“To Highlanders, of course, Christmas is a pagan festival which they are perfectly prepared to enjoy as long as no one sees them doing it, but Hogmanay is the night of the year.” G. M. Fraser, The General Danced At Dawn.

My epigraph here is a warning to all those seeking to avoid the toils of Section 183, and a Hogmanay greeting to everyone else.

To the former, don’t let them see you having fun. At least, don’t let them see you having too much fun.

To the latter, Happy New Year. And no, I won’t be found in Times Square tonight blowing a vuvuzela or similar horror; I shall be at home, decently behind a glass of Piper-Heidsieck.

As for having too much fun, while no one said a profit-making enterprise must involve suffering (see my blogpost “And All That Jazz”, 8/14/13: as I said then “…that element of personal pleasure doesn’t negate a profit motive. You can have fun and make money.”), two taxpayers had way too much fun to escape the hobby-loss chop.

From 12/30/13, two T. C. Memos.

First up, Austin Otology Associates, 2013 T. C. Memo. 293, filed 12/30/13, which is really the story of the conjoined case Patrick W. Slater, II, and Robin H. Slater.

Though Pat is a neurotolgist of note, he’s at heart a Nimrod, in the Biblical sense (see Genesis 10, verses 8 through 10).

Pat invents a noise suppressor for shooters called Shooter’s Ear, and an ear cream to prevent swimmers’ ear, but to test the same goes off numerous times to British Columbia, to take part in guided hunts, the costs of which he deducts via his business.

Pat takes other dubious write-offs, but I’ll stick with the slaughter of animals.

Judge Goeke, clearly no inordinately enthusiastic sportsman: “We address the British Columbia trips first. Dr. Slater claims he took the trips to perform research in cold weather. However, Dr. Slater could have tested the products in the same conditions without purchasing expensive hunting trips. Outdoor shooting ranges would have provided the same conditions as the guided hunts at a fraction of the cost.” 2013 T. C. Memo. 293, at p. 15.

Moreover, “Dr. Slater enjoys hunting. He took hunting trips and leased hunting property before he began developing Shooter’s Ear. Dr. Slater could have performed his research without hunting, and he spent only a small portion of his time on the trips documenting his research. On these facts we find that petitioners have not clearly established that the principal character of the trips was the active conduct of Austin Otology’s business. Therefore, the expenses did not directly relate to the active conduct of a trade or business, and Austin Otology improperly deducted them.” 2013 T. C. Memo. 293, at pp. 15-16.

Oh yes, Pat also wrote off the taxidermy expenses for his trophies.

Next up is (or are) Travis A. Mathis and Bettina C. Jary-Mathis, 2013 T. C. Memo. 294, filed 12/30/13, but it’s really Bettina’s story, although Travis, as heir to the Brown & Root engineering fortune, supplies the moolah wherewith Bettina disports herself.

Bettina is a great fan of cutting horses. No, not the kind that get the “G” in the racing form. Her cutting horses are those used by cowhands to isolate individual members of a cow herd, so as to “rope ‘em and brand ‘em and bob off their tails” with a loud whoopie-ti-yi-yo.

Ever since she could toddle round the corral, Bettina was a devotee of the cutting horse. At first she tried training and selling, but the best trainers wouldn’t go on retainer, as they wanted to exhibit their craft in many stables. Of course the training operation lost money.

Then Bettina turned to breeding. She studied bloodlines, took a seminar, made a business plan, hired a bookkeeper to record every expenditure and kept the same CPA preparing her tax returns for all the years she ran her ranch.

But the switch from training to breeding wasn’t starting a new activity. The two are too closely related.

Besides, “The current and expected losses of an activity should not be of such a magnitude that an overall profit going forward would not be possible. Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965), aff’d, 379 F.2d 252 (2d Cir. 1967). Petitioners have accumulated over $9 million in losses from their cutting horse activity. It is unrealistic to expect that petitioners would not continue to accumulate significant losses. They have presented no convincing evidence that future profits could possibly offset these losses.” 2013 T. C. Memo. 294, at p. 16.

