Boondockery meets bludgeoning in Morgan Run Partners, LLC, Overflow Marketing, LLC, Tax Matters Partner, T. C. Memo. 2022-61, filed 6/14/22, so whom else but Judge Albert G. (“Scholar Al”) Lauber can tease out from the unconventional easement deed the ambiguous verbiage to defeat IRS’ Reg. Section 1.170A(14)(g)(6) perpetuity gambit? And, mirabile dictù, neither Hewitt nor Oakbrook gets a look-in.

“Respondent contends that the deed at issue violates the ‘judicial extinguishment’ regulation. But this deed, unlike most easement deeds the Court has examined, does not explicitly address the subject of judicial extinguishment. Rather, it expresses the parties’ intention that ‘no change in conditions . . . will at any time or in any event result in the extinguishment’ of the easement. Should circumstances arise that would justify modifying certain restrictions, the deed envisions that Morgan and the Trust would agree to appropriate amendments, with the proviso that the Trust would have no power to agree to any amendment that would violate section 170(h). Given this text, petitioner has a reasonable argument that the deed violates neither the ‘judicial extinguishment’ regulation nor the statutory requirement that the conservation purpose be ‘protected in perpetuity.’ See § 170(h)(5)(A).” T. C. Memo. 2022-61, at p. 6.

And as for eminent domain, the 501(c)(3) gets its “Proportionate Share” of proceeds; no mention of improvements in or out or how “Proportionate Share” is to be computed. Maybe AL law is in play on this point. No summary J for IRS.

But there is a penalty approval form in evidence prior to any written intimation of chops to the Morgan Runners, and that’s enough for Judge Scholar Al.

“Petitioner does not allege that the IRS formally communicated to Morgan [before the penalty approval form sign-off] its decision to assert penalties. Petitioner nonetheless argues that there is a dispute of fact as to whether the IRS issued some sort of penalty communication before that date. Petitioner asserts that the answer to this question is currently ‘unknowable’ and must be determined by trial.

“We disagree. Respondent has supplied documentary evidence confirming that RA A’s immediate supervisor approved the assertion of penalties… well before the IRS formally communicated its penalty determinations to petitioner. As we have repeatedly held, the statute’s timeliness inquiry ‘turns on the timing of the first ‘formal written communication’ to the taxpayer against whom the penalties are being asserted.’ We have regularly decided this question on summary judgment, on the basis of IRS records and declarations from relevant IRS officers.” T. C. Memo. 2022-61, at pp. 7-8. (Citations and name omitted).

Leaving aside the “assessed” blunder in statutory language, the evil Congress intended to avert, namely, using penalties as bludgeons to extort unjust concessions from cowering taxpayers, takes place long before anything is put in writing. Can you imagine Vito Corleone sending a postcard stating “If I am not paid by tomorrow noon, you will be the headless horseman. Love and kisses, Don V C”?

Judge Travis A. (“Tag”) Greaves has to figure out whether and when Gregg Michael Kellett, T. C. Memo. 2022-62, filed 6/14/22 opened his datamining operation, so he could currently deduct some of the expenses he paid in creating the same, and write off the rest per Section 195.

As collateral damage in Judge Tag Greaves’ reconnaissance in force, he demolishes Rev. Proc. 2000-50: “To the extent Rev. Proc. 2000-50 purports to establish the taxpayer’s entitlement to a deduction, therefore, we cannot sustain the rule without a statutory predicate.” T. C. Memo. 2022-62, at p. 16. The Rev. Proc. apparently intended to mitigate the Section 174 research constraint, the “go where no one has gone before” rule. Gregg used off-the-shelf stuff, with which his engineers tinkered to produce the datamining service, which earned no money in year at issue. And while IRS said in Rev. Proc. 2000-50 they “wouldn’t disturb” some startup research expense deductions even if they fell foul of Section 174, IRS is not estopped by a Rev. Proc., and even if IRS was, pore l’il ol’ Tax Court has no equitable jurisdiction.

