Archive for May, 2021|Monthly archive page


In Uncategorized on 05/14/2021 at 13:14

I gave Judge Christian N. Weiler the sobriquet “Speedy” last September, in my blogpost “Fastest Promotion on Record,” 9/10/20.

Although it takes him some little time, Judge Speedy straightens out IRS counsel in Otay Project, LP, Oriole Management LLC, Tax Matters Partner, Docket No. 6819-20, filed 5/14/21.

IRS tries to amend its answer two (count ’em, two) days after the Otays replied to their answer. Rule 41 says you need leave of court to serve an amended pleading after an adversary has responded to yours.

So IRS moves for leave to file a second amendment to its answer, but that fares no better.

“Respondent filed the first amendment to his answer on October 21, 2020, just two days after petitioner replied to respondent’s answer on October 19, 2020. Since the first amendment to answer was not filed within the time an amendment could have been filed as a matter of course, it may be filed only by leave of Court.  However, no motion for leave to file accompanied the first amendment to answer. Therefore, the filing of respondent’s first amendment to answer violates Rule 41.

“In respondent’s second amendment to answer, lodged with his motion for leave to file, respondent seeks to clarify his position regarding Exhibit B to the answer, clarify the theories supporting his position in the case, and cure any issue under Rule 41(a) relating to respondent’s first amendment, by deleting the text ‘and the substantial understatement penalties under I.R.C. §§ 6662(b)(2) and 6662(d)’ from paragraph 11(l) of respondent’s first amendment to answer.” Order, at p. 2.

Note that IRS is up against a well-known and well-regarded white shoe law firm.

The test for leave is whether the counterparty is ambushed, like eve-of-trial or after discovery closed, and the amended pleading does more than “make the case harder or more expensive for the other party since this is likely to occur in any amendment to the pleadings.” Order, at p. 2. (Citation omitted).

Here, trial is not scheduled, and apparently IRS tipped off the Otays in a December phoneathon. So no ambush.

But here’s the bonus: Judge Speedy gives us some insight into what he thinks is speedy. “Furthermore, the motion for leave was filed some 3 months after the original answer, which does not strike the Court as dilatory under the circumstances of this case.” Order, at p. 2.

A docket search shows a major joust over summary J, with electrons flying in all directions. Maybe there’s no need for discovery, so all they’re talking about is law, and the proposed amendments are only explanatory.

So straightening out the procedural part, Judge Speedy lets IRS “…file a motion for leave to file an amended and restated answer in accordance with Rule 41(a) reflecting the contentions made in the first and second proposed amendments to the answer.” Order, at p. 3.

And calls for another phoneathon next month, after IRS sends in the amended and restated answer. Maybe some head-banging might settle the case.


In Uncategorized on 05/13/2021 at 18:25

For whatever reason, IRS didn’t cross-move for summary J in Cahill; see my blogpost “Summary J – Tactics,” 6/18/18. Turns out IRS may have been wise, because there are lots of facts when split-dollar life insurance arrangements meet estate tax. And Judge Goeke digs through all of them, as we come to evaluating the tax and chops (40% style) in Estate of Clara M. Morrissette, Deceased, Kenneth Morrissette, Donald J. Morrissette, and John D. Morrissette, Personal Representatives, 2021 T. C. Memo. 60, filed 5/13/21.

I gave a tip of the battered Stetson to the late Clara’s trusty attorneys in my blogpost “Heir Splitting,” 4/13/16, which see for part of the backstory. Judge Goeke has more backstory, and it’s a family feud of the clessic (no misprint, that) species. Dad starts business with one used truck and builds a moving and storage empire covering 32 States, slave-drives his sons, two leave, one stays and gets a Prodigal Son complex when the two come back, the brothers hate each other, sue each other, the next generation wants to get into and keep the business but get shut out by the battling brothers, and Mommy wants the business to stay in the family.

Enter the split-dollar, whereby Mommy’s trust funds the life insurance policies that wind up with the sons’ dynasty trusts.

And Judge Goeke buys it all.

The desire to keep the business in the family, the need for liquidity for estate tax purposes (Mommy owned 75% of the stock, plus real estate and securities), the need to secure peace among the battling brothers, and provide the means for the next generation to buy into the business, get the split past Sections 2036, 2038, and 2703.