But ultimately, Bettina was having too much fun. “After weighing all the facts and circumstances in light of the relevant factors, we conclude that petitioners did not engage in their cutting horse activity with the requisite profit objective. Mrs. Jary-Mathis is determined to be a successful horsewoman. She wants to build a reputation as a producer of top-level cutting horses. However, she has pursued this goal independently of any desire to earn profits. She has continued training and breeding cutting horses for 17 years without ever approaching profitability, yet she has never seriously considered discontinuing operations.” 2013 T. C. Memo. 294, at p. 18.

The CPA helps Bettina avoid the 20% penalty, however.

No, this is not about Ray Fouche, the victimized bus operator (see my blogposts “The Cover Up”, 11/23/11 and “The Cover Up – Uncovered”, 4/24/13).

This is about the most commented-upon topic of my blogposts, the ineffectual whistleblower statute, Section 7623.

More than one frustrated whistleblower has vented his (it’s always “his”) spleen to me about how all IRS does is stonewall, and Tax Court duly rubberstamps whatever IRS tells them. And I have commented myself on TIGTA’s failure to address the problems in administration; see my blogpost “Another Whistleblower Gets Blown”, 8/30/13.

So there’s no surprise as that obliging jurist, Judge David Gustafson, apparently at the behest of a K Street law firm, conveniently removes from public view any sign of the alleged skullduggery uncovered by Joseph (“Fighting Joe”) Insinga. K Street, as we all know, is the home of the Beltway influence peddlars. As someone remarked, “Where the carcass is, there will the vultures be gathered”.

Remember Fighting Joe Insinga? No? See my blogposts “Did Nothing”, 3/13/13, “Perpetual Discovery”, 3/21/13,  “A Voyage of Discovery”, 3/30/13, and “Youth Wants To Know”, 4/24/13. Fighting Joe fought the good fight, but was stymied by the delaying tactics so easily utilized in 7623 cases.

But Fighting Joe fights one last battle. Even though he surrendered at last, he mounts a final campaign in Joseph A. Insinga, Docket No. 4609-12 W, filed 12/31/13, Judge Gustafson’s farewell to Fighting Joe.

The unnamed skulldugger, upon whose trail Fighting Joe was fiercely treading, now moves for a permanent seal on identifying information. And gets it, Judge Gustafson retroactively applying Rule 345(b).

Rule 345 itself came into effect 7/6/12. Joe’s filing took place before that date, so Joe isn’t anonymous. But Fighting Joe wants the information in public view.

Of course, IRS “… does not object to the redaction of names, addresses, and other identifying information of the taxpayer(s) to whom the claim relates from the documents in the record of this case or the sealing of some documents in the record in this case.” Order, at p. 1. Surprise, surprise.

Fighting Joe claims the movant (anonymous, of course) filed late, and that the information isn’t proprietary or confidential.

Now that don’t make Judge Gustafson no never-mind. “Section 7461(a) of the Internal Revenue Code (‘I.R.C.’; 26 U.S.C.) provides that all reports of the Tax Court and all evidence received by the Tax Court shall be public records open to the inspection of the public. At the same time, I.R.C. section 6103 provides that returns and return information are confidential and are not subject to disclosure, except in limited circumstances. Because the taxpayer to whom the claim relates is not a party to this proceeding, the third party taxpayer has no control over what information has been included in the public record of this case. For this reason, Rule 345 was adopted to require that the parties shall redact the nonparty taxpayer’s name, address, and other identifying information and that redacted information will be sealed in a reference list. See Rule 345(b).

“Although Rule 345(b) was adopted after most documents containing the information regarding the third party were filed in this case, the Court will grant the Motion for Protective Order and seal the documents identified in the Supplement to Motion for Protective Order.” Order, at p. 2.

Oh yes, and Clerk, send a copy of this order over to K Street.

Further comment is superfluous.

The WordPress.com stats helper monkeys prepared a 2013 annual report for this blog.

Here’s an excerpt:

The concert hall at the Sydney Opera House holds 2,700 people. This blog was viewed about 12,000 times in 2013. If it were a concert at Sydney Opera House, it would take about 4 sold-out performances for that many people to see it.

