The last time I looked at accountants’ compensation it was in the context of the annual bloodbath (sorry, I meant compensation meeting). See my blogpost “Over-compensation,” 3/31/11.

Today Judge David Gustafson discusses dissolution of an accounting partnership, and the divvying up of clients and money, in Clark Raymond & Company PLLC, D. Edson Clark, CPA, PLLC, Tax Matters Partner, T. C. Memo. 2022-105, filed 10/13/22.

Judge Gustafson finds clients have value, and clients who follow departing partners generate unrealized gain to the departed. The departed, who are buying out the retiring rainmaker, did get distributions from the partnership to the extent of the previous calendar year’s net revenue. But because the partnership failed to keep the capital accounts in compliance with Reg. Section 1.704-1(b)(2)(iv), the special allocation to them of the unrealized gain flunks all tests for economic effect.

So a Rule 155 beancount must determine how much income the departed have to be allocated to bring their negative capital accounts to zero.

There’s a lot more, and my accountant friends might want to revisit their partnership agreements in light of Judge Gustafson’s dissertation.

No, I’m not playing war correspondent. Neither is Judge Goeke, although he is allowing an advance by Bloomberg L.P, Bloomberg, Inc., Tax Matters Partner, et al., Docket No. 3755-17, filed 10/13/22.

The Bloombergs and their bunch als (hi, Judge Holmes) want to put in evidence an Advance Pricing Agreement (APA) they made with IRS concerning gross income from UK branches. An APA is sort of a safe harbor deal for certain entities in certain years to avoid a Section 482 income-deduction reallocation jumpball.

IRS moves in limine to preclude same, claiming Sections 10.03 and 10.04 of Rev. Proc. 2006-9, 2006 1 C.B. 278 bar use of the APA by anyone but the named taxpayer, and introduction thereof in any judicial or administrative proceeding for any year outside those covered by the APA.

But the Bloombergs say they are putting in the APA “… to use a transfer pricing method derived from the APA to establish the reasonableness of the allocation of gross receipts between domestic production gross receipts (DPGR) and non-DPGR for purposes of I.R.C. § 199 if the Court holds that part of gross receipts qualifies as DPGR. It asserts that it does not intend to use the APA with respect to the qualification issue.” Order, at p. 1.

Now the APA never discussed Section 199, and neither tax treaty nor sourcing of income issues are involved here.

What wins it for the Bloombergs is Reg. Section 1.199-1(d)(2).

“Treas. Reg. § 1.199-1(d)(2) identifies factors relevant to evaluating the reasonableness of the method allocating gross receipts between DPGR and non-DPGR. These factors include whether the allocation method was used for other Federal or state tax purposes or internal management purposes. Accordingly, an allocation method used for transfer pricing issues is relevant under the regulations. Thus, the APA is relevant. Further, we hold that the APA’s admission is not barred by any part of the revenue procedures cited by respondent.” Order, at p. 1.

So the Bloombergs can produce the APA to advance their case.

A Taishoff “Good Job” goes to Adam R. (“No Phone”) Gahtan, Esq., and his team at Fenwick.

I’ve two (count ’em, two) takeaways from Judge Elizabeth A. (“Tex”) Copeland’s order in Zola Jane Pugh, 17992-19P, filed 10/12/22.

IRS wants summary J that they correctly denominated Zola Jane as a major delinquent in their billet doux to State, wherefore State grabbed Zola Jane’s passport. Zola Jane never responded to the summary J motion.

To be charitable, IRS’ paperwork in support of the motion is appalling.

“In this case, Ms. Pugh did not file an income tax return for tax years [One] and [Two]. Respondent prepared substitute for returns pursuant to section 6020(b) for both tax years. He attached three exhibits in support of his motion: (1) Exhibit A is Ms. Pugh’s Account Transcript for tax year [One]; (2) Exhibit B is Ms. Pugh’s Account Transcript for tax year [Two]; and (3) Exhibit C is a copy of a District Court order for an unrelated taxpayer. We note that none of these documents were accompanied by any form of certification of official records nor declaration regarding same.” Order, at p. 2.

To win a Section 7345 passport grab, IRS must establish a liability north of an inflation-adjusted $50K assessed, legally enforceable, and the subject of a filed NFTL or completed NITL. Section 7345(b)(1), (f).

For SFRs, IRS must proceed the deficiency route, with SNOD to last known address, no timely petition therefrom, CDP notice, NOD, and no timely petition therefrom. Exhibits A and B above establish none thereof. I won’t extract or paraphrase; read for yourself.

So here’s the checklist for IRS. Attach this to your next motion for summary J, because this one is tossed, without prejudice.

