I’d ordinarily ignore Noel Christopher Knight, T. C. Memo. 2022-76, filed 7/14/22. It’s the usual ya-should’a-raised it-at-the-CDP. Noel C had a couple CDPs, each covering a couple years of the seven (count ’em, seven, and hi, Judge Holmes) years for which he had gotten NFTLs and NITLs, Noel C raised the one year he hadn’t had a prior chance to contest, but he raised it in the second CDP, although he had had the chance to raise it in the first, but didn’t.

For the rest, it’s the offered IA that Noel C rejects but doesn’t counter or file Form 433-A, and the promised returns that never got filed. The supervening COVID lockdown is of no help, either.

So why do I mention this case, aside from the fact that today’s orders are mostly standing regular and small-claimer pretrials, 99% of which will never go to trial?

Judge Albert G (“Scholar Al”) Lauber provides the answer. “Petitioner is a lawyer who resided in California when he filed his Petition.” T. C. Memo. 2022-76, at p. 2.

Without having independently verified, I infer that Noel C is admitted to the CA Bar, or at least was so when the petition was filed in 2020. He thus could have been automatically admitted to practice in US Tax Court.

“In opposing summary judgment petitioner contends that there is a dispute of fact as to whether he authorized his representative during the CDP hearing to forgo an underlying liability challenge by relying exclusively on the filing of amended returns. Because the [second] CDP hearing barred petitioner from challenging his [earlier year] liability on any ground, this factual dispute (assuming it to exist) is immaterial. In any event petitioner’s representative did not submit to the SO—despite the SO’s request by letter…—either a copy of an amended [earlier year] return or any other evidence regarding petitioner’s [earlier year] liability. That issue therefore was not ‘properly raised in the taxpayer’s CDP hearing,’ Treas. Reg. § 301.6330-1(e)(3), Q&A–F3, and it could not properly be advanced in this Court, see Thompson v. Commissioner, 140 T.C. 173, 178 (2013).” T. C. Memo. 2022-76, at pp. 5-6, footnote 2.

For the George Thompson story, see my blogpost “Losing My Religion – Part Deux,” 3/4/13.

More troubling is this line: “He asserted that the IRS erroneously attributed to him ‘nearly $100,000+ of separation/divorce related income,’ funds that he alleged were not his income but were held in a client trust account.” T. C. Memo. 2022-76, at pp. 3-4. I’ve had a lot more than that in various client trust accounts (my own or the firms’ with which I was then affiliated), and every such account was clearly labeled as a trust account, precise records were kept of every transaction, and NY mandates that every such account bear an appropriate title and a TIN separate from one’s own. I’m not licensed in CA, so I can’t say what CA requires; I’d be surprised if it were any less stringent.

So it should be easy enough to show what funds are clients’, and what are one’s own, and never the twain shall meet.

Gregory Bernard Colbert II and Simone P. Colbert, T. C. Memo. 2022-74, filed 7/13/22, are trying to fight about interest on their two years’ worth of conceded deficiencies, but that a non-starter.

Judge Wells man-‘splains.

“Finally, we agree with respondent that interest is not at issue in this case, and we otherwise conclude that we lack jurisdiction to consider the issue. The Tax Court is a court of limited jurisdiction, and we may exercise our jurisdiction only to the extent authorized by Congress. In deficiency proceedings such as this case, our jurisdiction does not extend to interest imposed by section 6601. In limited circumstances that are not present here, this Court does have jurisdiction to redetermine interest. Pursuant to section 7481(c)(1) and (2) we have jurisdiction to redetermine an overpayment of interest when certain requirements are met, including an assessment made by the Commissioner under section 6215 which includes interest. Interest has not yet been assessed in this case. Consequently, we do not have jurisdiction to redetermine interest pursuant to section 7481(c).” T. C. Memo. 2022-74, at p. 4.

