And a new Circular 230 person?

Although abuse-of-discretion in CDPs is rare, here’s one filed today, Shawn Michael Lewis, 2012 T.C. Mem. 138, filed 5/16/12. Shawn was hit with SNODs, but filed Chapter 11. He and IRS jousted about the deficiencies in Bankruptcy Court, but eventually IRS’ second amended proof of claim carried the day, after Shawn signed a Form 4549, Income Tax Examination Changes.

IRS proceeds to levy, and Shawn asks for a CDP. It takes a year for his request to get assigned to a SO. He asks for a face-to-face, which is granted, so he gets sent from one SO to another. The second SO asks for documents Shawn says he sent but the SO says he never got, so he issues a NOD sustaining the levy for failure to furnish documents.

Shawn can’t challenge the underlying liability, of course. Judge Paris: “Where a taxpayer has filed a bankruptcy action and the Commissioner has submitted a proof of claim for unpaid Federal tax liabilities, the taxpayer has had the opportunity to challenge the underlying tax liability for the purposes of section 6330(c)(2)(b). See Kendricks v. Commissioner, 124 T.C. 69, 77-79 (2005). Additionally, a taxpayer who consents to additional assessments by signing Form 4549 is also deemed to have had the opportunity to dispute his or her tax liability for the years included in the Form 4549. Aguirre v. Commissioner, 117 T.C. 324, 327 (2001).” 2012 T.C. Mem. 138, at p. 8. Incidentally, it’s a proceeding in Bankruptcy Court, not an action, but that doesn’t help Shawn, he’s barred from contesting the liability.

But the second SO dropped the ball. He never gave Shawn a face-to-face, and Shawn had only one phonecall with the SO before the SO issued the NOD. Judge Paris:  “During the call petitioner reasserted his desire for a face-to-face conference on the basis of the complexity of his bankruptcy issues, asked for a total of his liabilities, and restated his desire to explore collection alternatives. SO X advised petitioner that he would have to submit the financial documentation requested in his previous letter in order to be eligible for collection alternatives. At no point did SO X indicate that the phone call would constitute petitioner’s CDP hearing. SO X had no further contact with petitioner until the issuance of the notice of determination….” 2012 T. C. Mem. 138, at p. 11 (Name and date omitted).

Judge Paris throws out the NOD. “In reviewing the administrative record, it is difficult to conclude that SO X dedicated much effort to a meaningful review of the issues presented by petitioner’s CDP hearing request.

“Respondent does a commendable job of attempting to argue that each individual defect in SO X’s administrative review can be rebutted to show that said defect was not an abuse of discretion. However, respondent’s argument seeks to quilt together a string of exceptions to account for SO X’s deviation from what one would consider a thorough review of petitioner’s case. While each individual defect on its own may be insufficient to support a holding that respondent abused his discretion, the cumulative effect of such defects demonstrates that SO X acted both arbitrarily and capriciously in rendering his determination. Accordingly, the Court holds that respondent abused his discretion in sustaining the proposed levy.” 2012 T. C. Mem. 138, at pp. 12-13 (Name omitted).

An also-ran among the Tax Court Memoranda filed May 16 is Gabriel S. Garcia and Maria Garcia, 2012 T. C. Mem. 139. This is another unsubstantiated deduction case, not worth commenting on, except for one interesting remark by Judge Cohen: “Petitioners’ tax returns for 2007 and 2008 were prepared by petitioner’s brother, Richard Garcia. Richard Garcia is not an accountant or an enrolled return preparer.” 2012 T.C. Mem. 139, at p. 3.

Was there such a thing as an “enrolled return preparer” in 2008 and 2009 (when presumably the 2007 and 2008 returns, respectively, were filed)? There certainly were enrolled agents, enrolled actuaries, and enrolled retirement plan agents in those years, and unenrolled return preparers abounded (and probably still do, notwithstanding the latest Circular 230), but Registered Tax Return Preparers only came into existence this year, and so far as I know the candidates are still being tested and screened for registration.

Never heard of an “enrolled return preparer” before 2009, or since. Anybody know who or what they were?

