Counsel for Pierre L. Broquedis, Docket No. 14214-18, filed 11/30/18, has a tough fight. He wants to strike a bunch of IRS’ exhibits to its answer, and a paragraph thereof, claiming it’s false.

Well, the exhibits are summaries of what IRS hopes to prove, and the paragraph states the attached copy of the SNOD is a true copy thereof.

The Judge With a Heart, STJ Rob’t N Armen, isn’t having any.

“Under Rule 52, Tax Court Rules of Practice and Procedure, the Court may order stricken from any pleading any redundant, immaterial, impertinent, frivolous, or scandalous matter.

“Motions to strike are not favored by the Federal courts. A matter will not be stricken from a pleading unless it is clear that it can have no possible bearing on the subject matter of the litigation.” Order, at p. 1.

And in case of doubt, let it all come in and sort it out on the trial.

“Based on a review of the motion papers and the pleadings in this case, the Court concludes that the allegations and exhibits that are the subject of petitioner’s Motion To Strike clearly bear a relationship to the issues in this case. The Court further concludes those allegations and exhibits are therefore best left to a determination on the merits. Lastly, the Court concludes that petitioner has failed to show that material prejudice to him will result by a denial of his Motion To Strike.” Order, at p.3.

There’s six figures of deficiency and chops here, so maybe the motion was worth a try. But I doubt it.

Tax Court enters the last decade of the Twentieth Century, and teeters on the edge of the first decade of the Twenty-First, as the electronic petition is in the wings. And if State yanks your passport at Treasury’s behest because you owe big-time, the Glasshouse Gang has new rules to help you get it back.

Here’s the ganze megillah: https://ustaxcourt.gov/press/113018.pdf

Other changes from previous Congressional legislation are here, too. Interest abatement, innocent spousery, the Federal Rules of Evidence (unalloyed with USDCDC’s nonjury variations), and Form 2 Petition are featured.

The new Form 2  has the passport yank added, although the filing fee is still last on the list. Ch J Maurice B (“Mighty Mo”) Foley is still ready from the getgo to toss the impecunious or the dilatory, so watch it.

Lest we all get too het-up about the coming All-Electronic Era, note this (from Tax Court’s non-existent press office): “Before the Court implements electronic filing of petitions and certain other papers, however, the Court will furnish detailed information about those procedures in the Court’s electronic filing guidelines on the Court’s Web site.”

Cain’t hardly wait.

Getting ready for the great Handelian seasonal singalong, I came across a designated hitter from Judge Mary Ann (“No Cognomens”) Cohen. Judge Cohen tosses IRS’ expert appraiser’s report and grants petitioner’s in limine motion in Donald L. Bren, Docket No. 20942-16, filed 11/29/18.

IRS’ expert appraiser, whom I’ll call Mr. P., will be unavailable to testify on next month’s trial “…because of various family catastrophes recently occurring. The Court indicated an inclination to grant the Motion in Limine but had planned to have voir dire of Mr. P conducted at the commencement of the trial before ruling on the Motion in Limine. In view of Mr. P’s apparent unavailability, however, the Court decided to grant the Motion in Limine upon receipt of an additional filing by petitioner and agreement that Mr. Perdue’s deposition would be marked as an exhibit in this case (not to be received in evidence).” Order, at p. 1.

Turns out that Mr P. discarded paper and deleted electronics he looked at but disregarded in reaching his conclusions.

When IRS responds to Don’s motion to toss Mr P’s testimony, Judge Cohen is less than enthused.

“Respondent’s response posits extreme situations where a prospective expert might investigate or review material that is not reduced to paper or electronic methods of preservation. Respondent ignores the facts of this situation where the expert admittedly destroyed materials after deciding to reject their use in his analysis. Data considered and rejected may be as significant as data considered and adopted. Deliberate omission and rejection of data and the reasoning of the analysis are the essence of cross-examination of an expert witness, and impairing cross-examination by destroying rather than producing such materials is inherently prejudicial to the adverse party. In this case, the explanation of why the expert deviated from previously expressed opinions deserves careful examination. Under these particular circumstances, it is not necessary to address other cases and their similarities or distinctions.” Order, at pp. 1-2.

Tossing Mr P only torpedoes IRS’ increased deficiency, as to which IRS has burden of proof. Don still has burden of proof as to the basic deficiency.