Click here to see the complete report.

Who’d’a thunk we’d ever see a sentence like this in a full-dress T.C.: “Common sense dictates that the answer must be no, and our findings of fact and analysis support that answer.” 141 T. C. 19, at p. 14.

That sentence made Andrew Wayne Roberts a happy camper. He’s the star of the eponymous 141 T. C. 19, filed 12/30/13, with Judge Marvel as the exponent of common sense.

Andy Wayne loved not wisely but too well; Mrs. Andy Wayne, hereinafter referred to as “Ms. Smith”, as the high-priced lawyers say, was a master of penmanship. She forged Andy’s name to a bunch of withdrawal orders from his IRAs, forged his signature on the checks the custodians of said IRAs trustingly issued (notwithstanding the forged signatures bore no resemblance to Andy Wayne’s true signature) and mailed to her job, whereupon she deposited them in a joint account (of which she alone possessed checks, and she alone got the bank statements), and finally used the cash to take their kids to Disneyland and set up a separate dwelling for herself.

And then she prepared phony tax returns for herself and Andy, and e-filed them. She’d done all their joint returns in past years, but this time Andy never got a copy, although he asked.

Andy claims he never got wind of Ms. Smith’s shenanigans until the next year, when the 1099-Rs hit the fan, and he never got any benefit from the cash she stole.

IRS says Section 408(d)(1) says IRA distributions are taxable to the “distributee” or “payee”, and that was Andy.

No, says Judge Marvel, Section 408(d)(1) doesn’t define those terms. “The taxable distributee under section 408(d)(1) may be someone other than the recipient or purported recipient eligible to receive funds from the IRA. Indeed, we have previously rejected the contention that the recipient of an IRA distribution is automatically the taxable distributee. See Bunney v. Commissioner, 114 T.C. at 262.” 141 T. C. Memo. 19, at p. 13.

So now we have a case of first impression (which is why this is a T. C. and not a Memo.): is payment based on forged documents, of which the true owner was unaware and from which he got no benefit, a taxable distribution?

No, of course not.

Andy testified he signed nothing, got nothing and knew nothing until he got the 1099-Rs, showing he’d been robbed. No economic benefit, no participation, and no legal obligation to make payment. This last point distinguishes Andy’s case from Vorwald, 1995 T. C. Memo. 15, because Vorwald’s IRA was grabbed to pay court-ordered child support, so did serve to discharge a legal obligation and was thus like writing Vorwald a check and having Vorwald write his spouse a check. Andy didn’t owe Ms. Smith nuthin’, at that point.

Andy is off the hook, right?

Not yet, says IRS. Under State law, Andy had a year to go back to the custodians of his IRAs, make a claim they paid on a forged instrument, get back the money, and treat it as a rollover contribution (and thus not taxable), per PLR Priv. Ltr. Rul. 201119040 (May 13, 2011). How a PLR is authority for anything is another story, but Judge Marvel lets it pass.

Even if Andy could have done (which he didn’t), he had a year to do it, and that throws the question of his ratifying the distribution by his non-action into a year not before the Court.

One last try. IRS claims Andy got the benefit of the cash Ms. Smith grabbed by way of a credit in the divorce decree two years later. But that was also after the year at issue, so no constructive or ratified distribution to Andy in that year.

Judge Marvel makes this clear: “We express no opinion as to whether petitioner’s failure to exercise available remedies under [State] law resulted in a constructive distribution from the IRA accounts in a later tax year.” 141 T. C. 19, at p. 22, footnote 18.

My comment: And they’re all probably closed years by now, anyway.

Andy’s on the hook for Ms. Smith’s erroneous 2008 tax return, because he took no steps to correct (amend) it, and he concedes he didn’t report some interest income, and underreported some wages. So he may get the Section 6662(d)(1)(A) 20% substantial underpayment based on substantial understatement chop on that money, but not on the IRA theft.

Of course, he can’t rely on Ms. Smith as preparer, even if the criminal charges against her were dismissed.