If the Deal Has No Economic Substance

This is a Hewlett-Packard disaster you can’t blame on Carly Fiorina, as Lewis Platt OK’d this one (right way to spell “Lewis”, though). It’s Hewlett-Packard Company and Consolidated Subsidiaries, 2012 T.C. Mem. 135, filed 5/14/12. And Judge Goeke has to wade through 82 pages to reach a simple conclusion.

Some tax wits at AIG concocted a Netherlands Guilder-USD shellgame, using an allowance of deductible contingent interest asymmetry between the IRC and the Dutch tax code. Essentially, AIG was going to lend ABN (that’s Algemene Bank Nederland) multiple millions and ABN was going to pay nominal real interest but a ton of contingent interest (currently taxable by Dutch law but not US law), disguised as “preferred stock dividends”,  via a stooge intermediary with the obviously stooge name Foppingadreef.

All of the interest, real and contingent, would be characterized for Dutch law as preferred dividends, and would be taxed, setting up a huge foreign tax credit for HP, which had tons of foreign income but no available foreign tax credits.

ABN’s ethics committee blesses the deal, the Dutch tax authorities give the equivalent of a PLR based on Dutch law, and various high-priced law firms sign off.

AIG flogs this unexploded ordnance to HP for a mere $15 million.

Cutting through the wheeling and dealing, Judge Goeke finds that the “dividends” weren’t; they were interest on a debt from ABN, Foppy being disregarded. HP got a minority interest in Foppy, but had stranglehold rights to bail out and get paid if the tax laws changed or the majority shareholder (ABN) tried to invest in anything but ABN notes. The actual interest HP got was less than 2%, at a time when US government bonds were paying over 6%, but when the foreign tax credits were factored in, HP got better than 9%, with ABN, one of the strongest banks in the Netherlands, essentially guaranteeing the deal.

HP wanted to deduct as a capital loss the upfront $15 million they paid AIG for the deal. No, says Judge Goeke. HP didn’t pay a commission to buy preferred stock, they paid a fee to AIG to facilitate a tax shelter. And that’s a non-starter first class.

Judge Goeke doesn’t have to get to economic substance, he says, but after reading the 82 pages, I couldn’t find any economic substance.

When You Get a Piece of Their Disability Pension

Shannon Fernandez finds this out the hard way in the eponymous Tax Court full-dress opinion, 138 T.C. 20, filed 5/14/12. Judge Wherry is the bearer of the bad news in this case of first impression.

Shannon’s loved-once, Mr. Fernandez, was another disabled L. A. County Sheriff, like Jay Sewards (see my blogpost “Service Trumps Sickness”, posted 4/2/12), but unlike Jay, Mr. took the disability option because he didn’t have the 20 years of service he needed for full benefits. He and Shannon split, and Shannon gets a piece of Mr.’s pension.

L.A. gives Shannon a 1099-R but Shannon doesn’t report the income, replying on Section 402(e)(1)(A) as placing her in the shoes of Mr. as regards any distribution from an exempt trust, like the L.A. Sheriff’s retirement fund.

That’s fine, except neither Section 402 nor Section 72 (the annuity section) talks about Section 104 bodily injury payments. Judge Wherry: “Nowhere in section 402(a) or section 72 is section 104(a) mentioned. Section 402(e)(1)(A) explicitly provides: ‘For purposes of subsection (a) [of section 402] and section 72, an alternate payee who is the spouse or former spouse of the participant shall be treated as the distributee of any distribution or payment made to the alternate payee under a qualified domestic relations order ‘. If Congress had included section 104 in this portion of the statute, the result in this case might be different. However, without congressional approval we decline to expand the reach of section 402(e)(1)(A) beyond the sections specifically referred to in its text.” 138 T.C. 20, at pp. 6-7.

Going back to the earliest days of the income tax, the prehistoric, pre-IRC, Revenue Act days, Judge Wherry finds: “A version of section 104(a)(1) allowing an injured person to exclude disability income from his or her taxable income has been in the Code since the Revenue Act of 1918 when it was added because ‘Under the present law it is doubtful whether amounts received* * * as compensation for personal injury or sickness * * * are required to be included in gross income.’ H.R. Rept. No. 65-767 (1918), 1939-1 C.B. (Part 2) 86, 92. In all of the years since, to our knowledge, petitioner’s particular issue has not been before the Court. We note that petitioner did not suffer an injury, and the Senate explicitly stated ‘as compensation for personal injury’. In the case at hand the compensation was not for petitioner’s personal injury, but that of her former husband.” 138 T. C. 20, at pp. 7-8.

