Obviously you are reading my blog, dear reader, so this blogpost clearly is not meant for you. But Judge Patrick J (“Scholar Pat”) Urda, to whom I most respectfully extend the above-captioned invitation, might wish to do so.

George Luniw, T. C. Memo. 2023-49, filed 4/18/23, escapes the Section 6673 frivolity chop despite his all-zeros returns for the two (count ’em, two) years at issue. True, George’s three (count ’em, three) previous trips to Tax Court never resulted in a full-dress T. C., or a T. C. Memo.,  or even a humble Sum. Op.

But back in November, 2019, CSTJ Lewis (“The Name”) Carluzzo handed George a couple 6702 frivolous return chops (hi, Judge Holmes) in an off-the-bencher. See my blogpost “IRS Goes Two For Three,” 11/20/19.

But Judge Scholar Pat is technically correct. Off-the-benchers aren’t precedent and can’t be cited.  “We have not found that Mr. Luniw has made these or similar frivolous claims in previous cases. We thus will choose not to impose this penalty at this time. We caution Mr.  Luniw, however, that he risks penalties under section 6673 if he presses these or similar arguments in the future.” T. C. Memo. 2023-49, at p. 7.

Next time maybe George is not so lucky.

This greeting from the old wildcatters echoes in North Donald LA Property, LLC, North Donald LA Investors, LLC, Tax Matters Partner, T.C. Memo. 2023-50, filed 4/18/23. Of course, you’ve sussed out by now that this is more Dixieland Boondockery, LA land bought for $2975 per acre in March and syndicated for a conservation easement charitable deduction of $471,000 per acre in December of the next year.

IRS wants Boss Hoss partial summary J, and Judge Albert G (“Scholar Al”) Lauber gives IRS that much. IRS’ paperwork is perfect. But the perpetuity attack falters. The former owners the Donald family, first reserved to mine for clay, but quitclaimed that away. Mineral reservations are a no-no “‘if at any time there may be extraction or removal of minerals by any surface mining method.’ Section 170(h)(6)  provides that “the term ‘qualified mineral interest’ means . . subsurface oil, gas, or other minerals, and . . . the right to access to such minerals.” T. C. Memo. 2023-50, at p. 7.

IRS claims the Donalds reserved the right to mine for subsurface clay, but the Donalds say no, they quitclaimed that away. Judge Scholar Al finds the quitclaim deed is ambiguous (surprise, surprise!), so no summary J on perpetuity.

“…any subsurface minerals to which the Donald family reserved rights ‘may be withdrawn or extracted . . . only by means of unitization through unit wells located on other lands or by directional drilling beneath the surface of the [tract] by means of wells located on other lands.’” T. C. Memo. 2023-50, at p. 9. “Unitization” means consolidating oil and gas on lands in different ownership, not solid minerals.

Unitization is done by agreement. But the headline first set forth at the head hereof refers to the old-time practice of acquiring land with no oil under it but abutting land that does, and drilling on the slant (deviating) to steal said oil. My Texan connections tell me that said phrase had better be accompanied by a smile, or the consequences may be dire.

So there must be a trial. See ya later, deviator!

I well understand sympathetic petitioners getting a bye in an off-the-bencher, when IRS’ counsel doesn’t offer to drop the Section 6662 five-and-ten chops. Judge Ronald L. (“Ingenuity”) Buch does stretch matters a wee bit in Lucell Trammer, III & Sharonda M. Trammer, Docket No. 6615-22, filed 4/18/23.

Their tax situation is complicated. Lu is an IT consultant, who is employed but also freelances and works through a referral service. So he has W-2, 1099, and direct payment from his own customers. Sharonda is a traveling social worker for the State.

“The Trammers filed tax returns for 2019 and 2020, reporting their income and myriad personal and business expenses. To prepare those returns, they took their receipts to a return preparer who decided how and where to report items on the Trammers’ returns. Some of the personal expenses, such as home mortgage interest were reported in multiple places and double or triple counted. Many personal expenses, such as home maintenance and improvement, were reported as business expenses. Indirect business expenses were reported as direct business expenses.” Transcript, at pp. 4-5.

IRS disallowed the whole shebang. “At trial, the Trammers offered testimony and documents to support many of their expenses, but their evidence generally failed to establish either the amount of a particular expense or its deductibility. But they clearly established that the errors were those of their return preparer on whom they relied.” Transcript, at p. 5.

OK, the disallowance sticks. But Lu & Sharonda are clearly in five-and-ten trouble (Section 6662(d)(1) says substantial understatement is greater of 10% of understated tax or $5K), as they deducted $50K and only get the standard.

