Source: https://taishofflaw.com/2013/10/
Timestamp: 2019-04-26 00:04:36+00:00

Document:
I really hoped for a good case out of Tax Court today; perhaps one, if not scary, at least evocative of ghouls, ghosts, goblins and the brigade of frighteners who make the day what it is.
What we have is an eager entrepreneur who, notwithstanding one IRS audit and a couple of State audits (California, where else?), persisted in making cash withdrawals from his one corporate account, not reporting income and trying to stonewall two Revenue Agents. Oh, and he was late eight of ten years in his filings. I do not recommend this course of action.
You can read all about it in Rodney Eric McClellan, 2013 T. C. Memo. 251, filed 10/31/13, as Judge Laro gives Rod the Grand Chop, 75% fraud penalty. I really hoped for some more elaborate scheme, involving offshore tax-indifferents, trusts, LLCs, loans from offshore banks with “Hypotheken” thrown in somewhere, and high-priced lawyers and accountants dancing the Highland Fling through the IRC, but not today.
Rod’s basic maneuver was the “joint check”. Rod was a drywaller. This is a construction trade that puts up gypsum board, wallboard and similar materials. The general contractor would write a check payable both to Rod and to the gypsum board supplier who sold Rod the materials, to make sure they both got paid and wouldn’t file liens.
Apparently out in the Great Wide Open a supplier’s or tradesperson’s lien trumps the building loan mortgage from Day One, unlike back East here.
So Rod would get the GC to write the joint check to Rod and the supplier, but only for enough to cover the materials supplied. The GC would then give Rod a check drawn to Rod only for the non-material portion of the required payment. Rod would sign over the material check to the supplier, then deposit his check and take out cash. He’d pay his employees and ICs partly by check and partly by cash. Of course, he deducted the supplier’s bill from his check, notwithstanding the supplier had already been paid. And he carefully avoided payroll taxes on the cash payments he made to his employees.
Shows some inventiveness, but unravels really fast.
And the only designated hitter is STJ Daniel A. (“Yuda”) Guy going through some allegedly privileged documents IRS’ counsel prepared in the Eaton Corporation case, and letting Eaton Corporation’s counsel take a peek at a redacted version of one of them. If document discovery is your thing, and if governmental deliberative and pre-decisional processes make your day (no accounting for tastes), it’s Eaton Corporation and Subsidiaries, Docket No. 5576-12, filed 10/31/13.
And see my blogpost “Advance and Retreat”, 6/26/13, for background.
The old tennis player’s truism proves true for John D. Moore and Julia A. Smith, f.k.a. Julia A. Moore, in 2013 T.C. Memo. 249, filed 10/30/13.
John started as a humble CPA, but kept on truckin’, until he worked his way up to be president of Peterbilt. Anyone who’s ever driven an Interstate knows what a Peterbilt is. As reward for John’s loyal service, he got to buy 5% of the family Sub S for $241K, which he paid for.
Later on, Peterbilt merged with another outfit, in the course of which Peterbilt granted stock to the stockholders of the mergee. When the mergee stockholders wanted to sell their Peterbilt stock, the family wanted the stock in safe hands. Whom else but trusty John should hold the family jewels?
So Peterbilt lent John the $5 million against his promissory note, on which he was personally liable. They tinkered with the terms after the loan and stock purchase, but John remained on the hook.
Two years down the road, John having paid Peterbilt zippo, John sues Peterbilt, claiming mutual mistake as to the value of the stock he bought, if he knew the facts he never would have paid $5 million for stock worth $1 million, etc.
They settle, and John gets off the hook for all but $1 million. On top of which, John’s brilliant accountant, Catherine Fox from BDO, gets John off the COD (cancellation of debt) hook by claiming good faith dispute (see my blogpost “Blogger’s Holiday”, 7/4/13). IRS buys it.
Fast forward three years. John unloads his stock for $3 million and claims a $1.5 million capital loss, resulting from his alleged $5 million basis. Catherine dreamed that one up, and I give her a Taishoff “good try”; basis consisting of relieved debt plus real cash really is creative.
