Judge Gustafson is an obliging fellow. Remember the boost he gave hapless ol’ Khadija Duma? Read all about it in my blogpost “Go For It”, 1/23/12. Now Judge Gustafson again extends a helping hand, sort of,  in an Order, Docket No. 30786-09, filed 9/18/12, the story of John Carter.

John applied for a Writ of Habeas Corpus Ad Testificandum back in February, but it was denied by then-Chief Judge Colvin, because John hadn’t provided for the costs of bringing him to The Home of the Bean and the Cod (that’s Boston, Mass) from his abode, in order to try his tax case.

Apparently, John was a guest of the people and the government at the time, and needed to be in the courtroom in The Hub to try his case. No go, so C.J. Colvin then handed John’s case over to Judge Gustafson.

Now Judge Gustafson deals with John’s problems. First, he told John to mail a list of his trial witnesses both to the Court and to IRS. John doesn’t bother with IRS (which is probably the root cause of his problems with IRS; IRS gets peevish when ignored), but sends Judge Gustafson the following sad tale: “…the letter does state that Mr. Carter will not be calling any witnesses, because of: financial difficulty; the adverse nature of some potential witnesses; and the logistical difficulty of locating helpful witnesses.” Order, p. 1.

Tough to try a case when you’re in the Stony Lonesome. But remember Robert L. Willson, the hero of Justice Holmes’ (The Judge Who Writes Like a Human Being) famous lecture on basis. See my blogpost “Basis for Dummies”, 11/24/11. IRS kindly waited until Willie was restored to society before trying his case.

But Willie had some barfly witnesses. John has none, as aforesaid. And apparently John may be away longer than Willie.

But Judge Gustafson is willing to go more than halfway: “We point out that, in part because of Mr. Carter’s apparent inability to pay for his own transport to a Boston trial (see order of March 21, 2012), we have scheduled his trial to take place at his prison, which is the most we can do to address his financial difficulty and facilitate his presentation of his case. As for locating helpful witnesses, we note (1) that this case has been pending for more than two and a half years, during which Mr. Carter has not located these witnesses, and (2) that he does not suggest (nor does it appear) that the situation will change in the future.” Order, p. 1.

So Judge Gustafson orders the Clerk of Tax Court to send a copy of John’s missive to IRS, and, lest IRS feel even more neglected, orders John to show  the Court that he’s sending IRS copies of all his correspondence.

And now, Tax Court goes to jail. That’s my kind of court.

And, A Footnote

Loretta Lea Wanat, formerly a highflyer with Northwest Airlines, doesn’t bother with tax returns for three years, the IRS assesses deficiencies, apparently without bothering with Section 6020 SFRs, Loretta Lea petitions Tax Court, and, the day before trial of the eponymous 7463, Loretta Lea hands IRS counsel purported returns for the three years at issue.

Now this should call for a “Don’t Ambush the IRS, Either”. But STJ Lew Carluzzo (the Judge who spells our name correctly), seeing the IRS didn’t use the famous Rule 70 “the Court expects the parties to attempt to attain the objectives of discovery through informal consultation or communication before utilizing the discovery procedures provided in these Rules”, decides to wade through Loretta Lea’s last-second impromptu 1040s. His exegesis is found in T. C. Sum. Op. 2012-92, filed 9/17/12.

But first he gives Loretta Lea and IRS a piece of his judicial mind: “Issues arising from deductions yet to be shown on a Federal income tax return are contemplated in the petitions filed in these cases. Ignoring what petitioner labeled as ‘preliminary’ returns submitted to respondent’s counsel after the petitions were filed, the returns on which the deductions here in dispute are claimed were not provided to respondent’s counsel until the day before trial. Sometimes late is just as bad as never.

“Petitioner’s procrastination, coupled with respondent’s restraint from using formal discovery in cases subject to a sec. 7463 election, in effect transformed one of the traditional roles of a trial, that is, to resolve factual disputes between litigants, into an exercise more in the nature of an examination of petitioner’s untimely submitted returns. A trial even as informal as contemplated under Rule 174(b) is ill suited for such purposes.” T. C. Sum. Op. 2012-95, at p. 4, footnote 3.

