Ex-Ch J Michael B (“Iron Mike”) Thornton has that hard lesson for Clinton Deckard, 155 T. C. 8, filed 9/17/20. Clint formed and bankrolled a KY N-f-P (Not for Profit Corp.) to run fashion shows to assist the redevelopment of the Louisville waterfront. It never got 501(c)(3)ed, and its first fashion show cratered, leaving Clint with heavy-duty out-of-pockets and no way to write them off.

Two years later, Clint files a retro Sub S election, and takes two years’ worth of passthrough Sub S losses on his 1040s.

Unhappily, the KY N-f-P law says “no shareholders, no distributions to individuals or for-profits.” Clint claims beneficial ownership of the non-existent stock.

” [A]lthough the meaning of ‘shareholder’ for purposes of Subchapter S election has been said to be a matter of federal law rather than of state law, this means only that it is federal law which determines which kind of shareholder–namely, beneficial rather than record–is required to elect in order for the corporation to achieve Subchapter S status. Whether a particular investor was a shareholder of that kind– in this case was a beneficial shareholder of * * * [the corporation] on the date of the election–is an issue of state law. [Citation omitted.].” 155 T. C. 8, at p. 12.

And at pp. 14-16 ex-Ch J Iron Mike has his usual “copious citation of precedent and somber reasoning” to show that “nonprofits do not have owners,” except maybe cemeteries. The idea is that nonprofits cannot provide benefits to insiders like officers, directors and shareholders, both record and beneficial.

Clint’s argument that the N-f-P is tantamount to a profitmaker founders on KY law and Nat’l Alfalfa. “He asserts that he intended [N-f-P] to be a for-profit entity and ‘objectively operated’ it ‘consistently with it being a for-profit entity that he owned entirely.’ He urges that ‘the only fact inconsistent with [N-f-P] * * * being a for-profit entity is that an attorney formed * * * [it] as a nonprofit corporation prior to when the economic realities of the project came to light.’ He states that although he ‘should have sought to change [N-f-P’s] * * * corporate documents to reflect’ these changed plans, he was ‘mistakenly unaware of these formalities of corporate law’ and so treated [N-f-P] ‘like he was the sole owner in every practical sense.’” 155 T. C. 8, at p. 21.

Like Nat’l. Alfalfa says, “Taxpayers are generally bound by the form of the transaction they choose.” 155 T. C. 8, at p. 21.

Of course Clint blames his former attorney for everything. I’ll spare me from having to write it and you from having to read it.

And ex-Ch J Iron Mike spares himself from having to figure out whether pore l’il ole Tax Court has jurisdiction to determine whether a valid retro S election was made. The previous cases involved determinations at shareholder level in TEFRA cases. Here no stock, so nothing to elect.

Judge Emin (“Eminent”) Toro is direct. He tells the (now former) attorney for Robin Rothrock, Docket No. 17936-19, filed 9/17/20, to “… cooperate immediately and energetically in transmitting to petitioner all of the files and papers relevant to this case requested by petitioner.” Order, at p. 1.

This order follows a phoneathon Robin requested, wherein she announced she had dumped said attorney. Any client can discharge their attorney at any time for any reason, or for no reason, so that’s no biggie. And the client can replace their attorney or go it alone; their call.

Robin chose to go it alone. Although Judge Eminent reminds all and sundry that this case is on for trial in November, “(D)uring the same conference call, the parties agreed that respondent would forward decision documents to petitioner for review.” Order, at p. 1.

Questions arising: “Immediately and energetically”? Was said attorney dilatory? Did Judge Eminent suspect a meter-run (wasted motion to run up the bill)? But a docket search shows no motions, no discovery issues, and the standard scheduling and pre-trial orders issued not remarkably late.

Was there an unreasonably high fee? We know Tax Court doesn’t decide those. See my blogpost “A Court of Limited Jurisdiction,” 10/25/16, although then-STJ Lewis (“Quel Nom!”) Carluzzo came close.