It takes 125 pages, but the Estate is leading at the sixteenth pole, when IRS’ valuation of the Estate’s share of the split comes up on the outside on Boss Hoss, and beats the Estate at the wire.

The Estate got $7.5 million, say the PersReps. IRS says $27 million. One of the Estate’s experts is off the mark, but the other and IRS’ expert agree on methodology. On the numbers, IRS wins, and the e-mail exchanges between the RA and his immediate supervisor satisfy Section 6751(b).

Trusty attorney warned the brothers that their valuation was too sweet, but they eschewed getting a legal opinion. No good faith defense to the chop, when they finish the Rule 155 beancount.

Is the SDLIA really dead? Maybe not.


In Uncategorized on 05/12/2021 at 16:59

That entrepreneurial gentleman Scott A. Blum, star of my blogpost “OPIS Finis,” 11/18/12, seems to have an inexhaustible appetite for tax dodges, as he’s back today with Scott A. Blum and Audrey R. Blum, Docket No. 5313-16, filed 5/12/21. This time it’s BLIPS. I’ll let Judge Kathleen Kerrigan explain.

Scott was a partner in “… Democrat Strategic Investment fund LL (DSIF), which engaged in a tax shelter, Bond Linked Issue Premium Structure (BLIPS). DSIF was an entity taxable as a partnership pursuant to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, sec. 402(a). 96 Stat. at 648, which established unified procedures for the IRS examination of partnerships rather than a separate examination of each partner. See secs. 6221-6234.” Order, at p. 1.

“The BLIPS transaction resulted in a purported tax loess which petitioners claimed on their 1999 Federal income tax return.” Order, at p. 2. Tax loess? Judge, I thought you might be referring to Clay; see my blogpost “Indians Not Taxed – Redivivus,” 11/28/16.

Howbeit, IRS descended on the Democrats (please, this is a nonpolitical blog; any resemblance between my remarks here and any political organization or party is purely coincidental). The Democrats’ TMP elected to challenge the FPAA in USDCNDCA, at which IRS won on all counts, including without limiting in any wise the generality of the foregoing, the Section 6662(h) overvaluation chop.

So IRS hit Scott with a bunch SNODs (hi, Judge Holmes).

The SNODs seek the chops USDCNDCA affirmed, and Scott claims he doesn’t owe them.

We all know pursuing affected items in Tax Court is a nonstarter. Happily, the next generation of partnership dodges will all be sorted out in a single proceeding. Maybe.

“Deficiency procedures apply to affected items which require partner level determinations (other than penalties, additions to tax, and additional amounts that related to adjustments to partnership items. Sec. 6230(a)(2)(A). This is a deficiency case and therefore, penalties attributable to affected items determined at the partner-level are not before the Court.” Order, at p. 2. (Citation omitted).

So anything in Scott’s petition relating to the chops is stricken.

Scott, sometimes it’s better just to pay the tax. And stay away from the tax loess.



In Uncategorized on 05/12/2021 at 16:08

Before drilling down into Judge Pugh’s prose, I’d like to bestow a new Taishoff award, called the Chutzpahdika Punim, upon the trusty attorneys for BRC Operating Company LLC, Bluescape Resource Company LLC, Tax Matters Partner, and Bluescape Resources Company LLC, Bluescape Resources Investors LLC, Tax Matters Partner, twinned for trial and disposition in 2021 T. C. Memo. 59, filed 5/12/21. The reason for the award will become clear, even without the need for translation.

The Bluescapes passed through to their investors $160 million in mineral lease acquisition costs over two (count ’em, two) tax years. But The Bluescapes failed to heed the well-known admonition “Drill, Baby, drill!” Not only did they not drill anything but two test wells, which they stiped were irrelevant, they earned no income whatsoever. But they characterized the passed-throughs as costs of goods sold.

The Bluescapes try to dodge IRS’ motion for summary J disallowing this novel approach by claiming that it’s not section 461 economic performance (The Bluescapes are accrual basis), but Section 451 timing of receipt of gross income. Remember, the Sixteenth Amendment permits taxation of gross income, not gross receipts, lest Congress try to tax return of capital. That’s why COGS.