Loretta Lea made her beds, but it wasn’t where she lay her head; it was dog beds she made to sell. And STJ Lew gives her some deductions in that regard. Her real estate venture deductions fall apart on non-substantiation and failure to distinguish between personal and business use. And she held the realty for appreciation in value, not in a trade or business, so at best she’d have the Section 212 production-of-income deductions, but can’t prove them. There’s an appendix in which the purported deductions are shown, and STJ Lew sends her and IRS off to a Rule 155 bean-count.

But why should Tax Court judges, even special trial judges, engage in what amounts to return preparation? Loretta Lea should have gone to Liberty, Jackson-Hewitt or H & R Block; she would have saved the additions to tax for nonfiling and nonpayment. But maybe she thought that the $60 filing fee and an overnight to 400 Second St, N.W., was cheaper. Better not let the word get out, STJ Lew. You might find yourself  overwhelmed on April 14.

And now the footnote. See my blogpost “The Rule of Reason – Circular 230 Revisited”, 9/15/12. As I have been preparing marketed opinions for at least 35 years, I am somewhat loath to throw my old Section 10.35 language away; I rather think that my modification will be much less extensive than my blogpost suggested.

Of course, if and when the proposed Regulations go temporary, I won’t send the “cigarette pack” warning on every piece of paper or electron I send out, but I will use a variant in my opinions. While the proposed regulations are well and good, neither IRS nor Treasury can overrule Section 6664(c). As long as that is the law, a serious disclaimer is in order, at least in marketed opinions, and not just for avoiding penalties either.

 IRS Drops the §10.35 Cigarette Pack Warning

In a burst of realistic thinking, the IRS has finally decided to get rid of the §10.35 “don’t rely on this to avoid penalties” boilerplate warning in Circular 230. The good news is to be found in REG-138367-06, notice of proposed rulemaking and public hearing.

You can read all about it here.

Finally realizing that the “cigarette pack” warning was being pasted on every e-mail every practitioner sent, whether it had anything to do with taxes or not, IRS decided to dump the whole thing. Nobody understood what it meant outside the tax profession, anyway. And if I sent a non-professional friend an e-mail on my office stationery saying “let’s meet for drinks tomorrow”, he or she would ask me “what do you mean I can’t use this to avoid penalties on my taxes?”

IRS also wants to get rid of the reliance-marketed tax opinion conundrum, which made us try to figure out exactly into what pigeonhole our opinions fitted, wasting time and energy.

Best of all, the proposed regulations establish a reasonable standard of competency, taking all facts and circumstances into account before hanging us out to dry; but with a heightened standard in abusive situations.

I’ve written a bunch of marketed opinions under the present §10.35, with no ill effects to person or property. I’ve got the boilerplate in my word processing software. But I can’t say I’ll be sorry to get rid of the rigamarole. I’ll have to put in a simpler statement when the new regulation comes into effect, and, as always, concentrate on the facts and the law.

Oh, and a word of warning. If a practitioner fails to file four out of five annual returns the practitioner needs to file for self, or misses filing in five out of seven periods where returns are required more times than once annually (like 941s, 1040-ES) for self, then IRS can invoke expedited suspension. And reapplication for reinstatement, if you don’t win administratively or before an ALJ, can’t be made sooner than five years.

But read, heed and file your comments with Treasury electronically via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-138367-06) by November 16, 2012. And if you want to attend the December 7, 2012 public hearing in the auditorium at 1111 Constitution in Our Nation’s Capital, get a hold of Oluwafunmilayo Taylor at (202) 622-7180, and give him (or her) your vital statistics.

It may not be as much fun as Laura Nyro’s 1968 hit “Stoned Soul Picnic”, but surry down anyway.

That’s the problem for Enterprise Water Works, Docket No. 20441-12L, filed 9/14/12. No decisions out of Tax Court today, and no Designated Orders, so this is the best of the plain-vanilla orders, from Chief Judge Thornton.

