Archive for June, 2018|Monthly archive page


In Uncategorized on 06/18/2018 at 23:31

No, not Weller, Newcomb College, nor yet The Mad Potter of Biloxi, or any other whose works bring tears to David Rago’s eyes. Today we have another in the ongoing series examining cost of goods sold (COGS) as an offset to the earnings of the floggers of medicinal cannabis, Jesse M. Loughman and Desa C. Loughman, 2018 T. C. Memo. 85, filed 6/18/18.

Jess and Des have a Sub S. All their trafficking write-offs gets bounced; what COGS they could prove, they get. But they claim that their non-COGSnizable salary and wages are being double-taxed, as they can’t deduct them per Section 162 because of Section 280E, yet they have to put them on their 1040 MFJ.

“Petitioners contend that discriminatory treatment results from an S corporation’s being required to pay a reasonable wage as a salary to its officers pursuant to sections 3111, 3121, 3301, and 3306, as other entities are not subject to this reasonable wage requirement. The Code sections which petitioners refer to apply to the administration of employment taxes. The parties are not disputing the reasonableness of the wages. Rather, petitioners are contending that this reasonable wage requirement results in double taxation.” 2018 T. C. Memo. 85, at p. 8.

Tough, says Judge Kerrigan.

“If petitioners had hired a third party to perform the officer duties that they performed, and they paid that third party an amount equal to that included as wages in petitioners’ gross income, petitioners’ gross income would not include the third party’s wages from [pottery]. Petitioners would ultimately have less income, but they would not owe Federal income tax on the wages paid to the third party. However, section 280E would still disallow [pottery]’s wage expense deductions not attributable to COGS. Petitioners’ flowthrough income would be the same.  The application of section 280E to deny Palisades’ wage expense deductions is not discriminatory; it applies equally, regardless of whether petitioners themselves or a third party receives the wages.

“To the extent that petitioners believe they received disparate tax treatment as a result of organizing their marijuana business as an S corporation, petitioners were free to operate as any business entity and in other trades. Petitioners chose to operate [pottery] as an S corporation in the marijuana business. Petitioners are responsible for the tax consequences of their decision.” 2018 T. C. Memo. 85, at pp. 10-11.

Section 530 doesn’t help, because this isn’t an employee reclassification. Officers of a Sub S are statutory employees and can’t be reclassified.


In Uncategorized on 06/18/2018 at 22:53

Is it always wise to counter an adversary’s summary J motion with a cross-motion for summary J ? Maybe not, but I wish I had more insight into IRS’ decision to resist but not cross-move in Estate of Richard F. Cahill, Deceased, Patrick Cahill, Executor, 2018 T. C. Memo. 84, filed 6/18/18.

Pat Ex’r wants summary J that Reg. Section 1.61-22 economic benefit regime wipes out Sections 2036, 2018 and 2703. IRS says no it doesn’t, but there are material questions of fact.

Like what? “In his response to the estate’s motion, respondent argues that there are genuine issues of material fact. In its reply to respondent’s response, however, the estate argues that ‘the facts regarding the split-dollar transactions and the documents underlying the transactions remain undisputed.’ In its reply the estate concedes that it has no objection to respondent’s proposed findings of fact as attached to respondent’s response. And the heading of one section of the estate’s reply is ‘Respondent’s Summary of Facts Does Not Conflict with Petitioner’s’. Because the estate agrees with respondent’s characterization of the facts, we accept respondent’s summary of facts and proposed findings of fact as undisputed for the purposes of deciding the estate’s motion for partial summary judgment.” 2018 T. C. Memo. 84, at pp. 2-3 footnote 2.

It’s a split-dollar life insurance deal. The late Richard, 90 years old and incompetent, borrows $10 million via a self-settled trust (of which Pat Ex’r is trustee, and also the late Richard’s attorney-in-fact immediately prior to the time the late Richard became the late Richard), to buy life insurance on Pat Ex’r (individually), cousin William (trustee of another of the late Richard’s last-minute trusts) and Mrs Pat Ex’r. The late Richard’s trust and Pat are personally liable for the loan, but the policies are pledged.

The late Richard promptly becomes the late Richard.

It’s the usual stash of the cash surrenders of the policies. You can read all of ex-Ch J Michael B (“Iron Mike”) Thornton’s narrative, but in the end, the estate of the late Richard claims it has only $183K, where the cash surrender values aggregate $9.6 million and were stowed in the other last-minute trust.

