Fraud serves more than one purpose, for IRS as well as for the fraudster. That Obliging Jurist, Judge David Gustafson, revisits fraud as a tool for IRS, not only as grounds for the Section 6663 chop, but also to toll the statute of limitations, in Johannes Lamprecht & Linda Lamprecht, Docket No. 14410-15, filed 2/22/18.

Y’all will recall Judge Gustafson having Graev second thoughts about the Section 6751(b)Boss Hoss sign-off last September. No? See my blogpost “Misplaced Modesty,” 9/26/17.

Well, IRS let Judge Gustafson off the hook when they conceded they didn’t have the Boss Hoss for the fraud chops. But IRS does claim they have the Boss Hoss for the Section 6662 accuracy chops.

Except Jo & Lin claim SOL ran on years for which IRS issued the SNOD.

IRS wants to run a slalom, skirting the fraud chops for want of Boss Hoss, but nevertheless proving fraud to get around SOL, and hitting the finish line with the Section 6662 accuracy chops.

“Fraud was the main argument advanced by the Commissioner (among other alternatives) for why the statute of limitations remained open through the time that the IRS issued the NOD, pursuant to section 6501(c)(1). (ECF 30 at 7, ¶20(a).) Section 6501(c)(1) provides that the statute of limitations is extended indefinitely if a return is false or fraudulent, meaning that ‘the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.’” Order, at pp. 2-3.

In today’s episode, IRS is seeking responses to interrogatories and document production, but is a wee bit coy. Judge Gustafson wants some more candor.

“The Commissioner stated that in the event he ‘does not prove that petitioners’ returns were false or fraudulent, the Commissioner’s alternative position [among others], is that the accuracy-related penalty applies in each year as set forth in the statutory notice of deficiency.” (ECF 30 at 7-8, ¶ 20-21). While the Commissioner’s [latest] status report concedes that the requirements of section 6751(b) were not met with respect to the section 6663 fraud penalty, the status report is silent as to whether the Commissioner intends to concede the issue of fraud in its entirety, or if he still plans to argue fraud for purposes of the statute of limitation issue (i.e., section 6501(c)(1)).” Order, at p.3.

Now civil procedure 101 taught us that discovery is used to ferret out information germane to the issues of the case. But IRS wants information without telling Judge Gustafson and Jo & Lin’s attorneys whether they’re going to try the fraud issue or not.

So Judge Gustafson holds onto IRS’ discovery motions until IRS fesses up. If IRS isn’t going to try to prove fraud, the SOL puts paid to their case.

I beseech Judge Gustafson to call a Statutory Notice of Deficiency a “SNOD” for short, to distinguish it from a Notice of Determination (for example, in a Section 7428 tax-exempt, a Section 7436 EE-vs-IC, or a ticket to a CDP), which is properly a “NOD.”

No, this is not the latest entry in the #MeToo log. Judge Holmes is steadfastly refusing to be detoured from determining the intent of the parties, notwithstanding the nine-prong debt-vs-equity cheval de frise erected by 9 Cir.

“We of course follow this caselaw, and discuss each of these factors, but will not let ourselves be poked by any of these prongs away from our goal of discerning the parties’ intent at the time of the advances.  Bauer v. Commissioner, 748 F.2d 1365, 1367-68 (9th Cir. 1984), rev’g T.C. Memo. 1983-120.” 2018 T. C. Memo. 18, at p. 11.

Y’all can find the whole story in Michael J. Burke and Jane S. Burke, 2018 T. C. Memo. 18, filed 2/21/18. Mike’s old college pal and fellow-scuba enthusiast Hugh surfaced after many years, and wanted to start a scuba operation in Belize. One of my nearest and dearest said it was great fun scuba-diving there, until she got an ear infection.

Mike got more than infection; Hugh and Mrs Hugh spent the $11 million Mike claims he lent them (but which IRS claims is equity) for the scuba business, and claimed bad debt when the business was under water (sorry guys).

Well, no demands, no due date, no periodic (or otherwise) payments, no interest, no attempts to collect, subordination to other financing, and no notes until Mike’s trusty lawyers got aboard. Judge Holmes trudges through all nine (count ‘em, nine) factors. There are a couple neutrals (it’s Judge Holmes, after all), and Mike wins one (a bank or two did lend to Hugh and Mrs Hugh), but the rest are losers.