Judge Buch: “The Trammers relied on a return preparer to whom they had been referred. They supplied the return preparer with necessary and accurate information each year, and the return preparer decided what to do with that information.  The Trammers reasonably relied in good faith on their return preparer’s judgment. Accordingly, the section 6662 accuracy-related penalty does not apply for the years in issue.” Transcript, at p. 15.

We’re not told what qualifications this bespoke preparer had, if any. We don’t know Lu’s or Sharonda’s level of tax sophistication, if any. But what level of sophistication is required to question the same item deducted two or three times?

Lest I be misunderstood, I’m not beating up on Lu & Sharonda, much less on Judge Buch. The petitioners may well deserve a bye, and Judge Buch saw them and heard the whole story. I did not.

But preparers of the kind herein described are another story.

It might be interesting to know if IRS paid a visit to said bespoke preparer and went through some of the other returns they prepared.

Notwithstanding the late Justice Antonin Scalia’s dismissive characterization of Tax Court as the equivalent of a village traffic court at a long-ago Tax Court Judicial Forum, Taishoff says it’s a real court. That too many self-represented petitioners seem to agree with the late Justice is nothing to the point. Today we have two (count ’em, two) instances.

First, Ronald Powell and Cynthia Powell, T. C. Memo. 2023-48, filed 4/17/23. Appeals generously accepts their late-filed return and drops the deficiency from the SFR. Even more generously, Appeals offers two (count ’em, two) IAs, both well within Ron’s and Cynthia’s ability to pay per their belated 433-A, adjusted to the local standards for mortgage payment and car loans. Ron and Cynthia do nothing until they get the NOD, when they claim Appeals erroneously computed their RCP, but provide no backup.

“Petitioners assert that they sent the SO additional financial information, which allegedly would have supported a deviation from national and local standards, and they speculate that these documents were lost in the mail. Petitioners do not claim that they sent the documents by certified or registered mail, and they have supplied no affidavit or exhibit supporting their allegation. The taxpayer generally bears the risk of nondelivery when a tax return or other document is not sent by registered or certified mail.” T. C. Memo. 2023-48, at p. 7. (Citation omitted).

Do not try this with Judge Albert G (“Scholar Al”) Lauber (or any other Tax Court Judge or STJ).

Second, John J. Evan and Carissa R. Clark, T. C. Sum. Op. 2023-15, filed 4/17/23. John and Carissa claim the software made them do it, claim a Section 53 excess prior years’ AMT. Except IRS transcripts show whatever AMT John and Carissa paid in prior years was more than accounted for by what Section 53 credits John and Carissa claimed.

“Petitioner testified at trial that [his tax software] automatically generated his Form 8801 and that he had relied on the software to calculate the amount of tax credit to claim. Petitioner indicated that he had been unable to retrieve tax return documents for prior tax years from either [tax software company] and/or the IRS.” T. C. Sum., Op. 2023-15, at p. 4.

Petitioners have burden of proof, generally.

STJ Peter Panuthos: “Petitioners bear the burden of proving that the AMT was imposed and that they are entitled to the claimed credits. See Rule 142(a). From the record before us, we are unable to conclude that there is prior year minimum tax credit carryforward from which petitioners could claim a credit for the year in issue. Petitioners have failed to demonstrate their entitlement to the prior year minimum tax credit for the year in issue.” T. C. Sum. Op. 2023-15, at p. 5.

It’s a real Court, with real rules, and real trials. And real judges.

This was a hot topic years ago among us Excelsior State courtiers: could one rescue a late filing on the basis that the party’s attorney missed the cutoff? Turned out that, barring prejudice to the diligent, most of the time law office failure was an adequate excuse.

STJ Adam B (“Sport”)  Landy has recourse to that calculation in Thornell Johnson, Docket No. 17082-22SL, filed 4/14/23. Back in January, Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan told IRS to man-‘splain why they should be allowed to file a late answer to Thornell’s petition to toss his various preparer penalties. IRS was late by two (count ’em, two) days after Thornell’s motion to dismiss and for summary judgment.

I told the story in my blogpost “All Those Old Familiar Faces – One Mo’ Time,” 1/31/23, which includes Thornell’s appearance here ten years ago.

STJ Sport Landy: “Although the Commissioner filed the Motion for Leave and lodged his Answer two days late, Mr. Johnson has not shown that the delay has caused him to be at a disadvantage or any form of prejudice. This Court has the discretion in the interest of justice to allow pleadings to be filed out of time, and the Court will allow the Commissioner to file his Answer out of time in this case.” Order, at p. 2. (Citations omitted, but check out Rule 25(b)(1)(B)).

As for summary J, giving nonmovant IRS the benefit of the doubt and scoping out Thornell’s averments, questions of fact remain as to all issues raised in his papers.

