Or,  If You Want a Refund, Ask For It

Taking his cue from John Osborne’s 1956 London hit, thus instructs STJ Dean, in Abdelrahman Rabie, 2011 T.C. Sum. Op. 137, filed 12/12/11. AbRab overpaid his taxes in the year at issue, but IRS issued a SNOD claiming he underpaid. After concessions, everyone agrees AbRab overpaid. But the lookback in Section 6512(b)(3)(b) bars his refund.

AbRab never filed his return for that year until three and a half years later. He did timely file an undated 4868 auto-extension, but that showed a balance due. Then,  two years after his return was due (as extended), he sent IRS a letter apologizing for not filing but claiming he always got a refund in the past. He  sent in a return, and what he styled a “corrected return”, a year after that, which “corrected return” everyone agrees finally got AbRab’s numbers right.

Now, does AbRab get a refund? STJ Dean says no.

“A taxpayer seeking a refund of overpaid taxes ordinarily must file a timely claim for a refund with the IRS that meets the requirements of section 6511. That section contains two separate provisions for determining the timeliness of a refund claim: The taxpayer must file a claim for a refund ‘within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid.’ Sec. 6511(a)(1).

“Section 6511 also defines two ‘lookback’ periods: if the claim is filed ‘within 3 years from the time the return was filed’, then the taxpayer is entitled to a refund of the portion of the tax paid within the 3 years immediately preceding the filing of the claim plus the period of any extension of time for filing the return. Sec. 6511(b)(2)(A). If the claim is not filed within that 3-year period, then the taxpayer is entitled to a refund of only that ‘portion of the tax paid during the 2 years immediately preceding the filing of the claim.’ Sec. 6511(b)(2)(B). If no claim has been filed the refund cannot exceed the amount that would be allowable under section 6511(b)(2)(A) or (B) if a claim was filed on the date the refund is allowed. Sec. 6511(b)(2)(C).” 2011 T. C. Sum. Op. 137, at pp. 4-5.

Clear, right?

AbRab says he did make a claim, albeit informally, in his 4868 or in his “so sorry but I always get refunds” letter. And those, he says, were timely.

No, says STJ Dean. Even though the courts have accepted claims even so vague that IRS rejected them out of hand (provided they were timely amended to demystify), “(I)t is not enough, however, that the facts supporting the claim reach the IRS in some ‘roundabout’ fashion. ‘The evidence should be clear that the Commissioner understood the specific claim that was made even though there was a departure from form in its submission.’” 2011 T. C. Sum. Op. 137, at pp. 5-6 [Citations omitted.]

In fact, even a 37-page letter was found insufficient in Martin v. United States, 833 F.2d 655 (7th Cir. 1987), because “…to be considered an adequate informal claim, the writing must be ‘sufficient to apprise the IRS that a refund is sought and to focus attention on the merits of the dispute so that an examination of the claim may be commenced if the IRS wishes.’” 2011 T.C. Sum. Op. 137, at p. 7. The taxpayer in Martin never said a refund was wanted, or demanded an IRS administrative review of the return.

IRS need not launch an independent investigation into every piece of paper or e-correspondence it receives. IRS need not, like Peer Gynt in Ibsen’s play, “go round about”. AbRab never said “I want a refund.” He only said he always got one before, and took three and a half years to get the numbers right. His 4868 was insufficient, because it showed a balance due. Even so, in the past a 4868 was held to be sufficient notice when taken together with other documents submitted by the taxpayer (Kaffenberger v.United States, 314 F.3d 944, at pp. 955-956 (8th Cir. 2003). But AbRab’s letter wasn’t specific enough.

Nevertheless, AbRab might be OK in Tax Court, even if not with IRS.

“A taxpayer seeking a refund in this Court, however, does not need to actually file a claim for refund with the IRS. He need only show that the tax to be refunded was paid during the applicable lookback period. Sec. 6512(b). In this case, the applicable lookback period is set forth in section 6512(b)(3)(B), which provides that this Court cannot award a refund of any overpaid taxes unless it first determines that the taxes were paid ‘within the period which would be applicable under section 6511(b)(2) * * * if on the date of the mailing of the notice of deficiency a claim had been filed (whether or not filed) stating the grounds upon which the Tax Court finds that there is an overpayment’.

“Section 6512(b)(3)(B) treats delinquent filers of income tax returns less favorably than those who have filed timely. Whereas timely filers are most likely to have the opportunity to seek a refund in the event they are drawn into Tax Court litigation, a delinquent filer’s entitlement to a refund in Tax Court depends on the date of the mailing of the notice of deficiency. Section 6512(b)(3)(B) directs the Tax Court to measure the lookback period from the date on which the notice of deficiency is mailed and not the date on which the taxpayer actually files a claim for refund. In the case of delinquent filers, section 6512(b)(3)(B) establishes only a 2-year lookback period, so the delinquent filer is not assured the opportunity to seek a refund in this Court. If the notice of deficiency is mailed more than 2 years after the taxes were paid, the Court lacks jurisdiction to award the taxpayer a refund.” 2011 T. C. Sum. Op 137, at pp. 9-10. {Citations omitted.]

