An IRS partial summary J motion works in Nassau River Stone, LLC, GH Manager, LLC, Tax Matters Partner, T.C. Memo. 2023-33, filed 3/16/23. FL boondockery this time; Judge Albert G (“Scholar Al”) Lauber finds whoever had to sign when did sign when. How closely they looked at what they signed before they signed doesn’t matter. Boss Hossery OK.

“Petitioner alternatively contends that RA K should not be regarded as having made the ‘initial determination’ because his case activity record ‘shows that he spent only 64 hours on [p]etitioner’s [a]udit.’ But section 6751(b)(1) does not inquire into the depth or comprehensiveness of IRS officers’ review; it simply requires supervisory approval of the penalty recommendation. As we have said before: ‘The written supervisory approval requirement . . . requires just that: written supervisory approval.’ We have repeatedly rejected any suggestion that a penalty approval form or other document must ‘demonstrate the depth or comprehensiveness of the supervisor’s review.’ We do not second-guess the extent of the RA’s or the supervisor’s deliberations about whether penalties should be imposed. We confine our search to seeking evidence of written supervisory approval.” T. C. Memo 2023-33, at p. 8, footnote 3. (Name and citations omitted, but the cites are all cases I’ve blogged).

So before you ask “So what else is new?”, check out how Judge Scholar Al describes the Nassau Riverines’ seven (count ’em, seven) trusty attorneys’ attempts to raise questions of fact in this procedural joust.

“Petitioner struggles mightily, but in vain, to gin up a dispute of material fact.” T. C. Memo 2023-33, at p. 6. “Tilting at windmills, petitioner vainly probes for a dispute of material fact.” T. C. Memo. 2023-33, at p. 9.

“The ‘presumption of regularity’ likewise supports the actions of the IRS officers here. ‘The presumption of regularity supports the official acts of public officers and, in the absence of clear evidence to the contrary, courts presume that they have properly discharged their official duties.’ It remains a well-settled rule that ‘all necessary prerequisites to the validity of official action are presumed to be complied with.’ * * * * Petitioner offers no evidence, much less ‘clear evidence’, to overcome this presumption.” T. C. Memo. 2023-33, at p. 10. (Copious citation of precedent omitted).

The point (and yes, I have one, for a change)? Judge Scholar Al shows the Nassau Riverines no Section 6673 yellow card, no Rule 33(b) OSC, not even a tiny reprimand, for eleven (count ’em, eleven) pages of wasted valuable Tax Court time and electrons.

But there’s a $17 million syndicated conservation easement deduction here. When Alberto and Virginia Delgado were fighting over a $49K employment discrimination settlement, Judge James S (“Big Jim”) Halpern laid an OSC on them and their counsel without any visible notice or warning for a delay-of-the-game chop, for arguments no more windmill-worthy than what was raised here. See my blogpost “Why The Chop?” 3/13/23.

Now lest I be misunderstood, judges have to run their own divisions without constantly looking over their shoulders. Trial judges see and hear the parties and counsel. They have to deal on the spot with the honest but ignorant pro ses, the rounders, wits, wags, and wiseacres, inept counsel, extras from Judge Judy reruns who wandered into the wrong courtroom. I don’t want a set of rigid guidelines for off-the-bench chops.

What I do want is a warning, whether in a previous case, a pretrial phoneathon, an order, or from the bench in a hearing, and a chance, however brief the circumstances require, for the errant litigant or litigator (or both), to repent and cure the transgression. If any remain obdurate, then let judicial wrath descend upon them heavily.

Judge Patrick J (“Scholar Pat”) Urda and Judge Albert G (“Scholar Al”) Lauber were joined by litigators from the private and public sectors (one each) for a causerie on expert witnesses. Practitioners found it interesting.

The SPTO paragraph 4 calls for a motion to file an expert witness’ report. Apparently some practitioners just file the report, others just file a notice of report and file, and some actually comply with the order. Judge Scholar Al said he didn’t mind not having to stamp yet another motion GRANTED, and the matter was left undecided. Taishoff says the SPTO is an Order, not a suggestion, and suggests the motion route. That way the record is clear, and your compliance with the SPTO manifest.

There was lamentation over the asymmetry of access to technical data underlying an expert’s opinion. Especially is this the case where industry standards and practices are at issue. The petitioner, being engaged in the industry for years, may have contacts with access to highly technical data, and employ individuals with decades of experience. IRS has none thereof. While there was a general feeling that the parties should play nice in discovery, I cannot think that the petitioner, with monumental deficiencies and chops on the block, would willingly hand over the goods. Rule 143(g)(3) allows expert testimony as to industry standards without the need for a written report. I guess I can add to my “Stealth” file the Stealth Expert.