“Immediately” makes sense, if Robin has to decide whether to stip out on IRS’ terms, try to negotiate a better deal, or go to trial. She needs to check out what discovery her former attorney got from IRS, if anything, and what he gave IRS, if anything. And see what research he did, if any.

But “energetically”? I don’t see delay. This is obviously a fact case, or IRS would have moved for summary J already. And either the facts have been Branertoned and stiped out, or the parties are ready to go with whatever they’ve got. If decision documents have been drafted, then fact disputes are not stumbling blocks.

Of course, there may be a fee dispute here. If there’s a question of an attorney’s retaining lien on the file to secure payment of fees, that’s outside Tax Court’s jurisdiction. You’ll find a variant, the attorney’s charging lien for a piece of a recovery, discussed by Judge Gustafson in my blogpost “We Don’t Need No Stinkin’ Badges,” 4/2/14. As I said back then anent the charging lien, “(T)his is to keep deadbeats from tossing hard-laboring peasants like Your Humble Servant under the proverbial on the eve of victory and scampering with the boodle.”

All this is pure speculation, but as Mark Twain said, “(O)ne gets such wholesale returns of conjecture out of such a trifling investment of fact.”

CF Headquarters Corporation, Docket No. 22321-12, filed 9/16/20, was here back in ’14, in a discovery joust; see my blogpost “Be Late But Be Plausible,” 11/14/14, but I doubt that story will leave either of us any the wiser about why CF HQ and IRS are jousting about what 3Cir did in BrokerTec.

BrokerTec, you’ll recall, starred in my blogpost “The Capital of New Jersey,” 4/9/19, wherein His Honor Big Julie, a/k/a Judge Julian I Jacobs, hereinafter “HHBJJJIJ,”decided the Garden State’s unguided largesse to a World Trade Center runaway was a capital contribution per Section 118, and not payment for a benefit, thus not ordinary income.

Except 3Cir reversed. See CIR v .Brokertec Holdings, Inc. f.k.a. ICAP US Investment Partnership, No. 19-2603, decided 7/28/20. New Jersey’s unguided largesse was too unguided. No strings means it wasn’t capital, just income.

So CF HQ apparently relied on what HHBJJJIJ said, until they got word from 3Cir. Then CF HQ filed a Notice of Supplemental Authority. But CF HQ went a bridge too far.

So IRS “…filed a Motion to Strike, requesting therein that the Court strike, as prejudicial, certain portions of petitioner’s Notice of Supplemental Authority that ‘raise legal arguments and direct the Court to findings of fact and trial testimony that petitioner posits supports its legal argument.’ Respondent further argues that he ‘on the other hand has not been afforded the opportunity to rebut petitioner’s argument.’ Respondent advises that petitioner opposes the granting of the Motion to Strike, and further that, should the Court deny it, he ‘intends to file a Motion For Leave to respond to Petitioner’s Notice.'” Order, at pp. 1-2.

Remembering that “play nice” is Tax Court’s bedrock, Judge Gale treats the Notice of Supplemental Authority as a supplemental brief, and allows IRS thirty (count ’em, thirty) days to respond.

Takeaway- This is a good guide for dealing with adversaries who try to wild-card in legal arguments when scheduled briefing is completed.

Those practitioners too young for Medicare won’t remember when those of us geriatric types actually had legal secretaries, whose syntactical, grammatical, and legal skills equaled or in some cases far outpaced ours. I remember Dolores and Lydia, to name just two; of course, their daughters became lawyers.

There were others, of course, less good. One of them, when the dictation was “very truly yours,” ended a letter with “Virtually yours.”

But that’s what today’s blogpost is about.

I have often praised the Low Income Tax Clinics, their motivated future Bar leaders, and their distinguished faculty advisers. They are definitely there to help.

But even they are useless if those of Low Income fail to show, even virtually.

