Or, Sly and the Family Stone  Do It Right

That’s the lesson Judge Goeke has for us in Estate of Joanne Harrison Stone, Deceased, Cosby A. Stone and Michael D. Stone, Personal Representatives, 2012 T.C. Mem. 48, filed 2/22/12.

The late Jo was a Sunday school teacher for 60 plus years, up to the Sunday before she died, at the age of 81. In her spare time, she and husband Roy produced six children, and the six produced a platoon of grands.

When not spreading the good news, Jo worked with Roy and some of their kids in the family publishing business, while acquiring 740 acres of Cumberland County, Tennessee. To create a lake next to the property of son Steve, and to protect and preserve (and maybe develop), along with kids and grandkids, the woodland parcels next the lake site, Jo and Roy set up the Stone Family Limited Partnership (FLP), under the guidance of local attorney Harry Sabine (and I mention his name because he got it right, and saved his client’s estate $2.5 million in estate tax).

They had the land appraised (and this appraisal was apparently so good IRS didn’t attack it),  gifted limited partnership interests to kids, kids’ spouses and grandkids (inartfully, but well enough to survive), and paid gift tax based upon the appraisal (with no blockage or fractional interest discount).

The issue here is the Section 2036(a) landmine. Did Jo still have enough hold on the partnership assets so that they belong in her estate?

Judge Goeke unpacks the Section 2036(a) landmine thus: “Section 2036(a) generally provides that if a decedent makes an inter vivos transfer of property other than a bona fide sale for adequate and full consideration and retains certain enumerated rights or interests in the property which are not relinquished until death, the full value of the transferred property will be included in the decedent’s gross estate. Section 2036(a) is applicable when three conditions are met: (1) the decedent made an inter vivos transfer of property; (2) the decedent’s transfer was not a bona fide sale for adequate and full consideration; and (3) the decedent retained an interest or right enumerated in section 2036(a)(1) or (2) or (b) in the transferred property which he or she did not relinquish before death.” 2012 T.C. Mem. 48, at pp. 10-11.

Most important in establishing adequate and full consideration, there was a bona fide non-tax purpose in the FLP. “Testimony at trial established that a significant purpose of decedent’s transfer of the woodland parcels to SFLP was to create a family asset managed by decedent’s family. Decedent and Mr. Stone desired that their children, their children’s spouses, and their grandchildren work together to develop and sell homes near the lake. We have previously found that a desire by a decedent to have assets jointly managed by family members, even standing alone, is a sufficient nontax motive for purposes of section 2036(a).” Estate of Mirowski v. Commissioner, T.C. Memo. 2008-74.” 2012 T.C. Mem 48, at p. 14.

When two of their kids divorced, and the outgoing spouses deeded back their interests in the land (but not in the FLP),  and Jo and Roy paid the nominal real estate taxes from their own funds and not FLP funds, IRS attempted to blow up the FLP because partnership formalities weren’t followed. But Judge Goeke didn’t buy it.

“We agree with respondent that the partners of SFLP failed to respect some partnership formalities.

“Other factors, however, support the estate’s argument that a bona fide sale occurred. First,  decedent and Mr. Stone did not depend on distributions from SFLP as no distributions were ever made. Second, decedent and Mr. Stone actually did transfer the woodland parcels to SFLP. Third, there was no commingling of partners’ personal and partnership funds, as SFLP had no partnership funds. Fourth, no discounting of SFLP interests for gift tax purposes occurred; decedent and Mr. Stone had the woodland parcels appraised and valued the SFLP interests so that that the total value of SFLP interests was equal to the appraised value of the woodland parcels. Finally, the evidence presented tended to show that decedent (and Mr. Stone) were in good health at the time the transfer of the woodland parcels was made to SFLP. Although decedent was over age 70 at the time of transfer in 1997, she lived until 2005 and was healthy enough to continue teaching Sunday school up to and including the last Sunday before she passed away. Although Mr. Stone was over age 80 at the time of transfer, he was still alive at the time of trial in June 2011.” 2012 T.C. Mem. 48, at pp. 16-17.

Thereby the late Jo’s estate avoids the Section 2036(a) landmine. Good job, Harry.

Such is the lesson of Robert B. Anderson, 2012 T. C. Mem. 46, filed 2/21/12. Bob was accused of frivolity for his 2006 and 2007 returns, which showed zero. However, his 2008 and 2010 returns showed (apparently valid) refunds, which IRS grabbed, thus satisfying IRS’ claims for 2006 in full, while Bob’s timely CDP request was pending.

