Once again it’s all about timing, and Judge James S (“Big Jim”) Halpern is on the case in a designated hitter, Sheila Ann Smith. Docket No. 1312-16L, filed 8/30/19.

Thanks to the Glasshouse Gang and Judge Big Jim for posting this before the usual 3:30 p.m., EDT release. Even bloggers deserve an early out before a three-day weekend.

Judge Big Jim tried this one in May two years ago, and briefing was complete. But Sheila Ann made a motion to reopen the record to make sure IRS had gotten the essential Section 6751(b) Boss Hoss sign-offs for each and every one of the six (count ‘em, six) Section 6702 frivolity chops they laid on Sheila Ann.

“These submissions were either (1) original filings, (2), a copy of the original filing, or (3) purported copies of an original filing for which respondent claims he possesses no record of receiving. Additionally, petitioner submitted an original Form 1040X, Amended U.S. Individual Tax Return…. In total, six discrete submissions were received by respondent in [year at issue].” Order, at pp. 1-2.

Feels like it just happened yesterday?  Well, of course it did. See my blogpost “From the Serious to the Frivolous,” 8/29/19.

Judge Big Jim allows Sheila Ann is right to challenge the Boss Hosses. But IRS already put the Forms 8278 in on the trial. So Sheila Ann’s “…motion to compel discovery (motion) requesting that we order respondent ‘to provide evidence that proper approval was made related to all § 6702 penalties that have been asserted upon Petitioner, showing that an Immediate Supervisor approved them in writing prior to penalties being asserted upon Petitioner,’” Order, at p. 2, gets denied.

Nevertheless, Sheila Ann’s trial happened before all the Graev silt and Clay got stirred. Fans of the evolution of Boss Hossery should read Judge Big Jim’s exposition at p. 3 to be brought up to date on timing.

Nonetheless, Judge Big Jim orders supplementary briefing on the Kalin Twins’ 1959 hit, “When.” And he gives Sheila Ann a couple pointers (hi, Judge Holmes, enjoy the weekend).

“Her motion is unwarranted, however, as the evidence that she seeks is presently in the record. She may find respondent’s citations to the record in his opening seriatim brief particularly helpful in that regard. But because briefing in this case concluded before the recent developments in our case law concerning by when supervisory approval of penalties must be obtained. We wish to extend to the parties the opportunity for additional briefing addressing whether the supervisory approvals of the six section 6702 penalties assessed in this case were timely.” Order, at p. 3.

At least Judge Big Jim doesn’t ask for briefs (if any) sooner than the week after next.

Enjoy the weekend, everybody.

The Thursday afternoon of that Obliging Jurist, Judge David Gustafson, certainly ran the gamut. First there was a 56-page designated hitter examining and exagminating the Section 45 clean coal credit. Now there’s a full-dress T. C., exploring the Section 6702 frivolous return chop, continuing the saga of Gwendolyn L. Kestin, 153 T. C. 2, filed 8/29/18.

Gwen’s been on my blog before now. See my blogpost “What More Can I Say,” 6/7/18, wherein I catalogue Gwen’s trips to Judge Gustafson’s wordprocessor.

Now the question is whether any or all of the six (count ‘em, six) photocopies of the original frivolous 1040X that Gwen unloaded on IRS was itself (or themselves) separate frivolous returns, each incurring its very own Section 6702 $5K frivolity chop.

IRS got partial summary J a year ago May on the original 1040X. It was a classic zero-income Section 3401 FICA/FUTA phony of the sort protesters routinely file. So Gwen is short-stacked going into the trial. The trial sorts out whether the remaining six copies are returns sufficient to get the chop, and whether the Boss Hoss Section 6751(b) sign-off was well and truly delivered (if indeed it needs to be).

IRS first hit Gwen with Letter 3176C, which said “If not immediately corrected, the Internal Revenue Service will assess a $5,000 penalty against you. * * * As stated above, we are proposing to assess a $5,000 penalty against you for each frivolous tax return or purported tax return that you filed. * * * If you send us corrected returns, we will disregard the previous documents that you filed and not assess the frivolous return penalty * * *.  [Emphasis added.].” 153 T. C. 2, at p. 6.

