v. Commissioner, 792 F.2d 91, 93-94 (7th Cir. 1986), aff’g T.C. Memo. 1985-237; Price v. Commissioner, T.C. Memo. 1996-204; Cloutier v. Commissioner, T.C. Memo. 1994-558. But see Zell v. Commissioner, 763 F.2d 1139, 1144 (10th Cir. 1985) (“Clearly, where the taxpayer has informed the IRS of his refusal to file or to pay, and of the reasons for that refusal, the government has not been deceived. In addition, the disclosure clearly negates any intent to deceive.”), aff’g T.C. Memo. 1984-152; Raley v. Commissioner, 676 F.2d 980, 983-984 (3d Cir. 1982) (holding that a taxpayer did not act with fraudulent intent because he “went out of his way to inform every person involved in the collection process that he was not going to pay any federal income taxes”), rev’g T.C. Memo. 1980-571. Third, petitioners deducted the claim of right deductions with the intent of underreporting their taxable income and evading their obligation to pay their proper income tax liabilities when due.” 2012 T. C. Memo. 293, at p. 14, footnote 13.

So John gets nailed for the 75% fraud penalty.

Not for nuthin’, as they say, but isn’t this a case where John went a bridge too far? He admitted he took a phony deduction to stall the IRS and failed to file his State income tax return. Let’s see if John takes an appeal, so we can see what Eighth Circuit has to say.

 Don’t Always Make Bad Law

Contrary to the old law school dictum dinned into my youthful ears on The Hill Far Above, hard cases sometimes don’t make bad law. Such is the story of William George West, Deceased, Docket No. 20428-11, filed 10/18/12.

There has been a real paucity of interesting decisions out of Tax Court the last few days, just unsubstantiated deductions and one egregious nonfiler-protester. Nothing here for the “man o’ independent mind”, who “looks an’ laughs at a’ that”, in the words of Scotland’s greatest.

So it’s off to the orders. And the late Bill and his widow (who, the Court notes, is not fluent in English) are the recipients of a heartwarmer from The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, His Honor Mark V. Holmes.

Starts off quite routinely, SFRs for non-filed returns for two tax years, followed with SNODs. Petition filed, but the signer was unauthorized.

Now for the hard facts: “Mr. West, however, had not prepared the returns because he was seriously ill and he died just about the time the Commissioner was sending him the notices of deficiency. His widow — who is not fluent in English — filed the petition, but had no legal authority to do so. On September 19, 2012, the Commissioner moved to dismiss the case for lack of jurisdiction.

“The Court would be concerned at merely dismissing a challenge to deficiencies if that would lead to an assessment without a practically meaningful opportunity to challenge them. It therefore spoke with the parties on October 17, 2012. The Commissioner’s lawyer explained that Mrs. West had been able to find a preparer who worked with her and IRS Appeals to submit the missing returns and that the much lower tax bill those returns showed had already been assessed. Dismissing this case, therefore, is just cleaning up the paperwork.” Order, p. 1.

Clean up the paperwork and do justice at the same time. That’s my kind of Judge, even if he doesn’t appreciate the partitive genitive.

And the Grounds for Treating His Compensation as Compensation

Judge Holmes (The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being), again exhibiting his disdain for the partitive genitive (c’mon Judge, a “couple thousand people?”, 2012 T. C. Memo. 290, at p. 2), tells the tale of Harold Schmeets, a prominent citizen of Harvey, North Dakota. H & M, Inc., is the case, 2012 T. C. Memo. 290, filed 10/15/12.

Harvey is a tiny town where fewer people move in than die or move out. But Harold moved in forty years ago and stayed. He was a go-getter, known far and wide across prairie and badlands to the outermost little house on the prairie as The King of Insurance, even to his competitors, none of whom, it is admitted, can hold a ten-year  level-premium term life policy to Harold. He started selling insurance for the local bank, but bought out their insurance operation (a C corporation, of course) over the years. He was the acknowledged expert on bonding: getting payment, performance and completion bonds for contractors; and sweet-talking the big insurers into writing policies in this minuscule crossroads hamlet.