Bob never got a SNOD, just a letter stating he was frivolous. Bob’s request for a collection alternative went down in flames when he failed to file a Form 433-A, despite two requests from IRS.

IRS moves for summary judgment on 2006; Bob is fully paid up via the grab of his 2008 and 2010 refunds, so nothing more to fight about. Bob cries “foul, they grabbed my refunds while my CDP was pending, which was a levy, and CDP suspends all collection activity.”

Nope, says Judge Halpern. This was an offset, not a levy. There’s Circuit Court of Appeals learning on this point (Boyd v. Commissioner, 124 T.C. 296, 300 (2005), aff’d, 451 F.3d 8 (1st Cir. 2006). Yer out, Bob. 2006 is history.

But as for 2007, IRS wants partial summary judgment. No go, IRS, says Judge Halpern. Even though Bob attached to his CDP request a preprinted 23-item checklist (on which he checked 21 items), and all but two seemed frivolous: “[R]espondent appears to argue for summary adjudication in his favor with respect to the first assignment of error on the ground that petitioner’s initial 2007 return, showing zero wages, was incorrect ‘due to petitioner’s frivolous position echoed in his CDP request, petition, and amended petition.’ While there is much in the attachment to the CDP request, the petition, and the amended petition that strikes us as frivolous, paragraph 7 of the attachment does state that petitioner had no opportunity to challenge the penalty and paragraph 20 of the attachment does raise claims of denial of due process and of the right to appeal imposition of the penalty. Those do not strike us as frivolous positions; indeed, they raise genuine issues as to material facts.” 2012 T. C. Mem. 46, at p. 7.

Bob wanted to be sent back for a face-to-face conference with Appeals (a standard delaying dodge), but Judge Halpern heads that off, telling Bob to save his arguments for the trial in Tax Court.

Lest Bob should feel too elated by his goal-mouth save on summary judgment, Judge Halpern shows him the Section 6673(a)(1) $25,000 frivolity penalty yellow card: “We are concerned that petitioner may have instituted this proceeding to delay collection of the penalties at issue. We caution petitioner to proceed with section 6673(a)(1) in  mind.” 2012 T.C. Mem. 46, at p. 9.

Or, Settled vs. Settled Right

Once again, Judge Mark Holmes takes on his colleagues in a “Son of BOSS meets Petalumas” case, Tigers Eye Trading, LLC, Sentinel Advisors, LLC, Tax Matters Partner, 138 T. C. 6, filed 2/13/12, a real eye-glazer.

Echoing his dissent in Randall J. and Karen G. Thompson, 137 T. C. 17, filed 12/27/11 (see my blogpost “The Great Dissenter”, 12/28/11), Judge Holmes takes on Judge Beghe, who writes the Tigers Eye decision, and Judges Colvin, Cohen, Halpern, and Goeke. Judge Halpern concurs “only to add some small weight to what, in the main, I consider to be a forceful and persuasive analysis by Judge Beghe.” 138 T.C.  6, at p. 128.

In brief, Tigers Eye and IRS stipulated a decision blowing up Tigers Eye, a phony tax shelter, and raining penalties on the partners. It’s another no-outside-basis case, with the partnership-level versus partner-level TEFRA gloss.

But then came Petalumas I,  II and III, with D.C. Circuit deciding that Tax Court has no jurisdiction even though IRS had conceded and stipulated jurisdiction. So the taxpayer moves to revise the stipulated decision.

No way, say the majority. They decide not to follow the Petalumas, because of factual differences and the decision of the US Supreme Court in Mayo Clinic (131 S. Ct. 704 (2011)), which requires the courts to follow regulations unless they fail the Chevron tests (Chevron USA Inc. v. Natural Res. Def. Council, 467 U.S.837 (1984). See my blogpost “Carpenter, Colony, Chevron and Mayo”, 4/26/11). For the next 125 pages, the majority upholds its jurisdiction and enforces the stipulated decision–no revision.

Judges Gale and Paris concur without opinion, and Judge Foley dissents, likewise without opinion, but Judge Marvel has her own dissent (in part II of which Judge Kroupa agrees, and Judges Gale and Paris agree in part), which goes off on the Section 6662(a) understatement or overvaluation penalties applying irrespective of inside or outside basis in a disregarded sham partnership.

Judge Wherry has a separate concurrence, based on what Tax Court should do when it disagrees with the relevant Circuit, and rebuking Judge Holmes as a grammarian.

Judges Gustafson, Vasquez and Morrison pass on this one.

