Source: https://taishofflaw.com/2016/07/
Timestamp: 2019-04-26 00:40:02+00:00

Document:
It’s an old baseball trick that was, or should have been, pensioned off long ago. The pick-off throw is late. The runner holds the base. The infielder pretends to throw the ball back to the pitcher, but holds it for a second as the runner steps off the base. Whereupon the sneaky infielder tags the runner and yells for the umpire to declare the runner out. Of course, the correct counter is for the runner to watch the pitcher actually receive the ball before making any move off the base.
Well, IRS is wise to the hidden spouse trick, wherein one spouse pays the whole mortgage interest for the year at issue, files MFS and tries for more than the $500K that Section 163(h)(3)(B)(ii) allows.
Tony Tao-Fu Hsu, Docket No. 30921-15S, filed 7/29/16, tries it on. And is tagged out in a designated hitter from The Judge With the Wonderful Name, STJ Lewis Carluzzo.
Tony Tao-Fu evidently didn’t read my blogpost “Faina, Meet Sophy,” 5/17/12, or he would have known this was a loser.
STJ Lew: “As noted, according to petitioner, the ‘obvious purpose’ and ‘spirit of the law’ is to prevent married taxpayers who file separately from each using an indebtedness limitation of $1,100,000. We see the purpose of the statutory limitations quite differently.” Order, at p. 4.
Going back to ol’ Faina Bronstein, 138 T.C. 21, cited in my blogpost aforesaid, “We believe section 163(h)(3)(B)(ii) clearly states that a married individual filing a separate return is limited to a deduction for interest paid on $500,000 of home acquisition indebtedness.” Order, at p. 4.
It doesn’t matter than Mrs. Tony Tao-Fu (name omitted in order) was never in title; never signed note, deed of trust or anything else; and had no legal obligation to lender, Tony Tao-Fu or anybody else. Or that Tony Tao-Fu paid every centavo of the mortgage interest for the year at issue. Or that the mortgage well exceeded $1 million.
“Obvious purpose” and “spirit of the law” don’t get it when Congress hasn’t spoken unequivocally.
And His Honor Big Julie Judge Julian I Jacobs (hereinafter “HHBJJJIJ”) responds in a flash.
In a designated hitter, no less, Z & N Group, Inc., Docket No. 30013-15L, filed 7/28/16.
“ORDERED that the Motion to Withdraw as Counsel, filed July 26, 2016, at 2:13 p.m., is granted in that RS and QD, are deemed withdrawn as petitioner’s counsel of record in this case.” Order, at p. 1. (Names omitted).
The duplicative motion is stricken, but I can speak from decades of experience that I have been in the situation when I just wanted to bail out, many a time and oft.
Judge James S. (“Big Jim”) Halpern is on a discovery tear, with a full-dress TC (Whistleblower 11099-13W, 147 T. C. 3, filed 7/28/16) and three (count ‘em, three) designated hitters concerning the discovery disputes Whistleblower 11099-13W (hereinafter “Whiskey13”) has stirred up.
And Judge Big Jim gives Whiskey13 the whole enchilada: IRS must hand over IDRs (Information Document Requests), address and phone number of ex-IRS employee and when and how IRS found it out, and allow eleven (count ‘em, eleven) depositions of ex-IRS staffers, with teleconferencing by IRS Chief Counsel attorney.
You “win your case at discovery” CLE providers and addicts can go to the Tax Court website for today’s designated hitters.
I’m more interested in where Judge Big Jim isn’t going. And that’s in the full-dress T.C.
Whiskey13 blew the doors on a LIFO inventory shuffle whereby target (small T, not the circle-and-dot retailer) deferred tax. IRS examined and picked up some money, whereupon target, feeling the heat, dropped the dodge and paid a lot more tax going forward.
Whiskey13 claims IRS got the big money later because Whiskey13 showed them where to look. But do Section 7623(b)(1), and Reg. Section 301.7623-2(b) stretch that far?