Economic benefit applies only to gift tax, not estate tax. And the future possibility that Ex’r Pat, Mrs Ex’r Pat and cousin William might give gifts to their progeny to buy out the family business is a matter for the beneficiaries, not the estate. All they got was the cost of current life insurance premiums; the estate of the late Richard kept the rest.

But whatever the law, ex-Ch J Iron Mike won’t buy that this was an exchange of equivalent values. The late Richard’s trust, and thereby his estate, got $183K; Ex’r Pat, Mrs Ex’r Pat and cousin William got $9.6 million.

Anyway, ex-Ch J Iron Mike lets it all ride. “Respondent has not moved for summary judgment in his favor on any of the issues discussed. As there may be other facts or theories not yet presented, we decline to treat respondent’s response to the estate’s motion as a cross-motion for partial summary judgment.” 2018 T. C. Memo. 84, at p. 35.

I’m perplexed. Motion to revise?



In Uncategorized on 06/16/2018 at 00:04

Misconstruing the famous line from my daughters’ school days furnishes my headline. Today we have two exemplars of this restatement of the law of Tax Court.

First, Elliot P. Kakon & Ettie A. Kakon, Docket No. 24228-17S, filed 6/15/18. Ch J Maurice B (“Mighty Mo”) Foley catalogues nine (count ‘em, nine) documents accompanying their petition, but none is the magic SNOD or NOD. So the petition is dismissed, but Elliot and Ettie can try their luck in USDC or USCFC. Maybe.

Next is Joanna Kane, Docket No. 10988-17L, filed 6/15/18. IRS wants summary J.

“The liabilities in question in the instant case are trust fund recovery penalties (TFRPs). On April 5, 2018, the Court issued its Opinion in Blackburn v. Commissioner, 150 T.C. No. 9. In Blackburn the Court did not address whether I.R.C. § 6751(b)(1) applies to TFRPs because the record included a Form 4183, Recommendation re: Trust Fund Recovery Penalty Assessment, reflecting supervisory approval of the TFRPs in question. We determined that the Form 4183 was sufficient to enable the SO to verify compliance with I.R.C. § 6751(b)(1), assuming the IRS had to verify compliance in the first place.” Order, at p. 1.

I blogged Blackburn. See my blogpost “Robosigner? – Part Deux,” 4/5/18.

Except IRS hadn’t put in Form 4183 or anything else to show that supervisory approval was either requested or obtained before hitting Joanna with the chops.

So Judge Albert G (“Scholar Al”) Lauber gives IRS a chance to put up, and Joanna a chance to answer back.



In Uncategorized on 06/15/2018 at 00:49

Maybe not the seven times seventy freebies directed by a much more exalted authority, but that Obliging Jurist, Judge David Gustafson, has given Douglas Stauffer Bell & Nancy Clark Bell, Docket No. 1973-10L, filed 6/14/18, more than a couple of outs.

Now maybe Doug & Nancy were perplexed; see my blogpost “Forms and Letters,” 6/5/17. But their three (count ‘em, three) tossed bankruptcy petitions (each for failure to comply) don’t show much perplexity.

And Judge Gustafson made sure that, if and when Doug & Nancy stiped to anything, they wouldn’t waive their right to appeal any decision Judge Gustafson made. So he remanded Doug & Nancy to Appeals, whereat they supplied no Form 433-A and related info.

Of course the supplemental NOD sustained the NITL.

Doug & Nancy aren’t finished. Judge Gustafson warned them that no appeal lies from an order denying jurisdiction over the NFTL (as opposed to the NITL; see my blogpost above-stated); there has to be a decision. They nevertheless appealed.

And 4 Cir duly tossed their premature appeal.

So Judge Gustafson holds a phoneathon and tells Doug & Nancy, and IRS, to play nice; he even gives Doug & Nancy a list of LITCs. But IRS tips off Judge Gustafson that Doug & Nancy stand mute.

So Judge Gustafson in today’s order gives a timeline on this eight-year-long story. Doug & Nancy thrice got the 11USC§368 automatic stay and got tossed each time for noncompliance; got a remand to Appeals but failed to provide financial info, leading to another toss; and “pursued in this case–in disregard of this Court’s previous explanation of the proper occasion to appeal an adverse decision–a premature and pointless appeal to the U.S. Court of Appeals that was dismissed for reasons consistent with this Court’s explanation.” Order, at p. 7.

Judge Gustafson is a patient man, an obliging sort, but Doug & Nancy are pushing the cliché a wee bit too hard.