OK, so the deficiencies themselves are conceded, and interest is off the menu, so why are we here?

Well, there are the Section 6662(a) chops for substantial understatement. And all GB and Simone (who gets some innocent spousery) have is “…they were unaware that an individual who assisted them in preparing their taxes ‘[was] submitting and declaring certain  ‘write-offs.’” T. C. Memo. 2022-74, at p. 2.

Judge Wells is about to sink that one. “We note here that there was no tax return preparer signature on either the [Year One] or the [Year Two] income tax return.” Idem, as my expensive colleagues would say.

I wonder what they paid the aforesaid individual, and whether it was a piece of the refund action.

But to the rescue comes The Graev Illegibility.

“The record in this case includes copies of Civil Penalty Approval Forms, signed by the immediate supervisor of the examiner who examined petitioners’ returns, approving imposition of section 6662(a) penalties against petitioners for [Year One] and {Year Two]. However, the date provided on each Civil Penalty Approval Form is illegible, and we are unable to discern whether the initial determination of the assessment was made before the mailing of the notice of deficiency upon which this case is based. Thus, we cannot reliably conclude on the basis of the penalty approval forms that respondent satisfied the requirements of section 6751(b)(1) before issuing the notice of deficiency determining the penalties at issue. Consequently, we find that respondent has not satisfied his burden of production to show compliance with section 6751(b)(1), and we therefore hold that petitioners are not liable for accuracy-related penalties for underpayments due to substantial understatements of income tax for [Year One] and {Year Two].” T. C. Memo. 2022-74, at p. 4.

Great silt stir, eh, Judge Holmes?

A lawyer’s won-lost record doesn’t tell the whole story. A lawyer may be at the top of the league, but gets the toughest cases, so he has a lot of losses. But those are the cases no one could win. The Great Chieftain of the Jersey Boys definitely qualifies. By way of illustration of the foregoing, as my expensive colleagues would say, here’s Thomas E. Kelly, T. C. Memo. 2022-71, filed 7/13/22.

Tom was a character out of a Michael Lewis tell-all, a Wall Street broker with three years’ worth of million-dollar earnings, but no returns filed until long after due dates, showing liabilities north of $2.9 million. IRS gave Tom both a NFTL and a NITL. Tom wants a CDP, but COVID stalled the process.

Tom wanted “first-time abatement” of the late filing, late paying, and no estimateds add-ons, but he’d got that for the year immediately preceding the first of the years at issue.

Tom claimed reasonable cause for nonfiling, nonpaying, etc. ” He alleged that his wife…had been spending lavishly on luxury goods, causing marital and financial problems. He stated that in [last of years at issue] his wife filed for divorce, necessitating that he pay an ‘exorbitant’ amount of money on legal fees and spousal support. These events, petitioner said, caused ‘financial hardship, emotional problems, and depression.’ SO2 rejected his request for abatement on this ground, noting his history of nonfiling, his ‘consistent high income,’ and his ‘lack of payment protocol.’” T. C. Memo. 2022-71, at p. 3. (Name omitted; SO2 is a Settlement Officer, not a gas).

Tom claims the NFTL would make FINRA tag his broker’s license, making it hard for him to earn the money he needs to pay. That fails for want of substantiation.

Tom claims the NFTL was late-filed, but IRS has the proof.

Tom wants a PPIA, but all that does is cause his present taxes to remain unpaid while he pays his past due taxes.

However, his reasonable cause defense, though shaky, may survive for trial, as his adroit counsel gets Judge Albert G (“Scholar Al”) Lauber to give Tom the benefit of every favorable inference. Unless the case settles, of course (nudge nudge, wink wink).

Frantic Frankie gets the tough ones. And maybe even gets a partial win.

