Or, If You Do It Right, You Can Do It Among Yourselves

That’s the takeaway from James Maguire and Joy Maguire, 2012 T.C. Memo. 160, filed 6/6/12.  Judge Ruwe is in the driver’s seat in this tale of two S Corps, one that sells used cars and the other that provides financing for those sales. Both the S Corps are owned by the Famiglia Maguire, hence these tears, as IRS claims the Famiglia’s mix-and-match with accounts receivable from one S Corp to the other to build basis for loss deductions didn’t really happen.

Oh no, says Judge Ruwe, the swap was real. “Held: Shareholders in two related S corporations are not prohibited from receiving a distribution of assets from one of their S corporations and then contributing those assets into another of their S corporations in order to increase their bases in the latter. The effect is to decrease the shareholders’ bases in the S corporation making the distribution and thereby reducing the shareholders’ ability to get future tax-free distributions from the distributing S corporation, while increasing the shareholders’ bases in the S corporation to which the contributions are made. The fact that the two S corporations have a synergistic business relationship and are owned by the same shareholders does not preclude accomplishing Ps’ goal, so long as the underlying distributions and contributions actually occurred.” 2012 T. C. Memo. 160, at p. 2.

Ya gotta like a Judge who makes it easy for the poor blogger.

The story:  Auto Acceptance (AA) sold cars, CNAC, Inc., financed the sales. CNAC made money, AA lost money. The Famiglia owned 100% of the stock of both, but their basis in AA was insufficient for them to take all the AA losses, as S Corp pass-through losses are limited to stock basis plus debt basis.

The Famiglia called their accountants, who told them to write a check from CNAC, where they had plenty of basis, to themselves and from themselves to AA, to increase their AA basis so they could take the losses. The Famiglia replied that the accountants could write their own checks, as the Famiglia didn’t have that much cash in the CNAC accounts.

Nothing daunted, the accountants (into whose professional credentials Judge Ruwe goes in some detail, for good-faith reliance purposes) suggest distributing to the Famiglia some receivables AA owed CNAC, whereupon the Famiglia would  transfer those to AA, and build basis thereby.

The Famiglia’s basis in CNAC was always positive after the distribution of the AA receivables to themselves and the contribution thereof to AA.

The Famiglia and the accountants papered the deals well, with corporate resolutions, adjusting journal entries, assignments, promissory notes for intraFamiglia borrowings, and took the AA losses.

IRS drops the SNODs, saying it was all a game of put-and-take.

Judge Ruwe: “In determining whether a particular transaction qualifies as a shareholder investment, a taxpayer must make an actual ‘economic outlay.’ A taxpayer makes an ‘economic outlay’ when he incurs a cost or is left poorer in a material sense after the transaction.” 2012 T. C. Memo. 160, at pp. 11-12 (Citations omitted).

IRS says there wasn’t any real economic outlay, but Judge Ruwe isn’t buying that. The Famiglia did transfer the receivables, in that there were adjusting journal entries on the respective corporate books, and there were resolutions, for each tax year at issue, timely made.

“When petitioners received the accounts receivable from CNAC, as they had every right to do, and contributed them to Auto Acceptance, that transaction reduced the liabilities of Auto Acceptance; made Auto Acceptance solvent in terms of its assets exceeding its liabilities; and increased the net worth of Auto Acceptance, exposing a greater amount of its assets to its general creditors. At the same time, petitioners’ bases in CNAC were reduced by the amounts of the accounts receivable that CNAC had distributed to them, thereby reducing their ability to receive future tax-free distributions from CNAC.” 2012 T. C. Memo. 160, at pp. 14-15 (Footnote omitted).

But the footnote says a lot: “Petitioners stress that the risk involved in exposing more of Auto Acceptance’s assets to its creditors was more than hypothetical, because by mid-2004 the Kentucky attorney general had instituted a lawsuit against petitioners and their businesses claiming millions of dollars on the basis of consumer fraud claims. Petitioners contend that the risk of the loss to Auto Acceptance’s creditors, including vendors that it alone dealt with, when viewed in consideration of the attorney general’s lawsuit, was very real and the additional net worth in Auto Acceptance created by the capital contribution was put at greater risk, making them poorer in a material sense.” 2012 T. C. Memo. 160, at p. 15, footnote 7.