There’s no caselaw that anybody can find, so Shannon gets nailed. But “(T)his outcome should come as no surprise to petitioner. Although not controlling on this Court, we note that the order and stipulated division of retirement benefits stated that ‘[d]istribution under this Order shall be taxable to the Nonmember [petitioner] and not the Member [her former spouse].’ We further note that the State court did not decrease petitioner’s share of the disability payments because it believed that she would receive the money tax free.” 138 T. C. 20, at p.8, footnote 5.

But would the result been different had the State court in fact decreased Shannon’s share? I doubt it.

No cases out of Tax Court on May 11, but one typo in an order is worth noting. The order is Leona Allen, Docket No. 3680-12S, served 5/10/12. Chief Judge Colvin wrote: “No notice of determination concerning collection action was attached to the petitioner nor has petitioner produced one. Accordingly, the Court lacks collection jurisdiction with respect to petitioner’s taxable years 1993, 1994, and 1995.” Order, at p. 2 (Emphasis added.)

You may or may not wear your heart on your sleeve, but you’d better staple a Notice of Determination to your chest when you show up in Tax Court.

As I’ve said before “One sure way to drive a coach bananas is to fail to finish a play.” See my blogpost “Finishing the Play”, 3/26/12.

And today we have two cases out of Tax Court that prove the rule. First up is Stanley Patrick Zurn, 2012 T.C. Mem. 132, filed 5/10/12, Judge Gale calling the play.

Stan never bothered to file four years’ worth of returns (like a certain New York City Mayor), but got an audit notice anyway. Stan raises SOL on brief, but Judge Gale throws that out: in the immortal words of Carole King, “it’s too late baby, now it’s too late”. Judge Gale: “Petitioner did not plead the statute of limitations as an affirmative defense as required by Rule 39. Petitioner did not raise the issue during the evidentiary hearing, nor has he at any time moved to amend the pleadings so as to include this omitted affirmative defense. Petitioner’s failure to plead the statute of limitations in his petition or in an amended pleading constitutes a waiver of the issue. Moreover, petitioner’s raising of the issue for the first time on brief would prejudice respondent, who has been deprived of the opportunity to present relevant evidence, such as evidence that petitioner consented to extend the period of limitations. We decline to consider this issue.” 2012 T.C. Mem. 132, at p. 17 (Citations and footnote omitted.).

Worse,  Stan claims three Section 1031 like-kind exchanges, but has no recorded documents showing acquisition of replacement properties and no documents of any kind showing full payment of purchase price for any of them. He has closing statements from the escrow closings (California properties, so no sit-down closings such as we have back East), and not much else. And in one deal the statement shows what is called a “buyer’s credit”, making the purchase price as stated dubious. Stan never finished the play in any deal, so his 1031s don’t defer gain. But Stan does get something for his trouble– a negligence penalty.

Next is yet another Section 7463 “not for nuthin’”, George Saadian, 2012 T.C. Sum. Op. 44, filed 5/10/12. George and his mom lent a “distant relative”, who was also a compatriot, $200K for a real estate deal, got a promissory note and some payments, but the latter were desultory and never timely. George was reluctant to sue a compatriot, as that was supposedly taboo among compatriots, but finally George had his lawyer send a letter threatening suit.

George never followed through, so no lawsuit, and relative finally avoids the issue by dying. George asks relative’s sons, who were also involved in relative’s business, to make good, but never files claim against estate, and sons were never signatories to the note nor guarantors.

The last meeting with the sons took place the same year George had a big capital gain, and George says the sons told him not to expect payment, so George takes a nonbusiness bad debt deduction for the $200K.

No, says Lew Carluzzo, the STJ with the correctly-spelled first name. “The allowance of a deduction under section 166 [nonbusiness bad debt] requires that the debt to which the deduction relates was a valid debt and that the taxpayer claiming the deduction was the creditor.” 2012 T.C.Sum.Op. 44, at p. 7 (footnote omitted). STJ Lew assumes (without finding) that both prongs of the test are satisfied, although IRS disagrees.