Unhappily for poor ol’ AbRab, the SNOD got mailed to him after the three-year window had closed, so he was out of luck even if the three-year lookback applied.

Takeaway–Every letter to IRS should say “I want a refund”. If you file a 4868 and can state in good faith that you overpaid, write on the front in big letters “I want a refund”. And tell ‘em AbRab sent you.

Or, A Little Learning Is a Dangerous Thing

Once again I quote Alexander Pope, as I did in my blogpost “A Dangerous Thing”, 4/13/11:

A little learning is a dangerous thing;
Drink deep, or taste not the Pierian spring:
There shallow draughts intoxicate the brain,
And drinking largely sobers us again.

This was advice an unnamed Missouri law firm should have heeded, but their failure to read and heed bails out DeeDee Dennis, in Denise Diana Dennis, 2011 T. C. Sum. Op. 134, filed 12/5/11.

Echoes of poor ol’ Debbie Crane (see my blogpost “No Hurt, No Foul?”, 11/1/11). DeeDee wins a discrimination suit (race this time, not sex), claiming damages for “loss of self-esteem, humiliation, emotional distress and mental anguish and pain, and related compensatory damages.” 2011 T.C. Sum. Op. 134, at pp. 2-3.

What’s wrong with this picture? No physical injury or illness.

Now for the kicker. Judge Wells takes up the story:  “…petitioner signed a document from her attorneys titled ‘Settlement Distribution – Tax Consequences’, which stated, among other things:

“‘Counsel has informed client that there are complicated issues surrounding the taxability of employment discrimination awards and/or settlements. Counsel has further informed Client [sic] that payment for non-physical injuries are generally taxable * * *.

*******

“‘Counsel informed Client [sic] that the law is unsettled as to whether emotional damages in non-physical injury cases are taxable. Counsel informed client about the decision in Murphy v. Internal Revenue Service 460 F.3d 79 (2006) holding that such damages are not always taxable. Counsel has urged client to obtain professional tax advice and provide a copy of the attached case to the tax professional to determine what, if any, impact it has on the resolution of the issue of the tax consequences associated with this settlement. Counsel has informed Client [sic] that there has been an appeal of that case and the case may be overturned and/or may not be followed by the Courts in Missouri * * *’.

“The case mentioned in that document, Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 2006), was later vacated by the Court of Appeals for the District of Columbia Circuit on December 22, 2006, Murphy v. IRS, 99 AFTR 2d 2007-396, 2007-1 USTC par. 50,228 (D.C. Cir. 2006). The Court of Appeals subsequently heard additional arguments before issuing another decision on July 3, 2007, in which it held that the taxpayer’s compensatory award for emotional distress was taxable. Murphy v. IRS, 493 F.3d 170 (D.C. Cir. 2007). However, petitioner was not aware of those developments.” 2011 T.C. Sum. Op. 134, at pp. 3-4.

DeeDee and her lawyers were both unaware that Murphy’s Law had trumped the Murphy case. If anything could go wrong, it did.

DeeDee went to a franchise tax preparer when she got the 1099-MISC showing her recovery in the lawsuit. The franchisee didn’t have a clue whether the award was or was not taxable, although Section 104(a)(2) had not changed. DeeDee, disappointed at the clueless franchisee, went to another preparer, whose address she did recall but whose name she did not, obtained that preparer’s oral opinion that the award was not taxable, and rewarded that preparer by taking her business to still another preparer. She never showed that preparer the 1099-MISC (DeeDee said she had lost it), said the settlement was confidential, and the preparer, taking her at her word (serious mistake), never put the settlement income on DeeDee’s return.

IRS wants the Section 6662(a) accuracy penalty.

Judge Wells again: “Petitioner is obviously unfamiliar with tax law. She was advised by the attorneys who handled her lawsuit that she should seek professional advice regarding the tax treatment of her income from the settlement. By advising her of the Court of Appeals’ holding in Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 2006), those attorneys also provided her with a reason to believe that the income from the settlement might not be taxable. Petitioner consulted three different tax preparation services, and none of them advised her that the income from the settlement was taxable. On the basis of petitioner’s background, education, and actions seeking advice on a complex tax issue, we conclude that petitioner had reasonable cause for her position and acted in good faith on her belief, although mistaken, when she failed to report her income from the settlement.” 2011 T.C. Sum. Op. 134, at pp 9-10.

Judge Wells finds that the tax advice her attorneys gave was erroneous when given, as Murphy I had already been overturned by the time they wrote their disclaimer.

As with Debbie Crane, litigators–don’t give tax advice unless you know what you’re talking about. Drink deep, guys and gals. Or leave the stuff alone.

