Or, Tax Court Litigation Can Be Hazardous to Your Health (Financial, if Nothing Else)

This is the lesson Judge Holmes, a judge who writes like a person and not like a lawyer, is trying to teach Erik McBride Thompson, in 2011 T.C. Mem. 291, filed 12/19/2011.

Erik started by trying to do good, and ended up by doing well. Erik, a son of the pioneers in tiny Milan, Minnesota (population 300), went to Stanford University. There, he earned three degrees. From there, he went to Truk, once Japan’s Gibraltar of the Pacific and now a proud member of the Federated States of Micronesia, with the Peace Corps. Leaving the South Pacific, he returned to Milan, where he ran the Prairie Sun Bank and the Prairie Land & Lumber Company. In short, Erik was a very big bullfrog in the Milan pond.

But the call of the islands was irresistible, so Erik imported 100 Trukians to work in the local meatpacking plant. This move prospered Milan so well that Erik got considerable green fallout therefrom. But domestic tranquility wasn’t enough; Erik decided the wars in Iraq and Afghanistan were immoral and illegal, so he had to do something.

Or rather, not do something: he didn’t file proper returns or pay his income taxes.

With the usual result. IRS descended upon the banker-lumberjack with Substitutes for Returns, SNODs and breathings of fire and slaughter. After Erik spent a year fiddling around in Appeals to no visible purpose, and filed his petition with Tax Court,  IRS sent Erik a Branerton letter (see Branerton Corp. v. Commissioner, 61 T.C.691, 692 (1974)) which is a way to commence informal discovery without resort to formal demands; to try to agree on exhibits and facts before hitting the real matters in dispute.

Erik’s reply was not quite in line. Judge Holmes: “‘You may be curious about my decision not to file * * * my actions are designed to call us back to the rule of law and stop the slaughter of innocents.’ The letter goes on at some length but leaves no doubt that Thompson intended to resist paying taxes because he disapproved of the wars in Iraq and Afghanistan.” 2011 T.C. Mem. 291, at pp. 4-5.

Erik waxed eloquent about the Nuremberg Principles. The Nuremberg Principles provided that compliance with the law would be no excuse for those tried if the conduct would be complicit in, for example, a crime against humanity. United States v. Malinowski, 472 F.2d 850, 856 n.7 (3d Cir. 1973). 2011 T.C. Mem. 291, at p. 5, footnote 5.

However, Judge Holmes was less concerned with Erik’s hypothetical trial before an international war crimes court than about his approaching trial in United States Tax Court, and told Erik that if he didn’t provide some evidence 14 days before trial, he would be precluded from producing any at trial.

So Erik coughed up some paper. Judge Holmes, however, moved things right along. “But when we called the case for trial, Thompson still banked on a continuance. As the Commissioner reminded us, however, Thompson had spent almost a year with the Appeals officer doing nothing. We therefore denied his request.

“This finally jolted Thompson into action.” 2011 T.C. Mem. 291, at pp. 5-6.

Erik claimed investment interest carryforwards that would wipe out his past due taxes. Judge Holmes explains in “people talk” what investment interest is, in footnote 7 at page 6 of his decision, to which I refer everyone. As I said, here is a Judge who uses “people talk”. And the best part of his decisions is in the footnotes, where he explains things.

Of course, Erik plays around with handing over documents, and IRS wants everything precluded, claiming that to let them in would reward Erik’s dilatory tactics. Judge Holmes says he’ll let the documents into evidence. “We take into account that the documents’ purpose was to substantiate the disputed expenses, which we find does not prejudice the Commissioner. Cf. Cagle v. Commissioner, T.C. Memo. 1993-217. We also recognize that Thompson is going at this pro se and for the first time. He would be unlikely to get such indulgence in the future, and we have other ways of discouraging delay. See sec. 6673.” 2011 T.C. Mem. 291, at p. 8, footnote. In the immortal words of the late great Conrad Veidt, “Ve haff our vays of making you talk.”

Erik has a problem with his investment interest claim. He can prove some payments of interest, but not that the loan  was intended, and the loan proceeds were used, to purchase investment property. “The purpose is crucial because it determines whether the interest paid is deductible. When we know a taxpayer paid a deductible expense, we sometimes can estimate the amount. See Cohan v. Commissioner, 39 F.2d 540, 543-44 (2d Cir. 1930). The converse does not hold true–knowing the amount (without more) does not let us estimate that an item is deductible.” 2011 T.C. Mem. 291, at p. 11, footnote 12.

Erik also claimed losses from a residential real estate rental operation. Judge Holmes unpacks this one: “The Commissioner argues that ‘petitioner was not able to establish that the rental activity was non-passive or that the activity was engaged in for a profit.’ Showing unusual chutzpah, Thompson blames the Commissioner for waiting too long to raise the issue of character of the losses. (At trial Thompson focused on the amount of the loss.)

“It’s true that if an issue is untimely raised–unfairly surprising the opposing party by not giving him a chance to adequately address it at trial–-we’ll refuse to consider it.

“But we disagree with Thompson’s premise. The Commissioner didn’t raise this issue for the first time on brief; he raised it at trial. (And considering Thompson hadn’t bothered giving the Commissioner anything relating to his deductions and losses until one week before trial, this was no small feat.)” 2011 T.C. Mem 291, at pp. 13-14 (Citations and footnotes omitted–but go back and read them).

Erik’s disputed deductions are disallowed for failure to sustain his burden of proof, and since no exception to penalties applies to him, Erik gets the full carload.

Not one whit deterred, Erik apparently girds his loins for future voyages of discovery before the panel of the USTC. “Petitioner is on a fact-finding journey through the Tax Court and any encouragement of delay, hindrance, or cost increasing would be directed at future proceedings. Petitioner does not ‘disregard * * * the rules of this court,’ but rather hopes to learn them and possibly use them in the future.” Answering Brief for Petitioner at 9-10.” 2011 T.C. Mem. 291, at p. 16, footnote 15.

To cool Erik’s ardor, Judge Holmes fires a parting shot: “A final word of caution. Thompson seems to welcome future opportunities to come to the Tax Court. We can help pro se litigants with legitimate claims, but not those who make frivolous arguments. Perhaps Thompson believes conflating the two is worth the risk; he is now cautioned that section 6673 allows the Court to impose sanctions of up to $25,000 on taxpayers making frivolous arguments.” 2011 T.C. Mem. 291, at p. 16 (footnote omitted).

Erik, you did good, you did well, now leave well enough alone.