The problem is not whether the debt went south, but when. There is no standard rule, it’s all facts and circumstances (Sir Ed Elgar could have composed a march by that name), but the creditor must use sound business judgment based on what information s/he could reasonably obtain at the time. The mere fact that collection might be difficult or uncomfortable doesn’t mean the debt is worthless.

STJ Lew drives home the point: “Petitioner’s decision not to enforce collection of the debt for personal rather than financial reasons, in and of itself, operates to deny him the deduction here in dispute.” 2012 T.C. Sum. Op. 44, at p. 8.

You have to run out the grounder, even if you know you’ll be thrown out. Finish the play, guys.

Two Tax Court dismissals today, both of interest, although one is another Section 7463 “not-for-nuthin’”.

First up is a case of first impression for Tax Court, and thus warrants a full-dress T.C., Thomas Edward Settles, 138 T.C. 19, filed 5/8/12. Tom had petitioned for a Section 6330(d) levy review, but before Tax Court ruled Tom filed Chapter 11 bankruptcy, and 11 USC §365(a)(8) automatically stayed  “the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability of a debtor.”

While Tax Court stood frozen, Tom started an adversary proceeding in Bankruptcy Court to contest his tax liability and the computation thereof. He lost, as Bankruptcy Court said he was estopped from challenging IRS’ proof of claim. Now Tom, still in bankruptcy, moves to dismiss his Tax Court proceeding. IRS, of course, has no objection.

A petitioner cannot get dismissal of a proceeding to redetermine a deficiency. Judge Wells: “When the Tax Court dismisses a deficiency case for a reason other than lack of jurisdiction, we generally are required by section 7459(d) to enter a decision for the Commissioner for the amount of tax determined against the taxpayer in the notice of deficiency. Rule 123(d) requires that a decision entered pursuant to a dismissal on a ground other than lack of jurisdiction operate as an adjudication on the merits of the taxpayer’s case.” 138 T.C. 19, at p. 4 (citations and footnote omitted).

So be careful what you ask for, deficient taxpayer, because if you change your mind you might get both a lot less, and a lot more, than you bargained for.

But in this case Tom isn’t seeking a deficiency redetermination. Judge Wells again: “However, in the instant cases, petitioner petitioned the Court to review a collection action under section 6330(d), not to redetermine a deficiency under section 6213(a). In contrast to the deficiency context, a taxpayer who files a petition asking the Tax Court to review a collection action does have the option to withdraw that petition.” 138 T.C. 19, at pp. 4-5.

Since Rule 123(d) doesn’t answer the question in a collection case, Judge Wells turns to FRCP 41(a)(2), which lets judges dismiss on terms they consider proper. Although such a dismissal is normally without prejudice (meaning that the petitioner could refile, as nothing was decided), in this case time has run out and Tom can’t refile, so IRS doesn’t care, and the only remaining hurdle is 11 USC §365(a)(8).

The major concerns that the automatic bankruptcy stay addresses are giving breathing room to the beleagured debtor to try to make an offer to creditors, and to prevent the swift creditor from grabbing assets while leaving the slower creditor of the same class high and dry. Neither is a problem here. If the Tax Court case goes away, Tom has one less lawsuit to deal with, and the creditors have the status quo. Likewise, Tax Court need not examine or determine any underlying issues in the case before it to decide to dismiss, so there’s no “continuation” in this case. The stay only applies to commencement or continuation of a proceeding, and this motion does neither.

So Tom, you’re outta here.

Next is Rick E. Payne and Dee M. Payne, 2012 T.C. Sum. Op. 43, filed 5/8/12. Sad story: Rick loses job, son dies, Rick and Dee file bankruptcy, and Rick can’t pay the taxes although he filed the returns. IRS sends NFTL, and Rick and Dee appeal.

The SO is singularly unsympathetic, given that Rick is elderly and bewildered, and gives him a fast shuffle, like 48 hours to file a Form 433-A with supporting documents. Judge Wells doesn’t like this, and goes at length into the SO’s behavior as contrasted with the procedures set forth in the IRM. Is Rick in the clear on abuse-of-discretion?