The IRS examiner sent up a Form 8278 “Assessment and Abatement of Miscellaneous Civil Penalties,” proposing to hit Gwen with the $5K chop, but her boss changed it to $10K, because Gwen in the meantime sent in a copy of her first 1040X.

Nothing daunted, Gwen fired a five-round salvo, all dated differently but all received by IRS at once. “The Commissioner cites his records to show that the third, fourth, fifth, and sixth of Mrs. Kestin’s submissions, though dated in November 2015, December 2015, March 2016, and May 2016, were all received by the IRS on the same day (August 17, 2016) and three of them in the same location (Kansas City, Missouri).  Mrs. Kestin does not dispute these assertions but rather, in her posttrial brief, “admits that the times, dates, and actions described in R’s Statement of Facts, ¶¶ 1 through 50 of his Seriatim Opening Brief * * * are generally accurate.” 153 T. C. 2, at p. 8, footnote 3.

That was just a warm-up. Gwen hit her stride, sending notices to KC, MA, TX, and DC, all with copies of said 1040X. IRS ripostes with The Magnificent Seven, a $35K chop.

Gwen tries a CDP, and can contest liability, but gets a NOD because she frivols.

Section 6702(b)(3) gives a statutory out; if the frivolite folds within thirty days, no chop. Of course IRS has burdens of production and proof, and the Section 6751(b) Boss Hoss is in play.

If a document flunks the Beard test (contains info to calculate tax due, claims to be a return, and shows good faith attempt to comply), it isn’t a return, but that goes only where the taxpayer claims what they sent was a return and IRS claims it isn’t, like last-known-address and trigger-SOL cases.

“Section 6702(a) is a very different context.  That statute imposes a penalty on a document that merely ‘purports to be a return’ (the second of the Beard criteria).  Thus, even if (or especially if) a document fails the other Beard criteria, the document may warrant the penalty as a ‘frivolous tax return’.  Mrs. Kestin’s original Form 1040X failed the Beard test because, although it ‘purports to be a return’, it lacks an ‘honest and reasonable attempt to satisfy the requirements of the tax law’; and it is therefore not a return.  However, because that Form 1040X purports to be a return but has the defects set out in section 6702(a), it is subject to the section 6702(a) penalty.” 153 T. C. 2, at p. 20.

OK, but what about the photocopies?

“But the photocopies require a different analysis.  No doubt they are photocopies of a document (the Form 1040X) that purports to be a return, but the question we must answer is whether the photocopies themselves purport to be returns.  She did not request action on the photocopy itself; rather, she asked the IRS to process and honor her original Form 1040X.  A photocopy so marked and so explained does not ‘purport to be a return’.

“The statute does not address whether copies might be subject to the penalty, and the Commissioner points us to no pertinent regulation on the subject.  The Commissioner cites no case law that addresses the question of copies labeled as such (or even of copies not labeled as such).  The Commissioner does cite Grunsted v. Commissioner, 136 T.C. 455, 456-457 (2011), in which two section 6702(a) penalties for each of two years were sustained against a taxpayer who, after being told that the IRS would not accept his first purported returns, ‘resubmitted substantially identical purported tax returns for those two years’. However, there is no suggestion in Grunsted that the later returns were mere copies or were labeled as such.  On the contrary, we found in that case that the later documents were ‘again seeking a refund’.  Id. at 457.  We explicitly held that ‘each purported to be an income tax return’ and that each was ‘filed to obtain tax refunds’.  Id. at 459.” 153 T. C. 2, at p. 21.

The IRM says that it doesn’t matter whether the purported return is original or a photocopy. But since each copy was labeled as such and sought no refund greater than the original, Gwen ducks $30K’s worth of chops.

