For the backstory on Mitchel Skolnick and Leslie Skolnick, et al., 2021 T. C. Memo. 139, filed 12/16/21*, see my blogpost “Horsefeathers,” 6/3/19. And to my colleague, Peter Reilly CPA, here’s another “goofy regulation” case for your reading pleasure.

It’s Mitch’s case, as his former spouse and her successor are in it only because MFJ. Mitch, heir to a vitamin-pill fortune, was introduced to harness racing (that’s trotters and pacers, another horse-drawn Hoover for your loose cash) by Daddy. He retired from his successful software development company to run Daddy’s operation, but quit after a family feud. He and a Cornell grad (Eric, the al), who had made out selling insurance to Daddy and others, founded Bluestone Farms, a partnership-taxed LLC.

On the trial, Eric testified that Daddy “…warned Eric that, if he invested in the syndicate, he might lose all his money, but that he would meet interesting people he would otherwise not have met. Eric testified at trial that both predictions proved ‘prophetic.’” 2021 T. C. Memo. 139, at p. 5.

So Mitch and Eric bought the farm (literally, a NJ dairy farm) and started breeding Standardbreds. Mitch liked this because it was like computer programming, figuring which stallion to breed with which mare. But Mitch and Eric, and a passive investor they brought in, went through four (count ’em, four) business plans, each one losing more money than the last. Mitch, fortunately, had the trust fund Daddy set up for him.

Judge Albert G (“Scholar Al”) Lauber goes through Mitchel’s unsuccessful horsing around and his more successful drain of Bluestone cash for his personal expenses. Bluestone eventually racked up $7 million in losses over 12 (count ’em, 12) years. And Bluestone’s recordkeeping was not of the best. But the result comes out to between 150% and 300% of expenses to income, until one year (not at issue) when it did make a profit, finally breeding a winner.

That’s about the right ratio for winning to losing tickets, be it flat or sulky; believe me, I know.

Mitch and Eric used credentialed CPAs, each with his own. And Bluestone did survive one year’s audit with a “no change,” although Section 183 wasn’t considered.

Now comes the SNOD, the initial expert joust more particularly bounded and described in my blogpost hereinabove cited, and the trial, with five (count ’em, five) experts, four horsemen and one farmland appraiser. Before doing the usual mix-and-match Judge Scholar Al does some pruning of the experts’ testimony “… excluding portions of certain reports as irrelevant, outside the scope of their expertise, or invasive of the province of the Court.” 2021 T. C. Memo. 1390, at p. 27. Right on, Judge; give these guys a nose and they’ll take a furlong.

The Section 183(d) two-of-seven for horsing around is out for the years at issue; none showed a profit. So comes the trudge through the “goofy regulation.”

Some of the operating accounting and operations were professional grade, but the partners’ capital accounts, contributions, and distributions were a mess. There were business plans, but these were out of date for most of the years at issue, and. nothing was done to staunch the losses. Mitch and Wife Two lived on the farm rent-free, had the farmhouse disassembled nail by nail and rebuilt to their specifications, and prettied the place up to the extent of $35K for their wedding, all using Bluestone money and paying none of it back.

Though Mitch makes much of the horse-by-horse recordkeeping, that alone doesn’t evidence an intent to make a profit. And here Judge Scholar Al makes an observation close to my heart. “Wine enthusiasts may keep detailed records about every bottle of wine in their cellars, including date of purchase, acquisition price, tasting notes, and anticipated period of drinkability. * * * Maintaining such records does not mean that the person is engaging in the activity with the intent to make a profit. It just shows that he or she is a serious hobbyist as opposed to a careless amateur.” 2021 T. C. Memo. 139, at p. 38.

Judge, I have  written records, spanning forty-six years, of every wine, and almost every spirit, I’ve drunk, with extensive notes of provenance, cost, date, place, food (if any), and labels or copies thereof. I’ve never made a dime, nor intended to, but it’s been a great ride.