Or, A Sentence or Two

Somebody reads my blog. I got an e-mail on Friday, 12/2/11, from J. P. Finet, Legal Editor with the BNA Daily Tax Report, asking me to comment on Coffey v. Com’r, No. 11-1362, decided 12/2/11 by the Eighth Circuit. I’ll quote the relevant portion of the e-mail: ”That decision appears to be at odds with the Third Circuit’s ruling in Appleton v. Commissioner, which allowed the U.S.V.I. to intervene. What I am looking for is just a sentence or two from Mr. Taishoff about why practitioners should care about the ruling.”

I was out getting a drink when Mr. Finet’s e-mail arrived, so I didn’t respond at once. My apologies, sir.

However, anyone who has ever read this blog, much less ever encountered me in any other context, knows that I never limit myself to “a sentence or two.” Wind me up, and I’ll give the Energizer Bunny a decent run for his/her loose change.

Coffey is not “at odds” with Appleton, except for a hyper-technical parsing of FRCP 24, which I leave to the law review editors. See my blogpost “Missed It, But Better Late Than Never,” 8/24/11, wherein I summarized the Third Circuit’s decision, reversing Tax Court. Third Circuit remanded the case, stating that Tax Court (Judge Jacobs) got intervention under FRCP 24 wrong.

Appleton talks about as-of-right intervention. Coffey talks about either as-of-right or permissive intervention. But Third Circuit and Eighth Circuit agree. Holding in both cases: USVI should be allowed in at the trial stage. Appleton involves an argument about effective and orderly tax administration. Coffey goes off on the administration of USVI’s “unique” economic development program, but that’s embodied in Section 934.

Effective tax administration or economic development program, call it what you will, is, and of right ought to be, an essential governmental interest, beyond economics. And in Appleton and Coffey the issue is statute of limitations. In both cases, returns were filed per Code; three-year period ran; and no IRS  claim of tax-protester phony returns or fraudulent returns. IRS says, “You filed with BIR (United States Virgin Islands Bureau of Internal Revenue), per Section 932(c)(4). But the statute of limitations is open because you never filed with IRS.” Eighth Circuit noted that Section 932(c)(4) says filing with BIR satisfies filing requirement.

If IRS is right, no VI taxpayer who filed properly per Section 932(c)(4) has ever filed a return. And even if they were audited by BIR, paid up, and case closed–they are still subject to IRS audit.

So USVI has a very real interest. If BIR says it’s over, is it over?

Why should practitioners care? Other than VI practitioners, of course. Because it matters when it’s over. For everybody. We all know that the economic development program for our beautiful but insolvent Islands in the Sun, like all unguided Congressional largesse, led to game-playing. Were the taxpayers in Appleton and Coffey pure of heart and clean of hand? I don’t know. But good or bad, if the law, as embodied in the Acts of Congress, says it’s over, it’s over.

So my reply to Mr. Finet’s request for “a sentence or two why practitioners should care” is “All practitioners should care because it matters that taxpayers, and people, should know that when it’s over according to law, it’s over.”

In-the-trenches tax preparers should welcome IRS’ December 8 town meeting concerning real-time matching of 1099s and W-2 to e-filed returns. The idea is that, if IRS detects a non-reporting, the preparer and taxpayer get immediate notice and a chance to amend. As matters stand, it may be a year or eighteen months before the error is found, triggering interest and penalties.

I know some preparers have objected that this system will allow IRS to match W-2 and 1099s, prepare an individual’s return and mail it to him/her/them for signature, thus cutting out the preparers, paid and unpaid. Is this the thin end of the wedge? I can’t tell. Just sayin’, this year the decree went out from Douglas Augustus that all preparers must be registered; this is the first registration, when Douglas was Commissioner of Internal Revenue and Timothy was Secretary of the Treasury.  Of  course, all the world was to be taxed long before this.

But I just blogged Kurt C. Olsen, 2011 T.C. Sum. Op. 131, filed 11/23/11. Briefly, Olsen updated his tax software in order to report income from a K-1 his wife got, neither his wife nor he ever having seen a K-1 before. He hit the wrong key and, though he accurately reported the payor, didn’t report the income on their Schedule E or transfer that income to their joint 1040. When IRS asserted substantial underreporting long afterwards, Special Trial Judge Armen let Kurt off the hook for the five-and-ten penalty because he clearly acted in good faith. Of course, Kurt still owes tax and interest.

How much time, effort, energy and agita could have been avoided, had Kurt got a next-day e-mail that read something like this: “Hey, dude, where’s the $X your wife got from Y? You got a 1099 but didn’t show it on your 1040”. Time to correct (and presumably avoid penalty), minimal interest, no need to waste scarce Tax Court resources–the benefits could be substantial.

What do you guys think?