“To petitioner, it does not matter that respondent did not act to shut down the [scam] on the basis of his information. To petitioner, it is a sufficient justification for an award that the investigation respondent undertook on the basis of his information put target on notice that the [scam] was under scrutiny by the IRS. That, he believes, caused target (1) to abandon elements of the [scam], which almost immediately resulted in its paying more tax and (2) eventually, to abandon LIFO, which resulted in billions of dollars in increased tax collections. Moreover, petitioner believes that respondent derived leads from the investigation that he undertook on the basis of petitioner’s information and that those leads led to respondent’s making adjustments for years 1 and 2 to target’s reported income that are attributable to his information.” 147 T. C. 3, at pp. 12-13.
IRS counters with Example (2) in Reg. Section 301.7623-2(b)(1), where, once tipped off by Whistleblower, IRS gets additional info from IDRs and summonses that Whistleblower didn’t furnish to begin with, and therefore Whistleblower gets nothing.
“In part, the example concludes that the portions of the IRS’ investigation relating to the additional facts obtained through the issuance of IDRs and summonses are not actions with which the IRS proceeds on the basis of information provided by the whistleblower because the information provided did not substantially contribute to the IRS’ administrative action based on the information provided by the whistleblower. Sec. 301.7623-2(b), Example (2), Proced. & Admin. Regs.” 147 T. C. 3, at pp. 14-15.
I said it a long time ago in my blogpost “Qui Tam?” 9/12/12.
“Now the problem is obvious: it needs the whistleblower to connect the dots. Some dots may be public, some private, some hidden, some in plain sight. But in the immortal words of the late great Bill Klem, ‘Some is balls and some is strikes, but they ain’t nuthin’ till I calls ‘em.’ Somebody has to call ‘em, or at least put it all together, so the party charged with ‘callin’ ‘em’ can in fact call ‘em.
“Does no one remember Edgar Allen Poe’s classic short story ‘The Purloined Letter’? The essential document was in plain sight all along, but disguised. It took an expert’s eye to find it, and an expert’s hand to recover it for the true owner.” Qui Tam?, 9/12/12.
If the Whistleblowers don’t show IRS where to look, how will IRS ever know where to look? And without looking, what will IRS collect?
But Judge Big Jim has had enough for one day.
“We need not at this point in the case address the merits of respondent’s lack of-authority argument, which respondent has not fully developed. Petitioner’s case, grounded on the legal theory that the IRS collected proceeds from target on the basis of petitioner’s information about the [scam], is well pleaded. It is not obviously contradicted by section 7623(b)(1). The validity of section 301.7623-1, Proced. & Admin. Regs., has not been tested, nor does respondent argue that it applies. The proper interpretation of section 7623(b)(1) is something that the Court may decide in due course during these proceedings upon argument or briefing by the parties. If respondent is interested in a pretrial ruling from the Court on matters of law, then his proper course of action under our Rules would be to file a motion for summary judgment under Rule 121.” 147 T. C. 3, at p. 15.
And he’s had enough of IRS’ stonewalling.
“Respondent’s principal objection to the motion is, as we have discussed, relevance. He also objects to producing four of the requested IDRs on the ground that petitioner cannot move to compel discovery for documents that he has not sought through discovery. Petitioner, by his… letter made known his request for those four IDRs, and we see no benefit to making petitioner ask again for something respondent has made clear he will not produce except upon order of the Court. With respect to the 17 IDRs petitioner did not identify in that letter, we likewise see no benefit in making petitioner take any further steps to make his request for those IDRs clear to respondent.” 147 T. C. 3, at p. 17.
But it’s all subject to a Section 6103 confidentiality order.
A Taishoff “good job” to Henry S. Lovejoy, Esq., and the team from Kostelanetz Fink.
I don’t want to embarrass IRS’s attorney, so I will mention no particulars about that person. But that person’s response to a petition that arrived in the mail with a USPS meter mark within the 90-day limit for reconsideration of a SNOD is embarrassing.
See Marion I. Tanner Trust Dated 03/28/2002, Rita A. Wilson, Trustee, Docket No. 13446-16S, filed 7/28/16.
Here’s that person’s motion. I’m leaving in the dates because they are material.
