Walter D. Prezioso And Kimberly J. Prezioso, T. C. Memo. 2026-63, filed 7/28/26, provide an illustration of a definition of the term “partnership” I’ve long favored; “a partnership is where two or more people engage in business activities to steal from one another.” It’s Walt’s story; he succeeds to operating control of the business Dad and partner built, turns it around as it’s about to crater, and compensates himself by keeping two sets of books, one to allegedly defraud Dad’s partner and the other to defraud IRS, both of which contained bogus payees and omitted money Walt took. 

Walt claims he needed to disguise his payments for his own expenses to stave off disgruntled employees. “Walter maintained that he disguised his personal expenses because there was ‘a lot of talk, a lot of envy’ among GSP employees, and that, upon seeing GSP’s payment of his personal expenses, they might request a raise.” T. C. Memo. 2026-63, at p. 10.

Judge Cary Douglas (“C-Doug”) Pugh won’t wear it. “Walter asks us to accept that he laboriously recoded hundreds of expenses, often multiple times, to avoid discovery by a few employees. This explanation falls apart with the slightest scrutiny. Walter assigned his personal expenses to a different payee even when [business] incurred business expenses in the same month from the same vendor. When asked how a [business] employee could identify certain expenses as personal when the payee for his personal expenses also was an existing vendor for [business], Walter only offered that he tried to keep his practices consistent.” Ibid., at pp. 10-11.

Taishoff says, I’ve never seen a non-publicly-owned business that let any random employee look at the books. 

Besides his partner launching a shareholders’ derivative against Walt when partner’s son was turned down for a job and managed to get a sneak-peek at the books, Walt pulled the ultimate head-shaker.

“The record demonstrates that the expense arrangement represented more than a genuine attempt at tax minimization. On a credit application for a Ferrari lease, Walter understood his actual income to be far greater than that reported to the IRS; he listed both his ‘Verifiable’ income of $52,950, and his ‘Actual’ income of $275,000.” Ibid., at p. 14.

Section 6663 75% fraud chop for Walt.

Judge Rose E. (“Cracklin'”) Jenkins gives the Separate Returns Limitation Year (SRLY) rules, with their lonely parent exception and their application to an F reorg where a Section 382 loss corporation is brought onboard and then Section 332-liquidated into a directly wholly-owned subsidiary S Corp of a later-unelected consolidated group a thorough workout in HBM Holdings Company, 167 T. C. 6, filed 7/27/26.

The consols want to take the losses of the loser into the consolidated returns for the three (count ’em, three) years at issue. IRS says the SRLY rules keep the losses with the loser.

Here’s the plan.  “Effective July 1, 2018, HBM ceased to be an S corporation pursuant to a revocation of its S corporation election filed pursuant to section 1362(d)(1)(A). Accordingly, the QSSS status of four of its subsidiaries—MLCO, Aerofil Technologies (Aerofil), FLCO, Inc. (FLCO), and Schafer Industries, Inc. (Schafer)[Founding Members]—ceased, effective July 1, 2018. In addition, Delavau [loser] filed an entity classification election pursuant to Treasury Regulation § 301.7701-3(c) to be disregarded as separate from HBM, effective July 1, 2018. Under Treasury Regulation § 301.7701-3(g)(1)(iii), this election caused Delavau to be deemed to liquidate into HBM at the close of business on June 30, 2018. The parties agree that sections 332 and 381 apply with respect to this deemed liquidation. Under section 381, HBM succeeded to, and was required to take into account, Delavau’s NOL carryovers, which amounted to $108 million at the time of liquidation. The parties agree that the deemed liquidation was not a reverse acquisition within the meaning of Treasury Regulation § 1.1502-1(f)(3).” 167 T. C. 6, at p. 3.

To keep a consolidated group from roping in a loser and using those NOLs to write off their own income, the NOLs are available only for years the loser is in the group; the old stuff are SRLYs (Separate Return Limitation Years). There can be subgroups, some but not all of the members of the consol, and they can use the NOLs. “However, under the ‘lonely parent rule,’ an SRY [Separate Return Year]  of ‘the corporation which is the common parent for the consolidated return year to which the tax attribute is to be carried’ is not an SRLY. There are two exceptions to the lonely parent rule, which respondent acknowledges are not relevant here. The lonely parent rule allows the common parent to apply NOL carrybacks or carryovers from its SRYs without regard to the SRLY NOL limitation.” 167 T. C. 6, at p. 5. (Citation omitted).

One exception, irrelevant here, is detailed at 167 T. C. 6, at p. 5, footnote 4, but I’ll spare you. 

Clear? Thought not. But Judge Jenkins knocks out the NOL carryforward anyway. Delavau is a predecessor of HBM, as HBM says, but that doesn’t help them.

” The Delavau NOLs all arose in tax years of Delavau for which it filed a separate return, i.e., its SRYs. See Treas. Reg. § 1.1502-1(e). Because it is a predecessor of HBM, its SRYs constitute SRLYs under the general SRLY definition. See id. para. (f)(1). None of the three SRLY exceptions applies with respect to the Delavau SRYs because Delavau is a predecessor that was never a member of the group. See id. subpara. (2). Accordingly, the Delavau SRYs are SRLYs.” 167 T. C. 6, at p. 10. (Footnote omitted).

And subgrouping doesn’t help either.