But before we get to timing, Judge Pugh has a basic question.

“Can Bluescape recognize costs of goods sold before it has any gross receipts from the sale of goods? In other words do we even reach the question of whether costs of goods sold are subject to the economic performance requirement when there are no gross receipts to offset yet?” 2021 T. C. Memo. 59, at p. 7.

IRS says ya gotta have goods sold to offset income therefrom with cost of the goods ya sold.

“Petitioners, framing respondent’s position as a ‘clear reflection of income’ argument, argue that ‘matching’ of cost of goods sold and gross receipts is not required. Thus, petitioners argue, they can recognize cost of goods sold as soon as they assume the obligations to drill the wells, giving rise to a loss that flows through to their partners.” 2021 T. C. Memo. 59, at p. 8.

Judge Pugh goes back to 1918 for the history of COGS. And the cases The Bluescapes cite only shows up the illogic of their position. Taxpayers won those cases by expensing against income items disallowed by IRS as COGS. But they had to have income against which to deduct or offset.

“…petitioners take the position that Bluescape’s estimated drilling costs are not deductible expenses but costs included in cost of good [sic] sold–that is, that the expenses are part of the cost of acquiring the natural gas. This position is how they claim to avoid the economic performance requirement. But it is also what requires them to wait until there are gross receipts against which to offset cost of goods sold.” 2021 T. C. Memo. 59, at pp.16-17.

Despite all The Bluescapes’ trusty attorneys’ gyrations, there is only one essential undisputed material fact.

“In sum, we conclude that to recover cost of goods sold a taxpayer generally must have some gross receipts from the sale of goods to offset. Because Bluescape had no gross receipts from the sale of natural gas for the years in issue, the estimated drilling costs reported as ‘cost of goods sold’ are not allowable as a cost of goods sold offset to gross receipts.” 2021 T. C. Memo. 59, at pp. 20-21.

“Inventive” isn’t the word.


In Uncategorized on 05/11/2021 at 17:38

The connection? Two men with horse problems. We now know about Medina Spirit and the fly in the ointment. And  now IRS Com’r Chuck loses, because his horse is scratched.

Stanley Battat and Zmira Battat, 2021 T. C. Memo. 57, filed 5/11/21, are back, and doing a lot better than they did at their last outing. See my blogpost “Necessity Knows No Law,” 2/6/17, for that one.

But IRS founders on the famous Boss Hoss, as Stan’s & Zmira’s trusty attorneys find the Revenue Agent’s Report, a/k/a RAR, a/k/a Form 4549, Income Tax Examination Changes (Unagreed and Excepted Agreed), plus the transmittal Letter 4121, were bestowed on Stan and Zmira before the RA got the Section 6751(b) immediate supervisor Boss Hoss sign-off.

Judge Colvin has the “somber reasoning and copious citation of precedent” handy.

“‘[The] term [“determination”] has an established meaning in the tax context and denotes a communication with a high degree of concreteness and formality’, Belair Woods, LLC v. Commissioner, 154 T.C. 1, 15 (2020), and denotes a ‘consequential moment’ of IRS action, Chai v. Commissioner, 851 F.3d 190, 220-221 (2d Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-42. The RAR states that it shows the “corrected” amount of petitioners’ tax and penalty liability. The RAR also includes a signature box for petitioners to consent to the assessment of those tax and penalty amounts.

“Providing the opportunity to consent to assessment of tax and penalty is a ‘consequential moment’ to a taxpayer and the Commissioner. See Beland v.Commissioner, 156 T.C. at __(slip op. at 10); Belair Woods v. Commissioner, 154 T.C. at 15. A signed, completed RAR sent with a Letter 4121 provides the requisite definiteness and formality to constitute an ‘initial determination’ for purposes of section 6751(b)(1). See Beland v. Commissioner, 156 T.C. at__ (slip op. at 13); Oropeza v. Commissioner, 155 T.C. at __ (slip op. at 17). The RAR includes the EA’s initial determination and, because no supervisor approval was provided before the RAR was issued to petitioners, the penalty did not meet the requirements of section 6751(b).” 2021 T. C. Memo. 57, at pp. 5-6. Note here “EA” means Examination Agent, not Enrolled Agent.