“Our order of March 22, 2018 (ECF 56) was intended to provide the Bells with one last opportunity–and to spur them on–to provide information to the Commissioner’s counsel in order to substantiate any contentions they may wish to make at trial or, in the alternative, facilitate a settlement of some or all of the issues remaining in this case. We took the extraordinary step of scheduling this case for trial at a special trial session, on a date that would give petitioners a 4-1/2-months-long opportunity to prepare for trial. It appears that so far they have ignored this opportunity.” Order, at p. 7.

So does Judge Gustafson toss Doug & Nancy? Not for Judge Gustafson the “impulse of a baser mind,” as a much finer writer than I put it.

Rather, he tells Doug & Nancy to correct IRS’s status report, or tell Judge Gustafson if they mean to drop their case (hint, hint), or repent and play nice with IRS and tell Judge Gustafson what they’ve done to show their repentance.

And they can always have another phoneathon.





In Uncategorized on 06/14/2018 at 06:22

In case you need one, Judge Albert G. (“Scholar Al”) Lauber has a checklist of losing arguments for the nontaxability of Social Security Disability Income (“SSDI”, 42 U.S.C. secs. 402, 423(c)(1) (2012); 20 C.F.R. sec. 404.130 (2017)).

Here’s Jon K. Palsgaard and Kimberly A. Kelly, 2018 T. C. Memo. 82, filed 6/13/18, delayed because I had to sort out a minor shunt with our State’s Attorney General’s office that ended well for all parties.

It’s Kim’s story (that’s Doc Kim, M.D.), and a sad one. Everyone agrees Doc Kim is disabled and can’t practice due to injury. She has a dust-up with her disability insurer, so applies for SSDI. And doesn’t report the payout.

Well, Section 86.

No, says Doc Kim, Section 104. And her lawyer, whom I’ll hereinafter designate as MTW, runs the checklist and gets a Taishoff “Good Try, Second Class,” but loses.

Workers’ Comp doesn’t work, because Congress said that SSDI is taxable under Section 86(d)(1)(A), so that quashed Section 104(a). And there’s no evidence that Doc Kim’s injury was work-related. Even if it was, SSDI doesn’t depend on employment status or past contributions to Workers’ Comp fund.

And it’s not “damages,” as there was no litigation. The “no-fault” argument wasn’t raised, but it wouldn’t work here anyway. See my blogpost “The Egg and I,” 1/22/15, in which appears the Perez case, cited by Scholar Al.

Finally, MTW tries the accident-health insurance provision in Section 104(a)(3), but SSDI isn’t accident or health insurance, because Congress said it wasn’t.

A handy checklist for Section 104. Thanks, MTW.







In Uncategorized on 06/13/2018 at 17:14

Bookkeeping was never a strong point in the potters’ field. The potters herein referred to aren’t ceramicists, but suppliers of State-legal medical vegetation; the kind we never inhaled. Much business is done in cash, and Section 280E’s preclusion of deductions for expenses of trafficking in the green goddess requires creativity and a legal side business.

Well, Laurel Alterman and William A. Gibson, 2018 T. C. Memo. 83, filed 6/13/18, are up before Judge Morrison, who eviscerates Laurel’s bookkeeper and paid preparer both as to inventory and separation of items of expense between Federal legal and Federal illegal expenses. Laurel ran the show, but Bill dropped his innocent spousery, so they’re in it together.

IRS is super-generous with cost of goods sold (not a deduction but an adjustment to gross receipts; see my blogpost “Everybody Must Get Stoned,” 8/3/12), but all the deductions go by the boards, because Laurel can’t show what was for legal, and what for illegal, and anyway the two were too close together for Judge Morrison’s (and Tax Court precedents’) liking.

If Accounting for Potheads is a course you want to take, read Judge Morrison’s excursus.

But the side business deserves better than this.

“Besides marijuana paraphernalia, Alterman testified that the dispensary also sold (1) hats and T-shirts with the name and business logo of Altermeds, LLC, (2) magazines about marijuana, (3) and chicken soup.  No documentary evidence corroborates the existence or extent of these sales.  On a preponderance of evidence, we find that no such items were sold.  Furthermore, these types of products as described by Alterman would generally complement the sales of marijuana by the dispensary.  For example, the hats and T-shirts as described by Alterman bore the name and business logo of Altermeds, LLC.  Thus, even if Altermeds, LLC, sold such hats and T-shirts, selling those items would have helped advertise medical marijuana.” 2018 T. C. Memo. 83, at p. 27, footnote 18.

OK as to the hats and t-shirts, and the maryjane mags.

But chicken soup?

Who ever had the stoned munchies and went for chicken soup?