As for the Boss Hoss, the Section 6702 chop is not “electronically calculated,” so it needs the Section 6751(b) imprimatur. But the Letter 3176C doesn’t need that.

“However, as to the first two penalties… we must determine whether the earlier Letter 3176C constituted a previous, unapproved ‘initial determination’.  We conclude that it did not.  Although it gave a stern warning about the IRS’s intention to impose a penalty, its purpose was actually to invite the taxpayer to make a correction that, if made, would have the result that the IRS ‘will * * * not assess the frivolous return penalty.’  At the time Letter 3176C was sent…one could not ‘determine’, initially or otherwise, the application of the penalty.  Rather, at that time it remained to be seen—depending on the Kestins’ actions–whether they would be liable for the penalty.

“Interpretation and application of the supervisory approval requirement in section 6751(b)(1) is made difficult by the ambiguity of the operative phrase- ‘initial determination of such assessment’–and by the fact that, no matter how it is interpreted, the statute will achieve only imperfectly the congressional purpose of ensuring ‘that penalties [w]ould only be imposed where appropriate and not as a bargaining chip.’  However, we know to look for a ‘determination’ of a penalty liability, not just an indication of a possibility that such a liability will be proposed.  Letter 3176C is not an unequivocal communication that advises the taxpayer that penalties will be proposed’; it is instead a contingent communication warning that a penalty will be assessed if the taxpayer’s frivolous filing is ‘not immediately corrected’ and assuring that the IRS ‘will * * * not assess’ the penalty if the taxpayer does correct her return.” 153 T. C. 2, at pp. 26-27. (Citations omitted, but read them.)

Gwen has all kinds of finger-fehler arguments about IRS’ paperwork, but none of them persuades Judge Gustafson.

It’s frivolites like Gwen who keep us bloggers in business.

The Cross Colliers adopted the role of the mythical dress manufacturer who lost a nickel on each dress sold, but made it up on the volume. And that Obliging Jurist, Judge David Gustafson, will tell you the whole story in an off-the bencher, Cross Refined Coal, LLC,  USA Refined Coal, LLC,  Tax Matters Partner, Docket No. 19502-17, filed 8/29/19.

The Cross Colliers were a partnership (they claimed, but IRS said they weren’t) that got some coal-washing technology that supposedly batted clean-up at the coal-fired powerplants, paid to install it in situ, and took the risk that the powerplant operators, the regulators or the courts could shut them down.

The Cross Colliers bought the coal from the operators at list, and sold it back to them at a discount, losing money on every sale. But they made it up on the Section 45 clean coal credit, which let them cash out in year one. “One best-case-scenario… which assumed uninterrupted high volume sales of refined coal over the entire 10-year period during which the tax credits would be available, projected an investment of $7 million being paid off before the end of the first year, an internal rate of return (“IRR”) of 197%, and total 10-year benefits of almost $140 million.” Order, Transcript, at p. 16.

Treasury allowed the Cross Colliers a fixed-dollar tax credit for each ton of refined coal sold. The deal was a dead loser without.

Our tax dollars at work.

IRS claims this wasn’t a partnership, but a sale of tax credits. Remember our old pal Historic Boardwalk Hall? No? See my blogpost “Take a Walk on the Boardwalk,” 6/5/13.

No, says Judge Gustafson. In Boardwalk, the supposed “partner” walked into a deal already in place, that needed no management, with no risk. The Cross Colliers had real risks and real benefits. While one partner could be bought out, there was neither interest payable on the partner’s capital nor was the buyout noncontingent.

Besides, there was “…Notice 2010-54, 2010 I.R.B. 403, sec. 5. 01, which provides that ‘[t] he refined coal credit is allowed . . . without regard to whether the taxpayer owns the refined coal production facility in which the refined coal is produced. Accordingly, a taxpayer that leases… a facility owned by another person may claim the credit for refined coal that the taxpayer produces in the facility.’ It would seem that such a lessee might be in a circumstance equivalent to Cross’ s members, stepping into a facility thought ready to commence operations.” Order, Transcript, at p. 46.