No, not the Beach Boys’ 1963 track from their Surfin’ USA album (good golly, is it really fifty years since then?), but rather Ch J Michael B. (“Iron Mike”) Thornton chastising IRS for failing to read Tax Court’s ukase  anent the famous government shutdown this past October.

And as the elephants fight, the proverbial gets trampled, in this case Lauren E. Goldstein, Docket No. 25669-13, filed 12/27/13, who gets her petition tossed, notwithstanding that IRS is willing to give her a bye because their doors were closed.

See my blogpost “High Noon”, 9/30/13.

IRS moved to bounce Lauren’s petition because the postmark on her envelope was outside the ninety-day safety zone, but then relented.

Ch J Thornton: “…respondent [IRS] filed a Motion To Withdraw the motion to dismiss, stating therein that ‘[t]he due date of petitions required to be filed during October 1, 2013 and October 16, 2013 was extended to October 25, 2013’. The Court is unaware of any authority that would support that statement, and none has been provided by respondent.” Order, at p. 1.

Ninety days is ninety days, and the USPS was truckin’ right along, even though Tax Court’s doors were barred.

In fact, Ch J Iron Mike refers to the Tax Court reopening announcement of October 17, 2013; but the Tax Court shutdown notice of September 30, 2013, cited in my blogpost aforementioned, told the same story. Section 7502 mailed-is-filed controls, whether Tax Court is open or closed.

So Ch J Iron Mike denies IRS’ motion to withdraw its motion to dismiss, and tells Lauren to file any objection she might have to getting summarily tossed.

Yeah, right: good luck, Lauren.

Yes, I know The Judge Who Writes Like A Human Being, a/k/a The Great Dissenter, Judge Mark V. Holmes, had a six-page disquisition on discovery today, in Harper International Corp. But that’s strictly for technicians and the terminally obsessive-compulsive.

Or, Gambler’s Choice

A belated Christmas present for that Prince of Orthography, STJ Lewis (“The Right Spelling”) Carluzzo is delivered through the opaque verbiage of Kimberly J. Gafford, Docket No. 19207-13L, filed 12/26/13.

KJ gets off on the wrong foot. STJ Lew: “If either of petitioner’s affidavits, both filed October 29, 2013, were construed as a motion to compel some form of discovery, the motion would be denied. But neither is, so respondent’s Motion for Protective Order, filed November 27, 2013, and presently before us, is, at this point, unnecessary.” Order, at p. 1.

Moot? Maybe not. As I said in an earlier blogpost, “It Depends”, 10/22/13.

Only we now know upon what it depends.

STJ Lew: “Respondent [IRS] is free to construe the affidavits in the manner he sees fit, and further may choose to respond to, or ignore the demands, if any, made in those documents.” Order, at p. 1.

So it’s gambler’s choice: if IRS wants to respond, it may do so, in whole or in part, reserving (or maybe renewing) its protective order motion (in whole or in part), or do nothing.

In the meantime, lest KJ feel neglected or ignored, STJ has a pertinent suggestion to KJ et hoc genus omne: “If petitioner is unsatisfied with respondent’s response or respondent’s failure to respond, he should consult the Tax Court Rules of Practice and Procedure, which are available on the Internet, and proceed accordingly.” Order, at p. 1.

Here, KJ, I’ll make it easy for ya; paste in this URL: http://www.ustaxcourt.gov/notice.htm

Then look at Rules 70 through 74, both inclusive.

Note that, although STJ Lew says IRS’ motion “is moot”, he didn’t deny it on that ground.

So the moral of Harry Golden’s tale remains: “Vot Did She Set?”

This time from Judge David (“That Obliging Jurist”) Gustafson, on a day when Tax Court seems to have the holiday hangover, no opinions and a few designated hitters of no great novelty, except–well, see for yourselves, guys.

Here’s our old petitioners Ovadia Meron & Galit Meron, Docket No. 9172-11, filed 12/26/13. Remember them? No? Well, see my blogpost “Which Side Are You On?”, 7/9/13, where Judge Gustafson asked Ovadia’s & Galit’s counsel to explain how he wasn’t conflicted out of representing Galit on her innocent spousery, while representing Ovadia on his defense of IRS’ unpaid taxable income claim. Oh, Judge Gustafson also wanted to know why he shouldn’t toss Galit’s innocent spousery for failure to prosecute.

