That’s what CSTJ Peter Panuthos has for us today in a Summary Op (“don’t quote me”), Nayemul B. Chowdhury and Laila Banu, 2016 T. C. Sum. Op. 31, filed 6/30/16.

It’s a fight about a big $7800 deficiency, but add a zero to show the magnitude of the case for these taxpayers; they really got hit hard.

Nay and Laila bought a Häagen-Dazs franchise, which they coupled with a “Submarina” franchise (sounds like Subway on a bad day), and didn’t make a dime from either.

Their SBA loan was foreclosed, their landlord booted them for unpaid rent, their part-ownership of a gas station likewise tanked, and they saved their home in FL only by filing bankruptcy.

Their records were a mess and their tax return for the year at issue was late, and Nay and Laila put in no evidence why, so get hit with the late filing penalty.

CSTJ Panuthos gives us the basics.

“Petitioners seek to deduct losses from the sale of assets repossessed by their creditor. A sale in which the collateral is repossessed from the debtor constitutes a taxable sale or exchange by the debtor of the encumbered property. See Helvering v. Hammel, 311 U.S. 504, 506-511 (1941); Estate of Delman v. Commissioner, 73 T.C. 15, 28 (1979). The debtor’s gain or loss in the disposition is measured by the difference between the amount realized in the disposition of the property and the debtor’s adjusted basis in the property. Sec. 1001(a). In the case of recourse debt, the amount realized is the fair market value of the property repossessed. Frazier v. Commissioner, 111 T.C. 243, 245 (1998). In general, the debtor’s basis is cost. Sec. 1012. The debtor’s basis must be reduced by the amount of depreciation that was allowed or allowable during 2010 and 2011. Sec. 1016(a)(2).” 2016 T. C. Sum. Op. 31, at p. 7. (Footnote omitted, but I’m leaving in the citations for your next brief.)

CSTJ Panuthos goes through the property sold at the foreclosure of the SBA loan, works out cost, depreciation, and FMV at sale, and sends the parties off to a Rule 155 beancount based upon same.

What wasn’t foreclosed was abandoned when the landlord tossed Nay and Laila, and though IRS wants capital loss treatment, CSTJ Panuthos gives Nay and Laila Section 1231 business property largesse, although it wasn’t much of a business, and goes through the computations to arrive at the loss, giving it the Cohan shuffle. And it also goes to the Rule 155 mix-and-match.

IRS wants to slice off some of the aforesaid largesse based upon the bankruptcy discharge Nay and Laila got, but that was the year after the year at issue. That’s not on the table. I note it might be closed year, unless IRS plays the mitigation gambit.

As for the 20% negligence chop, “(P)etitioners provided no evidence of expenses underlying either their Schedule E deductions or their itemized deductions. Petitioners conceded that they claimed losses on their Schedule C to which they are not entitled. Petitioners’ records did not support the loss reported on Form 4797. Petitioners have not demonstrated that they acted with reasonable cause and in good faith with respect to the recordkeeping requirements; therefore, the Court sustains respondent’s determinations on this issue.” 2016 T. C. Sum. Op. 31, at p. 18.

I offer this for the B-Schoolers as a case study. Much to learn here.

A truly dull day in Tax Court, but a great performance of Sleeping Beauty by the American Ballet Theatre, so I’m ahead.

Aside from loan proceeds not being income in the only T. C. Memo. today, and tax protester drivel not earning a Section 6673 chop in the only designated hitter, all I could find with which to entertain you is a reprise by Ch J L. Paige (“Iron Fist”) Marvel of my blogpost “CPA = USTCP?” 6/6/16.

Here’s the whole story. “On June 27, 2016, respondent filed a Response to the Motion for Entry of Decision filed on behalf of petitioner by E., C.P.A. on May 31, 2016. In that response, respondent states that the parties have agreed to a stipulated decision and that he expects to submit executed stipulated decision documents for the Court’s consideration very soon.” John E. Cox, Docket No. 10207-16S, filed 6/29/16, at p.1. (Name omitted).

