And Don’t Disqualify

That’s Judge Patrick J (“Scholar Pat”) Urda’s advice to Jerry J Sun and Sun N. Sun, Docket No. 14749-17L, filed 3/14/22, and IRS. Seems the SO on their CDP overlooked the fact that he had discretion per IRM part 5.14.1.4(5) to let Jerry and Sun keep their multimillion dollar home unencumbered and unliquidated; sure, the SO should consider whether to tell Jerry and Sun to encumber or liquidate their MacMansion to pay off their multimillion dollar deficiencies, add-ons, and chops, but not be more intrusive than necessary.

This case is back to Tax Court on a supplemental CDP, which IRS asked for. The “liquidate or encumber” issue arose out of the supplemental CDP, whereat three (count ’em, three) of Jerry’s and Sun’s “representatives” participated. I use the inverted commas, because only one of the three is shown as attorney for Jerry and Sun in the online docket. Except that the other two “representatives” are name partners in the attorney’s law firm.

OK, fair enough. But now comes one of my pet peeves.

After the trial started on the supplemental CDP, IRS said they might want the attorney for Jerry and Sun to testify. Judge Scholar Pat stopped the trial so the parties could brief the issue. Then IRS moved for summary J.

Judge Scholar Pat denies summary J. It’s a question of fact what the SO thought were the limits of his discretion to order liquidation.

Asking to have trial counsel testify in midtrial is dirty deck tennis, but Judge Scholar Pat is too much of a gentleman (and a scholar) to say so.

“We do not believe that current trial counsel is likely to be a necessary witness.  Three attorneys appeared on the Suns’ behalf at the CDP hearing, two of whom are available to testify and were listed as potential witnesses in the Suns’ pretrial memorandum. Even if we were to conclude that the Suns’ trial counsel was likely to be a necessary witness after the settlement officer’s testimony at trial, we would nonetheless permit continued representation given that disqualification in the middle of trial would work substantial hardship on the Suns (especially since their other representatives have not participated in the trial so that they might be available to testify).” Order, at pp. 3-4. (Footnote omitted, but it says IRS didn’t put the attorneys on their witness list).

I’m glad Judge Scholar Pat reads ABA Model Rule 3.7 and Rule 24(g)(2)(A) beyond just a knee-jerk disqualification when anyone suggests a party’s attorney might have to testify. The idea behind attorney-as-witness disqualification is that the attorney should not argue his or her own credibility; this confounds the disparate roles of attorney and witness.

This confoundment misleads a trier of fact into placing excessive weight upon what a witness-attorney says when not testifying; and the trier of fact who most needs this protection is a jury, composed of nonprofessional triers of fact. In US Tax Court there is no jury to be confounded or misled. As Judge Vasquez said many years ago “(S)ee Diaz v. Commissioner, 58 T.C. 560, 564 (1972) (stating that the process of distilling truth from the testimony of witnesses, whose demeanor we observe and whose credibility we evaluate, is the daily grist of judicial life).” See my blogpost “Practicing Accountancy Can Be Hazardous to Your Health,” 12/26/12.

I’m sure Judge Scholar Pat can distill with the best of them.

IRS does make a last-ditch try by claiming some shady numbers in Jerry’s and Sun’s 433-A would justify the SO telling them to liquidate or encumber, but those who move for summary J give the other side the benefit of the doubt, and Jerry and Sun get it.

I’ve proclaimed far and wide that I’m a great fan of summary J. It rivals the Swiss Army knife as a multipurpose tool. You can win all or part of your case; you can get testimonial and documentary discovery without the scrimmaging of face-to-face or Zoomie Q&As (or the cost of hiring a high-priced stenotypist who’ll get things wrong anyway); and best of all, you can see what the judge thinks of your case.

IRS must think so too, because summary J is one of IRS’ most made motions. Tax Court’s website devotes a bunch Q&As (hi, Judge Holmes) to the subject on its information for petitioners pages.

