It’s off-the-bench day in The Glasshouse in the City of the Fortified Ballroom, but that doesn’t mean the4 Judges aren’t working. Judge Emin (“Eminent”) Toro deconstructs Section 6211(b)(2) and accompanying Regs in Brendan Bettis, Docket No. 6560-25S, filed 9/25/26. The Rebate Debate goes on apace.

BB had his identity stolen by an unlicensed, unregistered preparer, to whom he entrusted all his PII and data for year at issue. Said preparer generated a phony return, which BB never saw, signed, nor for which he ever signed Form 8879 e-file authorization. Preparer then stole the refund the fictional “return” generated.

BB and IRS agree his real tax is $1263. But IRS claims he owes $23K, being the phony fuel tax credit the phony was allowed for the equally phony landscaping business BB never owned, operated, or ever heard of. The phony got the refund, less what BB owed for AL unpaid child support.

In this deficiency case, IRS claims Section 6211(b)(2) includes “rebates” and the fuel tax credit is a “rebate.” This is the famous “Deficiency = correct tax – (tax on return + prior assessments – rebates) = correct tax – tax on return – prior assessments + rebates,” to support Tax Court Section 6213 jurisdiction

Except.

“For a credit or refund to come within the scope of the term ‘rebate’ under section 6211(b)(2) on the facts before us, the statutory text requires the Commissioner to determine that the correct tax under the Code was less than the ‘amount specified in’ section 6211(a)(1). As relevant for our purposes, section 6211(a)(1) in turn requires consideration of ‘the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon.’ See also Treas. Reg. § 301.6211-1(f) (‘As used in section 6211, the term ‘rebate’ means so much of an abatement, credit, refund, or other repayment as is made on the ground that the income tax imposed by subtitle A . . . is less than the excess of (1) the amount shown as the tax by the taxpayer upon the return increased by the amount previously assessed (or collected without assessment) as a deficiency over (2) the amount of rebates previously made.’ (emphasis added)).” Transcript, at p. 12.

Section 6211 requires IRS to compare the actual tax due to the tax shown on the taxpayer’s return. But BB never filed a return; the return filed here was a phony.

Judge Eminent Toro cuts to the cliché. “Whatever else the Commissioner may have done when he applied the credits to Mr. Bettis’s [year at issue] liabilities and sent money to the State of Alabama, he did not make the determination required by section 6211(b)(2).” Transcript, at p. 14.

The Regs don’t help.

“The regulations do not change this conclusion. Treasury Regulation § 301.6211-1(a) provides that ‘If no return is made, or if the return . . . does not show any tax, for the purpose of the definition ‘the amount shown as the tax by the taxpayer upon his return’ shall be considered as zero.’ But the regulations cannot save the Commissioner’s position.

“As we have discussed, on the fact pattern before us, a rebate exists only if the Commissioner compares the correct tax due under the Code with that reported by the taxpayer on his return and issues a repayment ‘on the ground that’ the former is less than the latter. See I.R.C. § 6211(b)(2). If no return is filed and the tax shown on the return is simply assumed to be zero for purposes of the deficiency computation (as the regulation contemplates), the Commissioner has no ground on which to make that determination.” Transcript, at pp. 14-15.

Section 6211(b)(4) is no better for IRS. The refundable fuel tax credit only gets included if shown on BB’s return. But BB filed no return.

Reg. Section 301.6211-1(f) is scraping the barrel, because it requires a return filed by the taxpayer to support IRS’ determination, and here there was none.

No Tax Court jurisdiction, because no deficiency.

Of course, IRS (and the rest of us taxpayers) are not without a remedy, but Judge Eminent Toro is not teaching a law school class. While a Section 6213 deficiency case fails for want of jurisdiction (parties stipulated actual tax due), 7 Cir suggested unjust enrichment in a civil recovery suit. See USA v.  Frontone, 383 F.3d 656 (7 Cir, 2004), at pp. 660-661 (citations omitted). Opinion by Judge Posner (whom else?).

BB was pro se, and did as good a job as many a practitioner.

Judge Emin (“Eminent) Toro has no present but only sympathy and bad news off the bench for Terry D. Predmore & Theresa A. Predmore, Docket No. 9391-25S, filed 9/25/26. They owe Section 6662(a) accuracy chops with a five-and-ten on the deficiency.