Unfortunately for Catherine and John, Ch J Thornton isn’t buying it. To compute gain on sale of a capital asset, start with cost. As this is Sub S stock, Section 1367 adjustments must be made, but we’ll skip that for now, as Ch J Thornton does. IRS claims $1 million, because that’s what the stip settling John’s lawsuit said.
“Although cost basis generally equals the price paid for property, irrespective of its actual value, this rule might not apply ‘where a transaction is based upon “peculiar circumstances” which influence the purchaser to agree to a price in excess of the property’s fair market value.’” 2013 T. C. Memo. 249, at p. 10 (Citation omitted).
John and Catherine claim that the loan was a separate transaction from the stock purchase, but this goes nowhere. John claimed in his lawsuit that he bought the stock with money Peterbilt lent to him. The money was paid directly to the selling stockholder, and John couldn’t have done anything with the money.
It was as if Peterbilt bought the stock and sold it to John. Thus, when John and Peterbilt settled their lawsuit, it was as if Peterbilt gave John a reduction in the purchase price of the stock. Anyway, it was not an arms’-length deal, and Peterbilt never expected to be paid $5 million.
“Petitioners also point to the fact that the IRS’ examination of their 2002 tax return resulted in a determination that the agreed judgment did not give rise to cancellation of indebtedness income for them because the amount of the debt was in dispute. This circumstance, however, supports rather than undermines our conclusions. The determination that petitioners had no cancellation of indebtedness income for 2002 is consistent with our view that Mr. Moore’s original debt… was not absolute and that the actual amount of the debt was the $1 million ultimately reflected in the agreed judgment. To permit petitioners a basis in the … stock reflecting the nominal purchase price of the stock… without realizing any cancellation of indebtedness income as a result of the agreed judgment would result in an unjustified tax windfall to petitioners.” 2013 T. C. Memo. 249, at pp. 21-22 (Names omitted).
But John did buy $241K of basis in the 5% of the stock he bought before the shenanigans started, and IRS didn’t give him that, so Ch J Thornton does.
You want basis, you have to buy it. Earn your way to the net.
And John’s reliance on Catherine gets him off the hook for penalties, although I suggest re-reading my blogpost “OPIS Finis”, 1/18/12. While Catherine and BDO weren’t promoters of the deal, it certainly sounds too good to be true, and John was a CPA and president of a heavy-duty corporation, a savvy businessman.
Well, Judge Cohen is confronted with a different kind of elephant in John T. O’Donnell and Ellen J. Norris O’Donnell, 2013 T. C. Memo. 247, filed 10/29/13.
Although Judge Cohen confirms Appeals’ denial of Dr. John’s and Ellen’s proposed installment agreement on other grounds, namely, that Dr. John and Ellen had funneled money to Dr. John’s stepson, that Dr. John’s and Ellen’s living expenses exceeded the local IRS norms, and that Dr. John’s and Ellen’s counsel had been dilatory in furnishing information to the SO, there remains one distinguishing feature in this case.
Dr. John’s and Ellen’s counsel furnishes the SO with a billing statement for its legal fees, which includes this gem: “preparation for meeting with clients. Prepared outline. Meeting with Dr. and Mrs. O’Donnell – reviewed all calculations and explained that bankruptcy is the only total solution to the problem but they need to wait before filing. We will try to reach a settlement at the CDP hearing to tide them over for one year or some portion thereof, and then file an Offer in Compromise based on a bankruptcy which should hold off IRS collection for another year or more.” 2013 T. C. Memo. 247, at p. 8.
The SO tells counsel it’s obvious you’re stalling, Dr. John and Ellen are funneling money out of their accounts to stepson, they’re over the allowable living expense limits, so I confirm.
Dr. John’s and Ellen’s counsel claim the SO misinterpreted the billing statement. I will not discuss whether litigation strategy should be discussed in a billing statement; or whether, even if it is appropriate, why anyone would furnish that information to one’s adversary.