True, Mitch talked to experts, but never showed he asked about making money, only about running a top-class operation. Mitch and Eric were office types; they hired people to do the dirty work. And while the land did appreciate over the years, it was farmland, and Reg. Section 1.183-1(d)(1) requires farming activities, though separate from landholding, must offset the net cost of landholding. With telephone number losses from horsefarming, no way could that happen. Yes, the one horse who turned out to be a big winner finally came in after the years at issue, but Mitch had sold a piece of that horse to someone else. Both Mitch and Eric had heavy-duty other income, so they were using their horsing around to get us taxpayers to subsidize their horsestuff. They want to rely on the “no-change” audit from a single early year to prove an NOL, but that exam didn’t go into goofy regulationdom. Their records are only a statement of claim, not proof.

Finally, Mitch and Eric had fun, socialized with top-drawer Standardbreeders and owners, and lived the lives of the rich and famous.

Relying on their CPA, Mitch tries to get out of a late-filing add-on for one year. The return was a year late, but the CPA said, because he thought no tax was due, it could wait while he was busy with other matters. Except there’s a personal, non-delegable duty to file on time. But because both Mitch’s and Eric’s respective CPAs have a bushelbasketsful of credentials and years of experience in the horse game, no accuracy chops.

*Mitchel Skolnick 2021 T C Memo 139 12 16 21

From time to time, and at any time, I may post handy practice tips, or observations of Glasshouse doings. Some may seem obvious, but that means you’re a grizzled, battle-hardened tax war veteran; so spare an indulgence for the newbie. We were all newbies once.

First, it seems Ch J Maurice B (“Mighty Mo”) Foley is requiring forma pauperis claimants to get the Form Without a Number, the Application for Waiver of Filing Fee, right the first time. No Mulligan for Amaka L. Ezan, Docket No. 30234-21, filed 12/16/21.*

“Petitioner has not checked the boxes indicating whether or not he receives income from five of the six possible sources listed on the application. Additionally, the caption on the application does not match the caption of this case.” Order, at p. 1.

So application denied, and Amaka has until January 27 to stump up the sixty Georges.

I would have thought Ch J Mighty Mo, notwithstanding the unprecedented burden of 34,000+ petitions laid upon him and The Glasshouse Gang so far this year, would give Amaka a chance to amend his app; after all, as a much finer writer than I put it, this “…is a good time; a kind, forgiving, charitable, pleasant time; the only time I know of, in the long calendar of the year, when men and women seem by one consent to open their shut-up hearts freely, and to think of people below them as if they really were fellow-passengers to the grave, and not another race of creatures bound on other journeys.”

Next, though the carpenters may take Sappho’s advice to raise high the roof beams, we lawyers should see to the foundations, without need for advice from Judge Christian N. (“Speedy”) Weiler. Judge Speedy Weiler plows through a bunch motions in limine (hi, Judge Holmes, greetings the season) in Leigh C. Fairbank & Barbara J. Fairbank, Docket No.13400-18, filed 12/16/21.** Once again the meticulous Helvetian attorney Britta Delmas (insert here Swiss equivalent of “Esq.”) shows how business records are to be certified. Britta’s been here before; see my blogpost “Forever Swiss – Part Deux,”2/19/20.

But the NPB (which my source tells me is the Neue Privat Bank, now or formerly of Zurich) seems not to have the equivalent of the meticulous Ms. Delmas. “…the Court finds the NPB records to be business records under Fed. R. Evid. 803(8); however, unlike the [Delmas-certified] records there has been no ‘Certification of Business Records’ executed by a legal representative of NPB Bank. Accordingly, we do not admit the NPB records into evidence as self-authenticating foreign business records in advance of trial. See Fed. R. Evid. 801(d)(2), 803(6), 902(11), (12). Respondent remains free to lay a foundation to overcome any objection as to the authenticity of these records. See Fed. R. Evid. 901.” Order, at pp. 3-4.

Good question for the Tax Court admissions examination. And good checklist item for practitioners.

