Sarah S. O’Nan, T. C. Memo. 2023-117, filed 9/18/23, was denied a refund of the $123K net proceeds from the non-short sale of the house she and deceased spouse held in a OH “survivorship tenancy.” For non-dirt lawyers, that means survivor takes all. But there was a NFTL for the $123K in unpaid taxes. Sarah filed innocent spousery, got Section 6015(f) equitable partial relief for Year One and total relief for Year Two, but IRS held on to the $123K that came out of the sale (obviously to release the lien).

I want to start with a Taishoff “Good Job, First Class,” to Sarah’s trusty attorney, whom I’ll call Louie.

Sarah was widowed when spouse died suddenly at age 43, leaving her broke and owing taxes. There were two (count ’em, two) mortgages on their home, on which Sarah stopped paying. Sarah signed both mortgage deeds (OH is apparently a conveyance state), but deceased spouse only signed the senior mortgage note; unclear whether Sarah signed the junior mortgage note. While the senior mortgagee was foreclosing, Sarah sold, paid off both mortgages, and the tax lien.

When the dust cleared, Sarah owed IRS $3340 for Year One, and zero for Year Two. IRS would not give back the $123K, claiming Sarah flunks the Section 6015(g)(1) payment-from-own-funds test. While there can be a refund for an innocent spouse to the extent the relieved liability arises from nonrequestor, the innocent spouse must have paid the tax from which s/he is now relieved.

Review in this case is de novo. Before every reader yells “Section 6015(e)(7),” Sarah petitioned before the Taxpayer First Act came into effect, so she gets a real trial, but with BoP attached. She’s already innocent, which nobody denies.

State law determines whether the NFTL attaches to the interest she automatically inherited at her late spouse’s death; and there’s caselaw that says it does.

Comes Section 6015(f) to the rescue. Judge Elizabeth A. (“Tax”) Copeland judge-‘splains.

“…when a requesting spouse is granted section 6015(f) relief, we recalculate her federal tax liability as if she and her spouse (or deceased spouse) had filed married-filing-separately returns for the relevant years. If Mr. and Mrs. O’Nan had filed married-filing-separately returns for the years in issue, then for [Year One] Mrs. O’Nan would have had a liability of $3,340 (the amount for which she was denied section 6015(f) relief) and for [Year Two] she would have had no liability (as she was granted full relief for that year). We therefore hold that although the IRS retained a lien on the family home in the full amount of the liabilities for the years in issue, that lien did not encumber Mrs. O’Nan’s original one-half interest except to the extent of $3,340 plus interest.” T. C. Memo. 2023-117, at p. 8.

Judge Tex Copeland whacks up the sales proceeds from deceased spouse’s half first. Closing costs come out off the top; most of that is State and local tax, she assumes without deciding (as those total only $14K, it probably doesn’t matter). Only deceased spouse signed the first mortgage note; Sarah signing the mortgage is at best a surety, and since deceased spouse’s share of the proceeds is more than enough to pay off the first mortgage, Sarah’s share is untouched; likewise, the first mortgage was perfected before the NFTL, so it has Section 6323  priority.

As for the junior mortgage, the record doesn’t show who signed the mortgage note, but deceased spouse was primary breadwinner and junior mortgage was made only about a year after the first. Howbeit, that mortgage was senior to the NFTL also. And whatever was left of deceased spouse’s half of the proceeds went to pay the junior mortgage.

So as IRS is low totem on the pole, and as Sarah is adjudicated innocent except for the $3340, and there’s nothing left of deceased spouse’s half, whatever paid off the lien must have come from Sarah’s half, hence her money.

IRS argues deceased spouse’s death has nothing to do with the lien. True, but Sarah was given innocent spousery for all but $3340. Sarah wants back the whole $123K, but IRS gets to keep the $3340.

