Got my first view today from Africa’s farthest west. A warm welcome to Sénégal.

Now c’mon, Bolivia, get with it.

Ch J Maurice B (“Mighty Mo”) Foley announces a new series of webinars spotlighting taxicolegal pioneers, their emergence and success.

Here’s the skinny. https://ustaxcourt.gov/resources/press/02122021.pdf

Here’s a new one on me; a losing petitioner seeking a vacation of a footnote. Glade Creek Partners, LLC, Sequatchie Holdings, LLC, Tax Matters Partner, Docket No. 22272-17, filed 2/12/21, wants Judge Goeke to scrub a footnote.

Y’all will recall the Glade Creeks; what, no? Then see my blogpost “So It’s Not Perpetual,” 11/2/20. The Glade Creeks had two (count ’em, two) appraisals, and thereby hangs the cliché.

The latest bœuf only happens at p. 57 of 2020 T. C. Memo. 148, and then at footnote 16. The Glade Creeks want Judge Goeke to revise same, but Judge Goeke doesn’t say how the Glade Creeks want him to tinker therewith.

He just says no, the footnote didn’t figure into anything.

“The footnote states that the Court would not address certain issues relating to the qualifications of Mr. Clark as an appraiser and the timeliness of his appraisal that respondent had disputed but subsequently withdrew or conceded. Because of respondent’s concession, the Court did not have to resolve the issues that it stated it would not address. The footnote contains no factual findings.” Order, at p. 1.

According to Judge Goeke, the reason the Glade Creeks couldn’t get around the 20% overvaluation chop was their managing member’s knowledge that both the appraisals the Glade Creeks relied upon were too high. This had nothing to do with whether the appraiser in question was qualified, or whether his appraisal was timely.

“For resolution of good faith reliance, the issues of a qualified appraiser and a qualified appraisal are immaterial. Any inconsistency between the footnote and the parties’ stipulations or a later concession by respondent on brief is not substantial. The footnote indicates that we would not rely on either issue.” Order, at p. 1.

Taishoff says you’ll recollect that Judge Goeke roughed up IRS’ appraiser real good. No appraiser came out well, although I think y’all will agree that Mr. Clark fared best of the three.

But this is a rare vacation memo. Mr. Clark must have been really upset. Most losers want to toss the whole opinion, not just a footnote.

No, for once it’s not another syndicated conservation easement. Judge James S (“Big Jim”) Halpern goes to sea with Little Sandy Coal Company, Inc., 2021 T. C. Memo. 15, filed 2/11/21. The L’il Sandys build boats; and drydocks. And they claim a bunch Section 38 and 41(a) tax credits (hi, Judge Holmes).

But most of what the L’il Sandys claim is wages for production and supervisory types, and a freelance inspector, but not for experimenters. 80% of the spend has to be for experimenters and researchers, per Section 41(d)(1)(C) and Reg. sec. 1.41-4(a)(6). True, the recordkeeping is not what businesses usually do, but IRS loosened the rules years ago, and the L’il Sandys didn’t even do enough recordkeeping to get to that point.

It’s the usual Judge Big Jim drill-down, measuring each person on the job against what is Qualified Research Expenditure activity, throwing up fractions and percentages in every direction. And in every direction the L’il Sandys miss the 80% cut.

Judge Big Jim does have time to take a shot at a USDJ in USDCNDTX. That Judge (unnamed) reckoned that since all of the ships in the case that Judge had were new, everything was research, and didn’t look at who did what and how much.

“If the court did not make a line-by-line determination of those otherwise qualifying research expenditures that involved a process of experimentation, we do not understand how the court concluded that the 80% test was met. Moreover, the proposition that the court’s finding in regard to the 80% test meant that all costs necessary in the development of the ship were QREs conflicts with the governing regulation. Section 1.41-4(a)(6), Income Tax Regs., makes it clear that ‘the remaining 20 percent (or less) of a taxpayer’s research activities with respect to the business component [that] do not constitute elements of a process of experimentation for a purpose described in section 41(d)(3)’ must ‘satisfy the requirements of section41(d)(1)(A)’–that is, the cost of the activities must be eligible for deduction under section 174. Not all costs necessary in the development of a business component are research or experimental expenditures within the meaning of section 174. (We are hard pressed to see, for example, how the purchase of insurance is an activity ‘intended to discover information that would eliminate uncertainty concerning the development or improvement of a product.’ Sec. 1.174-2(a)(1), Income Tax Regs).

