Unlike the magnificent start to creation, Henry C. Williams and Sonja L. Johnson, 202 T. C. Memo. 48, filed 4/16/20, find that the expenses of beginning one’s own business can only be amortized over 15 (count ‘em, 15) years, and then commencing in the year when the business becomes a going concern. Those expenses are not deductible in year when paid or incurred.

Judge Vasquez: “To qualify for deduction under section 162 or 212, expenses must be associated with a trade or business or other income-producing activity that is functioning as a going concern. Although a taxpayer may be committed to entering into a business and invest considerable time and money in preparing to do so, the activity does not constitute a trade or business for section 162(a) purposes until the business is actually functioning and performing the activities for which it was organized. Business operations with respect to the activity must have actually commenced.” 2020 T. C. Memo. 48, at p.18. (Citations omitted). So nothing doing until something is doing.

And when something is doing, here’s how to deal with those expenses.

“However, under section 195(b)(1)(A), a taxpayer may elect to deduct for the taxable year in which the active trade or business begins up to $5,000 of startup expenditures, reduced by the amount by which those expenditures exceed $50,000. The remainder is allowable as a deduction ratably over the 180-month period beginning with the month in which the active trade or business begins. Sec. 195(b)(1)(B). This election must be made no later than the time prescribed for filing the return for the taxable year in which the trade or business begins. Sec. 195(d)(1). Section 1.195-1(b), Income Tax Regs., provides that a ‘taxpayer is deemed to have made an election under section 195(b) to amortize start-up expenditures as defined in section 195(c)(1) for the taxable year in which the active trade or business to which the expenditures relate begins.’ A taxpayer may forgo this deemed election by affirmatively electing to capitalize startup expenditures on a timely filed return for that year. Sec. 1.195-1(b), Income Tax Regs.” 2020 T. C. Memo. 48, at p. 19. (Footnote omitted; it deals with years for which the election can be taken).

Henry’s testimony that he really looked hard for business to buy is entirely believable, but that just means he was really starting a business.

When one acquires a new business, as Henry ultimately did, one pays for goodwill among other things. Henry claims the insurance business he bought was all goodwill, as the other assets were almost worthless. Section 197 gives a 15-year writeoff similar to start-up costs, and again Henry’s credible testimony carries the day. I myself have found that sales of service companies generally involve assets that walk out the door every evening, namely “an established staff with extensive knowledge of the customer base, the accounts, and other aspects of the business.” 2020 T. C. Memo. 48, at p. 30. Of course, a one-man band like Harold Schmeets is another story, for which see my blogpost “His Name Is His Fame,” 10/15/12.

There’s the usual Section 274 insubstantiation for a lot of Henry’s expenses, a Section 72 10% whatever, and IRS does some major folderoos. But nothing that need long detain the tourist.

For the Content of this Blog

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I needed something to fill space on a day when there are no opinions, no designated hitters, and 247 (count ‘em, and I did, 247) orders, none of which is worth blogging.

RTWFS

My breakfast this morning consists of a large helping of crow.

I apologize to Judge David Gustafson. I cited the wrong statute yesterday in my blogpost “A Different Kind of Blower,” 4/14/20.

I read Section 62(a)(21) instead of 62(a)(20). I looked at the caption of the latter enactment, not the statute itself. The caption ”Costs involving discrimination suits, etc.,” should have warned me. “Et cetera” is a warning to look closely.

Congress, like another ruler long ago, has dealt cunningly. Tucked away in the middle of the enactment is this gem. “Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of… a violation of subchapter III of Chapter 37 of title 31, United States Code….”.

I should have to write 500 times “Read the Whole Statute.” The “F” is for emphasis.

Haste makes waste. Deadlines are no excuse for sloppiness. Sorry, Judge.

You remember Pengcheng Si, Docket No. 18748-18, filed 4/14/20, got his trial. No? How come? Well, see my blogpost “‘Too Soon Arrives As Tardy As Too Late’ – The Next Generation,”1/20/20.

