I won’t go into the policy pros and cons of the captioned enactment, as that trespasses into the political no-go. Rather, I’ll address the statute as Judge Mark V. (“Vittorio Emanuele”) Holmes does in Jie Gao & Chengdu Wang, Docket No. 23405-21, filed 11/21/23.

It’s Jie’s story; Chengdu was salaried throughout year at issue. Jie was a computer wiz who had her own operation for part of 2018 (the year is significant), and part working for some kind of entity she created, which in the same year became part of a corporate chain with an offshore whale who was putting up cash.

The types of entities are unclear,so however they are taxed is unclear. Jie’s T&E deductions, ordinarily an IRS free-fire killing zone for the poorly documented, survive intact. Jie is obsessive-compulsive when it comes to recordkeeping. But a bunch lose, because they occurred either in 2017 (time-barred), or were done while Jie was part of the chain, thus paid to further the chain’s business, not Jie’s own operation. And Jie of course cannot claim unreimbursed employee business expense deduction for work done for the chain; Section 67(g) put paid to that for years ending after 12/31/17 until 1/1/26.

IRS’ Answer increased the deficiency, thus picking up BoP, on mortgage interest for a warehouse Jie bought to store stuff she was working on, and contract labor. Jie shows she paid all the contract labor while still on her own, so IRS fails on BoP. As for the warehouse, she paid it all, but part would be barred by Section 67(g).

As for the splits between Jie’s solo time and her chain time, that requires a Rule 155 beancount, to which Judge Holmes volunteers to lend his aid if the parties get stuck, and check their arithmetic. Also, Judge Holmes thinks there’s a Rev. Proc. that might help when converting Chinese yuan to $USD, but Taishoff suggests this handy-dandy item from LB&I might do the trick.

Then there’s the start-up vs. ordinary-and-necessary jumpball, but Jie wins that.  New businesses like Jie’s computerization need a lot of runway prior to takeoff, they are profit-motivated, and we don’t want to stifle the pioneers. Best of all, Jie did make a wee bit of cash. See my blogpost “Opening Day,” 6/14/22, for more.

Unhappily, the Genius Baristas posted this off-the-bencher in a PDF that doesn’t let me drag-and-drop Judge Holmes’ deathless prose. So y’all will need to deskew and process it all for your next memo of law.

Allen R. Davison and Sharon L. Davison, T. C. Memo. 2023-139, filed 11/20/23, can’t substantiate the NOL that they claim wipes out all their tax liabilities. Besides, they can’t fight about their flock contract deduction either, because they didn’t raise it at the CDP; I’m not sure if it’s to do with chickens or software.

And their claim for Section 6601(d)(1) restrictive interest treatment founders when their NOL claim goes down. Judge Elizabeth Crewson Paris explains: “In the case of an income tax deficiency that is later reduced by the carryback of an NOL, section 6601(d)(1) authorizes the Commissioner to collect deficiency interest from taxpayers such as petitioners whose deficiencies are eliminated by NOL carrybacks. Section 6601(d)(1), which codifies the principle… that a taxpayer is liable for interest on a deficiency until the deficiency is paid or otherwise abated, provides that a reduction in tax by reason of a carryback of an NOL does not affect the computation of statutory interest due for the period ending with the filing date for the taxable year in which the NOL arose.” T. C. Memo. 2023-139, at pp. 20-21. (Citations omitted).

Sharon wants innocent spousery, but fails. “The evidence showed that Mrs. Davison received income that gave rise to the deficiencies, was involved in the business activities, and meaningfully participated in the prior cases. The Court will not further address this issue.” T. C. Memo. 2023-139, at p. 13-14, footnote 16.

Is this the end of the Davisons’ twenty-year Tax Court safari? I did get two blogposts out of it, although I’m sure I missed more. See my blogposts “Maybe Not Over,” 4/3/19, and “What Kind of Tool Am I?” 5/14/20.

One might hardly believe that a barren waste of Australian scrubland could furnish forth such abundance of blogfodder, but the hush-hush Pine Ridge joint US-Australian defense installation has done just that. See my blogposts “A Town Like Alice,” 1/12/23, “Not Even His Hairdresser Knows For Sure – Part Deux,” 6/8/23, and “I’ve Heard That Song Before,” 10/30/23.

Seems like the Raytheon braintrusters while away their time on-station thinking up ways to avoid the Section 7122 closing agreements they signed, and parse obscure tax treaties, to try to get Section 911 foreign earned income credits, while Tax Court Judges employ scarce judicial resources to thwart them.

Today, we have Andrew P. Mattson & Lindsey J. Mattson, Docket No. 6501-20, filed 11/20/23. Judge Ronald L. (“Ingenuity”) Buch need expend little ingenuity.

If you’re intrigued by the history of US-Australian tax treaties, see Order, at pp. 4-5.

Judge Ingenuity Buch has this to say about the closing agreement.