Taishoff says: But given that there is no limit to the number of motions for summary J (complete or partial) subject only to the Rule 121(b) temporal cutoffs, petitioners might do well to consider IRS’ tactic du jour and make motions for partial summary J, being careful to avoid the shoals of Rule 121(i).

2021 was the year of the Great Petition Tsunami. I thought the highwater mark was reached at Docket No. 35423-21 (see my blogpost thus entitled, 1/3/22), but I was wrong, as the hardlaboring intake clerks and flailing date stampers were laboring and flailing well into the new year with the overburden.

But imagine my astonishment as I discover a remaining trickle generated by Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan, as she crafts another docket number for 2021, 468 (count ’em, 468) days after the calendar year 2021 had ended.

Keith M. Phillips, Docket No. 5854-21P, filed 4/13/23, is fighting about a seriously delinquent tax debt that locks up his passport per Section 7345. But Keith threw into the mix a SNOD, so his petition was one-size-fits-both, which offends Ch J TBS’ sense of order.

So Keith gets a new Docket for the SNOD, and keeps the old for the passport. Since his petition was filed in the 2021 tsunami, he gets the 21 suffix for the SNOD, as docket No. 37955-21 takes the lead as last of the tsunami.

Best of all, no filing fee for the new docket.

Will the adventure continue? Watch this space.

Judge Mark V Holmes explores another variety of ambiguity in Edwin L. Gage and Elaine R. Gage, T. C. Memo. 2023-47, filed 4/12/23. Ed and Elaine were personally liable to HUD under a regulatory agreement executed in connection with an HUD insured mortgage on their nursing home, when said mortgage went south. IRS claimed the liability, $4 million, was punitive damages, therefore not deductible per Section 162(f). So when Ed and Elaine settled for $875K and tried to deduct the payment, did they incur the Section 6662 substantial understatement of tax chop?

The Gages did buy an official bank check for the $875K in December and give it to their trusty attorney to give to the AUSA. But the AUSA couldn’t take the check until the settlement papers were approved, and that wasn’t until the following March.

“The record we have shows the Gages are competent, skilled business people able to organize and operate two different corporations, but that they are not learned in tax law. We do find it more likely than not that they delivered the check to their attorney with the intent of fulfilling the terms of the settlement agreement. From their perspective they were out the $875,000 when they bought the check and gave it to their lawyer. We think their reporting position on the timing issue was reasonable under the circumstances, and that they acted in good faith in thinking they’d made the payment in [December].” T. C. Memo. 2023-47, at p. 9.

But that’s not enough. If the $875K is for retributive damages, not compensatory, mox nix when it was paid. So what was the payment for? IRS claims DOJ sued the Gages for equity skimming from the project insured by HUD, , in violation of the regulatory agreement, per the National Housing Act, 12 U.S.C. §§ 1701–1750, and section 421 of the Housing and Community Development Act of 1987, 12 U.S.C. § 1715z-4a.

That enactment allows for “double damages, costs, and fees for breach of a regulatory agreement with HUD. The United States also sought in its complaint recovery under federal common-law theories of unjust enrichment, fraud, disgorgement of profits, recoupment, and restitution.” T. C. Memo. 2023-47, at pp. 10-11.

1 Cir and 2 Cir have slightly different takes on what the statutes are trying to do. 2 Cir says the statute is a deterrent, smacking the bad guys hard. 1 Cir says DOJ can ask for doubles, but USDC decides, and then only for repeated or substantial default.

Judge Holmes is a lawyer’s lawyer. If he can’t find an ambiguity, no one can.

“We conclude from this that the double-damages provision under which the government sued the Gages may serve both to compensate the government and to punish. We also conclude that is not clear from the text of the statute or the caselaw construing it which purpose was present in the Gage’s settlement.” T. C. Memo. 2023-47, at p. 12.

The settlement agreement provides no clues. It just specifies that payment releases the Gages from civil or criminal liability, and expressly excludes any tax characterization. This case went up on Rule 122, fully submitted, so no testimony as to intent or evidence of “intercourse” between DOJ and Gages’ trusty attorneys.

And the settlement was less than HUD’s actual damages. So the Gages were justified in thinking the payment was compensatory.

The Gages did lose the timing issue. Until the USA got the check, the amount of the settlement wasn’t paid. So payment took place in March, not December. Federal law, not State law, decides that; the need for national uniformity trumps any State interest.

So that saves Judge Holmes from having to decide whether the payment was in fact deductible per Section 162. The Gages might think in good faith that the payment was compensatory and not punitive, but thinking doesn’t make it so.

For background, see my blogposts “Why The Chop?” 3/13/23, and “Why The Chop? – Part Deux,” 3/16/23.

Late last night, 4/11/23, I received the following unsigned text message: “Good evening. I am reaching out with respect to the Delgado case and Judge Halpern’s show cause order re:  6637 penalty. In response to your question, no warning re: imposition of the penalty was given by the court, or penalty sought by Chief Counsel.”