The big question of course is whether Gregg’s expenses are deductible Section 195 start-ups. The hurdle here is Section 195(b)(1)(A)(ii), which denies any deduction if aggregate start-ups exceed $55,000 pre-opening. Gregg has no proof of what he paid besides what he claimed as Section 162s. But Section 195(b)(1)(B) saves whatever startup costs Gregg paid in opening month, if he can establish when that was.

But all is not lost. Maybe Gregg’s opening day happened during year at issue. Although Sections 195(c)(2)(A) and 7701(a)(11)(11)(B) say IRS will have regs stating when opening day for business takes place, there ain’t no such regs. 4 Cir, whence Gregg is Golsenized, says it’s when it’s a going concern, doing what it was organized to do. Now earning revenue usually begins out of the gate, but Gregg prioritized getting online and running, even giving stuff away free, and Judge Tag Greaves is down with that.

“The parties agree that [datamine] opened to the public in or around September 2015. The burden of establishing the opening date does not shift to respondent under section 7491(a)… because petitioner has not proposed, let alone introduced credible evidence of, an opening date. We therefore err on the side of respondent by postulating that petitioner opened the website at the end of the day on September 30, 2015.” T. C. Memo. 2022-62, at pp. 7-8.

So Cohan throws the first pitch on opening day.

Gregg gets what he paid in opening month, and loses the rest.

I give Gregg’s trusty attorney, a Jersey Boys alum, a Taishoff “Good Job.”

An old family joke resuscitated yet again gives me a headline for Rodney Smith, 12731-19L, filed 6/14/22. Rod petitioned a NOD from a CDP, but no hearing was held due to a miscommunication (type unspecified). Rod got remanded and Appeals confirmed the NITL. At issue were a couple Section 6702 chops (frivolous returns)(hi, Judge Holmes).

Rod then amended his petition (without asking leave, but Judge Ronald L. (“Ingenuity”) Buch lets it go) claiming the supplemental hearing was defective because IRS didn’t give him enough information in its answer.  IRS answered the amended petition, but pled no new facts. Ron moves to toss IRS’ answer per Rule 123. Both sides admit that the only issue is the Section 6702 chops.

Rule 142(a)(1) says BoP is generally on petitioner, unless statute or the Court determines otherwise. But here statute does tilt the playing field. Section 6703(a) says BoP is on Com’r (IRS) for Section 6702 chops. So if IRS’ papers are faulty, do they get tossed?

Judge Ingenuity lives up to his cognomen.

“Rule 36(b) provides more specific rules regarding the form and content of an answer. Generally, an answer is sufficient if it contains “a specific admission or denial of each material allegation in the petition.’ Rule 36(b). A statement that the Commissioner ‘lacks knowledge or information sufficient to form a belief’ as to an allegation’s truth has ‘the effect of a denial.’ Id. Again, the Commissioner’s answers to Mr. Smith’s petition and amendment to petition conform to this standard.” Order, at pp. 2-3.

So IRS is OK, right?

Not quite. Rule 36(b) says where IRS has BoP, the answer must “contain a clear and concise statement of every ground, together with the facts in support thereof on which the Commissioner relies and has the burden of proof.”

So IRS gets tossed, right?

Not while Judge Ingenuity Buch is on the case.

“Rule 123(a) provides that the Court may hold a party in default and enter a decision against that party if he or she has ‘failed to plead or otherwise proceed as provided by these Rules or as required by the Court.’ Kramer v. Commissioner, T.C. Memo. 2021-16, at *8-9. Whether to hold a party in default under Rule 123(a) is a matter of discretion. Default and dismissal are not the proper remedies in this case. Mr. Smith’s motion for default and dismissal is the 88th entry in the docket record of this case and was filed nearly three years after the petition in this case. The Commissioner’s position in this case is no mystery, and Mr. Smith has not been prejudiced or subjected to unfair surprise. Instead, a more appropriate remedy would be to order the Commissioner to amend his answer to add ‘a clear and concise statement of every ground, together with the facts in support thereof’ as to the imposition of penalties under section 6702. See Rule 51(a).” Order, at p. 3. (Citations omitted; for Don Kramer’s story, see my blogpost “Don’t Overtry Your Case,” 2/16/21).