And a docket search still shows John as pro se.

So CPA’s can file motions in Tax Court, without an Entry of Appearance, or even a power of attorney, and even if not admitted to practice?

As I have received no response to my previous inquiry above noted, I’ll try again.

“So, as I have heard it expressed in certain circles, whassup wit’ that?”

I don’t know whether Keith A. Newman, Jr., 2016 T. C. Memo. 125, filed 6/28/16, is going to lift up his head and shout “There’s Gonna Be a Great Day,” as Billy Rose, Vincent Youmans and Edward Eliscu adjured him to do back in 1929.

But he beats a $7800 rap for COD from a bounced check on a BOA account years ago because he was down and out (insolvent) at the time, and Section 108(a)(1)(b), plus his truthful testimony, rescue him.

Briefly, just before the 36-month lookback of Reg. Section 1.6050P-1(b)(2)(iv) began, Keith bounced a check. BOA never chased him for it, and sent him a Form 1099-C. Keith never reported the COD, which earned him a SNOD.

Keith was unemployed, and testified believably that he then owed big on his wheels and his student loans.

“Section 108(a)(1)(B) excludes COD income from gross income if the discharge of indebtedness occurs when the taxpayer is insolvent.  The amount by which the taxpayer is insolvent is defined as the excess of the taxpayer’s liabilities over the fair market value of the taxpayer’s assets.  Sec. 108(d)(3).  Whether a taxpayer is insolvent and by what amount is ‘determined on the basis of the taxpayer’s assets and liabilities immediately before the discharge.’  Id.  The amount of income excluded under section 108(a)(1)(B) cannot exceed the amount by which the taxpayer is insolvent.  Sec. 108(a)(3).” 2016 T. C. Memo. 125, at p. 6.

Keith was discharged when BOA sent the 1099-C. Now a 1099-C, by itself, isn’t dispositive.

But Keith paid nothing, and BOA got nothing from Keith, during the 36-month lookback ending when BOA sent the 1099-C. The creditor had ceased to pursue Keith on the debt (thus COD), except Keith was insolvent at the magic moment, hence off the hook.

I cannot close without a tip of the battered Taishoff Stetson to James R. Monroe, Esq., Keith’s attorney, for taking on and winning a $4k deficiency. That’s the stuff that gets sent to the law school low-income tax clinics in most places. If James R. Monroe, Esq., did this one pro bono, he honors the profession.

This is, as I have repeatedly and consistently stated, a non-political blog. My political views are no secret; but I air them in a different place. Therefore I make no mention here of the Supremes’ decision in Whole Woman’s Health v. Hellerstedt.

That said,  woman’s health is of great interest to me, as I have a sister, a wife, two daughters, two granddaughters, and my other relatives and friends who are women number in the dozens.

But here’s the sad tale of Ashley R. Kruse & Jeffery W. Kruse. Docket No. 7166-16S, filed 6/27/16.

Ashley’s and Jeff’s petition is a day late and more than a dollar short.

It’s Ashley’s situation that gave rise to the blown SOL.

Ch J L. Paige (“Iron Fist”) Marvel tells the tale: “…(1) due to her pregnancy, Mrs. Kruse incorrectly calculated the last date to file a timely petition as to the deficiency notice issued to petitioners…upon which this case is based; and (2) petitioners waited until the 90-day filing period expired in order to recover as much of their records as possible so as to better prepare their Tax Court case.” Order, at p. 1.

What Jeff was doing while Ashley was trying to gather documents and file their petition is not stated.

As for the effects of pregnancy upon mind and body, I defer to those who have experienced it. I have heard descriptions from my nearest-and-dearest, and while I am delighted with the results, I am told it’s not always a pleasure, to say the least.

Howbeit, the law is inflexible. Ashley and Jeff are out of Tax Court.

Perhaps Congress might wish to amend Section 6213(a)  to help women in Ashley’s situation.