*Amaka L Ezan Docket No 30234-21 12 16 21

**Leigh C Fairbank Docket No 13400-18 12 16 21

I’m driven to use the lingo of the opposable-thumbed virtuosi, they who transmit whole volumes of stuff by thumbs alone, while hanging from subway straps and holding their smartphones at impossible angles. For the traditionally-handed, that means “shaking my head.”

First up, Bryan Edward Menge, Docket No. 22622-16, filed 12/15/21.* Menge has a seriatim bœuf concerning “many years and thousands of hours of the petitioner’s life spent trying to resolve tax related issues with the IRS that started in 2011 and were directly caused in part or in whole by the unlawful violations * * * by US government contractors, officials and employees of HUD, of the Federal District Court for the District of Rhode Island, the Kent County Superior Court, the DOL, and the IRS.” Order, at pp. 3-4. Apparently there was a HUD $60K holdback from a construction contract payment to Menge’s eponymous construction outfit, from which Menge his own self was credited with $2660 ITW.

Menge wants to fight about the holdback in Tax Court. A definite nonstarter, but Menge wants to fight so badly that he gets a $500 Section 6673 frivolity chop from Judge Tamara Ashford, even though he wins. He’d been warned about frivolizing before.

Ya see, IRS handed Menge a deficiency, which they concede in full. But it’s not only Menge’s obduracy that has me shaking my head; clearly, he hasn’t a clue about courts, or is so frustrated he doesn’t care.

Here’s the deficiency: “…respondent determined a deficiency in petitioner’s Federal income tax of $0.78, an addition to tax pursuant to section 6651(a)(1) of $802.95, and an accuracy-related penalty pursuant to section 6662(d) of $1,070.60 for the 2013 taxable year.” Order, at p. 1.

Seventy-eight (count ’em, seventy-eight) cents of tax and $1873 in add-ons and chops? And for this we’ve had a bunch orders and motions (hi, Judge Holmes)? SMH, indeed.

Speaking of Judge Holmes, he has an off-the-bencher today, Chung Yung Chong & Anita Chong, Docket No. 8551-20, filed 12/15/21.** Reading about Chung Yung’s securities investments (for which he claims long-term capital losses above the standard $3000 per year), I am reminded of Greg and Sue Raifman, and their unerring nose for fraud; see my blogpost thus entitled.

I’m moved, though, by Judge Holmes’ lament for the vanishing Form 1040. “…I need to discuss…whether the Chongs are entitled to long-term capital losses of more than $3000 for the years at issue. This was a particularly difficult topic to understand in the context of this case. We didn’t have a Form 1040. We had an electronically-filed form, and it was not at all clear what the source of these alleged long-term capital losses were.” Transcript, at p. 5.

Takeaway- Might be a good idea to have a printable Form 1040 handy as a back-up to the e-Filed version to use as an exhibit, when trying your case with a Senior Judge.

*Bryan Edward Menge Docket No 22622-16 Filed 12 15 21

**Chung Young Chong Docket No. 8551-20 12 15 21

Generally, we lawyers have inquiring minds. It’s not enough to know what, or who, or when; before all, it is to know why. That is true, even if “why” is totally irrational. Once we know why, we can deal with the consequences.

I’ve mused before on this my blog why Form 6 Ownership Disclosure Statement is such an obstacle to entity petitioners. It is a single-page form. It asks only three (count ’em, three) questions. I dare say in 95% of the petitions filed in US Tax Court, the answer to all three questions is “NONE.”

Yet today, 12/14/21, a very special day in our family, I see no fewer than six (count ’em, six) orders giving petitioners more time to file Form 6. The petitioners are all conducting, or, I assume, assert they are conducting, or have in the year(s) at issue conducted, business operations to the extent that principals thereof had to know how to read and write at least well enough to graduate from lower school.

I have in the past suggested modifying Form 6, by adding the words, in bold-faced capital letters “YOU CANNOT LEAVE THIS FORM BLANK; IF “NONE” WRITE “NONE”. See my blogpost “Even Good Accountants,” 3/25/19.