Ogden Sunseteer obstructionism got a boost from DC Cir’s shootdown of Mandy Mobley Li, another pro se non-litigated case that resulted in a travesty. Now the OS are trotting out Section 6103 to stall discovery in Whistleblower 972-17W, 159 T. C. 1, filed 7/13/22. But Judge Emin (“Eminent”) Toro isn’t buying. 17W has been scuffling with the OS for four (count ’em, four) years over the admin record. IRS will hand over some redacted stuff, but claims sacred taxpayer info bars the rest.

No doubt the stuff here is Section 6103 taxpayer info; no doubt the IRS conducted proceedings and got money, although they claim 17W didn’t help. And no doubt the info sought is “in connection with” determining as taxpayer’s civil or criminal tax liability. So no doubt 17W crossed the Li threshold-declination barrier.

But when it comes to “goofy,” IRS counsels’ contortions are worth reading.

“Based on certain statements in Li, one might argue that all the elements of section 7623(b)(1)—including the requirement that any action be in fact ‘based on the whistleblower’s information’—are jurisdictional. But that’s not what the D.C. Circuit decided in Li; rather, its holding is confined to threshold rejections in which the IRS takes no action. See Li v. Commissioner, 22 F.4th at 1017. A case like this one,  where the IRS has both acted and collected proceeds, raises jurisdictional considerations not present in Li.

“Specifically, if we were to read Li as requiring our Court to make a factual determination that the IRS proceeded against a target and collected proceeds from that target ‘based on’ the whistleblower’s information simply to establish our jurisdiction over the appeal of the WBO decision, then every case in which the WBO denies a claim on the ground that the information provided by the whistleblower was not useful to the IRS would require a full determination of the merits before we would know whether we had jurisdiction to begin with. Put a different way, if our jurisdiction to review the WBO’s decision not to make an award in a case that involved both an examination of the taxpayer and the collection of proceeds exists only if it turns out (contrary to the WBO’s conclusion) that the recovery was in fact ‘based on’ the whistleblower’s information, then (in cases involving the fact pattern now before us) the whistleblower would win on the merits in virtually every case over which we have jurisdiction (except perhaps those subject to section 7623(b)(3)), and we would have no jurisdiction in virtually every case that the whistleblower would otherwise lose on the merits. See I.R.C. § 7623(b)(1) (providing that if the Secretary proceeds with an action based on the whistleblower’s information, the whistleblower ‘shall’ receive an award).” 159 T. C. 1, at p. 9.

There’s a lot more, including without in any way limiting the generality of the following, a dictionary chaw, a discussion of what “in connection with” means, where it begins and ends, the legislative history of tax whistleblowing, “somber reasoning and copious citation of precedent” from DC Cir and the Supremes.

In the end, IRS has to fork over.

Judge Travis A. (“Tag”) Greaves has to deal with the Section 41 Qualified Research Expenses of J.G. Boswell Company and Subsidiaries, Docket No. 2408-19, filed 7/12/22. Are they expenses to produce more cotton or safflower, better cotton or safflower, or just cotton and safflower (in which case they don’t qualify at all)?

“Section 41(d)(2)(C) distinguishes between research designed to improve a taxpayer’s commercial product, on the one hand, and research that seeks a better process for producing the taxpayer’s existing product, on the other. Respondent argues that petitioner engaged in only the latter kind of research, testing new ways of growing the same crops.” Order, at p. 1. Therefore, says IRS, any expenses that JG would incur just to grow the stuff anyway is not QRE.

Judge Tag Greaves says OK, but the record doesn’t show that product improvement wasn’t on the JG menu. But the cost of just producing product to show the method didn’t degrade quality isn’t research at all, must less Qualified Research.

But more facts are needed, and neither side can get summary J on this record.

“If petitioner demonstrates that its tests of the viability of improved crops are section 41(d) qualified research, therefore, the trial crops it produced were experimental models, and the associated costs are QREs to the extent permitted by section 41(b). Respondent cannot defeat any such argument simply by demonstrating that petitioner would have incurred the expenditures had it used its standard production processes on the research acres.” Order, at p. 8.

