I mean written ones. Among businesspeople. They never follow them. They never even read them, until it’s time to sue or be sued. Or maybe be audited. Just ask Michael Hohl and Jennifer Parker Hohl, 2021 T. C. Memo. 5, filed 1/13/21. Or you could also ask Braden B. Blake and Kristen S. Blake, conjoined as partners with Mike and Jen.

You could ask Ed Rodriguez, who bankrolled Mike and Brad in their text message advertising business that went bust. But Ed never showed for the trial.

The business suffered because Mike and Brad and another partner, also a no-show at trial, got guaranteed payments. I’ll let Judge Buch man-‘splain.

“A guaranteed payment is a ‘payment[] to a partner for services’ that is ‘determined without regard to the income of the partnership.’  Guaranteed payments from a partnership to a partner are comparable to a salary paid by an employer to an employee. Unlike a payment representing a return of capital, the payments are not tied to the financial success of the partnership. Like a salary, guaranteed payments are ordinary income to the partners and deductible to the partnership under section 162 or 263, as appropriate.” 2021 T. C. Memo. 5, at p. 21.

OK, so the partners had that income. But did they have any other? Well, what were the cash infusions from Ed Rodriguez, capital contributions or loans? The 1065s treated them as loans; the operating agreement (partnership agreement or box-checked LLC) said that capital contributions required formal overcall notices and other stuff, none of which the partners followed. Mike and Brad claimed they were capital contributions from Ed Rodriguez. I won’t keep you in suspense; spoiler alert: IRS said they were loans, and when the partnership cratered and Ed Rodriguez didn’t collect, Mike and Brad had passthrough cancellation of indebtedness income.

Judge Buch: “We focus on the substance of the transaction, not the form. Among the factors we consider are: ‘(1) The presence of a written agreement; (2) the intent of the parties; and (3) the likelihood of obtaining similar loans from disinterested investors.’” 2021 T.C. Memo. 5, at pp. 10-11. (Citation omitted).

But Judge Buch don’t need no factors.

“We do not find credible petitioners’ argument that Mr. Rodriguez made capital contributions. While the absence of a written loan document might support petitioners as to the first factor, the partners clearly intended to treat, and did treat, the amounts received from Mr. Rodriguez as loans.” 2021 T. C. Memo. 5, at p. 11.

In proof of my assertions at the head hereof, see the following.

“[Partnership’s] partners’ actions suggest that they considered Mr. Rodriguez’ cash infusions to be loans. [Partnership] reported the amounts as liabilities each year it operated. The Schedules K-1 [Partnership] sent to its partners reported the amounts as liabilities every year and allocated a share of those liabilities to each partner…. Mr. Hohl and Mr. Blake each filed individual returns accepting and benefiting from their characterization of these amounts as debt. If Mr. Rodriguez had made a capital contribution of $265,000 in [Year X}, paragraph 4.4 of the operating agreement would have required Mr. Rodriguez to include that contribution in his initial capital account balance. He did not do so. And according to the agreement, if the partnership needed additional capital contributions, [Partnership] had to notify all partners in writing and give them an equal opportunity to contribute. We have no evidence of any such notices. The record also does not include any explanation as to why Mr. Rodriguez’ ownership percentage did not change as a result of his supposed additional capital contributions. Mr. Rodriguez did not testify.” 2021 T. C. Memo. 5, at pp. 11-12.

Judge Buch does throw in a make-weight: “As for the third factor, the record includes no evidence that [Partnership] could not have obtained loans from third parties.” 2021 T. C. 5, at p. 12. Judge, after reading your description I make so bold as to doubt that third parties would lend.

The identifiable event that marks the end of the enterprise was the year at issue, when the last of Ed Rodriguez’s loans was made. And while Mike claims the Section 108(a)(1)(B) insolvency out, his numbers showed he was under water by $351; and his liabilities were inadequately established.

This old-time basketball play doesn’t help Aaron G. Filler, 2021 T. C. Memo. 6, filed 1/13/21, who tries for a ginormous capital gain based upon the alleged diminution in value of his 75% stockholding (unrealized) in the corporation to which he transferred his patent.