And the credit was for production of coal, not investment. There had to be coal produced and sold, and the members of the Cross Colliers got credits in proportion to their capital. In Boardwalk, the investor needed to do nothing and got 99% of the credit.

And there were shutdowns and pollution problems. Finally, their big customer shut down the plant altogether.

It’s a rare case, where millions are involved, and more than a dozen attorneys for the parties, that goes off on an all-or-nothing 56-page Section 7459(b) off-the-bencher.

“Small court,” indeed.

Ordinarily I skip the unsubstantiated car and truck mileage cases. They are truly much-of-a-muchness: diaries, spreadsheets, back-of-the-envelope guesstimates, all prepared long after the years at issue, often after the SNOD had issued and trial looms ahead.

But today Suresh Hatte, 2019 T. C. Memo. 109, filed 8/28/19, lets Judge Albert G. (“Scholar Al”) Lauber shows us a rare example.

Suresh was a taxi driver and a real estate appraiser. He claims business expenses for three (count ‘em, three) passenger vehicles he used in his appraisal business. And produces spreadsheets.

“On May 7, 2015, for example, he flew to Detroit, Michigan, to complete a seven-hour training course. His spreadsheet asserts that, on the same day, he made three trips totaling 334 miles to conduct appraisals in Maryland and Virginia.  It is beyond implausible that he flew to Michigan, completed a seven-hour course, flew back to Maryland, and then drove 334 miles to take photographs in the dark.  The spreadsheets allege multiple appraisal trips on four other days on which he attended seven-hour continuing education classes in Maryland.  On cross examination he admitted that the mileage he recorded for those days could not possibly be correct.” 2019 T. C. Memo. 109, at pp. 9-10.

It gets better, but not for Suresh.

“On at least six occasions, the spreadsheets implausibly show two roundtrips to the same address on the same day.  And some of these entries lack credibility for other reasons.  On January 3, 2014, petitioner alleges that he made two trips–one of 34 miles and the other of 36 miles–to the same address in Hyattsville, Maryland.  Since petitioner lived in Hyattsville, these numbers are highly suspect.  And even if we assume that petitioner drove from Hyattsville to Silver Spring and then back to Hyattsville–and did so twice on the same day–the distance from Silver Spring to Hyattsville is less than 10 miles.” 2019 T. C. Memo. 109, at p. 11.

Judge Lauber sums up a lot better than I could. “These examples only scratch the surface of the improbabilities that pervade petitioner’s spreadsheets.” 2019 T. C. Memo. 109, at p. 12.

A word to Judge Courtney D. Jones, newly joined USTC: Look what you have to look forward to.

The move used to be that a real estate operator would increase the rent roll so that he (it was usually “he” in those days) could get a mortgage and let the renters pay it off, while he took the proceeds and bought other investments. The interest was deductible, and amortization was sheltered by depreciation. Of course the investment interest rules and the passive activity rules put paid to that maneuver, but fortune favors the wise.

William C. Lipnick and Dale A. Lipnick, 153 T. C. 1, filed 8/28/19, shows how Wm’s Dad Maurice, a real estate whiz, worked the deal, so Wm doesn’t have the Section 163(d) investment interest cap.

Maurice and his partner owned LLC memberships, and borrowed against their memberships and the assets of the LLCs (real estate, primarily). They distributed the loan proceeds to themselves in a debt-financed distribution. Maurice used the cash to buy investments. For the first couple years (hi, Judge Holmes) Maurice got the passthrough income and interest deduction from the LLCs, the latter subject to the Section 163(d) limitation.

Then Maurice gifts 50% of his ownership interests to Wm, and Wm signs on to what Judge Albert G (“Scholar Al”) Lauber calls “each partnership’s operating agreement.” 153 T. C. 1, at p. 5. Judge, though an LLC may be taxed as a partnership, it isn’t a partnership, it’s the child of a different statute.