Now You See Her, Now You Don’t

The late Jane H. Gudie wanted to avoid probate. She played the living trust gambit, and that worked as far as her native California went. She also wanted to avoid estate tax, but that isn’t going to go so well.  Her trustee/beneficiary Mary Helen Norberg filed a 706 and listed herself as executor, even though she never qualified and never planned to qualify in California or anywhere else. Judge Wherry tells the story, finding that Tax Court has jurisdiction, in Estate of Jane H. Gudie, Deceased, Mary Helen Norberg, Executor, 137 T.C. 13, filed 11/30/11.

As it’s a motion to dismiss, Judge Wherry stresses he isn’t finding facts, just backstopping Tax Court subject matter jurisdiction.

Mary Helen and her sister Ms. Lane were the nieces and sole beneficiaries of the late Jane H.’s largesse–and it was large, about $5 million. Mary Helen and Ms. Lane went through a purported deal whereby the nieces agreed to make annuity payments to the late Jane H. in exchange for Jane H.’s promissory note, secured by the trust assets. If the note was bona fide, the claim against the estate would wipe out those assets. Of course, the nieces never made Payment One to the late Jane H. This carefully-crafted piece of estate tax planning was the work of Robert P. Hess, qualifications unstated.

Jane H. shuffles off this mortal coil. Mary Helen files a 706, signing as executor, although she never was and claims she never will be. IRS, not impressed either with the annuity-note gambit nor Mary Helen’s now-you-see-me, now-you-don’t routine, hits the estate with a great deficiency, claiming GST, gifts within the 3 years before death, and sundry other delictions.

Mary Helen moves to dismiss her own petition for want of subject matter jurisdiction, claiming IRS’ SNOD was sent to her as executor, which she isn’t and never was, and not to the trustees.

Judge Wherry finds Mary Helen was in possession, whether actual or constructive is not stated and it doesn’t matter, of the property of the late Jane H., at least enough to trigger Section 2203 and make her a statutory executor. “…Ms. Norberg, because she was in actual or constructive possession of property of decedent, was a statutory executor. As such, she had the responsibility and authority to file the estate tax return. By filing the estate tax return, she notified respondent of a fiduciary relationship and was the proper person to receive the notice of deficiency.

“Section 2203 defines ‘executor’ for purposes of the Federal estate tax as ‘the executor or administrator of the decedent, or, if there is no executor or administrator appointed, qualified, and acting within the United States, then any person in actual or constructive possession of any property of the decedent.’ In her objection, Ms. Norberg states she ‘was never in possession of any assets of the probate estate of Jane H. Gudie, or of other estates, with respect to any and all times relevant to our motion to dismiss.’ Ms. Norberg attached to her objection the signed declaration of Mr. Hess, who also states that ‘Norberg was not ever in possession of any assets of the probate estate of Jane H. Gudie’. Ms. Norberg and Mr. Hess carefully confine their statements to the ‘probate estate’. The fact that the property Ms. Norberg received did not pass through probate is immaterial to this discussion. This Court has previously held in situations like this that ‘the fact that * * * property interests passed * * * directly rather than as part of decedent’s probate estate is immaterial.’ Estate of Guida v. Commissioner, 69 T.C. 811, 813 (1978); see also Estate of Wilson v. Commissioner, 2 T.C. 1059, 1083-1084 (1943) (stating that if taxpayers could distinguish between probate and nonprobate property to defeat the estate tax, ‘the law would soon be a nullity’).” 137 T. C. 13, at pp. 10-11.

Mary Helen argues that IRS’ affidavits and exhibits are insufficient evidence to defeat her motion, but Judge Wherry steers a course between the motion for summary judgment and the motion to dismiss. In the latter case, the Court is free to look at what it likes. In the former, FRCP 56(e) rules the roost, and there must be admissible evidence. So IRS’ papers stay in, and so does Mary Helen.

Mary Helen claims she never filed Form 56, notifying IRS of her executorship, and therefore she wasn’t. Judge Wherry notes that the Form 56 instructions say a fiduciary may (my emphasis) so notify IRS, but there are other ways–like filing a 706 and signing it as executor. And since Mary Helen never gave notice that she wasn’t a fiduciary until after the SNOD, Mary Helen is definitely in.

Finally, Mary Helen, in her usual style, both raises and doesn’t raise the statute of limitations, but Judge Wherry steers that aside. “Although the argument is unclear, in her motion to dismiss Ms. Norberg appears to argue that the period of limitations on assessment has expired. In her objection to respondent’s (IRS’) objection, Ms. Norberg states she ‘did not and is not asserting in this motion any issue regarding statute of limitations’ and asks us not to rule on this issue. We need not analyze this issue here but do note two things. First, pursuant to sections 6503(a)(1) and 6213(a), the period of limitations on assessment, if open when a notice of deficiency was sent, would generally be suspended if a timely petition was filed until such time as the Secretary is no longer prohibited from assessing the tax. Second, the statute of limitations is an affirmative defense, not a jurisdictional matter. See Rule 39; Freytag v. Commissioner, 110 T.C. 35, 41 (1998).” 137 T. C. 13, at p. 15.