Aaron (that’s Doc Aaron, Esq., to you; doctor, lawyer, entrepreneur, author, inventor, with a CV to wow the judges, except Judge Elizabeth A (“Tex”) Copeland is unimpressed, claims Section 1235 gives him capital gains on the transfer of the patent even with less than a one-year hold, because Congress wanted to play the mother of invention.

Except transfer to a 25% controlled entity means inventors must come up with some other statutory authority, and Doc Aaron doesn’t.

Heavy-duty NOL for carryback-and-forth has to come from realized loss. Doc Aaron is in a trade or business, and his claimed loss would allow NOL carryons, if he realized loss. But all he has is his own calculations of unrealized diminutions.

His trusty CPA, who might get Doc Aaron off the Section 6662 five-and-ten chops, doesn’t testify.

Judge Tex Copeland devotes twenty-plus pages detailing Doc Aaron’s corporate give-and-gos, interspersed with the numerous lawsuits Doc Aaron brought to defend his patent. And he loses them all, just like…but this is a non-political blog.

Among others, he sues UCLA. That’s the Los Angeles branch of California’s State university system, not the University on the Corner of Lexington Avenue, the alma mater of a very wealthy former client.

“…despite the numerous lawsuits involving the … patent, no court has found infringement. Dr. Filler insists that we must decide whether UCLA infringed upon the … patent. But the law is clear–the United States Tax Court is not the proper forum to litigate a patent infringement claim. 35 U.S.C. sec. 281 (2006) (‘A patentee shall have remedy by civil action for infringement of his patent.’); 28 U.S.C. sec. 1338(a) (2006) (“The district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents[.]”).” 2021 T. C. Memo. 6, at p. 47. (Citations omitted).(Emphasis by the Court).

I can’t end this blogpost without giving Doc Aaron a Taishoff “Good try, with wildcard ribbon.”

Has No Place in Tax Court

Theoretical physicist Werner Heisenberg (1901 – 1976) is known for his uncertainty principle, the proof of which “ascends to such rarefied heights of pure mathematics that it is said that there was no man in the scientific press capable of criticizing it, ” as a much better writer than I put it. But Judge David Gustafson has no need of Heisenberg’s groundbreaking quantum mechanical aptitude; Brian Heberling, Docket No. 2846-17, filed 1/13/21 (link to text unavailable; direct your complaints to the Genius Baristas), though uncertain of his offsetting loss to his phantom income, cannot escape a Section 6651(a)(1) add-on for late filing.

Brian was a real estater who got auction-hammered in the Black ’08. He and IRS stiped out two (count ’em, two) years, but left only the late filing add-on for one year for Judge Gustafson to decide in this off-the-bencher.

“Mr. Heberling argues that he delayed filing his tax return because of the uncertainty of his financial situation and his lack of accurate information.  At trial he stated that he knew he had an obligation to file a return for [year at issue]. He acknowledged that in [year at issue] he actually received more than $33,000 in rental income–an amount well above the ‘exemption amount * * * plus the basic standard deduction’–and that he agreed to a [year at issue] allocation of $540,000 from a partnership in which he was a member.  However, he stated that he wanted to wait until the ‘dust settled’ in order to file his returns with more accurate information.  But uncertainty about the precise amounts to be reported does not excuse late filing.”  Order, Transcript, at pp. 10-11. (Citations omitted).

The rule is file with whatever you had, and amend as soon as you have better. When Brian finally filed, he says he still didn’t have final numbers. Judge Gustafson says if you’d done that to begin with, there wouldn’t be any add-ons. And reliance on his accountant doesn’t help. He knew he had income above exemption plus standard deduction. Brian claims he had to spend $30K when IRS committed “malpractice” by slugging him for one year when he was insolvent.

That year isn’t the year at issue, nor does what happened at Appeals excuse late-filing in a different year. Brian can still seek Section 7430 legals within thirty (count ’em, thirty) days of getting this transcript. Hop to it, Brian.

But don’t hold your breath; in the words of an Authority much more exalted even than Tax Court Judges, speaking of another tax collector, “I tell you this man went down justified.”