But Judge Holmes, bless his contrarian heart, comes out swinging, despite Judge Wherry’s disdain for his grammatical take on Section 6231(a)(3), 138 T.C. 6, at p. 143.

To begin with, whether Tax Court likes it or not, the Petalumas control here: “In our landmark decision in Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971), we held “that better judicial administration requires us to follow a Court of Appeals decision which is squarely in point where appeal from our decision lies * * * to that court alone.” (Fn. ref. omitted.) Golsen tells us not to bang our head against contrary appellate precedent, and we’ve consistently held that we must follow the precedent of the court that has appellate jurisdiction over a case.” 138 T.C. 6, at pp. 180-181 (Footnote omitted.)

Ignoring Golsen and its progeny will wreak havoc and engender endless appeals. “The tsuris this will cause us–where two circuit courts,  a few trial courts, the Department of Justice, and even the IRS (at times) all disagree with the position we’re taking–cannot possibly be worth it. Especially when it’s nothing more than a dispute about a complicated little bit of partnership-tax law–and not even substantive partnership-tax law, but partnership-tax-law procedure. And a point of partnership-tax-law procedure in a motion to revise a stipulated decision we entered in 2009. This was not the case to use to revisit Petaluma I: ‘[I]n most matters it is more important that the applicable rule of law be settled than that it be settled right.’ Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 406 (1932) (Brandeis, J., dissenting).” 138 T.C. 6, at p. 182. (Footnotes omitted.)

Judge Holmes sums it up: “In conclusion, I believe that we shouldn’t challenge the D.C. Circuit on the issue of our partnership-level jurisdiction over penalties any more than we should challenge it on the issue of outside basis as a partnership item.  Of all the routines in judicial gymnastics, few have a higher degree of difficulty than the reverse benchslap, and we’re trying for a combination double with our Opinion today.

“I’ll stand a safe distance off to one side, and respectfully dissent.” 138 T.C. 6, at p. 211. (Footnote omitted).

And because Judge Holmes writes cool footnotes, here’s the omitted footnote, footnote 17 at p. 211: “I’ll reiterate what I noted in Thompson: The Secretary should not view our Opinion as foreclosing the possibility that he could clear this area up much more efficiently through regulation than the Commissioner has been able to do through litigation. Thompson v. Commissioner, 137 T.C. at 244 (Holmes, J., dissenting).”

Oh yes, and Judges Kroupa and Thornton agree in part.

And, The Best Excuse Yet

Two recent Tax Court cases piqued my interest, picked from among the plethora of levy and lien timewasters. I can’t enjoy my vacation without a small retreat into blogging.

First, Lisa LaFlamme, 2012 T.C. Mem. 36, filed 2/6/12, and not just for the taxpayer’s name.  Lisa was a self-employed, licensed real estate agent in Florida during the year in question, while the boom was still booming and the bubble bubbling. Lisa made a hefty contribution to her pension plan, the Lisa K. LaFlamme Defined Benefit Pension Plan and Trust.

No question the contribution is deductible. But where? Lisa put the magic number on line 19 of her Schedule C, not line 28 of her 1040, and that caused the IRS to fire off a SNOD for tax and accuracy penalty.

Lisa claims she’s entitled because legislation enacted in 1962 allows self-employedniks to deduct pension contributions like corporations. True, but this is a case of “right law, wrong chapter”. Her contribution is not a Section 162 business expense for self-employment tax purposes, but rather an AGI adjustment for income tax purposes.

Thus, she owes self-employment tax on the amount of the contribution, but not income tax. Income tax is a Chapter One tax, SE is a Chapter Two tax, and Section 404(a)(8)(C) doesn’t help Lisa, although the language of the law (which see) looks like it does. Judge Vasquez says the legislative history makes it clear the Section 404(a)(8)(C) deduction is for income tax only, not SE. Judge Vasquez: “The legislative history suggests that the sec. 404(a)(8) rule is limited to the income tax, stating that the 1962 Act ‘allows contributions to retirement plans to be a deduction for income tax purposes’. S. Rept. No. 87-992, supra, 1962-3 C.B. at 310.” 2012 T.C. Mem. 36, footnote 7, at p. 9.

But Lisa acted reasonably and in good faith, obviously not having studied the legislative history of the 1962 statute. Lisa relocated from Connecticut to sunny Naples, FL (not so sunny today, as it’s been raining all night) years ago, and sells waterfront property. Chances are Lisa wasn’t born when Congress enacted the Self-Employed Individuals Retirement Act of 1962, and even I had barely escaped teenagerdom.

