Source: https://taishofflaw.com/2017/10/
Timestamp: 2019-04-19 12:20:54+00:00

Document:
Thus spake Judge Laro in Carlos Alamo, 2017 T. C. Memo. 215, filed 10/31/17. Carlos claimed IRS never sent him a SNOD, so the alleged deficiency was fatally flawed.
“Notwithstanding respondent’s disorganized recordkeeping as to the tax account for petitioner for [year at issue], we find that respondent has carried his burden of proving that he mailed a deficiency notice to petitioner.” 2017 T. C. Memo. 215, at p. 24. You can read the facts and conjectures for yourselves. IRS didn’t cover itself with glory on that score.
But Carlos was a trifle casual with what mail he picked up and what he didn’t.
Carlos petitioned from a NOD on a NFTL, although there had be a NITL (which Judge Laro calls FNIL; we really need uniformity here), which Carlos didn’t contest because the certified letter was returned uinclaimed.
When Carlos first went to Appeals on the NFTL, although Appeals turned down Carlos on his contest of liability based on nonmailing of the SNOD, when Carlos petitioned the NOD, IRS moved to remand, to give Carlos a chance to put in evidence of what he owed, if anything.
Carlos stuck to the “you never mailed a SNOD” story, and put in nothing else.
“We have already determined that respondent did mail a notice of deficiency to petitioner. But it is also true that because petitioner did not receive the notice, he was entitled to raise the issue of the underlying liability at his CDP hearing. See sec. 6330(c)(2)(B). Petitioner errs, however, by contending that he was not required to provide a completed [year at issue] income tax return or any other documentation to the IRS Office of Appeals to contest his income tax liability.” 2017 T. C. Memo. 215, at p. 29.
In short, you get a chance to tell your story if you didn’t get a SNOD. But you have to tell your story.
“A taxpayer may not claim to challenge the underlying tax liability in a CDP hearing and then refuse to cooperate with the Office of Appeals in attempting to establish that liability. In previous cases, we have found against taxpayers where they stated that they were challenging the underlying tax liability in a CDP hearing but failed to provide to the Office of Appeals any evidence on that issue. See, e.g., Snodgrass v. Commissioner, T.C. Memo. 2016-235; Stevenson v. Commissioner, T.C. Memo. 2013-284. In short, intransigence has no reward.” 2017 T. C. Memo. 215, at pp. 31-32.
Note that IRS knew they blew it at Appeals the first time around, so they sought (and got) remand. They used that opportunity to build a fortress of a record.
Practitioner, when IRS seeks remand to Appeals, they’re looking for a chance to remediate a sketchy record. And you should be looking for a chance to strengthen yours.
Dana D. Messina and Kyle R. Kirkland (hereinafter respectively “DD” and “KK”) were corporate wheeler-dealers who bought the sub S stock of a regulated CA card room corporation, heavily leveraged the buy with a loan from a hedge fund, and when the business climate went south tried to buy out the hedgefunder via a Sub S they created and funded.
DD and KK wanted to argue that the buyout sub S was really just an incorporated pocketbook or an agent, or should just be collapsed, so that their basis in the buyout sub S stock really should be treated as basis in the card room sub S.
Judge Laro has this one, and you can find it as 2017 T. C. Memo. 213, filed 10/30/17.
The card room S corp had great losses, which DD and KK wanted to grab. But they needed basis in the card room sub S stock to take the losses. If they simply bought the hedgefunders’ loan and had the card room S Corp treat that as a capital contribution although keeping the loan alive, they were concerned that they would thereby subordinate that loan to the notes they gave when they bought the card room in the first place. Given that their sellers had signed an agreement subordinating their notes to the hedgefunders’ loan, and that in the middle of everything else they were suing each other, this was not an unreasonable concern. The word “novation” does come readily to the mind of every subordinated party.
So rather than buy the hedgefunders’ loan themselves or lend the card room sub S the money to do so itself, DD and KK formed another sub S, lent it the money, and had that sub S buy the loan. And release DD and KK from their personal guarantees on the loan.