No, because Rick delayed in seeking continuance of trial, and never provided a Form 433-A despite Judge Wells telling IRS’s counsel to offer Rick ample time to do so, to make up for the SO’s quick whistle. Rick did nothing. IRS moved to dismiss, or in the alternative for summary judgment

Judge Wells seems more than slightly steamed at Rick’s delay-of-the-game: “Throughout the pendency of their case, petitioners have repeatedly failed to file requested motions, responses, and other documents. Despite instructions from respondent’s counsel and ample time, petitioners failed to file a motion for a continuance until after respondent filed his motion for summary judgment. Petitioners failed to file a response to respondent’s motion for summary judgment, even after we extended the time for them to do so. Petitioners failed to submit a proposed collection alternative by February 1, 2012, in compliance with our order of November 16, 2011. According to respondent’s counsel, when he contacted petitioners on February 3, 2012, they informed him that they had elected not to complete a collection alternative form at this time. Petitioners have failed to prosecute the instant case despite repeated opportunities and ample time.

“On the basis of petitioners’ repeated failures to comply with our orders and apparent disinterest in pursuing any collection alternatives, we will dismiss their case for lack of prosecution. Accordingly, we will deny respondent’s motion for summary judgment as moot.” 2012 T.C. Sum. Op. 43, at pp. 14-15.

Takeaway–Do what the judge tells you. It is rarely a good idea to annoy the judge.

Not in Tax Court, Anyway

That’s the lesson Judge Gustafson teaches Hershal Weber in the eponymous case, 138 T.C. 18, filed 5/7/12.

Hersh overpaid his 2006 personal income tax and asked for the overpayment to be applied to what he’d owe for 2007. But IRS hit him with TFRPs for payroll taxes not withheld by an outfit called S&G, in which Hersh had some unspecified role, enough to make him a responsible person. And the Section 6672 TFRPs ate up his 2006 overpayment, so IRS held him for tax due for 2007, but that wasn’t much. Again Hersh asserted he had a previous overpayment to carry forward, so he wanted this applied to 2008. No, says IRS, nothing to apply, it’s all gone, and this time Hersh owes serious money.

IRS sends notice of levy for withholdings, and Hersh asks for a CDP. While waiting for Appeals, some other S&G types pay enough to satisfy the unpaid withholding taxes, and IRS says “no levy, withholding paid.” Hersh sues for a refund in US District Court, but no disposition of that case is brought to Judge Gustafson’s attention.

Meantime Hersh still owes personal income tax for years 2007 and 2008, so IRS sends Hersh a letter so stating, and a new notice of levy. Hersh asks for CDP hearing, alleges the TFRPs were paid and his payments should be applied as he requested, resulting in no tax due, but Appeals says “we have no jurisdiction for 2006 and 2007.” Hersh petitions Tax Court.

Judge Gustafson gives IRS summary judgment. Abuse of discretion is the standard. IRS can abuse its discretion in applying overpayments, but IRS has broad discretion per Section 6402(a): “The statute and case law are clear that the discretionary authority of the IRS supersedes any desires or wishes on the part of a taxpayer to have their overpayment credited to specific, preexisting, tax liabilities”). For purposes of the Commissioner’s motion for summary judgment, we assume that, in a collection due process case, we can review for an abuse of discretion the IRS’s decision under section 6402 to credit an overpayment to a nondetermination year rather than to the year at issue.” 138 T. C. 18, at p. 14, footnote 5 (Citations omitted).

While a taxpayer can ask that one year’s overpayment be applied to another year’s liability, Congress has given IRS regulatory authority to decide how to do this, but in any case, Reg. 301.6402-3(a)(6) makes it clear that IRS isn’t bound by what a taxpayer asks for.

Here TFRPs create a problem. While IRS can collect the penalty only once, there may be multiple payors, and in fact (as occurred here) the sum of the parts may be greater than the whole. So the IRS deems the TFRPs collected only after two years have gone by from last payment with no claim from the employer or any responsible person for a refund. In any case, Section 6672(d) allows responsible persons and the employer to sue one another for contribution if one of them paid more than their fair share.