And Don doesn’t have a walkover. “The time spent at trial will best be focused on the reliability of petitioner’s expert’s opinion.” Order, at p. 2.

The material your expert reviews may be “despised, rejected,” but don’t shred or delete unless you want to be the one “acquainted with grief.”

No, not Pres. Nixon’s 1971 initiative that has been either a blessing or a curse (depending upon your point of view). This is IRS’ ongoing fight to tax to the uttermost limits of the law the medical MaryJaners in the 33 (count ‘em, 33) States where medical vegetation is legal.

And IRS slugs successfully the wannabe “gold standard” of the Golden State’s medico-potteries, Patients Mutual Assistance Collective Corporation d.b.a. Harborside Health Center, 151 T. C. 11, filed 11/29/18.

The fight is over COGS (Cost Of Goods Sold), an adjustment to gross receipts, not a deduction. Per Section 280E, P-MAC can’t deduct expenses for trafficking in a controlled substance, which cannabis is, despite attempts to remove it from the schedule; Judge Holmes has a list of eight such attempts, 151 T. C. 11, at p. 36, all unsuccessful.

If you’re coming late to the party, see my blogposts “Everybody Must Get Stoned,” 8/3/12, and “He Canna Care,” 10/22/15. Judge Holmes cites extensively to the cases I discussed.

So if COGS are all this is about (and it is; see below for the rest), can P-MAC capitalize per Section 263A, or are they stuck as “resellers” with the much more restrictive Section 471 rules?

P-MAC first claims that DOJ stiped out with prejudice their attempted civil forfeiture of the premises wherein P-MAC operated. But that’s no basis for claim preclusion, as DOJ and P-MAC couldn’t have tried the tax issues in the civil forfeiture. And the case P-MAC cites goes more to election of remedies than claim preclusion.

Next is the obligatory dictionary chaw. Judge Holmes twice quotes Shakespeare, and every dictionary the parties and he can find going back to 1893 (I kid you not; 151 T. C. 11, at pp. 29-30). The issue is where the words following the phrase “consists of” in Section 280E is an exhaustive or non-exhaustive list.

Read the opinion. Exhaustive or non-exhaustive? I’m exhausted.

If exhaustive, P-MAC wins, but Section 280E is eviscerated. Can’t have that. And while Congress prevents DOJ from spending taxpayer cash on medico-pottery-busting, that doesn’t obliterate Section 280E as far as IRS is concerned; they’re Treasury, not Justice.

I’m sure some of my readers are saying “It’s not justice, that’s for sure.”

Howbeit, Judge Holmes finds that allowing P-MAC Section 263A capitalization would allow an end-run around Section 280-E and Section 263A(2), which says if an expense wasn’t allowable before Section 263A took effect, it can’t be capitalized now. “So if something wasn’t deductible before Congress enacted section 263A, taxpayers cannot use that section to capitalize it.  Section 263A makes taxpayers defer the benefit of what used to be deductions–it doesn’t shower that as grace on those previously damned.” 151 T. C. 11, at p. 53.

Judge Holmes the Puritan?

On facts and circumstances, P-MAC is only running a pottery, no other trade or business; its ancillary services (mandated by CA law) and gift shop activities only provide one-half of one percent of the gross. Their marketing and branding aren’t separate trades or businesses, because they weren’t conducted or reported that way.

And on facts and circumstances, P-MAC is a “reseller,” not a “producer,” per Section 471, so their COGS are substantially reduced. They don’t do enough with the stuff and keep it under tight enough wraps.

I have to give P-MAC’s attorneys a Taishoff “good try.” The found P-MAC a Constitutional argument. If they can’t treat their costs as COGS, they’re being taxed on more than their gross income, and the Sixteenth Amendment prohibits that. (Yes, protesters, it is valid).

“Harborside would get COGS adjustments for its direct inventory costs no matter what–even if it was trafficking cocaine or any other controlled substance not legal under California law.  The only things Harborside doesn’t get are indirect inventory costs granted as deductions and then deferred under section 263A.

“The section 263A capitalization rules don’t apply to drug traffickers. Unlike most businesses, drug traffickers can’t capitalize indirect expenses beyond what’s listed in the section 471 regulations.  Section 263A expressly prohibits capitalizing expenses that wouldn’t otherwise be deductible, and drug traffickers don’t get deductions.  Because federal law labels Harborside a drug trafficker, it must calculate its COGS according to section 471.” 151 T. C. Memo. at p. 56.