So Judge Vasquez gives Lisa a bye: “We find that petitioner had reasonable cause for the position taken on her return regarding the pension contribution and acted in good faith. See sec. 6664(c)(1). Petitioner, knowing that she was entitled to deduct her pension contribution, mistakenly believed she was entitled to deduct it on line 19 of her Schedule C which was labeled as ‘Pension and profit-sharing plans’. See sec. 1.6664-4(b), Income Tax Regs. (stating that a honest mistake of law may indicate reasonable cause and good faith).”

So Lisa, forget the penalty, but recompute your SE and income taxes in a Rule 155 jamboree. And preparers, look out, here be a trap for the unwary.

Now for my personal favorite in The Best Excuse for Late Filing sweepstakes. It comes from Steve and Lori Esrig, and is delivered by none other than the Judge that writes like a human being, The Great Dissenter and Ace Footnoter Judge Holmes. In the immortal and oft-quoted words of the late great Charles Dillon Stengel, “you could look it up”, specifically in 2012 T.C. Mem. 38, filed 2/7/12, under the name and style of Steven A. Esrig and Lori S. Esrig.

There are two cases rolled into one, because once Steve petitioned Case One, IRS fired off some fresh SNODs, so Steve and Lori petitioned Case Two. But you can read the tangled tale of Steve’s trademark dealings and his various unsubstantiated business activities; it’s the usual lack-of-substantiation case.

Until we get to the Section 6651(a)(1) late filing penalty. Steve and Lori were late by anything between one-and-a-half and four-and-a-half years in filing returns over the six-year span at issue. But Judge Holmes throws Steve and Lori a conditional rope: “Section 6651(a)(1) imposes an addition to tax for failing to timely file a tax return. A taxpayer can beat the penalty by showing reasonable cause, id., which here would mean proof that the Esrigs acted with ordinary business care and prudence and nevertheless were still unable to file as required, see United States v. Boyle, 469 U.S. 241, 246 (1985); sec. 301.6651-1(c)(1), Proced. & Admin. Regs.” 2012 T.C. Mem. 38, at p. 17.

But Steve and Lori drop the rope. Judge Holmes: “At trial Steven blamed the couple’s return preparer. He said that he’d asked his accountant to request extensions for all the years at issue, but his accountant missed all the deadlines because she had to serve a very long prison sentence for murdering her husband, and the person in her office who took over their account made a slew of mistakes.” 2012 T. C. Mem. 28, at p. 18.

That beats “the dog ate my homework” and “I was kidnapped by Martians” any day.

But Judge Holmes doesn’t buy this murder mystery. “We aren’t convinced. The Esrigs had no evidence to corroborate this lurid tale, and we therefore find that they had no reasonable cause for failing to timely file. Accordingly, we find Steven liable for the failure-to-timely-file additions to tax for 1998-2000 and both Esrigs liable for the failure-to-timely-file additions for the later years.” 2012 T.C. Mem. 38, at p. 18.

Good try, Steve and Lori.

When is interest on unpaid taxes abated? And what does it take for Tax Court to make abatement happen? Judge Goeke tells the story in John Hancock and Lynn Hancock, 2012 T.C. Mem. 31, filed 2/1/12.

John and Lynn got nailed on audit, but their accountant Mr. Biegler got them an offer from IRS that John and Lynn couldn’t refuse: no interest on the deficiencies if they signed at once. So John and Lynn signed the Form 4549 and went away happy.

Until IRS woke up to their mistake, and sent John and Lynn a demand for payment of interest. John and Lynn replied, asking that IRS honor their agreement. IRS replied by grabbing their tax refund to apply to the interest. So John and Lynn correspond with IRS, and IRS offers a partial abatement, but then backtracks.

IRS claims they mistook the date when John and Lynn were informed of the correct amounts of interest, and reduces the partial abatement. John and Lynn claim abuse of discretion, which IRS rejects, so John and Lynn petition Tax Court.

Judge Goeke: “Section 6404(e)(1)(A) provides that the Commissioner may, at his discretion, abate the assessment of interest on any deficiency in tax attributable, in whole or in part, to any unreasonable error or delay by an IRS officer or employee in performing a ‘managerial’ or ‘ministerial’ act.” 2012 T.C. Mem. 31, at p. 7. [Footnote and citations omitted.]

Finding Tax Court jurisdiction pursuant to Section 6404(h)(1), Judge Goeke examines the managerial and the ministerial: A ‘managerial act’ is an administrative act which occurs during the processing of a taxpayer’s case and involves the temporary or permanent loss of records or the exercise of judgment or discretion relating to management of personnel. ‘Ministerial acts’ include procedural or mechanical actions not involving the exercise of judgment or discretion that occur during the processing of a taxpayer’s case after all prerequisite action has taken place.