Courts aren’t infallible (and I can hear my colleagues one Bloody Mary ahead of me saying “You can say that again, chum”), but there are two main judicial errors to compare and contrast in this evening’s chat. These are harmless error and prejudicial error.

Prejudicial error is what keeps appellate judges in business. They call the off-sides, legs before wicket and suchlike, that deprive one party of a truly fair shake.

It’s the other I wish to speak of just now.

Yes, the Judge let in evidence she shouldn’t have, or the Judge left out evidence he should have let in, but at close of play the party making the squawk got a fair shake.

Now Judge James S. (“Big Jim”) Halpern confronts what to do post-decision when an expert witness’ testimony was admittedly false. The case is AD Investment 2000 Fund LLC, Community Media, Inc., A Partner Other Than The Tax Matters Partner, et al., Docket No. 9177-08, filed 6/24/16. And if this seems to jog your memory, it jogged mine.

See my blogpost “Haber-Dashery,” 11/19/15.

This is one of the celebrated immunologist James (“Little Jim”) Haber’s Bialystoks. For those who tuned in late, a Bialystok (noun form) is a deal where the counterparty is guaranteed a huge recognized loss offset by an equally huge unrecognized gain. I call it so in honor of the celebrated producer Max Bialystok, whose deals, if they made any money, would land Max in jail.

Well, here one of the IRS’s expert witnesses, whom I’ll call Murph, was a wee bit casual about his resume and the cases in which he had testified.

When Murph was shown up post-trial as a Fibber First Class, “(W)e concluded that his report did not accord with the requirements of Rule 143(g), Tax Court Rules of Practice and Procedure, addressing expert witnesses and we excluded it. Rule 143(g)(2) provides that an expert’s testimony will be excluded for failure to comply with Rule 143(g) unless the failure is shown to be due to good cause and unless the failure does not unduly prejudice the opposing party. Since [Murph] has already testified, we cannot at this point not allow him to testify. Petitioners argue that, in the present cases, [Murph]’s testimony was material and that the Court’s decisions in these cases should be vacated.” Order, at p. 1.

As the late great Ed MacMahon would have said “How material was it?”

That’s what Judge Big Jim wants to know.

IRS is down with vacating the prior decisions and going into Murph’s credentials.

Judge Big Jim has a lengthy laundry list of questions for petitioners and IRS, but the bottom line is simple: had Murph not testified at all, would there have been any evidence that Little Jim’s mix-and-match was anything other than a Bialystok?

And if all the remaining evidence was that the deal was a Bialystok, what does Judge Big Jim do?

Harmless error?

I said a long time ago that if governmental deliberative and pre-decisional processes make your day, there’s no accounting for tastes. Well, today you’ve got a bonanza, as Judge Laro has written a law review case note on Guidant LLC f.k.a. Guidant Corporation, and Subsidiaries, et al., Docket No. 5989-11, filed 6/24/16.

You’ll remember my little blogpost “Quick Peek,” 5/12/16. Well, they “got ‘er done,” as the Cable Guy says, and there are 26 Selected Documents on the no-fly list.

IRS is quibbling only about a sentence or two here and there in some of the no-flies, but they want others off the table.

Judge Laro is thorough. First there’s the commonlaw definition of the privilege, but that seems to apply here.

Next there’s the delegate question, as to who can invoke, but the IRS lawyer on the case swears she’s one of the chosen few and that does it.

Next there’s third-party contractor reports, but here the contractor is above the fray, that is, hasn’t an economic interest in the outcome, so the report, even if later made public, is pre-decisional and equivalent to a report from one of IRS’ own wonks, so deliberative.

Next there’s waiver. “Respondent had originally withheld the entirety of Exhibit A.26 but now claims privilege only as to four lines in that document. However, respondent’s release of his privilege claim cites a page that plainly does not meet the narrative description of its content in respondent’s First Supplemental Memorandum. Since this attempted waiver of privilege is incoherent, we err on the side of caution and do not find that respondent waived privilege as to this document.” Order, at p. 7.