Don’t expect surprises at trial or in the decision.

 And Hope for the Computer Semi-Literate

Two useful “Just Sayin’” 7463s from the flood of good Tax Court cases filed 11/23/11.

First, continuing the popular “For Dummies” series, Judge Holmes writes a useful and practical guide to basis, which the in-the-trenches practitioner can use to explain this essential concept to clients in more-or-less English, free of what Judge Holmes calls “taxspeak”. This can be found in Robert L. Willson, Sr., 2011 T.C. Sum. Op. 132, filed 11/23/11.

I can’t set the scene better than Judge Holmes: “Robert Willson opened a bar in 1986, and it gave him nothing but trouble. He’s seen lawsuits, endless repairs, and even a catastrophic fire. One might say the City of Des Moines did him a favor when it finally condemned the land in 2000 to expand its airport–right around the time Willson began serving a federal prison term. But the Commissioner wouldn’t let things be and says that the condemnation triggered a large capital gain that Willson didn’t correctly report. This meant the bar would give him one more headache–because, though Willson represented himself at trial, the facts as he described them would be worthy of an advanced exam problem in tax accounting.” 2011 T.C. Sum. Op. 132, at pp. 1-2 [footnote omitted].

Willie was an auto mechanic who opened a rock bar after burglar shot him in the arm. He had to rebuild the place, repair, refurbish and remodel it extensively, contend with the change from hair bands to grunge rock, but in Des Moines, Iowa, hair bands were still big until one of his artists-in-residence set off a smoke machine and burned the whole place down. Then the City of Des Moines condemned the whole shebang for an extension to the striving, thriving Des Moines International Airport, triggering a big award.

Willie’s lawyer took custody of the award, because the U.S. of A. took custody of Willie, over something to do with drugs, guns and money–Judge Holmes isn’t quite clear about that, and apparently Willie glossed over that at trial.

Notwithstanding the foregoing, as my high-priced colleagues say, Willie had managed, from Uncle Sam’s Stony Lonesome, to file his tax return timely for the year of the condemnation.

Although they claimed Willie underreported the gain on the condemnation, IRS, gracious as always, waited until Willie was restored to society before trying the case.

Willie chose S case treatment, with its looser evidentiary rules. Willie conducted the trial his own self, as they say in the Des Moines rock bars, and he and his barfly friends made out a reasonable case. But the numbers were flying in all directions, and Judge Holmes had to sift through them.

Again, Judge Holmes does such a good job that I’m not going to excerpt or paraphrase his decision. Just read it, and even copy it for your clients. Willie’s story is the stuff reality shows wish they were made of, so your clients might actually read something you give them (for once), and even more astonishingly remember some of it (maybe).  Judge Holmes’ prose is crystal clear.

Second, Kurt Olsen may have misled the shrink-wrapped guru, but it was an accident, so Special Trial Judge Armen, a judge with a heart (cf. Timothy John Karlen and Jennifer Karlen, 2011 T.C. Sum. Op. 129, filed 11/10/11, and my blogpost “Ignorance Is Bliss? And ‘gude faith, he maunna’ fa’ that’”, 11/10/11), lets Kurt off the penalty hook in Kurt C. Olsen, 2011 T.C. Sum. Op. 131, filed 11/23/11.

Mrs. Kurt got a distribution of interest from Mrs. Momma’s trust fund after a lawsuit, with a K-1 to match. Neither Mrs. Kurt nor Kurt had ever gotten a K-1 from anybody before that.

Now Kurt is an attorney, so that is strike one; except STJ Armen is at pains to point out that Kurt is a patent attorney with the US Energy Administration, with all kinds of security clearances and good conduct badges, so tax evasion where less than ten grand of tax is involved doesn’t really fit Kurt’s lifestyle.

Kurt was a roll-your-own taxpayer, so he rolled up his sleeves and trundled out the software.

STJ Armen tells the tale: “Because he had never dealt with a Schedule K-1 in the past, petitioner upgraded his tax preparation software to a more sophisticated version as a precaution to ensure proper treatment of the unfamiliar form.

“Using the upgraded software’s interview process, petitioner correctly entered the name and tax identification number of the trust, properly reporting the source of income. While transcribing the remaining information, however, he made a data entry error that prevented the amount of interest income from being correctly displayed on Schedule E, Supplemental Income and Loss, of his Federal tax return. Petitioner reviewed the Federal tax return before filing, including using the verification features in his tax preparation software, but did not discover the error.” 2011 T.C. Sum. Op. 131, at p. 3.