But Pengcheng lost. After a bench trial, Judge David Gustafson obliged IRS (but not Pengcheng) by tossing his deductions for “other expenses”, “meals and entertainment”, and “legal and professional services”. Order, at p. 1.

Now Pengcheng wants reconsideration of the last of these. $19K of legals, he says, was paid in connection with his whistleblower case. You’ll note there is no “W” in Pengcheng’s docket number. Pengcheng blew under 31 USC 18 (sic) Section 3730, the Civil War qui tam False Claims Act. Has nothing to do with taxes.

But his whistleblower case got tossed with no recovery three years after the year at issue, wherein Pengcheng claimed the $19K.

And Judge Gustafson states the rule for False Claims is the same as Section 7623 whistleblowing: “No dough, no go.” Only Judge Gustafson is a lot more elegant than I.

“Neither Mr. Si’s motion for reconsideration nor his reply in support of that motion cites or discusses the controlling statute, section 62(a)(20) of the Internal Revenue Code (26 U.S.C.), nor suggests any reason that it does not have the effect stated in our bench opinion.” Order, at p. 2.

Judge, with submission, Section 62(a)(20) only mentions legal fees in connection with awards under section 7623(b), or, in the case of taxable years beginning after December 31, 2017, any action brought under section 21F of the Securities Exchange Act of 1934 (15 U.S.C. 78u–6), a State false claims act, including a State False Claims act with qui tam provisions, or Section 23 of the Commodities Exchange Act (7 USC 26).

Pengcheng didn’t mention a statute that clearly on its face doesn’t apply.

Privilege characters, that is, those whose studies of evidentiary rules concentrate on evidentiary privileges, such as client-attorney and governmental deliberative privilege, and 6103 confidentiality, will find Thomas Shands, Docket No. 13499-16W, filed 4/14/20, a mine of DC Cir and allied learning on those topics.

STJ Diana L. (“Sidewalks of New York”) Leyden has outdone herself. As set forth in the above-cited, she ordered the parties to do simultaneous memoranda of law on DC Cir’s take on client-attorney privilege in light of the 61 (count ‘em, 61) Ogden Sunseteers who could peek at the info on e-Trak, and the impact of Section 6103(k)(13)’s bukh to blowers provision. Y’all will recall STJ Di’s interest in Section 6103(k)(13) from my blogpost “Taxpayer First,” 8/2/19.

Spoiler alert: the parties agree Section 6103(k)(13) plays no role here. Notwithstanding anything otherwise or to the contrary hereinabove set forth, as my high-priced colleagues would say,  STJ Di dishes on all of it in 23 pages.

A quick summary follows, but you privilege characters will want to read and heed in depth, grabbing citations for law review articles, memos of law and casual conversazioni.

No problem with the 61 peeking at e-Trak, IRS’ case management system. “The Court finds that the number of employees who could have accessed the e-Trak system does not, in and of itself, defeat the confidentiality of the communications in the e-Trak system. Further, the Court finds that the system for obtaining authorization to access the information along with the penalties for willfully accessing information that is not authorized assures that the persons who accessed the e-Trak system entries were assigned to process petitioner’s claim and, therefore, needed to know the information, and that the communications were not transmitted outside the WBO.” Order, at pp. 8-9.

If you’re interested in waiver of client-attorney, STJ Di has something for you. “Assuming, without finding, that the application of the attorney-client privilege would deny petitioner access to information vital to his appeal, petitioner has failed to prove the first two conditions required to establish respondent impliedly waived the privilege. Respondent has not asserted the attorney-client privilege as a result of an affirmative act, such as filing suit or asserting an affirmative defense, nor has respondent through an affirmative act put the protected information at issue by making it relevant to the case.” Order, at p. 9.

And deliberative privilege gets a going-over from STJ Di. “Petitioner has not asserted that his need for disclosure outweighs the harm that disclosure may do to intragovernmental candor.