Looks like IRS may have its own Case of the Incoherent Accountant.

The pre-decisional threshold, like a certain festival, raises four questions. The big ones are when was the document prepared, and did it go from subordinate to decider (sounds deliberative) or the other way (sounds like policy already arrived at)? Of course, the document had to relate to the decision at issue, and the decider had to take the document into account in reaching the decision.

And of course a lot of the stuff “discuss substantive questions related to the report and the process of its production. Since they include statements of advice, deliberation, and recommendation, they fall within the privilege.” Order, at p. 11.

This is a fourteen (count ‘em, fourteen) page order. So we get to page eleven, and the stuff is privileged. Game over, right?

Not quite.

“The deliberative process privilege is not absolute.  It ‘is qualified in that it [recognizes] there are instances in which justice will require disclosure of such material. A balancing of interests is required; the gravity of the individual’s need for disclosure must be weighed against the harm that disclosure may do to intragovernmental candor.’  Ultimately, the privilege ‘is merely meant to save possible embarrassment of governmental officials that would result from dissemination of certain of their statements to the public.’ Ostensibly, ‘[t]he prospect of such embarrassment would inhibit free expression in rendering advice and recommendations necessary to effective policy- and decision making’.” Order, at pp. 11-12. (Citations omitted).

So do the Guidants clear the bar?

(Drumroll)

“In this case, the Selected Documents are exclusively under respondent’s control and petitioner cannot obtain the information contained in them by other means, the potential transfer pricing adjustment is approximately $3.5 billion, and respondent is a litigant with interests directly adverse to those of petitioner.” Order, at p. 12.

But wait, there’s more.

“Respondent has not established that his employees would become fearful of public scrutiny or even embarrassed if the Selected Documents were disclosed. It is the lot of public servants that they are on occasion in the public light, and at issue here is nothing that would implicate national security or the safety and wellbeing of respondent’s employees or contractors. The Selected Documents are not ‘so candid or personal in nature that public disclosure is likely in the future to stifle honest and frank communication within the agency.’ Moreover, Exhibits A.15 and A.16 demonstrate that respondent’s employees assumed that the Freedom of Information Act might apply to at least the consultant’s report.” Order, at p. 12. (Citation omitted).

But is the stuff relevant? Here’s where Taishoff’s summary J approach is a winner. “In denying petitioner’s motion for partial summary judgment in this case, we held that respondent had not abused his discretion as a matter of law, but we left open the ultimate decision on that question until the factual record is fully developed and we have been able to give all facts their due weight. Since the Selected Documents, taken together and in their entirety, have potential probative value with respect to the issues in this case, we find that the first factor of the balancing inquiry also favors petitioner.” Order, at p. 13 (Citation omitted, but see my blogpost “Before Truth,” 5/29/16. And I was wrong; this isn’t going to settle.)

You can see where this is going.

Hidden evidence, yuuuge deficiency, evidence necessary for the trial, equals turn it loose, IRS.

Takeaway- Ya gotta love summary J. Really can help, even if you lose.

This is an unrelentingly nonpolitical blog. The only comment I can make here about the recent vote in the United Kingdom to invoke Art. 50 of the Treaty of Lisbon (I invoke my right to ignore Twitterspeak and similar neologisms) is to note the opportunity for practitioners in the international and offshore fields to spend profitable years trying to prognosticate what the new tax regimes resulting therefrom will comprise, and how to maximize tax avoidance.

I can’t remember if I ever cited this wonderful wisdom that I stole from a CA practitioner (whose name I’ve forgotten). So I’ll say it again, maybe. “Every taxpayer needs two advisers, one to tell them what the law is, and the other to tell them what they wish the law was. Then they can choose whose advice to follow.”

After a Sum. Op. today involving  unsubstantiated noncash charitables, some of which were allegedly picked up on the street, drawing a waspish dig from Judge Gerber that it’s income if you didn’t pay for it or get it as a gift, I scrolled through the orders and found a familiar face.