Going for innocent spousery first with a young, broke, sympathetic widow was a good move. Not putting in the second mortgage note was brilliant; well done, Louie. I’m surprised the lenders didn’t insist on both parties signing both note and mortgage; I always did when I represented lenders. The Little League catchers’ rule: Tag ’em all, baserunner, batter, umpire and yourself.

Takeaway: Post Section 6015(e)(7), when you have a stand-alone innocent spousery, Appeals is your trial. Put everything in the administrative record. You won’t get a second chance. And tell ’em Louie sent ya.

Judge Mark V. (“Vittorio Emanuele”) Holmes blunts the efforts of Alice Perkins & Fredrick Perkins, Docket No. 28215-14, filed 9/15/23 to revive their claim to untaxed gravel. Readers with long memories will recall Judge Holmes’ digging into Seneca Nation’s lands and the history of Indian treaty obligations from my blogpost “Indians Not Taxed – But They Are,” 3/1/18.

Despite Judge Holmes’ dubious excursion into NY dirt law (see my blogpost aforesaid and ex-Ch J Maurice B (“Mighty Mo”) Foley’s dissent in 150 T. C. 6, at pp. 29-30), 2 Cir affirmed the denial of tax exemption, which was all Alice & Fred raised. And the Supremes denied cert two (count ’em, two) years ago.

So why are they back in Tax Court? Well, 2 Cir affirmed, but remanded for further proceedings. Exactly what “further proceedings” were required neither IRS nor Alice & Fred could tell. There had been a decision entered after the Tax Court’s opinion affirming the SNOD, so no Rule 155 beancount needed.

But Alice & Fred got new trusty attorneys, and here’s the story.

“They want to amend their petition to introduce—for the very first time—the issue of whether they had business-expense deductions that would reduce the mining income that we and the Second Circuit have held to be taxable. Their reason for this delay is that they believed the mining income was tax-exempt which, they argue, would have made claiming business expenses on that income an inappropriate and unlawful duplicative deduction. The obvious problem here is that Tax Court has no prohibition on making an argument in the alternative, which might well have made good sense in this case.

“But that’s not what they did.” Order, at p. 1. They want a Rule 162 vacation a couple years late (this is Judge Holmes, after all). The only reasons that a decision can be vacated after it becomes final (and this one is final beyond possibility of successful appeal or further appeal) are want of jurisdiction, fraud on the court, or mutual mistake of fact. None of these apply.

But trusty attorneys (no, not The Jersey Boys, but cast in the same mould; never say die) claim Rule 1(a) lets them go on a FRCP 60(b)(6) vacation “for any other reason that justifies relief.”

Though this is worthy of a Taishoff “Good Try, Second Class,” Judge Holmes isn’t buying.

“Such justification may be found during ‘extraordinary circumstances, or where the judgment may work an extreme and undue hardship.’

“While we don’t doubt that the Perkinses’ inability to raise the issue of their eligibility for business-expense deductions works some financial injury, we cannot find that it rises to the level of an extraordinary circumstance or an extreme and undue hardship. If anything, it would hardship for respondent to litigate a new issue raised one-and-a-half years after the decision became final.” Order, at p. 2. (Citation omitted).

No, not another radical terrorist group; sad to say we’ve too many of those. This is the Section 6721(e) chop imposed when an employer fails to file timely the annual Forms W-2 with the Social Security Administration (SSA). And no, I didn’t know about that chop either.

But ex-Ch J Maurice B (“Mighty Mo”) Foley knows all about it, and tells us all in Piper Trucking & Leasing, LLC, 160 T. C. 3, filed 9/14/23.

If one is an employer with FICA/FUTA/ITW obligations , one must file W-2s with Form W-3 transmittal with SSA; nonfilers wind up in IRS’ Combined Annual Wage Reporting (CAWR) computer database. Ex-Ch J. Mighty Mo tells the story.