“As to petitioner’s assertion that respondent engaged in misconduct, the Court finds that petitioner has not shown that the WBO engaged in misconduct. The length of time respondent took to make a determination of petitioner’s claim is not, in and of itself, evidence of misconduct. Therefore, the Court does not find any basis not to apply the deliberative process privilege claimed by respondent….” Order, at p. 13.

And STJ Di has an extra. When information, and not paper or electrons, is sought, use interrogatories, not document production demands. See Order, at pp. 18-19.

Although STJ Di says the parties agree Section 6103(k)(13) plays no role here, she has plenty to say about Section 6103(h)(4)(B). This enactment lets IRS dish about matters directly related to a judicial proceeding.

“Section 6103(h)(4)(B) does not define ’directly related’. The legislative history of section 6103(h)(4)(B) indicates that it was created to provide a limited exception to the general nondisclosure rules for a taxpayer who is seeking to resolve his or her tax liability but only with respect to the treatment of an item reflected on the return being sought that was directly related to the resolution of the taxpayer’s tax liability.” Order, at p. 15.

Contrast this with Section 6103(h)(2)(B). STJ Di does, and comes up with this.

“’By using “directly” to modify “related to” language in § 6103(h)(4)(B), Congress intended an even narrower exception to apply for disclosure to members of the public in judicial proceedings’. In re United States, 669 F.3d at 1338. Therefore, the Court declines to adopt petitioner’s assertion that evidence that may be relevant and lead to admissible evidence would be directly related to petitioner’s issue. Rather, the Court examines the documents to determine if they are directly related to petitioner’s claim that information he provided in connection with the prosecution of the targets was the basis for the IRS to create the 2011 OVDI program and what spurred the unnamed taxpayers to file under that program for the period noted.” Order, at p. 16.

Of course, there’s more, but I don’t want unduly to try the patience of the unprivilege characters who may stumble upon this my blog.

I expect whatever readership I have left is as tired as I am of the endless mantra “those who need it won’t read it, and those who read it don’t need it.” But I will plod on, however Sisyphean my labors.

Vox clamantis in deserto, as they say around Hanover, NH.

Jason E. Shepherd, 2020 T. C. Memo. 45, filed 4/13/20, learned the lesson above-captioned from STJ Daniel A (“Yuda”) Guy, but it comes too late and the tuition is very high, $165K in TFRPs from the ambulance company of which Jason was CEO, hence Section 6672 “responsible person.”

Jason never got the Letter 1153 pay-up notice. He did send in Form 12153 when he got the NITL. And he got an Appeals review, at which he was placed in CNC. But Jason never mentioned doubt as to liability.

The readership above-mentioned will now say “And we can stop here.”

But I must go on. Jason’s circumstances bettered, he submitted an OIC of $1.00 based upon doubt as to liability. That got kicked, so he went to Appeals. Appeals said his liability might be reduced if he withdrew the OIC, which he didn’t. So IRS gave Jason a NFTL, which he took up to Appeals. Appeals said you had your chance to contest, and you blew it.

STJ Yuda: “Although petitioner did not receive a notice of deficiency, the Appeals Office determined that he nevertheless had an earlier opportunity to challenge his liability for the TFRPs within the meaning of section 6330(c)(2)(B) and consequently was barred from reasserting that claim in the administrative proceeding concerning the lien at issue.

“Respondent maintains that petitioner had two prior opportunities to contest his liability for the TFRPs. First, when he obtained Appeals Office review of the notice of intent to levy issued to him in 2013, and a second time in 2016 and 2017 when he submitted his OIC in respect of the TFRPs.” 2020 T. C. Memo. 46, at pp. 10-11. (Footnotes omitted, but one says there is no SNOD for TFRP, and the second says the first go-round, when Jason got CNC, was a real chance to contest liability).