So, IRS counsel, let it all hang out.

It’s an interesting argument, so I give the trusty attorneys for Ronald W. Howland, Jr. and Marilee R. Howland, T. C. Memo. 2022-60, filed 6/13/22, a Taishoff “good try.” Ron and Marilee had a pair of mortgages on their principal residence, which were both within the Section 163(h) Qualified Residence Interest cutoffs for year at issue. Ron and Marilee got foreclosed by both mortgagees, but the junior mortgagee was first past the post.

Judge Christian N. (“Speedy”) Weiler unpacks the timeline, but at close of play it’s how to whack up the $321K net that the junior received out of the foreclosure sale. Ron and Marilee argue that the mortgage foreclosure concluded in a sale of the residence for the amount realized by the foreclosing mortgagee; the note, which the mortgage secured, provides that payments are applied first to interest, then to principal; that the amount of interest computed in the foreclosure proceeding was $100K; and therefore they have a $100K interest deduction.

There’s case law that says no, but those cases apply where the debtor is insolvent, and there’s no showing Ron and Marilee were insolvent at the time.

The case goes up on stipulated facts (Rule 122). No trial.

Judge Speedy Weiler: “The record before us is silent as to how [junior] applied the funds received and whether petitioners owe any remaining principal balance. These facts (if favorable) could support a finding that petitioners in fact paid home mortgage interest (in some amount)— rather than repaying principal balance. However, statements in briefs do not constitute evidence. Pertinent facts missing from the stipulation merely mean that the party bearing the burden of proof has failed to sustain the burden of showing them.

“Petitioners bear the burden of proof and must show, by a preponderance of the evidence, that they are entitled to a home mortgage interest deduction of $103,498, or some other amount. For the reasons discussed above, we conclude that petitioners have failed to meet their burden.” T. C. Memo. 2022-60, at pp. 7-8. (Citations omitted).

Taishoff says, excuse me, Judge, but you have the judgment of foreclosure and sale. A Court of unchallenged jurisdiction has computed and characterized the numbers. The junior mortgagee and Ron and Marilee have a written agreement which tells the junior mortgagee how to apply them. After interest, whatever is left is principal. What the junior mortgagee writes in their books is nothing to the point. Whether the junior mortgagee seeks a judgment against Ron and Marilee for any shortfall, or even whether or not a shortfall is due and owing, is likewise nothing to the point. A contract is a contract.

Word to trusty attorneys: Reargue, then appeal.

Oh, and Ron and Marilee avoid chops on good-faith reliance.

William R. Rohlf and Kristin A. Rohlf, et al., Docket No. 7395-22, filed 6/10/22, find themselves confronted with an old gambit I thought had long since been discredited.

Bill and Kris timely file two (count ’em, two) petitions for the same SNOD. One was signed, the other wasn’t, but neither was accompanied by the sixty George big blind. IRS, maybe playing an old gambit (see my blogpost “Another Taishoff ‘Oh, Please,’ 9/24/14)  tried to close the signed petition file on grounds of duplication, setting up a quick toss for unsigned petition, but Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan straightens it out, and closes the unsigned.

IRS has of course filed motion for leave to file an answer out of time (that’s late in FedCourtspeak) and lodged (that’s filed but not filed, ditto) an answer in both.

Since Bill and Kris petitioned 3/21/22, they still have a couple days (hi, Judge Holmes) to ante up the sixty Georges before the Section 6213(a) 90-day cutoff (assuming the Supremes haven’t monkeyed with that also). So what about Ch J TBS’ sixty days for sixty Georges (see my blogpost thus entitled).

Ch J TBS gives Bill and Kris until 7/5/22 to ante up or plead poverty.

Since it’s apparently open season on all Tax Court time limits, how about equitable tolling for the sixty Georges?

