Archive for December, 2019|Monthly archive page


In Uncategorized on 12/11/2019 at 19:12

We all know Rev. Rul.s. We also know Rev. Proc.s. These are the daily grist of Federal tax practice.

Mark Marineau, Docket No. 9469-16L, filed 12/11/19, is another last-known-address story. Mark’s last notice didn’t include his SSAN or his middle name, but Judghe Buch doesn’t need to decide if those omissions are material, because IRS got the letter with the address change three (count ‘em, three) days before they sent Mark the SNOD off the SFR. IRS gets 45 (count ‘em, 45) days to process a change-of-address per Rev. Proc. 2010-16, and thereby hangs the cliché.

Judge Buch: “Mr. Marineau argues that he should not be bound by the 45-day processing window outlined in Rev. Proc. 2010-16. In support, Mr. Marineau quotes Macey’s Jewelry Corp. v. United States, 387 F.2d 70, 72 (5th Cir. 1967), which states ‘Revenue rulings, however, are not authority having the force of law, to be automatically applied in each and every case.’ Mr. Marineau conflates a ‘revenue ruling’-an IRS interpretation of tax law-with a ‘revenue procedure’-an official statement of procedure issued by the IRS. While it is also true that this Court is not bound by revenue procedures, we often look to them for guidance.” Order, at p. 7 (Footnote omitted, but it’s a cite to Hollimon v. Commissioner, T.C. Memo. 2015-157, at *7-*8.).

And Tax Court is often guided by Rev. Proc. 2010-16.


In Uncategorized on 12/11/2019 at 18:42

It’s not a good day for IRS. First Judge Goeke is less than charitable toward their arguments in Joyner (see my blogpost “We Don’t Need No Installment Method,” 12/11/19).

Now Judge Buch is on their case, twice, in Anthony I. Provitola & Kathleen A. Provitola, Docket No. 12357-16, filed 12/11/19.

First, IRS wants to bring electronics into the Jacksonville courtroom on Monday. But the local courthouse has its own limits on electrons (other than free-floating ions). However, Judge Buch has independently squared that away. But IRS calls its motion “Unopposed.” Order, at p. 1.

“Separately, we note that, in contrast to the title of the motion, paragraph 5 of the motion states:

“’5. Respondent called petitioners to determine their views on this motion, and left a voicemail message. Petitioners did not return this call as of the date of the motion, and as a result, petitioners’ views on this motion are unknown.’

“The title of the motion (characterizing the motion as ‘unopposed’) is either misleading or false.” Order, at p. 1.

But Judge Buch is in a mellow mood, so he just tosses the motion as moot, since he made the electronic arrangements himself.

Now don’t go away, because here’s the canard. Same parties, Docket No. 16168-17, filed 12/11/19.

IRS filed “a motion in limine asking that we ‘exclude all facts, evidence, and testimony not related to the circular flow of funds between petitioners, their Schedule C entity, and petitioner Anthony I. Provitola’s law practice.’

“According to the parties’ pretrial memoranda, the Provitolas attempted to develop and market something, what exactly is unclear. In connection with that something, the Provitolas, perhaps through entities controlled by them, purport to have made payments to a law firm run by Mr. Provitola.

“The parties’ arguments are easily summarized: the Provitolas argue that they have a bona fide business; the Commissioner argues that this is all a sham and there is no real business. Based on prior testimony from Mr. Provitola, it appears that he intends to testify about development and marketing of the something underlying the Provitolas purported business.” Order, at p. 1.

But ya gotta love IRS counsel’s go-for-broke motion practice.

“One might recharacterize the Commissioner’s motion as asking the Court to prohibit testimony inconsistent with his theory of the case. We will issue no such order.” Order, at p. 1.

IRS counsel argues that courts routinely ignore self-serving testimony. True, except.

“The canard that Courts disregard self-serving testimony is simply false. We disregard self-serving testimony when there is some demonstrable flaw or when the witness does not appear credible. If we were to disregard testimony merely because it is self-serving, we would disregard the testimony of every petitioner who testifies in furtherance of their own case and of all the revenue agents or collections officers who testify that they do their jobs properly, because that testimony would also be self-serving.” Order, at p. 2.