But Wm didn’t assume the debts of the LLCs, didn’t use any proceeds to buy investments, and Maurice was relieved of said debt. Maurice treated the relief as taxable capital gain.

Maurice picked up some more debt-financed distributions, paid tax with the investment interest limitation, and died. Wm got more interests in the LLCs under his dad’s will.

Wm claimed the interest the LLCs paid wasn’t investment interest as to him, as he wasn’t liable on the debts and hadn’t used any of the proceeds to acquire any investments.

IRS claims Wm should have been subject to the investment interest limitations, hits him with Section 6662 chops, and a SNOD at no extra charge.

“Investment interest is defined as interest that is ‘paid or accrued on indebtedness properly allocable to property held for investment.’ Sec. 163(d)(3)(A).  The interest in question was incurred by [LLCs], which owned, operated, and actively managed apartment buildings and other rental real estate.  The loans on which the interest was paid were secured by those real estate assets.  Respondent does not contend that the operating assets held by the partnerships constituted ‘property held for investment.’” 153 T. C. 1, at p. 12. Of course not; the property was used in the trade or business of renting residential property.

The basic idea is that use of loan proceeds dictates character of interest. Borrow to go on vacation, personal interest. Borrow to buy investment property, investment interest plus passive activity rules. Borrow to run business, business debt.

Judge Scholar Al cut to the cliché. “In short, if a taxpayer uses debt proceeds to acquire an investment, the interest on that debt is investment interest regardless of whether the debt originated in a partnership.” 153 T. C. 1, at p. 14.

IRS claims “like father, like son.” If the loan proceeds were used to buy investments (and they were), then any interest paid on said loans, the incidents of which are passed through to the son, is investment interest.

Judge Scholar Al isn’t having it.

“We find no support for this theory in the statute, the regulations, or the decided cases.” 153 T. C. 1, at p. 14.

“William did not receive, directly or indirectly, any portion of the debt financed distributions that the partnerships made to Maurice….Nor did William use distributions from those partnerships to make ‘investment expenditure[s].’  See sec. 1.163-8T(a)(4)(i)(C), Temporary Income Tax Regs., supra.  In short, the facts that caused the passed-through interest to be ‘investment interest’ in Maurice’s hands simply do not apply to William.” 153 T. C. 1, at p. 15.

“Notice 89-35 refers to this scenario as a debt-financed acquisition, as opposed to a debt-financed distribution, and it explains how the regulation applies to partnerships and their partners:  ‘In the case of debt proceeds allocated under section 1.163-8T to the purchase of an interest in a passthrough entity (other than by way of a contribution to the capital of the entity), the debt proceeds and the associated interest expense shall be allocated among all the assets of the entity using any reasonable method.’

“In short, whereas Maurice received a debt-financed distribution, William is treated as having made a debt-financed acquisition of the partnership interests he acquired from Maurice.  See ibid.  For section 163(d) purposes, therefore, the debt proceeds are allocated among all of the partnerships’ real estate assets using a reasonable method, and the interest paid on the debt is allocated to those assets in the same way.  Sec. 1.163-8T(c)(1), Temporary Income Tax Regs., supra.” 153 T. C. 1, at p. 16.

And everyone agrees the real estate owned by the LLCs wasn’t investments, but property used in a trade or business.

And Wm never borrowed anything or bought any investments with the proceeds.

“Respondent urges us to adopt a ‘once investment interest, always investment interest’ rule on the theory that any other approach would ‘place a myriad of additional administrative burdens on both taxpayers and the government.’  But the temporary regulations and IRS guidance clearly dictate different outcomes depending on whether the partner receives a debt-financed distribution or makes a debt-financed acquisition.  See sec. 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., supra; Notice 89-35, supra.  Recognition that partnership interests may change hands is thus an inherent part of the regulatory structure.  And the allocation is no more cumbersome than allocating debt for any other purpose under subchapter K.” 153 T. C. 1, at pp. 20-21.

Wm wins.