“The SSA sends two warning letters to employers that fail to file these forms. The first letter informs the employer to either respond or file the missing forms. The second letter warns the employer that the matter will be referred to the Internal Revenue Service (IRS) to determine whether penalties are applicable. If an employer fails to respond to both letters, their name is added to a database. Every year the SSA transfers this database to the IRS. Following the transfer of the database, the CAWR computer program automatically sends the employers in the database a Letter 98C asserting a section 6721(e) penalty. If the employer does not respond to the Letter 98C, the IRS, through the CAWR computer program and without any human intervention, assesses the section 6721(e) penalty.” 160 T. C. 3, at p. 2.

Well, Piper didn’t file, so got the 98C, and went to Appeals. Do we hear the thundering hoofbeats of the Boss Hoss?

Appeals didn’t, and issued a NOD sustaining the NFTL. Piper did, opposed the NOD alleging want of Boss Hossery, and petitioned the NOD. Summary J for IRS denied for want of Boss Hossery. IRS tries again, and this time gets it right.

Section 6751(b)(2)(B) stables the Boss Hoss when the chop is automatically calculated through electronic means.

Ex-Ch J Mighty Mo: “Because petitioner failed to respond to the Letter 98C, the underlying section 6721(e) penalty was determined through respondent’s CAWR computer program and did not involve human intervention. Therefore, the underlying section 6721(e) penalty was ‘automatically calculated through electronic means.’ See Walquist v. Commissioner, 152 T.C. 61, 70 (2019)(concluding that an accuracy-related penalty issued without human intervention through the IRS’s Correspondence Examination Automated Support computer program was automatically calculated through electronic means). Thus, section 6751(b)(2) dictates, and we hold, that a section 6721(e) penalty assessed through respondent’s CAWR computer program is not subject to the section 6751(b)(1) supervisory approval requirement.” 160 T. C. 3, at pp. 3-4.

For the Walquist story, see my blogpost “I Sing the Penalty Electronic – Part Deux,” 2/25/19.

As Piper had no CA, summary J for IRS.

Oh, the inhumanity!

They taught us in the law school on The Hill Far Above, in the last millennium, that “expressio unius exclusio alterius.” I need not, of course, translate. But Section 7701(c) puts paid to this concept, and Judge Nega reinforces the lesson in Rock Cliff Reserve, LLC, Five Rivers Conservation Group, LLC, Tax Matters Partner, et al., Docket No. 12472-20, filed 9/13/23.

The Rock Cliffs object that IRS want to claim that what the Rock Cliffs donated was inventory property, and therefore limited by Section 170(e), and that the entities involved in this Dixieland Boondockery were not bona fide partnerships for tax purposes. So the Rock Cliffs want IRS precluded from arguing same.

“Petitioners cannot claim surprise that respondent’s July 19, 2023 letter raised the issue of limitations to charitable contribution deductions imposed by section 170(e) because respondent issued to each petitioner a Final Partnership Administrative Adjustment (FPAA) in 2020 identifying violation of the requirements of section 170 to support the deficiency determination. Complying with section 170(e) is one of the requirements of section 170 and is directly implicated by the language in the FPAAs that respondent issued to petitioners. Similarly, the breadth of the FPAA encompasses the validity of the transactions. All information regarding whether the entities involved in the transactions were bona fide partnerships is readily available to petitioners who will thus not be prejudiced by the presentation of such a theory at trial.” Order, at pp. 1-2.

Mentioning a Code provision brings in the entire provision.

I do have to ask why Judge Nega left the question of shifting BoP for trial. If he means to play the “preponderance of evidence” gambit, he should say so. But looking at the seven (count ’em, seven) trusty, high-priced, and battle-hardened attorneys for the Rock Cliffs shown in the printable docket search, I doubt very much they would be surprised.

Johnny Johnson (not the UK’s WWII ace of aces, rather the AK real estate wheeler-dealer) likes class lives. He likes them so much that, rather than deconstruct the entire Best Western and Extended Stay hotels he owned, he depreciated both buildings over seven years MACRIS, rather than the commercial building useful life of 39 (count  ’em, 39) years.