Problem: to increase your basis in an S corp, you need to contribute capital to the S corp (stock basis) or incur debt on behalf of the S corp (debt basis), and the latter must be real economic debt and the stockholder directly on the hook . DD and KK had their loans to the debtholding sub S recharacterized on the books as capital contributions, but that only built basis in the debtholding sub S, not the card room sub S.
So is the debtholding sub S real, or just an agent? “The Supreme Court has set forth several factors to consider when evaluating whether a corporation is another’s agent: (1) whether it operates in the name and for the account of the principal, (2) whether it binds the principal by its actions, (3) whether it transmits money received to the principal, (4) whether receipt of income is attributable to the services of employees of the principal and to assets belonging to the principal, (5) whether its relations with the principal depend upon the principal’s ownership of it, and (6) whether its business purpose is the carrying on of an agent’s normal duties. Nat’l Carbide Corp. v. Commissioner, 336 U.S. 422, 437 (1949). “ 2017 T. C. Memo. 213, at p 36.
Well, it acquired the hedgefunders’ debt in its own name and was never designated as an agent in writing, or held out as an agent. It’s true that its only assets were a few bucks DD and KK fed it, and the debt, and it did pay every cent of debt service it got from the card room S corp to KK and DD. But that’s not enough to make it an agent, says Judge Laro. The debtholding sub S was a blocker, to keep the hedgefunders’ debt from being subordinated to the suing sellers’ notes.
And the debtholding sub S wasn’t an “incorporated pocketbook.” That’s a corporation which habitually uses its funds to pay the stockholders’ personal debts, or the debts of another entity related to the stockholders. But the debtholding sub S did neither.
It’s true DD and KK made an actual economic outlay. But that only builds their basis in the debtholding sub S.
Finally, collapsing the transaction and disregarding the debtholding sub S flunks the Alfalfa test. While DD and KK could structure their business deals how they wanted, they cannot restructure them to get a better tax result after the fact.
Takeaway- Sometimes the tax tail does wag the business dog. The sellers’ notes were way less than the hedgefunders’ loan. If the tax breaks are worth more than the risk of subordination, when the business was in trouble and in default of said loan, don’t sweat the small stuff. Sometimes the insurance just isn’t worth the premium.
“Swift” is the word; the race is to the swift.
Today Judge Nega has an off-the-bencher that brings back memories, as I described in my blogpost “Swift, Light and Unattached,” 12/19/12.
All y’all will remember Billy Armstrong and his failed effort to substitute his modified divorce decree for the sacred Form 8332 that his loved-once was supposed to sign and deliver, but didn’t. And Judge Holmes’ daring dictionary dive, which failed to save the day for Honest Billy. No? Then read the aforementioned blogpost, and weep.
But Judge Nega has good news today for Christopher James Brauer, Docket No. 21000-16S, filed 10/27/17.
CJ’s parenting plan, which was signed by both CJ and ex-Mrs CJ, is the lead-off here. “This parenting plan was an unconditional release wherein the custodial parent agreed, in the absolute, to waive her right to claim a dependency exemption deduction with respect to their minor child, K.D.B.; that petitioner, although he was the noncustodial parent, should instead be eligible to claim the dependency exemption.” Order, transcript, at p. 4.
Someone’s family lawyer was on the ball. I don’t know her/his name, but a Taishoff “well done” is in order.
Of course, as Judge Holmes pointed out in my abovecited blogpost five years ago, “…in our fallen world, there are few stages on which rational actors are more outpeopled by the children of wrath than in domestic-relations law.” So ex-Mrs CJ welshed and refused to sign the proffered Form 8332.
CJ attached the parenting agreement to his 1040, wherein he claimed all the good Section 152 benefits, so he could file timely, which he did.
IRS promptly hit CJ with a SNOD, claiming the parenting agreement didn’t satisfy the waiver provisions of Section 152.