The Tax Court playing field shifts ever so slightly with every new Chief Judge. Ex-Ch J Maurice B (“Mighty Mo”) Foley was known for tossing nonpaying petitioners in as little as a fortnight; see my blogpost “Out-of-Date Slang – Part Deux,” 10/2/18.

But now Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan cuts plenty slack (hi, Judge Holmes) for the limpers-in and hangers-out.

Here’s Patricia Wiggen a.k.a. Tricia A. Wiggen, Docket No. 13004-22, filed 6/8/22. Tricia has neither anted nor pled poverty.

So Ch J TBS orders “…on or before August 8, 2022, petitioner(s) shall pay the Court’s filing fee of $60.00, or this case may be dismissed. Waiver of the filing fee requires an affidavit or declaration containing specific financial information regarding the inability to make such payment.” Order, at p. 1.

To Georgia

IRS violated a basic Taishoff tenet: IRS stipulated and capitulated. IRS and North By Northwest III, LLC, Bryan Kelley, Tax Matters Partner, Docket No. 12105-19, filed 6/8/22 stipulated “… that the partnership at issue, North by Northwest III, LLC, has a principal place of business in the state of Georgia….” Order, at p. 3. And Section 7482(b)(1) sends appeals from Tax Court to circuit wherein entity has principal place of business.

OK, say my grizzled readers; leaving aside that an LLC is not a partnership, but only an entity created by State law that is taxed as a partnership for Federal tax purposes unless it otherwise elects, so what?

So this is another conservation boondockery. But these boondocks are lying, being and situated in wild, wonderful West Virginia. And, says Judge Elizabeth Crewson Paris, “…significant state property law questions may exist.” Order, at p. 3.

By now said readers are waiving their hands high in the air. They figure this is an improvements-out-at-extinguishment Reg. Section 1.170A-14(g)(6)(ii) “highly contestable reading of what it means to be perpetual.” And GA is 11 Cir, where Hewitt reigns supreme.

WV is 4 Cir, and that’s the New Frontier when it comes to boondockery. Maybe 4 Cir will buy 6 Cir’s Oakbrook deconstruction of boondockery. It’s a better shot than the dead loser in 11 Cir.

IRS folds, filing a Notice of Supplemental Authority describing 11 Cir’s giving Reg. Section 1.170A-14(g)(6(ii) the works.

“Respondent recognizes in the above-described Notice of Supplemental Authority, however, that, under the Golsen rule, this Court will now apply the Eleventh Circuit’s holding in Hewitt that Treasury Regulation § 1.170A-14(g)(6)(ii),  alone, does not operate to disallow a charitable contribution deduction in cases in which the easement deed subtracts the value of post-donation improvements to the easement property from the proceeds allocated to the donor and donee in the event of judicial extinguishment. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971).” Order, at p. 4.

Stipulations are the bedrock of Tax Court practice. That said, stipulate, don’t capitulate.

Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan certainly takes at least one-half of President Theodore Roosevelt’s advice. As we see today, the Chief does speak softly. And Deborah Lynn Johnson, Docket No. 13860-20L, filed 6/8/22, despite her fears, will not encounter any big stick.

Deborah Lynn “… checked boxes on the petition form indicating dispute of multiple types of Internal Revenue Service (IRS) notice….” Order, at p. 1. But all Deborah Lynn attached to her petition was a NOD from a CDP and from her request for Section 6015 innocent spousery for one (count it, one) year.

Now checking all the boxes on the Form 2 sounds like a rounder move to me. Especially when IRS moves to toss and strike “… so much of this case as purported to request redetermination of deficiency, redetermination of determination not to abate interest, redetermination of worker classification, redetermination of certification of seriously delinquent Federal tax debt, and redetermination of whistleblower action, on the grounds that no Notice of Deficiency, Notice of Final Determination for Disallowance of Internet Abatement Claim, Notice of Determination of Worker Classification, Notice of Certification of Your Seriously Delinquent Federal Tax Debt to the Department of State, or Notice of Determination Under Section 7623 Concerning Whistleblower Action, had been issued to petitioner with respect to the taxable year [at issue] that would confer jurisdiction on this Court.” Order, at p. 1.