But no; the form, last modified almost ten years ago, retains its 1 Corinthians 1:23 characteristics.

And it doesn’t provide for signature by post-TEFRA representatives.

Ch J Maurice B (“Mighty Mo”) Foley joins in the words of Nobel Laureate R. A. Zimmerman’s 1967 chanson, as he announces “…today that order search is now available in the DAWSON case management system. In addition to being able to search for orders by case name or docket number, the public may search for orders by keyword or phrase, by judge, or by date range. ‘Today’s Orders’ will continue to be available on the Tax Court website.”

Here’s the gladsome news.

So the Genius Baristas and the 18Fs (if they’re still on-scene) have joined the Isaiah 9:2 brigade.

Now, my merry readers, join with me in the words of the Project Farmer of youtube.com: “We’re gonna test that!”

In the best (??) traditions of DAWSON, if one document in a docket extending ten (count ’em, ten) years is sealed (even without a Rule 27 or Rule 103 order), the entire docket is sealed, so forget searching by name or number or anything else.

Ah, DAWSON, what sins are committed in thy name!

Judge Joseph Nega regretfully shuts down Vardan Antonyan’s Paradise Acres, as Vardan’s plan never gets nearly operational. Here’s the story: Vardan Antonyan and Margarita Safaryan, 2021 T. C. Memo. 138, filed 12/13/21*.

Vardan wanted to make the desert bloom, so he started with 10 acres “in the middle of the Mojave Desert, approximately 1 mile away from any road and 120 miles away from petitioners’ residence.” 2021 T. C. Memo. 138, at p. 2. Vardan says he wants to subdivide the land into plots, get USDA organic certification, and rent to farmers.

Unlike so many hobby losers and busted starters-up, Vardan had a business plan. This “…first required him to construct a nonlivable outdoor structure, similar to a barn, on the property. The business plan then required him to obtain a certification from the U.S. Department of Agriculture (USDA) certifying that the land complied with the standards set forth for organic farming. Finally, the business plan provided for the installation of an irrigation system on the property and the construction of an access road to the property.” 2021 T. C. Memo. 138, at p. 3.

Vardan did build a water storage tank to catch whatever rainfall one might find in the middle of the Mojave Desert, bought some materials and rented some vehicles, did some building work (but the barn never got done), never got the USDA certification, and never put in the irrigation system.

And Vardan was less than stellar on the stand. “Assuming, arguendo, that none of the steps in petitioner husband’s business plan was necessary to rent the property, petitioners nevertheless failed to produce any evidence to establish that petitioner husband held the property out for rent during [year at issue]. Other than petitioner husband’s incredible testimony, petitioners failed to produce any evidence to establish that petitioner husband was actively managing and engaging with potential customers to rent the property during [year at issue] or that he received any offers from potential customers.” 2021 T. C. Memo.138, at p. 12.

Vardan’s deductions are dried up.

Takeaway- So many start-ups and Section 183s founder for want of a written business plan. But having the plan isn’t enough. My colleague Peter Reilly, CPA, has often said that, while a plan certainly helps,  if it’s not executed it’s nothing.

*Vartan Antonyan 2021 T C Memo 138 12 13 21

(Sorry, Guys)

Our Ancient Foe made me do it.

Happily, it seems that Mark Betz & Christine Betz, et al., Docket No. 21587-18, filed 12/13/21*, and IRS have both of them given over the discovery razzmatazz that so upset Judge Nega back in February.

The bases for Judge Nega’s lament are more particularly bounded and described in my blogpost “CLE Has Much to Answer For – Part Deux,” 2/3/21. But the intervening ten (count ’em, ten) months have apparently stilled the waters and chilled the beeves to the extent that a bushebasketful of discovery-related motions can all be dismissed as moot today.

A great holiday present for a hardworking Judge.