The Letter 1153 was mailed to Jason’s last known address by certified mail, so his not getting it doesn’t matter. And the RO in that case got Form 4183 signed off by her Boss Hoss before the Letter 1153 issued.

NOD and NFTL sustained.

When first you go to Appeals, lay out everything but officially-noticed frivolities. Don’t think you’re going to win if you get CNC; that’s only temporary. Your first chance is your only chance, so let it all hang out.

Lockdown or no lockdown, the hard-laboring clerks at The Glasshouse on Second Street are pumping out those T. C. Memos. and designated hitters today.

So I’ve plenty on my plate, a veritable embarras de richesses. I already beat the throw by blogging Kent Trembly, Docket No. 25068-17L, filed today, before the hard-laboring clerks could get it on the designated hitter list. See my blogpost “Time Sensitivity,” 4/13/20.

Zaid Hakkah and Layla Naji, 2020 T. C. Memo. 46, filed 4/13/20, is just another unsubstantiated Section 469 real estate pro try. But for one of Judge Tamara Ashford’s classic observations, I’d give it a pass.

But this is too good to pass up.

“At trial petitioners discussed how Mr. Hakkak had health problems during the years at issue, and Mr. Hakkak testified that he worked as an attorney only from “12 to three” about “two times a week”. However, despite these claims Mr. Hakkak still managed to have income of $449,437 in [Year One] and $81,777 in [Year Two] from the practice of law… and petitioners did not produce any calendars or timesheets related to Mr. Hakkak’s legal work because he apparently had no such records.” 2020 T. C. Memo. 46, at pp. 18-19.

I wish I could do what he done.

Section 481 undermines SOL when a Section 446 change in accounting method (imposed by IRS) causes a rollback to closed years. For Gary Pinkston and Janice Pinkston, 2020 T. C. Memo. 44, filed 4/13/20, even having seven (count ‘em, seven) lawyers to contend with IRS’ two, cannot defeat the inexorable slugfest that IRS’ reallocation between nondepreciable land and depreciable improvements thereto wreaks on their island paradises.

Gary and Janice own a couple Hawaiian rental properties (hi, Judge Holmes). They have to use Section 168 MACRIS depreciation, so they load up the improvements and downplay the land. My former (I stress the word “former”) clients would describe this as “mach gresser, mach veyniger.”

Well, Judge Albert G (“Scholar Al”) Lauber isn’t impressed.

“Section 481, captioned ‘Adjustments required by changes in method of accounting,’ was enacted as part of the 1954 Code. It applies in situations where a taxpayer’s income for a particular year (the ‘year of change’) is computed ‘under a method of accounting different from the method under which the taxpayer’s taxable income for the preceding taxable year was computed.’ In that event section 481(a)(2) provides that ‘there shall be taken into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted.’” 2040 T. C. Memo. 44, at pp. 8-9.

Even though Section 481 has been criticized as “codified confusion,” the Courts, says Judge Scholar Al, have concluded that if prior (closed) years couldn’t be adjusted after the year of change, the statute would be virtually useless. And duty of consistency doesn’t o’ercrow the powers of Congress.

The tests for a change in method are materiality of the item and prior consistency of treatment. Well, Gary and Janice certainly were consistent over the time they owned each of their paradises. And depreciation is certainly a timing issue: if they depreciate their basis quickly, when they sell or dispose, basis lower, so their gain is greater; if depreciate slowly, basis higher, gain less. And timing issues are material.

What we have here is a change in MACRIS classes for improvements and timing of deductions. These trigger both the reporting of income and the allowance of deductions. And Gary and Janice will still recover their allowable cost bases; the only question is when and how.

Gary and Janice (and their seven lawyers) argue that IRS didn’t change their method, only the characterization of their deductions.

“Changes that affect whether, as opposed to when, an item is includible in (or deductible from) gross income generally do not implicate changes of accounting method.