Here’s Raymond J. Owens, Docket No. 20681-18, filed 9/15/20.

Raymond J. had apparently stiped out back in February, but never returned the signed documents for entry. So Judge Nega did a whass’up phoneathon with all hands in June.

“During that call, petitioner expressed interest in seeking assistance from a low-income taxpayer clinics (LITCs) and the Court provided petitioner with a list of those clinics available in the Chicago, Illinois area.” Order, at p. 1.

But Raymond J. tells IRS he “…had contacted multiple LITCs and that ‘none of the clinics reached back out to him.'” Order, at p. 1.

Maybe the law schools were all locked-down and teletubbying their classes; I don’t know. In any event, Judge Nega sent Raymond J. and IRS off to teletry the case this November.

But now IRS moves to dismiss for want of prosecution.

“…respondent represents that on August 18, 2020, respondent spoke with petitioner and ‘schedule[d] an appointment to speak with LITCs and pro bono legal volunteers at a Virtual Settlement Day event held on August 28, 2020’ to which petitioner indicated he would be available to attend. Respondent further represents that on August 28, 2020, petitioner failed to attend the Virtual Settlement Day even though respondent made numerous attempts to contact and reach petitioner. Lastly, respondent states that petitioner’s views as to the granting of respondent’s motion to dismiss are unknown.” Order, at pp. 1-2.

So let Raymond J. respond.

And it’s nice to know the LITCs are “virtually yours.”

(Very Much Off-Topic)

Today is the eightieth anniversary of Battle of Britain Day. Eighty years ago, democracy around the world was under attack, dictatorships were ascendant, and in many countries freedom had been entirely crushed.

On this day, much evil was matched by the very few, who prevailed.

In these times, when we are imperiled both physically and morally, let us remember and honor the few then and the few now. “Let us therefore brace ourselves to the challenge, and so bear ourselves,” that whatever may come, this will be our finest hour.

Pass the word for Peter Reilly, CPA, Forbes’ intrepid blogger and Webinar mayvinn (if you’ll pardon an arcane technical term)! Judge Holmes needs CPAs and RAs on the bridge.

It looked at first like a simple NFTL for two quarters of FICA-FUTA-ITW in Life-Skills School, Ltd., Docket No. 10114-19L, filed 9/14/20.

But Judge Mark V. Holmes quickly found himself embrangled in “several other quarters and years.” Order, at p. 1.

“And the particular problem is that one of petitioner’s employees was embezzling money to pay taxes owed by a completely different entity. That now-former employee has since paid restitution, which has led to a complex tangle of credits, overpayments, and assessments.” Order, at p. 1.

So what is a judge, even one whose opinions have reached “to such rarefied heights of pure mathematics that it is said that there was no man in the scientific press capable of criticizing” them, as Judge Holmes, to do?

Why, call in people who can actually do arithmetic without removing their socks.

“After a brief review, the Court concluded that turning this tangle over to accountants and revenue agents would be likelier to lead to its unraveling than leaving it with the lawyers.” Order, at p. 1.

I’m sure my colleague and esteemed luncheon companion Peter Reilly, CPA, would have the whole frittata unscrambled, with the mushrooms back in the ground, the bell peppers back on the vine, and the eggs back in their shells, in time for a quick Sam Boston Lager at day’s end.

Now that he is relegated to senior moments, I’ve come to miss Judge Mark V. Holmes’ quirky locutions and colloquialisms. Rather than a silt-stir today, Judge Holmes climbs down from the “bedrock of Tax Court practice” in Scott A. Householder & Debra A. Householder, Docket No. 6541-12, filed 9/11/20.

Scott & Debra have been here before, horsing around (see my blogpost “Gilded Offering, Gelded Horse,” 8/23/18) and getting hit with a res gestae Boss Hoss (see my blogpost “Greenberg’s Express – Not the Last Stop,” 7/13/18).

And Scott & Debra have returns that are “unusually complex,” Order, at p. 2.