Hersh’s overpayment, if there was one, applies to his Section 6672 TFRP payment, not his 2006 income tax withholding. Judge Gustafson: “…if the IRS holds Mr. Weber’s money wrongly, it holds it not as an overpaid 2006 income tax but as an overpaid section 6672 penalty. But there is no regulation that permits a taxpayer to elect to have an overpayment of a section 6672 penalty to be applied to his income tax liability, and there is no line on the Federal income tax return form that permits the reporting of an overpaid section 6672 penalty as a credit to income tax. A credit elect overpayment can be an issue in a CDP case…, but Mr. Weber has no valid claim of a credit elect overpayment. After the 2006 income tax overpayment was credited against the section 6672 penalty, the 2006 income tax overpayment was no longer available for application to 2007 income tax. In the absence of that credit elect overpayment, Mr. Weber had no 2007 income tax overpayment that could be credited to his liability for 2008 income tax. The 2008 income tax liability could thus not be satisfied by cascading credit elect overpayments from 2006 and 2007.” 138 T.C. 18, at pp. 24-25.

While Tax Court can consider whether IRS abused its discretion in refusing to apply an available credit, there is no available credit here, because whatever credit Hersh has was applied to the TFRPs. Hersh wants Tax Court “not to consider a credit that is already ‘available’ (because it has already been determined) but rather to make ‘available’ a credit that is currently not available because the IRS has disallowed it. He contends that there is a positive balance in his penalty account and that we could decide this case in his favor as an almost arithmetical matter–but that is not the case: Whether the penalty has really been overcollected is a potentially complex question that may depend not only on the balance in his account (which in fact is still negative) but also on the pendency of refund claims by other responsible persons and on liabilities for interest and additions to tax. See supra pp. 17-19. Mr. Weber thus asks us not to allocate an uncontroversial credit but rather to adjudicate a disputed refund claim that is unrelated to the liability the IRS proposes to collect….” 138 T.C. 18, at pp. 35-36.

This would expand Tax Court’s jurisdiction in ways Congress never intended.

No dice, Hersh. Duke it out in District Court.

And Don’t Sweat the Numbers

Here’s good news for supporting parents, whose divorced or separated partners welsh on the deal to sign a Form 8332, delivered by none other than the Judge who writes like a human being, the Great Dissenter Judge Holmes. The case is Gary L. Scalone and Sandra Vieira Scalone, 2012 T. C. Sum. Op. 40, filed 5/2/12.

Unfortunately this is a Section 7463 “not-for-nuthin’”, so it’s useless as precedent. But read and heed, matrimonial lawyers; use the reasoning, and especially use the language. And please, even if it’s not necessary, get the SSANs.

Usual story. Gary and former spouse Denise have minor child N. S., who lives with mother, but Gary furnishes more than half of support. The separation agreement says “Gary ‘shall be entitled to claim’ N.S. as a dependent for tax purposes ‘[f]or calendar year 2000 and for any taxable years henceforth.’ And Denise promised to sign a declaration ‘on forms acceptable to the Internal Revenue Service’ that she would not claim N.S. as a dependent if Gary kept current on his child support.” Gary did, but Denise didn’t.

Incidentally, Gary and current spouse Sandra have a child who lives with them; IRS denied exemption and credit for both children, but conceded Gary and Sandra’s child, earning a wry compliment from Judge Holmes.

As to N.S., no Form 8332 or equivalent means no exemption and no credit; see my blogposts “Supported Child; Unsupported Exemption”, posted 7/11/11, and “Kicking Richard Nixon”, posted 11/25/11.

But Judge Holmes rides to the rescue, with a pardonable understatement: “What makes this part of tax law complicated is that some of the information that’s listed on the Form 8332 is absolutely required, and some is just helpful to the IRS in processing the return.” 2012 T. C. Sum. Op. 40, at p. 6.

Having no fully-executed Form 8332 from the welshing Denise, Gary and Sandra attached a signed copy of the separation agreement to their return for the year at issue. Both Denise and Gary signed. This gets past the critical hurdle: the custodial parent and the non-custodial parent must manually sign whatever document substitutes for the Form 8332. The cases say that the signatures are the “controlling factor.” 2012 T.C. Sum. Op. 40, at p.6.

Moreover, “…Gary correctly points out that almost all the information on a Form 8332 is in that agreement–the only things missing are his and Denise’s Social Security numbers. That Gary’s number isn’t in the agreement isn’t a problem–his number is elsewhere on the return–but the absence of his ex’s number may be a problem.” 2012 T.C. Sum. Op. 40, at p. 6.