*Mark Betz Docket No. 21587 18 12 13 21

If, dear reader, you are old enough to remember the radio program thus entitled, you are definitely in the zone for Medicare. Judge Courtney D (“CD”) Jones is not in that category, but today she puts a stop to an incipient waltz in Nautical Hill Holdings, LLC, Inland Capital Management, LLC, Tax Matters Partner, Docket No. 11971-20, filed 12/10/21.*

The Nautical Hillbillies were on for trial in Atlanta next Valentine’s Day, but moved jointly with IRS for a continuance (what we State courtiers call an “adjournment”) and a “new trial.”

Exactly how you get a “new trial” when you haven’t yet had the old trial eludes me. Judge CD Jones is more than equal to the task, and will give the Nautical Hillbillies a “special trial”, with a scheduling order adopted from the moving papers, setting discovery deadlines. So she renames the motion as one for a special trial, and grants the motion as thus restyled.

Except.

“We agree that setting the proposed pretrial schedule shall provide the parties with adequate time to prepare this case for trial. However, in the best interest of judicial economy, we will set trial for a time and date certain following a show of compliance with the pretrial schedule and substantive trial preparation.” Order, at p. 1.

Judge CD Jones will stop the music if the parties keep waltzing.

Here in NY, our major trial courts’ Rule 202.21 requires the filing of a Note of Issue and Certificate of Readiness, showing that all discovery is complete, before a case may be calendared for trial. Perhaps where large sums and complex issues are involved, Tax Court might wish to consider a similar rule.

*Nautical Hills Holdings LLC Docket No 11971-20 12 10 21

Depositions might be an “extraordinary means of discovery” in US Tax Court, but they’re the flavor du jour everywhere else. So the interjection “asked and answered” when examining counsel tries a second round of the same question is commonplace.

Well, today I have a new take on the old rejoinder. Here’s my e-mail to Public Affairs anent the current petition inundation, and the reply I got (name omitted).

Dec. 4, 3:04 p.m.: “Ms. S, There has been much discussion lately, not only by me but also by commenters on my blog, about the flood of petitions in calendar 2021. Two recent press releases have stated that the Court itself has sought to address one consequence, the need to prevent IRS enforcement proceedings when a petition has been filed but, because of the processing backlog, has not yet been served on IRS.

“But so far no particulars have issued from the Court, discussing how the staff are dealing with the backlog generally. Is there a preliminary screening of petitions? For example, are petitions divided between those accompanied by the filing fee and those that are not? Are the petitions themselves subjected to a quick-peek, to see if they meet any applicable standard of adequate pleading (whatever that is; Conley, Twombley, Iqbal or some sui generis Tax Court standard)? If classified, how is each class dealt with? Has any stay-of-enforcement protocol directed to the backlog been adopted?

“I suggest an interview with staff might yield valuable guidance for the public. I would like to interview a member of the staff by telephone and publish the results. Can this be arranged?”

Reply, Dec. 9, 4:00 p.m.: “Thank you for your email. The Court does not comment on internal operations, but you may refer to the press release issued December 9, 2021.”

So I did. And here is something worth repeating. “Of the total petitions filed, approximately 20% were filed electronically. The Court continues to process petitions expeditiously, and the number of paper-filed petitions that have yet to be processed continues to drop as the number of electronic petitions increases. Electronic petitions were up to 30% in October and increased to 36% in November. There is no backlog with respect to electronically filed petitions.” Press Release, 12/9/21.

Btw, Tax Court reports that, as at 11/30/21, 33,300 petitions have been filed so far this year.

Anyone want to start a no-cash, air-bet pool on the final number?

Oh yes, there was an opinion today, a small-claimer. Libia Higuita Wheeler, 2021 T. C. Sum. Op. 42, filed 12/9/21*, had a beef with her ex about their Sub S and their divorce decree. But inasmuch as the case involves Section 66(c) community property issues, of which I know nothing and do not practice in community property jurisdictions, and inasmuch as I was having barbecue beef and a delightful chat with my colleague Peter Reilly, any communist proprietors will have to read Judge Pugh’s opinion without my gloss.