Especially so are the notes, drawn up well after the advances which they evidence were made, and after Mike had a big capital gain which needed speedy burial. “We specifically find that the promissory notes, the sale of the note to Mrs. [Hugh], and the deferred compensation agreement were more likely than not orchestrated by Burke and his attorneys to offset the large capital gains Burke had from unrelated interests….. They are not proof of what they purport to show happened before they were all executed.” 2018 T. C. Memo. 18, at p. 8.

Maybe Mike can take a capital loss when he disposes of the stock he got from Hugh and Mrs Hugh, but he didn’t do it in the years at issue.

IRS wants heavy-duty Section 6662(a) five-and-tens. But guess what? IRS has another Mike to contend with: Michael Corleone. Nothing in their hands from Boss Hoss. So even though Mike couldn’t reasonably rely upon his attorneys who concocted the note dodge, no chops.

And Tax Court

IRS outrageously stalled the Friends of the Benedictines In the Holy Land, Inc., 150 T. C. 5, filed 2/21/18, sitting for a year on the Friends’ 1023 application for 501(c)(3) exemption, and refusing to give a date certain when they would act.

IRS blew past the 270-day Section 7428(b)(2) clear-to-sue; but the Friends, mindful of St. Benedict’s Rule 54, didn’t want to receive letters, so they waited until fourteen (count ‘em, fourteen) months had passed, to send in a petition, arduously and painstakingly drafted by their high-priced attorneys.

They served it on a Friday. IRS folded on the Monday.

Judge Wells takes up the tale.

A week after IRS unloaded the letter exempting the Friends, “…counsel for respondent spoke with petitioner’s counsel and discussed the recently issued determination letter.  Respondent’s counsel intended to file a motion to dismiss, but petitioner’s counsel instead proposed that they resolve the case with a joint decision and stipulation.  Respondent agreed, and over the next month and a half worked with three separate attorneys for petitioner to file the stipulation and decision documents.” 150 T. C. 5, at p. 3.

Does the phrase “Section 7430” come to mind?

The Friends want $68,990 in undifferentiated admins and legals. That sum they had not yet paid, at least when the Section 7430 motion was filed (150 T. C. 5, at p. 19, footnote 8). And some invoices were directed to an organization different from the Friends.

Bottom line: IRS’ folderoo means that no admins or legals can be allowed.

“Congress amended section 7430 to allow for the awarding of costs in declaratory judgment proceedings…but only where the Government’s position is not ‘substantially justified’.  While we recognize that section 7430 leaves a gap in coverage in circumstances such as this one, it is not our place to provide a remedy.  See, e.g., Pac. Fisheries, Inc. v. United States, 484 F.3d 1103, 1111 (9th Cir. 2007) (Although the IRS’s issuance of the administrative summonses forced the taxpayers into litigation, we see no fees remedy for them in the judicial proceeding.  We conclude that their case falls into a gap in the statute, but it is not our role to bridge that gap.’).  In the instant judicial proceeding, because respondent’s counsel promptly conceded the case, the Government’s position was substantially justified, and petitioner is not a prevailing party entitled to recover litigation costs.” 150 T. C. 5, at p. 19. (Footnote omitted, but read it, lawyers; informal billing can torpedo your claim for fees).

Judge Wells is sympathetic to the Friends, but as far as Tax Court is concerned, they are friendless.

Not only are they friendless, but as far as the Friends, or any would-be 501(c)(3), is concerned, Section 7430 is toothless. All IRS has to do is jack them around for a year (or more), let them run up a bill for preparing a petition (unless they can find a pro bono), and fold the minute the petition hits. Given the games played with the 501(c)(4)s, here is a first-class reason why the statute needs Congressional remediation.

I will refrain from making a political comment on the possibility of that happening.

That ever-obliging jurist, Judge David Gustafson, echoing the words of Neil Diamond some 49 years ago, exercises saintly patience, and again tries to school IRS counsel, who unlike the petitioner communicates with Judge Gustafson, albeit not entirely to the point. And it’s once again the Chapter-imposed shootdown of the settlement agreement in Cecil K. Kyei, Docket No. 9118-12, filed 2/20/18.