Finally, the “hot tub.” This apparently was a thought of the late Judge Laro. The judge would call the experts together out of the presence of the attorneys and attempt to find upon what principles they could agree, to narrow the divide between their respective reporting positions. These concessions could serve to shorten the trial and make it easier to find the correct result. I cannot think too many attorneys would agree to this, and I am sure their clients, who are paying this high-priced talent to win their case and not engage in a philosophical excursus, would not.

But it was an interesting seminar. I look forward to the next, when Judge Ronald L (“Ingenuity”) Buch will take the lead.

Rule 33(b), that’s why. I was puzzled (see my blogpost “Why The Chop?” 3/13/23), and did some research. Though rarely invoked, and my research showed only for grievous infractions, Rule 33(b) permits a sua sponte chop for proceedings that cause “unnecessary delay or needless increase in the cost of litigation.”

The Rule doesn’t require a warning, but was the conduct here so egregious that no warning should have been necessary before the OSC? If the parties or their trusty attorney were recidivists, or ignored a warning, might it not have been well to spell that out in the opinion?

Yet another reason why some sort of guidelines for imposing sanctions are needed.

I’ve seen that tactic used (and used it for clients) to get control of a property; be careful of champerty and maintenance, but that’s not the problem for Mike and Catherine, co-exr’s of Dad’s estate. Their problem is that, by buying the mortgages, they paid off the mortgage debts they bought while Dad was still among us, thus invalidating them as claims against his estate in reduction of estate tax. Worse, another mortgage they bought at a discount landed each of them with $960K in gift tax.

I’ve recently lamented the delay in adopting ex-Ch J Maurice B (“Mighty Mo”) Foley’s amendments to the Rules. But if Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan has to spend time unscrambling frittatas like Estate of Bernard J. MacElhenny, Jr., Deceased, Donor, Michael P. MacElhenny and Catherine MacElhenny Dann, Co-Executors, T. C. Memo. 2033-33, filed 3/15/23, I can see why she has no time for rulemaking.

Briefly, the late Bernie Mac was mentally impaired toward the end, and co-ex’rs had POA. Bernie Mac’s affairs were a mess. Mike had real estate experience, and tried to straighten things out. Bernie Mac had a couple mortgages (hi, Judge Holmes) in default. Mike thought he could refinance the mortgaged properties out from under, and buy the mortgages. He haggled the lenders into taking haircuts for ready cash, and got assignments of the mortgages, although the lenders warranted nothing.

After Bernie Mac passed, Mike claimed these were debts of Bernie Mac’s estate.

No, says Ch J TBS.

“There is no evidence to support petitioners’ contention that the assignments were negotiated at arm’s length.Mr. MacElhenny was on both sides of the transactions. He agreed on decedent’s behalf to have the judgments entered against decedent and in his and Ms. Dann’s favor. There is no record of consent by decedent for maintenance of the liabilities after payment. True, Mr. MacElhenny held decedent’s power of attorney and so had the authority to make these decisions on decedent’s behalf. It is also true that Mr. MacElhenny employed multiple attorneys to represent the competing interests involved. But we do not see any evidence that these individuals actually negotiated amongst themselves.

“We note that the consent judgments entered against decedent did not resolve a dispute between decedent and his children. Mr. MacElhenny contends that he did not want to take over his father’s debts. At the time of the assignments for both claims, agreement had been reached regarding settling the debts with the banks.” T. C. Memo. 2033-33, at p. 12.

In fact, the debts were extinguished as against Bernie Mac during his life. There was another property where there was a live claim, but that was extinguished within one month. These were clearly all donative deals, to pass the mortgaged properties to the ex’rs (heirs) at a discount.

It gets worse.

Mike and Catherine acquired the mortgaged property for an alleged $4.75 million while there was a valid claim against Bernie Mac. But they really only paid off two mortgages, and reduced the balance of one of them. So they paid less than the worth of the property, and as it came from Bernie Mac, it’s a bargain sale, hence a gift.

I find it hard to reconcile the arithmetic, but maybe one of my CPA readers can give me a clue.

The late Scott Hoensheid did make a charitable gift to Fidelity Charitable Gift Fund, a donor-directed 501(c)(3). And if a gift is made without expectation of tangible reward, out of disinterested love and affection, then the late Scott’s gift of $3.5 million worth of his family’s closely-held corporate stock was certainly a gift. Scott got absolutely nothing for it, except a major capital gains hit. He got no charitable deduction. He did duck the enhanced Section 6662(a) understatement chop via his trusty tax attorney.