Likewise the distribution from CNAC wasn’t taxable to the Famiglia under Section 1368(b), as the Famiglia still had basis in their CNAC stock after each distribution.

The Law of Relativity doesn’t torpedo the Famiglia either: “The fact that the CNAC accounts receivable were distributed to petitioners and then contributed to a related entity does not require a finding that there was no economic outlay. We have previously considered this issue and have held that ‘the fact that funds lent to an S corporation originate with another entity owned or controlled by the shareholder of the S corporation does not preclude a finding that the loan to the S corporation constitutes an “actual economic outlay” by the shareholder.’ The fact that petitioners contributed intangible assets to Auto Acceptance, rather than cash, does not preclude increases in their bases. The tax basis of an S corporation may be increased through the contribution of cash, tangible assets, or intangible assets (such as accounts receivable).” 2012 T. C. Mem. 160, at p. 16.

Or to put it simply, “(T)he fact that the two S corporations have a synergistic business relationship and are owned by the same shareholders should make no difference so long as the underlying distributions and contributions actually occurred.” 2012 T. C. Memo. 160, at p. 16.

Make it real, and you’ve got the losses.

Or, If You’re Not Indicted You’re Not Stayed

In the words of Paul Simon’s 1970 blockbuster hit (No. 47 on Rolling Stone’s 500 greatest hits), “when you’re down and out, when you’re on the street, when evening falls so hard”, you’ll get no comfort from Tax Court unless you’ve at least been indicted. So rules hard-hearted Judge Goeke (he who gave The Great Dissenter, Judge Holmes, the Judge who writes like a human being, a firm time-out in Petaluma FX Partners, LLC, Ronald Scott Vanderbeek, A Partner Other Than The Tax Matters Partner, 2012 T. C. Mem. 142, filed 5/17/12; see my blogpost “Judge, He Didn’t Mean It”, 5/17/12), in Ironbridge Corp. and Subsidiaries f.k.a. Pitt-Des Moines, Inc., 2012 T.C. Mem. 158, filed 6/5/12.

Ironbridge was another casualty of the Forex mix-and-match shenanigans of the late Nineties, whereby recognized major currency (Euro and Yen) puts were married to unrecognizable minor currency (Danish Kroner) calls, with offshore tax indifferents thrown in, so the economics zeroed out but not the tax benefits. A big-time accounting firm put Ironbridge into one of these, and IRS, Zeus-like, flung SNODs like thunderbolts.

Meantime, DOJ got into the act, and Haber, president and panjandrum of Ironbridge, was concerned that he might be principal soloist in a concerto for stool pigeon and Grand Jury.

While the foregoing was foregoing, Ironbridge petitions Tax Court, but IRS and Ironbridge seriatim ask for stays, saying that to try the case would prejudice DOJ (in that Ironbridge could get discovery of the criminal matters beyond that permitted by Fed. R. Crim. P.) and that Ironbridge couldn’t meet their burden of proof if Haber and certain of his unnamed minions took the Fifth at the trial.

However, DOJ finally sends Haber a “dear defendant” letter, wherein they state that they’re investigating, but not to worry, we have no present intention of indicting either you or your companies. Think IRS told DOJ to send that letter? No prize for the correct answer.

Anyway, “On March 27, 2012, petitioners filed a motion to dismiss the consolidated cases and enter decisions against them. Petitioners stated that they filed the motion as a result of their inability to present the testimony of Mr. Haber and other individuals who planned to invoke their Fifth Amendment rights. Petitioners claim that the lack of such testimony ‘would prevent the petitioners from being able to put on their case at trial’ because ‘Testimony from * * * [these] witnesses is critical to petitioners’ ability to meet their burden of proof in these cases’. Respondent objected to petitioners’ motion to dismiss on the grounds that ‘The principles of judicial economy require a final determination of these issues in this proceeding, which only a decision on the merits or an agreed stipulated decision can produce.’ Respondent is concerned that petitioners’ motion ‘is merely an attempt to unnecessarily prolong and delay this proceeding.’” 2012 T.C. Mem. 158, at pp. 4-5.