“…petitioner misunderstands the purpose of the SRLY subgroup rules. Their purpose is not to aggregate income from ‘related’ entities in general; it is to preserve aggregation for continuously affiliated corporations. The SRLY subgroup rules provide a narrow exception to the SRLY limitation designed to preserve ‘single entity’ treatment for members that move together from one affiliated group to another. See Consolidated Returns—Limitations on the Use of Certain Losses, Deductions and Credits, 56 Fed. Reg. 4228, 4229–30 (Feb. 4, 1991). If not for the SRLY subgroup rules, an NOL carryover carried from the former group by one member would no longer be permitted to offset the income of the other member, even though the two members had been continuously affiliated with each other. Id. at 4229. However, continuous affiliation is a key requirement.” 167 T. C. 6, at p. 12.

So HBM can’t hang on to Delavau’s losses, because HBM had no separate-entity income during years at issue and the others in this conglomerate weren’t there with Delavau.

“…,a consolidated group is generally permitted CNOL [Consolidated NOL] deductions on the basis of NOL carryovers of a member (including potentially the member’s predecessors and successors) arising in an SRLY only to the extent of the group’s consolidated taxable income attributable to that member. See Treas. Reg. § 1.1502-21(a)(1), (c)(1)(i), (f)(1). Because HBM had no taxable income on a separate entity basis for its short tax year ending December 31, 2018, through the 2021 tax year, its NOL carryovers arising in an SRLY cannot be taken into account in the HBM group’s CNOL deductions for the years at issue. And because the Founding Members  do not constitute an SRLY subgroup, their taxable income cannot be taken into account in determining the amount of NOL carryovers included in the CNOL deduction. Accordingly, because the Delavau NOL carryovers arose in an SRLY, they cannot be included in the HBM group’s CNOL deductions for the years at issue. Therefore, the CNOL deductions claimed by the HBM group for the years at issue are not allowed.” 167 T. C. 6, at pp. 12-13.

As Mark Twain remarked “Well you’ve got to admire men that deal in ideas of that size and can tote them around without crutches.” Judge Rose E. (“Cracklin'”) Jenkins is the equal of all of them.

The old Social Security double taxation argument (“my wages were taxed with my FICA contributions, and now I’m taxed on my SS distribution”) gets shot down yet again in Charmaine A. Gray, T. C. Memo. 2026-61, filed 7/27/26. In a footnote, yet. 

Judge Jeffrey S. (“Schwer”) Arbeit: “Petitioner’s argument that the taxation of SS benefits constitutes “double taxation” because she previously paid Social Security taxes on her wages is unavailing. Congress expressly provided in section 86 that SS benefits may be subject to incometax when a taxpayer’s income exceeds certain thresholds. Moreover, petitioner’s assertion that taxing SS benefits is unconstitutional has long been rejected by numerous courts. See, e.g., McAdams v. Commissioner, 118 T.C. 373, 379 (2002) (“We have repeatedly held that section 86 does not suffer any constitutional infirmities.”); Clark v. Commissioner, T.C. Memo. 1998-280, slip op. at 5, aff’d, 187 F.3d 641 (8th Cir. 1999) (unpublished table decision); Roberts v. Commissioner, T.C. Memo. 1998-172, slip op. at 6, aff’d, 182 F.3d 927 (9th Cir. 1999) (unpublished table decision); see also Kelley, T.C. Memo. 2021-2, at *8–10 (rejecting constitutional challenge to section 86(c) and concluding that Congress had a rational basis for filing status distinction, even if the resulting tax treatment may appear inequitable).” T. C. Memo. 2026-61, at p. 4, footnote 4. For the backstory on Kelley, see my blogpost “Constitutionally Speaking,” 1/11/21.

And Judge Arbeit obliges with an example of how to compute taxable Social Security benefits at pp. 4-5, much better than IRS’ infernal Social Security Benefits  Worksheet – Lines 6a and 6b. See T. C. Memo. 2026-61, at pp. 4-5.

Lawrence Hubbard, T. C. Memo. 2026-62, filed 7/27/26, is a versatile fellow, “sometimes self-employed working as a barber, a musician, and a chef.” T. C. Memo. 2026-62, at p. 2. But his claimed business income and deductions lack substantiation, he fails to report unemployment compensation (though he claims to be victim of a fraud, he notified his bank but did not show he notified CA EDD of any fraud. STJ Peter (“HB”) Panuthos recognizes the difficulty of a taxpayer proving s/he did not receive income, but Hubbard didn’t show what happened to his fraud claim. “Information as to the outcome of the claim would have been useful for the Court to make a finding based on conclusions reached by the payor of the unemployment benefit. Petitioner did not provide any other relevant documentation for the year in issue and, instead, provided evidence of unemployment compensation received for a different tax year. Taken on their own, petitioner’s assertions substantiate only that he made a fraud claim.” T. C. Memo. 2026-62, at p. 5.

A new Tax Court look is Hubbard’s claim for refundable credits per Families First Coronavirus Response Act (FFRCA) and American Rescue Plan Act (ARPA), for leave taken during the COVID lockdowns. STJ Panuthos goes through the substantiation requirements exhaustively, T. C. Memo. 2026-62, at pp. 6-8.

Leaving aside Hubbard’s self-employment, want of substantiation denies the credits. “Even were we to consider that petitioner was engaged in a trade or business for the year in issue, petitioner failed to substantiate eligibility for these credits. Petitioner did not include with his tax return Form 7202 to support his claimed refundable COVID–19-related sick and family leave credits. While petitioner testified that he was sick at some point during the year in issue, he failed to specify the dates of his sickness. Further, he failed to provide any documentation related to the ‘need for leave’ criteria and his inability to work. Therefore, petitioner is not entitled to any COVID–19-related sick and family leave credits for the year in issue. ” T. C. Memo. 2026=62, at p. 8.

IRS concedes the Section 6676 erroneous claim for refund or credit chop, T. C. Memo. 2026-62, at p. 1, footnote 2.