Enterprise files what looks like a timely petition, but it’s signed by “Tom B. King, ‘CPA – POA’”. Order, P. 1.

Chief Judge Thornton checks the shortlist of Tax Court admitteds, that miniscule number who made their way through the eye of the needle that is the admissions examination (see my blogposts “A Book and A Modest Proposal,” 5/22/12, and “Another Argument,” 6/7/12), and doesn’t find Tom’s name among the elect.

So he admonishes the waterworkers thus: “The Tax Court does not recognize powers of attorney.” Order, p. 1. Throw away those Form 2848s, guys.

He then directs the powerless waterworkers to “…file an amendment to petition, duly signed and bearing the original signature of its president or another officer authorized to institute this litigation on its behalf, ratifying and affirming the filing of the petition on its behalf.” Order, p. 1.

Chief Judge Thornton mercifully directs the Clerk of the Court to send a form to the waterworkers for the proper person to sign, ratifying whatever Tom did, because obviously the waterworkers will never get the paperwork right, and Tom is not among the chosen few who can advise them.

The relevant Rule is 23(a)(3), which requires that all papers filed with Tax Court shall be signed as follows: “The original signature, either of the party or the party’s counsel, shall be subscribed in writing to the original of every paper filed by or for that party with the Court, except as otherwise provided by these Rules. An individual rather than a firm name shall be used, except that the signature of a petitioner corporation or unincorporated association shall be in the name of the corporation or association by one of its active and authorized officers or members, as for example “‘Mary Doe, Inc., by Richard Roe, President’”.

And waterworkers, see also Rule 33. An unsigned pleading can be stricken, and if filed for an improper purpose can result in sanctions to the signer.

That’s Special Trial Judge Daniel A. (“Yuda”) Guy. Back on 4/24/12, when STJ Guy was appointed to the Tax Court bench, I greeted his appointment with the following comment: “We look forward to many interesting opinions from STJ Guy.” See my blogpost “Welcome, Judge Guy”, 4/24/12.

Well, it’s only a designated order, but it is interesting. It’s Diamond Packaging Corporation, Docket No. 27463-10, filed 9/13/12, and it deals with playing nice during informal discovery. The basic documents are Rule 70(a) and Branerton Corp. v. Commissioner, 61 T.C. 691, 692 (1974).

IRS made informal document requests from six of Diamond’s corporate clients, trying to track down the increasing research activities for which Diamond had claimed Section 41 tax credit for the years at issue.

Diamond replies with a motion for a protective order, claiming “…respondent’s actions circumvent the Court’s rules and procedures governing discovery, are unduly burdensome, and have unnecessarily tarnished petitioner’s reputation.” Order, p. 1.

Nope, says STJ Guy. “In the light of the record presented, we reject petitioner’s argument that respondent’s informal requests for documents circumvent the Court’s rules governing discovery. To the contrary, the Court has not prescribed rules specifically relating to informal pretrial discovery of potential witnesses. Moreover, it has been the Court’s longstanding policy to encourage the parties to attempt to attain the objectives of discovery through informal consultation and communications. There has been no showing that respondent’s requests are tantamount to the more formal administrative summons…. Although petitioner complains that respondent did not consult with petitioner before issuing the informal requests, the Court is not persuaded that this factor provides justification for a protective order.” Order, p. 2 (citations omitted).

Besides, four of the six clients Diamond wanted to protect are ready, willing and able to comply with IRS’ request, and raised no objection. The other two said they had nothing of the kind IRS sought, and IRS said they’re down with that.

“Petitioner’s final argument, that respondent’s informal document requests create ‘a stigma against petitioner that has already harmed its business interests’, is also unavailing. We agree with respondent that alleged harm to a party’s reputation generally is not sufficient to show good cause for the issuance of a protective order under Rule 103. See Willie Nelson Music Co. v. Commissioner, 85 T.C. 914, 921 (1985) (a showing that information in the public record would harm a party’s reputation is generally not sufficient to support the issuance of a protective order under Rule 103). Moreover, petitioner has failed to demonstrate any harm (financial or otherwise) that it has suffered or will suffer if its motion for protective order is denied. Id. at 925. Petitioner’s mere allegations of harm are insufficient to demonstrate good cause.” Order, at p. 2.