Finally, the bank buys out Harold, who wants to secure his old age and the educations of the kiddies he and Miz Mona bestowed on Harvey, ND,  to counterbalance the movers and diers.

Harold does the deal without an attorney and asks the bank’s accountant to look it over. Basically, the price for the name and goodwill of the agency is peanuts, and everything in an employment agreement with Harold.

IRS claims the deal is really a disguised capital gain at corporate rates and dividends to Harold. No, says Judge Holmes: “The bank’s insurance agency dropped its name in favor of Harvey Insurance Agency, Inc. because Harvey Insurance had been around longer and had more name recognition because of its association with Schmeets. Schmeets served as its manager for the entire six-year term of the employment agreement, and the bank reported his compensation as wages subject to withholding and Federal Insurance Contributions Act (FICA) tax. Schmeets rewrote existing insurance policies, took new applications, supervised and trained the agency’s four employees, attended bank planning sessions, negotiated commissions with insurance companies, and did the agency’s bookkeeping. The transition multiplied his responsibilities, and Schmeets went from a 40-hour work week before the sale to almost double that after.

“At the end of the six-year term, the bank was pleased with Schmeets’s performance and asked him to continue to manage the agency under year-to-year contracts. Schmeets agreed and kept working several days a week for about $30,000 per year to help train his replacement. The replacement was an insurance salesman that didn’t have as much experience as Schmeets–he didn’t do bonding work, and he had never been a manager. Despite this lack of experience, the bank paid the new man an annual salary of between $55,000 and $65,000. Having managed this last transition, Schmeets then retired.” 2012 T. C. Memo. 290, at pp. 9-10.

IRS claims form-over-substance: the bank bought the agency. Harold says no: the bank bought Harold.

Judge Holmes: “There will be no salable goodwill, however, where the business of a corporation depends on the personal relationships of a key individual, see Martin Ice Cream Co. v. Commissioner, 110 T.C. 189, 207-08 (1998), unless he transfers his goodwill to the corporation by entering into a covenant not to compete or other agreement so that his relationships become property of the corporation, see Norwalk v. Commissioner, T.C. Memo. 1998-279, 1998 WL 430084, at *7.” 2012 T. C. Memo. 290, at pp. 19-20.

Moreover: “The insurance business in Harvey is ‘extremely personal,’ and the development of Harvey Insurance’s business before the sale was due to Schmeets’s ability to form relationships with customers and keep big insurance companies interested in a small insurance market. He grew relationships with large insurance companies that other brokers in the area didn’t. And we specifically find that when customers came to his agency, they came to buy from him–it was his name and his reputation that brought them there. We also find he had no agreement with H & M at the time of its sale that prevented him from taking his relationships, reputation, and skill elsewhere, which was precisely what he did when he began working for the bank’s renamed insurance agency.

“Beyond the business’s goodwill, the Commissioner doesn’t specify what other purchased intangible assets, other than the name Harvey Insurance, he thinks were not accounted for in the purchase price. We have already found that the name Harold Schmeets had by far more name recognition in the community than Harvey Insurance. And the Commissioner hasn’t given us any persuasive evidence that the name of the corporation had much value other than its connection with Harold Schmeets himself.” 2012 T. C. Memo. 290, at pp. 21-22 (Footnote and citations omitted).

Harold’s personal taxes are not before the Court, so the question of adequacy of Harold’s compensation really isn’t an issue, although Harold’s replacement, a mere Baron or Earl of Insurance, says Judge Holmes, is paid twice what Harold was paid.

Harold runs into some of what they call “bob wahr” when it comes to a note from his wholly-owned corporation, and some unsubstantiated deductions, but they’re small compared to his employment as King of Insurance in the fair town of Harvey.

Takeaway- Goodwill counts for little if your name is your fame.