“A copy of the notice of deficiency allegedly issued to Ms. Pugh for each
tax year at issue with proof of mailing to Ms. Pugh’s last known address;
and

“A copy of the notice of intent to levy (or, if applicable, any notice federal
tax lien filing) allegedly issued to Ms. Pugh for each tax year at issue;
and

“Forms 4340, Certificate of Assessments, Payments, and Other Specified
Matters, for each tax year at issue, with an accompanying Certificate of
Official Record, if respondent wishes to rely on internal records and
account transcripts.” Order, at p. 3.

Takeaway 1- Practitioner, this is also your checklist for a Section 7345 passport grab. Like the old Yellow Pages, if it’s not in here, it’s not out there.

Takeway 2 – Petitioners, I know the deer in the headlights effect is blinding. But answer motions when prompted; the Judge may be telling you something by offering you the chance to answer. Like maybe IRS’ papers aren’t of the finest.

Judge Travis A. (“Tag”) Greaves authors a full-dress T. C. today, Daniel Cochran and Kelley Cochran, 159 T. C. 4, filed 10/12/22. And it’s definitely short-listed, as it’s only six (count ’em, six) pages long.

Dan and Kelley have a confirmed Ch 11 Plan;  their trusty attorney wants the 11 USC§362 automatic stay lifted, so they can proceed in Tax Court with the SNOD they petitioned before they filed chapter. They claim confirmation discharges any pre-petition debt.

The pre-2005 amendment language of 11 USC §1141(d) led Tax Court to this conclusion in Moody v. Com’r, 95 T. C. 655 (1990).

But Congress played the spoiler.

“In Moody we held that a bankruptcy court’s confirmation of the taxpayer’s chapter 11 bankruptcy plan served to effectively discharge or deny discharge to the taxpayer-debtor for purposes of 11 U.S.C. § 362(c)(2)(C), thereby terminating the automatic stay that was in place with this Court under 11 U.S.C. § 362(a). Moody, 95 T.C. at 664. In reaching this holding, we relied upon 11 U.S.C. § 1141(d)(1), which provides that a bankruptcy court order confirming a debtor’s chapter 11 bankruptcy plan generally acts to discharge the debtor from any debt that arose before the date of the confirmation. See Moody, 95 T.C. at 659–62. The version of 11 U.S.C. § 1141(d) applied in Moody was subsequently amended in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, §321(d), 119 Stat. 23, 95–96, and in 2010 as part of the Bankruptcy Technical Corrections Act of 2010, Pub. L. No. 111-327, § 2(a)(36)(A), 124 Stat. 3557, 3561.” 159T. C. 4, at p. 4. (Footnote omitted, but it says that Moody was pre-SNOD and petition, Cochran post-SNOD and petition, but mox nix).

Judge Tag Greaves finds that the amended statute doesn’t discharge anything unless all payments have been made (here they haven’t), or the BJ orders the debt discharged after notice and hearing. So the automatic stay remains. And no need for legislative history, as the statute is unambiguous.

So Dan and Kelley (and trusty attorney, who gets a Taishoff “Good try, third class”) are left singing the Moody blues.

We practitioners must make sure that our contracts are severable; that is, if one part is found unenforceable, the rest can be enforced, unless that leads to an absurd result. Legislators must assure that the statutes they enact are severable in like manner. And we all must so state.

But a SNOD need not. Judge Patrick J. (“Scholar Pat”) Urda provides much “somber reasoning and copious citation of precedent” in support thereof in Craig J. Schieder, T. C. Memo. 2022-104, filed 10/11/22, at p. 6, footnote 7. If IRS concedes any item in the SNOD, the rest survives.

CJ is an IC salesperson, selling RVs and campers. He’s also a protester, the Section 3104 SE variety, conflating income taxable for FICA/FUTA with all income, Section 61 type.

The SNOD failed to include some SE income, which failure wound up in the original answer to CJ’s petition. IRS amended, but fell short at the SE fence.

“…we note that the Commissioner’s post-trial brief assumes that the amount of self-employment income at issue includes the unreported income amounts identified in the notice of deficiency as well as the increased amounts set forth in his answer to the amended petition. The Commissioner’s answer failed, however, to allege that those additional amounts constituted self-employment income, as the notice of deficiency had done with respect to the T payment. We thus will analyze only the self-employment income determined in the notice of deficiency. See Rule 36(b).” T. C. Memo. 2022-104, at p. 6. (Name omitted).

Remember, “…the answer shall 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.” Rule 36(b). When IRS amends and thereby acquires BoP, check the amended answer carefully for clear and concise statements of grounds and facts.

Note CJ avoids the Section 6673 frivolity yellow card. IRS allowed him only the standard deduction, whereas the record shows CJ paid more in State income tax, so he gets the benefit of the extra 73 bucks, even though he put in no evidence on the trial.

A finger-fehler by IRS can save a frivolite big bucks.