CJ didn’t stand idly by the while, hoping Tax Court would save his dependency. He went into State court and dragged ex-Mrs CJ before the Bar of Justice, whereat ex-Mrs CJ coughed up the Form 8332, personally and manually signed. CJ puts the same into evidence.
Judge Nega: “At trial, respondent did not dispute the validity or veracity of the Form 8332. Respondent did not invite our attention to any terms of the parental plan or other documentary evidence indicating the noncustodial spouse’s waiver was conditional, and we find none. Respondent did not allege petitioner and the custodial parent [ex-Mrs CJ] colluded to ‘double-dip’ with respect to claiming a dependency deduction….” Order, transcript, at p. 7.
IRS’ one and only argument is that the Form 8332 wasn’t “attached” to CJ’s 1040. But Judge Nega won’t let IRS’ counsel get away with that one. “When pressed by the Court, respondent did not proffer an opinion as to whether petitioner could still properly file an amended return for tax year 2014, ‘attach’ the Form 8332, and again satisfy the requirements for claiming the subject dependency exemption. We observe that petitioner’s return was timely filed less than three years ago. We similarly note that the return of the custodial spouse is likely still open to either audit or amendment.” Order, transcript at p. 8.
Paying due obeisance to Billy Armstrong’s case, as affirmed by 8 Cir., and the dictionary stuffin’-chaw over the word “attachment,” Judge Nega opines as follows: “However, because we find the parental [sic; probably “parenting”] plan petitioner included with his return, and the Form 8332 supplied to respondent satisfied the statutory requirements of section 152(e) (2), we need not and do not weigh in on that subject here.” Order, transcript at p. 8.
It’s a win across the board for CJ.
Takeaway- If you’re the noncustodial but entitled to a Form 8332 that your loved-once withholds, attach whatever you got to your 1040 and file timely, and head for State court with all due deliberate speed, invoking fire and slaughter upon the recalcitrant parental unit. And tell ‘em Judge Nega sent you.
Only one tiny quibble: Judge Nega, why didn’t you designate this? CSTJ Lew (“That Spelling! Oh, That Spelling!”) Carluzzo designated some mathematical brain-twister, and you made me plow through 125 irrelevant orders to find this gem. On a Friday afternoon, yet.
The Great Dissenter, etc. etc., Judge Mark V. Holmes, is really swinging away today, his designated hitters wowing the fans. Here’s Estate of Marion Levine, Deceased, Robert L. Larson, Personal Representative and Trustee, Robert H. Levine, Trustee and Nancy S. Saliterman, Trustee, Docket No. 13370-13, filed 10/26/17.
This big-ticket case first appeared on my radar two years ago. See my blogpost “Unfair Surprise,” 11/21/15. My faithful readers know that when there’s big doin’s brewin’ at The Glasshouse, you’ll read about it here first.
So apparently IRS amended, and now the jumpball has to do with attorney work product and how wide a net can be cast over an attorney’s files, when the client claims reasonable cause. Although clearly no one was born yesterday, Neonatology is in play.
“The work-product privilege exists to prevent ‘unwarranted inquiries into the files and the mental impressions of an attorney’ because ‘it is essential that a lawyer work with a certain degree of privacy.’ Hickman v. Taylor, 329 U.S. 495, 510 (1947). The privilege specifically limits discovery of documents prepared ‘in anticipation of litigation.’ See Rule 70(c)(3); Fed. R. Civ. P. 26(b)(3); Bernardo v. Commissioner, 104 T.C. 677, 687 (1995). “In anticipation of litigation” means ‘created ‘with a specific claim supported by concrete facts which would likely lead to [the] litigation in mind,” not merely assembled in the ordinary course of business.’ Bernardo, 104 T.C. at 687 (quoting Linde Thomson Langworthy Kohn & Van Dyke, P.C. v. Resolution Trust Corp., 5 F.3d 1508, 1515 (D.C. Cir. 1983)); see also Simon v. G.D. Searle & Co., 816 F.2d 397, 401 (8th Cir. 1987). We’ve held that documents prepared during audit — and so before the IRS issues an NOD — can be created ‘in anticipation of litigation.’ Bernardo, 104 T.C. at 688. We’ve also held that documents prepared by a representative who isn’t directly retained, or who isn’t even a lawyer, can be work product. Id. at 687-88. Any documents that [attorney] and his firm produced after petitioners retained them specifically for this litigation likely fit within the definition of work product.” Order, at p. 2. (Name omitted).