In Uncategorized on 06/12/2018 at 16:33

Ronald A Caselli, 2018 T. C. Memo. 81, filed 6/12/18 (a celebrated date in these parts), is neither a waitron nor a barback or busperson, but finds he is tipped out when he tries to claim Section 45B credit for FICA his Sub S paid, when the Sub S (which had other shareholders) took deductions for the FICA payments. The Sub S employed persons who provided food and beverages on-premises and got tips, so FICA is on the table.

Ron A wants a new precedent, whereby a single shareholder can nullify the decision of the Sub S to deduct, rather than take the credit and pass it through to its shareholders, so the shareholder gets the credit. Remember, though a pass-through for income tax, when it comes to FICA/FUTA/ITW, a Sub S is an employer and a taxpayer.

Ron A says the Sub S could amend for the years at issue. Except the Sub S hadn’t.

Judge Cohen would ordinarily toss Ron A’s argument, but the question is sufficiently interesting.

“Because [Sub S] has never filed any amended returns, petitioner is essentially requesting an advisory opinion based upon a future contingency.  Normally, we would decline such a request. However, since there is little development of the law concerning section 45B in cases or otherwise, it is useful and expedient to discuss the provision and its application to the facts before us.” 2018 T. C. Memo. 81, at p. 4.

Section 45B gives the Sub S a choice; either deduct the FICA that the Sub S paid on the tips its employees got, so the taxable net for distribution to shareholders is diminished, or let credits for the FICA paid flow through to the shareholders. Obviously, the credit is a dollar-for-dollar offset against the shareholders’ personal income tax, where the deduction only results in less taxable income.

Since Ron A was dealing with $350K in fraud chops, which apparently got conceded to some extent, any direct offset to tax really helps Ron A.

So Ron wants to tip out the Sub S and take the credits himself.

“The answer seems quite straightforward.  Section 45B(c) explicitly provides that ‘[n]o deduction shall be allowed under this chapter for any amount taken into account in determining the credit under this section.’  Section 45B(d), titled ‘Election Not to Claim Credit’, further provides that ‘[t]his section shall not apply to a taxpayer for any taxable year if such taxpayer elects to have this section not apply for such taxable year.’  In combination, these two provisions suggest that when [Sub S] chose to deduct its FICA tax payments, it had made an election not to claim any FICA tip credits.  Indeed, [Sub S] never claimed, or intended to claim, FICA tip credits….  Consequently, on the basis of [Sub S]’s reporting position, petitioner is not entitled to any flowthrough FICA tip credits…. 2018 T. C. Memo. 81, at pp. 5-6.

Ron A isn’t stiffed by the foregoing.

“Petitioner agrees that [Sub S] elected not to claim any FICA tip credits. Nonetheless, he asserts that [Sub S] now seeks to change its election and ‘may claim the FICA Tips Credit pursuant to Section 45B’ by filing amended returns.  The evidence in the record contradicts his assertion.  [Sub S] has never stated its intention to change the election it made more than nine years ago.  Petitioner’s assertion, in effect, is that [Sub S]’s election could be changed unilaterally by his request made in his capacity as a shareholder.” 2018 T. C. Memo. 81, at p. 6.

Except corporate elections get made by corporations. Especially Sub S corporations; see Section 1363(c)(1) and Reg. 1.1363-1(c)(1). Of course, there’s an exception for mining deals and for foreign tax credits, but neither plays a part here.

Even if in this one case, the other shareholders in Ron A’s Sub S wouldn’t be hurt, so it wouldn’t be unfair, Judge Cohen isn’t creating precedents.


In Uncategorized on 06/11/2018 at 16:34

Sky M. Lucas, 2018 T. C. 80, filed 6/11/18, paid a bushelbasketful of legal fees in the course of disengaging from loved-once Margaret. The fight was over what part of the $47 million of distributions Sky got from his foundered investment advisory business after the investors bailed during the Great Meltdown of ’08 was up for equitable distribution. At close of play, the State court handed Margaret $7 million.

In the fight over the marital estate, Sky paid $3 million to his lawyers and allied professionals. He wants a deduction.

Judge Vasquez doesn’t give it to him.

“…whether legal fees are deductible expenses or nondeductible personal expenses depends upon whether the claim arises in connection with the taxpayer’s profit-seeking activities or his personal activities.” 2018 T. C. Memo. 80, at pp. 8-9 (Citation omitted.)

This formula is called “origin of the claim.” In the marital dissolution context, the test is “but for” the marital relationship, would the claim exist? And here it wouldn’t.

Of course, there are exceptions. Where would tax law be without exceptions?