“Section 6404(e) applies only after the Commissioner has contacted the taxpayer in writing about the deficiency, and this Court will give due deference to the Commissioner’s use of discretion.” 2012 T.C. Mem. 31, at p. 8. [Citations omitted.]

That said, the taxpayer bears the burden of proof. “To qualify for abatement of interest, the taxpayer must: (1) identify an error or delay by the IRS in performing a ministerial or managerial act; (2) establish a correlation between the error or delay by the IRS and a specific period for which interest should be abated; and (3) show the taxpayer would have paid his or her tax liability earlier but for such error or delay.” 2012 T.C. Mem. 31, at p. 9.

If IRS misinforms the taxpayers about their liability, that’s ministerial. And IRS agrees they did misinform John and Lynn. But did John and Lynn provide answers to the three questions: Did they identify the error? Did they tie the error in to the specific period for which they seek abatement of interest (and seeking 100% abatement won’t get it)? Finally, could John and Lynn have paid the liability but for the error?

“Petitioners are not merely searching, groundlessly, for an exemption from interest, nor have they contributed to the many errors by respondent. Instead, petitioners validly seek an interest abatement on account of respondent’s professed errors.

“Petitioners’ inartful attempt to expressly articulate the period for which interest abatement is warranted is a direct function of the confusion and inconsistency which pervaded respondent’s actions following petitioners’ execution of the Form 4549. Initially, respondent appeared to agree that no interest accrual was warranted on petitioners’ deficiencies when he approved the executed Form 4549. In an unexplained change of posture, respondent then issued a notice and demand to petitioners on November 3, 2008, stating that they owed interest for their 2005 and 2006 tax years. Petitioners, continuing to rely on the executed Form 4549 In an unexplained change of posture, respondent then issued a notice and demand to petitioners on November 3, 2008, stating that they owed interest for their 2005 and 2006 tax years. Petitioners, continuing to rely on the executed Form 4549 and uncertain as to the propriety of the notice and demand, subsequently wrote two letters to respondent seeking clarification of respondent’s position and also requesting that respondent abide by the terms of the executed Form 4549. During the period in which petitioners waited for respondent’s official response to their letters, respondent applied a tax refund from petitioners’ 2008 tax year to their tax liabilities at issue, satisfying the liabilities in full. It was only at this point that petitioners realized that respondent had disregarded what petitioners perceived as the clear calculations in the executed Form 4945 and instead relied on the calculations in the November 3, 2008, notice and demand. Respondent’s position was altered twice thereafter, further complicating matters.

“Given the confusion engendered by respondent’s actions, we find that petitioners’ request for interest abatement is framed by the period following the their receipt of Form 4549 and ending with the payment in full of the liabilities on April 15, 2009. Respondent’s posttrial brief underscores this point by conceding that he was in error from the “date the erroneous interest amounts were provided to the taxpayers until the date on which respondent provided corrected interest amounts.” We find that the date respondent unequivocally provided corrected interest amounts was April 15, 2009.

“Thus, petitioners have satisfied their burden.” 2012 T.C.Mem. 31, at pp. 12-13. [Footnote omitted.]

But what about paying the tax? “The argument that petitioners did not present evidence of their ability to pay the interest liabilities, irrespective of respondent’s error, applied equally to the conceded period; yet respondent accepted that he abused his discretion in failing to abate interest for the period from June 19 to November 3, 2008. As respondent has abandoned the argument in part, we find as a corollary that he abandoned it in whole. We need not address it further.” 2012 T.C. Mem. 31, at pp. 14-15.

John and Lynn raised equitable estoppel, that is, “. . . a judicial doctrine that ‘precludes a party from denying his own acts or representations which induced another to act to his detriment.’” 2012 T.C. Mem. 31, at p. 16.

But Tax Court’s jurisdiction is limited,  so there will not be any excursion around equitable estoppel. Taxpayers must show affirmative misconduct by IRS, and even more, that the misconduct results in serious injustice and the public interest will not be injured by the estoppel sought. Here, that’s not the case.

But the taxpayers win this one.

But Why an Opinion?

Abstract from the Tax Court website. “Generally, a Tax Court Opinion is issued in a regular case when the Tax Court believes it involves a sufficiently important legal issue or principle.” “Generally, a Memorandum Opinion is issued in a regular case that does not involve a novel legal issue. A Memorandum Opinion addresses cases where the law is settled or factually driven.”