Fire destroyed a substantial portion of the Predmores’ domicile only two days before Christmas in year at issue. They filed their return for year at issue as Terry “always filed his own taxes and in the past did so by obtaining the Internal Revenue Service’s forms and instructions at public libraries.” Transcript, at p. 5. He claimed $315K as a Section 165 casualty loss.

Except.

The year at issue was post-TCJA. Terry’s claim he was going to use part of the house for a dogbreeding business fails because the business hadn’t started, and he was only going to use part of the house anyway. Personal Section 165s are out.

And his insurance company had paid loss of use and personal property cover. Terry claimed he wasn’t sure that the insurance would cover the house itself.

Except.

“Six weeks before they filed their return, the Predmores signed a contract indicating that insurance would be paying for the reconstruction of their home. About a month before they filed their return, the insurance company told the Predmores that the calculations for their dwelling coverage were complete and that actual cash value computations would be completed in about a week. Statements show that the insurance company paid the Predmores $258,332 either 17 days before or 4 days after they filed their return. Three days after they filed their return, the insurance company sent the Predmores a letter confirming that the company had paid out $333,689 on their claim to date.” Transcript, at p. 18.

And yes, ultrasophisicated readers, before you cry out “Section 165(h)(5)),” there were two (count ’em, two) Federally declared disasters in the Predmore’s home State (IN), but they were COVID-related.

While the Predmores may have been unsure about insurance (I always am before the check clears and the SOL runs out), Judge Eminent Toro finds that sincere, “we do not find that belief reasonable in light of all of the circumstances here.” Transcript, at p. 19.

Chop appropriately Boss Hossed.

This time it’s IRS, not Kenton R. Bowen, et. al., Docket No. 2215-24, filed 9/25/26, that’s party to a divorce. Judge Ronald L. (“Ingenuity”) Buch goes off the bench finding IRS proposed “recharacterization would result in tax consequences that are divorced from the economics.” Transcript, at p. 18.

Ken and buddy Scott ran a concert promo outfit fittingly named PromoWest. In case they sold PromoWest to nonpromoters, they created SSKB, LLC, a passthrough to provide management services to PromoWest. PromoWest paid management fees to SSKB when it had cash. PromoWest was promoting and seeking new venues in the Midwest, but like all promoters it was chronically short of cash. Ken and Scott landed a deal with a bank, which loaned money to SSKB but required SSKB to make distributions to Ken and Scott, who of course personally guaranteed payment and performance of the loan terms.

PromoWest, SSKB, and Ken and Scott all reported as written.

“Everyone treated this series of transactions consistently for tax purposes. PromoWest deducted the management fees it paid to SSKB. SSKB reported the management fees it received as income, including those management fees that were redirected to loan repayments. SSKB treated the loan as a loan, in other words, it did not take the loan proceeds into income and it did not deduct any repayments of principal. [Scott and Ken] reported their shares of income from SSKB, which included the management fees paid by PromoWest.” Transcript, at pp. 8-9.

Finally, Ken and Scott sold PromoWest to another promoter who didn’t need a management arm, so SSKB was dissolved and paid off the loan in the same year.

IRS gets creative. “Taken together, the gist of the Commissioner’s adjustments is that he recharacterizes $6 million of the loans to SSKB as a dividend from PromoWest to [Scott and Ken]. The Commissioner treats the dividend as taxable to [Scott and Ken] and non- deductible to PromoWest. If loan proceeds distributed to [Scott and Ken] were actually a dividend from PromoWest, then the loan must have really been made to PromoWest. So the Commissioner’s notices determine that PromoWest ‘was in substance the true debtor with respect to [the] Loans.’ And if the loans were in substance made to PromoWest, then the loan repayments must have come from PromoWest. To reach this result, the Commissioner disallows the management fee deduction claimed by PromoWest, but instead, allows an interest expense deduction to PromoWest. For consistency, the Commissioner reduces SSKB’s income for the now-disallowed management fee.” Transcript, at p. 10. And at trial, IRS claims the management fees paid to SSKB weren’t ordinary and necessary, so no Section 162 treatment for those.

