Source: https://taishofflaw.com/2011/11/
Timestamp: 2019-04-19 12:49:31+00:00

Document:
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.
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.
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).
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.
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.
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.
It always stings to see a fellow tax professional upended, even when it’s his or her own fault. But this case approaches the limits of tolerance for human frailty, because Linzy puts her own neck in the noose. I’m referring to Joyce Ann Linzy, 2011 T.C. Mem. 264, filed 11/7/11.
Linzy has her own tax preparation business. She claims she employs “contract labor”, but has no records of any value showing to whom she paid what. Judge Vasquez takes up the story: “Petitioner presented canceled checks, bank account statements, receipts, and invoices purporting to substantiate various items claimed as business expense deductions. These records are not well organized and have not been submitted to the Court in a fashion that allows for easy association with the portions of deductions that remain in dispute. Nevertheless, we make what sense we can with what we have to work with….” 2011 T.C. Mem 264, at p. 7.
It gets worse. “None of the numerous receipts petitioner offered in support of her claimed contract labor expense were for contract labor.[Footnote- For example, petitioner introduced receipts for blinds, carpet, repairs, and furniture.] However, some of the receipts were for valid business expenses properly deductible elsewhere on petitioner’s Schedule C. We permit those expenses to be deducted and discuss them below in the appropriate expense category.
“At trial petitioner attempted to claim a deduction for additional contract labor expenses. Petitioner introduced photocopies of checks and a few pages of someone’s handwritten timesheet. The checks are photocopied such that the dates are missing or incomplete, and the full amount cannot be determined for one of the checks. These records are incomplete, and there is not enough information to permit a reasonable estimate. Accordingly, respondent’s complete disallowance of petitioner’s $34,880 deduction for contract labor is sustained.” 2011 T.C. Mem. 264, at pp. 7-8.
Though Judge Vasquez throws Linzy a few dollars’ worth of deductions above what IRS would allow in the other categories referred to, the net result sustains IRS’s deficiency.
Finally, as to the Section 6662 penalty (negligence and substantial understatement), Judge Vasquez had this to say: “Petitioner’s records were insufficient to substantiate several of her claimed deductions, and she failed to keep adequate books and records. Furthermore, petitioner, a tax return preparer with more than 15 years’ experience, improperly deducted the cost of numerous items instead of depreciating the items as required by law. Although petitioner credibly testified as to the business purpose for her claimed deductions, her underpayment was still attributable to her negligence.” 2011 T. C. Mem. 264, at pp. 18-19.
Apparently Linzy was an unenrolled preparer, a species about to become extinct with the advent of the new Registered Tax Preparer testing and CPE requirements, and Circular 230 regulation. It remains to be seen whether the proposed testing and CPE requirements, and the oversight of OPR, will improve the performance of Linzy and her colleagues–at least as to their own tax returns.
If at first you don’t succeed, try, try again, but Esmiss Esmoore missed the first time and Jim fares no better in James F. Moore, 2011 T.C. Mem 265, filed 11/8/11. Readers of my blog, and followers of Tax Court decisions, will remember my blogpost “Essmiss Esmoore, Essmiss Esmoore”, 8/16/11, reporting James F. Moore, 2011 T.C. Mem. 200, filed 8/16/11. Jim missed out because the payment to Esmiss Esmoore, that Jim claimed was alimony but IRS said wasn’t, didn’t terminate at the death of Esmiss Esmoore, and Indiana law didn’t state that all alimony ceases automatically at death of recipient ex-spouse.
Jim tries again, but the case his counsel relies upon doesn’t say what counsel says it says, at least to Judge Vasquez’s satisfaction. So although Jim’s Rule 161 reconsideration motion is not supposed to serve as “the appropriate forum for rehashing previously rejected legal arguments or tendering new legal theories to reach the end result desired by the moving party.” 2011 T.C. Mem. 265, at p. 3 [citation omitted], Judge Vasquez goes the extra mile, analyzes the cited case, finds it’s still ambiguous, and holds that Jim is once again out of luck.
Takeaway- If you want to make a Rule 161 reconsideration motion, better have some heavy artillery, like a demonstrably serious error of law or fact, or evidence newly discovered that could not, by the exercise of due diligence, have been produced at the proceeding.