But Not If You Want the Gulf Opportunity Zone Deduction

That’s Judge Vasquez’s lesson to Brien C. Blakeney and Pamela A. Hall, 2012 T. C. Memo. 289, filed 10/15/12. It’s the saga of the bad ship Shockwave, a 62-foot Viking Convertible Yacht.  Brien bought her for his charter fishing company that operated out of Orange Beach, AL, smack-dab in middle of the Gulf Opportunity Zone, because it was smack-dab in the middle of Hurricane Katrina of infamous memory.

Shockwave was exactly that. Brien and his trusty master Captain Enos took delivery of this masterpiece of marine artistry in Florida, outside the Gulf Zone, to take it on a shakedown cruise prior to moving it to Orange Beach. However, it took nearly a year to get from Florida to Port Orange. The electrics fried routinely; seawater infiltrated the fuel tanks; something or someone stove a hole in her side as she lay at anchor under repair; the refrigeration equipment went on the fritz, frying the computer. Finally poor Captain Enos died, and Captain Stine, a hardy mariner, at last conned this latter-day Flying Dutchman into Port Orange.

Notwithstanding the foregoing, as the high-priced lawyers say, and even though ol’ Shockwave could barely make five knots with a following sea or go more than a mile or two offshore without imperiling passengers and crew before finally being repaired, the fish-filled waters of the Caribbean adjoining Florida permitted Brien to charter her for 43 days in those out-of-Zone waters (and get some personal use out of her along those lines), before ol’ Shockwave limped wearily into Port Orange, where she remained available for charter for some 74 days, but the fishing season had closed and nobody wanted to charter her.

Brien claims the 50% of purchase price bonus depreciation under Section 1400(N), Congress’ largesse to the battered businessfolk of the Gulf Coast. If you buy, place in service, and use business property in a trade or business substantially all of which is conducted in the Zone, the bonus is yours.

Brien claims that the use outside the Zone wasn’t use in business at all, as poor ol’ Shockwave couldn’t be used until finally fixed.

IRS claims “that under Notice 2006-77, 2006-2 C.B. 590, ‘substantially all’ of the Shockwave’s use was not in the GO Zone. Notice 2006-77, supra, provides that for the purposes of section 1400N(d)(2)(A)(ii) “substantially all” means 80% or more. Id. sec. 3.01, 2006-2 C.B. at 590.” 2012 T. C. Memo. 289, at p. 15.

No, says Judge Vasquez, IRS Notices do not have the force of law nor are they entitled to Chevron deference. See my blogpost “Carpenter, Colony, Chevron and Mayo”, 4/26/11. While Notices might be deferred to under Skidmore v. Swift & Co, 323 U. S. 134 (1944), we don’t need to go there. 43 days of charter in the Caribbean is 37% of the total of 117 days (74 in the Zone and 43 days out of Zone). That is substantial non-Zone use.

So Brien’s deduction sinks.

To quote Paul Simon, while there might be “fifty ways to leave your lover”, as stated in his 1975 hit of that name, there’s only one correct way for an attorney or Tax Court practitioner to be relieved. But neither attorney got it right in this case.

No Tax Court decisions today, 10/11/12, and no really exciting orders either, so here’s the story from a pair of orders from 10/10/12, both from Martin F. and Mary S. Tynan, and both Docket No. 28876-83 (yes, 83; these are remnants of the Kersting tax shelters of infamous memory, Tax Court’s equivalent of Dickens’  Jarndyce v. Jarndyce, or perhaps more precisely, the Night of the Living Dead).

Judge Colvin was really losing patience. I cannot blame him.

And the Tynans did have two attorneys, although which of the petitioners each represented is unclear. Apparently Judge Colvin thinks each attorney represents both petitioners.

I won’t name either attorney here, because, as I’ve said often before, there but for the grace of you-know-Whom goes any or all of us.

Judge Colvin says it all, once in each order: “The motion to withdraw does not comply with Rule 24(c), in that Mr. X did not provide petitioners’ current address (their last known address is not necessarily their current address) or their current phone number, and he did not state that he contacted petitioners and whether or not they objected to his withdrawal from the case.” Order, p. 1. (Names omitted).