Of course, attorney prepared the return and did the tax planning, and IRS wants the whole shebang, all ten (count ‘em, ten) years’ worth. Rob, Rob & Nan only want the stuff from inception to filing the return. They want to show reasonable reliance by the late Marion to dodge any chops.
Rob, Rob & Nan retained attorney as soon as the SNOD hit.
IRS admits the stuff they want is work product, but IRS claims that invoking reasonable reliance waives the privilege.
Of course, IRS is trying to go from first to third on a bloop single without touching second base. Judge Holmes’ rifle arm cuts them down.
“Respondent admits there’s no case directly supporting his position, but he does cite an opinion about attorney-client privilege and a recent order citing that case in a work-product context. In the opinion, Ad Inv. 2000 Fund LLC v. Commissioner, 142 T.C. 248 (2014), we held that raising a good-faith defense could waive attorney-client privilege. Id. at 255. But the only documents at issue there were the more-likely-than-not opinion letters written before the transaction; the IRS wasn’t seeking anything from after the taxpayer filed its return. See id. at 250. The same is true of the order that respondent cites, which concerned documents related to a taxpayer’s choice of transfer-pricing method — a choice it necessarily made before filing its return. See Eaton Corp. & Subsidiaries v. Commissioner, Docket. No. 5576-12, Order, May 11, 2015 (discussing both good faith and reasonable reliance).” Order, at p. 3.
Well, citing an Order is clearly out; Rule 50(f) calls the ball dead and the runner out when you try that, except for issue preclusion and law of the case in the same case.
Anyway, as to the Ad. Inv. 2000 Fund case, see my blogpost “Self-Determination,” 4/16/14; and as to the Eaton order, see my blogpost “The Forty Million – Part Deux,” 5/15/15.
OK, no waiver here. You waive privilege when you invoke it for more-likely-than-not cold-comforts prior to filing the return in the reasonable cause context, but invoking privilege for post-SNOD documents is another story.
“That’s not the end of our analysis. A party can get work product if he shows he has a “substantial need” for it. Fed. R. Civ. P. 26(b)(3)(A)(ii); Simon, 816 F.2d at 400; see also Hickman, 329 U.S. at 512 (burden on movant seeking discovery through court order or subpoena). Respondent says only that he has a ‘genuine need to review [attorney’s] files and communications ‘to rebut petitioners’ reasonable-cause defense. That defense will require petitioners to show that they gave a competent professional all pertinent facts and relied in good faith on his advice when taking the disputed return position. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002). Respondent doesn’t explain why anything produced after petitioners took their return position, let alone after respondent mailed the notice of deficiency, could possibly lead to evidence that is relevant and admissible to this defense. The cliché is that subpoenas aren’t for fishing expeditions, see Wis. Psychiatric Servs., Ltd. v. Commissioner, 76 T.C. 839, 846 (1981); see also Rule 70(b) (discovery limited to items ‘relevant to the subject matter involved in the pending case’), but that’s not quite true. A well-placed baited hook or cast net may well be okay; this kind of large-scale drift-netting is not.” Order, at p. 3.
IRS can have from start of estate planning through filing the return. The rest is corban, as a much more exalted source put it.
I give all the cites here so you can drag-and-drop for your brief. Just don’t cite the order, OK?
No, I’m not peddling a get-rich-quick scheme or giving a compensated pitch for Powerball. This is CSTJ Lewis (“The Spelling That Casts a Spell”) Carluzzo bringing the bad news to Kevin M. Flynn & Jennifer M. Flynn, Docket No. 4085-16S, filed 10/26/17.