“Because the District Court… did not explain how it arrived at its finding that the taxpayer’s research on two of the vessels in issue satisfied the substantially all test of section 41(d)(1)(C), and because, in each case, the court  stated its finding after a recitation of those aspects of the vessels that were new or redesigned, we can understand how petitioner might have interpreted the court’s substantially all analysis to have turned on an assessment of the proportion of novel elements in each vessel. If that understanding of the court’s analysis is correct, however, we judge the analysis unsupported by the governing regulations and thus decline to follow it.” 2021 T. C. Memo. 15, at pp. 28-29.

Judge, I can imagine the TX USDJ had little idea what was Section 41(a) research, and even less of what has to happen before brand-new steel can go to sea; and wasn’t going to make a career out of figuring it out. And neither did 5 Cir., which affirmed.

But mox nix; the L’il Sandys, being back home in Indiana, are Golsenized to 7 Cir.

Howbeit, the L’il Sandys are out for incomplete records, and taking an “all-or-nothing” approach, rather than shrink-wrapping item by item, per Reg. section1.41-4(b)(2); but shrinking-down wouldn’t help, without records.

Rarely is Judge James S (“Big Jim”) Halpern unable to demystify even the most devious corporate caper, but today he confesses it was a challenge in Complex Media, Inc., 2021 T. C. Memo. 14, filed 2/10/21.

As near as I can figure it, a partnership composed of a couple LLCs (hi, Judge Holmes) got bought out by a corporation with not enough cash to pay off its preferred shareholders if it liquidated. So the bought-out would stay in with the buyer-out via a new corporation, and the buyer-out would stump up enough cash to keep the new corporation going.

Needless to say, one of the basic tenets of partnership organization comes into play: whatever the other partners want, one partner doesn’t, whether it’s a business deal or what to order for lunch. So the buyer-out and the bought-outs do a tax-free incorporation, whereby the buyer-out contributes cash and the bought-outs contribute IP, some beat-up computers, and office furniture. Buyer-out and bought-outs get stock in the new corporation, plus some cash and receivables (but they’re not part of the equation until much later, maybe 90 pages in).

Some of the stock in the new corporation that the bought-outs get is immediately redeemed with the cash the buyer-out put in, and paid to the dissenting partner in redemption of his partnership interest.

Everything the bought-outs contributed is fully amortized, except the IP, which is Section 197 start-up fifteen-year amortizable. The new corporation (hereinafter “P”) claims a $3 million basis in the IP. IRS claims zero. Judge Big Jim starts out with the question whether the deal was a tax-free incorporation or a taxable sale. If a sale, the bought-outs would have gotten a much bigger gain, and P would have a much bigger basis in the IP; see 2021 T. C. Memo. 14, at p. 21, footnote 10. The FMV of the IP was way more than what P claimed on its 1120. So both sides want Section 351 treatment, the bought-out shareholders wanting to shield the gain, and IRS to claim P only has the Section 362(a) carryover basis from the bought-outs, way less than $3 million.

But there’s another problem. The deal is out of control. That is, the transferors (the bought-outs and the buyers-in) didn’t own 80% or more of P’s stock immediately after the transfer to P, as Section 351(a) requires, because the dissenting partner got enough stock, which he immediately redeemed for cash, to torpedo the control group. Caselaw says that if a transferee of shares is obligated to part therewith immediately after getting same, that transferee is out of control.

Clear? Thought not. Cheer up; it gets worse.

The buyer-out swapped its stock for a stock in P, but the stock it swapped was preferred, and what it got back is common. Remember, buyer-in didn’t have enough cash to pay its preferred shareholders their liquidation preferences. What they got in the swap was less than what they gave. And they needed the common shareholders to go along, although the commoners got nothing.