It is possible that since 1983 the petitioners may have shuffled off this mortal coil. But as these were partnerships with TEFRA partnership-level FPAAs and affected items, the end is not yet in sight. See my blogpost “Bang – A Warning to Tax Matters Partners (And Their Advisors)”, 1/5/11.

Alternatively, these may be situations like that in the old joke about the continuing legal education ethics class, where the lecturer sternly warned the attendees,  “You may not have sex with your clients”, to which one attorney shouted “Sex with them? I don’t want to talk to them!”

Alas, the two attorneys in the Tynan case are, at least for the moment and in the immortal words of The Platters’ great manager Buck Ram who wrote their 1956 smash hit The Great Pretender,  “still around.”

 And Privilege is not Unlimited

 Everything has an end, but a sausage, said my old friend Paul V. Olsson, quoting his Swedish grandmother, has two. Proving him (and his grandmother) right is Carpenter Family Investments II LLC, David James, LLC, Tax Matters Partner, Docket No. 30834-08, filed 10/10/12.

You’ll recall that Judge Wherry gave IRS the right-about-face in 43 pages in 136 T. C. 17, filed 4/25/11, as set forth in my blogpost “Carpenter, Colony, Chevron and Mayo”, 4/26/11. But I finished my blogpost with my usual prescient comment: “And you may be sure there will be an appeal.”

Well, there was. But IRS moved to dismiss its appeal in the outwash from Home Concrete & Supply v. United States, 132 S. Ct. 1836 (2012), and Ninth Circuit, nowise loath to clear its docket, dismissed.  See my blogpost “Colony Lives”, 4/26/12, one year to the day after Carpenter.

So the Clan Carpenter moves for summary judgment dismissing everything as barred by the 3SOL, and Judge Wherry, although not quite so obliging as his colleague Judge Gustafson, grants Carpenter’s motion.

You can see there was nothing interesting by way of opinions out of Tax Court today, but the orders had something interesting.

We lawyers write tax opinions for clients. At rare intervals, they take our advice; sometimes we even get paid. The protection of client-attorney privilege attends such opinions. Only the client can give up the privilege, although it can be lost through careless disclosure, and there’s bushelbaskets of caselaw on that point.

And there’s been recent discussion of the privilege as pertains to accountants on the LinkedIn Technical Tax Issues Board, which I co-manage with a certain highly-regarded Director at a major accounting firm. See 26USC§7525(a)(1), which puts “any federally authorized tax practitioner” in the position of an attorney. How about Registered Tax Return Preparers?

But Tax Court answers one question today: if taxpayer wants to use reasonable cause (Section 6664(c)), and an expert rendered advice that would be privileged, even if the taxpayer doesn’t want to use that advice on the trial, the taxpayer has to give up the privilege and hand over the opinion.

The Order is Humboldt Shelby Holding Corporation and Subsidiaries, Docket No. 25936-07, Judge Goeke. It’s an economic substance case. IRS moves to compel production of the tax opinions which taxpayer got from well-regarded New York City attorneys. “The law firm of Pryor, Cashman, Sherman, and Flynn LLP rendered two legal opinions (Cashman opinions) to petitioner regarding the federal income tax consequences of the aforementioned transactions. Petitioner refuses to produce the Cashman opinions on the basis that they are protected by the attorney-client privilege and work-product doctrine. On September 14, 2012, respondent filed a Motion to Compel Production of Documents with regards to the Cashman opinions.” Order, p. 1.

Taxpayer claims Section 6664(c) reasonable cause umbrella to ward off penalties, but wants to withhold the opinions. Apparently taxpayer has other grounds for showing reasonable cause, and claims they didn’t rely on the opinions. Haven’t we all heard that old song before? I hope Cashman & Co got paid.