Today being a public holiday in The District of the Stateless, namely, viz., and to wit, US Indigenous Peoples Day, United States Tax Court has called a truce to its labors. Wherefore I will do likewise.

Includes US Tax Court

Blogging allows me a freewheeling approach: reporter, critic, “grumpy old man” (hi, Mr. Reilly). At risk of being shoehorned into the last-named, I’ll return again to a well-worn peeve: the nonrecognition of law firms in US Tax Court practice.

Here’s Ricardo Cano & Lillian Cano, Docket No. 21204-22, filed 10/7/22. And again it’s nothing to do with Ric or Lilli; it’s their trusty attorneys from a well-regarded and inveterate Tax Court regular firm.

Said trusty attorneys, whom I’ll call James and Dave, got caught in the electronic petition tangle. Apparently the Electronic Signatures in Global and National Commerce Act does not apply at The Glasshouse on Second Street.

Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan issues the usual admonition.

“If the petition is being filed by multiple practitioners, the Petition should be signed by the additional practitioners. However,  review shows that the petition bears a stylized signatures of counsels [Dave] and [James]. The Tax Court’s procedures require at a minimum a digital image of an actual signature or use of an authentication program. See DAWSON User Guides on the Court’s website, http://www.ustaxcourt.gov. If petitioners’ counsel wishes to be recognized as counsel of record in this case, it will be necessary at this juncture to electronically file an entry of appearance on behalf of petitioners in accordance with Rule 24 Tax Court Rules of Practice and Procedure. Petitioners’ counsel may obtain an Entry of Appearance form under ‘Case Related Forms’ on the Tax Court’s website at http://www.ustaxcourt.gov/case_related_forms.html  .” Order, at p. 1.

Ch J TBS is aware of the existence of law firms; her bio on the Tax Court website recites that she was employed as associate and later partner in a leading law firm. Why elevation to the Tax Court bench acts like a shot of Lethe I cannot guess.

Time, and past time, for a Firm Entry of Appearance. Law firms have existed in this country for 225 years or more. I much doubt they will cease to exist any time soon.

If ex-Ch J Maurice B (“Mighty Mo”) Foley could craft an updated and much improved Ownership Disclosure Statement, I’m sure a Law Firm Entry of Appearance is no great shakes.

Effective Tax Administration does not end with Collections. The tax judiciary needs to make it easy for taxpayers with meritorious (or at least good-faith) claims to seek redress speedily, economically, and with counsel of their choice.

Followers of the late Norm Dacey will find their formbook living trusts empower the trustee(s) to dispose of assets and pay claims, but absent judicial paperwork, the doors of the Glasshouse on Second Street are shut to them.

As FL was long reputed to have one of the toughest probate grand slaloms, Leda Sander, trustee of her mom’s probate-dodger, never sought nor got letters from the FL circuit court acting in its probate court capacity. So when IRS hit Mom with a couple SNODs (hi, Judge Holmes) post-mortem, Leda filed a petition in Mom’s name and moved to be subbed in as trustee.

The case is Sandra E. Sander, T. C. Memo. 2022-103, filed 10/6/22.

Judge Morrison writes a dissertation on FL probate law, denying Leda’s attempt to sub in and telling her to get letters. The key is Rule 60(c). This punts capacity to sue over to State law.

Obviously Leda’s trusty attorney left no cliché unturned as he hunted for anything to get Leda over the FL bar. If you’re a FL practitioner, read Judge Morrison’s opinion. And estate planners everywhere should be aware that the living trust is not the universal answer.

The good news is Rule 60 doesn’t nonsuit Leda entirely. Judge Morrison takes IRS’ motion to toss the petition is under advisement for six months, until Leda can get letters.

Those of my readers who remember the bifurcated road where trod Heinrich C. Schweizer, T. C. Memo. 2022-102, filed 10/6/22, now get to see the end of said road. Those who don’t remember Heinrich C. can read my blogpost “There’s A Bifurcation in the Road,” 2/18/22, and join the rest.

Turns out the bifurcation resulted in a trial that only knocked out Heinrich’s good faith reliance on his return preparer for a Section 170(f)(11)(A)(ii)(II) save of his $600K deduction. Heinrich’s preparer’s testimony varied from Heinrich’s, and Heinrich’s counsel’s direct examination fell a wee bit short. And the Form 8283 fell a lot shorter than that.

Judge Albert G (“Scholar Al”) Lauber isn’t sympathetic.

“In this case Mr. K was available to testify, and did testify, at trial. But he did not corroborate, in any respect, petitioner’s testimony about the alleged advice. And petitioner’s counsel asked no questions of Mr. K squarely directed to this point. The fact that petitioner did not seek corroborative testimony from the person who might have supplied it weighs against him.” T. C. Memo. 2022-102, at p. 9. (Name omitted).

Ever have a witness tell you not to call him, because his testimony would sink your client? Oh yes.