Now there’s nothing wrong with deconstructing; longtime readers of this my blog will recollect Ruel Hamilton, the disappearing TX deconstructor, who depreciated the kitchen sink (literally), as more particularly bounded and described in my blogpost “The Sum of Its Parts,” 3/12/12.

But Johnny didn’t follow Logic or Tears for Fears, and break it down. He depreciated the whole shebang in a lump.

Johnny couldn’t be bothered with minutiae, like getting an appraisal when he gave a building to an OR opera house, or a CWA from the opera company or for some fencing he have to a rehab center in HI.

Arriving at The Glasshouse in the Unstated City sub nom. John R. Johnson and Estate of Judith E. Johnson, Deceased, John R. Johnson, Personal Representative, T. C. Memo. 2023-116, filed 9/13/23, Johnny’s trusty attorneys fold the deficiencies. They’re fighting only about the Section 6664(c)(1) good faith reasonable cause out to the Section 6662(a) negligence or disregard 20% chop.

Unhappily for Johnny, it’s another case of trusty well-credentialed CPA who swears she never told Johnny to file a six-figure Form 8283 without an appraisal, or passed on his other shenanigans.

“Petitioners presented no evidence that their CPA told them that the seven-year depreciation schedule was applicable to commercial buildings or that the mortgage interest deduction could be claimed twice. Petitioners also failed to show that their CPA advised them that the county assessor’s valuation would suffice instead of a qualified appraisal for the building donated to the… Opera House. When asked whether she advised Mr. Johnson that the charitable contribution deduction could be claimed using the county assessor’s valuation instead of a qualified appraisal, petitioners’ CPA testified that she ‘never had that discussion with [Mr. Johnson.]’ Petitioners cannot claim to have reasonably relied on advice which was never given. In addition, Mr. Johnson was not credible when he definitively stated: ‘We thoroughly discussed the tests’ related to the donation of the building to the … Opera House. This was decidedly in contrast with his immediately following statement that details about the donation were ‘[t]oo far to remember.’” T. C. Memo. 2023-115, at p. 7. (Name omitted).

One wonders how much Johnny’s trusty attorneys sweated trusty CPA in trial prep. Hearing such testimony from a key witness might induce serious settlement negotiations before going to trial.

Step Lightly on the Bedrock

I said it back five (count ’em, five) years ago: “Stipulations are the IEDs of litigation; they look so innocent, until they go off, taking your case with them.” See my blogpost “Baked,” 7/12/18, the story of Marty Washburn’s Baltic bakery fiasco. Judge Ronald I. (“Ingenuity”) Buch has a lot to say about “the bedrock of Tax Court practice,” citing Washburn, in Noel M. Parducci & Kenneth L. Parducci, et al. Docket No. 20894-19, filed 9/12/23.

Amongst the als is the irrepressible Dennis Lee Simpson, making his fourth (count ’em, fourth) appearance on this my blog. As I said in my blogpost “Inadmissible Admissions,” 2/27/23, Dennis Lee is the inventor of “Bamboozle Your Way to Victory at Discovery,” and a leading candidate for Wag of the Year honors.

IRS has five (count ’em, five) separate proposed stipulations of fact, supported by two USDCs, which found for Federal Trade Commission against Dennis Lee and the als. The Branerton play-nice elicited no joy, but Dennis Lee did put in two of his own proposed stips, so Judge Buch puts all seven in play with a Rule 91(f) deemed-agreed OSC.

First of all, relevance of the fact is off the table. If any responding party admits, the fact is admitted, relevance thereof to be determined at trial.

Second, want of knowledge is not a valid objection, if the fact at issue is otherwise supported by the proponent. Some of the USDC opinions are sufficient to support some asserted facts, but not all.