I need not add that I have blogged all the cases cited.

And as the Section 6662 chop proposed was $345K, the Boss Hoss was an expensive scratch for Chuck & Co.


In Uncategorized on 05/11/2021 at 15:46

It’s been almost nine (count ’em, nine) years since I last blogged a case of the accountant who mailed without proof. But today, William J. Spain and Idovia A. Spain, 2021 T. C. Memo. 58, filed 5/11/21, are in the same condition as Mr. Tesoriero, whose story I told in my blogpost “Wait Just a Minute, Mr. Postman – Part Deux,” 9/11/12.

Judge Albert G (“Scholar Al”) Lauber will explain.

“The IRS issued petitioners separate notices of determination dated September 10, 2019, sustaining the collection action. Tracking data from the U.S. Postal Service (USPS) show that these notices were mailed the following day and delivered to petitioners on September 16, 2019. The notices advised petitioners: ‘If you want to dispute this determination in court, you must file a petition with the United States Tax Court within 30 days from the date of this letter.’ See sec.6330(d)(1). Because the notices were mailed on September 11, 2019, the 30-day period expired on Friday, October 11, 2019.

“The Court received a petition from petitioners on October 21, 2019. That date was 40 days after the IRS issued the notices of determination. Petitioners disputed their underlying liability for 2014 and asked the Court to ‘plac[e] a hold on collections until the ** * [IRS] has had the opportunity to complete the audit reconsideration process and process the related amended income tax return.'” 2021 T. C. Memo. 58, at p.  3. (Citation omitted).

The petition, dated October 10, 2019, lacked original signatures. And Wm. and Indovia had gotten a SNOD for the years at issue, which they had not petitioned. The petition from the NITL which followed was contained in a properly postpaid envelope, with a postage machine stamp, but no USPS postmark. So IRS told Wm. and Indovia that they would move to toss unless Wm. and Indovia came up with “receipts or other documents” showing timely mailing.

“…petitioners’ accountant, Richard Shapiro, replied with a letter in which he stated that the petition had been signed by petitioners on October 10, 2019, and mailed that same day from his office in Scottsdale, Arizona. However, Mr. Shapiro supplied no ‘receipts or other documents’ as respondent had requested.” 2021 T. C. Memo. 58, at p. 4.

IRS moved to toss, and Mr. S sent Judge Scholar Al a copy of the letter he sent IRS, and asked “…that petitioners ‘be provided their opportunity to review their case through[the] appeals process.'” 2021 T. C. Memo. 58, at p. 5.

Minor problem: “Mr. Shapiro has not entered an appearance on behalf of petitioners, and petitioners did not sign his letter. See Rule 23(a)(3) (providing that paper filings ‘shall bear the original signature of the party’s counsel, or of the party personally if the party is self-represented’).” 2021 T. C. Memo. 58, at p. 4, footnote 2.

No mention whether or not Mr. S is admitted to practice before Tax Court. But here it doesn’t matter.

The Section 7502 mailed-is-filed regs deal with USPS and non-USPS postmarks, but not when a mailpiece has no postmark at all. Tax Court has generally (love that word!) allowed extrinsic evidence to show due mailing, but that has to be “convincing” evidence. And the petitioner has BoP.

“When confronted with illegible or missing postmarks, we have considered various types of extrinsic evidence. We have examined the envelope to see whether any markings indicate that the letter had been ‘misplaced, missent, or inadvertently lost or damaged.’ We have also considered testimony from the person claiming to have mailed the envelope. This testimony must be credible and convincing. We are not required to accept uncorroborated, self-serving statements ‘as gospel.’” 2021 T. C. Memo. 58, at p. 7. (Citations omitted).

The envelope is undamaged; no sign that it was misdelivered, misdirected, or misplaced. And all the evidence Judge Scholar Al has is Mr S’s letter.

No good.