Oh yes, and in the alternative Ironbridge asked for yet another stay.

This launches Judge Goeke into a disquisition anent the stay of civil proceedings in criminal cases, which I’ll leave, as is my wont, to the law review writers and the terminally insomniac. Here’s a brief preview: “The District Courts of the Second Circuit have often used the following six-factor balancing test: (1) the extent to which the issues in the criminal case overlap with those presented in the civil case; (2) the status of the case, including whether the defendant (here, petitioners) has been indicted; (3) the private interests of the plaintiff (here, respondent) in proceeding expeditiously weighed against the prejudice to plaintiff (respondent) caused by the delay; (4) the private interests of and burden on the defendant (here, petitioners); (5) the interests of the courts; and (6) the public interest. Id. at 99-100. After considering each factor, as explained herein, we found the cumulative weight of the factors to favor denying the stay.” 2012 T. C. Mem. 158, at p. 6.

The bottom line, however, is “…petitioners are not at risk of criminal prosecution (thereby reducing the possible future use of collateral estoppel to zero), and it does not appear likely that Mr. Haber is in criminal jeopardy. Given that it is uncertain whether Mr. Haber will even be indicted, granting the motion could result in the imposition of a lengthy and indeterminable stay for no reason.” 2012 T.C. Mem. 158, at p. 9.

No stay, guys, and Section 7459(d) gives IRS judgment for the amounts stated in the SNODs upon dismissal of the petition on any ground other than want of jurisdiction. “The acceptance or rejection of a proffered concession is a matter within the discretion of this Court, and we should exercise our discretion in accordance with the ‘interest of justice’. See Jones v. Commissioner, 79 T.C. 668, 673 (1982); McGowan v. Commissioner, 67 T.C. 599, 607 (1976). Respondent has not suggested how the interests of justice would compel us to deny petitioners’ motion, and we can conceive of no injustice in granting petitioners’ motion.” 2012 T.C. Mem. 158, at pp. 10-11 (Footnote omitted).

Oh, and here’s the omitted footnote: “Respondent has stated that petitioners’ motion is merely an attempt to delay the proceedings and that judicial economy requires either a decision on the merits or else execution of ‘a stipulated decision effectuating a final, full, and complete concession of this case by petitioners.’ However, respondent has not specified how granting petitioners’ motion would delay the proceedings. We note that ‘A decision rendered upon a default or in consequence of a dismissal, other than a dismissal for lack of jurisdiction, shall operate as an adjudication on the merits.’ Rule 123(d); see also Settles v. Commissioner, 138 T.C. ___, ___ (slip op. at 4) (May 8, 2012); Estate of Ming v. Commissioner, 62 T.C. 519, 522-523 (1974.).” 2012 T.C. Mem. 158, at p 11, footnote 4.

As to Settles, above cited, see my blogpost “Dismissed!”, 5/8/12. And as to IRS’ demand for “either a decision on the merits or else execution of ‘a stipulated decision effectuating a final, full, and complete concession of this case by petitioners’”, see my blogpost “Victory is not Vindication”, 5/1/12. If the taxpayer can’t get “full, final and complete concession”, neither can IRS. You won, so go away.

Readers of my blogpost “To Have and Have Not”, 8/31/11, will remember the sad tale of Clyde W. Turner, Sr., who had when he should have had not, and thereby torpedoed his estate plan. But a happier fate befalls the Estate of George H. Wimmer, Deceased, George W. Wimmer, Personal Representative, in 2012 T.C. Mem. 157, filed 6/4/12.

George I and wife Ilse set up a Family Limited Partnership, ostensibly to invest in land and stocks. George I and Ilse, general partners, never bought land, but they bought some good dividend-paying, publicly-traded stock. And the trust instrument provided “…partnership profits are allocated to the partners according to their proportional partnership interests. All distributions of net cash flow are also shared among the partners in proportion to their partnership interests. Distributions must be made in cash pro rata. The partnership agreement, as amended, provides that the primary source for distributions is distributable cash derived from partnership income.” 2012 T.C. Mem. 157, at p. 6 (Footnote omitted).