Nevertheless, here the summary J motions fulfilled very useful purposes. It permitted discovery of JG’s case, IRS’ case, and, most importantly, Judge Tag Greaves’ view of the case.

“We deny both Motions so we may determine (1) which of petitioner’s 55 research trials sought to improve petitioner’s production process alone, as opposed to one of its products, (2) which disallowed QREs associated with these research trials petitioner would not have incurred had it cultivated the research acres as production acres, and (3) the amount of QREs incurred in the remaining research trials.” Order, at p. 8.

Judge Courtney D (“CD”) Jones’ opinion in Estate of William E. DeMuth, Jr., Deceased, Donald L. DeMuth, Executor, T. C. Memo. 2022-71, filed 7/12/22, brought back to my memory the tragic 1981 murder of Prof. (formerly Dean) Norman S. Penney, who taught me negotiable instruments 57 (count ’em, 57) years ago, on The Hill Far Above. Oh, was I clueless, until I finished typing an outline of my course notes at 2:00 a.m. the morning of the final. I got a “B” in a course I should have failed. Bless his memory.

Judge CD Jones must have gotten at least a “B” at Harvard when she took the course, because she knows the difference between a drawee bank and a depositary bank, and that the final payment rule can only be satisfied by the drawee bank, not the depositary bank.

For the civilians among you, when you write a negotiable instrument, like a check, the “drawee” bank is the bank where your money is. You are drawing on your balance at that bank. If the person you named in the check (the “payee”) deposits the check in their account at the same bank, the depositary bank is also the drawee bank. But if that person deposits your check in another bank, that bank is the depositary bank, so that deposit is not “cleared” (“paid”) until the drawee bank pays the depositary bank the amount of the check. Forget about “available” funds; that’s a fiction. And electronics have different rules.

Judge CD Jones calls out both IRS counsel (for giving away $70K of taxable estate by not knowing the difference and thereby conceding checks deposited by the payees in depositary banks, not the drawee bank, were out of the estate), and the ex’r’s counsel for not knowing the difference either.

Ex’r had POA for his late Dad. As Dad’s life was near its end, ex’r wrote a bunch checks (hi, Judge Holmes) to family members as he had done for some years, as the POA entitled him to do. But only one (count it, one) got paid by the drawee bank before Dad died.

Judge CD Jones checks out the PA UCC (Uniform Commercial Code), an enactment that covers bank stuff in a uniform framework. Ex’r could stop the checks any time before final payment by drawee; the issue is could, not would or did. Section 2033 and Reg. Section 25.2511-(2)(b) include in a decedent’s estate all cash on hand and in bank at death. The cash was there in drawee bank until drawee bank paid it out.

And Judge CD Jones knows that the distinction between a gift inter vivos and a gift causa mortis plays no part here, because until the check is finally paid, there is no completed gift. See T.C. Memo. 2022-71, at p. 8, footnote 10. “…the distinction made by the parties between causa mortis and inter vivos gifts is improper and irrelevant.”

I recommend Judge CD Jones’ opinion to anyone struggling with negotiable instruments law. I’m sure Norm Penney would have given her an “A”.

The latest entry in my “ambush” sequence is the most important. Judge James S (“Big Jim”) Halpern has a lot to say about unexplained delay by petitioner seeking to amend their petition six-plus years after telling IRS’ counsel they wouldn’t seek to amend on that issue, in TBL Licensing LLC f.k.a. The Timberland Company, and Subsidiaries (A Consolidated Group), T. C. Memo. 2022-71, filed 7/12/22.