Judge Nega tells why trying to time your gift to the minute before the stock sale becomes subject to a definite agreement doesn’t work. The case is Estate of Scott M. Hoensheid, Deceased, Anne M.  Hoensheid, Personal Representative, and Anne M. Hoensheid, T. C. Memo. 2023-34, filed 5/15/23.

Before he became the late Scott, he was afraid that if he made the gift of stock to Fidelity and the deal to sell the family business cratered, his brothers would have more stock than he. Scott and siblings apparently didn’t make the Psalm 113, verse 1 cut. So Scott said he didn’t want the gift to go final “until we are 99% sure we are closing.” T. C. Memo. 2023-34, at p. 5.

After negotiations for sale of the corporate stock are virtually completed,  massive change-of-control bonuses are paid out, and the corp stripped of whatever cash it had thereafter, Scott’s backdated gift was made and the deal closed.

Judge Nega deconstructs. Scott’s trial testimony is less than stellar. The piece of paper from Fidelity that was later corrected never makes it into evidence, drawing a negative inference that the gift was accepted when it had to be for tax purposes. There’s endless “intercourse” between Scott, his trusty tax attorney, and his financial adviser, which all gets into the record. Oh, those e-mails!

Scott decided to save money by having his financial adviser do the appraisal of the stock, notwithstanding his trusty tax attorney suggested using a major accounting firm with creds, although said adviser’s appraisal qualifications were submarginal.

Taishoff says when there’s big bucks on the line, don’t get silly about fees.

This is an assignment of income case. Fidelity’s standard policy was to sell closely-held stock as soon as it got any, although it wasn’t obligated to do so. So IRS claims what really happened was that Fidelity was Scott’s agent, unloading the stock to the buyer of the business. See my blogpost “Cosi Fan Tutti,” 9/3/20.

Judge Nega trudges through MI law as to what constitutes a gift. There’s a gift here, but it was completed when the sale was a 99% certainty.

So assignment of income. But a fallback is that, if there was a taxable assignment of income but a real gift, shouldn’t there be a charitable deduction? Yes, if the appraisal is good. Here it isn’t, because of the unqualified appraiser; substantial compliance can’t cure a dud appraisal. And Scott’s good faith reliance is lacking, as he ignored the suggestion to get a qualified appraiser.

But Scott’s trusty tax attorney saves him from IRS’ enhanced chop. IRS has burden of proof when its amended answer increases the chop sought.

Takeaway- Maybe it’s better to trust your brothers than to trust to luck.

No, not the 1949 English crime film, nor the 1979 Little River Band’s number, nor even Sir Paul McCartney’s upcoming post-Beatles retrospective. This is the story of Thomas LaRonn Mitchell, T.C. Sum. Op. 2023-9, filed 3/14/23.

Tom LaRonn “… was employed by Dallas Independent School District (DISD) and Liberty Mutual Group, Inc. (Liberty), as a school counselor and an insurance salesman, respectively. He worked a 40-hour week between those two jobs. He also performed ‘business consultant’ activities that he reported on Schedule C attached to his [year at issue] Form 1040, U.S. Individual Income Tax Return. Mr. Mitchell described his ‘business consultant’ activities as ‘artist development,’ ‘studio production consultation,’ ‘performance consultation,’ and ‘business consultation’ in connection with managing gospel and R&B artists. Mr. Mitchell did not report any income from his Schedule C business for the year in issue.” T. C. Sum. Op. 2023-9, at p. 2.

But Tom LaRonn had business expenses from the Sched C  that threw him for a $49K loss, wiping out his taxable income from his counseling-insurance selling gigs.

STJ Adam B (“Sport”) Landy drew this case, and Tom LaRonn’s $22K of vehicle expenses took center stage. Tom proffered a logbook showing “… a beginning odometer reading on January 1, 2018, of 50,000 miles and an ending odometer reading of 132,205 miles on August 1, 2018. Mr. Mitchell claimed that all miles listed were driven for business purposes.” T.C. Sum. Op. 2023-9, at p. 4

“To discredit the mileage log and refute the starting mileage of 50,000, respondent offered copies of Mr. Mitchell’s Texas vehicle inspection reports dated October 20, 2017, and November 15, 2018, providing the odometer readings for his vehicle of 182,291 and 204,107, respectively. According to the inspection reports between October 20, 2017, and November 15, 2018, 21,816 miles were driven on the vehicle, far less than the driven miles shown on the mileage log. Mr. Mitchell failed to explain or refute the inconsistencies.” T. C. Sum. Op. 2023-9, at p. 5.

Tom LaRonn also had receipts for travel expenses. They only made matters worse.