Now what’s missing from this picture? Hint, Judge Holmes is writing this opinion for a unanimous bench.

Those of my readers who’ve stuck with me through this laborious trudge will cry out with one voice “Section 6751(b) Boss Hoss!”

“This leaves only the issue of whether Harborside owes accuracy-related penalties under section 6662(a).  We will address this issue in a separate opinion.” 151 T. C. 11, at p. 62.

Cain’t hardly wait.

The free-and-easy discovery practice in Tax Court is certainly a relief to the weary practitioner, accustomed to the endless scrapping, jousting and push-and-shove of State court (and even sometimes Federal court), with endless appeals to the overburdened courts to play schoolyard monitor.

“Play nice” and “talk among yourselves” are the watchwords.

Except.

Here’s Judge David Gustafson, the blogger’s obliging friend, with a designated hitter and a discovery suggestion for IRS in Palmolive Building Investors, LLC, DK Palmolive Building Investors Participants, LLC, Tax Matters Partner, Docket No. 23444-14, filed 11/28/18.

IRS wants to amend its answer to KO Mike Ehrmann’s appraisal of the Palmolive façade. IRS claims Mike was a “promoter” of a dodge, thus unworthy of the Palmolives’ confidence.

Mike’s been around and had a bumpy time of it, finally being enjoined by USDCNDOH “from preparing any further property appraisals for federal tax purposes.” See my blogpost “The Façade Collapses – Redivivus,” 6/20/14.

But the Palmolives were a wee bit casual in pleading good faith reliance. “(The petition did not explicitly assert a defense of ‘reasonable cause’ pursuant to section 6664(c)(1). Palmolive has never sought leave to amend the petition to assert such a defense.)” Order, at p. 2.

Nevertheless, IRS is also a trifle ambiguous. Though the Palmolives’ ambush claims are thrust aside, Judge Gustafson wants IRS to bukh with some more specificity. And he uses a tried-and-true method familiar to all of us.

“Palmolive correctly states that ‘Respondent has provided no facts to support his new promoter allegation.’ Given the petition’s lack of specificity about penalty defenses, this defect does not incline us to deny the motion for leave. However, we will require the Commissioner to communicate to Palmolive detailed allegations about its contention that Mr. Ehrmann was a promoter, so that Palmolive can prepare for trial.” Order, at p. 5.

The bill of particulars is alive and well in Tax Court.

I do not know if Judge Holmes ever heard these words at a funeral service, but he certainly reflects on that seventeenth-century sentiment in Estate of Lydia Ramirez, Deceased, Rowena L. Ramirez, Special Administrator, 2018 T. C. Memo. 196, filed 11/28/18.

The late Lydia was a busy entrepreneur until illness caught up with her. She ran businesses that she reported as active, and ran a bunch of rental real estate she reported as passive, but never elected aggregation directly, by PLR or by Rev. Proc. 2011-34, 2011-24 I.R.B. 875. Nor had she logs, timesheets or GPS readouts to establish professionalism when daughter Rowena had to deal with the two years at issue.

IRS disallowed the late Lydia’s pro status, thus preventing her passive losses from offsetting active gains. And Judge Holmes agrees.

It’s the usual fact-bound Section 469 mélange. Rowena’s claim that she often visited her late mother collides with Judge Holmes’ arithmetic and Rowena’s day job. And her mother’s many illnesses (“She was suffering from hypertension, diabetes, emphysema, subclinical congestive heart failure, and diffuse microvascular disease.” 2018 T. C. Memo. 196, at p. 9) may have hindered her work activity, despite Rowena’s claim otherwise.

So why am I telling you all this? And why the quote from a burial service?

Well, IRS gave the late Lydia a SNOD before she became the late Lydia. And Lydia petitioned. But prior to trial, the late Lydia succumbed, so Sp’l Adm’r Rowena took up the fight.

And on said trial IRS failed to put in evidence the Boss Hoss Section 6751(b) sign-off to sustain the five-and-ten chop that would clearly ensue.

So we’re standing at the Graev.

But who has the burden of production, the late Lydia (an individual), the estate of the late Lydia (a “taxpayer” but not an individual), or the IRS (the usual suspect)?

