Blogging Tax Court is so much fun. I sometimes pity those law review writers and trade-press types, with their festoons of footnotes and “somber reasoning and copious citation of precedent,” plowing agonizingly through the dustbowl of appellate jurisprudence.

I’m more of a freelance vagabond, driftin’ along with the tumblin’ cliché.

Here’s the kind of thing that wrings a guffaw from my gnarled visage, Louis J. Baumgartner & Beth A. Baumgartner, Docket No. 23018-16, filed 11/10/16.

Lou (“Too Bad About the Spelling”) & Beth sent in what Ch J L. Paige (“Iron Fist”) Marvel denominates as an imperfect petition. So she tells them to send in an amendment and the sixty bucks, please.

Lou (“TBATS”) & Beth denounce the crafty invitation to join the Tax Court promenade.

“Recently, you sent a request for me to submit to your jurisdiction by: (1) filing an Amended Petition and (2) sending a filing fee on or before December 15, 2016. It would be an Order if I were subject to the limited jurisdiction the USTC and IRS are only authorized to operate within. Your request had a sub silentio design in its intent to draw me into your territorial jurisdiction for the express purpose to allow the USTC and by extension, the IRS, to impose the federal income tax that has been levied only upon the National Government per The Legislative Intent of the 16th Amendment, written by former POTUS William H. Taft on June 16, 1909. Therefore, the federal income tax is only applicable within the jurisdiction of the statutory ‘United States’ meaning the District of Columbia.

“I exist ‘outside the statutory United States’ as an American National [nonresident alien non US person] with no taxation nexus to the jurisdiction of the US Tax Court, the statutory ‘United States’ [26 USC§7408(d)].” Order, at p. 1. (Some emphasis in original omitted).

Oh, Ch J Iron Fist, you crafty devil you!

Nothing daunted, Ch J Iron Fist: “…it appearing that petitioners do not intend to file an amended petition and pay the filing fee as directed in the Court’s Order,” the case is dismissed for lack of jurisdiction.

Lou (TBATS”) & Beth, take a look at Section 6673, before you have your next bright idea.

Judge Lauber has a good one today in Whistleblower 26876-15W, 147 T. C. 12, filed 11/9/16. The blower claims no jurisdiction and wants his petition tossed.

Blower put in a claim, but the audit crew gave a “no change” to the blown, so no proceeds, no award.

The Form 11369 bouncing the blower was prepared by a senior tax analyst, who signed the letter telling blower he (masculine pronoun used without designating actual gender of blower, as Judge Lauber is at pains to point out) was out of luck. The Form 11369 was also signed by Mr Chief Whistler.

The letter went to the (admittedly) wrong address.

Now while Section 7623 mandates no specific form of claim rejection, or even that it be written or communicated to the blower, Tax Court has held that the rejection must be written and sent to blower’s last known address.

Of course, there’s the battle of the letters (see my blogpost “Contra Proferentem,” 10/2/14), and the Comparinis’ epistolary duel with the Ogden Sunseteers is retold.

But the petition came during the thirty-day window after Letter No. Two, which went to the right address.

Oh, the Boss Hoss Rule? Well, the denial letter that got to the blower was signed by the senior tax analyst aforesaid. And blower says the analyst’s not covered by Delegation Order 25-7 (Rev. 1), Internal Revenue Manual pt. 1.2.52.8(2) and (3) (July 1, 2008). So the second letter is also a dud.

Judge Lauber is unimpressed: “We find no merit in this argument.  Delegation Order 25-7 delegated to Mr. [Chief Whistler] the authority to approve or disapprove awards under section 7623.  Mr. [Chief Whistler] exercised that authority…when he signed the Form 11369 adopting his staff’s recommendation that petitioner’s claim be disallowed in full because no ‘proceeds’ had been collected.  The following day, the Office sent petitioner a final determination letter informing him of this decision.  There is nothing in Delegation Order 25-7 (or anywhere else) that required this letter to be signed by Mr. [Chief Whistler] personally rather than by a member of his staff.” 147 T. C. 12, at p. 7.