“Additionally, there were inconsistencies between the mileage log and the hotel receipts Mr. Mitchell provided. One receipt stated that Mr.  Mitchell stayed in Houston, Texas, on June 15, 2018, but the mileage log showed that he was in Charlotte, North Carolina, from June 15 through 20, 2018. Similarly, Mr. Mitchell provided another receipt showing that he stayed in Miami, Florida, on July 10, 2018, but the mileage log showed that he was in Dallas, Texas, from July 8 through 15, 2018. Mr. Mitchell claimed that the discrepancies were due to his artist-clients driving his vehicle for business purposes even though he was not present in the vehicle. We are not bound to accept a taxpayer’s self-serving, unverified, and undocumented testimony. Mr. Mitchell’s testimony is not credible, and the Court finds that no mileage was incurred for a business purpose.” T. C. Sum. Op. 9, at p. 5. (Citations omitted).

Takeaway- If you’re going to be on the run, make sure your paperwork runs with you.

Taken to Canada as a lad of ten years, naturalized as a Canadian, and not divested of his natural-born US citizenship until fifty-six (count ’em, fifty-six) years later, successful stockbroker and investor George B. Dengin, T. C. Memo. 2023-31, filed 3/14/23, finds the price of his relinquished citizenship to be very high.

GB was beneficiary of three (count ’em, three) Canadian RRSPs, the north-border equivalent of an IRA. Like US IRAs, Canada only taxes distributions from RRSPs, not accumulations within; but US taxes RRSP accumulations in the years they take place, even if the beneficiary cannot or does not draw them down. There is, of course, a treaty, and IRS promulgated various Rev. Proc.s to help out people like GB, who never filed US income tax returns until IRS audited him. The treaty and Rev. Proc.s let a Canadian elect to have his RRSPs taxed for US purposes at distribution.

Although Judge Ronald L. (“Ingenuity”) Buch doesn’t so state, the audit probably resulted from GB’s relinquishment and the Section 877A expatriation tax.

GB filed a bunch returns late. IRS says that’s insufficient as untimely, but Judge Buch reads Rev. Proc. 2014-55 to omit the requirement that the returns be timely, as its predecessors required. So GB’s belated returns are sufficient.

Next, GB claimed substantial compliance. He did substantially comply for two RRSPs, filing for every year he had them, but not for the last. The last goes back years before GB ever filed.

I’m not sure of my arithmetic, but it looks like GB’s US citizenship, of which he was unaware for fifty-six years, will cost him around $9 million in deficiency and add-ons.

USA is the land of the free, but citizenship sure isn’t.

Judge James S (“Big Jim”) Halpern is a stickler for the Rules, and I don’t fault that. But I wonder today that he might have been too quick to give an OSC to the trusty attorney for Alberto Delgado and Virginia Delgado, T.C. Sum. Op. 2023-8, filed 3/13/23, why he shouldn’t get the Section 6673 chop.

True, Alberto’s unreported income came from the same source as his reported income, so any Section 6201 claim about the 1099-MISC fails. Both Alberto and IRS got confused about what Alberto reported, $49K or zero, but at close of play the parties agree on $25K, apparently an employment discrimination recovery net of legal fees (this is pre-TCJA, so deductions for production of income are still on the table).

Alberto’s trusty attorney argues defective SNOD, but that fails. IRS complied with Section 7522(a): basis for deficiency, year, amount(s) of tax, interest, add-ons, and chops. Even if they didn’t comply, it’s good enough. Judge Big Jim says the concept of what it takes to notify a taxpayer of a deficiency is “evolving.” T. C. Sum. Op. 8, at p. 9. Judge Big Jim goes into the evolutionary process. I’m still confused.

Apparently there was some epistolary volleying between Alberto and IRS. Judge Big Jim finds Alberto’s (and maybe trusty attorney’s) reluctance to put this “intercourse” into the record shows nefarious intent. I’m not so sure, but I didn’t see the parties.

“Petitioners have no arguments on the merits to respondent’s adjustments resulting in a deficiency in income tax. Their grounds for this lawsuit are process related, and we have rejected all of those grounds. The course of respondent’s determination of a deficiency in petitioners’ … income tax is fairly clear. There is, however, one opaque chapter, i.e., petitioners’ intercourse with respondent in response to the May CP 2000 Notice. Petitioners have not volunteered that information, and they have objected to respondent’s attempts to inform us. Petitioners’ response to the May CP 2000 Notice may well have resolved the confusion resulting from the improbable statement both in the December CP 2000 Notice and in the Statutory Notice that petitioners had reported $49,062 on the … Return. Petitioners’ failure to be forthright and their lack of arguments on the merits lead us to suspect that perhaps they have little or no reason for bringing this lawsuit other than to delay collection of a tax rightfully owing.” T. C. Sum. Op. 8, at pp. 15-16.