Now the trust George I and Ilse set up for the grandchildren was a limited partner, the grandbabies had the right to annual distributions from the trust corpus, and the trust did get its dividends along with everybody else.

As usual, the initial limited partners were George I and Ilse, and they gifted out partial limited partnership interests every year, staying under the $10,000 (now $13,000) per head radar. Also as usual, transfers of the limited partnership interests, otherwise than interfamily, were strongly restricted.

Judge Paris didn’t seem sure whether any extrafamily transfer required 70% or 100% approval by all limiteds. “The transfer of limited partnership interests requires, among other things, the prior written consent of the general partners and 70% in interest of the limited partners. Upon satisfaction of the transfer requirements, the transferee will not become a substitute limited partner unless the transferring limited partner has given the transferee that right and the transferee: (1) accepts and assumes all terms and provisions of the partnership agreement; (2) provides, in the case of an assignee who is a trustee, a complete copy of the applicable trust instrument authorizing the trustee to act as partner in a partnership; (3) executes such other documents as the general partners may reasonably require; and (4) is accepted as a substitute limited partner by unanimous written consent of the general partners and the limited partners.” 2012 T. C. Mem. 157, at p. 3. Then again, the limited partnership agreement isn’t crystal clear, either.

Howbeit, every limited partner was entitled to receive net cash distributions, and they did, every year, in proportion to their respective limited partnership interests.

George I shuffles off this mortal coil, and IRS claims the limited partnership interests George I and Ilse gifted to the family are not gifts of present interests, therefore not excludable from gross estate of George I.

Now a present interest is an unrestricted right to the possession, use and enjoyment of property or the income therefrom. “The terms ‘use, possess or enjoy’ connote the right to substantial present economic benefit, that is, meaningful economic, as opposed to paper, rights.” 2012 T. C. Mem. 157, at pp. 8-9 (Citations omitted).

But limited partnership interests may or may not be present interests. The interests the grandbabies and other limited partners got might not differ from what they would get if they were beneficiaries of a trust. Here, however, Judge Paris finds that, although the donees of the limited partnership interests did not get an unrestricted right to those interests, they sure got the right to the income.

Judge Paris: “…the estate must prove, on the basis of the surrounding circumstances, that: (1) the partnership would generate income, (2) some portion of that income would flow steadily to the donees, and (3) that portion of income could be readily ascertained.” 2012 T. C. Mem. 157, at p. 10 (Citation omitted).

Well, the limited partnership held dividend-producing, publicly-traded stock, so there should have been income (and there was), it would flow steadily (the generals were fiduciaries under State law and the limited partnership agreement said they had to distribute net cash), and the amount was readily ascertainable (just check the dividend history of the corporations whose stock was held).

Result: the grandbabies and the other limited partners had, and George I’s estate had not, so the gifts were properly excluded from George I’s estate.

One Burden, But Not Another

The truck driver in this case is David W. Bauer, and his eponymous case is 2012 T.C. Mem. 156, filed 6/4/12. But Dave is no over-the-road California Turnaround Jack Greene type. Dave hauls personal effects, furniture and furnishings for relocating businesspeople and others who have to get out of Dodge (or wherever).

To do his job, Dave needs to wrap and pack, and unwrap and unpack, his customers’ future entries on Antiques Roadshow. To make all this happen, he hires roustabouts, day laborers and casual folks at start and at destination, whom he gets from local moving companies. The casuals only take cash, because Dave is here today and gone with Chuck Berry’s cool breeze tomorrow.

Dave keeps a logbook, wherein he records his trips and what he pays his pickup crews. As he roams from town to town, he never hires the same people twice, so he doesn’t send out 1099s or W-2s, as nobody gets more than $600 from Dave.