So Ch J TBS spends a page-and-a-half scheduling the jurisdictional bases for all the checked boxes, for none of which does Deborah Lynn qualify.

Responding to IRS’ avalanche, Deborah Lynn begs to be heard. She says she never was into anything but the CDP and innocent spousery.

“… petitioner seemed to suggest that confusion and a neurological disability may have led her to check boxes on the petition form that were not necessarily germane to instant case. Her overarching concern appeared to be that her disability and the harassment she has suffered be recognized and that she be heard. The Court would therefore reassure petitioner that, despite the technical matters being address [sic; should be “addressed”] by the respondent’s motions, petitioner’s case will remain before the Court, and she will have an opportunity to present her position as to her entitlement to relief under section 6015, I.R.C.” Order, at p. 3.

I could see IRS’ counsel assuming that this was a trial balloon for a new rounder tactic, like the old petition twenty years, and make IRS search for nonexistent SNODs and NODs in years long closed. Without more than the bare petition, I would have done as IRS did, and unloaded accordingly.

Anyway, Deborah Lynn will get her chance.

This phrase guarantees the removal of all persons within earshot of the speaker at a speed that exceeds any theoretical maximum calculated by Albert Einstein or Max Planck. Lest my diminishing circle of readers be further diminished, I hasten to state that I will not do so. It was only the mention of the homeplace of William E. Musselwhite, Jr. and Melissa Musselwhite, T. C. Memo. 2022-57, filed 6/8/22, that brought back memories of Lumberton, NC, the local hospital and its doctor transplanted from Brooklyn, Medevac Barbie and her coadjutors, the dash through the night with sirens wailing, and the holdover eviction petition I drafted in the recovery room at Duke University Hospital.

Bill’s story is much less instructive or amusing. Bill was doing great in his dad’s law office, so he branched out into real estate. Like ever so many of his contemporaries and mine, Bill got hit in The Black ’08.

Judge Tamara Ashford finds Bill was not in the business of real estate development, so his million-dollar ordinary loss claim transmutes into the capital loss IRS says it is.

Judge Ashford does the obligatory factorial trudge through the eight (count ’em, eight) essentials 4 Cir has decreed are needed to winnow the capital from the ordinary. Bill loses one through six, both inclusive, but scores on seven and eight (brokers and advertising).

That doesn’t help, though, as Bill performs a classic own-goal. “Mr. Musselwhite testified that all the things he and Mr. S were doing through DS & EM Investments were ‘really investment’ and that specifically with respect to DS & EM Investments’ acquisition of the four lots, it was an opportunity to invest in a subdivision that Mr. L (who was an established developer) was already developing (as the owner of the other five lots in the subdivision). His testimony is consistent with the representations made on (1) DS & EM Investments’ 2005–12 Forms 1065 that its principal business activity was ‘INVESTMENT’ and (2) DS & EM Investments’ 2005–12 LLC reports that its business was real estate investment.” T. C. Memo. 2022-57, at p. 12. (Names omitted).

With that testimony, I am sure Bill’s trusty attorney followed the advice of that great trial lawyer, the late Henry Miller, and smiled her sweetest smile (and her LinkedIn profile shows she has a very sweet smile), as if that was exactly what she wanted to hear, and went out into the hallway and sobbed.

I note in passing a T. C. Memo. and a Sum. Op., neither of which contains any noteworthy development.

Innocent O. Chinweze, T. C. Memo. 2022-56, filed 6/7/22, is a tax attorney and an admittee to the Tax Court Bar. I leave it to you to assess his litigating skills. Judge Patrick J (“Scholar Pat”) Urda makes no comment, and neither do I.

Brandon Paul Spencer, T. C. Sum. Op. 2022-8, of even date, testifies broadly as to his car service expenses, but Judge Alina I (“AIM”) Marshall prefers a wee bit more precision than Brandon Paul has to offer. It’s another Section 274-beats-Cohan, proving again that the worst piece of contemporaneous paper beats the most candid and broad post-event testimony.