Today Judge Nega shows how to go around from a missed approach when you blow the sixty-day cutoff in Rule 121(a). Motions for summary J must be made so as not to delay trial, and in no event later than sixty (count ’em, sixty) days before the first day of the trial session wherein your case is calendared, even if you’re not going to trial that day.

In John Joseph Bauche, Docket Number: 12241-20L, filed 3/11/22, IRS moved for summary J last July, but that motion was dismissed without prejudice last August. So IRS tried again a week ago. Problem was, the IRS was a day late, as trial was noticed for the 5/2/22 session; IRS moved 2/4/22, but last day was 2/3/22.

Apparently IRS’ counsel caught the glitch just as they hit the “send” button for the motion, so they immediately followed with a motion for leave to file out of time.

Judge Nega: “In respondent’s motion for leave, respondent states that the filing of his Motion for Summary Judgment was delayed due to clerical error. Respondent further that petitioner will not be prejudiced by the delay given that the motion for summary judgment contains only minor updates to the motion for summary judgment respondent filed in this case [last July], and given that respondent informed petitioner on February 25 and March 3, 2022, that he would be filing a motion for summary judgment with respect to the May 2, 2022, trial session. Respondent represents that petitioner objects to the granting of respondent’s motion for leave. We find that respondent’s short delay in filing his motion for summary judgment has not prejudiced petitioner. Accordingly, in light of our discretion under Rule 25(c), we will grant respondent’s motion for leave.” Order, at pp. 1-2.

So here’s the missed-approach go-around checklist. When you first decide to go for summary J, tell the adversary. Calendar the due date. Remind yourself and adversary. Have a form of motion for leave to file out of time handy in the wordprocessor. Make sure your new motion for summary J, to file which you’re requesting leave, has only minor tweaks to the rejected motion, and so represent to the Court.

Fly runway heading, climb to pattern altitude, and hopefully the Judge will let you reenter the traffic pattern.

It is, of course, extremely unlikely that any jurisdiction would consider me for such an exalted post. Still, I’m glad I don’t have to wade through such stuff as Judge Morrison encounters in the daily grist that comes to his judicial mill. By way of illustration, here’s Brian K. Bunton and Karen A. Bunton, T. C. Memo. 2022-20, filed 3/10/22.

I’ll be brief, as I’m meeting some old friends shortly.

Reviewing the admin record (the Buntons resided in CA when they petitioned, hence 9 Cir record rule), Judge Morrison finds the SO in the Buntons’ CDP got “…undated correspondence from the Buntons. It was filled with frivolous arguments, including that the Buntons were not ‘citizens of the United States Corporation.’ The letter referred to Mr. Bunton as a ‘Trust and a Vessel in Commerce,’ and threatened a ‘lawsuit and a penalty of $2 million against each government officer or agent.’” T. C. Memo. 2022-20, at p. 7.

I was going to comment on the originality of the above-set-forth protester jive, but it’s probably on some protester site.

If, to qualify to deal with this sort of thing, one had to obtain degrees from each of the Universities of Kansas and Chicago, clerk for a CCA Judge, practice in two (count ’em, two) white shoe law firms, and serve as Deputy AAG for appeals and review in DOJ Tax Division, you can see why I’m glad I never did.

My colleague Mr Press notified me Sunday morning about the death of Judge Gerber. I replied that judges don’t seem to survive retirement very long. Perhaps it’s the never-ending parade of humanity in all its forms, and the role of judge as Flaubert, in an ongoing search for the right solution or le mot juste that keeps them (and us) going.

Howbeit, here’s the press release.

Far more straightforward than Proust is the story of Robert Ward, Jr., and Swanette Triem Ward, T. C. Memo. 2022-19, filed 3/9/22. Swanette was a painter, but not of abstracts, landscapes, or portraits; her C Corp did warehouses, multifamilies, and highrises.