IRS audits Dave. Dave doesn’t like IRS’ numbers, so he petitions, and introduces his logbook, looking for a Section 7491(a) burden of proof shift. No, says Judge Paris, you can’t upshift this one. “Petitioner claims that he met the requirements to shift the burden of proof to respondent because he substantiated his contract labor expenses with a logbook and testimonial evidence. Although the logbook purports to document petitioner’s daily expenses during the tax years at issue, its omission of periods of time and, as petitioner acknowledges, its mathematical errors and other inconsistencies, undermine the credibility of the logbook and the expenses recorded therein. The Court does not accept the logbook as credible evidence within the meaning of section 7491(a), nor does the Court accept petitioner’s uncorroborated and selfserving testimony to overcome the logbook’s unreliability. See, e.g., Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Thus, the Court holds that petitioner has not shown that he complied with the requirements of section 7491(a), and the burden of proof remains with him.”  2012 T. C. Mem. 156, at p. 6 (Footnote omitted).

Dave flunks the burden of proof, as he admits his logbook is inaccurate.

Now for the penalties. Even though Dave’s logbook fails to shift the first time, it works to shift the penalties. Judge Paris: “Although inadequate to substantiate his expenses, petitioner’s logbook demonstrates that, given the circumstances of his profession, he made a good faith effort to maintain a record of his contract labor expenses for substantiation purposes. Petitioner paid each contract laborer less than the $600 reporting threshold amount of section 6041(a).13 Therefore, except for substantiation purposes, petitioner did not have a business reason to keep detailed records of payments made to contract laborers. Moreover, because petitioner generally hired itinerant workers, he was compelled to make payments in cash. Although he did not use the more reliable recording options available for other types of payments, petitioner kept hand notations of his cash payments in a logbook.

“Accordingly, even though petitioner’s attempt to keep a record of his contract labor payments fell short for substantiation purposes, his recordkeeping demonstrates that he made a good faith effort for purposes of section 6662(a).” 2012 T. C. Mem. 156 at pp.11-12 (Footnote omitted).

Keep on truckin’, Dave.

The heirs, executors, trustees and distributees of the late Billy Hawk, Jr. take on the IRS, but the game ends in no score, as Judge Wells is giving away nothing in Billy F. Hawk, Jr., GST Non-Exempt Marital Trust, Trustee, Transferee, Nancy Sue Hawk and Regions Bank, Co-Trustees, Et Al., 2012 T.C. Memo. 154, filed 5/30/12.

We’ve heard this same old song before. Billyhawk owned a string of Tennessee bowling alleys in a C Corp, Billyhawk Inc; basis zero, FMV astronomical. Mrs Hawk, his wife of 48 years and principal beneficiary of Billyhawk the man and the C Corp, knows from nothing; her business acumen is a gutterball.

So she and her advisors, attorneys and accountants hawk the alleys via Hansell, a bowling alley broker with nationwide connections (you can’t make this stuff up). Hansell finds la famille Corley, New England bowlerini of vast experience, who are willing to fling boatloads of USD at the C Corp. Mrs Hawk loves it, until she hears about double taxation, capital gains, estate taxes and other disturbers of the sleep of the righteous distributee.

Hansell offers a solution. How do you spell “MidCoast Financial”, friend of the zero-basis, cash rich C Corp? And how do you spell “here we go again”? See my blogposts “Substance Matters”, 3/1/12, and “A Good Day for Taxpayers”, 3/15/11.

MidCoast swears they’re getting the cash to buy all the Billyhawk Inc stock from their own and borrowed funds, but there’s no proof of this, and MidCoast  avers it will operate Billyhawk Inc. for the foreseeable future, laying off short-term capital losses against tax from the sale of the bowling alleys to la famille Corley, which MidCoast will close and leave the cash in Billyhawk Inc. Needless to say, MidCoast strips Billyhawk Inc. of the cash, does a phony Danish kroner mix-and-match forex deal with its trusty offshore (see my blogpost “An Option Isn’t a Contract”, 4/14/11), and when IRS challenges the deal, waltzes away into the sunset, pursued by DOJ brandishing handcuffs and breathing fire and slaughter.

Of course, Section 6901 transferee liability rains down upon Mrs Hawk and the hawklings near and far. The IRS yells “intermediary transaction”. MidCoast gave the hawklings the Corley boodle less whatever rake-off (not referring to a certain USDCSDNY Judge; he’s a different Rakoff) MidCoast got for facilitating these shenanigans. MidCoast did nothing but play ring-a-ring-a-rosie with the Corley cash, says IRS, and Mrs Hawk and the hawklings made a fraudulent conveyance of the Billyhawk stock to MidCoast to defeat, delay, defraud, vex, harass and swindle the United States Treasury, its lawful creditor.