So there’s jurisdiction. And you know this isn’t going to end well for the blower.

David B. Greenberg, Esq., claims that he’s the real party in interest in the Section 7430 claim  he’s making after his client prevailed.

No dice, says Judge Pugh, in 147 T. C. 13, filed 11/9/16. Dave’s client prevailed, and Dave claims he has the right to collect the admins for the work he did. As his claimed assignment from his client crashes under the Anti-Assignment Act, 31 USC §3727(b), he says that he’s the real party in interest because he did the work.

Lawyers are endlessly inventive. Check out my blogpost “We Don’t Need No Stinkin’ Badges,” 4/2/14.

Dave’s Problem One is who is a “party.” The only case where the courts look behind the caption is when there’s a test case situation, where numerous petitioners band together in a cost-sharing arrangement and use one case from among them to resolve all of their cases. There, however, every member of the band has skin in the cliché.

Problem Two is the statutory language awarding admins to the party who incurred the fees, not the one who had the claim to be reimbursed. Dave was the payee, not the payor.

The idea is that the fee award is a waiver of sovereign immunity, and must be narrowly construed, lest the fisc be plundered by inventive lawyers.

“Here, petitioner was acting as his client’s representative pursuant to a power of attorney and was not a party in the underlying dispute.  He seeks to recover fees he charged (but has not received from) his client, not costs he incurred.  Because he was not a party to the underlying dispute and therefore cannot be a prevailing party, he is not the proper party to petition the Court for review of respondent’s denial of an award for administrative costs, and we lack jurisdiction to decide this case.” 147 T. C. 13, at pp. 14-15.

Dave, it’s not your party, but you can sure cry if you want to.

And so it shall stay. Of course, it remains to be seen how long it will continue to be a blog, once net neutrality is gone.

A busy day for CSTJ Panuthos, as he deals with shilling for dollars and hustlers at the Hustler.

To clarify: Peter Phuong K. Pham and Bach T. Nguyen, 2016 T. C. Sum. Op. 73, filed 11/8/16, hereinafter sometimes referred to as “Pete & Bach,” worked for the Hustler Casino. And they hustled.

“…casinos sometimes hire house players to ensure that there are enough players to start and maintain card games or to gain an additional source of revenue from the player’s winnings. Petitioners explained that as house players for Hustler Casino they would start a game of ‘Texas Hold ‘Em’ poker (Texas Hold ‘Em). The goal was to attract other players/customers. Petitioners each received an hourly wage.” 2016 T. C. Sum. Op. 73, at pp. 2-3. (Footnotes omitted).

But there was a hitch (isn’t there always?).

“…they were required by Hustler Casino to use their own funds for betting in the games of poker, including paying the same table fees as customers not employed by that casino. The table fees included a regular table fee of $5 per hand and a collection for a “bad beat jackpot”, which was $1 per hand. Hustler Casino set aside one dollar from each hand for the bad beat jackpot. Under certain circumstances not described in this record, Hustler Casino would decide that a player had ‘hit the jackpot’. Hustler Casino would then redistribute the accumulated bad beat jackpot funds to the winner of that jackpot.” 2016 T. C. Sum. Op. 73, at pp. 3-4. (Footnotes omitted).

Hustler didn’t train Pete & Bach, or require them to exhibit or maintain any skillsets, just to present a neat appearance and keep playing.

Pete & Bach “…assert that initially they tried to keep track of their poker winnings and losses by writing down the amount won or lost at the end of each day, but after a while they gave up that practice because it is ‘bad for your psyche * * * you need to be strong mentally’ when playing cards.” 2016 T. C. Sum.Op. 73, at p. 4.

A strong psyche doesn’t help when you’re trying to deduct your losses, even if you can claim professional gambler status. In this case, you can deduct your losses against all income to get to AGI. If not a pro, all you get is a miscellaneous itemized deduction to offset losses against winnings; losses in excess of winnings are truly lost.