At least not to an IRS agent on an audit, is provided by the taxpayer-petitioner and his primary tax adviser and longtime accountant, Viggo (“Wiggy”) Carstensen, in Perry W. Browning, 2011 T.C. Mem. 261, filed 11/3/11.
Merry Perry was an electronics company CEO who needed to stash some cash against his impending old age and his company’s flagging sales. Wiggy put him in touch with some employee-leasing promoters, who put Merry Perry into a lease-and-sublease deal with an Irish corporation, a US shell, and a Bahamian bank (sounds like a joke, doesn’t it?).
Briefly, Merry Perry made a deal with the Irish to let the Irish lease him to a US corporation with no discernable business purpose except to sublease Merry Perry back to his company and help him stash the cash generated by the differential between the lease rent and what Merry Perry nominally got paid by the sublessor. Notwithstanding anything to the contrary elsewhere herein contained, as the high-priced lawyers say, Merry Perry continued to act, hold himself out, and generally carry on as if he still worked directly for his electronics company.
The deal was that the Irish would collect, via the US sublessor, Perry’s real salary as rent, stash what part he wanted in the Bahamas (“it’s better in the Bahamas”, as the tourist board slogan says), and give Merry Perry and Mrs. Merry Perry credit cards on a Bahamian bank, whereby they could use the stashed cash how they wanted.
Taxes were not a great concern. When Wiggy wanted a second opinion, he got one from a knowledgeable person (he thought), but one whose Circular 230 status was never made clear. The second opiner, McCarthy, was concerned that the personal service corporation cases wouldn’t fit, as Merry Perry wasn’t an athlete, an entertainer, or otherwise a personal services corporation type. Merry Perry had no PSC of his own, and, if audited, the whole deal would implode. Nevertheless, and notwithstanding et cetera, Wiggy told Merry Perry to go for it.
Merry Perry and Mrs. Merry went for it with a will, maxing the plastic and paying with the stashed cash, maintaining the fiction that the Irish controlled the expenditures. In fact, Wiggy checked the “no” box on line 7a of Schedule B to Merry Perry’s and Mrs. Merry’s joint 1040s, claiming they had no control over any financial account in a foreign country, such as a bank account, securities account, or other financial account. He later blames this on the default setting on his computer software, but Judge Halpern doesn’t buy it.
Comes now Bad Belinda Evans, IRS agent, and audits the Merry pair. No foreign accounts, the Merry pair aver, and hand Bad Belinda a credit report that doesn’t show the Bahama credit cards. Not for two months does the truth come out, when Bad Belinda grills Wiggy, telling him she knows about the hidden plastic, and Wiggy unbags the cat.
“Q Okay. So, Ms. Evans, what was the nature of your conversation with Mr. Browning regarding his use of the Leadenhall credit card?
“Q Mr. Carstensen or Mr. Browning?
“A Mr. Carstensen stated that everybody does it. Mr. Browning then stated that this is the standard way of using credit cards. Mr. Browning then went on to say it’s like running a red light or going the speed limit. You do things you shouldn’t while you can.” 2011 T.C. Mem 261, at p. 42.
Well, now Merry Perry can’t do it, as Judge Halpern finds enough badges of fraud to hang Merry Perry and Mrs. Merry (who’s bound by her husband’s fate per stipulation).
Takeaway–Do not, repeat do not, crack wise with an IRS agent, not now, not never.
So we learn from Glenn R. Crane and Deborah A. Crane, 2011 T.C. Mem. 256, filed 11/1/11.
This is a sad story. Deb’s son dies of cancer two days before Christmas. Deb gets cancer. Then Deb’s co-worker Amie claims their mutual boss sexually harassed her (and he didn’t even have the excuses that he was nominated for the Supreme Court or running for President). Deb steps up for Amie, claiming the boss is a chauvinist hog.
Deb gets demoted, her employee lease gets canceled putting her out of a job, and when she posts for a replacement job with the employee-lessor, doesn’t get it. Deb demands arbitration on her claim that all this was retaliation for backing Amie against Boss Hog, and gets awarded $44K, plus another $25K for counsel fees and arbitration costs.