Mrs Hawk and the hawklings seek summary judgment. They shower Judge Wells with affidavits proclaiming the bona fides with which they acted, the due diligence they pursued, with attorneys and accountants checking references, doing research and all that jazz.

But summary judgment is a hunt for disputed facts, and Judge Wells finds a biggie. Although the hawklings swear MidCoast got funds to close the purchase of Billyhawk Inc from Mid-Coast’s own monies and a private loan from an offshore, and didn’t strip Billyhawk Inc’s proceeds from the sale to Corley, they don’t have checks, bank statements or anything else to prove it. Every payment to the hawklings came out of MidCoast’s attorneys’ escrow account. If MidCoast did get outside funds, then Billyhawk Inc wasn’t rendered insolvent when the hawklings got the boodle, as the Corley cash was still aboard, so no fraudulent conveyance. But if there was the ring-a-ring-a-rosie with the same money, namely, the Corley cash, then Billyhawk Inc was rendered insolvent when the hawklings and MidCoast chopped the pot, and there might be a fraudulent conveyance, depending upon the facts and circumstances (strike up the band, Eddie Elgar). So there must be a trial.

No there mustn’t, says IRS, at least not yet. We need a continuance, stay, time out on the field, if there’s going to be a trial here. There’s a criminal investigation going on into MidCoast, and we can’t permit the defendants to use the liberal civil litigation discovery proceedings, such as we have in Tax Court, against the government, which could torpedo the investigation.

The hawklings squawk that they’re not the subjects of any criminal investigation, MidCoast isn’t a party here, and IRS is just stalling, hoping for some evidence to fall from the sky and bail them out of their losing litigation.

Judge Wells: “… petitioners are not targets of the criminal investigation of MidCoast. Respondent’s (IRS) contention that the testimony of certain MidCoast employees might be inhibited by the criminal investigation is, at this stage, purely conjectural. Moreover, respondent’s contention is at odds with the undisputed fact that, in other cases involving MidCoast, respondent has taken the depositions of numerous MidCoast employees, including the individuals who served as MidCoast’s president, general counsel, and controller during 2003. We conclude that the criminal investigation of MidCoast does not warrant a stay of the instant proceedings at this time. Accordingly, we will deny respondent’s motion for a stay of proceedings.” 2012 T. C. Mem. 154, at pp. 23-24 (Footnote omitted).

So game ends in no score. Stay tuned, fans. Rematch coming up.

Or, No Good Deed

You know the rest. Now so do Joseph Mohamed, Sr. and Shirley Mohamed, generous of spirit but failures at tax preparation, in the eponymous case, 2012 T.C. Memo. 152, filed 5/29/12. And this follows up on a current discussion in one of the LinkedIn tax blogs I subscribe to.

Joe and Shirl generously funded a Charitable Remainder Unit Trust (CRUT), properly set up and compliant. Instead of paying a few bucks to an EA or a CPA, they funded the CRUT over two tax years with $20 million worth of property (which the CRUT sold at arms’-length, and which yielded prices above what Joe and Shirl claimed on their 8283s), and prepared their own tax returns, with home-made 8283s.

Like my old law school icon, “the jolly testator who makes his own will”, Joe was a do-it-yourselfer and only read the 8283 form, never bothering to read the instructions. The Form 8283 in use for each of those years only spoke about appraisals for works of art in excess of $20K. OK, says Joe, I don’t need no stinkin’ appraisals, I’ll just be conservative in my guesses on the 8283s.

Judge Holmes delivers the bad news. The regulations are clear, the statutory delegation to the Sec’y of the Treasury to make regulations is clear, and the instructions are clear; reliance on the form alone won’t help you, and Joe, you’re not in substantial compliance. Your appraisals are too late, and one of them would be insufficient even if it were timely. That the properties sold in the aggregate at more than you claimed is great for the CRUT, but helps you not at all for the current deductions.