“The Mattsons filed a Motion for Partial Summary Judgment on the validity of the Closing Agreement they entered into with the Commissioner. Most arguments the Mattsons raise have been directly addressed in one or more of several cases addressing nearly identical motions premised on nearly identical facts. See Smith. 159 T.C. 33, Henaire, T.C. Memo. 2023-131, and Baney v. United States, 2023 WL 6564028. For the same reasons enunciated in these other cases, we will deny the Mattsons’ motion.” Order, at p. 6.

Baney is a USCFC case, so I didn’t blog it, but if you must have it, here it is, sans Taishoff gloss; it’s much of a muchness. Henaire and Smith are covered in my above-cited blogposts.

I thought ex-Ch J Maurice B. (“Mighty Mo”) Foley put paid to stealth after his epic amendment to Rule 147(a) ditched The Stealth Subpoena. But today we have William A. DePietri & Beth Ann DePietri, Docket No. 7936-22, filed 11/17/23, and Estate of Kevin Giblin, Deceased, Catherine Giblin, Personal Representative, Docket No. 2182-22, of even date therewith.

Both are routine Rule 37(c) denials of IRS motion to deem admitted undenied allegations in the (amended) Answer. I blogged neither STJ Adam B. (“Sport”) Landy’s order permitting said amendment nor the order granting the joint motion to consolidate; pretty much run of the mill.

So I was going to pass on these two otherwise routine orders, until I read the last sentence in each: “Respondent is advised that in the future such motions should not bear more than one docket number and should not be filed in more than one case.”

Before I said “Huh?” I checked to make sure the cases had not been severed. Nothing on either docket to that effect.

Rule 141(a) was my next stop, but the Tax Court website still had the last sentence as it had always been. “Unless otherwise ordered, the caption of all documents subsequently filed in consolidated cases shall include all of the docket numbers arranged in chronological order, but may include only the name of the oldest case with an appropriate indication of other parties.”

I couldn’t find any otherwise order either.

Do we now have stealth severance or stealth amendments to the Rules?

Note I’m quick enough to jump on counsel when they seriously get it wrong, but I think here IRS’ counsel got an undeserved admonition.

And Stir That Boechler Silt

That’s Judge Goeke’s word to the notice partners in Island Shoals Henry 430, LLC, Island Shoals Investments, LLC, A Partner Other Than The Tax Matters Partner, et al., Docket No. 30074-21, filed 11/16/23. The notice partners (NPs) are claiming their FPAA notices were improperly addressed, as well as the TMP FPAA notice.

And of course the validity of the TMP FPAA is the key to the Tax Court door: if that is defective, then there’s nothing for the NPs to contest.

Involved here are extra names (correct name and address but additional names added) and the addresses of individual NP and indirect partner (also a NP). Judge Goeke, invoking the usual somber reasoning, etc., says IRS can use additional info like individual income tax returns to get correct addresses, and TMPs and NPs should let their mailroom people know how to deal with incoming IRS mail, especially when their office receives mail for several different entities.

This all goes off on BoP. If IRS has a correct Certified Mail Log, or can fill in enough blanks on a missing one, then the TMP FPAA was properly mailed, even if not received.

“USPS Form 3877 or CML that is incomplete or defective in some way does not create a rebuttable presumption. Where the presumption does not apply, respondent is subject to a burden of production without the presumption. USPS Form 3877 or CML with omissions or defects is probative of proper mailing and may be combined with additional evidence to meet respondent’s burden. Additional evidence can be evidence of the IRS’s mailing practices corroborated by direct testimony or documentary evidence that the FPAA was placed in the USPS’s custody. Thus, the IRS’s failure to comply precisely with established procedures may not be fatal if respondent presents evidence that is otherwise sufficient to prove mailing. Where the taxpayer has rebutted the presumption, we weigh the evidence and determine on the basis of the preponderance of the evidence whether respondent mailed the FPAA.” Order, at p. 10. (Citations omitted).

Another TEFRA legacy is notice partner addresses. Judge Goeke delivers the following homily for historians (or those cleaning up leftover messes).

“Section 6223(c) does not mandate use of the Schedule K-1 address when that subsection is read in its entirety. Petitioners cite only subsection (c)(1). Section 6223(c)(1) provides that respondent shall use the names, addresses, and profits interests shown on the partnership return ‘except as provided in paragraphs (2) and (3).’ Relevant for purposes of Mr. W’s notice partner FPAA, section 6223(c)(2) allows respondent to prescribe regulations for the use of additional information that the TMP or any other person furnishes to him. It states that respondent ‘shall use additional information’ that is furnished to him in accordance with the regulations.” Order, at pp. 18-19. (Name omitted).

Judge Goeke trudges through the Regs, finds most recent individual income tax return addresses satisfy same. Ditto for indirect partner (sole member of a pass-through which is a partner).

OK, so the TMP FPAAs were properly mailed. But does Tax Court have jurisdiction over NP FPAA beeves? NPs have the right to be heard that their NP FPAAs were improperly mailed when they get a SNOD for an affected item (that is, an individual item on their personal return that passes through from their partnership interest).  Here apparently no SNOD.

So Judge Goeke invites them to a show-and-tell.