This Latin tag from the Greek original is surely well-known to Judge Patrick J. (“Scholar Pat”) Urda. It may even be well-known to the trusty attorneys for Michael J. Boettcher and Katherine H. Boettcher, 2021 T. C. Memo. 4, filed 1/12/21. Can’t link to the text; DAWSON doesn’t allow it. Get with it, Genius Baristas.

The Boettchers had their IA bounced, and the bounce affirmed by Appeals, but the SO on the case was less than punctilious with the paperwork.

“Multiple unanswered questions cast doubt on the settlement officer’s analysis, however. First, we note that in calculating the Boettchers’ income and expenses, the settlement officer rejected the Form 433-A out of hand because of perceived omissions with respect to “bank info and investments” on the second page and business income and distributions on the fourth page. But the Form 433-A in the record before us plainly contains bank and investment information. The settlement officer herself noted that the Boettchers had no income besides wages in [year at issue], suggesting that there would be no business income or distributions to be reported. We are left perplexed as to the reasons for rejecting the Form 433-A.

“The settlement officer’s analysis of the Boettchers’ income likewise raises questions.” 2021 T. C. Memo. 4, at p. 12. And Judge Scholar Pat has more to say about that than I have space for.

Judge Scholar Pat weighs heavily against the SO for not asking the Boettchers for more information to clarify, although we’ve seen cases where SOs get a bye. Maybe here it’s quantity; too many unanswered questions, plus the usual nod to Chenery.

“In his briefs respondent defends the rejection of the installment agreement on the ground that the Boettchers failed to supply the financial information requested by the settlement officer in her scheduling letter. This purported failure, however, was not cited in the notice of determination as a reason for rejection. To the contrary, the notice suggests that the Boettchers’ financial information sufficed, stating that ‘[w]e asked you to provide the requested information to us …. We received your correspondence’ and later, ‘we considered your financial information, unfortunately, we were unable to accept your proposal based on our review of your income and expenses you have the ability to make larger monthly payments.’ We cannot uphold a notice of determination on grounds other than those actually relied upon by the settlement officer.” 2021 T. C. Memo. 4, at p. 15. (Citations omitted, but Chenery leads the peloton).

Now the case comes up on a Rule 121 agreed statement. But Judge Scholar Pat, apparently deciding sua sponte that the record is so flawed he can’t decide for IRS or for the Boettchers, remands the case back to Appeals.

I’ve said before that, if offered a remand, or perhaps seeking remand, the practitioner should think twice. See my blogpost “Take the Hint,” 11/25/15. Remand may be a goal-line save for IRS, who can rehabilitate a dicey record the better wherewith to scuttle your client, especially if the Judge gives them a blueprint for the rehab.

But when the Judge decides to do it, unsought by the parties, practitioner beware. See my headline hereinabove set forth at the head hereof (as my already-on-their-second-18-year-old-Macallan colleagues would say).

Before getting dewy-eyed over the new, improved (?), jim-dandy US Tax Court website, note that I said yesterday only that it “cleans up halfway fair.” See my blogpost “Orders in the Court – Part Deux,” 1/11/21.

The Genius Baristas still have a way to go. My links to the texts of yesterday’s orders and opinions don’t work. The case search feature doesn’t update daily, so you won’t find texts that way. There is no cumulative list of orders or opinions, so every day’s budget does a Cinderella number at midnight, never to be seen again (until maybe the case search feature updates, if ever).

In short, there’s plenty work to do.

And maybe so it just might could be that these cybersages and technowiseacres should talk to a few of us who actually use the website every working day and night. Better late than never.

No, this is nothing to do with elections or politics. Patrick C. Kelley, 2021 T. C. Memo. 2, filed 1/11/21, is complaining that his equal protection rights were violated when Congress enacted Section 86(c)(1)(C) and Section 86(c)(2)(C).

Pat is married to Mrs. Pat for the entire year at issue. They did file a LA Separate Property Matrimonial Regime, apparently a Code Napoleonic pre-nup, which gave rise to their MFS returns. Pat wanted the $25K base for his Social Security benefits, but only got zero.

Judge Elizabeth A (“Tex”) Copeland has this.