*Libia Higuita Wheeler 2021 T C Sum Op 42 12 9 21

We all know that Section 6015(e)(3) ousts Tax Court of innocent spousery when the alleged innocent sues for a refund. But does it matter whether the innocent sues first and petitions afterwards? Nope, says Judge Christian N. (“Speedy”) Weiler, in Alice J Coggin, 157 T. C. 12, filed 12/8/21.*

Judge Speedy Weiler has a great syntactical chaw. “Sec. 6015(e)(3) provides: ‘If a suit for refund is begun’; it does not say ‘[i]f a suit for refund is [later] begun’ or ‘is begun [after the Tax Court case]’. It provides that ‘the Tax Court shall lose jurisdiction’, not that ‘the Tax Court shall lose [earlier acquired] jurisdiction’. It provides that ‘the [district] court acquiring jurisdiction shall have jurisdiction over the [Tax Court] petition’, not ‘the  [district] court [subsequently] acquiring jurisdiction’ nor ‘shall have jurisdiction over the [previously filed Tax Court] petition’.” 157 T. C. 12, at p. 20, footnote 19.

Alice was 50-50 in a Sub S with late spouse Phil. Late spouse Phil was also late filer Phil. Alice claims late spouse forged her signature on late-filed MFJs for years 2001-2009. Just before late filer Phil became late spouse Phil, he paid all of 2001-2007 (tax, but not add-ons, chops or interest), part of 2008 (ditto), and nothing of 2009. After late spouse Phil became so, IRS socks Alice with joint-and-several for whatever late spouse-filer didn’t pay. Alice files amended MFSs, claiming refunds. IRS says no, so Alice sues in USDCMDNC for refunds, never mentioning innocent spousery. DOJ counterclaims for the unpaid stuff. USDCMDNC tosses the refund claims, but doesn’t rule on the DOJ counterclaims (reserving same for trial).

Alice finally petitions as a stand-alone (no SNOD), asking USDCMDNC for a stay pending Tax Court proceedings, which USDCMDNC grants, saying it’s not ruling on innocent spousery, but might like to hear what pore l’il ol’ Tax Court has to say, if Tax Court has jurisdiction, 157 T. C. 12, at p. 22, footnote 23.

If. How many cases revolve, rise, or set on that word.

Well, Judge Speedy Weiler, like an even greater juridical mind of old, renders a split decision. Tax Court decides tax years; claims may involve several years (identical issues, identical parties), but only the years placed in issue count. USDCMDNC put paid to years 2001-2007. Alice could’a would’a should’a raised innocent spousery there; after all, she amended her pleadings three (count ’em, three) times, and anyhow, she conceded 2001. Thus res judicata (claim preclusion) bars Tax Court from considering innocent spousery for those tax years.

But 2008 was never paid in full, and 2009 not at all. Alice did petition more than six (count ’em, six) months after DOJ tossed her, so stand-alone is definitely in play, barring res judicata.

IRS wants Judge Speedy Weiler to toss the whole shebang, arguing that when Alice invoked the jurisdiction of USDCMDNC, Tax Court was out. OK, she’s out as to 2001-2007 tax years, but there remain 2008 and 2009 tax years. Those years may serve as a defense to the DOJ counterclaims, so as USDCMDNC has jurisdiction over the trial, it has jurisdiction over that issue. But Tax Court has innocent spousery stand-alone jurisdiction for those years as well.

“Section 6015(e)(3) does not address this overlap in jurisdiction and therefore leaves us to consult principles of comity to decide whether both courts should go forward on these common issues or, if not, which one should proceed.” 157 T. C. 12, at p. 22.

Remember, USDCMDNC wanted to hear what Tax Court would say. And judges are no different from the rest of us: if someone else wants to take the heavy lifting, go to it, mate.

Alice can go for innocent spousery for years 2008 and 2009 in USTC.

*Alice J Coggin 157 T C 12 12 8 21