“2. The 90-day period for timely filing a petition with this Court from the notice of deficiency expired on June 5, 2016. June 5, 2016, was a Sunday, so the [90-day period for filing a timely Tax Court petition as to that] notice of deficiency expired on June 6, 2016.
“3. The petition was filed with the Tax Court on June 8, 2016, which date is 93 days after the mailing of the notice of deficiency and 2 days after the expiration of the notice of deficiency.
“5. The irradiation process for mail sent to the United States Tax Court is approximately 7 days.
“6. The petition was not filed with the Court within the time prescribed by I.R.C. § 6213(a) or § 7502.” Order, at p. 1.
Ch J L. Paige (“Iron Fist”) Marvel is positively douce.
She sends that person off to check on Reg. 301.7502(c)(1)(iii)(B), about delivery when a mailing would ordinarily be delivered if timely mailed.
And exactly what the irradiation process has to do with this is unclear; if it ordinarily takes seven (count ‘em, seven) days for the radioactors to do their thing, so what? When did the petition arrive in their (literally) hot little hands?
But that person isn’t done yet. That person claims the petitioner hasn’t shown that Rita A. is truly the trustee.
Except the SNOD says she is.
So let that person file a supplement to that person’s motion to dismiss. “In that Supplement respondent shall set forth and discuss fully respondent’s position as to both (1) whether the petition in this case was filed timely in light of section 301.7502(c)(1)(iii)(B) of the regulations, and (2) based upon a diligent and good-faith search conducted by respondent, whether Rita A. Wilson is the duly appointed trustee of the trust.” Order, at p. 2.
NOTHING IS BETTER THAN SOMETHING?
As we say in The City That Never Sleeps, go figure.
On a day when I posted nothing (overwhelmed by Judge Chiechi’s 264 page magnum opus on the Indiana UFTA), my blog got 94 views. On the previous two days, when I did post something, I got 58 and 63 views respectively.
And mindblowingly (pardon the neologism), there was a day when I had posted nothing and my blog got 127 views. I forget when this was, and WordPress.com’s miserable statistics page doesn’t have it.
But why am I posting at all, when I could get more views if I shut up (as some have suggested)?
Maybe nothing is better than something.
That’s the state in which your long-suffering blogger was left after a couple piña coladas (hi, Judge Holmes) and Thomas L. Weintraut, Transferee, et al, 2016 T. C. Memo. 142, filed 7/27/16.
Moreover, I am stupefied by Judge Chiechi’s labor in dealing with a deficiency amounting to around $750K, chops included. Multi millions have involved much less ink and toner.
I’m not even going to try to depth-blog the opinion. It’s an old MidCoast Midco roundy-round with the transferees (a family that owned a C Corp fan business; no, not the kind that cools your office or car, the kind that dries out grain before ensiloing same, lest in the throes of spontaneous combustion it blows up the census tract) and their advisors doing no due diligence, ignoring the smell test, while the MidCoasties use the old “secret formula” T-bill mix-and-match dodge.
It starts out as a stock sale, of course, mutates into an asset sale as the outside buyer wants no part of the C Corp, and when the tax bill (steep and double) is computed, their lawyer (no tax background) finds MidCoast, and their accountant doesn’t look too closely either.
MidCoast dresses up the scam with an opinion letter requiring reps of business purposes, which of course there aren’t. And all the players knew that the kicker MidCoast was paying for the C Corp stock was based upon not paying any income taxes.
So of course they are transferees. We reach this conclusion at page 154 after an exhaustive analysis of sham transaction, business purpose and economic substance.
Comes now the Indiana version of the Uniform Fraudulent Transfers Act. Judge Chiechi writes a law review article on that subject alone (and if any son or daughter of Indiana wants a shot at law review, take that as thy text, and go read and write).
Subjective knowledge and good faith are entirely irrelevant. If the creditors were defrauded, it matters not that the transferees were not the fraudsters.
So what price Alterman? See my blogpost “It’s Not Fraud,” 12/1/15. Due diligence and getting good reps and warranties don’t count?