If IRS counsel is unhappy when Anthony tells his tale on the stand, he can object. Of course, he can also cross-examine.

IRS counsel, whom I’ll call Randy, didn’t have a good day.


In Uncategorized on 12/11/2019 at 18:19

I’ll only cite to the last paragraph of Growmark Inc. & Subsidiaries, 2019 T. C. Memo. 161, filed 12/11/19, because it’s largely a repeat of AgProcessing, as to which see my blogpost “A Hill of Beans,” 10/16/19.

Judge Paris: “The Court concludes that in accordance with this Court’s holding in AgProcessing, petitioner is not required to compute separate DPAD amounts for its patronage and nonpatronage activities.  Also in accordance with this Court’s holding in Ag Processing, petitioner must allocate its aggregately computed DPAD between its patronage and nonpatronage accounts.  Because the Schedule G allocation is done pursuant to subchapter T, not section 199, petitioner should allocate the aggregate DPAD on its Schedule G using the same method it used for its other Schedule G allocations.” 2019 T. C. Memo. 161, at p. 18.

If any of this makes sense to you, please accept my heartfelt condolences.

Oh, and Judge Paris will deal with Growmark’s COGS issues in a later opinion. I’m sure you’re all “hanging, breathless, on its fate,” as a far better writer than I put it.


In Uncategorized on 12/11/2019 at 18:09

Though it’s not a business model any of my developer clients would use, and I certainly would not recommend it, Joyner Family Limited Partnership, Gary Joyner Revocable Trust, A Partner Other Than The Tax Matters Partner, Janel Joyner Revocable Trust, A Partner Other Than The Tax Matters Partner, And Joyner Investment Company, Inc., Tax Matters Partner, 2019 T. C. Memo. 159, filed 12/11/19, can continue using cash method accounting even though they are dealers and thus precluded from using Section 453 installment method reporting.

IRS wants to slug the Joyners with $8 million in tax, claiming the notes the Joyners took from their down-and-out customers in payment for marked-up land and mobile homes were worth face. Except. Six years into the program, 92% of the notes were in default, and the Joyners’ expert witnesses testified no bank would buy them.

“Typically, JFLP’s customers had not previously owned homes.  They were primarily low income, had poor credit histories and unstable employment histories, and could not obtain traditional financing to purchase homes.  JFLP offered affordable housing.  Mr. Joyner determined the amount of the monthly payment on the basis of what the customer could afford.  Monthly payments ranged from $100 to $700.“  2019 T. C. Memo. 159, at pp. 7-8.

Judge Goeke has this one.

“The Joyners are well respected in the community.  They rarely declined to sell to a prospective buyer except if they suspected the buyer was involved with drugs.  Their philosophy was to give people a chance.  For some buyers JFLP obtained the necessary information to perform credit checks, but the Joyners did not perform credit checks because of the costs of running credit checks and because Mr. Joyner believed that the buyers’ poor financial situation made the credit checks pointless.  Mr. Joyner would ask prospective buyers whether they had jobs, but he did not request any documentation, such as pay stubs, or otherwise verify their employment or income.” 2019 T. C. Memo. 159, at p. 8.

The Joyners let defaulting purchaser/borrowers transition to renters, and waited until several note payments were in default before trying to collect. They used their trusty CPA who had advised other developers similarly situated. They bought their land sale agreements, notes, and landlord-tenant documents from an office supply store. I hope it was the one with which one of my nearest and dearest is associated.

By now my developer clients have stopped reading, and reached for an Anacin.

IRS wins on the Section 453 closeout. No question the Joyners are dealers.

But IRS goes full-throttle Michael Corleone on everything else.