You ready to quit yet? I was, about half-an-hour ago. Judge Big Jim is also ready.

“Although we are not convinced that, as a matter of law, petitioner’s acquisition of the assets of the transferred business was part of an exchange to which section 351 applies, we will treat it as such in disposing of the cases before us. Petitioner is the only party that would benefit from a determination that its acquisition of those assets was a taxable purchase and sale rather than a section 351 exchange. And it has steadfastly maintained that the acquisition is covered by section 351. Moreover, the duty of consistency might prevent it from taking a contrary position.” 2021 T. C. Memo. 14, at pp. 30-31 (footnote omitted).

Hurray for consistency!

But if you think you’re confused, IRS’ counsel is, if you will pardon an arcane technical term, utterly fahrblundgit. Read 2021 T. C. Memo. 14, at pp. 32-35. If thereafter you reach for a Tylenol, welcome to the club.

Having reached this point, Judge Big Jim isn’t ready to quit. OK, so it’s a 351. But what if P now wants to claim it isn’t? Well, how about Danielson and Makric? And Tseytin? For Danielson and Makric, see my blogpost “RTFC,” 3/9/16. For Tseytin, see my blogpost “The Secret Agent?” 12/29/15. Maybe the Nat’l Alfalfa “you broke it, you own it,” rule isn’t an impenetrable barrier; and Judge Big Jim will tell you so in seventeen (count ’em, seventeen) pages of “somber reasoning and copious citation of precedent.”

And Judge Big Jim ends up with the words of a former President of Our Fair Country: “Yes, we can!”

“Therefore, we now conclude that the additional burden the taxpayer has to meet in disavowing transactional form relates not to the quantum of evidence but instead to its content–not how much evidence but what that evidence must show by the usual preponderance. The Commissioner can succeed in disregarding the form of a transaction by showing that the form in which the taxpayer cast the transaction does not reflect its economic substance. For the taxpayer to disavow the form it chose (or at least acquiesced to), it must make that showing and more. In particular, the taxpayer must establish that the form of the transaction was not chosen for the purpose of obtaining tax benefits (to either the taxpayer itself… or to a counterparty…) that are inconsistent with those the taxpayer seeks through disregarding that form. When the form that the taxpayer seeks to disavow was chosen for reasons other than providing tax benefits inconsistent with those the taxpayer seeks, the policy concerns articulated in Danielson will not be present.” 2021 T. C. Memo, 14, at p. 64.

And P meets the burden. Nobody is better or worse off if the form is disregarded, and the redemption deal is treated as separate from the Section 351 incorporation. There’s a business reason also: the buyer-in didn’t have the cash to do a straight buyout, and the bought-out wouldn’t take less than their outfit was worth. And the dissenting partner wanted out every which way.

So we have a step transaction analysis (copious and somber), finishing up with a Cohan approximation (ditto) that sends the parties off to a Rule 155 beancount, and me to a large whiskey.

As Mark Twain put it, “Well you’ve got to admire men that deal in ideas of that size and can tote them around without crutches.”

This is the fourth time I’m quoting Richard Lovelace’s classic “To Althea: From Prison.” In the past it’s usually been that “stone walls do not a prison make, nor iron bars a cage” when one is either filing late or not at all because one is behind the stone walls and iron bars. Tax Court Judges rarely allow that being in the slammer is a good excuse for late or non filing.

Today, though, Judge Vasquez lets Alan Dexter Wenk, 2021 T. C. Sum. Op. 6, filed 2/10/21, off the hook for the Section 6651(a)(1) late filing add-on. Alan Dexter went down in USDCDKS and did some time. When he pled out, he had to pay restitution to his former employer, so he drew down his retirement plan (either ESOP or 401(k), Judge Vasquez isn’t sure) to fork over.