Judge Scholar Al shows that Heinrich is a fellow scholar, having a German law degree and passing the five-day state Bar exam over there. He was ABD (all-but-dissertation) for a PhD in German law, when he switched to fine arts, and became head of Sotheby’s African fine arts department. He’d done enough value estimating and even donating art himself to ask for a Statement of Value (SOV) from the IRS Art Appraisal Services. Check out Pub. 561 for more. But Heinrich never got the SOV in time to attach to his return.

Hence the willful blindness.

” Even if petitioner had not already been familiar with Form 8283 and its requirements, the defects were there in plain view. The … sculpture was listed (incongruously) in section A of the form, where taxpayers are instructed to report donated property worth less than $5,000 and ‘certain publicly traded securities.’ On the line calling for a ‘[d]escription of donated property,’ the words ‘SEE ATTACHED’ appeared, but there was no attachment. Section B of the form, where the gift should have been reported, was left blank, including two gaping blanks for signatures. Form 8283 explicitly says that ‘[a]n appraisal is generally required for property listed in Section B,’ but there was no appraisal.

“One does not need to be a tax expert to open his eyes and read plain English. If petitioner had reviewed the Form 8283 as he testified, it would have been obvious to him that it was defective in many respects. We find it wholly implausible that a taxpayer as educated as petitioner, having devoted almost a decade to the study of law, would have acquiesced in the notion that he could properly file a tax return obviously lacking these required elements.” T. C. Memo. 2022-102, at p. 11.

Studying law can be hazardous to your tax health.

No chops, as IRS folds the Section 6662s for want of Section 6751 Boss Hossery.

Today we have another entry in my “I Won’t Mourn TEFRA” stakes, Silver Run Holdings, LLC, Silver Run Partners, LLC, A Partner Other Than The Tax Matters Partner, Docket No. 12660-21, filed 10/5/22. Partners filed timely seriatim petitions for the Holdings FPAA, one as TMP and t’other as notice partner. Partners want partial summary J from Judge Patrick J. (“Scholar Pat”) Urda, deciding which petition goes forward, and which gets tossed.

The LLC operating agreement for Holdings designates two co-managers, one of whom is a member and t’other isn’t, but Partners is none of the above. And neither co-manager of Holdings, which got the FPAA, petitioned.

Both the year-at-issue 1065 and correspondence at Exam say Partners is the TMP. Except only a general partner of Holdings can be TMP. And “(O)nly a member-manager of a limited liability company can be a general partner. See Treas. Reg. § 301.6231(a)(7)-2(a).” Order, at p. 2.

Clear? Thought not.

Judge Scholar Pat to the rescue. I leave in the dates, as they are important.

“The record establishes (and the parties agree) that SR Partners was not a member-manager of Silver Run. SR Partners thus was not a general partner of Silver Run and could not act as its tax matters partner. SR Partners thus was a notice partner on June 8, 2021, and the petition it filed in Docket No. 10457-21 constituted a premature petition under section 6226(b)(5) as it was filed within the 90-day tax matters partner petition window. This premature petition is deemed to be filed on the last day of the 60-day notice partner window, i.e., August 23, 2021. See § 6226(b)(5).

“SR Partners properly initiated this case as a notice partner on June 28, 2021, during the 60-day period following the 90-day window for petitions by tax matters partners. See § 6226(b). The petition here was filed before the date on which the petition in Docket No. 10457-21 was deemed to be filed, and we therefore have jurisdiction over this case.” Order, at p. 2.

I’ve chronicled chases after tax matterers, and the concomitant jousts among partners as to who exactly is entitled to petition a FPAA. See my blogpost “Tax Smatterer,” 3/12/15, for one such.

Judge Alina I. (“AIM”) Marshall has the ongoing chase after a missing TMP, in Colorado Land and Holdings, LLC, John Sfondrini, Tax Matters Partner, Docket No. 11875-20, filed 10/5/22. Y’all will recall that the Coloradans wanted to toss John and sub in Gerry. What, no? Then see my blogpost “No Bipartisan Cure,” 9/21/21.

The Coloradans and IRS searched high and low for documents showing the removal of John and installation of Gerry, but can’t find the signed originals. Thus John is in, at least until John gets a chance to be heard. See Rule 250(b).

So Judge AIM orders the parties to dig out what addresses they have for John so Judge AIM can give him a view halloo, and report whether they still want to toss him and sub in Gerry.

Taishoff says I praise Congress for getting rid of this ridiculous rigamarole. And IRS’ Reg. Section 301.6223-1(e) seems a proper and quick solution for the problem of the absent or recalcitrant representative.

But partners, beware, before entrusting your “lives, fortunes and sacred honor” to any non-partner representative. Is a representative a fiduciary? What duty does he/she owe you?