Kev & Jen filed timely, but their numbers didn’t include AMIT. That’s the 1969 dragnet supposed to snag the nonpaying richniks of the .1%, but which has morphed into the impenetrable thicket found in Form 6251, which catches the innocent like a certain ram in a thicket in a much more exalted document, but with the same result.
CSTJ Lew is not unsympathetic to Kev’s & Jen’s plight, but the law is the law.
“According to petitioners, they should not be held liable for the portion of the deficiency attributable to the alternative minimum tax because the alternative minimum tax was never intended to apply to the class of taxpayers that describes their financial status. At the hearing Mr. Flynn noted that the alternative minimum tax originally applied to only ‘100’ taxpayers, and over the years more than ‘four million’ taxpayers, including petitioners, became subject to the tax. We’re not sure of the numbers, but appreciate his point. Nevertheless, as he was advised at the hearing, the Court is bound to apply the law as written; petitioners’ complaint about the expanded application of the alternative minimum tax needs to be made to the Congress, not to the Tax Court.” Order, at p. 2. (Citation omitted).
Cheer up, Kev & Jen. Congress, or at least a majority thereof, is hard at work, crafting a major revision of the IRC. Let’s see what happens to Sections 55 and 56.
I’m breathless at the thought.
Thus spake Judge Gerber to Paul Peter Partyka and Catherine Elaine Partyka, 2017 T. C. Sum. Op. 79, filed 10/25/17.
Paul Peter and Cath rented their residential property to Ruth Games, and apparently her name was her fame. She robbed Paul Peter but not to pay Paul Peter or Catherine, because her security deposit check bounced.
She stiffed Paul Peter and Cath for the money she was going to pay them for some of the furniture in the rental property. Then she paid no rent, moved out ahead of the marshal showing up to evict her, and took all the furniture with her.
Paul Peter and Cath recovered some, but their house was damaged when Ruth took off in November.
Paul Peter and Ruth didn’t claim the theft loss until the following year. Though they’d recovered some of the furniture, some was damaged or destroyed, and they thought they had a chance at recovery until the next year, when two lawyers told them to forget it, that Ruth had been playing this game a lot but wasn’t likely to be able to pay any judgment they got even if they caught her.
Paul Peter and Cath had photographed the property as furnished immediately before delivering possession, and again after Ruth had knocked it over. They had some iBay and Etsy numbers for the missing stuff, but their eyeball estimate for the rest didn’t fly.
Judge Gerber finds that, so long as Paul Peter and Cath thought they had a chance of recovery that wasn’t pure fantasy, they should not claim the loss until it was a dead loss, and that was in the year at issue.
It’s the substantiation that hurts Paul Peter and Cath. They claimed $29K. Of that, they had nothing for $6700. For $10,000, they took the cost of replacement as new, but Judge Gerber only allows $2K as used. For $6K in bedding, he allows $1200.
Repairs and painting aren’t theft losses. At best, they’re capitalized. For the rest, Judge Gerber Cohanizes about $6K.
Talk about “bearing heavily upon the party” whose inexactness causes the problem. Judge Gerber: “It was their failure to prepare and maintain adequate records and documentation in support of their claimed $29,979 theft loss deduction that resulted in our reaching a $9,194 total value of the items lost.” 2017 T. C. Sum. Op. 79, at p.
I don’t know if Paul Peter and Cath are professional lessors, but it doesn’t appear that they are, despite the careful photography. Pros have receipts for teacups and toasters, and depreciation schedules to bring a fleeting smile even to the face of that Master of Depreciation (in all senses of the word) Judge Mark V. Holmes.
Worse, they’re pro sese, so they don’t put in evidence of who gave them specific tax advice about how to take the loss, leaving the 20% negligence chop hanging, even if they get under the five-and-ten for understatement in the Rule 155 beancount Judge Gerber orders.