So one expects a Tax Court Opinion to have a certain gravitas;  if not an Olympian pronouncement, then at least an oracular quality. But reading the five pages of Francis T. Foster and Maureen P. Foster, 138 T.C. 4, filed 1/30/12, one searches for the “sufficiently important legal issue or principle.” And comes up short (or at least I did).

This is another installment in the Dead Tax Credits series, involving the First Time Home Buyer Credit, Take 2 (the 2008 version, a refundable credit with no payback, unlike Take 1). The facts are simple. Although allegedly moving from the home they purchased in 1974 and listing it for sale, and moving in with Maureen’s parental units, the Fosters never vacated the old house. They “maintained utility services, frequently stayed overnight, hosted family holiday gatherings, kept personal belongings, accessed the Internet, and received bills and correspondence.” 138 T.C. 4, at pp. 2-3.

Maureen’s parents didn’t have an internet connection at their house. That doesn’t help the Fosters, because Maureen renewed her Illinois driver’s license, using the old house’s address; and the Fosters filed one year of their joint income tax returns with the old house address, after they had allegedly quit the old house. The Fosters sold the old house a year after they claimed they had moved out.

Finally, just over three years after the Fosters allegedly moved out, they bought the new house and claimed the FTHBC2.

No, says IRS. The old house was still your principal residence two years before you bought the new, and FTHBC2 applies only if you hadn’t owned a principal residence for three years before you bought a new principal residence.

Judge Foley:  “Whether property is used by a taxpayer as a principal residence depends upon all the facts and circumstances. See sec. 36(c)(2); sec. 1.121-1(b)(2), Income Tax Regs. In addition to the taxpayer’s use of the property, relevant factors include, but are not limited to, the address listed on the taxpayer’s tax returns and driver’s license and the mailing address for bills and correspondence. Sec. 1.121-1(b)(2), Income Tax Regs.

“The old house remained petitioners’ principal residence after July 27, 2006. Petitioners continued to identify the old house as their address when Mrs. Foster renewed her driver’s license and when they filed their Federal income tax returns. Furthermore, petitioners readily acknowledge that, at the old house, they continued to receive bills and correspondence, maintained utilities, kept furniture and other possessions, frequently slept overnight, and hosted family during holidays. Conversely, at the parents’ house, petitioners did not pay rent or contribute towards the cost of utility services.” 138 T.C. 4, at pp. 4-5.

No credit. But did this really merit an Opinion rather than a Memorandum?

We know Tax Court’s love affair with stipulations between parties. Rule 91(a) says it all: “The parties are required to stipulate, to the fullest extent to which complete or qualified agreement can or fairly should be reached, all matters not privileged which are relevant to the pending case, regardless of whether such matters involve fact or opinion or the application of law to fact.” And Tax Court may deem matters admitted against the recalcitrant or gameplayers. So it’s stipulation or flagellation, guys.

But suppose the parties do stipulate, and the stipulation is dead wrong on the law?

Judge Holmes, the Judge who writes like a human being, gives us an answer in Robert Jay and Elizabeth T. Brooks, 2012 T. C. Mem. 25, filed 1/26/12, while I was at the New York State Bar Association’s Annual Meeting soaking up wisdom and CLE credits.

RJ was a stockbroker with a golden handcuffs deal. His firm gave him $500K up front, for which he signed a promissory note in usual form, calling for annual payments of principal and interest. If RJ was still around at each anniversary, the brokerage was supposed to write RJ a check for the installment of p&i less withholding, and RJ was supposed to write the brokerage a check for the entire amount of that p&i installment, so RJ paid out more than he got. If RJ bailed before the note matured, he had to pay whatever he hadn’t paid or been forgiven to date. RJ stayed the course, but of course no one wrote checks or withheld anything.

RJ reported the principal as income in the last year of the deal, when the brokerage tore up the note, but not the interest. He claimed that the interest would be a deduction if he reported it, and so it would wash the income, claiming Section 108(e)(2) treatment. In this  case it wouldn’t, finds Judge Holmes, because the deduction would arise from RJ’s stock market investments, and the investment interest rule of Section 163(d)(1) trumps Section 108(e) and torpedoes RJ, because his net investment income is laughably below the amount of forgiven interest.

Now what happened to the stipulation? “The parties both assume that figuring out whether Brooks’s forgiven interest is taxable income is an issue only for the 2003 tax year.” 2012 T.C. Mem. 25, at p. 4.