Except it isn’t. IRS cites Richard A. Nixon, 2011 T.C. Mem. 249, but in that case there was nothing signed by Richard’s ex. Then  IRS cites Gessic, 2010 T.C. Mem. 88, but there taxpayer attached one initialed page from the separation agreement, and even that did not adequately specify to what years it applied. Even though Gessic produced a complete copy at the trial, it may not have been signed by the custodial spouse.

Gary had the magic language  “calendar year 2000 and for any taxable years henceforth.” That’s enough, says Judge Holmes.

“This turns out to be very important. The separation agreement here states that Gary ‘shall’ receive the dependency exemption ‘[f]or calendar year 2000 and for any taxable years henceforth.’ With this language, Denise was giving Gary the right to claim N.S. as a dependent for all years from 2000 into the future. The applicable regulations specifically allow this kind of general release. See sec. 1.152-4T, Q&A-4, Temporary Income Tax Regs., supra (release may be ‘for all future years’). We also specifically find that this phrase is Denise’s unconditional promise not to claim N.S. as a dependent.” 2012 T. C. Sum. Op. 40, at p. 9.

Moreover, the fact that the separation agreement was not incorporated in the divorce decree doesn’t matter, nor the fact that Denise’s declaration relinquishing exemption and credit is dependent upon Gary being current with this child support.

“The Commissioner has a second argument, though. He argues that even if the absence of the parents’ Social Security numbers doesn’t sink the Scalones, ‘conditional’ language in the separation agreement should. There is conditional language, kind of. But we disagree that it’s important. The language the Commissioner points to states that

‘Wife agrees to sign a written declaration on forms acceptable to the Internal Revenue Service that she will not claim the child as an income tax dependent exemption for any taxable year commencing calendar year 2000, provided that for the applicable calendar year she continues to receive child support payments as agreed from the Husband and such payments are current as of December 31 of the applicable tax year. The Wife further agrees to attach the declaration form required by the applicable rules and regulations of the Internal Revenue Code to her income tax return.'[Emphasis added.]

“This provision mentions a ‘written declaration’–clearly a Form 8332. And the Commissioner is correct that it has a quid pro quo. But it’s a very odd one: if Gary is current with support, Denise promises to complete a Form 8332 and attach it to her tax return–something that would have no effect on Gary’s right to claim N.S. as a dependent on his tax return, which she gave away in the preceding sentence of the agreement. It would sure have been a lot easier for Gary if Denise had given him a signed Form 8332, but as we pointed out earlier, the Code doesn’t require it.” 2012 T. C. Sum. Op. 40, at pp. 11-12.

Gary gets the exemption and the credit, and justice is done. Way to go, Judge Holmes.

Takeaway- Matrimonial lawyers, go and do thou likewise.

Or, Answering to a Higher Authority

Judge Goeke takes a look at a historic facade easement in Loren Dunlap and Nancy Dunlap, et al., 2012 T.C. Mem. 126, filed 5/1/12. And the easement is worth–nothing. That’s because their high-priced New York City condominium must, like a famous New York City hot dog, answer to a higher authority.

Loren and Nancy and their fellow unit owners in the chi-chi Cobblestone Loft Condominium, located in New York City’s Tribeca North Historic District, were sold the facade easement deduction by their managing agent. See my blogposts “Skimp on the Form but Attach the Appraisal”, 10/3/11, and “A Joy Forever”, 4/4/11.

Briefly, the National Architectural Trust (NAT), a Section 501(c)(3) not-for-profit, shepherded the Cobblestoners’ application through National Parks Service, got the condo designated as historic, and recommended a law firm (which had represented NAT and its for-profit affiliate SMS) to take care of drafting and recording the easement. A well-known appraisal firm (which had done other work for NAT) prepared an appraisal of the facade, which was distributed to all the Cobblestoners.

The appraiser never testified at the trial, however, and his report was thrown out as evidence. But it was good enough to let the Cobblestoners escape Section 6662 penalties.

The Cobblestoners took charitable deductions for their proportionate shares of the appraised worth of the easement.