The deficiency here is a big $4800, but Swanette’s trusty attorney (whom I’ll call Len) has paper and good witnesses, so gets a good result.

Judge Goeke: “Petitioners have substantiated the amounts of the disputed expenses, and the remaining issue is the business purpose of the expenses. The office equipment expenses relate primarily to the purchase of iPads, iPhones, a speaker, and related expenses for service plans and an accessory. Petitioners assert that Sherwin’s employees use these items in the performance of their jobs. On the basis of the record,  we accept petitioners’ assertion as to the business purpose and find that [C Corp] has substantiated the amount and business purpose of each expense.” T. C. Memo. 2022-19, at p. 3.

IRS gets their feet tangled over whether a $38K payment was a loan to Swanette from C Corp, hence a disguised dividend, and when it looks like they goofed, they doubled down. This is a highly dangerous maneuver. Judge Goeke doesn’t buy it.

“However, [C Corp] records establish that the return reported that the loan was made from Mrs. Ward to [C Corp]. Respondent refuses to concede his error and instead argues on brief that the disallowed business expense deductions should be treated as constructive dividends to Mrs. Ward. We reject this new position. There is no relationship between the disallowed expenses and the amount of the purported constructive dividends determined in the Wards’ notice of deficiency. [C Corp]’s failure to substantiate the business purpose of the disallowed deductions does not render the amount a constructive dividend under the circumstances of these cases. There is no indication that the Wards received an economic benefit from the amount of disallowed expenses. Accordingly, we hold that the Wards did not receive any unreported dividends from [C Corp].” T. C. Memo. 2022-19, at p. 4.

But Len can’t help when Bob and Swanette paid for Lucas to take a coding course at Northwestern U. True, Lucas did do coding work for C Corp, fluffing up the website and doing other coding, but never was paid therefor. And there is no agreement anywhere about what Lucas would give back in exchange for the free ride. Of course, when Lucas started the course he was dating Rob’s and Swanette’s daughter. And he married her after.

“While [Lucas] has provided services to [C Corp] free of charge that would have likely cost Sherwin more than the amount of the tuition, we nevertheless find that petitioners have not established that [C Corp] is entitled to deduct the tuition. [Lucas] was not an employee of [C Corp]. The Wards did not have an agreement with [Lucas] that he would perform any services in exchange for the tuition payment. [C Corp] paid the tuition without any expectation of a return and thus did not have a business purpose for the payment. The tuition was a personal expense, and [C Corp] is not entitled to deduct it.” T. C. Memo. 2022-19, at pp. 3-4.

My wily readers will doubtless have exclaimed that Rob and Swanette were better off with gift treatment than deductible tuition-as-salary-and-wages, because no FICA/FUTA/ITW, or income to son-in-law Lucas. Although maybe the years at issue were closed as to Lucas even assuming substantial understatement 6SOL, still going for the deduction was really a bridge too far.

If You Want My Passport

Judge David Gustafson has a message for IRS via Hendrieka Fitzpatrick, Docket No. 12797-21P, filed 3/8/22. Hendrieka wants to fight about her 2013 tax liability, but that ship sailed five years ago.

IRS says Hendrieka has a serious tax delinquency, which also seems to be correct. So IRS moves to toss Hendrieka’s petition. We all know that a Section 7345 certification to State does not let the petitioner relitigate any tax liability. See my blogpost “Ruesch to Judgment,” 6/25/20. All that’s in play is whether the certification is erroneous.

Except.

Section 7345(b)(1)(C)(ii).

A “seriously delinquent tax debt” is one for which “a levy is made pursuant to Section 6331.”

Now before my battle-hardened readers shriek “What about Section 7345(b)(1)(C)(i)? Wasn’t there an NFTL and all remedies exhausted?” Judge David Gustafson notes IRS doesn’t raise that in its answer. All IRS notes is amounts of taxes, chops, interest, and assessment dates. Nothing about NFTL.