Except it might not be. “In form, the agreement between Brooks and Dain [the brokerage] appears to be a loan: There is a note evidencing indebtedness and a stated interest rate. In substance, however, the up-front payment looks a lot like the advance in . . .–one that we held was compensation for personal services subject to a conditional obligation to repay. Brooks received the payment from Dain as part of his compensation arrangement and only had to repay it–on a pro rata basis–if he didn’t stay employed.

“This is a potential problem for the Commissioner. If Brooks’s ‘loan’ was compensation for personal services subject to a conditional obligation to repay, then Brooks should have reported the income from the forgivable note agreement in 1998–the year he received the money–and not 2003. And 1998 is not the tax year before us.” 2012 T. C. Mem. 25, at pp. 5-6. (Citations and footnotes omitted.)

Parenthetically, it might be too late for IRS to issue a deficiency for 1998. And anyway, IRS and RJ stipulated that the issue was what RJ did in 2003, not in any other year. What to do?

Duck the issue, says Judge Holmes. Apparently because he is going to nail RJ for tax on the unreported forgiven interest, he finesses as follows: “There are limits to what parties can stipulate, and pure statements of law that are just plain wrong may well be out of bounds. But we read the stipulation in this case as an agreement that Brooks received at least $506,300–the principal of the loan–as income in 2003. Because neither party has argued that the stipulation on this mixed question of fact and law doesn’t bind us, we deem this issue waived. See Buchsbaum v. Commissioner, T.C. Memo. 2002-138; see also Bartel v. Commissioner, 54 T.C. 25 (1970) (applying ‘duty of consistency’ in similar circumstances even without stipulation).

“We will therefore, like the parties, avert our eyes from this problem, and turn to the proper treatment of the forgiven interest.” 2012 T. C. Mem. 25, at p. 6. (Footnotes omitted.) And he nails RJ.

Ya gotta like a Judge who takes the bull by the horns, doesn’t flinch from the tough choices when confronted by a blatant error of law, and makes it all go away, preserving the error by means of the sanctity of the plainly erroneous stipulation. My kind of Judge.

The only case out of Tax Court today (1/24/12) was a failure-to-submit-documents in a collections alternative, that isn’t worth commenting on. So here is a scrap that may be of interest.

Don’t throw to the wrong base, it could be expensive. Case in point, Shawn P. Bowen & Michelle L. Bowen, Docket No. 24457-11S, order entered 1/24/12. Taxpayers filed at 400 Second Street, N.W., 134 days after SNOD, so IRS says “Class dismissed!”

Taxpayer says  “Our CPA mailed the petition and the $60 check payable to US Tax Court on the last day set forth in the SNOD to Internal Revenue Service, P.O. Box 331, Bensalem, PA 19020-8517, and when that was returned unprocessed he sent it to 400 Second Street, N.W.”

No good, says Chief Judge Colvin. Section 7502(a) doesn’t apply because you mailed to the wrong place. The magic language in 7502(a)(2)(B) is “properly addressed to the agency, officer, or office with which the return, claim, statement, or other document is required to be filed….” Your petition wasn’t properly addressed. And I have no authority to extend the statutory time to file your petition.

Tax professionals– if you’re petitioning the Tax Court, go to the Tax Court website and read the Taxpayer Information, even if you’ve done it many times.

No Tax Court decisions released today (1/23/12), and only one more football game before withdrawal sets in, so to take my mind off football withdrawal symptoms (and even though Eli Manning didn’t run Judge Kroupa’s beautifully-diagrammed play from Scott A. and Audrey R. Blum, 2012 T.C. 16, filed 1/17/12; see my blogpost “OPIS Finis”, 1/18/12), I have to write about something.

So here’s an Order, certainly not for citation or reliance as authority, but an interesting view of a busted play. This involves Khadija Duma, Docket No. 11042-07, filed 1/23/12. Khadija was a FNMA (Fannie Mae) employee who had problems declaring what income she received. Judge Gustafson dealt with this in 2009 T.C. Mem. 304, filed 12/23/09, finding Khadija owed substantial tax, interest and penalties and sending her off for a Rule 155 bean-count.

Of course Khadija submitted nothing. So Judge Gustafson told her to submit or file a status report. The day before Khadija’s papers were due, Khadija filed a document she styled “Petitioner’s Motion for an Enlargement of Time to Locate Material Documents, or in the Alternative, Petitioner’s Notice of Appeal of This Court’s Order in Favor of the Internal Revenue”.