Judge Cohen: “Petitioners in their brief suggest interpretations of the billing records containing discussion of bankruptcy strategy different from those drawn by the settlement officer in his notes. They contend that bankruptcy was intended only as an option, not as something intended to be done after time had passed to make more of their liabilities subject to discharge. This argument is apparently intended to counteract a question from the settlement officer concerning their sincerity about paying their Federal tax liabilities. There is no evidence in the record supporting petitioners’ explanation, and the settlement officer’s interpretations are not unreasonable. (His interpretation was validated by what subsequently occurred in this case.) In any event, the notice of determination does not rely on a subjective reaction to the billing records.” 2013 T. C. Memo. 247, at pp. 15-16.
Takeaway from my 600th blogpost: Counsel, save the strategy discussions for letters marked “CONFIDENTIAL – PRIVILEGED – MATERIAL PREPARED FOR LITIGATION.” And let the bills say as little as reasonably possible.
Remember Donald R. Fitch and Brenda T. Fitch, now playing in 2013 T. C. Memo. 244, filed 10/28/13? No? Neither did I, until I looked them up; there they were, or at least The Donald was, in my blogpost “Practicing Accountancy Can Be Hazardous to Your Health”, 12/26/12. There, IRS accused The Donald and his colleague Mark of playing give-and-go with The Donald’s CPA practice, but Judge Vasquez gave them a bye, saying The Donald couldn’t have manufactured a brain aneurysm and Mark a seizure, just to get a 15-year life to depreciate intangibles.
But The Donald’s and Brenda’s real estate wheeling and dealing were left for the Rule 155 beancount. So back they go to Judge Vasquez, as The Donald and Brenda claim their separate businesses should be aggregated for SE purposes.
Ordinarily, when spouses each have their own business, each files a separate 1040-SE for each business, and they cannot net profit and loss between their businesses for that purpose. But The Donald and Brenda are residents of The Bear Republic, and that’s community property country.
However, since the Social Security Protection Act of 2004, even in community property jurisdictions, if one spouse runs the show, then the income may be community property, but the SE tax falls to the operating spouse, and there’s no sharing with the other.
Brenda ran a real estate brokerage, and that’s the key to the case. She held the licenses, kept her own books (even though The Donald set up her website and maintained her Quicken software), ran around to find listings and make deals; and the fact they discussed business at the dinner table doesn’t help. Though The Donald and Brenda want a hearing on what she did, that’s not necessary.
Remember The Donald was recuperating from the brain aneurysm, and playing put-and-take with Mark, during the years at issue, so he could only work part-time, and that’s murderous for a single-shingle, so his accountancy practice lost a ton of money.
Brenda was keeping the ship afloat, so she had real income. And real SE tax to pay.
It’s easy to second-guess. That activity is on the Top Ten Indoor Sports List. And we’ve all messed up, sometimes really big. So I’m not naming names when it comes to the attorney who gets this footnote in Kathleen S. Simpson and George T. Simpson, 140 T. C. 10, filed 10/28/13: “We do not express any opinion as to whether Mr. X’s assessment was supported by the facts and the law underlying Ms. Simpson’s FEHA claims.” 2013 T. C. 10, at p. 8, footnote 3. (Name omitted). FEHA is California’s Fair Employment and Housing Act. And the Judge here is Judge Laro.
This case is noteworthy in that it applies the revised Section 104(a)(2) physical injury exclusion from income to a settlement otherwise than one arising from a tort or tort-like claim. Here, the claim is in the nature of a Workers’ Comp award, although it fails characterization as a Workers’ Comp for want of statutory compliance.
But in any event, whatever was settled (and it’s by no means clear what the payor thought they were settling, and that’s the test), it wasn’t the classic slip-and-fall or pedestrian-knock-down. Lost wages were in the mix, as were emotional harm, counsel fees and court costs (the latter two items being deductible but not excludable).
The problem is that Kathleen testified she had real physical problems arising directly from work. She had become a turnaround specialist for Sears, who sent her to manage a problem store that was three hours from her home, where the whole staff had been fired and replacements had less than a year of experience. She was working 60-hour weeks and lifting merchandise, to help out. She hurt her shoulder, she says, but the best the medical evidence she could produce claimed clinical depression, irritable bowel syndrome, and fibromyalgia.
Though she complained and asked for a transfer, Sears did nothing except fire her.