“The Commissioner has suggested that gamblers regularly maintain a diary, supplemented by verifiable documentation, of gambling winnings and losses. See Rev. Proc. 77-29, 1977-2 C.B. 538. A taxpayer’s ‘contention that it was too difficult for him to maintain contemporaneous records of his gambling activities is without merit.’ Kalisch v. Commissioner, T.C. Memo. 1986-541, 52 T.C.M. (CCH) 991, 995 (1987); see also Schooler v. Commissioner, 68 T.C. 867, 870-871 (1977).” 2016 T. C. Sum. Op. 73, at p. 10.

And Cohan doesn’t help, because Pete & Bach have nothing.

Fans of C. S. Forester’s fictional hero Horatio Hornblower will remember that Horatio was reduced to shilling for shillings at whist on his return from the West Indies in 1802, in the Long Rooms at the Keppel’s Head in Portsmouth, on the same terms as Pete & Bach two centuries later.

But Horatio got to command a sloop of war as a result. Whereas Pete & Bach are just sunk.

This was (and still is) an often-heard phrase in the dirt lawyer community. It refers to the practice of a mortgagor, whose property is worth less than the balance due on the mortgage debt, mailing the keys to the mortgagee (or more likely, mortgagee’s servicing agent) and walking away.

An unpleasant alternative is the mortgagor’s scorched-earth interposition of numerous defenses to foreclosure proceedings, including without limitation standing to sue, fraud in the inducement, oral modifications, and an occasional visit to bankruptcy court.

But the more hip among the servicing agents, deciding that peace is worth the price, and getting back the property untrashed and with taxes paid beats facing off with debtor-friendly courts and pro bono bulldogs, have reversed the process.

If the mortgagor plays nice and hands over title and clean property (both physically and legally clean), the servicing agent might fork over some of the cash that would otherwise go to their hard-laboring and underpaid foreclosure attorneys. Trust me, it isn’t easy being one thereof.

What has this to do with tax? Well, we know that cancellation of debt is income, a residence is generally a capital asset, foreclosure or deed in lieu thereof is a sale or exchange, and to the extent basis is greater than debt forgiven, there is a capital loss and the usual short-vs-long debate follows.

But how about the forked-over cash?

Karl D. Bobo & Kimberly D. Bobo, 2016 T. C. Sum. Op. 74, filed 11/8/16, say that $20K jingle they got was sales proceeds and therefore included in their computation of their capital loss.

IRS claims what K&K got was ordinary income. And the servicing agent did give K&K a 1099-MISC non-employee compensation for the $20K, in addition to the 1099-A abandonment. But of course neither K nor K worked for the servicing agent, so the 1099-MISC is strictly for the jingle money.

K&K’s trusty CPA filed their return showing the whole thing as COD.

CSTJ Panuthos, recovered from his recent display of modesty and displaying his full title, holds for K&K.

IRS’ claim that the jingle was an incentive payment falls flat.

Too bad this is non-precedential.

But the principle isn’t. The deed in lieu and the jingle are all one transaction. No way would the servicing agent have given K&K Penny One unless K&K handed over clean title and possession.

“Looking at the substance of the transaction the two agreements are inseparable; [servicer] would not have issued the cash for keys payment but for petitioners’ agreeing to sign over the deed to the property. Thus the cash for keys payment should be treated as part of the deed in lieu of foreclosure transaction and included in the amount realized….

“As a result, we calculate the gross proceeds from the transaction by adding the cash for keys incentive payment to the amount of loan forgiveness. Petitioners’ basis in the property is their cost basis. See secs. 1001(a) and (b), 1012(a); sec. 1.1001-2(a)(1), Income Tax Regs.” 2016 T. C. Sum. Op. 74, at pp. 10-11. (Citation and footnotes omitted).

K&K were pro se. They get a Taishoff “Good job!”

Correction, 3/17/17: Thanks to Mr Peter Reilly, CPA (happy St Patrick’s Day, sir!) for pointing out a misstatement. K&K’s trusty CPA didn’t list the jingle as COD; I should have read my own comment above. The CPA reported the entire amount as sales proceeds, as the mortgaged property was deemed sold for the outstanding debt balance plus the jingle.