Judge Gustafson man-‘splains.

“A ‘levy’ is a seizure of money or property pursuant to section 6331(a); and section 6330 provides a prerequisite to levy: ‘No levy may be made on any property or right to property of any person unless the Secretary has notified such person in writing of their right to a hearing under this section before such levy is made.’ Sec. 6330(a) (1). That is, first the IRS must give the notice and opportunity for hearing provided by section 6330, and then the IRS may actually make a levy pursuant to section 6331.

“However, as we read the motion, it does not allege that a ‘levy [was] made’ pursuant to section 6331, as section 7345(b)(1)(C)(ii) requires, but seems to rely instead on the IRS’s issuance of a notice of intent to levy under section 6331. Paragraph 14 on page 5 of the motion does refer to a ‘levy pursuant to I.R.C. § 6331’; but it states that that ‘levy … was issued’. Strictly speaking, a levy is not ‘issued’; rather a notice of intent to levy is issued, and then a levy (a seizure) may be made. The motion elaborates  (at 5 n.3) on the levy that was said to be ‘issued’ by explaining more precisely that ‘[a] notice of intent to levy for petitioner’s 2013 liability was issued…, notifying petitioner of her collection due process (CDP) rights under section 6330.’ As we read the motion, it stops short of alleging that a levy was actually ‘made’.” Order, at p. 2.

So must there have been an actual seizure? Or is issuance of a writ or mandate to the U S Marshal to go out and seize sufficient, even if the writ or mandate is returned unsatisfied (that is, the Marshal could find nothing to seize)?

In any event, IRS can either fold this case and rescind the certification, or show that at least they sent out the Marshal to grab. But of course, they can fold, decertify, send the grabber, and try again. See my blogpost “Ruesch to Judgment – Part Deux,” 9/22/20.

I was a little late getting this posted today, but there were 792 (count ’em, 792) orders today on DAWSON.

If you want a noncash charitable contribution deduction for household goods (see Sections 170(f)(16)(A) and 170(f)(16)(D)(i)), make sure they came from a well-kept house.

That’s the advice STJ Daniel A. (“Yuda”) Guy has for Cheri L. Rau, 2022 T. C. Sum. Op. 4, filed 3/7/22.

Cheri owned a house she rented over the years to college students. In the year at issue, she sought a $11K noncash charitable for a bunch stuff (hi, Judge Holmes) she took from the house that included “kitchen items, glassware, furniture, bedding, pictures, appliances, and lawn equipment.” 2022 T. C. Sum. Op. 4, at p. 3. IRS conceded $500.

But in the same return, Cheri wants a $9K deduction for building materials to fix the house; the students apparently weren’t good housekeepers.

“During the year in issue, petitioner hired contractors to make substantial renovations to the… house, including roof repairs, flooring and drywall work, replacement of the garage door,  siding, and gutters, remodeling of the kitchen and bathrooms, and landscaping improvements. Petitioner purchased the materials needed for the renovation work, delivered the materials to the house, and oversaw much of the work.” 2022 T. C. Sum. Op. 4, at p. 3.

“Petitioner failed to present objective and credible evidence that the items she donated were ‘in good used condition or better.’ Any suggestion that the donated items were in good used condition is undermined by petitioner’s testimony regarding the state of considerable disrepair at the … house before the items were removed. Respondent’s determination that petitioner is limited to a deduction of $500 for noncash charitable contributions is sustained.” 2022 T. C. Sum. Op. 4, at pp.  9-10. (Citation omitted).

But STJ Yuda does give Cheri some extra deductions for materials.

The trusty CPA who prepared the general ledger and tax returns for Blossom Day Care Centers, Inc., and Barry A. Hacker and Celeste Hacker, T. C. Memo. 2022-16, filed 3/7/22, and their subsequent bookkeeper who took over general ledger duties, used that category for the business credit card expenses run up by Barry and Celeste and adult children but paid for by Blossom, which Barry and Celeste wholly owned, but from which they never received salaries or dividends.