Catherine sues, but Sears gets summary judgment on two causes of action (neither of which mentions direct physical injuries), and based on the surviving third cause of action, her attorney, Mr X, negotiates a settlement based on Sears’ failure to give Kathleen a Workers’ Comp claim form when they can her. Though the settlement might qualify for treatment as a Workers’ Comp claim, Mr X doesn’t file or get it signed-off by the CA Workers’ Comp Board, so it fails the Section 104(a)(1) test. “Ms. Simpson never filed a workers’ compensation claim, and Sears and Ms. Simpson never submitted the settlement agreement to the California Workers’ Compensation Appeals Board (WCAB) for the approval required under Cal. Lab. Code sec. 5001 (West 2011). Mr. X was not aware of the approval requirement.” 2013 T. C. 10, at p. 10 (Name omitted).
Mr X, while stating he is not a tax attorney, does tell Kathleen “(D)ue to the nature of the claim that was settled, although I am not Ms. Simpson’s tax adviser, I understand that the settlement proceeds should not be considered taxable.” 2013 T. C. 10, at p. 11.
So Kathleen didn’t, but IRS said she should have, and gave her a SNOD for the whole $250K settlement (actually $262,500, but the $12,500 for lost wages she did report).
Kathleen and Mr X both credibly testify they meant to settle something to do with physical injury Kathleen sustained on the job. But noncompliance with the filing and sign-off requirement means that the settlement wasn’t a Workers’ Comp settlement. You have to fulfill the requirements, as I said in an eponymous blogpost, and Section 104(a)(1) requires statutory compliance.
But the 2012 amendment to Reg. 1.104-c comes to the rescue. As long as the injury is physical, it need not be based on tort or-tort-like conduct, or be statutorily-based.
Catherine gets her physical injury exclusion, based on 10% of her net award. The Court can’t do better than that “‘(B)ecause the record before us is not susceptible of any precisely accurate determination’ of the extent to which the settlement was attributable to Ms. Simpson’s personal physical injuries and sickness, we use our best judgment and find that 10% of the settlement payment of $98,000 was made on account of those physical injuries and physical sickness (other than emotional distress).” 2012 T. C. 10, at p. 27.
So Kathleen can exclude $9800, owes tax on the remaining $88,200, but can deduct the $152,000 in legal fees and court costs she paid to get it. IRS concedes the Section 62(a)(20) discrimination legal fees deduction, quibbles about the court costs, but Kathleen’s and Mr X’s candid testimony carry the day.
I won’t comment here on the proportion of fees and expenses to Catherine’s ultimate recovery.
Take away for PI lawyers– Please please please read and re-read Section 104 and the regulations. When you draft your settlement stip, beware of the Scylla of ambiguity and the Charybdis of unsupportable precision found in Healthpoint Ltd. (see my blogpost “An Unsettling Settlement,” 10/3/11). And don’t give tax advice, unless, of course, you’re competent to do so.
Indefatigable readers of my blog will remember the Unsinkable Virginia V. Kite, star of 2013 T. C. Memo. 43, filed 2/7/13, whose annuity sale to her three kids got a stellar review from Judge Elizabeth Crewson Paris; see my blogpost “No’ Deid Yet”, 2/7/13, for more about the canny Virginia’s unloading of the income interest from her late husband Petroleum Jim’s QTIP trust to the three Kite Kids.
Well, came the beancounters, and IRS comes in with the $816K for the non-income interest, while the Kite Kids claim zero. They claim Judge Paris decided that Virginia got paid for whatever she relinquished.
No, says IRS, and “no” says Judge Elizabeth Crewson Paris, in Estate of Virginia V. Kite, Donor, Deceased, Bank Of Oklahoma, N.A., Executor/Trustee, Docket No. 6772-08, a designated hitter filed 10/25/13.
Section 2519 says if the donee of a QTIP trust relinquishes all or any part of their interest in the trust, they relinquish all. And Virginia couldn’t sell the remainder interest, which is what the non-income interest is, because it didn’t belong to her. And it wasn’t a gift from Petroleum Jim to the remainder beneficiaries when created, because it was a future interest. Therefore, it only gets taxed at the time the donee spouse’s estate is taxed, because the spousal “exemption” from estate tax is not really an exemption, but a deferral. First spouse to die can bequeath property in trust or directly to survivor, but when survivor dies, the property gets taxed.