Y’all will recall CKK’s bankrupt manœuvers. No? Well, dig my blogpost “Obliging But Befuddled,” 1/26/18. And eyeball today’s installment above-cited.

OK, so Judge Gustafson did correct the erroneous date in his order, which gave rise to my above-cited blogpost. But then IRS failed to tell Judge Gustafson how the settlement agreement, which CKK’s bankruptcy stay voided, could be the basis for entry of decision. IRS now moves to enter decision based on the SNODs for two of the three years at issue, cutting the deficiency alleged in SNOD no. 3, and asking for reduced chops.

“Unlike his first such motion, it was complete, with no pages missing. Like the first motion, the second motion for entry of decision asks us to enter decision on the basis of the June 2015 agreement.” Order, at p. 2

Judge Gustafson, positively exuding benevolence toward an attorney clearly out of his/her depth (or perhaps oblivious to that 800-pound gorilla wearing a t-shirt emblazoned with “11USC§362(a)(8)” in day-glo orange letters 12 inches high), decides to treat the motion as one to dismiss for lack of prosecution.

CKK has dropped out of sight, perhaps better to prepare his next bankruptcy petition.

So maybe IRS will finally nail CKK, despite counsel’s somewhat less than stellar performance. Judge Gustafson has his hand and invitation extended.

But wait, there’s more.

“One issue requires supplementation: Although the motion makes a showing of compliance with section 6751(b)(1) as to the penalties for 2008 and 2009, with a ‘Civil Penalty Approval Form’ dated ‘12/20/11’, the motion makes no such showing as to the penalty still asserted for 2010, in the amount of $2,614.80. We do not know whether this omission as to 2010 was an oversight, or whether the Commissioner takes the position that section 6751(b)(1) does not apply to the penalty at issue here, or takes the position that a movant under Rule 123(b) does not bear a ‘burden of production’ pursuant to section 7491(c). We will require the Commissioner to explain his position on this issue.” Order, at pp. 3-4.

I’ll drop a wee hint to IRS’ counsel: watch the Rule 123(a) vs Rule 123(b) distinction. See my blogpost “Defaulters,” 5/27/14, and the cases therein referred to. Remember that post-Graev burden of production may be burden of proof, at least in 2 Cir.

As a much finer writer than I put it. Except 2/19/18 is a holiday in DC, so Tax Court is closed, wherefore opinion, decision, and order issue not from The Glasshouse at 440 Second Street, NW.

See y’all tomorrow.

Judge David Gustafson is sometimes a trifle idiosyncratic in retaining jurisdiction over cases in long-term reporting mode. See my blogpost “He Loves Me Not, He Loves Me,” 12/8/17.

But when he has locked onto jurisdiction in a case, he grapples it with hoops of steel, as a much finer writer than I put it.

So here’s a designated hitter to close out the work-week before the born-again Presidents give us a three-day break, Robert Rose, Docket No. 2060-17, filed 2/16/18.

Back in November last year, Judge Gustafson put Rob and IRS on the 90-day reporting list, and explicitly retained jurisdiction.

But when IRS reported yesterday for the first time on the new regime, IRS’ counsel asked “Respondent requests that Judge Gustafson retains jurisdiction of this case and orders another status report due in May or August 2018.” Order, at p. 1.

It must have been a very long day for that Obliging Jurist, because Judge David Gustafson waxes a wee bit testy, giving IRS a wake-up call.

First, you make motions. Putting requests for judicial intervention in status reports runs the risk of your request being overlooked. Moreover, the Judge can’t stamp the document “Granted” or “Denied” without engaging in busywork.

But ever willing to go the twain, or even the thrain, when a litigant, be the litigant a humble pro se or even the Com’r hisself, asks him to go the mile, Judge Gustafson does it.

“Moreover, in this instance, the request was unnecessary, and no motion was needed. By the Court’s order of November 27, 2017, the undersigned judge had already retained jurisdiction and had already required the filing of periodic status reports (“… and every 90 days thereafter”). However, respondent’s inclusion of the request in his status report makes us suppose that he may have overlooked the requirement of periodic status reports in our prior order and might fail to comply with that requirement unless we issue yet another order.” Order, at p. 2.

Shortening somewhat C. L. Dodgson’s immortal line, Judge Gustafson says “What I tell you two times is true,” and confirms that his above-referred-to order remains in full force and effect.