Roger that, says Judge Chiechi. “We conclude that the Indiana Supreme Court will not impose, and that the Court of Appeals for the Seventh Circuit will hold that the Indiana Supreme Court will not impose, the knowledge requirement before using Indiana substance over form principles in order to determine whether [C Corp] made a distribution or transfer under the Indiana UFTA of its property to each of Mr. F, Mr. Weintraut, and Ms. F in the [phony] sale transaction….” 2016 T. C. Memo. 142, at p. 197. (Citations and names omitted).
Maybe it’s a question of what IRS could prove on the trial, says I, and Judge Chiechi agrees. Even if knowledge did apply, says she, Weintraut and friends did nothing, looked at nothing, and didn’t want to know nothing, despite the usual malodorous emanations from the MidCoasties. Willful blindness.
And you have to treat the payouts to Weintraut and the et als as a single transfer.
But, at the end of the day, IRS hasn’t shown that what Weintraut and the et als got was equal to the deficiency, the chops, and the pre-notice interest.
So let’s have a Rule 155 beancount and numbercrunch.
José M. Curet echoes Steven Sondheim’s words from sixty years ago in 2016 T. C. Memo. 138, filed 7/25/16.
José was a self-employed consulting engineer who resided in Puerto Rico throughout the year at issue. He paid income tax timely to the Commonwealth, but never paid SE. José said he didn’t owe any US tax, only Puerto Rico tax.
“Petitioner argues that he was not subject to any U.S. tax for 2010 because he was a resident of Puerto Rico. Petitioner had net earnings from self-employment as evidenced by his Schedule M that he filed along with his Form 482.0. Although he was a resident of Puerto Rico during 2010, per section 1402(a)(6), petitioner was not exempt from U.S. self-employment tax. We conclude petitioner is liable for self-employment tax.” 2016 T. C. Memo. 138, at pp. 4-5.
As for additions and chops, “Respondent [IRS] has shown, and petitioner does not dispute, that petitioner failed to pay his Federal income tax obligations for 2010. Respondent has established that the Secretary prepared a substitute for return for 2010 that satisfies requirements of section 6020(b) by providing a Form 4549-A, a Form 886-A, and a Form 13496 for tax year 2010. See Cabirac v. Commissioner, 120 T.C. at 170-172. Respondent has met the burden of production.” 20156 T. C. Memo. 138, at p. 6.
José claims he talked to a Puerto Rican tax adviser, but same doesn’t testify. So no evidence adviser had any qualifications, or had all the information, or that José relied in good faith.
Torgeir Mantor isn’t lucky with his notes. We ran into him back in 2014; see my blogpost “A Sour Note,” 9/3/14. Now he’s doing a reprise with American Metallurgical Coal Co. And Subsidiaries, 2016 T. C. Memo. 139, filed 7/25/16. AMC is mixing-and-matching with a Liberian outfit (Lausanne) and an AMC subsidiary (Heimdal).
They’re running a CA geothermal deal, and Torgeir was VP of AMC. But Heimdal had to restructure when the US-Netherlands Antilles treaty ran out. Plus, they needed to keep within the bounds of financing covenants with third-party lenders. And they needed to funnel the profits offshore without paying US withholding.
Wherefore much corporate wheeling-dealing followed, in aid of which Torgeir and crew signed up a US Big Four partner, but no formal opinion was issued, and some of the advice (like annual statements of ownership) didn’t get followed.
The funnel was (you guessed it) a note, for a sale of partnership units from one sub to another.
Judge Cohen looked at the note.
“For a promissory note to constitute bona fide indebtedness, there must be an unconditional legally enforceable obligation to pay the money. Horn v. Commissioner, 90 T.C. 908, 938 (1988). The ‘simple expedient of drawing up papers’ is not controlling for tax purposes when “the objective economic realties [sic] are to the contrary.” Frank Lyon Co. v. United States, 435 U.S. 561, 573 (1978).” 2016 T. C. Memo. 139, at p. 22.
After a quick peek at twelve (count ‘em, twelve) factors, none of which is dispositive and some of which are more equal than others, Judge Cohen strikes up facts and circumstances (Sir Ed Elgar should get royalties).
And Judge Cohen, with an eye to the future, cuts to the chase.