Remember Annamalai Annamalai & Parvathi Siva Annamalai, Docket No. 15887-13, filed 6/23/16? I didn’t think so, so check out my blogpost “I’d Do Anything for Love,” 5/9/14, when  the Annamalais wanted Judge Cohen to get him or her (or maybe both; the order doesn’t state) out of the “Segregation Hole”; unhappily, Tax Court’s jurisdiction doesn’t extend to whatever slammer the Annamalais were honoring with their presence at the time.

Now apparently sprung, the Annamalais are discharged (in bankruptcy?) and IRS wants to enter order and decision embodying same. Judge Cohen had ordered the Annamalais to show cause why such order and decision should not be entered.

Judge, you asked for it.

“Petitioners’ response was filed… along with a Motion to Take Judicial Notice. Although much of petitioners’ response is unintelligible, it is apparent that they wish to regard this case as settled. They indicate no objections to the amounts set forth in the proposed decision. Although they seem to believe that entry of the decision indicates that the liability for Federal income taxes has been paid, that is not the law or the effect of entry of a decision in this case. Issues regarding payment and collection are not involved in this case.” Order, at p. 1.

While it looks like the Annamalais took the advice of the second of the two advisers, they are facing $56K in tax and $42K in penalty.

Noboru Paul Kaito, Docket No. 9324-16, filed 6/22/16, wants to petition denial of his innocent spousery.

Problem is, spouse Linda Darlene, from whose tax troubles Noboru wants to bail, is no longer with us.

Nothing daunted, Ch J L. Paige (“Iron Fist”) Marvel keeps Noboru in the hunt, and searches out the heir-at-law to spouse Linda Darlene and asks her to join the fun.

“In the notices regarding the notice of filing of petition…, respondent informs the Court that Linda Darlene Kaito died…, and that no personal representative or other fiduciary has been authorized to act on behalf of the estate of Ms. Kaito. In Fain v. Commissioner, 129 T.C. 89 (2007), the Court held that the right to intervene survives the nonpetitioning spouse’s death and passes to the decedent’s heirs. According to respondent’s unredacted notice, Ms. Kaito had two heirs at law, other than petitioner: CM, who provided her address to respondent, and AO, who declined to provide her address to respondent.” Order, at p. 1. (Names omitted).

So c’mon in, CM. You don’t need letters to duke it out with Noboru.

The Adventure Continues

The rounder tactic du jour, blessed by the St. Louis Sages (a/k/a United States Circuit Court of Appeals for the Eighth Circuit) back on 5/9/16, has returned to the lap of Judge Nega, who gave it short shrift back on 12/15/14.

The order is Leroy Moncy, Docket No. 27807-11, filed 6/22/16.

For Judge Nega’s blow-off of the SNOD-not-signed-by-authorized-delegate rounder gambit, see my blogpost “Restitution = Destitution,” 12/15/14. For the St. Louis Sages’ blowback, see my blogpost “Delegati Non Postest Delegare,” 5/9/16. If you don’t want to read my old blogpost, the sole issue for the St. Louis Sages was whether the signer of the SNOD was named in an appropriate delegation order from Alex Hamilton’s successor in office.

Judge Nega, back at the twenty, punts.

“…each party shall file a response to this Order, and attached [sic] thereto an offer of proof in writing, along with copies of documents or describing testimony that he would offer in evidence at further trial, if any, on the jurisdictional question presented on remand. Each party shall also identify any evidence in the record that supports his respective view of the jurisdictional issue. The parties are encouraged to stipulate to any additional documents that maybe received without further trial.” Order, at p. 1.

Good luck with the stipulating, Judge.

And if y’all are wondering why this blogpost is so late, I was at the Metropolitan Opera today, watching the American Ballet Theatre’s production of Romeo and Juliet. Isabella Boylston’s fragility and Daniil Simkin’s athleticism were much better worth watching than Tax Court orders. And Prokofiev’s score is a stormer.