Allowing the sale deal here takes the non-income property out of the survivor’s estate, so it never gets taxed, and that doesn’t go.
IRS claims you can’t raise these issues in a Rule 155 beancount, and Judge Elizabeth Crewson Paris agrees. But “Respondent [IRS] argues that petitioner’s objections are all new issues and are therefore waived. Notwithstanding respondent’s position, the Court will address petitioner’s objections without making a determination as to whether petitioner raised new issues in order to resolve any misunderstanding of the Memorandum Findings of Fact and Opinion.” Order, at p. 5, footnote 4.
But just to make sure, and notwithstanding the foregoing, Judge Elizabeth Crewson Paris drives the lesson home: “Generally, new issues may not be raised in a Rule 155 proceeding. Rule 155(c); Harris v. Commissioner, 99 T.C. 121, 123 (1992), aff’d, 16 F.3d 75 (5th Cir. 1994). Rather, issues raised in a Rule 155 proceeding are limited to ‘purely mathematically generated computational items’. Id. (quoting The Home Group, Inc. v. Commissioner, 91 T.C. 265, 269 (1988), aff’d, 875 F.2d 377 (2d Cir 1989)). The Court has considered the parties’ arguments and, to the extent the parties raised new issues, the Court finds that they are precluded by Rule 155(c).” Order, at p. 11.
Sec. 199’s largesse to producers, manufacturers, extractors and growers who do their several things in the USA gets a thorough going-over from that formerly-whimsical judge, Judge Wherry (apparently duly chastened by the acerbic remarks of Judge Posner in the Seventh Circuit; see my blogpost “There Goes The Neighborhood”, 9/3/13, for details).
The taxpayer is ADVO Inc. & Subsidiaries, 141 T. C. 9, filed 10/24/13. ADVO is a junk mailer, who solicits businesses for advertising, creates (or takes the businesses’ own) advertising, fiddles with it some, and sends it to contract printers, gets it back, stuffs it in packages, and drops it on the USPS, who in turn drops it on you.
If you want to learn a lot more about computer-generated advertising, web-offset printing, and how junk mail is packaged and winds up in your trashbarrel (with a side trip to your mailbox) than you ever wanted to know, read Judge Wherry’s guide.
The bottom line, of course, is who gets the Section 199 3% tax break. And that depends upon who owns the thing produced, manufactured, grown or extracted. And that depends upon who has the benefits and burdens that accompany ownership, whatever the papers say.
And that in turn depends upon Treasury guidance, IRS preambles, regulations and Mayo deference vs. Skidmore deference. You remember Mayo deference right now is the top: regulations made pursuant to Congressional statutory authorization directed to the proper twig on the Executive Branch. Skidmore deference (citation omitted, but Judge Wherry has much to say about it) is the lowest. If Mayo deference is the equivalent of “Aye aye, sir” and salute the quarterdeck, then Skidmore is the equivalent of “yeah, ok”, ranking just above “meh”.
So there follows the faceoff between the 263A benefits and burdens test, which IRS discountenances here and Judge Wherry agrees, and the stricter Section 199 test. You remember Section 263A requires capitalization of production costs, and in such production (or manufacturing, extracting or growing) there may be more than one party incurring such costs and bearing the burdens (and getting the benefits) of its role in the process.
But IRS says though there may be many claimants to Section 199 largesse, only one gets the prize. And it’s all facts and circumstances, as Sir Eddie Elgar might say.
At last, after unpacking each phase of the process, from idea on the back of a paper napkin to the “clunk” of junk in your mailbox, ADVO’s contracts with the printers, and noting that one of ADVO’s contract printers testifies he already took a Section 199 deduction (and I’ll bet someone suggested to him strongly that his testimony might help with the audit), Judge Wherry trashes ADVO. And the amici curiæ who plead the Section 263A test are left holding the bag.