Judge, I thought deficiency cases were de novo. What happened at exam is not even prologue. Greenberg’s Express sums it up. If Alberto’s (and trusty attorney’s) arguments are spider-web thin, they aren’t frivolous. And IRS didn’t exactly cover itself with glory here either. It takes two to have “intercourse;”  IRS could have put in the writings, if relevant.

So why the OSC  for the chop? Besides the lack of “intercourse”?

Unlike O. Henry’s 1903 short story that became the Broadway classic, the reformation here wasn’t the result of a judicial proceeding commenced within 90 (count ’em, 90) days after the due date of the estate tax return, so the attempted reformation of the Katz Trust, a subtrust of the late Susan R. Block’s own revocable trust, costs the late Susan’s estate the charitable deduction for the remainder of the Katz Trust. The case is Estate of Susan R. Block, Deceased, Julie B. Saffir and Peter A. Block, Executors, T. C. Memo. 2023-30, filed 3/13/23.

The late Susan, before she became the late Susan, wanted to provide for her sister and sister’s spouse, so she put $761K in the Katz Trust. Sister, and sister’s spouse if he survived sister, was to get the greater of all net income or $50K annually, remainder to a 501(c)(3). The co-trustees of the Katz Trust, who were also the late Susan’s co-ex’rs, had power to amend the Katz Trust to maintain compliance with Section 664(d)(1) and Rev. Proc. 2003-57.

And they did amend to reform, but only after IRS was auditing the estate tax return. And more than a year after the estate tax return was due. And they never started a judicial proceeding.

Problem: Section 2055(e)(2)(A) requires the income beneficiaries to get annual distributions of a fixed dollar amount or fixed percentage of net asset value, and Katz Trust did neither. Prior to enactment of Section 2055, settlors and income beneficiaries were playing games, by whacking up income distributions so as to shortchange charitable remainderguys after claiming big charitable deductions based upon cooked numbers. So whether the reformation might be made pursuant to State law (CT) is irrelevant.

Judge Elizabeth A. (“Tex”) Copeland finds substantial compliance doesn’t rescue the Katz Trust.

“Petitioners ask us to deem the Estate to have substantially complied with the exception. We decline to do so. As we have previously observed, Congress made clear that the rules for qualified reformations are to be construed strictly, in order to prevent abuse of the charitable deduction. Specifically, Congress was concerned that if the reformation regime were overly lenient, taxpayers would not reform trusts to comply with the split-interest rules unless and until the IRS discovered defects upon audit.” T. C. Memo. 2023-30, at p. 8. (Citation omitted).

I don’t mean to suggest that the ex’rs here, or their trusty attorney, were playing games, although this error was expensive.

I would suggest to my estate planning brethren and sistern that the kind of free-riding the statute means to prevent is a dangerous game. If you’re reforming a CRAT, make it a proper reformation.

No, this is not the story of a yuppie romance. It’s the apparently ongoing saga of Dennis Lee Simpson, Docket No. 17771-21, filed 3/10/21. Scarcely two weeks ago, I chronicled Dennis’ monumental requests for admissions; see my blogpost “Inadmissible Admissions,” 2/27/23.

Nowise daunted, Dennis now seeks “(A)ll and complete copies of IRS files and responses from the Jeff/Lori Hoyal IRS tax audit, the Crater Lake Trust IRS tax audit, and the Noel M. Parducci/Kenneth L. Parducci IRS tax audit.” Order, at p. 1.

Dennis is conjoined for briefing, trial, and opinion with the Hoyals, the Parduccis, and the Crater Lake Trust. So once again Judge Ronald L. (“Ingenuity”) Buch is called upon to exercise his considerable talent for devising ingenious solutions.

“Mr. Simpson’s request is facially overbroad, in that it has the potential to yield information that is wholly unrelated to the matters at issue in this proceeding. But his request also runs afoul of section 6103’s general prohibition on the disclosure of returns or return information by government employees. There are several exceptions to this general rule, and a limited exception is applicable here. Section 6103(h)(4) allows some disclosures in administrative or judicial proceedings. One such disclosure that is permitted is ‘if such return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding.’ To the extent Mr. Simpson’s request seeks information regarding transactions between and among parties to these cases, we will grant his motion.” Order, at p. 1.

IRS is down with this, and says it can have the stuff for Dennis by month’s end.

“We will enforce that deadline,” says Judge Buch.