“The regulations warn taxpayers and their advisers that ‘the sender who relies upon the applicability of section 7502 assumes the risk that the postmark will bear a date on or before the last date * * * prescribed for filing.’ Sec.301.7502-1(c)(1)(iii)(A), Proced. & Admin. Regs. To avoid this risk, the regulations advise the use of certified mail. Ibid. Had Mr. Shapiro used certified mail, he would have a receipt postmarked by the employee to whom he presented the envelope, and that postmark would be treated as the postmark date of the document. Id. subpara. (2). In this case petitioners have no persuasive evidence of timely mailing, and they have therefore failed to meet their burden to ‘establish affirmatively all facts giving rise to our jurisdiction.’” 2021 T. C. Memo. 58, at p. 9.


In Uncategorized on 05/10/2021 at 19:35

Jennevieve Marie Fletcher, 2021 T. C. Sum. Op. 9, filed 5/10/21, did the right thing. When she started her home-based business, she’d been receiving SSDI. So she told SSA, who took their time but agreed.  SSA let Jennevieve pay back the excess at $100 per month. Jennevieve paid, but it was after the year she had received the overpayment but hadn’t reported it on her 1040.

Section 86(d)(2)(A) lets those who pay back Social Security benefits received for a prior year deduct repayments in the current year, but that doesn’t help Jennevieve.

STJ Daniel A (“Yuda”) Guy has the story.

“Petitioner contends that the Social Security benefits that she received in [year at issue] should be excluded from her gross income because she is obliged to repay those benefits to the SSA. As petitioner sees it, the Social Security benefits that she received in [year at issue] are tantamount to a nontaxable bank loan or cash advance.” 2021 T. C. Sum. Op. 9, at p. 4.

Except it isn’t.

“Although we understand why petitioner might view the excess Social Security benefits as a loan or advance, the Code provides otherwise. Petitioner does not dispute that she received Social Security benefits in [year at issue] and, consequently, she must include those payments as income for that year to the extent provided in section 86. Petitioner’s repayment in [future year] of Social Security benefits received in [year at issue] does not affect her [year at issue] tax liability. Inasmuch as respondent properly computed petitioner’s income tax deficiency in accordance with section 86, the deficiency must be sustained, and we so hold.” 2021 T. C. Sum. Op. 9, at p. 4. (Footnote omitted, but it says that while Section 86(d)(2) might help Jennevieve, STJ Yuda isn’t going there).

Jennevieve did the right thing.


In Uncategorized on 05/10/2021 at 19:10

Randy Jenkins, 2021 T. C. Memo. 54, filed 5/10/21, tried to help his buddy Ira W. Gentry, Jr., with whom he is conjoined in said opinion, become a mover in the world of shakers, but both went down for numerous fraud counts.

The “shakers” were a new concept to me, until Judge Mark V Holmes man-‘splained. Shakers play a major role in product development and quality control, especially in the field of electronics. One needs to know what causes these expensive articles to fail. Dropping them from heights is expensive, and doesn’t answer all questions.

“While some electronics can be tested by dropping, others (like car headlights) can’t–they must instead be shaken. A headlight, for example, needs to withstand a substantial amount of road vibration to be useful. To test its durability, a ‘shaker system’ simulates road vibrations. A shaker system has three parts. The first is the shaker itself, and the second is an amplifier that runs the shaker. The third is software that can program the other two parts to simulate different road conditions.” 2021 T. C. Memo. 54, at p. 4.

Ira claimed he had some great software that would revolutionize shaking. He put together a corporate structure whereby he controlled a public company. He and Randy ran a “pump-and-dump,” putting out false statements that they were making millions, selling their stock at the top, and bailing when the lies were exposed, netting themselves millions. Judge Holmes has tables; oh, does he have tables! Meantime, Ira stashed the cash in corporations domiciled, respectively, in AZ, the Bahamas, and Belize, each of which traded through the same Canadian brokerage house.

The point is what these corporations, controlled by Ira, are. IRS doesn’t claim they’re shams. IRS wants the claim they’re alter egos for Ira. But whose law defines “alter ego”? IRS claims AZ, where Ira resides. Judge Holmes isn’t happy with the record; the stock that was traded had no particular location. So both nominee theory and sham are off the table.

Now we get vintage Holmes, a March-of-the-Penguins through the concept of Federal common law (blown up by the Erie Railroad case, known to every first-year law student), Restatement of Conflict of Laws One and Two, and a “flexible” approach which is now the flavor du jour.