But the bottom line is “(P)etitioner acknowledges that we have ‘denied motions to amend pleadings that were filed after a trial based upon “the established policy of this Court to try all the issues raised in a case in one proceeding.’” The prospect that a posttrial motion for leave can properly be denied does not establish that we have no choice but to grant a motion for leave made in any case in which no trial has yet been held. Although we resolved without trial the section 367(d) issues the parties presented on summary judgment, the case required extensive proceedings up to that point. The parties submitted thousands of pages of stipulated documents in connection with their Motions for Summary Judgment.  The burden on the Court of resolving the section 367(d) issues was not materially different because the parties submitted those documents by stipulation rather than in a trial. In positing that respondent be given ‘as much time as he needs to consider [its] entitlement to tax credits,’ petitioner, in effect, asks that we put on indefinite hold a case we have already decided and require respondent to open, conduct, and complete an examination of a previously unexamined issue. Our caselaw does not establish that parties are, in all events, entitled to one trial.” T. C. Memo. 2022-71, at pp. 14-15.

All y’all will recall that Judge Big Jim handled the Section 367(d) income pickups of Timberland’s inversion on submitted facts, more particularly bounded and described in my blogpost “Into the Woods – Part Deux,” 1/31/22, as corrected 2/8/22.

The Timberlands’ claim that IRS accepted the Section 41 research credits in years prior to year at issue evokes Judge Big Jim’s Einsteinian reply that you don’t do identical research year after year, leaving out that expecting different results is crazy. When one experiment fails, you try another.

And stale facts are a fresh problem, especially when dealing with research credits, which require an item-by-item drilldown.

The Timberlands’ trusty attorneys barely avoid a Taishoff “Oh, Please.”

Lower The River

That’s Congressional engineering for ya, as exemplified by Section 24a, the child tax credit, $1K per kiddo, $3K max. But to the extent the allowable credit exceeds total tax due, the overage is transmuted into the additional child tax credit per Section 24(d), and is “refunded” to the taxpayer.

The quotation marks are used, because I do not see how that which was not paid can be “refunded” to the non-payor, but that’s the people’s duly elected representatives for ya.

Judge Morrison man-‘splains, in Damian Peter Daly & Jeanne Daly, et al., Docket No. 23070-19S, filed 7/11/22.

” For 2016, the Dalys reported that they owed tax of $226. They claimed a $226 child tax credit and an additional child tax credit of $2,774. The adjustments in the notice of deficiency resulted in an increase in the tax liability of the Dalys above $3,000. As a result, the notice of deficiency disallowed the $2,774 additional child tax credit and increased the child tax credit by the same amount, $2,774.

“In summary, the notice of deficiency allowed $3,000 for the total of both the child tax credit and the additional child tax credit, which is the total amount the Dalys claimed for both credits.” Transcript, at p. 6.

It has been said that worshipping the Internal Revenue Code is not idolatry: it is not “like any thing that is in heaven above, or that is in the earth beneath, or that is in the water under the earth.”

We’ve had it “always ding, dinging” in our ears to return phonecalls promptly, even before the NY Chief Judge’s Civility Rules. And far be it from me to condone, much less advocate, doing anything else.

But That Obliging Jurist Judge David Gustafson is willing to extend some leeway to an SO, at least to the extent of not deeming it an abuse of discretion, not to return a phonecall. Here’s the Candace Hellyar and Stephen Hellyar, Docket No. 12791-20L, filed 7/11/22, story.