“To be sure, a deduction for legal expenses is not necessarily precluded because the taxpayer’s underlying claim arose in a divorce action.  The regulations provide a limited exception under section 212 for divorce-related legal fees incurred for the production or collection of taxable alimony income.  The legal costs of securing rights to other forms of income are also deductible.” 2018 T. C. Memo. 80, at p. 9 (Citations omitted).

And there’s also exceptions for legal fees incurred for getting income out of a corporation owned by the taxpayer, and for resisting ex-spouse’s interference with taxpayer’s corporation.

But Sky’s case is none of the above.

Sky’s business activity was almost done when the fight started. Sky wasn’t trying to recapture taxable alimony from Margaret or trying to prevent her from interfering with his moribund investment advisory business.

Of course a Section 162 business legal fee deduction is better than a 212 production of income legal fee deduction. “A deduction of litigation costs under sec. 162(a) may be more desirable to an individual than a deduction under sec. 212. The primary advantage to a deduction under sec. 162(a), vis-a-vis a deduction under sec. 212, rests on each deduction’s effect on gross income and adjusted gross income. A deduction under sec. 162(a) is subtracted in full from gross income to arrive at adjusted gross income. A deduction under sec. 212 is subtracted from adjusted gross income to arrive at taxable income and is subject to certain floor limitations in sec. 67(a). The benefit from a deduction of litigation costs under sec. 212 may also be limited by application of the alternative minimum tax.” 2018 T. C. Memo. 80, at p. 8, footnote 8.



In Uncategorized on 06/11/2018 at 11:23

I quote Johann Wolfgang von Goethe. He was writing about the French Revolution. I am writing today about the end of Net Neutrality.

Because this is a nonpolitical blog, I will refrain from repeating my comments, made elsewhere, about the United States House of Representatives.

Henceforth the Internet is a toll road, not a highway, a tool of repression and suppression, not free expression; the oligarchy of the mind.

I will continue posting as long as I can. You may find my posts delayed, or vanished altogether.


In Uncategorized on 06/08/2018 at 17:15

No, this is not an essay concerning the predecessor to the UK’s Royal Air Force (1912 through 1918). It does concern an award, however. Rounder First Class is a title I award to a frequent pro se litigator and persistent protestor who has accumulated at least two (count ‘em, two) Section 6673 chops in a short period of time.

Today’s designee is Gary A. Bell, Sr., Docket No. 10625-17L, filed 6/8/18, a designated hitter from The Judge with a Heart, STJ Armen. But STJ Armen has scant sympathy for Gary.

“Petitioner is no stranger to this Court, having filed multiple prior actions, all to no avail. Respondent in his June 28, 2017 motion catalogs those actions, their outcomes, and their similarities to the present action. In sum, petitioner has been warned on numerous occasions, and he has also been the recipient of a penalty in one instance. Given petitioner’s failure to take those warnings and the prior imposition of a penalty to heart, and his persistence in uttering tax protestor rhetoric in the present case, the time has come to impose an even-greater penalty on him under section 6673(a)(1). The decision to do so is supported by the fact that the Court is convinced that petitioner instituted and maintained this proceeding primarily, if not exclusively, for purposes of delay. Having to deal with this matter wasted the Court’s time, as well as respondent’s, and taxpayers with genuine controversies may have delayed.” Order, at p. 5. (Footnote omitted, but it’s coming).

Ordinarily, a record like this would be necessary, but not sufficient, for RFC status. Gary, however, clears the bar, as the above-referred-to footnote makes clear. It refers to IRS’ catalog of Gary’s past activities.

“One update is required. Petitioner’s case at dkt. No. 27787-16 was pending at the time that respondent filed his motion in the present case on June 28, 2017. However, on July 31, 2017, the Court entered an Order And Order Of Dismissal For Lack Of Jurisdiction granting respondent’s jurisdictional motion and imposing on petitioner a penalty under section 6673(a) of $5,000. Petitioner did not appeal to the Court of Appeals. Although the Court’s dispositive order at dkt. No. 27787-16 occurred after petitioner commenced the present case, petitioner filed both of his Objections in the present case after entry of that dispositive order. Petitioner was therefore on notice regarding his frivolous positions, but he nevertheless persisted by advancing them once again in the present case.” Order, at p. 5, footnote 3.

Even though I didn’t blog it, check out that 7/31/17 order from STJ Armen, and compare it to today’s order. He’s got the form for a Gary order in his word processor. That clinches it.

Gary’s award of the RFC designation places him in the zone for the Scott F. Wnuck Award, named for the star of my blogpost “One’ll Get You Five,” 5/31/11, and petitioner in one of the most-cited rounder cases.