When the tax liability is that of the estate, Tax Court has treated the estate as an individual for Section 7491(c) production purposes. But in all the cases Judge Holmes can find, IRS had the Boss Hoss sign-off and got it into evidence. So the distinction made no difference.

Here it does. And they key is the nature of the proceeding wherein the chops are in play.

Judge Holmes: “We need to focus…on the nature of the proceeding.  Is this case a proceeding with respect to the liability of Ramirez as an individual or of her estate?  We think the answer is that it is a proceeding to determine the liability of an individual.  Even though Ramirez’s additional tax liability had not been assessed at the time of her death, it was established and constituted a debt due the United States while she was still alive.” 2018 T. C. Memo. 196, at p. 33 (Footnotes and citations omitted, but read them for your next memo of law).

Remember, the Section 6662 chops IRS wants are treated and assessed as tax.

Burden of production on IRS, so without the Boss Hoss sign-off, Sp’l Adm’r Rowena wins on the chops.

That’s Judge Ashford’s admonition to Glenn Cunningham Ballard and Yu-Yuan Pu, 2018 T. C. Sum. Op. 53, filed 11/27/18, but it especially goes for Glenn. It seems he’s a pro, but the wrong kind.

Glenn “…was a certified public accountant (C.P.A.).  He earned a bachelor’s degree in business administration with a concentration in accounting, and a master’s degree in taxation.  During the years at issue Mr. Ballard attended part time (Saturdays from August to May with a brief break in December) the University of California, Berkeley, for a master’s degree in business administration (M.B.A.).” 2018 T. C. Sum. Op. 53, at pp. 3-4.

Glenn also ran seven (count ‘em, seven) rental properties, but only two were in his home State of CA; the remainder were across the continent in GA. Yu-Yuan claimed she helped, but she was raising three small children at the time, and whatever she did was investor stuff, not operator stuff.

Glenn’s substantiation of hours spent real estating fell short. He had logs, but they weren’t contemporaneous.

“These logs were not kept contemporaneously; Mr. Ballard created them from his recollection of activities in conjunction with reviewing emails, phone records, receipts, rental applications, and rental agreements.  With respect to Ms. Pu’s hours in particular, many of them were for nonmanagerial activities, i.e, investor-type activities.  Petitioners did not provide time logs for [two of the three years at issue] but provided to respondent on the day of trial copies of documents consisting of invoices, receipts, checks, rental applications, rental agreements, and letters.  Except to the extent allowed by application of section 469(i), respondent disallowed petitioners’ claimed loss deductions for the years at issue because their residential rental activities were passive activities in the context of section 469.” 2018 T. C. Sum. Op. 53, at pp. 5-6.

Even allowing (without deciding) that Glenn and Yu-Yuan were in a real estate trade or business, and that they both materially participated, they didn’t substantiate the hours.

And that’s where the chops come in. IRS wins the reopener to let in the Section 6751(b) Boss Hoss signoff, so Glenn must show good faith.

“Given Mr. Ballard’s experience, knowledge, and education, there is no justification for his misunderstanding of the law.  He testified that he has never dealt with tax preparation in his work experience although he is a C.P.A. with a professional degree in taxation.  Mr. Ballard has owned residential rental properties for over 10 years.  His professional background and real estate experience make it unreasonable for him to conduct these activities and not properly document the time that was invested into petitioners’ residential rental properties.  Accordingly, we sustain respondent’s determination regarding the accuracy-related penalties….” 2018 T. C. Sum. Op. 53, at pp. 19-20.

Glenn may not have been a real estate pro, but he was enough of a tax pro to know.

The Conundrum Tsunami

George A. Valanos & Frederica D. Valanos, Docket No. 29176-14, filed 11/26/18, thought they’d gotten valid subordinations from the two holders of the three deeds of trust (or maybe they’re mortgages or something in-between) on their historic Dumbarton Ave. house in Our Nation’s Capital.

Of course, they never mentioned insurance proceeds, so IRS wants partial summary J knocking out “joy forever,” since if the mortgagees (or trustees) can glom the insurance proceeds, then goodbye tax deduction, per Sec. 1.170A-14(g)(6)(ii).