But now everything has been tried to conclusion or stiped out. Still, Scott & Debra, and IRS, can’t reach agreement on the Rule 155 beancount. In default of the which, Judge Holmes goes back to the tried-and-true “Settle decision on notice,” hearkening back to my young day as a State courtier (see my blogpost “Settle Order on Notice,” 6/23/17).

The disagreement concerns two (count ’em, two) numbers. Scott & Debra showed a $145K gain, but the SNOD handed them a $317K loss. Of course, Scott & Debra take that thankfully. But where Scott & Debra claim $320K of flow-through income from their Sub S and various partnerships, IRS claims they really got $739K.

“The important thing to note here is that the Commissioner seemed to have made a mistake–it’s as if the revenue agent wasn’t looking at the filed return when he wrote about the adjustments he was making and compared it to what they had filed. The Householders had claimed a gain of $145,000 on their Form 4797, not a loss of $317,029; and they had claimed income of $294,502 from [Sub S and partnerships], not $320,059. And note as well that there is no mention of any adjustment to that ‘basis carryover’ number on Attachment 17 to the Schedule E.

“If this was a mistake, the Commissioner’s agents and lawyers didn’t notice it at the time.” Order, at p. 3. The basis carryover was Sub S loss that exceeded their then basis, but could be used when Scott and Debra bought more basis.

Judge, I’ve lost count of the times I’ve told all and sundry that lawyers can’t add.

Still, Scott & Debra and IRS stiped to $445K on Sched E and the $317K loss on the Form 4797 sale of business property.

You’ll recall from my glided-and-gelded blogpost aforementioned that Scott & Debra lost on the trial of the horsetheft.

“The Householders’ computations…took the numbers on the filed returns, then substituted different numbers from the stipulations in this case and the related TEFRA cases, and hit whatever button in Excel actually does the math. The result turns out to be zero deficiency for the Householders for [year at issue].

“At this point, the Commissioner suspected something was wrong somewhere. His explanation is coherent. He suggests that the agent who drafted the notice of deficiency for [year at issue] compared his determination for the allowable Form 4797 loss not to their original return but to an unsigned Form 1040 that they submitted as part of settlement negotiations toward the end of the audit. That would make sense of the weird language in the verbal explanation part of the notice of deficiency.” Order, at p. 4.

I give IRS’ counsel a free membership in the Taishoff “Order of Michael Corleone,” third class.

Judge Holmes is less generous.

“The Householders’ rejoinder is that stipulations are a deal. Their computations reflect that deal accurately. And, by the way, the exhibits that the Commissioner attached to his motion for reconsideration are not part of the trial record, and thus have no place in our posttrial, postopinion computations.

“The Householders are right.” Order, at p. 4.

Judge Holmes man’splains.

“Numbers on a filed return are conceded by the Commissioner if not redetermined in a notice of deficiency or subsequent pleading before this court…; numbers in a notice of deficiency are conceded by a taxpayer who doesn’t challenge them in his petition…. Pleadings define what’s at issue in a case.” Order, at pp. 4-5. (Citations omitted, but get them for your briefs).

And now Judge Holmes waxes nongeological.

“Stipulations are the bedrock of Tax Court litigation or, if one wants to wax nongeologically, are a contract between the parties that further narrows the issues from those that were pled to those left to be tried.” Order, at p. 5.

Now of course a stip can be set aside if it is clearly mistaken, as shown by the record. But the only proof IRS has is a posttrial document submitted as part of a Rule 162 reconsideration. That’s not part of the record.

Result: zero deficiency, zero overstatement. A Taishoff “Good job, first class,” to Scott’s & Debra’s trusty attorneys, Kacie N. C. Dillon, Esq., and Tim A. Tarter, Esq.