And they could even respond to one issue without responding to the other.

Of course, in the immortal words of the Bard, “The rest is silence”.

Although Ovadia & Galit got three (count ‘em, three) extensions of Judge Gustafson’s deadline to respond, not Word One came from either or their attorney.

So Judge Gustafson tosses Galit’s innocent spousery. Maybe he thinks that by doing so, there’s no longer a conflict of interest between Ovadia & Galit, so their attorney is off the metaphorical.

But there’s still a question.

Many a time and oft have I heard (or used) this phrase in a deposition. A deponent’s answer, if not downright non-responsive, is the deponent’s answer, and the party taking the deposition is stuck with it, absent proof of perjury.

The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being (despite his unprovoked war on the partitive genitive), His Honor Mark V. Holmes, gives the IRS an early Christmas present with his illustration of this principle in Rolv Heggenhougen & Linn H. Heggenhougen, Docket No. 7441-12, filed 12/23/13.

Because Tax Court is closed today, 12/24/13, I had to go back a day to find a subject worthy of a Taishoff blogpost. This is pretty good.

Background: “…respondent [IRS] moved to compel responses to his first request for production of documents and his interrogatories. Very similar motions had already been denied the last time this case was on a calendar, but without explanation. This suggests that those denials were less on the merits and more as an accompaniment to the granting of a continuance.” Order, at p. 1.

Remember the Tax Court show-and-tell and “play nice” rules for discovery.

But now IRS stops playing nice. And Judge Holmes gives them a time-out.

“The Court will deny the motion to compel answers to interrogatories because the Heggenhougens did answer the questions. The Court understands that respondent may disagree with those responses, and if they turn out to be perjurious, the Court can sanction the Heggenhougens and consider that fact in deciding any fraud questions still at issue. But the Court can’t presume that on the face of these responses.” Order, at p. 1.

Asked and answered, IRS. Move on.

But Judge Holmes isn’t through. “The Court will likewise deny the motion to compel responses to respondent’s first request for the production of documents. The Heggenhougens responded to these requests with a response in which they stated that they had supplied all documents that they had been able to obtain. Nothing in this response is contradicted by their responses to the requests themselves. If, however, the Heggenhougens attempt to introduce documents not already produced to respondent at trial, it is very likely that the Court will sustain an objection to their admission.” Order, at pp. 1-2.

While it’s fine to pursue discovery diligently, enough is enough.

No, not the late great Ferlin Husky’s 1957 crossover single (but that brings back memories of standing next the old Kingsbridge Armory, under the Jerome Avenue elevated tracks, singing “Uh-uh-uh-uh-uh-uh-oh, what I’d give, fuh-or the life time I’ve wasted….” I remember that teenage angst so well, fifty-five years on).

No, this is Tax Court taking today and, of course, tomorrow, off, with a day of grace to all you filers.

As a former boss used to say, here’s the scoop, Betty Boop:

NOTICE

“The United States Tax Court will be closed on Tuesday, December 24, 2013, and will close for regular business at noon on Tuesday, December 31, 2013.

“For purposes of computation of time under Rule 25, Tax Court Rules of Practice and Procedure, December 24, 2013, and December 31, 2013, shall each be treated in the same manner as a legal holiday. See Rule 25(a)(2) and (b), Tax Court Rules of Practice and Procedure.”

Merry Christmas.

No, not Charlie Dickens’ done-to-death classic, but rather another of my unending causeries on tactics and strategies for Tax Court, herein in three staves (or takeaways).

Now I know that the easiest position to play is Monday morning quarterback; and remember, there but for the grace of you-know-Whom goes any of us.

Case in point, Linda Sharp, 2013 T. C. Memo. 290, filed 12/23/13. It’s another Section 104 settled-for-personal-injuries-on-the-job case. Personal, not physical.