Originally Social Security was non-taxable, but to harmonize it with other retirement income like pensions, and to preserve non-taxability for the truly poor, but to prevent geriatric high-rollers from getting a windfall, Congress enacted the tax-free ceilings.

But gameplayers could file MFS, doubling up on the tax-free ceiling.

Now generally (love that word!) pore l’il ole Tax Court has zero jurisdiction when That Document is invoked. But Congress has left a minuscule lacuna wherein Tax Court may step a cautious toe, and that is where, inter alia (as my expensive colleagues say) the taxable portion of Social Security benefits is involved.

Unhappily for Pat and the rest of us Socially Securitized, Tax Court has ruled before now that Congress has a rational basis for the class distinction that torpedoes us. You’ll find the cases at 2021 T. C. Memo. 2, at p. 8.

And Congress decided to jump to the defense of marriage, Constitutionally. “… Congress reasoned that married couples should be treated as a unit to prevent windfalls to couples that might otherwise file separate returns. This reasoning demonstrates that Congress had a valid and rational basis for establishing a separate classification for a taxpayer who lived with a spouse for any part of the taxable year and filed a separate return.” 2021 T. C. Memo. 2, at p. 9.

And Tax Court must follow the law, however harsh it may be for Pat.

Edward J. Tangel and Beatrice C. Tangel, et al., 2021 T. C. Memo. 1, filed 1/11/21, are back again. They seem to have straightened out whatever protective order they were seeking in my blogpost “Settle (Protective) Order on Notice,” 9/30/20, but it doesn’t help, as the $900K of Section 41 research credits they got from their Sub S bites the dust.

The Tangels were hired hands. So the Tangels and their Sub S lose the John 10:12 gambit.

Judge Albert G (“Scholar Al”) Lauber notes that when the Tangels’ Sub S agreed to design and build turbine covers, they gave up all substantial interests in the products of their research. In their contract (apparently the standard form of the turbinator who engaged the Tangels’ Sub S), the turbinator (“Buyer”) tied up whatever technical information (“Information”) they gave to Tangels’ Sub S (“Seller”) to develop the turbine covers (“Articles”).

Tangels’ Sub S “…agrees that it will not use, or assist others in using, such Information, design funding or tooling to develop or sell such Articles (or similar interchangeable or substitute Articles, or parts thereof) to anyone other than Buyer, either as production, spare or repaired Articles, without Buyer’s prior written consent. Seller shall not use or disclose such Information except in the performance of Orders for Buyer, and, upon Buyer’s request, such Information and all copies thereof shall be returned to Buyer. If Seller develops, sells the Articles hereunder, or assists others in doing so, (or similar interchangeable or substitute Articles, or parts thereof) to anyone other than Buyer, the burden shall be on Seller to establish that Buyer’s Information, funding or tooling was not used.” 2021 T. C. Memo. 1, at pp. 4-5.

The agreement also states that whatever Seller produces is work for hire per Copyright Laws, and if a court ever decides it isn’t, Seller assigns it to Buyer in advance. That means it’s the Buyer’s.

Of course, Seller can use the info if Buyer consents, but there’s no limit on Buyer’s discretion.

Reg. Section 1.41-4A(d)(3)(i) says that the researcher gets the credit only if it retains substantial interests in the research. Seller can’t even keep any of the Information if Buyer wants it back.

Summary J for IRS.

I’m obliged once more to Dickens for the title of this blogpost. Karen D.Foxx, Docket No. 17625-19, filed 1/11/21, got two different W-2s for the same year from her employer, each showing different wages.

Seems Karen wasn’t the only employee of the Nebraska Urban Indian Health Coalition (NUIHC) thus embrangled, but she didn’t respond to the CP2000. Her boss, however, timely submitted some correspondence that explained Karen’s fix. This was treated as a petition; Karen was ordered to ratify, but it’s not clear she did. After the petition arrived at Appeals, IRS dropped any claim for tax or chop, and sent Karen decision docs so stating.

I won’t get into the issue whether the CEO of NUIHC is entitled to enter a Tax Court appearance when NUIHC is not the taxpayer. Karen’s story would end here, but for the arrival of an attorney, whom I’ll call Mikey. Mikey files Entry of Appearance, has a couple phonecalls (hi, Judge Holmes) with IRS, and gets new decision docs naming him as attorney.