No, says Judge Goeke: “In determining whether petitioner is entitled to the reasonable cause exception of section 6664, we must also decide whether petitioner acted in good faith. A good faith determination requires that we consider all information available to petitioner. Accordingly…we believe the Cashman opinions are relevant to such defense whether relied upon by petitioner or not. Therefore, we agree with respondent (IRS) that the claim of privilege regarding the Cashman opinions has been waived.” Order, p. 1 (Citations and footnote omitted).

“Gude faith, ye maunna’ fa’ that”, as Scotland’s greatest remarked. But hand everything over.

And Tax Court Can’t Review Why IRS Didn’t Get

Is Section 7623(b) a toothless lion? Unless, of course, you’re a Swiss moneylaunderer and tax evasion facilitator, doing time for your peccadilloes.

Maybe. See Raymond Cohen, 139 T. C. 12, filed 10/9/12, Judge Kroupa laying down the law. And see my blogposts, “Qui Tam?”, 9/12/12, “Whistleblowers, Beware!”, 9/7/11, and “The Whistleblower Blows It”, 6/20/11.

Briefly, a whistleblower gets paid if, and only if, IRS gets paid based on info provided by whistleblower and not publicly available.

If IRS doesn’t get paid for any reason, including but without in any way limiting the generality of the foregoing (as the high-priced lawyers say), IRS doing nothing for any reason or for no reason, whistleblower doesn’t get paid.

IRS can refuse to proceed arbitrarily, capriciously or stupidly, and Tax Court has nothing to say. Tax Court has no jurisdiction to review IRS’ determination to proceed or not to proceed.

Ray blew the whistle on a bunch of uncashed dividend checks his wife found when she was administering a decedent’s estate, claiming they were unreported income. IRS’ Ogden whistleblowing crew looked at it and said “we didn’t get any money, so you’re out”. Ray asked for a reconsideration, and Ogden said “no, but this time we say no because you used publicly available information (like a class-action lawsuit and the State’s unclaimed property website).”

The arguments: “This case presents an issue of first impression in this Court. We are asked to decide whether any relief is available under section 7623(b) when a taxpayer alleges that the Commissioner denied a claim without initiating an administrative or judicial action or collecting proceeds. Petitioner contends that respondent abused his discretion by not acting on his information. Petitioner argues respondent must explain the reason he denied the claim and reopen the claim. Respondent contends we can provide relief under section 7623(b) only after the Commissioner initiates an administrative or judicial action and collects proceeds.” 139 T. C. 12, at p. 5.

Ray argues IRS will bounce his claim, take his info, grab the money and pay him nothing. That’s not fair. Maybe not, says Judge Kroupa, but: “This Court, however, is not a court of equity and section 7623 does not provide for equitable relief. See Commissioner v. McCoy, 484 U.S. 3, 7 (1987); Stovall v. Commissioner, 101 T.C. 140, 149-150 (1993). Section 7623(b) does not provide any relief before whistleblower information leads to an administrative or judicial action and the collection of proceeds.” 139 T. C. 12, at p. 9.

Of course, there is the usual “so sad, too bad” finale: “We can appreciate petitioner’s frustration that information that he believes is actionable was not pursued. Congress, however, has charged the Commissioner with resolving these claims and has not provided any remedies until after an administrative or judicial action and the collection of proceeds.” 139 T. C. 12, at p. 9.

Want to close the tax gap, Congress, without increasing IRS’ budget? How about a more user-friendly whistleblower statute?

That’s Judge David Gustafson; by way of illustration of the foregoing, as the high-priced lawyers say, see my blogpost “We’ll Come to You”, 9/18/12, where I describe how Judge G offered to conduct John Carter’s trial in the prison where John was a-servin’ of his time.

Tax Court is closed today, 10/8/12, so no decisions or orders issued. I was suffering from Tax Court withdrawal, so I found an order of Judge G’s from 10/5/12, Michael J. Sylvia III, Docket No. 23908-11. Judge G helps Mike out by answering four questions Mike poses in his pre-trial brief, and incidentally showing what frivolous arguments are and the consequences thereof.

Candidates for the RTRP qualification  won’t be asked questions like these on their exam, although maybe they should be.