Judge Holmes, The Great Dissenter, the Judge who writes like a human being, and lately the Terror of the D.C. Circuit (see my blogpost “Judge, He Didn’t Mean It”, 5/17/12), tells the sad tale: “The Mohameds make one last-ditch effort to save their deductions. They point out that the Commissioner’s Form 8283 for 2003 and 2004 didn’t indicate anywhere on it that a taxpayer had to get an independent appraisal for contributions worth more than $5,000 and presented conflicting messages about what could be filled out by the taxpayer and what required an appraiser’s signature. We won’t try to explain away these difficulties, and note that the Commissioner has since changed his form to reduce confusion. Although sympathetic to the Mohameds’ cause, we can’t hold the form’s failings against the Commissioner here, because ‘the authoritative sources of Federal tax law are in the statutes, regulations, and judicial decisions and not in such informal publications.’ A taxpayer relies on his private interpretation of a tax form at his own risk.” 2012 T. C. Mem. 152, at p. 25 (Citations omitted).

So Joe and Shirl saved maybe a grand or two in tax prep fees, and lose deductions for $20 million worth of property demonstrably donated to a bona fide CRUT at FMV, plus legal fees, plus interest.

Pay me now or pay me later.

Nobody in the World?

Well, those were the words of the immortal Keith Richards, with an assist from Mick (The Mouth) Jagger, in their 1967 hit, so entitled. But yesterday’s papers (or rather blogs, e-blasts and sundry cybernetic emanations) did have one piece of news some people might fall upon with glee.

As long as IRS has not nailed the alleged employer for IC-ing an EE, that person or entity can participate in the Voluntary Classification Settlement Program, if  the employer has consistently treated the now-to-be reclassificados as ICs until now, has filed all the 1099s for whatever he/she/it/they paid the reclassificados for the last three years, and  is not currently under audit by State or Federal agency, or if audited in the past, is in 100% compliance with the results of such audit currently.

And it’s not all or nothing: the putative employer can volunteer for some, and await the draft for the others. If asked, I would strongly suggest, in Jack Lawrence’s immortal words in the Frank Sinatra 1939 hit, “All or Nothing At All”, that the employer reclassify the whole corps de ballet. You have placed yourself on the radar; and note the extended SOL in Form 8952, so be well advised.

Query-If a putative employee has dropped an SS-8, SSA has asked for information in response but time for responding has not yet run out,  is the alleged employer “under audit”?  Stay tuned.

State and municipal governments and not-for-profits can apply, if otherwise eligible (and a Form 990 audit knocks you out of the box, so beware).

The good news is that the volunteer gets a bye on past years’ FICA-FUTA indiscretions, if they pay the last year’s tax at a special discounted rate (for special friends of Doug Shulman, they have a special discount; see IRC §3509(a) and instructions to Form 8952). They must agree to keep open the SOL for each of the three years going forward, so IRS can see that they’re being good children and not backsliding.

Check out Announcement 2011-64. And Prime West, who made a guest shot on my blogpost “The Wichita Linewoman”, 5/23/12, please copy; you might want to join in now. Even if there is a rush.

To adopt the title of Erich Maria Remarque’s 1928 classic war novel, there are two Tax Court cases today, 5/24/12, but they both tell the same story–no substantiation means no deductions. Oh yes, and you should file tax returns timely and report all income. So all quiet on the tax front.

Or, It’s Not a Lease, It’s An Employee Expense Plan

Well, she was in California, and didn’t work for the County, but the old Jimmy Webb song that Glen Campbell made a hit in 1968 ran through my head as I read about the plight of Kathleen Murray, a/k/a Kathy the Cable Girl, 2012 T.C.Sum. Op. 49, filed 5/23/12. It’s another Section 7463 “so what?” case, but the unreimbursed employee business deduction angle makes it interesting.

Kathy started as a horse trainer, complete with a Sundowner Stampede horse trailer and a Dodge 3500 to pull it, but then met up with the Cable Guy (no, not Larry; Ernie Helm, known as Ernie the Cable Guy, hereinafter ETCG). ETCG convinces Kathy to stop training ponies and splice up with him (no, not that kind of splicing–splicing telephone wires).