Note that Diamond doesn’t claim the clients don’t have relevant information or that IRS is on a fishing expedition, digging for irrelevant information.

So no dice, Diamond. No protective order. Play nice. Welcome, Judge Guy.

Judge Kroupa blows off Cigna Corporation in T. C. Memo. 2012-266, filed 9/13/12. The issue was whether Cigna could reserve for maximum guaranteed death benefits when it was reinsurer, using a method not approved at the time by the relevant State regulator, although subsequently it was generally adopted.

IRS conceded the deficiency, and the parties stipulated that IRS would accept Cigna’s numbers for every year except those that pre-dated the year at issue. Even though those years are not before the Court, Cigna claims it’s vital for the life insurers to know whether the magic method can be used for the years before it was adopted.

Nope, says Judge Kroupa. “It rests within our discretion to issue an opinion on the merits even where the Commissioner concedes that there will be no deficiency for the years before the Court.” T. C. Memo. 2012-266, at p. 7. But Cigna shouldn’t get too elated.

“Petitioner suggests the ‘interests of justice’ entitle petitioner and other taxpayers to an opinion resolving the tax reserve issue. See McGowan v. Commissioner, 67 T.C. at 604, 608. We disagree. In McGowan we were asked to decide whether a compulsory employee contribution constituted a State income tax that the taxpayer could deduct. Id. at 602. The Commissioner conceded the deficiency and asked us to enter a decision in the taxpayer’s favor. Id. We rejected the concession and issued a substantive opinion at the taxpayer’s request. Id. at 608. The interests of justice compelled us to issue the substantive opinion. See id. at 607. First, unlike here, we found that the unresolved issue would arise in the upcoming tax year for thousands of taxpayers. Id. at 601, 608. A substantive opinion would consequently alleviate confusion in an area that lacked clarity. Second, the taxpayer rejected the unilateral concession in its entirety. Id. at 606.” T. C. Memo. 2012-266, at pp. 9-10.

But in this case, Cigna agreed to the concession; the reserve issue affects only a small group of taxpayers, not thousands; the new method is already in place and IRS will allow it for future years, so it is only past years (not before the Court) that are at issue. While it might be nice for Cigna if Tax Court sorted out those years, to do so would be an advisory opinion, and we don’t give those.

In short, Cigna, you won, go home. And on the way, see my blogpost “Victory is Not Vindication,” 5/1/12, where Judge Kroupa teaches the same lesson.

Means no Section 7430 relief. That’s the story of Terry L. Worthan, T. C. Memo. 2012-263, filed 9/12/12.

The fight started over a defunct machine tool company. Trust fund taxes were paid late, with a request to allocate the payment to trust fund taxes (employees’ share), per Rev. Proc. 2002-26. IRS, of course, applied the payment to non-trust fund payroll taxes (employer’s share), and presents Terry with a NFTL.

Judge Marvel recounts the lengthy saga, wherein William Holman, Terry’s representative duly admitted to practice before IRS, runs up $11K in fees getting IRS to straighten out the payment, which finally happens.

Bill wants the money under Section 7430, because he prevailed in an administrative proceeding. IRS says “no, collection is not administrative, and anyway, you didn’t prevail.”

Judge Marvel doesn’t rule on who prevailed.  “Section 7430(c)(5) defines the term ‘administrative proceeding’ as ‘any procedure or other action before the’ IRS. Pursuant to section 301.7430-3(a), Proced. & Admin. Regs., an administrative proceeding does not include ‘[p]roceedings in connection with collection actions (as defined in paragraph (b) of this section)’. A collection action includes any action that the IRS takes to collect a tax or any action a taxpayer takes in response to the IRS’ act or failure to act in connection with collection of a tax. See sec. 301.7430-3(b), Proced. & Admin. Regs. Specifically, collection actions include actions taken by the IRS to collect a tax through the filing of a notice of lien with respect to a taxpayer and actions the taxpayer takes in response to the IRS’ filing of a notice of lien.” T. C. Memo 2012-263, at pp. 13-14.