They raise the accounting stuff post-trial, so that’s out. No Section 446 change in accounting method; IRS is too late in asserting right to change method, and their method is no better than the Joyners’ cash basis. The Joyners’ bookkeeping flaws don’t disturb Judge Goeke’s result. IRS claims Section 1038 bars the Joyners from bad debt treatment on defaulted notes when they took back the mobile homes, but when they claimed  bad debt deduction the IRS first allowed it on the FPAA, and then disallowed it in the amendment to the answer. “Further, respondent makes the nonsensical argument that JFLP should be taxed on the notes’ face values but denied a worthless debt deduction because petitioners have not established the notes had value when executed, a requirement for a worthless debt deduction.” 159 T. C. Memo. 159, at p. 47, footnote 11 (Citation omitted).

I’ll spare you the rest. There’s a Rule 155 beancount, of course, but the Joyners should congratulate their able counsel, Juan F. Vasquez., Jr., Esq., Jaime Vasquez, Esq., A. Leonides Unzeitig, Esq., and Adrian Ochoa, Esq.


In Uncategorized on 12/10/2019 at 17:57

I spent a lot of time and electrons on MCM Investment Management today (see my blogpost “Pith O’ Sense and Pride O’ Worth”, 12/10/19). My trusty word processing program says 807 words, far above my usual 450 or fewer.

So I’ll only deal with private letter rulings, as Judge Buch deals with them in Dasher’s Bay At Effingham, LLC, Dasher’s Bay Management Group, LLC, Tax Matters Partner, Docket No. 4078-18, filed 12/10/19.

The Dashers gets their hopes for summary J on their conservation easement dashed for a bunch of reasons, but they include (without in any way limiting the generality of the foregoing, as my already-on-their-second Grey-Goose-Gibson colleagues would say) credit for improvements in case of judicial extinguishment overrules perpetuity, failure to state basis on their 8283, and Reg. 1.170A-13(c)(4)(ii)(E) is valid. There are three (count ‘em, three) other Dashers beside this one, all designated hitters, but they’re all same same.

We all know PLRs are only precedent for the requesting taxpayer, for the transaction in question, and the tax year(s) in question. They’re not precedent for anyone or anything else.

Judge Buch: “Dasher’s Bay argues that its deed of easement complies with the extinguishment regulation because the Commissioner previously allowed a deduction of a similar deed in Private Letter Ruling 200836014.

“Private Letter Rulings are written for specific taxpayers and other taxpayers may not rely on them as precedent. Courts are not required to consider private letter rulings; however, they may provide useful guidance.” Order, at p 8 (Footnotes omitted, but read them, as they have the relevant citations.)


In Uncategorized on 12/10/2019 at 16:31

MCM Investment Management, LLC, Mark and C’ann McMillin Family Trust Dated  04/09/1990, Tax Matters Partner, 2019 T. C. Memo. 158,  filed 12/10/19, had pith o’ sense and pride o’ worth, as Scotland’s Greatest put it, because Judge Pugh finds that the interests MCMIM held in the family’s real estate business had become worthless when MCMIM said it did.

The McMillins were owners and builders in CA and TX in the early ‘00s, leveraged up the cliché when the Black ’08 hit. They had tiered debt ahead of the equity and debt-for-equity in the business, their accountants had going concern issues, and their senior lenders were threatening fire and slaughter.

The McMillins decided to wind down the business, as a bankruptcy would be catastrophic (and they were personally on some paper).

Even though they were still winding down after year at issue, Judge Pugh allows the $40 million ordinary loss in year at issue, because she finds that, subjectively and objectively, the partnership interests were worthless. Even though intrafamily.

“First, respondent objects that Companies did not itself acquire the subordinate debt at a discount.  But that was beyond its control because the senior lender would not permit it.  Instead the McMillin children formed [affiliate] to invest new capital in [family business] by acquiring the subordinate debt from an unrelated lender.  Moreover, [family business] and its owners wanted an affiliate to purchase the debt because it ensured that a third-party owner of the debt–such as a distressed debt purchaser–would not push Companies into bankruptcy.  [Affiliate] later converted the subordinated debt to equity for a legitimate business reason:  to revive Companies’ balance sheet by reversing its negative net worth, thus enabling Companies to satisfy its minimum net-worth covenant and put it in a better position in restructuring negotiations with the senior lender.  The debt-to-equity conversion had economic substance for the parties: [Family business] shed significant debt and the risk profile of [affiliate]’s investment fundamentally changed when it traded various creditor’s rights and priorities for higher upside.