STJ Daniel A. (“Yuda”) Guy has an example of inventive ambiguity in a small-claimer, Jeffrey J. Furnish, 2013 T. C. Sum. Op. 81, filed 10/23/13. For a similar tale, see my blogpost “Ambiguity Is The Best Policy”, 8/23/12.
JJ furnished himself (sorry, guys) with two life insurance policies 40 years ago, while a 20-year old college student, from The Quiet Company, Northwestern Mutual Life Insurance Company (NML).
Of course, these had the usual premium loan from accumulated cash values rider. And JJ stopped paying long ago. But the loans just kept on coming quietly, until finally The Quiet Company bangs JJ with about $50K in deemed distributions, when the cash value is finally exhausted and Section 72(e)(1)(a) kicks in.
JJ spars with The Quiet Folks, gets endless series of numbers, but they don’t tie in. He asks for the whole set of calculations from the get-go, but those go back 40 years and The Quiet Guys won’t provide them.
JJ files two 1040s for the year at issue, one with the deemed distribution, one without, and includes a written statement of his fight with Northwestern. He then tries to deal with Appeals, gets neither a hearing nor relief, invokes the Taxpayer Advocate, ditto, and finally winds up petitioning the SNOD laid on him by virtue of his not paying tax on the $50K.
STJ Yuda: “When NML determined that petitioner’s insurance policies had lapsed, it applied the cash values of the policies to the outstanding balances on petitioner’s loans. As we have explained in numerous cases, the act of applying the cash value of a life insurance policy against an outstanding loan is not different from distributing the proceeds to the taxpayer (including the untaxed inside buildup) to permit the taxpayer to use the proceeds to pay off the loan.” 2013 T. C. Sum. Op. 81, at p. 11.
And the taxpayer has the burden of proof for most arithmetic issues, except that here NML blew the numbers when it gave JJ the 1099-R. Where there is a reasonable dispute with information furnished by a third party, and the taxpayer cooperates with IRS, the burden shifts to IRS per Section 6201(d).
JJ may be hairsplitting, but there’s enough hair to cause STJ Yuda to throw the ball into IRS’ court. “Although petitioner points to relatively minor discrepancies in NML’s records, we agree with petitioner that the discrepancies are of such a nature that their cumulative effect, compounded over the extended terms of the policies in question, would likely be significant and could very well alter the dates that the insurance policies lapsed.” 2013 T. C. Sum. Op. 81, at pp. 14-15.
Well, what about cooperation, asks IRS. IRS claims JJ raised this stuff on the eve of trial.
No, says STJ Yuda, y’all knew about this long ago. “Respondent [IRS] did not present any evidence that petitioner failed to respond to reasonable requests for information. Considering petitioner’s detailed communications with IRS personnel before and after the notice of deficiency was issued and the fact that he apparently was not given the opportunity to discuss the matter with the Appeals Office, we conclude that petitioner fully cooperated with respondent within the meaning of section 6201(d).” 2013 T. C. Sum. Op. 81, at p. 15.
IRS claimed they produced reasonable and probative evidence of the date when the policies lapsed and the deemed distribution was made, but all they had was the same stuff JJ claimed was erroneous, and unlike prior cases, IRS never produced the whole detailed loan history from Day One to the present.
Thus, insufficient evidence to sustain the tax on the deemed distribution.
Takeaway- If you ever get one of these, practitioner, go over the numbers from the insurance company. Then go over them again. Have you got the whole history? What should you do if you don’t?
But here’s an order to bring a grin even to my battered old face. It’s Carl W. Cox & Vicki S. Cox, Docket No. 9630-13, filed 10/22/13.
Carl and Vicki are Mr. & Mrs., obviously. Carl got the SNOD and Vicki got nothing. Both petition.
IRS, of course, moves to dismiss as to Vicki: no SNOD, no ticket to Tax Court.
Carl and Vicki object. Ch J Thornton: “…the Court received correspondence from petitioners…, objecting to the granting of the motion because petitioners ‘have the right to file a joint return and share the debt if any is owed’.” Order, at p. 1.
“For better or for worse, for richer or for poorer”–you know the rest, but that’s Carl and Vicki’s story, and they’re sticking to it.