The arbitrator finds Deb suffered no economic harm. There were economic reasons to cancel the lease, the job shift was to keep Deb away from Boss Hog, and Deb testified at the arbitration that she wasn’t going to take the pay cut that the replacement job offered.
So it would seem that the $79K was either for hurt feelings or punitive damages. The arbitrator said nothing about physical injury.
Deb and Glenn never reported the $79K on their joint 1040. Glenn claims Deb’s trial attorney told her it wasn’t taxable, and he wanted to disagree, but Deb was in so fragile an emotional state that he did nothing, and never told their accountant-preparer about the $79K or his qualms.
Section 104(a)(2) specifically excludes from gross income monies received on account of “personal physical injuries or physical sickness”. And money for emotional distress doesn’t get excluded, except to the extent there are actual medical expenses as a result.
To the contrary, the arbitrator’s award was apparently made on account of the arbitrator’s annoyance at the way Deb’s employer-lessee handled the investigation into Amie’s complaint, as same related to Deb.
Tax Court also finds that the entire $79K must be included in Deb and Glenn’s gross income, although they may have a deduction for their legal fees and arbitration costs, but leaves that to the Rule 155 horse-trade that will follow this decision.
Finally, Glenn’s qualms about the exclusion of the $79K despite trial counsel’s assurances, plus the fact that there’s no evidence what Deb told trial counsel to elicit the statement that the award wasn’t taxable; and finally, the fact Glenn never told his accountant-preparer about the $79K so as to get a second opinion, means that the Section 6662 accuracy penalty is sustained.
Takeaway–No hurt may be foul or no foul, but there’s income tax to pay.
So we learn from William J. Quarterman, 2011 T.C. Mem. 258, filed 11/1/11. Quarters was living in Germany when he got into a fracas with IRS over three years’ worth of deficiencies and accuracy penalties, so he gets 150 days to file a petition instead of the standard 90 days for in-country types.
IRS sent Quarters a SNOD to his Wiernsheim, Germany address, stating a last-day-to-respond as October 1, 150 days after the date of the notice, which was dated May 4. But IRS didn’t mail the notice until May 5, so Quarters would have had until October 2. As always with taxes, though, there’s an exception. This exception is that October 2 was a Saturday, so Quarters had until October 4 to file his petition.
Quarters sends his petition on September 27 via Deutsche Post registered mail. The envelope gets no US postmark, but is date-stamped by the intake clerk at Fier Hundert Zweite Strasse, Nord-West, at 8:04 a.m., October 5.
You’re a day late and nineteen thousand dollars short, says IRS, and moves to dismiss. Tax Court orders Quarters to reply; he says he did, but neither Tax Court nor IRS gets Quarters’ reply, so Tax Court dismisses.
Quarters moves to vacate, claiming his petition got to New York on September 29, entering the US Postal Services’ stream and therefore beating the October 4 clock. To supplement his motion, he sends in a letter from an official of Deutsche Post stating that the petition got to the US September 29.
“Hearsay!” shouts IRS. Likewise caselaw says you must have USPS Track & Confirm data showing entry into the USPS stream if you don’t have a postmark, and Quarters has neither.
Special Trial Judge Armen takes up the story: “Although timely mailing is generally determined by the U.S. Postal Service postmark date, see sec. 7502(a); sec. 301.7502-1(c)(1), Proced. & Admin. Regs., extrinsic evidence is admissible if a U.S. Postal Service postmark date is either illegible or missing, see Mason v. Commissioner, 68 T.C. 354 (1977); Sylvan v. Commissioner, 65 T.C. 548 (1975).” 2011 T.C. Mem. 258, at p. 7.
But there’s no USPS postmark and no USPS Track & Confirm to prove when the petition got into the USPS’s stream, and the Deutsche Post letter is hearsay.
We can all vouch for the truth of the Sylvan statement.
So Quarters’ petition is reinstated, and he can try to prove IRS wrong.
Takeaway- Three cheers for the hard-working intake clerks at 400 Second Street, N.W., who are on the job and stamping away by dawn’s early light, to give ex-pats like Quarters and the rest of us local nationals our day in Court.

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