The Great Dissenter, a/k/a The Judge Who Writes like a Human Being, s/a/k/a The Implacable, Incontrovertible, Irrefragable, Indefatigable, Insuperable, Ineffable, Ineluctable, and Illustrious Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes, cleans up an unresolved oldie that proves an old adage.

If you owe somebody money, stall. They might forget.

Unhappily, Judge Holmes’ elephantine memory digs through the soil of days gone by, and comes up with James A. Cavanaugh, Jr., Docket No. 30825-09, filed 11/7/16.*

On a day with no decisions and no designated orders, when I just got back from visiting my nearest and dearest in the Bayou City, I find this hangover from what a certain Nobel laureate called “the foggy ruins of time.”

All y’all (remember I’m just back this evening) will remember Big Jim Cavanaugh, Jr., the Clean-up King, his trusty sidekicks Rock Walker and Erica Fortner, and the late Claire (“Colony Anne”) Robinson.

What, no?!

Then read my blogpost “Well-Settled – No Deduction – Part Deux,” 11/27/12.

I thought Big Jim’s attempt to write off his legal fees settling with Mrs. Robinson was long gone, historical.

Wrong! Big Jim moved for reconsideration, and he was timely. Judge Holmes never dealt with the motion.

Well, there isn’t much to deal with. “The deductibility of legal expenses is governed by the same ‘origin of the claim’ test as is the deductibility of the cost of settling the lawsuit in which they arose. Respondent [IRS] had the burden of proof, because he challenged the deductibility of those expenses only in his answer. But he met it by stipulating to the amount of those expenses and that they were incurred because of the lawsuit, and then showing by a preponderance of the evidence that the origin of that lawsuit made the cost of settling it nondeductible.” Order, at p. 2.

Big Jim wanted to deduct the legal fees in settling the case, but as the claim originated in a non-business environment, no deduction for settlement or costs of procuring same.

So, guys, do the Rule 155 beancount.

Better late than never.

Edited to add, 9/6/21: 5 Cir affirmed. Note origin-of-claim vs effect-of-litigation analysis.

*James A Cavanaugh Jr 30825-09 11 7 16

Taking my headline from an exalted source, I bring to the attention of my readers IRS Notice 2016-66, coming soon to an IRB near you.

IRS has fought with alleged micro-captive insurance companies with mixed results. The Rent-A-Center case was a major win for the captive S Corp siblings; see my blogpost “Insurance – Are You Sure?” 1/14/14.

But the captors have also taken some tough hits. See, e.g., my blogpost “No Insurance? Go Pound Sand,” 5/28/13.

Well, IRS has a checklist of phony insurance deals where there is no shifting of risk, no economic substance, no adherence to generally-accepted industry-wide practices, and a roundy-round with money to dodge taxes.

These are now “transactions of interest,” and I’ll bet they’re going to get a lot of interest.

Should be some good litigation and blogfodder coming up.

Usually the Rule 155 bean count is just arithmetic, and of interest only to the parties to the case. Today, however, CSTJ Panuthos (in an unwonted burst of modesty signing himself simply as “STJ”) has a different take, as IRS, in a moment of candor, gives an assist to Djamal Mameri, Docket No. 16403-15S, filed 11/4/16.

Djam had his deduction bounced for “…the computer for his English 5 class at Berkeley City College. Since a computer is not tuition or a fee charged by an educational institution, it would have to qualify under ‘books, supplies, and equipment’. See sec. 1.25A-2(d)(2)(ii), Income Regs. There is no evidence that petitioner was required to purchase the computer directly from Berkeley City College. Instead petitioner was able to and in fact did purchase the computer from a third party. Thus the cost of the computer is not an expense that qualifies for the education credit. See id. subpara. (6), Example (2).” Order, at p. 1.

As the parties went into the beancount, IRS came up with a save for Djam.