The result was the substantial underreporting penalty. Clearly Kurt blew the five-and-ten ($5 K or 10% of tax due) test, but Kurt acted in good faith. He upgraded his software, and put in all the correct info, barring only the single transcription error. “He did not bury his head in the sand and ignore his obligation to check the accuracy of his tax return. Instead, petitioner reviewed the information he entered using his tax preparation software upon completion of the software’s interview process. Despite his best efforts, however, petitioner failed to discover that the amount of the interest income did not appear on the final version of his tax return that was filed.” 2011 T.C. Sum. Op. 131, at p. 7.

So STJ Armen lets Kurt off the substantial underreporting hook. He tried, he really did–energetically.

Or, Why He Stole May Save the Victim

Such is the lesson of City-Wide Transit, Inc., 2011 T.C. Mem. 279, filed 11/23/11, the drought-breaker of a long line of arid, uninteresting cases.

Ray Fouche ran a bus company transporting disabled children to school under contract to the New York City school system. She had a payroll company do the payroll and prepare the 941s, and no one finds any fault with any of that.

But Ray needed to sort out a reduction in certain employment tax liabilities unrelated to the years at issue. So she hires one Manzoor Beg, who claims to be an accomplished CPA. He isn’t an accomplished CPA, but he is an accomplished thief.

He gets official bank checks from Ray to pay the supposed taxes, gets her to sign a blank Form 2848 power of attorney, and has her hand over the returns prepared by the payroll company. He deep-sixes the real returns, and makes up phony returns, claiming false EICs. He then fraudulently alters the bank checks and deposits them in his Himalayan Hanoi account, whence the proceeds go to Hanoi or the Himalayas, but not to IRS. Instead, Manzoor gives the IRS his own Hanoi checks in an amount sufficient to pay the phony taxes, which is of course much less than Ray really owes.

Ultimately, Manzoor makes off with almost $350K, some of it being the money Ray properly owes IRS, plus some other monies he stole from other bus companies. Before he can skip to the fastnesses of Shangri-La or the Hanoi Hilton, the long arm of the law catches Manzoor, and he pleads guilty to money laundering, signing false returns and filing false returns. Before he can be sent to jail, Manzoor dies.

IRS comes after Ray for the back taxes. Ray says she did nothing wrong, her payroll company did nothing wrong, and IRS agrees, but says “too bad, so sad, but you owe the money and you trusted Manzoor.” Ray says “but those are all closed years.” IRS says, “not if there was fraud. Frauds, like diamonds, are forever.”

Ray’s attorneys, Herbert Kantor and Gary Hoppe (and I name them here because they did a real fine job), argue that Manzoor didn’t file false returns to evade the payment of tax, as Section 6501 proscribes, but rather to cover up his theft of Ray’s monies. In other words, Manzoor was trying to steal from Ray, not the IRS.

Now the general rule is that whether the taxpayer or the taxpayer’s preparer was filing the fraudulent return doesn’t matter. The taxpayer and the preparer are in the same boat. But that’s Section 6501(c)(1) learning, from Allen v. Commissioner, 2007 T.C. 37. And that involved filing a fraudulent return to evade or defeat payment of tax. That isn’t the issue here; the issue here is an attempt by any means to evade or defeat tax, per Section 6501(c)(2).

IRS claims that if anyone attempts by any means to evade payment of tax, even if the taxpayer is completely innocent and got no benefit from the skullduggery in question, it’s a fraud and IRS can assess tax at any time.

No, says Judge Vasquez. IRS failed to show by clear and convincing evidence (the standard of proof for fraud) that Manzoor intended to evade payment of tax. “Respondent [IRS] argues that the record clearly and convincingly shows that Mr. Beg intended to evade tax and/or willfully attempted to defeat or evade employment taxes for all of the periods at issue. Specifically, respondent points out that Mr. Beg filed fraudulent Forms 941 and amended Forms 941, pleaded guilty to violating section 7206(1), and had the knowledge and experience to know that his actions would result in the evasion of petitioner’s employment taxes.

“Petitioner counters that the stipulated facts and incorporated exhibits show that Mr. Beg intended to embezzle from petitioner and that he filed the Forms 941 and amended Forms 941 solely to cover up his embezzlement, not to defeat or evade petitioner’s employment taxes. Therefore, according to petitioner, the record does not show by clear and convincing evidence that Mr. Beg had the specific intent to evade tax or willfully attempted to defeat or evade tax, and respondent has failed to carry his burden of proof.” 2011 T.C. Mem. 277, at pp. 16-17.

IRS claims that Manzoor’s acts speak for themselves, and his guilty plea speaks even louder. No, says Judge Vasquez, the guilty plea is a factor but not conclusive. And specific intent to evade or defeat is not a factor in a Section 7206(1) violation, to which Manzoor pleaded guilty.

So the years are closed, and Ray drives off into the sunset. Good job by the defense.