And a Taishoff “Good Job” goes to M. I. Sanders and J. E. Misener; though they may be at Blank Rome, they weren’t shooting blanks.

As Ezio Pinza said to Mary Martin in the words of Oscar Hammerstein II. There are times when you’ve flopped the winning hand, and don’t want to fold.

Clutch City Sports & Entertainment LP, Leslie L. Alexander, A Partner Other Than the Tax Matters Partner, Docket No. 16424-18, filed 8/28/19 is on for trial in Philly in October. Both the Clutchers and IRS want a continuance (known as an “adjournment” to us State courtiers).

That Obliging Jurist, Judge David Gustafson, obliges, striking the case from the calendar.

But both IRS and the Clutchers don’t want to let Judge Gustafson out of their clutches (sorry, guys).They ask he retain jurisdiction of the case.

I can understand why.

But Judge Gustafson cannot oblige. “The motion made no showing that would warrant the retaining of jurisdiction, and it cannot now be known when the undersigned judge might be assigned to a future Philadelphia session.” Order, at p. 1.

Ex-Ch J L Paige “Iron Fist”) Marvel has a review of the caselaw nailing the potteries in pot-friendly States with the Section 280E traffic tickets.

Boulder Alternative Care, LLC, GLG Holdings, LLC, Tax Matters Partner, Docket No. 16495-16, filed 8/28/19, goes for judgment on the pleadings.

They get more than they bargained for. “’ Colorado state-legal marijuana sales do not conflict with the federal Controlled Substances Act or any other federal drug law. Under those circumstances, the Supreme Court has made clear that state law must control. Since Colorado law controls, state legal marijuana sales cannot be considered “prohibited” under federal law.’” Order, at pp. 1-2.

Well, the Boulderers get bowled over (sorry, guys). The motion relies on facts outside the pleadings, thus Rule 120(b) turns the motion into one for summary J. And all y’all know I just love summary J.

The Boulderers get buried in a judicial landslide.

“The precedent regarding the application of section 280E to state licensed marijuana dispensaries is well settled. In Gonzales v. Raich, 545 U.S. 1 (2005), the Supreme Court rejected the argument that the cultivation and possession of medical marijuana, isolated to and policed by a state, somehow removed the activities from the purview of the Comprehensive Drug Abuse Prevention and Control Act of 1970 (CSA). The U.S. Court of Appeals for the 10th Circuit has consistently upheld denials of deductions and credits under section 280E, noting in its most recent pronouncement that ‘[d]espite its legality in many states, marijuana is still a schedule I “controlled substance” under federal law.’ Feinberg v. Commissioner, 916 F.3d 1330, 1333 (10th Cir. 2019), aff’g T.C. Memo. 2017-211, petition for cert. filed, No. 19-129 (July 26, 2019); see also High Desert Relief, Inc. v. United States, 917 F.3d 1170 (10th Cir. 2019); Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187 (10th Cir. 2018), cert. denied, 139 S. Ct. 2745 (2019); Green Sol. Retail, Inc. v. United States, 855 F.3d 1111 (10th Cir. 2017), cert. denied, 138 S. Ct. 1281 (2018). This Court has also consistently applied section 280E, irrespective of any permissive state laws, to disallow deductions and credits with respect to a taxpayer’s trade or business that consists of trafficking in controlled substances. See Alt. Health Care Advocates v. Commissioner, 151 T.C. __ (Dec. 20, 2018); Patients Mut. Assistance Collective Corp. v. Commissioner, 151 T.C. __ (Nov. 29, 2018); Olive v. Commissioner, 139 T.C. 19 (2012), aff’d, 792 F.3d 1146 (9th Cir. 2015); Californians Helpingto Alleviate Med. Problems, Inc. v. Commissioner, 128 T.C. 173 (2007).” Order, at p. 2.

The issue the Boulderers raise is whether State law takes their admitted pottery out of CSA. “Petitioner misreads applicable case law from the Supreme Court, the U.S. Court of Appeals for the 10th Circuit and this Court. As noted above, the courts have consistently held that permissive state laws have no effect on Federal enforcement of the CSA. In following that precedent, we conclude that Colorado’s permissive medical marijuana laws have no effect on the CSA.” Order, at p. 3.