“Second, respondent argues that MCMIM and [affiliate] were two pockets of the same pair of pants.  We reject that analogy.  The McMillin entities were separate legal entities.  Respondent has not challenged their separate existence; indeed, he emphasized in his brief that ‘[w]hether the McMillin family entities are recognized as separate entities is not an issue in this case.’”  2019 T. C. Memo. 158, at p. 60. There was a real transfer, for non-tax business reasons.

Worthlessness has two separate but equal parts: subjective and objective (identifiable events).

“We conclude that MCMIM subjectively determined that its partnership interest in [family business] was worthless by the end of 2009.  First, MCMIM took the position on its tax return that the partnership interest was worthless in 2009….  Second, the owners and management of MCMIM and Companies testified credibly at trial that they believed MCMIM’s interest became worthless in [year at issue].  They based their belief, in part, on the dramatic and devastating impact of the financial crisis…, [family business]’ consistent operating losses in the years leading up to and including [year at issue], the subordinate position of MCMIM’s partnership interest to [affiliate], and the overwhelming debt burden of [family business] and its project entities.  The owners and management took into account [family business]’ deteriorating cashflow projections during [year at issue].  Those projections showed that [family business] would be unable to satisfy financial obligations owed to the senior lender, the subordinate lender, or the project debt lenders.  Ultimately, the McMillin family decided to wind down [family business] in an orderly manner to maximize value for the creditors.  These facts support our conclusion that MCMIM subjectively believed its partnership interest in Companies was worthless in [year at issue].” 2019 T. C. Memo. 158, at pp. 28-29.

There’s plenty of evidence of identifiable events underpinning MCMIM’s subjective decision that their LLC interests were worthless. They got cashflow projections from competent staff, their Big Four accounting firm was waving red flags, senior debt would have wiped them out in a liquidation, and no lender would look at them except to demand payment.

There was no appraisal here, but there doesn’t have to be, although IRS argues there should have been. Ditto foreclosure. You don’t have to ride the plane into the ground to justifiably bail out.

Having a positive capital account on a K-1 doesn’t mean the interest has residual value. And MCMIM’s operating agreement provides for liquidating preference only if computed per Section 704(b), not per GAAP, as the K-1 did. “Because section 704(b) capital accounts can differ from GAAP capital accounts, the GAAP capital account reported on the Schedule K-1 does not necessarily reflect what liquidating distributions MCMIM would have been entitled to under … the operating agreement.” 2019 T. C. Memo. 158, at p. 40 (citation omitted).

So MCMIM winds up with both pride o’ sense (they were right their interests were worthless in year at issue), and pith o’ worth (even though worthless).


In Uncategorized on 12/09/2019 at 16:53

I’ve inveighed against trial-by-ambush before. When it came to Indians, accountants, pro ses or ranchers, I was there. So today, I continue my “don’t ambush” series with the above-entitled.

Here’s Brent Lamb & Deanne Lamb, Docket No. 4748-18, filed 12/9/18.

Brent & Deanne are on for trial on Monday. Thursday evening their trusty attorney files a motion for summary J “calling into question the validity of Treas. Reg. 1.274-5T. The following morning, counsel for the Commissioner filed a motion in limine asking the Court to preclude any argument regarding the validity of that regulation.” Order, at p. 1.

Judge Buch is not amused.

Aside from the Rule 121 60-day pretrial cutoff for summary J motions without leave of Court (and you’d best have a real good story for that one), “(T)he Court’s record shows no indication of the validity of Treas. Reg. 1.274-5T being raised at any time before the filing of Mr. Lamb’s pretrial memo. And although Mr. Lamb initially filed his case pro se, counsel has been in this case since December 2018.” Order, at p. 1.

A quick docket search shows the Lamb’s pretrial memo was filed 12/2/19, last Monday.