Takeaway the First: Even if you denominate the settlement as entirely for mental, and not physical, injuries, if you have any medical expenses that you can tie to the mental, put them in evidence. “Damages not in excess of the amount a taxpayer pays for medical care for emotional distress are generally excludable from gross income. Sec. 104(a)(2) (flush language); sec. 1.104-1(c), Income Tax Regs. Petitioner failed to make this argument at trial or on brief and offered no evidence as to the amount she paid for medical care costs for her emotional distress. Accordingly, we find that none of the settlement award is excludable under this theory.” 2013 T. C. Memo. 290, at p. 11, footnote 10.

Takeaway the Second: Make a Workers’ Comp claim and follow it up. Make sure your settlement documents reflect you’re settling a Comp claim against the former employer. “Amounts that a taxpayer receives as compensation for personal injuries under a statute in the nature of a workmen’s compensation act may be excluded from gross income. See sec. 104(a)(1); sec. 1.104-1(b), Income Tax Regs.” 2013 T. C. Memo. 290, at p. 6.

Here, Linda’s attorney blows it: “The settlement agreement does not indicate that the parties intended petitioner to receive the settlement proceeds in exchange for her settling a claim under the IWCA [Iowa Workers’ Compensation Act]. The sole arguable reference to a workers’ compensation claim is lodged in the seventh and final term of the agreement and conditions the agreement on petitioner’s settling her ‘W.C. claim.’ This sole vague reference is insufficient to prove that the university paid petitioner the settlement proceeds in exchange for her settling a claim under the IWCA.” 2013 T. C. Memo. 290, at p. 8.

It gets worse: “Moreover, petitioner failed to offer any documents relating to her claims under the IWCA. This failure is particularly curious, given petitioner is currently being represented by her workers’ compensation attorney, who seemingly would have unfettered access to these documents. We remind petitioner that the burden of proof is on her.” 2013 T.C. Memo. 290, at p. 9, footnote 7.

Yes, I know, Constant Readers, that Tax Court looks at what the parties actually settled, not what they said they settled. I read my own blogposts; see “An Unsettling Settlement”, 10/3/11. But at least give the Judge a peg on which to hang a favorable conclusion: a longshot is better than no shot. If there’s a Comp claim, have the settlement refer to the claim in extenso, and put in all the documents on the trial.

Takeaway the Third. Although Linda is denied her exclusion, she had a shot at the Section 6664(c)(1) good-faith reliance on her attorney to avoid the 20% understatement chop. Judge Kroupa says all Linda offered was her own unsubstantiated testimony about what she told her lawyer. But Judge Kroupa ruled out her attorney’s testimony in yet another footnote.

“Petitioner could not offer the testimony of the attorney who had represented her in her workers’ compensation case and who had advised her that she could exclude the settlement proceeds from gross income because the same attorney represented her at trial before this Court.” 2013 T. C. Memo. 290, at p. 4, footnote 4.

Excuse me, Judge, but we get our ethical rules in Tax Court from the ABA Model Rules of Professional Conduct. See Rule 202(a)(3).

And the 2013 Edition of said Model Rules provides as follows, in pertinent part, as the high-priced lawyers say: “Rule 3.7 Lawyer As Witness

“A lawyer shall not act as advocate at a trial in which the lawyer is likely to be a necessary witness unless: (3) disqualification of the lawyer would work substantial hardship on the client.”

Wouldn’t precluding her attorney as a witness “work substantial hardship on the client”? Her lawyer was the sole party who could provide the evidence to corroborate her statements, there is no jury, which could be misled, in a Tax Court trial, and Judge Kroupa is certainly able to assess credibility without being overawed by the advocates who appear before her. Remember Judge Vasquez in Donald R. Fitch and Brenda T. Fitch, 2012 T. C. Memo. 358, at p. 12: “See Diaz v. Commissioner, 58 T.C. 560, 564 (1972) (stating that the process of distilling truth from the testimony of witnesses, whose demeanor we observe and whose credibility we evaluate, is the daily grist of judicial life).” And see my blogpost “Practicing Accountancy Can Be Hazardous To Your Health”, 12/6/12.

So why didn’t Linda’s lawyer object? Or if s/he did, I hope s/he can appeal.