They both worked for Prime West, an entity that connects things to other things, specifically telephone lines to add telephone and data services to people and businesses. ETCG and Kathy were employees of Prime West, and usually worked the same district. ETCG taught Kathy the trade.

Prime West supposedly leased Kathy’s trucks, and a van she owned, and certain tools she needed (not all cable can be spliced the same way with the same tools), and paid Kathy a flat hourly lease rent for all of them. But, says STJ Lew Carluzzo: “Prime West did not require petitioner to substantiate the actual expenses incurred for the use of her vehicles or tools, and she was not required to return to Prime West payments made pursuant to the equipment lease that exceeded her costs.” 2012 T.C.Sum. Op. 49, at p. 7.

Sound like a non-accountable employee expense reimbursement plan to you? It did to Judge Lew, lease notwithstanding. Also notwithstanding that Kathy reported her lease rent and expenses on a Schedule C. Also notwithstanding that she got a 1099-MISC for her lease rent.

Judge Lew disposes of the employee-independent contractor issue in four sentences (and it really doesn’t need more on these facts): “Petitioner was not engaged in an equipment rental trade or business independent of her employment with Prime West during any of the years in issue. Furthermore, there is nothing in the record that remotely connects the rental fee agreed upon in the equipment leases to the fair rental value of the equipment subject to those leases…. The form of the equipment leases notwithstanding, in substance the equipment leases represent Prime West’s program to reimburse its cable splicer/employees for expenses incurred in connection with their employment. For Federal tax purposes, the substance of a transaction takes precedence over the form of the transaction.” 2012 T.C. Sum. Op. 49, at p. 22.

Section 274 exactitude puts paid to most of Kathy’s vehicle expenses; she has no log, her oral testimony is inexact (she claims fuel and similar expenses for a month when she agrees she wasn’t working) and so she’s disconnected from strict substantiation. While a van she used might be exempt from Section 274 strictures, as it is a non-personal use vehicle, Kathy has insufficient substantiation even for the Cohan standard.

Now if whatever expenses she is allowed (and there isn’t too much, a GPS device and a digital camera she used to photograph her splices, which Prime West needed her to provide, utilities for a garage she used part of one tax year, some tools she bought and a storage unit she rented) were in fact deductible as unreimbursed employee business expenses, Kathy took the standard deduction and never itemized, so those expenses are lost.

But Judge Lew follows in the footsteps of The Great Dissenter, Judge Holmes (see my blogpost “The Busted Stipulation”, 1/27/12), and deftly ducks the issue. Judge Lew goes The Great Dissenter one better, and ducks in a footnote: “As noted, petitioner did not elect to itemize deductions for 2004 and 2005. Following the parties’ lead, we ignore the requirement that unreimbursed employee business expenses, if otherwise deductible, must be deducted as a miscellaneous itemized deduction pursuant to an election made on the taxpayer’s return. See sec. 63(e); see also Jahn v. Commissioner, T.C. Memo. 2008-141, aff’d, 392 Fed. Appx. 949 (3d Cir. 2010). Of course, itemized deductions allowed in this proceeding would be in lieu of, rather than in addition to, the standard deductions claimed on petitioner’s 2004 and 2005 Federal income tax returns.” 2012 T.C.Sum. Op. 49, at p. 11, Footnote 2.

And the parties can sort out whether to take the standard, or itemize and take the miscellaneous itemized above the 2% AGI floor, in the Rule 155 which will follow.

Kathy had a CPA do her taxes and told the CPA the whole story, so “gude faith, he maunna’ fa’ that”, as Scotland’s greatest remarked, and Section 6664(a) rescues Kathy from the Section 6662(a) penalty IRS wanted to splice onto Kathy’s bill.

I was asked by a reader for the particulars of the treatise I mentioned in my earlier blogpost this date (5/22/12), “A Book and a Modest Proposal”. The book is entitled “Practice and Procedure in the U.S. Tax Court”, by Prof. Danshera Cords, published by Civic Research Institute, Inc., Kingston, NJ 08528, copyright 2012. Note that I have not read this work, so I can neither review nor recommend it. Nor do I receive any compensation for mentioning it on this blog.