That sends Judge Gustafson off on a classic Judge Gustafson conundrum tear (or is it conundra?), with a long soak in Palmolive (the case, not the soap; see my blogpost “No Joy Forever – Because Golsen,” 10/11/17). Judge Gustafson, mildly steamed that 1 Cir let Gordo and Lorna Kaufman play the “so remote as to be negligible” gambit when their lenders didn’t relinquish the condemnation or casualty booty, lowered the cliché in Palmolive, played Golsen in Chicago, and wiped out the deduction.

But in today’s designated hitter on DC law, there are numerous real property questions undreamt-of in the philosophies of the Valanos’ attorneys and IRS’ counsel. What is a DC mortgage? Is a DC mortgage a conveyance of title determinable or a lien or something in-between? What does the DC recording statute do for an unrecordable instrument attached to a recordable one? Must subordinations (whatever they are) be recorded separately? Can one cure a defective recorded instrument nunc pro tunc? What if a holder of two deeds of trust or mortgages signs only one subordination agreement? What is an assignment of insurance proceeds in a mortgage-deed of trust; is it a present right or a future interest (no proceeds without casualty loss and collection from insurer: don’t ask, I got one of those right now)? What rights (if any) have third parties who buy one of these mortgages or deeds of trust?

Oh, and by the way, must a subordination agreement use the precise word “subordinate”? In my young day, our motto was “Suborn, but never subordinate.” Just kidding.

Seriously, I’m only scratching the surface of Judge Gustafson’s law review article on DC mortgage law.

There’s lots of “somber reasoning” but no “copious citation of precedent,” largely because the parties didn’t provide any, and he isn’t going to.

“We find inadequate legal authority in the Commissioner’s and petitioners’ filings to enable us to conclude whether the purported subordinations…were effective under D.C. law, and we will not sua sponte undertake such research and analysis to decide this motion for partial summary judgment.” Order, at p. 21.

So after 27 pages of digging through DC statutes and the Section 170 regs, with a bow to Palmolive, Judge Gustafson unloads nineteen (count ‘em, nineteen) questions for the midterm exam, answers due December 21.

He may bring doughnuts and coffee to calendar call, draft your papers for you and visit you in the slammer to try your case, but he’s not doing your research for you.

The following appears on the United States Tax Court’s website, in red, hence the title.

The United States Tax Court will be closed and paper documents will not be accepted for filing on Friday, November 23, 2018.

So I infer the Glasshouse Gang at 400 Second St, NW, has had enough of turkeys, both those with wings and those without.

See ya Monday.

Often have litigants, and not only the self-represented, ascribed to Tax Court powers which the Constitution and Congress have vested in the Article III courts. As an Article I court (see Art. I, Sec. 8), Tax Court is truly inferior.

I know my readers hardly need be reminded that Tax Court’s principal occupations are determining deficiencies and reviewing CDPs.

Today Judge David Gustafson has a designated hitter that reinforces the lesson, M. Sue Hawkins, Docket No. 19223-17, filed 11/21/18.

M. Sue says she was sick, so she missed showing up in the Mile-High City to try her case. IRS moved to toss for non-prosecution, and after the usual OSC, Judge Gustafson tossed her petition.

A couple days later (hi, Judge Holmes), M. Sue sends in a letter, which Judge Gustafson, obliging as always, characterizes as a Rule 161 vacation request.

“The letter states she does not owe any unpaid taxes. Her brief statement in her recent letter seems to be similar her petition [sic] (Doc. 1), in which she states that she ‘may have filed incorrectly’ (i.e., on her tax return) but that ‘as far as I can tell, the deficiency alleges was paid on my behalf by my retirement account.’” Order, at pp. 1-2.

Maybe the shortfall was paid, but that’s not the point.

“Our jurisdiction in this case is not to determine whether her tax liability has been paid but rather to determine what that liability is. In particular, we are to determine whether her … income tax liability is greater than what she reported on her return. Ms. Hawklins [sic] seems to admit that there is a deficiency in the tax she reported (the issue over which we have jurisdiction) but to contend that the deficiency has been paid (an issue over which we do not have jurisdiction).” Order, at p. 2.

If in fact the amount of deficiency had been paid, all Tax Court can do is dismiss for lack of jurisdiction.

So let IRS see if whatever they claim M. Sue owes was paid. And let M. Sue cooperate fully with IRS to establish whatever she claims.

But if she doesn’t play nice, her motion for vacation will be denied.