Here there was a notice of lien, and everything took place without litigation. Thus, no recovery of administrative costs.

Hope the client paid you, Bill.

Next is a reminder to taxpayers offering collection alternatives, from The Judge Who Writes a Like a Human Being, The Great Dissenter, Judge Mark Holmes. The case is Thomas W. Brombach, T. C. Memo. 2012-265, filed 9/12/12. Tommy owes IRS $150K, accumulated over years; he said he would pay when the number was $60K, but never did, and the interest kept mounting.

Tommy had already lost in Tax Court on the $60K many moons ago, so abuse of discretion is the issue here.

Tommy offers IRS $28K on an OIC, but IRS says his RCP (reasonable collection potential, after applying the manual number for living expenses) is $113K, and tells Tommy no-go, and serves a levy.

I’ll skip Judge Holmes’ lengthy assurance to Tommy that his present wife will not lose her share of marital property, and his unpacking, at great length, of the differences between Tommy’s RCP and IRS’ (for Judge Holmes doing his best unpacking, see my blogpost “The Sum of Its Parts”, 3/12/12).

Tommy is still way light on the numbers, despite Judge Holmes’ massage thereof.

The issue is whether the IRS had any obligation to respond to Tommy’s $28K with anything but a flat rejection and a levy. “The Appeals officer credibly testified that ‘We were so far apart that we didn’t get into * * * the negotiation of one or two particular items [that] would have brought us together.’ Citing this refusal, Brombach makes one final procedural argument–that the Commissioner failed to give him an opportunity to negotiate or amend his offer before issuing the notice of determination, and that this was itself an abuse of discretion.” T. C. Memo. 2012-265, at p. 26.

Now “…Brombach doesn’t point us to, and we have not found, any legal authority that  mposes a duty on the IRS to negotiate a collection alternative in any particular way. He does point to one source that seems to impose a lesser duty on the Appeals officer–a duty to give the taxpayer a chance to match the RCP before outright rejection. Brombach says the Commissioner’s offer-in-compromise explanation packet states: ‘The examiner may decide that a larger offer amount is necessary to justify acceptance. You will have the opportunity to amend your offer.’ Form 656-B, Offer in Compromise Booklet (March 2009), at 15. This language suggests that if the examiner finds that a higher offer might be accepted, he’ll at least give the taxpayer a chance to take it or leave it. This is not what happened in Brombach’s case. He sent in an offer and received a rejection. While it’s understandably frustrating to Brombach that the guidelines weren’t followed in his case, instructions and other IRS publications are not authoritative sources of federal tax law. Taxpayers must look to authoritative sources of Federal tax law such as statutes, regulations, and judicial decisions and not to informal publications provided by the IRS.” T. C. Memo. 2012-265, at pp.26-27 (citations omitted).

So Tommy is out. “Brombach hasn’t shown that an opportunity to amend his offer is required by the Constitution or by any statute, regulations, or caselaw. The opportunity to amend an offer is not a taxpayer’s right but is within the Commissioner’s discretion, and the Commissioner has no binding duty to negotiate with a taxpayer before rejecting his offer.” T. C. Memo. 2012-265, at p. 28.

But see my blogpost “A Busy Day”, 9/10/12, with the sad story of Marcius J. Scaggs and Andrea L. Scaggs. “Don’t Ambush the Taxpayers”,  IRS. Your booklet is misleading. Why not make it clear that “you may have a chance to amend your offer, but maybe not, if you’re too low or play games”?

Still, the better path is “Agree with thine adversary whilst thou art in the way, lest the judge hand thee to the bailiff, and ye be cast into prison. Truly I tell thee, thou shalt not be let out until thou hast paid the last farthing.”  See my blogpost “Give It Your Best Number”, 4/9/12.

Or, The Whistleblower Gets Supremely Blown

I am in favor of whistleblowers. If they didn’t exist, much skullduggery would go un-dug. Unhappily, many whistleblowers are also among the unrighteous, as it is rare for saints to be present when the skullduggers are plotting or doing the nasty.