You can see where this is going.

“The regulation Mr. Lamb seek to challenge relates to substantiation requirements for certain expenses. See I.R.C. § 274(d) and Treas. Reg. 1.274-5T. What is required for substantiation, by its very nature, affects what might be included in evidence at a trial. And it may affect what evidence is gathered for trial and what subpoenas are issued for trial. Seeking to change the evidentiary foundation upon which a case is based mere days before trial is an unfair surprise to both the opposing party and the Court.” Order, at pp. 1-2.

No go. IRS’ motion in limine granted.

Don’t ambush the judge. Don’t even ambush the IRS.


In Uncategorized on 12/09/2019 at 16:08

It’s Crystal Clear

Mark C. Klopfenstein, 2019 T. C. Memo. 156, filed 12/9/19, and his trusty attorneys got Appeals to drop $1.6 million in asserted Section 6707 preparer chops down to $169K, and stiped out for that. Examination claimed Mark was a “material advisor” who failed to dish about a bunch of Section 6111 reportables.

My ultra-sophisticated readers have already shouted “What SNOD? Section 6707s are assessables, they don’t need no SNOD!”

And Appeals never determined anything, whether for or against Mark: they just folded on all but the $169K, and Mark agreed to that. But Mark and trusty attorneys want Section 7430 admins (no legals because no litigation).

Judge Albert G (“Scholar Al”) Lauber gives IRS summary J.

“Congress intended section 7430(c)(7) to ‘protect the Commissioner from claims by taxpayers that positions taken by, for example, the Examination or Collections Division personnel, before issuance of a notice of deficiency or of the decision of Appeals, are not substantially justified.’ The statute accordingly ‘immuniz[es] the Government against claims for costs until the IRS’s position has crystallized in an Appeals Office decision or notice of deficiency.’ Because the Appeals Office in this case did not take a position that was ‘crystallized’ into either of those documents, petitioner cannot be considered ‘the prevailing party’ under section 7430(a).  See Friends of the Benedictines in the Holy Land, Inc. v. Commissioner, 150 T.C. 107, 114 (2018) (“When the Government fails to take a position at all, * * * a taxpayer cannot be the prevailing party.’). 2019 T. C. Memo. 156, at pp. 9-10 (Citations and footnote omitted).

For the story of the friendless Benedictines, see my blogpost “Friendless in the Holy Land,” 2/21/18.

The only thing Appeals ever put in writing was the settlement stip, so if that was the triggering determination for IRS’ position, then IRS had to be justified, because Mark signed off on it.

So once again, Examination and Collection have free-fire to herk-and-jerk, make heavy-duty demands, bludgeon and bullyrag, until the frustrated civilian calls them (at substantial expense), and then Appeals (supposedly independent) does a folderoo, and IRS walks.

As Judge Wells observed in Benedictines, supra, there’s a gap in the statute, but it is not up to Tax Court to fill it.

Yo Congress, it’s yours.


In Uncategorized on 12/09/2019 at 15:11

Judge Goeke adds to the holiday joy at Populous Holdings, Inc., Docket No. 405-17, filed 12/9/19, by allowing the Section 41 qualified research credits it claims for the two years at issue, encompassing more than 100 (count ‘em, 100) contracts and subcontracts for its architectural design services.

To qualify, the research has to be “unfunded.” That means it can’t be paid for by “any grant, contract, or otherwise by another person (or governmental entity).” Order, at p. 2. Moreover, payment for the research must be contingent upon the research producing a successful result for the payor, and the researchers must retain substantial interests in the products of the research (no work for hire).

Populous had fixed price contracts. This means that, if the research doesn’t at first succeed, the cost of trying again falls on Populous.

“In general, fixed priced contracts have been considered unfunded research, qualifying the contractor for the credit. See Geosyntec Consultants, Inc. v. United States, 76 F.3d 1330 (11th Cir. 2015); Fairchild Indus., 71 F.3d 868. Fixed price contracts are inherently risky for the contractor if the research is unsuccessful. Under fixed price contracts, the contractor must remedy failed research at its own expense. Fixed price contracts ‘generally place maximum economic risk on contractors who ultimately bear responsibility for all costs and resulting profit or loss.’” Order at p. 3 (Citation omitted).