Judge Elizabeth Crewson Paris has the third leg of this marathon.

“Petitioners and their children used the credit cards to make purchases necessary to operate the daycare centers, but they also regularly used them to pay personal expenses. During [four of the years at issue] the Hackers and their children charged thousands of dollars in personal expenses on Blossom’s credit card account, as well as their own AMEX, Citi, and Bank of America credit cards, all of which Blossom invariably paid. In addition to routine personal purchases, such as restaurant meals, auto expenses, and personal medical expenses, the Hackers either used the corporate credit card or had Blossom pay their personal credit card charges for such expenses as college tuition,  vacations, jewelry, and other luxury items. The Hacker children continued to make personal purchases with the credit cards even though they were not employees of Blossom….” T. C. Memo. 2022-16, at pp. 6-7.

Celeste and Barry have been here before. See my blogpost “Stipulate, Don’t Capitulate – One Mo Time,” 7/13/21, and “Headline News?” of even date therewith, as my expensive colleagues say.

Judge Paris has some rewriting to do, as the SNOD numbers need some extensive tweaking, but at close of play, Barry and Celeste are looking at Section 6663(a) 75% fraud chops.

But the moral for accountants is clear. If you don’t know what expenses are business or personal, ask. All credit card statements should be coded. Automobile lease or purchase installment payments must indicate whose vehicle and what purposes each vehicle serves.

And if you set up a category like “loans to shareholder,” “advances,” or “A/R – Officer,” and never see repayments or documentation, be prepared to see your name, if not in a T. C. Memo., then in an IRS computer.

After running successful La-Z-Boy stores in MI, her parents relocated to GA and started opening stores there for the trademarked cocoon. Her dad even got into the green building business, becoming an early exponent of Leadership in Energy and Environmental Design (LEED) certification. He successfully invested in a FL enterprise to get plastic waste out of streams. He even lectured on obtaining LEED certification at Western Carolina University in their construction management program. Dad and Mom sent Jessica Walters, T. C. Memo. 2022-17, filed 3/7/22, to law school, where she interned with the Carolina Mountain Land Conservancy.

But Jessica wasn’t interested in flogging furniture. So the family partnership transitioned into building/consulting environmentally-friendly homes. The flagship was Balsam Home, part of the Balsam Mountain Preserve, a low-density ecofriendly development.

Judge Wells takes up the tale.

“The development sells its landowners club memberships which include access to a golf course, tennis courts, a restaurant, hiking and mountain biking trails, horseback riding, and an educational facility that offers hikes and lessons on fly-fishing and on flora and fauna identification. In addition to private residences BMP has ten cottages,  featuring geothermal water and solar heating systems, where prospective owners may stay.” T. C. Memo. 2022-17, at p. 4.

The family partnership built Balsam Home.

True to their ecofriendly principles, “Balsam Home was constructed with various eco-friendly systems and materials. …while still under construction, Balsam Home received the Energy Star Qualified Home Certificate, which certified that the home met energy standards established by the United States Environmental Protection Agency. Balsam Home… was awarded the USGBC LEED for Homes Gold Certificate  (the highest LEED certification for homes)…. Balsam Home has (among other things) a wine cellar, a dry sauna, a putting green,  indoor and outdoor fireplaces, a dog wash, and a fully functional greenhouse.” T. C. Memo. 2022-17, at p. 4.

Just so you know, this is not a Section 42 low-income tax credit case.

The family held open houses and tours, touting their ecofriendliness and pitching their services. They lived off-site, but did use Balsam Home. They registered motor vehicles, stored wine in the wine cellar (I told you this isn’t a Section 42), used the golf course, and had DirectTV wired in.

They did engage in other deals, but none apparently got beyond the planning stage. They had started during the Black ’08. They did keep separate records for each venture the partnership was in, and did have income, but never covered the losses.