While out of circulation, Alan Dexter tries to get the numbers for his tax return, but cannot, despite diligent efforts (not enumerated, but Judge Vasquez does his signature number, “distilling truth from the testimony of witnesses, whose demeanor we observe and whose credibility we evaluate, is the ‘daily grist of judicial life.’”). 2021 T. C. Sum. Op. 6, at p. 11. (Citation omitted).

As soon as Alan Dexter got out, he got a wage and tax statement and filed a return, but it didn’t mention the ESOP/IRA draw because that wasn’t on the wage-and-tax statement.

If there was a 1099-R from the ESOP/IRA trustee, that isn’t mentioned, but at some later date Alan Dexter did let IRS know. For which he got a SNOD, with the Section 72(t) 10-percenter, the Section 6662(a) accuracy (which IRS later conceded), ands the Section 6651(a)(1) late addition, all at no extra charge.

IRS claims Alan Dexter was a CPA and should have known what to do. He filed nothing and didn’t ask for an extension.

Judge Vasquez finds Alan Dexter’s difficulties credible, and credits Alan Dexter with doing what he could as soon as he could.

Now there’s caselaw that says merely being in stir doesn’t excuse late filing.

“In this case, however, petitioner does not argue that the mere fact of his incarceration supplies reasonable cause. Rather, he argues that his efforts to timely file were thwarted despite his knowledge of the due date and his diligence in trying to comply with that deadline. As explained above, we found petitioner’s testimony credible in the light of his postrelease conduct. Respondent has offered no evidence to rebut petitioner’s credible testimony.” 2021 T. C. Sum. Op. 6, at p. 11.

Alan Dexter is off the chop and addition.

I often echo the words of George Bernard Shaw, as modified by Robert F. Kennedy: “There are those that look at things the way they are, and ask why? I dream of things that never were, and ask why not?”

The thing that never was is the amendment embodied in the motion to amend. At least in US Tax Court. In every other court I have encountered, the embedded amendment (be it complaint, petition, answer, or other pleading) is the accepted method of proceeding.

I have asked the question before. See my blogpost “Technical Fouls,” 10/7/20.

But there is embedding and embedding.

Today I ask the question again, after reading Denise J. Goltz, Docket No. 10012-20, filed 2/9/21. Denise’s proposed amended petition gets tossed because the motion for leave to serve same contained within it the proposed amendment.

Now I understand tossing the embedded amendment if defective in form, that is, trying to effect a piecemeal amendment by adding or eliminating stray allegations at random in the body of the motion, rather than by inserting the entire amended petition as a single document compliant with Rule 23 bodily in the motion or as an attachment thereto. A litigant, be they petitioner, respondent, or intervenor, needs to have one document, with discrete and separately numbered or lettered paragraphs, so as to be able to respond point by point. And the judge needs coherent documents in order to render an order or opinion speedily and efficiently.

Ch J Maurice B (“Mighty Mo”) Foley seems to be saying that in the above-referred-to order.

“‘The amendment to the pleading shall not be incorporated into the motion but rather shall be separately set forth and consistent with the requirements of Rule 23 regarding form and style of papers filed with the Court.’ Stated otherwise, the amendment to the pleading should be set forth in a separate document and lodged at the same time that a motion for leave to amend is filed.” Order, at p. 1.

Maybe my question only applies to lodging, rather than attaching. Is there concern that attaching will confuse a counterparty? Why?

Many individuals, sole proprietors all, conduct business under an assumed name. All, or almost all, States have filing or registration requirements (with a concomitant fee, of course) for registration of assumed business names, with lists of impermissible ones.

And all those assumed names are disregarded for income tax purposes, sole proprietors being treated as such, and multiple proprietors as partnerships.

But what happens when the sole proprietor (colloquially known as a “dba”, for “doing business as”) winds up in Tax Court?

It’s apparently a case of first impression, so Judge Patrick J (“Scholar Pat”) Urda decides it’s just like a single-member LLC, and service on the dba is service on the sole proprietor.