Now I was at a CLE this morning at which representatives of our State Attorney General’s Taxpayer Protection Bureau lectured us on Section 194 of our State’s Finance Law. This is our version of the Federal Statute, and it differs from the Federal False Claims Act (“Lincoln Law”), in that taxes are part of the State Finance Law’s scope, unlike the Federal, where tax whistleblowing is found in IRC Section 7623 (and see my blogposts “The Whistleblower Blows It”, 6/20/11, “IRS Loses a Double-header”, 7/12/11, and “Whistleblowers, Beware!”, 9/7/11).

You’ll remember that one of the sharpest arrows in IRS’ quiver for shooting down whistleblowers is that the information tendered is public.  The Supremes said “Amen”, 5 to 3, with Justice Elena Kagan, daughter of my old friend and colleague the late Bob Kagan, Esq., sitting it out, on 5/16/12, in Schindler Elevator Corp. v. US ex rel. Kirk, 10-188.

Kirk spilled the beans on Schindler’s supposed hiring of veterans that never happened, he said, relying on his wife’s Freedom of Information Act request to US Department of Labor. He used the results to back-check Schindler’s list of hires, as he worked for Schindler and was himself a veteran.

The Supremes said that the DOL information was public, available through FOIA, therefore constituted a “report” as defined by FFCA, thus barring any recovery by Schindler.

Now the problem is obvious: it needs the whistleblower to connect the dots. Some dots may be public, some private, some hidden, some in plain sight. But in the immortal words of the late great Bill Klem, “Some is balls and some is strikes, but they ain’t nuthin’ till I calls ‘em.” Somebody has to call ‘em, or at least put it all together, so the party charged with “callin’ ‘em” can in fact call ‘em.

Does no one remember Edgar Allen Poe’s classic short story “The Purloined Letter”? The essential document was in plain sight all along, but disguised. It took an expert’s eye to find it, and an expert’s hand to recover it for the true owner.

If the public policy of the United States is to create a disincentive to the knowledgeable coming forward, who will connect the dots? The Supremes saved pennies, and threw away dollars.

Fortunately, New York State does not bar whistleblowers who use public disclosure in addition to their own knowledge to connect the dots.

But a word of caution. If the whistleblower needs to make a NYS Freedom of Information Law request, let them first craft a disclosure and check in with the Taxpayer Protection Bureau at the Attorney General’s Office, and apply for some “cold comfort” before proceeding.

And in any event beware of the Federal FOIA; here be dragons.

Judge Wherry, again unwhimsical (but see my blogpost “A Whimsical Judge”, 3/6/12), has a lesson for IRS lawyers (but not only IRS lawyers) in Peter Kuretski and Kathleen Kuretski, T. C. Memo. 2012-262, filed 9/11/12.

The tax itself is uncontested, and the levy is sustained based on lack of hardship and the lack of meeting of the minds between AO and taxpayer’s rep on a full-pay installment agreement. Liability was more than the Section 6159(c)(1), (4) limit of $10K and payout more than three years, so no automatic installment agreement, thus IRS has discretion and on the facts here discretion wasn’t abused.

Now for the lawyer issue. IRS wanted the 6654(a) underpayment of withholding addition to tax. As we all know, the rule is 90% of current year’s tax as shown on return (or 90% of tax due if no return filed), or 100% of tax shown on previous year’s return (unless previous year was less than twelve months or no return filed).

But IRS introduces nothing to show what the prior year’s return, if any, showed as tax due, if anything. IRS counsel could have proffered the Form 1040 itself, or Form 3050 Lack of Record, or Form 4340, Certificate of Assessments, Payments, and Other Specified Matters. Instead, “The parties submitted a stipulated exhibit, Form 656, Offer in Compromise, in which petitioners stated that they sought to compromise tax liabilities for the 2006, 2007, and 2008 taxable years. This exhibit suggests that petitioners had a tax liability for the 2006 year but sheds no light on whether it was an income tax liability. In any event, this cursory statement is insufficient for us to determine the tax shown on the return for the 2006 taxable year.” T. C. Memo. 2012-262, at p. 16, footnote 4.