How I miss that towering figure from the Hill Far Above, the late Professor Rudolph Berthold Schlessinger. That he could pound these concepts into my thick skull bespeaks him a grand master.

But Judge Holmes comes back to AZ. “… most states have adopted a policy that their own law should apply when third parties are affected by those using corporations as their alter egos. This makes some sense–alter-ego doctrine protects those outside the corporation, and if most state courts have come around to the view that they will apply their own alter-ego law in their own courts, it also means that adoption of Arizona law here would ‘further the needs of the interstate and international systems and likewise the values of certainty, predictability and uniformity of result.” See Second Restatement, sec. 6(2) cmt. d.” 2021 T. C. Memo. 54, at p. 40.

And the Bahamas and Belize corporations never did business in their nations of incorporation.  “Perhaps even a new rule that reflects the change, in the decades since the First Restatement’s publication, to newer and easier methods of incorporation in jurisdictions that have no connection whatsoever to where a corporation is active.”2021 T. C. Memo. 54, at p. 41, footnote 23.

So back in AZ, the corporations are alter egos of Ira.

Randy ran his money through some trusts, so again we have tables.

IRS Boss Hossed the fraud chop, but conceded it post-trial.






In Uncategorized on 05/10/2021 at 12:28

The Genius Baristas better get with the program, as Morris Lee Brill, III, Docket No. 1881-21, filed 5/10/21, has his whole petition posted online.

Ch J Maurice B (“Mighty Mo”) Foley ordered that, because a page didn’t get scanned on the counterpart IRS got, “…the Clerk of the Court shall attach a complete copy of the Petition served on March 18, 2021, to this Order.” Order, at p. 1.

Well, the Clerk did, but the Genius Baristas posted the whole thing. Replete with Section 6103 material.

Welcome to DAWSON, where what should be available online is not, and what should not be, is.

Edited to add, 5/10/21: I exchanged v/ms with counsel for petitioner, who gave me to understand she will follow up with the relevant parties.


In Uncategorized on 05/08/2021 at 00:21

Joseph L. K. Snyder Trust, Docket No. 11520-20, filed 5/7/21, claims they are owed a refund of some excise taxes (type unspecified).

That may be, says Ch J Maurice B (“Mighty Mo”) Foley, but we here at The Glasshouse, a/k/a Pore L’il Ole Article I Tax Court, can’t help you.

The JLKS Trust got a disallowance letter from IRS, which said “(I)f you want to bring suit or proceedings for the recovery of any tax, penalties or other moneys shown on this disallowance notice, you can file suit with the United States District Court having jurisdiction or with the United States Court of Federal Claims. Generally, the law requires you to file suit within two years from the mailing date of this letter. However, if you signed Form 2297, Waiver of Statutory Notification of Claim Disallowance, the two-year period in which to bring suit began on the date you filed the waiver.” (Emphasis by the Court).

Tax Court is not in the picture.

The JLKS Trust does get a Taishoff “Good try, third class.”

They claim “…this Court has jurisdiction because, in assessing excise taxes for tax year 2015 and disallowing petitioner’s claim for abatement of those excise taxes, respondent is in effect seeking to collect a ‘deficiency’ within the meaning of the Internal Revenue Code. However… this Court’s jurisdictional [sic; I think you meant “jurisdictional limits,” Judge] are clear. The Tax Court is not the proper court in which to file a lawsuit challenging the IRS’s denial of a claim for refund or abatement such as petitioner’s. A taxpayer may seek a judicial remedy for wrongful denial of claims for refund—i.e., a refund suit in compliance with Internal Revenue Code sections 6532(a)(1) and 7422(a)—only in the United States Court of Federal Claims, pursuant to 28 U.S.C. sec. 1491(a)(1), or in Federal district court, pursuant to 28 U.S.C. sec. 1346(a)(1). Those statutes do not confer refund jurisdiction on the Tax Court. Accordingly, this Court cannot and does not decide whether petitioner is entitled to a refund or abatement of excise taxes for the 2015 tax year.” Order, at p. 2.

Excise tax refunds are excised in Tax Court.