These get signed off in less than three weeks. Mikey then asks for admins and legals of $6800.

“In this case, the IRS received third-party information that petitioner received two Forms W-2 from NUIHC – one reporting wages of $36,750 and another reporting wages of $50,350. In light of this information, respondent was justified in seeking clarification from petitioner regarding whether she received wages of $36,750 that she failed to report…. Unfortunately, petitioner failed to provide information to respondent to assist in resolving these questions, leading to the issuance of the notice of deficiency.” Order, at pp. 3-4.

So IRS is justified. When there are facts involved, IRS is entitled to time to get the facts, review what substantiation is proffered, and reach a result. Here IRS acted reasonably.

STJ Panuthos is his usual genteel self. “Although respondent contends that the claimed litigation costs are unreasonable, we need not resolve that question in disposing of this motion.” Order, at p. 3, footnote 2.

Even though Mikey’s involvement predates COVID-19, hard times are no excuse for this.

Mirabile dictù! Son of a fowling piece! Ma foi! There are 78 (count ’em, 78) Tax Court orders on the website today, with a précis of each.

The orders themselves are printed in a quality format, much different from old typewriter-style documents formerly posted.

In short, the website cleans up halfway fair.  Some of my numerous objections have been directly addressed, lowering my blood pressure and sparing my readers yet another rant.

Edited to add, 1/12/21: Ch J Maurice B (“Mighty Mo”) Foley heralds the great event. Maybe this link will work.

I entitle some new information as to the now-much-discussed launch of DAWSON, with the 1942 Cagney Brothers’ Canadian epic.

The aim of DAWSON was to migrate the United States Tax Court’s online operations from Tax Court’s own servers to The Cloud. But in trying to “slip the surly bonds of earth and join the tumbling mirth” of Cloud, DAWSON has, as has been noted by commentators other than me, resulted in a penguin march.

My sources inform me that the end-of-month revisions will unseal the case noted by Mr. Weston in his comment to my blogpost “Yes, We Have No Opinions,” 1/4/21. The Genius Baristas, with zeal for secrecy unmatched in The City Under Siege since the days of Deep Throat, decided that if any document in a case was sealed, the entire case file should be sealed, including without in any way limiting the generality of the foregoing, orders, opinions and decisions. Apparently, they never asked anybody about this brainstorm.

Orders and opinions will be unleashed at month’s end. What sort of judicial tsunami this will create is unknown. Remember that in pre-DAWSON days, the average daily release of orders amounted to some 150 to 200. A two-month backlog should result in some 6000 orders being released, whether in one gigantic deluge or over a few days. How anyone is supposed to scan and decide which of these is worthy of note is nowhere explained, as my sources confirm that the day of the designated hitter is gone forever.

My sources also tell me that orders will no longer be text-searchable. However, the Genius Baristas have devised a method whereby the inquirer can find out how many pages (or perhaps kilobytes) each order contains, from which one is expected to discern the importance of each.

It did not occur to these monuments of unageing intellect that, by this criterion, any of the novels of Edward Bulwer-Lytton (inspiration for the contest to write the worst opening sentence of a bad novel) would surpass The Sermon on the Mount, Magna Carta, the Declaration of Independence, the Constitution of the United States, and the Gettysburg Address. Put together.

The concocters of this present (sorry, I am at a loss for a descriptor fit for family reading) are apparently a fresh set of Genius Baristas, successors to the crew which gave to a public, that never did them any harm but who paid for that (see previous parenthetical) with their taxes, the July debut of the new, improved, jazzy website. See my blogpost “If It Ain’t Broke, Don’t Fix It,” 7/20/20.

I cannot ascertain how the Chosen Few, who it is said commented on the design and implementation of DAWSON, were selected.

The public deserves to know, in reasonable detail, how the project was conceived, designed, and implemented. And what did this cost the American taxpayer and the Tax Court litigants so far?

Most importantly, we need a system that is transparent, user-friendly, and accessible even by the technophobic Luddite.

Having requested comments from Public Affairs, I have received none at time of publication.

I welcome comments and corrections.