I’ll spare you a collation of my blogposts on this subject.

Ex-Ch J Iron Fist bounces the Boulderers’ motion. It’s unfortunate that the Rules don’t provide for cross-motions for summary J. That would save a lot of time.

The race to the back in the New Gambit stakes goes on apace. See my blogposts “I’m Beginning to See the Light,” 4/9/18, and “The Light at the End,” 8/20/19.

Today Frank M. Dartee, Docket No. 3792-18, 8/27/19, goes for the record…forty (count ‘em, forty) years, in one petition.

Ch J Maurice B (“mighty Mo”) Foley tells the story.

“Petitioner seeks review of purported notices of deficiency and notices of determination concerning collection action allegedly issued to petitioner for taxable years 2000 through 2018. On April 11, 2019, respondent filed a Motion for More Definite Statement Pursuant to Rule 51. On August 5, 2019, petitioner filed an Amended Petition seeking review of purported notices of deficiency and notices of determination concerning collection action issued to petitioner for taxable years 1979 through 2018.” Order, at p.1.

Ch J Mighty Mo, in a more mellow mood than is his wont, tells IRS to forget about a more definite statement from Frank, but to look and see whether there is anywhere to be found either NOD or SNOD issued to Frank for any of those years. Then tell Ch J Mighty Mo whether there is anything that would confer jurisdiction.

Is there a Section 6673 on the horizon?

All y’all (going to Texas next week, so I’ve got to warm up) will remember Denise Celeste McMillan, 2019 T. C. Memo. 108, filed 8/26/19, who has twice appeared in this my blog. You don’t? Well, see my blogposts “Who Would These Burdens Bear,” 6/12/15, and “Sad Tales,” 11/3/15.

Denise has a never-say-die approach. She’s been litigating in Tax Court five times before this case, And Judge Mark V Holmes schedules them all.

“Ms. McMillan’s litigation experience also includes five previous cases in the Tax Court.  She and the Commissioner settled three of those cases, but the other two went to trial with one going to appeal and then to the Supreme Court.  See McMillan v. Commissioner (McMillan II), T.C. Memo. 2015-109 (finding no trade or business in horse activity in which petitioner’s one horse had died); McMillan v. Commissioner (McMillan I), T.C. Memo. 2013-40 (finding no trade or business in horse activity in which petitioner’s one horse had neither been bred nor competed in eight years), aff’d, 697 F. App’x 489 (9th Cir. 2017), cert. denied, 138 S. Ct. 1010 (2018).” 2019 T. C. Memo. 108, at p. 9.

She’s a dab hand at correcting defective trial transcripts, too, “…such as when she wrote ‘should be “breeding,” not “breading” — was Spellcheck broken?”. 2019 T. C. Memo. 108, at p. 13. I’ve often had the same feeling when I see some deposition and trial transcripts here, although I’m a wee bit more douce in my corrections.

She’s the kind of unit owner that makes Board of Managers members cringe. She got a $70K settlement for noise and mold, which she excluded from income, but her physical harm argument loses, especially when her CPA warns her.

“While cross-examining Ms. McMillan the Commissioner’s attorney established that she didn’t consult any of her attorneys about her return position.  She did, however, admit that she asked a CPA she’d retained in the 1990s whether the exclusion for pain and suffering awards was still in place, and he told her that it’s now more ‘narrowly defined’ and applies only when someone is ‘physically ill.’  Rather than suggest reasonable reliance that might excuse a section 6662(a) penalty, see sec. 6664(c)(1); Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002); sec. 1.6664-4(b)(1), Income Tax Regs., this testimony shows that Ms. McMillan knew that the exclusion she was relying on was limited, that she had reason to question whether she qualified for it, and that she didn’t follow up to make sure her position was reasonable.  It’s also another reason to question her testimony about her physical symptoms–of which there’s no contemporaneous evidence and the treatment for which she could not remember.  The Commissioner therefore met his burden of showing that Ms. McMillan did not reasonably rely in good faith on professional advice, and that she had neither reasonable cause nor good faith in failing to report her settlement with the HOA.” 2019 T. C. Memo. 108, at pp. 48-49. But IRS counsel can’t come up with the Section 6751(b) Boss Hoss sign-off for the additional deficiencies IRS laid on Denise, so she avoids the chops.