Readers of my blogpost “More Shell Games”, 9/2/11, will remember Superior Trading LLC, Jetstream Business Limited, Tax Matters Partner, et al., 137 T.C. 6, filed 9/1/11. Judge Wherry therein waxed rhapsodic about the academic and other attainments of John E. Rogers, attorney and tax whiz.

This Mr Rogers, not to be conflated with the beloved television personality, constructed numerous distressed asset debt deals (DADs), and sold them to parties seeking to defer taxable gain. Incidentally, Mr. Rogers pocketed a good deal of cash.

He sought to disguise his receipts by claiming he held some of this money in trust in his Subchapter S Corporation (of which he was sole shareholder, director and officer) for his various disregarded single-member LLCs.

Alas, Judge Haines is much less impressed with Mr Rogers’ academic credentials in John E Rogers and Frances L Rogers, 2011 T.C. Mem. 277, filed 11/23/11. The so-called trust funds that Mr Rogers never reported for the year at issue were not segregated from Mr Rogers’ personal funds, there was no escrow agreement or other documentation memorializing any trust relationship, and the income in question was received by the Sub S which Mr Rogers entirely controlled, and not by Mr Rogers as manager of either of his LLCs. Only Mr Rogers’ self-serving testimony evidenced any “trust” relationship. So Mr Rogers has to pick up the “trust fund” income per the Sub S rules.

In simplest terms, “The economic benefit accruing to the taxpayer is the controlling factor in determining whether a gain is income.” 2011 T.C. Mem. 277, at p. 7 [citations omitted]. Mr Rogers had it all, so he has to pay. But pay what?

There’s a Rule 155 coming up, as Mr Rogers switched his corporation from a C to an S some years after incorporation, so we have to sort out retained earnings and profits (if any) above the allocated adjustment account as between dividends and return of capital, and Mr Rogers’ adjusted basis in his shares (sale or exchange to the extent the remaining distribution exceeds his adjusted basis).

Sounds like a fun project.

I’ve not posted recently because there’s been nothing out of USTC but cases that shouldn’t have been there in the first place. If I don’t see the cite for INDOPCO or Neonatology Associates or Cohan again for a couple of weeks, I won’t be sorry. I know that what seems obvious to some of us is not obvious to others (and Christy & Swan Profit-Sharing Plan, 2011 T.C. Mem. 62, filed 3/15/11 and my blogpost “Maybe Not So Obvious”, 8/28/11, are engraved in my memory). That said, the recent cases on which I’ve avoided commenting haven’t a shred of a reason for adjudication–the taxpayers are wasting their time and the Court’s.

I’m only commenting on Lori Menefee, 2011 T.C. Sum. Op. 130, filed 11/21/11, because it shows, in conjunction with Benny Nipps, 2011 T.C. Mem. 267, filed 11/10/11 (see my blogpost “”Ignorance is Bliss?” 11/10/11), what a monumental trap for the unwary has been created by the rollover and distribution rules in the pension and retirement fruit salad in the 400s of the Code.

The trustees of the several plans, of course, state that they are giving no tax advice, and require distributees to sign a declaration in conjunction with any distribution, that they have consulted their own tax advisers. Yeah, right. Benny and Lori probably think that EA stands for Enough Already. And there are millions like them. And as our boomers start to bust and their beneficiaries and distributees get their hands on whatever’s left of boomer’s nest egg, there will be plenty of busted rollovers and missed 60-day deadlines.

Lori, unlike Benny, was only contesting inclusion of the money she got from her late Mom’s 403(b) with the Hartford Board of Education in her gross income. Lori took the check directly in her own name, and waited 90 days before depositing the money in an IRA she opened.

So far, same as Benny. Result is the same–60-day rollover deadline irretrievably blown, IRS’ determination of deficiency sustained. Penalty not mentioned or adjudicated, so no inquiry into Lori’s education, knowledge or experience, but I doubt either she or Benny was a candidate for the editorial board of the Journal of Taxation. Little to note nor long to remember here.

But I do fault Landmark Bank in Benny’s case, and ING in Lori’s. I know their lawyers told them not to give tax advice, and get written disavowals of such before handing over Penny One to anybody. I know I’d give the same advice to any trustee of any plan. There’s nothing to gain if the tax advice is correct, and a lot to lose if it’s wrong, so don’t do it, and get written disavowals.

But couldn’t the trustees be required to give a “cigarette pack” warning? Caution- taking any of this money may be hazardous to your tax health.

The Loris and the Bennys are utterly clueless as to 401(k), 403(b) and IRA distributions. Telling them to consult a tax adviser may get the trustee off the hook, but it doesn’t mean the distributee will do it. I know we can’t protect everyone against everything, but this is a problem that will only grow.

And, “Gude faith, he maunna fa’ that!”