Judge G: “1. ‘Is the notice of deficiency valid?’ The apparent answer to his question is: yes. Mr. Sylvia’s point seems to be that the notice of deficiency is based on reports from third parties of amounts that they paid to Mr. Sylvia, and he challenges those reports. A taxpayer may indeed raise a ‘reasonable dispute’ about third-party reporting. See section 6201(d). However, it appears (though we cannot yet determine finally) that the nature of the challenge is that Mr. Sylvia contends that the amounts reported to do not constitute taxable income for various frivolous reasons. If, as he seems to admit, the payors on the reports really did pay money to Mr. Sylvia in exchange for his work or property, then the amounts are taxable, and the notices of deficiency would be upheld in that regard.

“2. ‘By what statute, if any, has the petitioner been made liable for a tax?’ The answer is: section 1 of the Internal Revenue Code (26 U.S.C.).

3. ‘Was the petitioner engaged in an activity that is subject to tax?’ The income tax is imposed not on activities but on ‘income from whatever source derived’, including ‘[c]ompensation for services’. I.R.C. sec. 61(a)(1). For example, if Mr. Sylvia was paid compensation for his labor, then that compensation is taxable income.

4. ‘Does the petitioner have zero basis in his labor? Yes. ‘The argument that a taxpayer has a basis in labor equal to its fair market value would effectively eliminate taxes on wages and is frivolous.’ Beard v. United States, 580 F.Supp. 881, 882 (E.D.Mich.1984).” Order, p. 1.

Then Judge G tells Sylvia all about it: “America is a free country, and citizens have the right to advocate for their views, to petition for redress of grievance, and to lobby Congress for the revision of our laws. However, no one has the right to make doomed, frivolous arguments in Tax Court litigation only to delay the inevitable assessment of their obvious tax liability.” Order, p. 2.

And Judge G tells Sylvia to play fair or expect a Section 6673 penalty if he doesn’t.

Can’t wait for the decision.

And,  “Lift Up Thy Voice”

Twofers from Tax Court today, 10/4/12, the tales of the two Bobbys.

First Bobby is Robert S. Yarish and Marsha M. Yarish, 139 T. C. 11, filed 10/4/12. It’s all Bobby’s problem, as his ESOP craters in 2004 retroactive to Day One (2000). Judge Kroupa, unraveller of tangled webs, has the floor: “Respondent (IRS) determined in the revocation letter that the Yarish ESOP did not meet the requirements under section 401(a) for failing to satisfy section 410(b) and that the trust under the Yarish ESOP was not exempt from tax under section 501(a). This Court sustained respondent’s determination to retroactively disqualify the Yarish ESOP for the 2000 to 2004 taxable years. See Yarish Consulting Inc. v. Commissioner, T.C. Memo. 2010-174.” 139 T. C. 11, at p. 4.

Apparently Bobby’s ESOP was a fable, because it was a Sub S holding corporation ESOP and disqualified. See my blogpost “The Unanswered Question”, 6/13/12, involving a Nonqualified Sub S ESOP that gets by when it dissolves.

So Bobby claims that, since 2004 is the only open year when he gets hit, he only need pay tax on the contributions made to his now-defunct ESOP for that year, relying on the “(other than the employee’s investment in the contract)” parenthetical in Section 402(b)(4)(A). This provision requires the disqualified beneficiary to pay tax on whatever he gets (in this case $2.43 million) less whatever he contributed or his employer, his captive Sub S, contributed for him.

OK, but does he pay tax on the whole enchilada or only what accretions there were in 2004, the only open year? Case of first impression, and no disputed facts, so Judge Kroupa has to parse the statute and grant summary judgment.

IRS argues that the only “employee’s investment in the contract” is what the employee actually paid tax on, and Bobby never paid tax from Dime One until now, so Bobby owes everything, whenever it accrued to his benefit, and as he was fully vested in the exploded ESOP from Day One, he owes tax from Dime One.