I expect my correspondent meant “6673 penalty.” Indeed, Judge Halpern’s OSC (to which a docket search shows Petitioners’ reply was filed yesterday, 4/11/23) refers specifically to Section 6673(a), the general frivolity delay-of-game penalty. I had thought that Rule 33(b) was implicated, but Judge Halpern did not refer to that Rule.

True, no warning is mandated either by statute or reg, but rarely has the chop been administered under either provision without at least an off-the-bench oral warning. Only in cases of well-documented egregious conduct can I recollect an OSC prelude to an immediate chop. I can’t find a more recent example from Judge Halpern than that set forth in my blogpost “A Further Cautionary Tale,” 4/28/14, nine years ago, when he invoked both Section 6673 and Rule 33(b). In that case, the documented misdoings of attorney Mac were well over the mark.

The Dixieland Boondockery epidemic bids fair to eclipse Son-of-Boss and Boss Hossery mass trials of the past. Today Judge David Gustafson is confronted with 50 (count ’em, 50) conservation easement cases, and the valiant attempts of counsel for both sides to try to corral the stampede, in Garden Lakes Estates, LLC, Garden Lakes Estates Holdings, LLC, Tax Matters Partner, Docket No. 3052-21, filed 4/11/23.

“…the parties filed a joint motion for continuance, in which they gave a helpful description of a group of 50 conservation easement cases related to this one and of counsel’s collaboration in recommending an orderly and economical approach to resolving the cases. We appreciate counsel’s work on these cases, and we agree in principle with the proposition that the economies of the parties and the Court would be served by identifying a small number of ‘exemplar’ cases, scheduling them for trial, and receiving in the non-exemplar cases stipulations to be bound by the outcome in an exemplar.” Order, at p. 1.

Maybe this isn’t quite as bad as the asbestos and other mass tort litigations, but clearly 50 trials are a wee bit much. Nevertheless, corraling the stampede requires more than one experienced cowpoke.

“Counsel understand that a single judge who is assigned to an essentially random sample from among the 50 cases (while other cases are assigned to another judge and others are still in the General Docket under the immediate responsibility of the Chief Judge) is not in a position to adopt the parties’ recommendations and assign judges. But their making their proposal in a single case does provide an occasion for one judge to learn more and perhaps to become able to make a recommendation to Court as a whole.” Order, at p. 1.

So Judge Gustafson propounds some seven (count ’em, seven) headings, which counsel should use to direct case management in a status report. Maybe the parties can draw a chart to show issues and features that align or diverge among the cases.

Clearly, this will provide blogfodder well into my twilight years.

Judge Pugh is not describing her yachting holiday where the Trade Winds blow and the Anegada Passage beckons. Rather, this is the story of David W. Tice, 160 T. C. 8, filed 4/10/23, who runs aground among the shoal waters of Section 932, as Congress both dredges and silts the filing requirements for USVI residents who are, or are not, bona fide residents of Our Insolvent Islands in the Sun at the magic date or dates. If bona fide, their filing with VIBIR starts 3SOL for VI and USA; if not, they need to double-file, if have both USVI-connected and US-connected income, at least for years at issue.

Dave is non-bona fide, but claims the cover-over regime adopted for years long post-years-at-issue should apply retroactively to the two (count ’em, two) years at issue.

Judge Pugh trudges through the convoluted history of Tax Court’s Laocöon-like struggles with Section 932(a) and its regulations (or non-regulations). I’ve blogged all this stuff for the last twelve (count ’em, twelve) years, starting with Appleton (“Statute of Limitations – Maybe Not,” 12/28/10), Cooper (“A Virgin State of Mind,” 4/8/15), Sanders, (“How to Be a Virgin,” 7/5/18), and Hulett (“Another Non-Virgin,” 1/30/18).  And I’m not even counting la famille Vento.

If by now your head isn’t spinning enough, Dave argues that the regulation that would save him if made retroactive violates both the APA and the Fifth Amendment.

“And were we to find Treasury’s election parameters arbitrary and capricious, the consequence would be to’hold [that part of the regulation] unlawful and set [it] aside,’ 5 U.S.C. § 706(2), not make it applicable for the years in issue. Although petitioner contends that the consequence of the regulation’s invalidity is that “the[r]egulation applies to [p]etitioner’s taxable years 2002 and 2003, thus making the  [n]otice of [d]eficiency untimely,’ petitioner does not explain how invalidating a regulation not applicable for the years in issue could make it applicable for the years in issue. Nor could we identify any legal basis for in effect rewriting a regulation in this way.” 160 T. C. 8, at p. 12.

Dave loses.

If you’re cruising the Virgins and have income, jump overboard.