IRS says substance over form. Ken and Scott say they can structure their business however they want, but must stick to the structure, and they did.

As for the management fees, SSKB provided them. IRS says Ken and Scott should have been deemed to have provided them directly. OK, says Judge Ingenuity Buch, that might support recharacterizing, but not deductibility.

Substance over form means sussing out the economics.  Cherchez les bucks. Here there were management fees, loans, and loan repayments. On all counts, Ken’s and Scott’s reporting more closely aligned with what they did rather than IRS’ convoluted ballet.

“PromoWest paid for the services of {Ken and Scott]. It received a deduction for the payments made for those services. Whether paid as a salary or a management fee, the consequences would have been the same to PromoWest, a deduction. And the consequence was the same to [Ken and Scott]. Whether received as a salary or as a share of partnership income, it would have been ordinary income to each of them. And this is how they reported it on each of their returns. Petitioners’ form, economics, and tax treatment all aligned.” Transcript, at p. 15.

IRS’ “dividends” argument founders on E&P. Dividends come out of E&P and are paid for specific years, not all in a lump, and here there’s no such link. “The Commissioner’s proposed recharacterization makes no economic sense.” Transcript, at p. 15.

IRS’ treatment of the loan and repayment thereof earns them a Taishoff “Oh Please, First Class.” And a blow-off from Judge Ingenuity Buch.

“The Commissioner’s recharacterization would treat the loan as being a loan to PromoWest, with $6 million of the proceeds deemed to be a dividend to [Ken and Scott]. But SSKB was liable for the loan, and SSKB’s owners are [Ken and Scott]. Under the Commissioner’s recharacterization, [Ken and Scott] would be taxed on the loan proceeds for which they remain liable. This is contrary to the principle that loan proceeds arenot taxable. The Commissioner’s recharacterization would result in tax consequences that are divorced from the economics.” Transcript, at pp. 17-18.

As for repayments, IRS fumbles that one, too.

“Petitioners’ form is consistent with the economics of a loan repayment. In form, SSKB paid interest and repaid the loans from its income and assets. What appears to concern the Commissioner is that the income used to make the loan repayments came from PromoWest. Indeed, PromoWest made the loan repayments on behalf of SSKB. But both economically and for tax purposes, PromoWest treated the loan repayments as amounts paid to SSKB in satisfaction of PromoWest’s obligation to pay management fees. Consistent with that treatment, SSKB took those payments into income. The Supreme Court acknowledged the economic effect of an arrangement such as this nearly a century ago. ‘The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed.’ Old Colony Tr. Co. v. Commissioner, 279 U.S. 716, 729 (1929). Petitioners’ form, economics, and tax treatment are consistent.” Transcript, at pp. 18-19.

True, IRS’ recharacterization is streamlined, but more divorced.

“The Commissioner would treat the loan repayments as loan repayments by PromoWest, without the added step of deeming these to be management fees to SSKB. As loan repayments, the Commissioner would neither tax nor allow deductions for the repayments. But the loan repayments satisfy a loan to SSKB, which is owed by [Scott and Ken]. Because a third party (PromoWest) is reducing SSKB’s liability on those loans, the loan repayments are income to SSKB, and ultimately to [Scott and Ken]. Id. Thus, while streamlined, the Commissioner’s recharacterization would divorce the economics of what occurred from the tax consequences.” Transcript, at p. 19.

Judges always have the last word. Here’s Judge Ingenuity Buch. “Substance over form is a doctrine designed to cause the tax consequences to be aligned with the economic reality of what occurred. The Commissioner seeks to use it to do the opposite.” Transcript, at p. 20.

C. S. Lewis, thou should’st be living at this hour.

I am sure I need not ask whether Ken’s and Scott’s trusty attorneys, John, Harlan, and Nic, to whom I award a Taishoff “Good Job, First Class,” have already started on the Section 7430 admins-and-legals motion.

Edited to add, 9/25/26: Before my ultrasophisticated readers berate me for having forgotten the 18 USC §2412(d)(2)(B) net worth cutoff engrafted onto Section 7430(c)(4)(D), I have left a v/m with one of Ken’s and Scott’s trusty attorneys enquiring, and will publish any reply.