Just a farm hand from the Dakotas, that’s Duane (“Doc”) Pankratz, 2021 T. C. Memo. 26, filed 3/3/21. The “Doc” is for his DVM from Iowa State University. The “lowly” is from Judge Mark V Holmes’ depiction of Doc Duane’s presentation on the stand.

Except.

The lowly farmhand is fighting about a couple million in charitables, plus a couple chops in connection therewith (this is Judge Holmes, after all; he never met a partitive genitive he liked). And Doc Duane created a cattle vaccine, in consequence of which he founded a lab, and sold it for $85 million. And ran a bunch of businesses in the Mount Rushmore area (chart on page 5 of 2021 T. C. Memo. 26).

Doc Duane had some high-priced tax counsel even before his top-class tax trial counsel. Disclosure: many years ago the tax counsel’s predecessor firm did tax work for me and the firm in which I was then a partner. But Doc Duane never talked to them. He was always “never around”, so he had one of his trusty bookkeepers, who had a BA in accounting but was never a CPA, Retrep or EA, talk to counsel. And then had a local CPA do the tax returns for the years at issue.

Judge Holmes pops the main question: “Can the failure to attach appraisals be due to reasonable cause when a taxpayer admits that he did not review his tax returns before filing?” 2021 T. C. Memo. 26, at pp. 1-2.

Doc Duane talked to a local appraiser about one charitable, but the appraiser said it was so unique that he couldn’t appraise it. So Doc Duane sent in his returns without an appraisal. He claims reliance. True, his tax counsel was competent, and Doc Duane gave him everything. But Duane never spoke to him, nor he to Doc Duane. And the trusty bookkeeper aforesaid, though trusty, wasn’t competent. Or, apparently, communicative.

Judge Holmes treads warily. Doc Duane was acting in good faith before he had his return prepared. Apparently, he’d once before had a large, non-cash charitable accepted by IRS without an appraisal. (Judge Holmes’ emphasis). “But we want to be careful about limiting this finding of reasonableness–we find only that it was reasonable for Pankratz to not know about this requirement when he first submitted information to the [tax counsel].” 2021 T. C. Memo. 26, at p. 25.

As for good faith reliance, Doc Duane never spoke to tax counsel. Tax counsel testifies that trusty accountant spoke to him, and he told trusty accountant that appraisal was required. But as trusty accountant never told Doc Duane, that’s out.

True, Doc Duane says he never examined the return before signing. But that’s not invariably disqualifying chopwise. “A taxpayer’s failure to review a return, though troubling, is not by itself fatal–there can be cases where even diligent taxpayers wouldn’t be able to see a subtle problem in their tax returns.” 2021 T. C. Memo. 26, at p. 26 (Citation omitted).

The trouble for Doc Duane is that Form 8283 says “appraisal” in four (count ’em, four) different places. Judge Holmes even prints a copy of the form (for the year at issue; since amended) at p. 14. And Doc Duane is a savvy, well-educated businessman, who built a multifaceted business from a start in a waterless farmhouse, doing hard chores.

Doc Duane boosted his depreciation deductions with sum-of-the-parts cost-segregation studies performed by tax counsel. Tax counsel got to see everything. Doc Duane took his deductions based on the draft report, but as the final didn’t vary materially, IRS loses any chops on any extra tax generated by failings thereof.

Finally, Doc Duane’s Section 162 ordinary-and-necessary deductions got hit, but as the issue there is bookkeeping mistakes, whether Doc Duane had a good system in place can vitiate the chops. In a multiplex business operation, the high command cannot oversee every ledger entry. It’s not a question of reliance on experts, but whether there were enough checks-and-balances to keep the rank-and-file on the straight-and-narrow. Mostly.

As to some of his businesses, his trusty CPA preparer did all the right things; if Doc Duane hadn’t settled out on the Section 162 write-offs, maybe her work would have gotten a better result. As to some other businesses, the trusty accountant, though no tax whiz nor great communicator, had been on the job for years and had done a good job.

There was a third bookkeeper. “All we know about N is that Pankratz believed her to be a ‘great bookkeeper.’ But we don’t know anything about her experience, her education, or her bookkeeping methods. We have nothing aside from Pankratz’s word (and we do mean one word–‘great’) with which to determine whether N was a qualified, competent bookkeeper. And there is nothing in the record to show that N’s work was reviewed by any more obviously qualified tax professional…. Penalties therefore apply to any erroneous deductions taken for businesses where N did the bookkeeping.” 2021 T. C. Memo. 26, at p. 40. (Name omitted).

Doc Duane had three (count ’em, three) attorneys on the case, from a high-powered tax firm with lots of combat time. I’m surprised they put in nothing about N’s experience and qualifications, especially since all the deficiencies were stiped out. When chops are all that is left, every little bit helps. Unless maybe N was less than “great,” and the less said, the better.