Here’s BM Construction, 2021 T. C. Memo. 13, filed 2/8/21. BM Construction is really Marius Bernotas, who apparently had some backup withholding problems with some subcontractors from whom he did not get TINs when he paid them.  I’m going to pass on the fact-specific issues like mailing of Letters 950-D and the effect of the Form 4669 Statement of Payments Received Marius later proffered.

I’m going to the question of how to treat BM Construction, which exists in name only, when it got the various IRS documents triggering the NITL at issue here.

“The record establishes that the notice of determination was issued to Construction, a sole proprietorship, rather than to Mr. Bernotas, its owner. A sole proprietorship is generally disregarded as a separate entity from its owner for Federal tax purposes, sec. 301.7701-2(a), (c)(2)(i), Proced. & Admin. Regs., raising the question whether the notice here was valid….” 2021 T. C. Memo. 13, at pp. 8-9. (Citation and footnote omitted).

And this is a case of first impression at The Glasshouse on Second Street.

“Although we have not previously addressed this question with respect to sole proprietorships, we have done so regarding single-member LLCs disregarded for Federal tax purposes. We have explained that such LLCs and their members ‘are a single taxpayer * * * to whom notice is given’, …and that the issuance of a notice of determination to a disregarded LLC was a ‘harmless error’ where, inter alia, the member was adequately notified of the liabilities… or was not prejudiced by the IRS’ failure to treat the LLC as disregarded….

“Given that a sole proprietorship is an entity ‘in which a single individual owns all the assets, is liable for all debts, and operates in an individual capacity’ …we hold that the same rule obtains.” 2021 T. C. Memo. 13, at pp. 9-10. (Citations omitted).

So Tax Court has jurisdiction, Marius has his day in court, and loses.

No, not us solos (“single shingles”). This is the disease from which Cindy Stassi suffered, as more particularly bounded and described by Judge Kerrigan in Timothy Stassi and Cindy Stassi, 2021 T. C. Sum. Op. 5, filed 2/8/21.

While employed, Cindy suffered from said disease. She was placed on a 30-day improvement plan thereafter, then on leave without pay, and finally she quit. A week after starting her planned improvement, she “…sent to a member of [employer’s] Board of Directors a letter complaining about the work environment at [employer]. Her letter described specific problems associated with her work…. The letter did not mention physical injury or sickness.” 2021 T. C. Sum. Op. 5, at pp. 2-3. (Name omitted).

Not good, right? It doesn’t get better. Cindy found a lawyer.

Said lawyer fired off a letter to Cindy’s employer “…demanding damages for wage and hour violations, constructive termination, and ‘Emotional Distress and Punitives’.” 2021 T. C. Sum. Op. 5, at p. 5.

You know what comes next.

“The settlement recitals described petitioner wife’s claims as follows: ‘[Petitioner wife] claims she is owed wages and that she was constructively discharged and retaliated against for making certain complaints, * * * [and that] she has suffered emotional distress with physical manifestations of same.’ The words ‘physical manifestations’, which had not been part of petitioner wife’s initial complaint, were inserted into the settlement agreement during negotiations.

“The parties agreed that $10,350 of the settlement proceeds would be designated ‘consideration for lost wages’, and that [employer] would issue to petitioner wife a Form W-2, Wage and Tax Statement, with respect to this amount. The parties further agreed that the remaining $69,650 of the settlement proceeds would be designated ‘consideration for physical manifestations of [petitioner wife’s] emotional distress claims”, and that [employer] would issue to petitioner wife a Form 1099-MISC, Miscellaneous Income, with respect to this amount.” 2021 T. C. Sum. Op. 5, at p. 3.

Employer gave Cindy two checks, one for the wages and one for the manifesto.

When tax time came, Tim and Cindy reported as follows. ” They reported the $10,350 portion of the settlement proceeds as taxable wages and reported $1 of the remaining $69,650 as ‘Other Income’. Petitioners attached to their… tax return a statement written by their tax return preparer explaining the decision to report only $1 of the $69,650 portion of the settlement proceeds, and a letter from petitioner wife’s attorney relating to the settlement agreement.” 2021 T. C. Sum. Op. 5, at p. 4.