“Here, it is far from clear that respondent’s basis reallocations are aptly described as involving ‘characterization’ of petitioners’ real estate. But even if they do, it would not matter. Because the IRS has initiated changes only in the timing of petitioners’ cost recovery, it makes no difference whether the changes coincide with or result from a change in character.” 2020 T. C. Memo. 44, at p. 16.

Reg. Section 1.446-1(e)(2)(ii)(d)(1) applies to Section 168 (MACRIS) property, and depreciation or amortization of same. True, the same Reg. also takes Section 167 property out of change-in-method, as far as “useful life” calculations are concerned. But what Gary and Janice have is Section 168 property, and therein are found specific statutory useful lives.

And there are no changes in underlying facts that might confine change-of-method to year of change.

But all Judge Scholar Al decides is that Section 481 is in play. Whatever other beeves exist between Gary and Janice, and IRS, are for another day.

Just the other day we saw Steve Mnuchin and the Treasury Munchkins giving everybody Corona-induced temporal distancing in Notice 2020-23, 4/9/20. But note well that Tax Court motion practice is apparently not subsumed within the mantle of Specified Time-Sensitive Actions. And if your motion required action before 4/1/20, Notice 2020-23 won’t help you, even if your trial got pushed off to the indefinite future.

Kent Trembly, Docket No. 25068-17L, filed 4/13/20, is caught up in the Twilight Zone of Corona. It’s really Kent’s trusty attorney, whom I’ll call Howie, who is involved.

Kent’s response to IRS’ motion for summary J, pre-supplement, was due last month. IRS supplemented four (count ‘em, four) days before Howie’s due date. But five days after due date, Howie not having responded to IRS’ motion, supplemented or unsupplemented, Judge Gale called off Kent’s trial because Corona.

“Petitioner was already delinquent in responding to the Motion for Summary Judgment when the Cancellation Order was served on him and to date petitioner has not filed a response.

“The Court surmises that petitioner’s counsel assumed that cancellation of the trial setting relieved petitioner of any obligation to respond to the Motion for Summary Judgment. However, the Cancellation Order provides: “The Court expects that the parties will continue to * * * work towards a resolution of the issue(s) in this case.” In the procedural posture of this case, that work includes resolution of the pending Motion for Summary Judgment. In these circumstances, the Court will exercise its discretion to waive any consequences of petitioner’s failure heretofore to respond to the Motion for Summary Judgment, see Rule 121(d) (last sentence), Tax Court Rules of Practice and Procedure, and instead extend sua sponte the date by which petitioner shall respond to the Motion for Summary Judgment, as supplemented.” Order, at pp. 1-2.

Takeaway- Unspecified Time-Sensitive Paperwork goes on.

And one more thing. IRS’ latest game of supplementing a motion for summary J a couple days (hi, Judge Holmes) before the date-certain cutoff for petitioner’s response is dirty deck tennis. If the original motion is incomplete or defective, IRS should move to withdraw and refile, or ask the Court in the supplement to give petitioner or counsel additional time to respond. The present system wrong-foots petitioners and their counsel, who may have spent hours working up a response, only to find their work nullified by the “supplement,” with no time to respond adequately. I called out one IRS attorney in my blogpost “Play Nice or Go Home,” 3/20/20. Now I’m calling out Lisa Kathryn Hunter, Esq.  And most respectfully suggesting Judge Gale do as Judge David Gustafson did in my blogpost aforesaid.

Back in January, in what now seems like another world since lockdown brings to mind Goethe on the battle of Valmy in 1792 (“Today a new world begins”), I lamented (off-blog) the death of Bob Shane, the last of the original Kingston Trio.

So as I scanned the website roster of USTC Judges and saw all the slots were filled, I remembered the Hawes-Steiner lament that Bob and his buddies sang so long ago.

Judge Mark V (“Quirky”) Holmes isn’t coming off senior status. There’s no room in the inn at the Glasshouse. I’d love to be proven wrong, but I doubt I am.

My comments on appointments to the Federal Judiciary, regrettably but necessarily political, are expressed elsewhere.