Robert J. Belanger, 2020 T. C. Memo. 130, filed 9/10/20, heeded the words of old Omar too well. Robert’s construction business did well, but Robert’s bookkeeping, as delegated to son Steven and a girlfriend or two, went less well. Robert also took cash payments, and checks for payment, for work done by the business and used same to buy cashiers’ checks, which never made their way into the business records or his Schedule C. Robert ran the business.

Robert, Steven, and girlfriend ran the cash through the Cape Cod Five Cents Savings Bank (which Judge Ashford calls the Cape Cod Five), but the cash was a lot more than five cents. And Cape Cod Five was more than a sleepy small-town bank.

“…Jane B, the assistant branch manager of Cape Cod Five’s Centerville, Massachusetts, location, contacted petitioner to inform him that numerous treasurer’s checks payable to him needed to be reissued because otherwise the bank would consider the checks abandoned property. During her conversation with petitioner, Ms. B asked whether he would like her to issue one or two treasurer’s checks or open an interest-bearing money market account or certificate of deposit in his name rather than reissuing treasurer’s checks payable to him in the same amounts. Petitioner declined her suggestions and told her that he would send Ms. [girlfriend] to the bank with the treasurer’s checks that needed to be reissued.

“Ms. [girlfriend] brought 21 treasurer’s checks totaling $120,903, all originally negotiated by Steven… to Cape Cod Five for Ms. B to reissue. After Ms. B reissued the treasurer’s checks, Cape Cod Five’s security officer, Diane R, became aware of the transactions. After conducting an investigation… she filed a Suspicious Activity Report (SAR) with respect to the transactions with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (also known as FinCEN).” 2020 T. C. Memo. 130, at pp. 12-13. (Names omitted).

The tale that Robert told the Treasury Special Agent that “he had purchased multiple treasurer’s checks with cash in smaller amounts on the same day rather than one big check because he felt like it,” 2020 T. C. Memo. 130, at p. 14, got Robert 21 months in USDCDMA for corruptly endeavoring to obstruct and impede the tax laws. Steven walked.

Robert got a SNOD with Section 6663 fraud chops at no extra charge.

Robert’s SOL argument loses; there are sufficient badges of fraud to persuade Judge Ashford. The RA’s specific item reconstruction carries the day; the method uses specific items of taxable income received but not reported. Robert’s claim that some of the money was Steven’s fails, because all Steven got was salary, and though he could sign business checks, Robert was firmly in charge.

Robert’s trusty attorney, playing a bad hand as best possible, tries Boss Hossery on the fraud chops, claiming that the Boss Hoss sign-off didn’t happen until later. “Petitioner contends that supervisory approval of the section 6663 civil fraud penalties was not manifested by the 30-day letter because respondent failed to authenticate that Mr. Noonan signed the 30-day letter or when he purportedly did so. According to petitioner, written supervisory approval of the penalties was manifested by Mr. Noonan’s digital signature on the Form 11661… 51 days after the date of the 30-day letter and therefore the requisite approval was untimely.” 2020 T. C. Memo. 130, at p. 28.

But unfortunately, Robert stipulated and capitulated. “The 30-day letter (with RA G’s RAR) was a stipulated exhibit that neither petitioner nor respondent reserved an objection to. Thus, its authenticity–Mr. [Boss Hoss’s] signature and the date reflected therein–is incontrovertible, and the Form 11661 is of no moment.” 2020 T. C. 130, at p. 29. (Names omitted).

Robert didn’t heed the rest of Omar’s words; the “distant Drum” was a lot closer.

One has to admire the newest luminary on the Glasshouse bench. Sworn in only yesterday, this morning Judge Christian N. Weiler appoints himself to his first case, bypassing Ch J Maurice B (“Mighty Mo”) Foley, in ES NPA Holding, LLC, Joseph NPA Investment, LLC, Tax Matters Partner, Docket No. 13471-17, filed 9/10/20.

Check out the signature on the order.

The cognomen I waited for has arrived. Welcome, Judge Christian N (“Speedy”) Weiler.