“The Commissioner cites the Findings of Fact in an FTC case as the primary source for most of the paragraphs contained in each Rule 91(f) Motion’s proposed stipulation. But a fact having been found in one proceeding does not mean that the parties are automatically bound by that fact in another proceeding. See Estate of Reis v. Commissioner, 87 T.C. 1016, 1028–29 (1986) (‘[t]he mere fact that a court in one opinion makes findings of fact is not a basis for the same or another court in another proceeding to . . . deem them to be indisputably established for purposes of the pending litigation.”). Therefore, the parties are not bound by these facts and are free to dispute the facts in the paragraphs that rely on the FTC Findings of Fact. In addition to the Findings of Fact in the FTC case, the Commissioner cites to Mr. Simpson’s informal discovery response, transcripts of individuals taken for purposes of the FTC case, and trial exhibits from the FTC case as support for his proposed stipulations. However, because the Court was not provided with copies of these sources with these motions, we cannot ascertain the accuracy of these statements. Therefore, the parties are not bound by these facts and are free to dispute the proposed stipulations that rely on these sources. Because [some als] and Mr. Simpson dispute the facts contained in these paragraphs, and the sources cited do not indisputably establish these facts, the parties are not deemed to have admitted these paragraphs.” Order, at p. 5. (Citation and names omitted). Remember, issue preclusion requires more than just a party’s presence in another judicial proceeding.

Third, Dennis Lee’s two proposed stips, one to IRS and one to one of the als, contain different facts. But these are consolidated cases; separate checks are a no-no. And Dennis Lee restates documents; these speak for themselves.

“Because these are consolidated cases, every party has to agree to the same set of facts for us to deem a fact admitted. Mr. Simpson’s proposed stipulations contained in his Rule 91(f) motions fail to provide the parties with the same set of facts, therefore we cannot deem any of the facts admitted. Furthermore, many of Mr. Simpson’s paragraphs simply restate the contents of documents, and the stipulation process is not to be used to stipulate to contents contained in documents. Documents speak for themselves. Therefore, we will deny both of Mr. Simpson’s Rule 91(f) Motions for order to show cause and not deem admitted any of the paragraphs contained in them.” Order, at p. 5.

But since Judge Buch has to mix-and-match IRS’ five stips to conform the pleadings to the proof, so to speak, we have a seven (count ’em, seven) page appendix with the facts Judge Buch deems admitted.

Even though Judge Patrick J (“Scholar Pat”) Urda demonstrates a greater familiarity with the contemporary music scene than I (I didn’t know that Michael R. Stevenson is “a very successful rapper who goes by the stage name Tyga,” T. C. Memo. 2023-115, filed 9/11/23, at p. 2), he cannot replicate Jack Lemmon’s differently-spelled Oscar-winning performance.

Tyga consistently fails to pay estimateds, while running up north of $8 million in taxes, add-ons, and chops. The SO keeps giving Tyga’s representative extensions to come up with the current 1040-ESs, but to no avail.

“Against this long backdrop of oft-fruitless accommodation, we cannot fault the settlement officer for ultimately determining that enough was enough. The settlement officer was within her discretion in denying another extension of time and rejecting any collection alternatives for lack of compliance with estimated tax obligations.” T. C. Memo. 2023-115, at p. 8. (Footnote omitted, but see infra, as my high-priced colleagues say.)

True, the SO didn’t consider the CA Tyga’s representative put forward. And she reviewed Tyga’s Form 433-A and back-ups herself, rather than bucking them over to Collection. No matter, says Judge Scholar Pat.

“We note in passing that the settlement officer acted in accord with the relevant IRM provisions in proceeding to consider Mr. Stevenson’s financial wherewithal after not receiving a response from the Collection Division. See IRM 8.22.7.4.1(2); (“A settlement officer does not abuse her discretion when she relies on relevant [IRM] provisions in evaluating collection alternatives.”) T. C. Memo. 2023-115, at p. 8, footnote 6. (Citation omitted).