IRS tipped off Djam and CSTJ Panuthos that IRS had “…proposed regulation section 1.25A-1(d)(3) issued August 2, 2016. The proposed regulation interprets the meaning of ‘required for enrollment or attendance’ as set forth in section 25A(f)(1)(A) and (i)(3) to mean that ‘the course materials are needed for meaningful attendance or enrollment in course of study, regardless of whether the course materials are purchased from the institution’. Respondent proposes to concede that petitioner is entitled to an education credit for the purchase of the laptop computer since petitioner satisfies the requirements of the proposed regulation.” Order, at p. 1.

IRS did the right thing.

It seems that every day is Rounders’ Day at 400 Second Street, NW. And Judge Gustafson certainly gets his share.

See my blogpost “Rounders’ Day – A Holiday?”, 9/9/16. Well, even though I’ve had a great day at the PwC International Tax forum and visiting family in the Magnolia City, I must chronicle the return of two rounders.

First is Frances M. Scott & Galen M. Anderson, Docket No. 26717-14, filed 11/3/16. Fran & Galen gave that Obliging Jurist Judge David Gustafson a chance to blow off some attempted rounderdom, culminating with Fran & Galen attempting to dismiss their petition, which falls into the “own goal” category, in the abovecited blogpost.

Thereafter, Judge Gustafson granted IRS’ motion to dismiss for want of prosecution. After that order, Fran & Galen file an objection. In today’s action, Judge Gustafson, obliging as always, gives Fran & Galen a two-for-one: he treats that as a motion to vacate, which he grants and a motion to reconsider, which he denies.

Fran & Galen, nowise daunted, attempt to stall everything by filing a notice of appeal to CCA 10. But since no decision had then been entered, there is only an interlocutory appeal available. And unless Judge Gustafson orders a stay, the interlocutory appeal stays nothing in Tax Court.

Judge Gustafson is not so obliging as to grant Fran & Galen a stay.

But he does vacate the order dismissing their petition for want of prosecution. Why?

“However, we will not yet re-enter decision in this case, because we now will consider whether to include in that decision the imposition of a penalty under section 6673(a)–something about which we warned petitioners in our order dated September 8, 2016. Section 6673(a)(1) provides that where proceedings are ‘instituted or maintained by the taxpayer primarily for delay’ or where ‘the taxpayer’s position … is frivolous or groundless, … the Tax Court, in its decision, may require the taxpayer to pay to the United States a penalty not in excess of $25,000.” Order, at p. 5.

So Fran & Galen can show cause why Judge Gustafson should not unload a $25K frivolity chop.

Next in line is Rodney W. Gattie, Docket No. 7077-15, filed 11/3/16. Rod was the number two player in my abovecited blogpost, and here he is again.

Rod was a Methodist minister and an insurance salesman. Whatever parallels one might draw therefrom, Rod drew money from both and got an SFR, to which he responded with a 1040EZ showing all zeros except for the withholding he wanted refunded.

As more fully set forth in my abovecited blogpost, Rod got the Section 6673 yellow card.

On the trial before Judge Gustafson, Rod kept up the frivolity, despite warnings.

Judge Gustafson, aweary of these tactics, unloads in this off-the-bencher.

“Mr. Gattie has raised frivolous arguments in prior proceedings before this Court and is thus a ’repeat offender’. He was warned that his arguments were frivolous and that raising such arguments could lead to the imposition of penalties–warned not only by the IRS but also by this Court in his prior case and in this very case; but he ignored or defied those warnings. He did not raise any non-frivolous arguments in addition to his frivolous arguments. His conduct imposed on the IRS and the Court a substantial undue burden to adjudicate his case. Until the 11th hour he refused to stipulate facts that in fact he could not dispute. And he has made no pretense of intending to comply with tax laws in the future.

“Taking into account all the facts and circumstances, we impose a penalty of $12,500–half of the maximum possible penalty–and we warn Mr. Gattie that if he should repeat this conduct in the future, the penalty can go up to $25,000.” Order, at p. 10.