My colleague Peter Reilly, CPA, a fan of hobby loss cases, will find little joy with Denise’s horse breeding/showing business. Denise shipped the late Goldrush, her last horse, to Australia in 2008, where the late Goldrush became the late Goldrush, and never replaced him. Since this case is appealable to 9 Cir, Judge Holmes walks through the Section 183 “goofy” regulations, even though Judge Posner in 7 Cir would have let him take a holistic approach.

Either way, Denise is beating a dead horse.

Denise tried the home-office deduction, but the office was the livingroom in her 800 sq ft unit, and Judge Holmes has four reasons for disallowing that deduction, the chiefest of which is “(E)ven if her lawsuits and websites were somehow trades or businesses–and we find that they weren’t–she still couldn’t take the deduction if she used her living room for anything else, and her testimony that she never used any part of it for anything other than business is simply impossible for us to believe.” 2019 T. C. Memo. 108, at p. 42.

I’m sure Denise will be back in Tax Court. Petitioners like her is what keeps bloggers writing.

The late great Dr Eric Berne would find an embarras de richesses in US Tax Court. To begin with, CSTJ Lewis (“Not Chief In Name Only”) Carluzzo has no patience for IRS counsel’s gameplaying in Ralph B. Marra, Docket No. 24599-17L, filed 8/23/19.

IRS claims Ralph had an opportunity to contest liability at the CDP, but didn’t, so wats summary J. Ralph wants a remand.

CSTJ Lew: “According to petitioner, his challenge to the amount of the underlying liability, or at least a portion of it, was raised at the administrative hearing by the submission of a Form 1127, Application for Extension of Time for Payment of Tax Due to Hardship, to the respondent’s settlement officer. We note that a similar challenge is made in the petition.” Order, at p. 1.

So summary J goes down.

“The parties disagreement over petitioner’s entitlement to challenge the existence or the amount of the underlying liability in this proceeding, not to mention their apparent disagreement over whether petitioner had reasonable cause for his failure to pay the underlying liability, see sec. 6651(a)(2), requires that respondent’s motion be denied because genuine issues of material fact remain in dispute, see Rule 121.” Order, at p. 2.

But CSTJ Lew isn’t sending Ralph and IRS back to Appeals, either.

“Turning our attention to petitioner’s motion, we fail to see what could be accomplished by further administrative review and action that could not otherwise be given effect by the parties without a remand.” Order, at p. 2.

Maybe CSTJ Lew is going to try this one.

But IRS isn’t the only gameplayer today.

Elizabeth Koham, Docket No. 5227-18L, filed 8/23/19, is part of a designated hitter coupled entry. Elizabeth tries a ploy with Judge Buch, who is definitely not playing. Elizabeth wants an OIC, and isn’t getting it. She and co-petitioner sent in a Form 433-A claiming “patently excessive monthly expenses.” Order, at p. 1.

“On their 433-A, Mr. Bereliani and Ms. Kohanmehr listed among monthly expenses: $7,500 for food, clothing, and miscellaneous, $9,500 for housing and utilities, and $1,000 for public transportation. They also listed a $250,000 student loan debt as a monthly expense, labeling it as a total debt, but offering no information about the monthly loan expense.” Order, at pp. 1-2, footnote 4.

This is not the way to ingratiate oneself with the court. Especially when one’s RCP is $312K and one offers an OIC of $2500.

But one does get “somber reasoning and copious citation of precedent” at no extra charge.