So it’s “goofy regulation” (Reg. Section 1.183-2(b)) time.

The separate records are neutral. While the family never explain their coding methods, their records are thorough. Even though interlarded with personal expenses ($18K for Atlanta Braves season tickets), it looks businesslike.

And Dad’s expertise plus Jessica’s training is enough. They consulted with experts when they built Balsam Home; Dad kept up his green training. And worked on the project personally.

“We find petitioner husband’s testimony credible. We believe that although petitioners employed a landscaping crew to assist with maintenance, they performed most of the maintenance themselves.  Additionally, petitioners’ work in furtherance of [partnership’s] business was not limited to the upkeep of Balsam Home or spending time at BMP. Petitioners engaged with potential clients, consistently advertised in the Western North Carolina Green Building Directory, and attempted to have various articles published about Balsam Home and the green building industry. Petitioner husband’s time dedicated to learning about eco-friendly building likewise shows that petitioners expended substantial time and effort in acquiring knowledge to develop the partnership’s green consulting business. We conclude that this factor weighs in favor of the partnership’s having a profit objective.” T. C. M<emo. 2022-17, at p. 12.

And the family had La-Z-Boy success in MI, transitioned successfully to GA, and Dad did serve on the Board of the FL clean-up hitters, selling out for a profit.

The Black ’08, however, is not enough to explain the continued losses of the partnership, nor is the residential real estate market speculative says Judge Wells, so IRS wins that one. I respectfully dissent as to the speculative nature of residential real estate, having been involved for 55 (count ’em, 55, and I have) years with residential real estate.

True, the family has money. But their income fluctuated over the years, and a lot of their net worth was created years before the years at issue. So that’s neutral.

Personal pleasure is a tough one. Dad hit the greens at the golf course, and that’s more fun than hitting the bricks. But the record doesn’t show one way or the other.

Bottom line is “(W)e recognize that the partnership’s efforts were not perfectly executed, but its actions overall fall in favor of a conclusion that it was seeking a profit.” T. C. Memo. 2022-17,at p. 17.

A Taishoff “Good Job” to Jessica’s trusty attorneys.

Reading Judge Pugh’s quietus to Global Asset Fund 2009, LLC, Global Asset Recovery, LLC, Tax Matters Partner, Docket No. 25108-17, filed 3/4/22, put me in mind of the late Arthur Kopit’s 1962 Drama Desk winner. This was another of the phony Distressed Asset/Distressed Debt marriages, disguised as partnerships, colloquially known as DADs, of the type made famous by the wrong Mr. Rogers.

Of course, said “partnership” needn’t be dissolved, because it never existed. “…the partner contributions of Brazilian credit card receivables to Global Asset Fund 2009, LLC, in taxable year 2009, upon which the Bad Debt Deduction was claimed, were not valid partner contributions.

“…the partners of Global Asset Fund 2009, LLC, did not join together for a business purpose in taxable year 2009 and consequently, no partnership was formed or existed in that year.” Order, at p. 2.

Wherefore, Global Asset transactions “…are disregarded under the economic substance, substance over form, and step transaction doctrines with regard to its taxable year 2009.” Order, at p. 2.

So Judge Pugh erases $18.5 million of deductions.

But there’s bad news and good news.

First, the bad news. 40% gross overvaluation chop for $18 million, and 20% underpayment for the rest.

Now the good news. “…$8,189 of Other Income reported by Global Asset Fund 2009, LLC, on its 2009 tax return is reclassified as Portfolio Income (Loss) Interest and treated as investment income included in portfolio income. As set forth above, Global Asset Fund 2009, LLC, is disregarded as a partnership for its taxable year 2009 and, consequently, its Portfolio Income (Loss) Interest of $8,189 shall be included in the gross income of its partners based upon their proportionate ownership interests in Global Asset Fund 2009, LLC, as directly and separately owned by them.” Order, at p. 2.