Ch J Thornton can’t be a defender of marriage; Congress won’t let him.
“The Tax Court is a court of limited jurisdiction, and we may exercise that jurisdiction only to the extent authorized by Congress. This Court’s jurisdiction to redetermine a deficiency depends on the issuance of a valid notice of deficiency and a timely filed petition. The fact that petitioners may be eligible to elect a joint filing status when submitting Federal income tax returns does not change this requirement.” Order, at p. 1 (Citations omitted, but they’re the usual, off-the-rack).
No dice, Vicki. Carl’s on his own.
Dashiell Hammett’s words, spoken by Sam Spade (and the sound is pure Bogart).
That’s the story in two small-claimers from 10/21/13, a day when the floodgates opened at Tax Court, inundating us bloggers, so I’m a day late but hopefully not short.
Two very different stories, though, one from STJ Lew (“Spell It Right”) Carluzzo, the other from STJ Daniel A. (“Yuda”) Guy. Both involve the usual unsubstantiated deductions with paid preparers, so I’ll skip the particulars.
In Kingsley O. Ofoegbu and Anthonia Ofoegbu, 2013 T. C. Sum. Op. 79, filed 10/21/13, STJ Lew lets K.O. and Anthonia off the penalty hook thus: “Petitioners’ 2007 Federal income tax return was prepared by a paid income tax return preparer. Under the circumstances, we find that petitioners reasonably relied upon their return preparer to properly calculate and report their 2007 Federal income tax liability. See sec. 6664(c); United States v. Boyle, 469 U.S. 241, 251 (1985); Higbee v. Commissioner, 116 T.C. 438, 448 (2001); Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002); sec. 1.6664-4(b)(1), Income Tax Regs. Therefore, we hold that petitioners are not liable for a section 6662(a) accuracy-related penalty for 2007.” 2013 T. C. Sum. Op. 79, at pp. 12-13.
Huh? What circumstances? Was the paid preparer an attorney, CPA, EA, RTRP, or an experienced if unregistered type? Did K. O. and Anthonia meet the three-point test of providing full info, checking out credentials and relying in good faith on expert advice, and if they did, how? STJ Lew doesn’t say. So it depends.
On the other hand, STJ Yuda gives us the whole story in Mark Anthony Rael , 2013 T. C. Sum. Op. 78, filed 10/21/13. STJ Yuda buries Mark Anthony and does not praise him for his unsubstantiated employee business expenses (car and phone, mostly), and then comes to the penalties.
“Petitioner’s tax return for 2007 was prepared by Charlene M., an employee of H&R Block. Petitioner testified that he provided Ms. M. with calculations of the miles that he drove for business purposes. He further testified that, after Ms. M. prepared the return, he did not review the document in any detail before it was electronically filed. Ms. M. is not a certified public accountant.” 2013 T. C. Memo. 78, at pp. 6-7. (Name omitted).
Leaving aside the fact that the CPA qualification is not the only indicium of expertise in income tax, Mark Anthony fails the three-part test despite whatever credentials Ms. M. might have.
But at least STJ Yuda gives a basis for disallowing Mark Anthony’s reliance defense to the Section 6662 accuracy and understatement slams: “Although petitioner relied on a paid tax preparer, there is no evidence in the record regarding the return preparer’s experience or qualifications that would support the conclusion that petitioner’s reliance on the preparer was reasonable. Petitioner admitted that he did not carefully review the return before filing it. Taxpayers have a duty to review their tax returns before signing and filing them, and the duty of filing accurate returns cannot be avoided by placing responsibility on a tax return preparer. Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987); Magill v. Commissioner, 70 T.C. 465, 479-480 (1978), aff’d, 651 F.2d1233 (6th Cir. 1981). In sum, on the record presented, petitioner failed to show that he acted with reasonable cause and in good faith within the meaning of section 6664(c)(1).” 2013 T. C. Sum. Op. 78, at pp. 15.
String citations are fine when they’re tied into the facts of the case; but as generalizations they are unhelpful as guidance to the practitioner.
Takeaway- If the taxpayer wants to know what it takes to avoid the Section 6662 slams, your best answer is Sam Spade’s abovecited.

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