“The real issue for tax purposes has long been held to be the extent to which the transaction complies with arm’s length standards and normal business practice. The various factors are only aids in answering the ultimate question of whether there was ‘a genuine intention to create a debt, with a reasonable expectation of repayment, and did that intention comport with the economic reality of creating a debtor-creditor relationship?’ The form of the transaction and the labels the parties place on the transaction may not have as much significance when the parties can mold the transaction at their will. The Internal Revenue Service recently released proposed regulations in an attempt to bring clarity and consistency to the analysis of distinguishing between indebtedness and equity investments. See Notice of Proposed Rulemaking, 81 Fed. Reg. 20912 (Apr. 8, 2016). Because the transaction at issue in these cases took place more than 20 years ago, we mention these regulations for posterity’s sake only.” 2016 T. C. Memo. 139, at p. 24. (Citations omitted).
This was an equity investment disguised as a loan. There was no negotiation, Torgeir and crew were on all sides of the table, and the only aim was not to pay tax. This went beyond the deal driven by economic or regulatory realities, but devised in a tax-efficient manner, which is OK.
Economic substance, fellas. Arms’-length dealing.
Unfortunately, Torgeir doesn’t dodge the chops, as he did in my blogpost aforementioned.
Takeaway—If you’re doing notes, make them real. Tell ‘em Torgeir sent you.
I take my subtitle from the 1917 poem that Strickland Gillilan used to introduce same to lovers of verse.
You remember John and Joan Finnegan, induced to fiscal sin by the fraudster Howell. If not, see my blogpost “The Fraudster’s Toolbox,” 6/17/16.
Now my blogpost aforementioned dealt with Howell’s skullduggery, but the Finnegans came unglued over the SOL. The standard three had run. IRS claimed unlimited due to Howell’s fraud; IRS never claimed that the Finnegans were fraudsters.
The Finnegans lost when trial counsel admitted that the return, not the Finnegans, was fraudulent.
Comes now a very well-known law firm, which I shall call The Jersey Boys, and moves to reargue. They kindly sent me their motions papers, which I read.
They rely on a USCFC decision, upheld by USCA Fed Cir. The upholder is BASR Partnership v. USA, No. 2014-5037 (7/29/15), which hadn’t been published when Finnegan was argued back in 2014.
Note again that it took nearly two years after trial for an opinion. Justice delayed is…but you know the rest.
BASR says that fraud, whether for imposition of the 75% chop or keeping SOL alive indefinitely, must be the taxpayer’s fraud, not the preparer’s. In doing so, Fed Cir deftly sidesteps poor old Ray Fouche (as to whose sad story see my blogpost “The Cover-Up – Uncovered,” 4/24/13). But Ray was in 2 Cir.
The Finnegans, being Floridians when they petitioned, are Golsenized to 11 Cir. And 11 Cir. doesn’t seem to have ruled on the issue.
I once again point out how ridiculous it is that the one Federal statute that affects more people, both US citizens and non-citizens, than any other; which moreover is a minefield in the middle of a toxic waste site, where even those highly-educated who have spent their working lives dealing with little else can come disastrously to grief; is most often adumbrated by non-specialists on a purely geographical luck-of-the-draw. There has to be a National Tax Circuit Court of Appeals, and the bench has to be comprised of specialists.
Back to business. You can read BASR for yourselves, and the taxpayers (a Jenkens-and-Gilchrest client; I’ll say no more) are sympathetic. As, I’m sure, are the Finnegans.
But the Fed Cir majority seems to think that taxpayers employ preparers only for complex returns. The statistics are overwhelmingly the other way. The tax prep industry is huge, and largely unregulated; Doug Shulman’s abortive efforts went down in well-publicized flames. And apparently Congress doesn’t feel moved to do anything. Wherefore in the Wild West atmosphere of tax prep, where the key to success is “I’ll get ya a big refund” and where the first casualty is the usual, no one should be surprised that there’s a big premium on fast-and-loose. And the revenue losses have to be enormous.
The taxpayer chose the fraudster. The rest of us taxpayers didn’t.

References: § 6213
 § 7502
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