The Cobblestoners had to make cash contributions to NAT, which IRS claimed was payment for services and not a Section 170 contribution. This doesn’t convince Judge Goeke, who finds the “services” to be minimal, and he allows the cash. But the facade deduction collapses.

Judge Goeke carefully deconstructs the appraisal and the expert testimony at trial, finding them deficient, but the point of the case is that the facade was already protected, and better protected, before NAT came on the scene, by the New York City Landmarks Preservation Commission (LPC), the governmental guardian of New York City’s architectural heritage.

Cobblestone was one of the very few buildings to achieve the LPC’s coveted “sound, first-class condition” status. As a result, Cobblestone entered into a continuing maintenance agreement with LPC.  Judge Goeke: “Under the continuing maintenance agreement, Cobblestone was required to have Cobblestone inspected every five years by a ‘Preservation Architect’ (to be selected from a list provided by the LPC) to make sure the building remained in sound, first class condition. The inspection was to cover various elements of both the interior and the exterior of the building. The preservation architect was required to prepare a report 45 days after each inspection which detailed work which should be completed to maintain the building in sound, first-class condition. Within nine months from the report date Cobblestone was required to either complete the work detailed in the report or else contest the required work with the LPC. The inspection, the report, and the work were all to be completed at Cobblestone’s expense. Other provisions of the continuing maintenance agreement imposed reporting obligations on Cobblestone in case of fire or other damage to the property.” 2012 T.C. Mem. 126, at p. 44, footnote 17.

This was far more than NAT ever did.

Judge Goeke again: “…we do not believe that the facade easement restrictions and enforcement were any more stringent than the LPC regulations and enforcement as of the date for which … valued the easement (December 29, 2003). The LPC is a well-staffed organization which works with community groups and preservation activists to enforce its regulations applicable to historic structures such as Cobblestone. Although the LPC’s regulations are slightly less rigorous than those promulgated by the Secretary of the Interior (which are the regulations purportedly enforced by NAT), Cobblestone had a special ‘sound, first- class condition’ designation with the LPC which caused it to be subject to a higher standard of preservation than most other historic structures in New York City. Only 150 of the 26,000 structures covered by LPC regulations had this special designation.” 2012 T.C. Mem. 126, at pp. 49-50.

Judge Goeke blasts NAT, finding its monitoring efforts to be poor or non-existent at the time the easement was granted, and that NAT was “…an organization more concerned with making money for SMS (a for-profit entity which employed many of the people who were held out to third parties as working for NAT and which was owned by the same two people who founded NAT and worked as directors and presidents of NAT) than monitoring and enforcing the terms of the facade easements it held.” 2012 T.C. Mem. 126, at p. 51.

So the easement was worth nothing. So no deductions.

Finally, the Cobblestoners acted reasonably and in good faith, so no penalties. The disregarded appraisal was attached to their tax returns, and they substantially complied with the requirements of the Form 8283 attached to their returns.

Nothing interesting out of Tax Court on April 30,2012, so here’s an Order from April 27.

You won, so go away. That’s the lesson Judge Kroupa teaches Frederick M. & Delores R. Nerlinger, Docket No. 27972-09 L, issued 4/27/12.

IRS made a full concession and asked that the case be dismissed. Fred and Del are completely off the tax hook.

But Fred and Del weren’t happy. When Judge Kroupa entered an order and decision in favor of Fred and Del, dismissing IRS’ claims entirely, Fred and Del moved to set the order and decision aside. They wanted a decision stating IRS abused its discretion.

No, says Judge Kroupa. “The Court finds that petitioners are abusing the purposes for which the collection review statutes, section 6320 and 6330, were adopted. Respondent fully conceded this case. Respondent acknowledged that petitioners did not receive the statutory deficiency notice. Respondent also abated (or would soon abate) the liabilities for 2001 and 2002 and the liens released. In addition, no levy action would occur for these years. Petitioners want respondent to admit he abused his discretion. This we cannot do nor, even if we could, the result remains the same. Respondent has made a full concession. There is no issue before us to decide.” Order, p. 1.

Leaving aside the grammatical lapses (the Court cannot admit the respondent abused his discretion; the Court can so find, but only respondent can so admit; and the word “nor” should be “and”), if you get a win, that’s all, folks.