“The crux of the Hellyars’ opposition to the Commissioner’s motion is that ‘SO R did not respond to Mr. Heller’s voicemail message [left July 14, 2020]. Instead, she closed the case’ without any further communication when she issued the notice of communication [sic; I think you meant “Notice of Determination” Judge} two and a half months later on September 30, 2020. It may be that a ‘best practice’ would always be to return every phone call, but we cannot say that the SO’s failure to do so in this instance constituted an abuse of discretion.  The CDP hearing is an opportunity for the delinquent taxpayer to request forbearance by the IRS in its discharge of its obligation to collect taxes that are due.  The taxpayer does not always fulfill his role in that hearing simply by trying to return a call and then leaving it to IRS Appeals to initiate further communication. IRS Appeals had given due consideration to the Hellyars’ 4% OIC and had, in the absence of any specific proposal by the Hellyars, made its own proposal of an installment agreement to which it would agree. It was then incumbent on the Hellyars to make a substantive response to IRS Appeals’ proposal. Instead, they simply left a voicemail message that (as the Hellyars describe it) ‘request[ed] an opportunity to discuss the appeal’. This may have been a reasonable first step. But when that communication stalled and IRS Appeals did not reply, the Hellyars were not entitled to sit back for weeks on end, leaving it to IRS Appeals to move the matter forward. IRS Appeals had already given its suggestion of the way forward—i.e., the installment agreement it had proposed. The ball was in the Hellyars’ court, not IRS Appeals’s. It was not an abuse of discretion for IRS Appeals to determine after the passage of two more months that the Hellyars would not be accepting the proposal of an installment agreement nor making a counter-proposal.” Order, at p. 6. (Name omitted).

Return phonecalls. Follow up when the other side does not. Document every effort to communicate. And tell ’em the Hellyars sent ya.

Might as well, as DC Cir has rendered that enactment completely illusory. And pension off the Ogden Sunseteers; there’s no reason for them to report for work, either physically or electronically, as all they have to do post-Li is nothing.

Mandy Mobley Li offered herself up on toast. As I said when Mandy Mobley first surfaced, “…perhaps maybe so this is a family law thing gone wrong. Just sayin’, not fur nuthin’.” See my blogpost “Ran The Checklist,” 4/6/20.

And Mandy Mobley was pro se then and thereafter. So when she was well and soundly trounced by Judge Courtney (“CD”) Jones, she appealed to DC Cir, all by her lonesome.

Remarkably, despite the much-proclaimed lenity shown pro ses, especially those as obviously hapless as Mandy Mobley, rather than seeking pro bono assistance for her, DC Cir engaged two attorneys (qualifications unstated and to fame unknown as far as the internet goes) as amici, to teach DC Cir about jurisdiction under Section 7623.

Truly, I can’t make it out.

I thought judges were the ones to decide questions of law. The only time an expert opinion might be required is when foreign law was at issue. Or so I thought.

As it happened, no sooner did the two amici conclude (might I indulge in a wee “nudge nudge, wink wink, say no more”?) that Tax Court had no jurisdiction unless IRS did something besides toss the claimant, than IRS folded. What Mandy Mobley did is unclear, but probably resembled a deer in the headlights.

From IRS counsels’ point of view, this is a gift. This is one entire area in which they have to do no work. Ditto from the Ogden Sunseteers’ point of view. And as Tax Court has exclusive jurisdiction (Section 7623(b)(4)), I can’t think but that a reduction in workload is welcomed by that hard-pressed Bench.

Now all that’s necessary is for Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan to issue the stereotyped order in, for example, Ronald R. Kopko, Docket No. 19210-21W, filed 7/8/22. “…the stay of proceedings in this case is lifted. … the parties are no longer required to file status reports on or before September 30, 2022. … on the Court’s own motion, this case is dismissed for lack of jurisdiction.” Order, at p.1.

But how about claimants who have something? And who can’t afford to hire or engage counsel? Are contingency fees permitted in whistleblower cases (cf. Circular 230, 31 CFR §10.27(b))? It’s not clear.

So the tax whistleblower statute, a creaky vehicle at its best, is now completely broken down.

Unless another Rich Lacey, with the wherewithal to pay counsel, arises from without the bounds of DC Cir, gets tossed by the Ogden Sunseteers and Ch J TBS, and appeals to a different Circuit, whose Judges aren’t afraid to decide the law their own selves. And maybe so even make some people work for a living.

For Rich Lacey’s story, see my blogpost “The Whistleblower Office – Blown,” 11/25/19

Note this is a nonpolitical blog; my views of current Federal judicial appointments have no place here.