Two for one today. We start with Benny Nipps, 2011 T. C. Mem. 267, filed 11/10/11. Benny was ignorant when he inherited his cousin Larry’s IRA. He told Landmark Bank, where Larry stashed his cash, to give him the money. Benny deposited it in a brand-new IRA he started for himself. Unhappily for Benny, he immediately took the money out of his brand-new IRA.

As he inherited the IRA and wasn’t his cousin’s wife, Section 408(d)(3)(C) prevents rollover. However, under caselaw, the door is open to a trustee-to-trustee if Benny never got his hands on the money. Yielding to temptation, Benny took the money and didn’t run fast enough.

Benny owes tax on the money, but does he owe Section 6662(d)(1) substantial understatement penalty? As Benny clearly understated more than $5K and 10% of the tax required to be shown (the five-and-ten penalty), it looks like a slam-dunk for IRS.

Judge Paris, however, looks at the forms the bank had Benny sign when he took over Larry’s IRA. Benny could have reasonably believed that the bank was going to withhold whatever Benny owed, based on the documents and Benny’s education, experience and knowledge. Benny also didn’t bother to pay tax on his Social Security, but that’s left for a Rule 155 jump-ball.

Although Benny’s exact educational, experiential and knowledge qualifications and attainments aren’t spelled out, Judge Paris seems to conclude that Benny isn’t the swiftest dune buggy on the beach, or, more elegantly: “Petitioner, who lacked knowledge and experience in tax law, reasonably believed that the correct Federal income tax would be withheld by Landmark Bank. The beneficiary notice stated that Landmark Bank would withhold Federal income tax unless petitioner elected otherwise. Petitioner did not elect out of this withholding. He reasonably relied on Landmark Bank’s lack of withholding of Federal income tax as basis for his position that the distribution was not taxable. While petitioner is liable for the tax, as the payor’s withholding obligation does not excuse taxpayers from the duty to report and pay the resulting tax, the Court finds that he had a reasonable basis to believe that the correct withholding would occur and that absent that withholding, the amount was not taxable.” 2011 T.C. Mem. 267, at p. 7.

So Benny dodges the Section 6662 penalty, as it regards the IRA. For Social Security, Judge Paris seems to decide that Benny should know better. So ignorance is partially bliss.

Now for the good faith, and why IRS “maunna fa’ that”, as Scotland’s greatest famously remarked. It’s Timothy John Karlen and Jennifer Karlen, a “don’t quote me” Section 7463, 2011 T. C. Sum. Op. 129, filed 11/10/11.

TJ set up three Section 529 college savings accounts, one for each of his and J’s children. As Dixie’s poet famously remarked, “By’n by hard times comes a-knocking at the door”, so TJ loots the kids’ account to pay their household expenses. Checks in hand, TJ heads for the bank, while J tearfully begs him to spare their innocent babies’ future. TJ relents, endorses the checks and mails them back to the trustee of the kids’ Section 529s.

Now, since all TJ could do by law was either fund a new 529 for each child with the proceeds or open a new 529 for another member of his family who would qualify as the beneficiary of a Section 529, he owes the $1318 income tax deficiency. And he candidly testified he never intended to do a rollover when he got the checks. A repentant sinner saved by his wife’s tears, and an honest witness on a trial–proves the old saying–“No good deed goes unpunished”–totally.

Special Trial Judge Armen, a man with a heart, holds the checks are gross income to TJ and J, but states the taxable redeposits will increase the basis in the accounts, thus eventually lowering any tax on future distributions. As they say in Texas, “How nice!”

But STJ Armen goes further, and forgives the Section 530(d)(4)(A) 10% additional tax on disqualified distributions. “Congress granted tax-exempt status to education investment accounts ‘To encourage families and students to save for future education expenses’. S. Rept. 105-33, at 16 (1997), 1997-4 C.B. (Vol. 2) 1067, 1096; H. Rept. 105-148, at 323 (1997), 1997-4 C.B. (Vol. 1) 319, 645. To impose a 10-percent additional tax upon petitioners given the unique facts in this case ‘would be like throwing salt into a wound.’ Larotonda v. Commissioner, 89 T.C. 287, 292 (1987). Although the distributions received are includable in petitioners’ gross income, ‘doubt exists in our mind as to whether the * * * [additional tax] was designed to cover the situation involved herein.’ Id. We are mindful that ‘A particular construction must not produce inequality and injustice if another and more reasonable interpretation is possible.’ Grier v. Kennan, 64 F.2d 605, 607 (8th Cir. 1933) (citing Knowlton v. Moore, 178 U.S. 41 (1900)). Because petitioners never used the distributions and instead immediately returned the distribution checks to the NC 529 Plan to save for their childrens’ future educational expenses, “we think it judicious to resolve this issue in favor of’ petitioners given their unique situation. See Larotonda v. Commissioner, supra at 292. Consequently, we hold that the 10-percent additional tax does not apply.” 2011 T.C. Sum. Op. 129, at pp. 7-8.

Good faith sometimes mitigates the blow.