Judge Gustafson takes up the story: “… the Court denied the motion to the extent that it sought an enlargement of time; and as to the alternative “Notice of Appeal”, the order stated:

“‘Ms. Duma’s alternative–a notice of appeal–is premature, because a decision (stating the amount of the deficiency) has not yet been entered.” Order, p. 2. But the denial was without prejudice to renew when the decision was entered.

Judge Gustafson also politely told Khadija to stop stalling and do the numbers. But the copy of his order mailed to Khadija was returned as “Undeliverable”. Meantime, IRS presented their numbers, and the decision was duly entered. This time, the copy of the decision mailed to Khadija wasn’t returned.

The 90-days-to-appeal had run, when Khadija filed yet another motion in Tax Court, asking to proceed in forma pauperis with an appeal to the DC Circuit, where an appeal would lie (assuming it was timely). Federal Rules of Appellate Practice (FRAP) allow forma paups, but the application must go to the Court of Appeals and it must be timely (FRAP 24). And so must be the notice of appeal.

Khadija’s sad story: “‘I did not receive the order from this court regarding my case in this court which was returned because the post office claimed non-payment. I did not find out that the box had been closed for sometime until I went in to claim my mail. I disputed the post office claim of non-payment to no avail, and I had no way of finding out how much mail had been returned. Today the records office gave me the details of the order issued by Judge Gustafson (which was not delivered to me). I had already filed a notice of appeal, but I don’t know that it is effective now.’” Order, p. 2-3.

All is not lost, Khadija. Judge Gustafson: “Under FRAP 4 (a) (2), as amended in 1979, a premature notice of appeal filed after a district court issues its opinion but before it enters judgment will be treated as timely; but FRAP 14 makes FRAP 4 inapplicable to appeals of Tax Court cases. However, even before and apart from the 1979 amendment of Rule 4 (a), ‘premature notices of appeal have sometimes been given effect in both criminal and civil cases to avoid injustice. E.g., Lemke v. United States, 346 U.S. 325, 74 S.Ct. 1, 98 L.Ed. 3 (1953).’ Feistman v. Commissioner, 587 F.2d 941, 942 (9th Cir. 1978). See also the Advisory Notes to the 1979 Amendment to FRAP 4 (a) (2) (‘Despite the absence of such a provision in Rule 4 (a) the courts of appeals quite generally have held premature appeals effective’) (citations omitted).” Order, pp. 3-4.

However, the question of timeliness or otherwise is for the DC Circuit, not for the humble Tax Court. Still, Judge Gustafson the Merciful gives Khadija a boost: “Pending before us now is the question of how to characterize Ms. Duma’s recent filing. We construe it to be in part a notice of appeal. See Feistman v. Commissioner, 587 F.2d at 942 (‘We treat taxpayers’ request to transmit the record to this court as a notice of appeal: taxpayers are proceeding Pro se [sic], and their request clearly evinced an intent to appeal. Under such circumstances, we construe an appellant’s filing liberally’). As a notice of appeal her recent filing would appear to be untimely; but, again, it will be for the Court of Appeals to decide the timeliness of her appeal. We simply discern that the recent filing ‘clearly evinced an intent to appeal’, as in Feistman.” Order, p. 4.

So Judge Gustafson denies the forma paup motion, again without prejudice, and directs the Clerk to file Khadija’s latest as a notice of appeal.

Takeaway- Even though a late notice of appeal will probably not get much sympathy, it might be worth a try. Of course, if a tax professional takes that tack, I dare say the late notice will evoke even less sympathy.

As Tax Court has released no new cases today, I thought I’d memorialize the defeat of SOPA/PIPA by referring to a fifty-five-year-old statement from China, a nation where internet freedom and intellectual piracy are burning issues. “Letting a hundred flowers blossom and a hundred schools of thought contend is the policy for promoting progress in the arts and the sciences and a flourishing socialist culture in our land.”

Well, I don’t know about a “flourishing socialist culture”, but it sure must be nice not to have to pay royalties for grabbing someone else’s ideas. Nevertheless, I am in favor of blossoms. And a hundred schools of thought, or even one single thought, contending is how we make progress in the arts and sciences, and maybe even in the law of taxation. And culture will flourish, or not, depending upon what we do with those thoughts.

Now, as I’ve said before, this is not a political blog. I grind no axes here. I hold no more brief for the stealers of thoughts or ideas than I do for the stealers of wallets or purses. I also do not like censorship; my motto is simple: “Say what you like, and I will do likewise”. And by the fruits of our thoughts and words the world will know us.

So let’s get on with blossoming and schooling and contending–and most of all, thinking.