We attorneys very often need to send our jackets to the cleaners; organic dry cleaners are good at removing the tire tracks left by the buses under which our clients have thrown us.

Here’s Timothy L. Blixseth, Docket No. 1422-14, filed 2/16/18. Tim’s counsel got IRS to drop Tim’s deficiency from $6 million to $1.3 million, and stipped to entry of decision in that amount.

Tim is unhappy with that. So unhappy is Tim, that he has his counsel move to have Tim relieved of the stip. Counsel claims that the magnitude of his error regarding an NOL Tim claims he had is so great as to shock the conscience.

Well, I don’t know about y’all, but as for me, it doesn’t even rate a Claude Rains Casablanca comment. And it certainly doesn’t for Judge Cohen.

Here’s Tim’s counsel’s story. “As the trial date grew near, most of my attention was focused in preparation for the expected trial in Timothy L. Blixseth v. Commissioner, docket number 24653-12. I did not give the Stipulation of Settled Issues the scrutiny it appropriately required. I glanced at paragraph 10 and believed that the amount that was being disallowed was the amount that was being allowed in that stipulation and that amount disallowed was the amount being allowed in the stipulation as the pass through loss.

“This was a unilateral error on my part. KB of District Counsel’s Office made no representation concerning the numbers and at no time tried to mislead me.” Order, at p. 2.

I will not, of course, name Tim’s counsel here. He’s suffered enough. I can’t think his carrier is particularly happy with his story, either.

But Judge Cohen, despite IRS’ “somber reasoning and copious citation of precedent” regarding not vitiating stips for unilateral mistake, told Tim and counsel last month that they could offer proof and try to show that could do better on a trial than they did by stipping out.

Of course they did, and can’t.

“Petitioner provides no reason to believe that he is likely to achieve a better result than the compromise reflected in the Stipulation, and a better result seems unlikely because of the unavailability of complete contemporaneous records, the necessity of estimates rather than reliable evidence of losses claimed, and the passage of time since 2008. His offer of proof shows no more than that witnesses would testify as to the preparation of returns in order to assert that the amounts claimed were correct.” Order, at p. 3.

Besides, going to trial would have a negative knock-on for another case, where Tim is tax matterer, that has been floating around for five (count ‘em, five) years.

“The record reflects substantial prejudice to the Court and to respondent if the settlement previously reached is vacated and trial preparations must begin anew. The record does not show an unconscionable result if the Stipulation is enforced. Neither legal precedents nor considerations of justice favor petitioner’s motion.” Order, at p. 3. (Citation omitted).

If I may draw an inference from Judge Cohen’s remarks, enough already.

If you want out of a stip, you’d better have a real good story. Especially if you just saved $5 million plus chops.

The seemingly never-ending benevolence of Judge David Gustafson again manifests itself as that Obliging Jurist gives some well-meant advice to Christine Robinson, Docket No. 16653-17, filed 2/16/18.

Chris doesn’t want to stip to facts. IRS wants an OSC per Rule 91 to require Chris to tell Judge Gustafson (and IRS) why she doesn’t agree with IRS’ version of the facts.

Judge Gustafson explains.

“Under this Court’s rules, the parties have a duty to cooperate in preparing a joint stipulation (i.e., a written statement signed by both parties) setting out the agreed facts in the case. For Ms. Robinson’s information, we stress that the stipulation process is often a substantial help to the petitioner, especially a petitioner who does not have a lawyer. The stipulation usually includes documents that the petitioner would otherwise have to offer into evidence during the trial of the case–a process that the self-represented petitioner finds somewhat difficult. But when instead petitioner’s intended evidence is included in the stipulation (as the IRS seems to appropriately propose here), then that evidence comes in at the beginning of the trial without further effort by the petitioner. And in case Ms. Robinson is concerned that her cooperating in preparation of the stipulation might somehow bar her from producing at trial additional evidence not included in the stipulation, we assure her that it does not. She can offer additional evidence not included in the stipulation.” Order, at p. 1. (Emphases by the Court).

Judge, I can understand why you don’t want to watch a pro se fumble with trying to lay a foundation, struggle with hearsay and all its variants, and chew up time and transcript paper in the process of getting a bank statement or a credit card slip into evidence. Neither you nor IRS’ counsel is on the clock. And if I were on the case and on the clock, I’d have compunction about billing a client for that time.