“None of the contracts expressly requires research; thus, none of the contracts expressly states that petitioner is being paid for research. Petitioner is paid for a work product at a fixed price. The work product included the need to perform research. If its research failed, petitioner would be required to incur additional expenses without additional compensation. Petitioner bore the financial risk of research failed. The capped expense reimbursement does not relate to research expenses and does not change our holding….” Order, at p. 3.

Right to reuse the research must be retained by the party claiming the credit. Increased knowledge or added professional experience doesn’t count.

Now per the contracts the clients owned all the documents, renderings, mock-ups, models, studies, manuals, as-built plans, and copyrighted the exterior features of the buildings, which Populous couldn’t use elsewhere without the client’s permission. And all that was left, says IRS, is repetitive, non-project-specific, pre-existing and other stuff not identifiable with the project.

But that’s just copyright, says Judge Goeke. “There were no provisions in these contracts that prohibited petitioner from using the research it performed or that required it to pay the client for use of the research.” Order, at p. 5.

Don’t conflate research with project. While the research gets folded into the project, it’s the project the client buys, not the research.

But since the amount of the SNOD here differs from that set forth in the stip of settled issues, do a Rule 155 beancount.

Now why Judge Goeke didn’t designate this enlightening order escapes me.




In Uncategorized on 12/06/2019 at 20:45

I take the title of this blogpost from a much finer writer than I, but I suggest the proposal is nonetheless valid.

I wish I had a better order than Francis Anthony Gallo, Jr., Docket No. 19986-19, filed 12/6/19, but I’ll take my blogfodder as I find it. Francis didn’t bother signing his petition from a SNOD, but Ch J Maurice B (“Mighty Mo”) Foley, already in a holiday mood, has given Francis until 12/30 to ratify, unlike the Ch J’s usual one-week toss. Maybe Francis sent in the sixty smackers, to prove he was for real. The order does not state.

Howbeit, Francis now wants out, moving to dismiss his (unsigned) petition.

“In his Motion petitioner states/indicates that he no longer wants to have the Court redetermine the proposed … income tax liability determined by respondent (the IRS) against him in the … deficiency notice upon which this case is based.” Order, at p.1.

Well, we’ve seen this before. See my blogpost “Good Call,” 7/14/17, when then-Ch J L Paige (“Iron Fist”) Marvel warned a pro se that, by dropping the petition, he forfeited his chance to try his case in Tax Court. The ninety days gone, no petition for redetermination of a SNOD lies, and a CDP doesn’t help, because the pro se had a chance to contest and didn’t. One swing at the baseball, chaps.

As I said then “(A)nd Ch J Iron Fist’s second chance language should get into every order when a pro se asks to drop the case to talk to IRS. This ‘drop the case and we’ll talk’ stuff should be retitled ‘come into my parlor, said the spider to the fly.’”

So I modestly propose the following.

Rather than just denying the motion to dismiss and telling the pro se to sign the petition, with a reminder that if he doesn’t he loses his chance to fight the deficiency in Tax Court, put the case on report track, with a quick-kick reporting schedule.

IRS and pro se are ordered to work to resolve and submit decision document in thirty (count ‘em, thirty) days. If they can’t file a decision document, a joint report (or separate if they can’t agree), stating what facts to which they can stip, what principles of law ditto, and a schedule for going forward to resolve whatever they haven’t yet been able, on or before Day Thirty, then the Court will decide what to do, including without in any way limiting the generality hereof, tossing the petition for want of prosecution.

If there are any signs of stalling or gameplaying at Day Thirty, the Judge can toss or sanction, as the facts may appear.

I understand Ch J Mighty Mo wants to move cases; that’s his job. And he’s not teaching a law school class in Tax Court law and practice; that’s not his job. But there’s no Tax Court Office for the Self-Represented deer-in-the-headlights pro ses. So maybe that’s my job.