I’ll forgive Judge Mark V (“Vittorio Emanuele”) Holmes a little lame humor in Short Stop Electric, Inc., T. C. Memo. 2023-114, filed 9/11/23. Bob, the majority stockholder in Short Stop, is an inventive type, so his story is worth some furbelows.

Short Stop was a C Corp, so double taxation. Bob decided to short circuit that (sorry, guys) by creating a “revolving line of credit” between himself and Short Stop, whereunder at year-end he’d note an advance on Short Stop’s books from him, and note a repayment with interest at a rate and amount determined solely by him. He’d pay tax on the interest he never got on his 1040 MFJ, but Short Stop’s 1120 would show minimal tax or a loss.

Bob was warned at an earlier exam that this was a dodge, but he seemed so earnest that the RA let it go. No good deed goes unpunished, so Bob kept right on with it. That earns him understatement chops.

Bob’s dicey loan to an unrelated fails for want of evidence; he claims Short Stop made the loan, but the borrower paid Bob. True, directing one who owes you to pay to one whom you owe is income to you, but there’s no showing of any of that. And the purchase of the cabin on the lake, ostensibly for future development, fails for want of proof of business use, as does the boat.

It’s true, as I once remarked, a sign of success is to own a boat. I never did.

And Short Stop’s NOLs get lost when the interest deductions it took get wiped out.

Fighting the chops, Bob’s CPA, though expert, has poor memory and no paper.

But Short Stop wins on the forklift, which survives even the Section 274 hurdle, although Bob’s poor recordkeeping limits him to 70% of the cost for his Section 179 deduction.

“The problem for Short Stop here is that we’ve found it to be a company that has taken unreasonable reporting positions for a long time, and after being warned not to do so by an IRS revenue agent. It had a competent adviser but didn’t rely on him for advice. So, even if other taxpayers might have been reasonable in deducting the cost of the equipment, Short Stop itself was unreasonable in not substantiating these deductions. The failure to track and substantiate in any way their varied uses was not reasonable here. We therefore find that the accuracy-related penalties apply for both years at issue.” T. C. Memo. 2023-114, at pp. 21-22. (Footnote omitted, but it says that even though Bob wins on the forklift, he kept no records allocating business use (he used the forklift to push a snowplow and most of that was personal) but deducted almost all of the forklift cost, hence the chops on the whole deduction, even though he gets 70% of the deduction itself).

I got a midnight hot flash from a well-placed source that IRS is folding all chops in Lakepoint Land II, LLC, Lakepoint Land Group, LLC, Tax Matters Partner, Docket No. 13925-17. Recalling IRS’ commitment to candor, fairness, and transparency, IRS will ditch the backdated docs, and will review the other syndicated easement cases to make sure that, if Boss Hossery is asserted, they’ll play it like Caesar’s wife, above reproach.

A Taishoff “Good Job, First Class, with Swords and Diamonds.”

And Tell Harvard Too

The following notice appeared on the United States Tax Court website homepage today, without elaboration.

“Petitioners and practitioners logged into their DAWSON accounts may experience problems opening documents on a docket record when using a mobile device such as a phone or tablet.”

Pity this warning wasn’t available back in mid-December, when Antawn Jamal Sanders was eleven (count ’em, eleven) seconds late with his filing due to his own nonDAWSON computer jimjams, as more particularly bounded and described in my blogpost “In the Midnight Hour,” 6/20/23.

It looks like Antawn never filed an appeal, but all is not lost.

He’s still within the 90-day window per Rule 190; 4 Cir, to which it seems Antawn is Golsenized, might go with 3 Cir in Culp and apply equitable tolling.

And if ever there was a Section 6213 SNOD case where equitable tolling was a slamdunk, this is it.

How ’bout it, Harvard? Shouldn’t the Fogg of the Legal Clinic of the Harvard Law School spread on to Richmond?