Moreover, without prejudging, Judge Gustafson doesn’t think IRS is trying to wildcard in any off-the-wall, non-verifiable stuff.

But he’ll let Chris tell her side of the story.

I note that Chris’ case in set for trial in Columbia, SC. Well do I remember that city and the adjacent Federal premises from the days of my youth. But it’s Judge David Gustafson’s home territory, so perhaps his benevolence extends even wider around there.

Next up will be the story of one who stipulated not wisely nor well, but is stuck.

Judge Buch has a busy day with designated off-the-benchers. Here, he paints the picture of an artist of many talents, Collin S. Pulsipher, in Collin S. Pulsipher & Marcella P. Pulsipher, Docket No. 5409-17S, filed 2/15/18.

“Mr. Pulsipher considers himself to be a professional artist. What he means by that is that he is a man of many talents and interests, all of which broadly fall into the arts. He has worked in fashion. He has worked as a musician. He has worked on set design. As relevant to…the year in issue, he was employed on production sets. He was also winding down his involvement in a band. And he was taking. the initial steps toward pitching a reality TV show.” Order, transcript, at p. 4.

Collin’s idea for the reality TV show brings to mind a 2004 film that won an Oscar for best song, sung on Oscar night by a former client of a firm with which I was then associated. Collin was going to do a motorcycle excursion with a camera attached. Judge Buch isn’t certain whether this was business or pleasure, but it doesn’t matter since the concept never went anywhere. And IRS disallowed all of Collin’s business-type deductions.

“The bulk of Mr. Pulsipher’s expenses are related to the preliminary steps he took to develop a reality show. Generally, expenses under section 162 are deductible to the extent that they relate to a functioning business at the time the expenses were incurred. A functioning business is one that is performing the activities for which it ïs organized. The bulk of Mr. Pulsipher’s expenses are related to the preliminary steps he took in developing a reality show, and not his income as a musician. Because those expenses are not related to a functioning business, they cannot properly be offset against his income as a musician.” Order, transcript, at p. 7. (Citations omitted).

And as start-up expenses, these items, though documented to some extent, are a nonstarter.

“To the extent his expenses relate to a new business, section 195 disallows business expenses for start-up expenditures. A start-up expenditure is any amount paid or incurred in connection with: (1) investigating the creation or acquisition of an active trade or business (2) creating an active trade or business, or (3) any activity engaged in for profit and for the production of income before the day on which the active trade or business begins in anticipation of such activity becoming an active trade or business. In all instances, the amount in question must be allowable as a deduction in the case of an existing active trade or business. Because the reality show was a new venture and not an active business, Mr. Pulsipher’s expenses are not deductible under section 195.” Order, transcript at pp. 7-8. (Citations omitted).

But all is not lost. Judge Buch lets Collin have his drumsticks, lyric books and studio rental deductions. Section 274 strictures don’t apply, and Collin did make a few bucks as a musician.

And Collin & Marcella avoid one of the chops. IRS asserted the five-and-ten (understatement of tax of $5000 or 10% of tax, whichever greater); but that must await the Rule 155 beancount.

In the alternative, IRS wants negligence. However, the issue here wasn’t recordkeeping or substantiation.

“…the expenses that have been disallowed were not disallowed for lack of substantiation. The expenses were disallowed because start-up expenses for a reality show were improperly aggregated with the income from being a musician. Mr. Pulsipher credibly testified that he discussed these expenses with his return preparer. We understand from Mr. Pulsipher’s testimony that it was the return preparer who aggregated those expenses. On this record, we cannot say that Mr. Pulsipher was negligent. We need not reach the issue of the quality of his substantiation.” Order, transcript, at pp. 9-10.

Bang the drum and blame the preparer. It works, sometimes.

The statistical wizards at The Glasshouse have posted the pass-fail numbers and percentages for the Tax Court admission exam for non-attorneys (no lawyers need apply) for the last eight biennial cycles (that’s sixteen, count ‘em, sixteen, years).

Here’s my take on those numbers. And please remember, like a lot of lawyers, math is not my long suit.

92 on average took the test, and 12 on average passed. The best year was 2014, with an 18.25% pass rate, the worst was 2004, with a 5.56% pass rate.

Casualty rates like that make you weep.