A cautionary tale for lessors, this. Official bank cashier’s checks for first rent and security if your tenant is less than WalMart; and receipts and depreciation schedules for everything.
CSTJ Lewis (“Spell It Right”) Carluzzo finds the above-quoted query asked and answered in Christian Ewoh, Docket No. 2938-17, filed 10/24/17, a designated off-the-bencher.
IRS wants summary J tossing Chris for late filing of petition from SNOD. Chris says he did mail it timely.
IRS’s retort evokes the above-quoted question.
“At the hearing respondent advised that the facts relied upon by petitioner in opposition to respondent’s motion, although not necessarily agreed to, were not disputed. According to those facts, the petition in this case was mailed to the Court prior to the date that the petition was due to be filed. See secs. 6213(a), 7502; sec. 301.7502-1(c)(1)iii)(B), Proced. & Admin. Regs.” Order, Transcript, p. 3.
Well, IRS, if you don’t dispute something, you agree, no?
IRS’ cubby of little tricks has an undistributed middle.
“Respondent now agrees that the elapsed time between the date that petitioner claims the petition was mailed and the date the petition was received and filed by the Court did not exceed the ordinary course of mail between Houston, Texas, and Washington, D.C.” Order, Transcript, at p. 3.
So, petitioner, if claim you beat the posted deadlines, you’re in. Maybe. This is an off-the-bencher and not precedent.
Few cases get cited as often as Cohan. The author-composer of “Over There” and “Give My Regards to Broadway,” known for decades as “the man who owned Broadway,” gave rise to the great Learned Hand, D. J.’s famous remark concerning deductions where the taxpayer produces insufficient records: “Absolute certainty in such matters is usually impossible and is not necessary; the Board should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making.” Cohan v. Com’r., 39 F.2d 540 (2d Cir. 1930), at pp. 533-534.
I’m sure all y’all have Judge Learned’s learned lingo in your memo of law files, ready to drag-and-drop.
Well, Neil Feinberg and Andrea E. Feinberg, 2017 T. C. Memo. 211, filed 10/23/17, with Kellie McDonald riding shotgun, are trying to graft Cohan onto their potted COGS.
Y’all remember Neil and Andrea and Kellie. What, ya don’t? Well, read my blogpost “They’ll Stone Ya When You’re Tryin’ to Make a Buck,” 3/25/15. There now.
Today’s fight is over unsubstantiated business expenses (utterly unsubstantiated, and propped up by a CPA’s conclusory jaunt through some local industry statistics, which gets thrown out via Daubert; a bad day for the pharmaceutical gang) and a claim for more COGS than IRS allowed.
Remember, COGS (Cost Of Goods Sold) is not a deduction. It’s an adjustment to gross receipts, to compute gross income from sales. Thus, it falls outside the Section 280E trafficking in controlled substances prohibition.
Neil and Andrea and Kellie were providing medicinal flora in CO, and their records for the years at issue were, putting it charitably, scanty.
Judge Kerrigan: “COGS is determined under section 471 and the accompanying regulations. See secs. 1.471-3(c), 1.471-11(c), Income Tax Regs. Petitioners contend we should allow the COGS in [their Sub S]’s income tax returns under the Cohan rule. See Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). Petitioners further contend that they should be able to subtract an amount for COGS based on industry standards for the medical marijuana industry during the tax years in issue. Respondent allowed COGS that were substantiated and also recharacterized below-the-line expenses as COGS to the extent allowable under section 471.
“Petitioners produced no evidence to substantiate COGS higher than those which respondent allowed.
“The Court may estimate the amount of a deductible expense if a taxpayer establishes that an expense is deductible but is unable to substantiate the precise amount. This principle is often referred to as the Cohan rule. The Cohan rule also applies to COGS.” 2017 T. C. Memo. 211, at pp. 11-12. (Citations omitted).
Neil and Andrea and Kellie had CO licenses to sell medicinal boo, but no proof as to what they did sell. And no proof they had greater COGS than IRS allowed.

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