So no addition.

Takeaway- Determine each element of your prima facie case for each claim or defense. Determine what evidence you need to prove or establish each thereof. Obtain, collect and collate your evidence. Offer it.

Or, Portney’s Complaint

This is the sad story of Anthony Tesoriero, and his long-time (but probably by now his ex) accountant, Jack Portney, CPA. Read all about it in Anthony Tesoriero, T. C. Memo. 2012-261, filed 9/11/12, Judge Wherry the Whimsical Judge (see my blogpost “A Whimsical Judge”, 3/6/12) being anything but whimsical here.

Tony’s problem was that his withholding was way low for the year at issue. Jack, not a bit dismayed “…did not adjust the estimated tax liability for wage income and did not adjust the total …payments for withholding credits. Nor did he adjust any entries to reflect Ms. Tesoriero’s income despite the fact that he knew she was employed by petitioner’s corporation.” T. C. Memo. 2012-261, at pp. 3-4 (footnote omitted).

By the way, Tony never told Jack that Ms. Tesoriero was in the process of divorcing him and that she was going to file separately, using another preparer. But that wasn’t all.

Jack, relying on the old SALY principle (Same As Last Year), just toted up Tony’s estimateds, put that number ($69K) down on a 4868, and sent his secretary to post it off via first-class mail. Jack routinely put about half his clients on extension; not uncommon. And used first-class mail, not registered or certified. Also not uncommon.

You can guess the rest. The 4868 never got there, Tony’s actual tax liability was more like $280K, and Tony gets nailed for the Section 6651(a)(1) late-filing penalty.

Tony pleads that Jack mailed the 4868, albeit not registered or certified, nor by a sanctioned private delivery service. Judge Wherry: “This Court has allowed taxpayers to prove delivery through other extrinsic evidence, such as testimony that they mailed the document. Estate of Wood v. Commissioner, 92 T.C. 793, 799 (1989), aff’d, 909 F.2d 1155 (8th Cir. 1990). In certain circumstances, therefore, taxpayers may prove delivery, thus filing, through testimony. But, as we have cautioned taxpayers in the past, when a return is not sent by registered or certified mail, it is the taxpayer, not the Government, that bears the risk of nondelivery. Walden v. Commissioner, 90 T.C. 947, 951 (1988).”  T. C. Memo. 2012-261, at p. 7.

Tony being a New Yorker, Judge Wherry has to follow Second Circuit learning, and Second Circuit isn’t friendly to unorthodox mailers. Section 7502 is the exclusive remedy in New York, Connecticut and Vermont. And that means registered, certified or sanctioned private deliverers…nothing else.

And the new retroactive regulation concerning mailing doesn’t matter: “Respondent contends for the first time in his posttrial reply brief that sec. 301.7502-1(e)(2), Proced. & Admin. Regs, promulgated in 2011 and effective September 21 2004, controls. See 76 Fed. Reg. 52561 (Aug. 23, 2011). Because we are constrained by precedent of the Second Circuit that reaches the same conclusion, we need not address this argument.” T. C. Memo. 2012-261, at p. 8, footnote 4. See my blogpost “Mail Call”, 9/16/11.

Tony is out of luck, and he can’t claim he reasonably relied on Jack to get the 4868 to IRS on time. Reliance on an agent is not reasonable reliance, unless a question of law is involved, such as “no tax due”, but not “I’ll timely file”. Second Circuit is adamant on that point as well. Finally, “petitioner did not produce evidence of such reliance. Petitioner never requested that Mr. Portney file an extension request. Nor did petitioner present evidence that he followed up with Mr. Portney to ensure that the extension request was filed. Mr. Portney did not call petitioner to inform him that an extension request had been filed.” T. C. Memo. 2012-261, at p. 11, footnote 6.

Preparers, pay the two-and-a-half bucks and send it certified (nothing says return receipt requested is required).

And taxpayers, don’t grouse when your preparer charges you the two-and-change for certified mail. It’s truly cheap.