Bobby argues that the magic words, not defined in Section 402 but as defined in Section 72, are terms of art but Judge Kroupa isn’t buying: “First, petitioners argue that ‘investment in the contract’ as defined in section 72 is an established term of art that applies universally throughout the Code and thus we should look to section 72 for its definition. We recognize that where Congress uses a term of art that has had an established specific meaning over long periods, Congress presumably incorporates that meaning when it uses the term. We disagree, however, that the phrase ‘investment in the contract’ is an established term of art.

“While section 72 defines the phrase ‘investment in the contract,’ nowhere in that section or its accompanying regulations is there any indication that the definition applies outside the context of section 72. Moreover, the definition of ‘investment in the contract’ in section 72 that petitioners argue applies for purposes of section 402(b)(4)(A) is expressly limited in scope to specific subsections of section 72. See sec. 72(c)(1), (e)(6), (f). Thus, we are not convinced that the phrase ‘investment in the contract’ as defined in section 72 is an established term of art that applies throughout the Code.” 139 T. C. 11, at pp.11-12 (Citation omitted).

Neither is Section 72 of similar purpose and intent to Section 402 so as to make the definition in pari materia (that’s high-priced lawyer babble for “same same”), and thus applicable.

Finally, Bobby argues each year stands on its own, and the closed years are off the table (IRS isn’t arguing nonfiling, fraud or substantial overvaluation, so standard 3SOL applies). No, says Judge Kroupa, there are plenty of places where Congress has moved otherwise taxable events from one year to another, and here the aim is to hit the heavies when their deferral schemes blow up, to the extent they haven’t sooner “given at the office”. And Bobby hasn’t, so the whole nine yards are taxable.

Next is another Bobby, Robert G. Fielder and Deborah R. Fielder, T. C. Memo. 2012-284, filed 10/4/12. Bobby is fighting a levy, and there’s much back-and-forth about whether his 433-A was complete or not, what his farm was worth, and whether he disclosed Debby’s business income, when he offered a collection alternative that Appeals rejected and sustained the levy.

But for sure he never got a SNOD, and he did file the necessary return to be considered timely for collection alternative purposes. IRS wants summary judgment affirming Appeals’ rejection, but Judge Laro says no.

There are questions of fact. First, as Bobby never got a SNOD, he can contest the deficiency, and that includes additions to tax, interest and penalties. “Respondent (IRS) takes the position in his motion that petitioners did not properly assert they are not liable for the additions to tax because they did not raise the dispute in their Form 12153 hearing request. As respondent sees it, the record supports his assertion that petitioners were merely confirming the accuracy of the information given to them by the IRS and were not substantively disputing the existence or amount of the liability.” T. C. Memo. 2012-284, at p. 15.

But the SO’s case activity record says that Bobby said he thought the penalty was unfair, that his return was late because his accountant quit on him and he prepared the return as fast as he could, and the SO tried to explain to Bobby why the penalty was proper. And the SO’s determination didn’t consider Bobby’s objection to the additions and penalty, although Section 6330(c)(3)(B) required him to do so.

“Nor do we accept respondent’s position that petitioners were precluded from challenging the additions to tax because they did not raise the issue in their Form 12153 hearing request. Neither the statute nor our caselaw requires a taxpayer to raise the liability issue in the request for a CDP hearing for it to be considered properly at issue. The statute provides only that a taxpayer may raise the issue of underlying tax liability at the CDP hearing if the taxpayer did not receive a notice of deficiency or did not otherwise have an opportunity to dispute such tax liability, and the determination by an Appeals officer is subject to judicial review under section 6330(d). The statute does not speak to the timing for raising the issue. The issue of underlying liability will be considered properly raised if a taxpayer raises it at any time during a CDP hearing.” T. C. Memo. 2012-284, at pp. 16-17 (Citations omitted).

So Bobby will get a trial.

Takeaway–When at a CDP, if you didn’t get a SNOD, take your text from Isaiah, Ch. 40, verse 9: “Lift up thy voice with strength; lift it up, be not afraid” even if you left it out of your Form 12153.