By now, my ultra-hip readers have turned off their smartphones and said “Why is he wasting my time with this? Emotional distress is not a physical injury, no matter what the manifesto says! See H.R. Conf. Rept. No. 104-737, at 301 n. 56 (1996), 1996-3 C.B. 741, 1041. The whole boat is taxable.”

Well, Judge Kerrigan came to the same conclusion (surprise, surprise).

And the reason I’m blogging this is so that I have materials for a CLE I’m planning to give to a trial lawyers’ group about how not to do it.

Let’s take “pedigree” for a lot. Jurisdictional pedigree, that is. Our quizmaster today is Judge Tamara Ashford, and our contestant is Estate of Georgia M. Spenlinhauer, Deceased, Robert J. Spenlinhauer, Executor, et al., Docket No. 11286-18, filed 2/8/21.

IRS assessed the estate tax liability to RJ as ex’r and separately as transferee. But the IRS is authorized by Section 6861 to quick-kick the assessment if it looks like the one assessed is about to skip with the boodle. Which it did.

RJ got a pair of Letters 1584(P), one as ex’r of the estate of the late Georgia, and the other as transferee of said estate, hitting him up jeopardy-wise for estate tax. But RJ blew the 30-day cutoff to go to IRS “…requesting a redetermination of whether or not: (1) the making of the assessment is reasonable under the circumstances, and (2) the amount so assessed or demanded as a result of the action is appropriate under the circumstances.” Order, at p. 3. And RJ got a couple NFTLs (hi, Judge Holmes) at no extra charge.

RJ is contesting the reasonableness of the assessments via a Rule 55 motion to review.

“Pursuant to section 7429(a)(1)(B), within 5 days after the day on which a jeopardy assessment is made, the Commissioner is required to provide the taxpayer with a written statement of the information that he relied upon in making such assessment. Pursuant to section 7429(a)(2), within 30 days after the day on which the taxpayer is furnished the aforementioned written statement or within 30 days after the last day of the period within which such statement is required to be furnished, the taxpayer may request an administrative review of the jeopardy assessment. This administrative review consists of determining whether or not (1) the jeopardy assessment was reasonable under the circumstances and (2) the amount so assessed or demanded as a result of the jeopardy assessment was appropriate under the circumstances. Sec. 7429(a)(3).” Order, at p. 4. (Footnote omitted).

Usually one contesting a jeopardy assessment after losing admin review has to go to USDC per Section 7429(b)(2)(A). But pore l’il ole Tax Court can wade in if the jeopardized petitions a deficiency before the jeopardy assessment is made. But RJ didn’t. His Letters 12153 (one as ex’r of the estate and one as transferee) “…unmistakably show that they were requests by Mr. Spenlinhauer for a collection due process hearing with respect to the filed notices of Federal tax lien of which he was advised on or around the same day as the making of the jeopardy assessments. Indeed, nowhere on these forms does Mr. Spenlinhauer indicate that he is requesting administrative review of the jeopardy assessments; his stated ‘reason for the dispute or * * * [his] request for a CDP hearing’ was to deny ‘any responsibility or liability’ for the estate tax…, i.e., to challenge the underlying liabilities, and he checked the box on these forms for lien withdrawal. Each jeopardy assessment notice to Mr. Spenlinhauer clearly instructed him as to how to challenge the jeopardy assessment, i.e., ‘you must file a written protest with the Area Director within 30 days from the [jeopardy assessment notice’s] date, requesting a redetermination’.” Order, at p. 5, footnote 7.

That sinks RJ. Quoting Abraitis v. United States, 709 F.3d 641, 644-645 (6th Cir. 2018) (holding that section 7429(a)(2) and section 7429(b)(1) ‘lack[] jurisdictional pedigree’; rather, these rules ‘present[] an exhaustion requirement’ that ‘remains mandatory, inasmuch as the availability of judicial review hinges on either exhaustion or a timely request for administrative review’).” Order, at pp. 5-6.

So Tax Court has jurisdiction. But RJ never exhausted his administrative remedies, so he’s out.