“We will treat our conclusion that respondent actually and properly mailed the notice partner FPAAs to petitioners as a preliminary determination and invite the parties to brief the issue of whether the Court has jurisdiction in a partnership case to decide whether respondent mailed a notice partner FPAA. The parties should address whether our jurisdiction to do so should be affected by the fact that the Petitions were filed by notice partners and were untimely filed in the absence of equitable tolling. To clarify, we do not want the parties to address further any factual or legal issues relating to our preliminary determination that the notice partner FPAAs were actually and correctly mailed. We will not consider any further arguments on the issues relating to the notice partner FPAAs‘ mailing that we have already determined herein. The parties should also address petitioners’ argument that the section 6226(b) period for filing a petition in a partnership case is a nonjurisdictional deadline that is subject to equitable tolling where the circumstances of the untimely filing warrant it.” Order, at pp. 21-22. (Footnote omitted, but it says this preliminary determination is non-preclusive unless it turns out Judge Goeke did have jurisdiction so to find.)

Good old TEFRA. Cain’t hardly wait for the postal pushbacks post-BBA, when only representatives are in play.

Oh, the title? At the poker table, when there is a designated dealer, the normal rotation of dealer between each hand is shown by a circular token, called “the button” placed before the player who would be the dealer. That player is said to be “on the button.”

I’ve gotten lots of blogfodder from YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, Yorkville Advisors, GP LLC, Tax Matters Partner and YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, Yorkville Advisors, LLC, Tax Matters Partner, 161 T. C. 11, filed 11/15/23. But it looks like we’re nearing the end of the trail. And YA is on the button.

Of course, with Judge James S. (“Big Jim”) Halpern taking us on the trail, we have 133 (count ’em, 133) pages of somber reasoning and copious citation of precedent. But that’s not all; at the end of the opinion, Judge Big Jim promises us another opinion on the last of the four (count ’em, four) years at issue.

Briefly, can the activities of the TMP be attributed to YA? If so, was the TMP engaged in a trade or business in (or effectively connected with) the US of A, so as to rope YA into Section 1446 withholding requirements for its offshore partners?

Spoiler alert: the answers are yes.

YA had enough command and control to rope in TMP, who ran its onshore investments, as its agent. YA was a hedgefund, and TMP did its finding, buying and selling, enough to rope YA into the mark-to-market regime of Section 475(a)(2).

YA claims TMP was a service provider. OK, merely acting for the benefit of an offshore doesn’t bring the offshore onshore. But a service provider gets instructions at inception, and is not under day-to-day control. And though a POA from YA to TMP, stated to be irrevocable and coupled with an interest, could be a security device that doesn’t create a true agency, here there is no identifiable interest that the POA protects.

TMP was buying stock in start-ups and special situations as a hedgefund does, and Judge Big Jim tells us how these deals are done, 161 T. C. 11, at pp. 14-19. And the deals TMP made weren’t options, 161 T. C. 11, at pp. 33-35.

TMP was doing more than just investing and making a profit from investments, It was seeking deals, structuring deals, and providing services to the target companies. And TMP was doing this on a regular, continuous, for-profit basis.

The Reg. Section 1.864-2(c)(2)(i)(c) safe harbor for traders and investors is unavailable to YA, because its agent TMP did more than that.

YA, via TMP, was a dealer in securities, because it bought the stock or other securities of the target companies, who were its customers.

YA, via TMP, had to mark its records to show that a security was purchased for investment when acquired, specifically citing Section 475, to avoid mark-to-market, lest YA get a free ride to decide at year-end whether to mark-to-market or not.

Section 1446 withholding for offshores extends to all YA’s income, as its source is its onshore operations. The withholding obligation may well exceed the offshore partner’s actual liability, but that’s the breaks, and doesn’t result in an overpayment of tax. Deductions from income tax have no bearing on liability for withholding.

SOL founders on failure by YA to file Form 8804 with its 1065s. IRS needs the information from the unfiled Forms 8804 that it couldn’t get from the 1065s.

Finally, if you’re going to rely on expert advice for a reasonable cause defense, make sure you can prove you reasonably relied (had no adverse knowledge) before you sue your expert when their advice proves wrong. Watch the testimony of YA’s experts on the trial (after the lawsuit); don’t be surprised if you get the same in like circumstances. And that there is much uncertainty and no clear guidance from IRS is no excuse when you rely on experts.

YA loses.

It’s a variant on my old mantra “Stipulate, Don’t Capitulate.” When entering into a stipulated decision, be aware that anything written below the judge’s signature, though not a judicial decision, nevertheless is an agreement between the parties, in fact a stipulation, and will be enforced.

Just ask Don L. Rockafellor and Kathleen M. Rockafellor, T. C. Memo. 2023-137, filed 11/14/23, and ask Judge Travis A. (“Tag”) Greaves. There’s a lot about issue preclusion and leg-before-wicket petitioning (petition before NOD), but I want to focus on the stipulated decision Don and IRS entered into back in 2018.

That covered, among other things, a Section 6694(b) preparer chop against Don. IRS dropped the chop for want of Section 6751(b) Boss Hossery. But attached to said decision was a “below the line” (where the judge signed) agreement that  “stated that the preparer penalty was abated for lack of compliance with section 6751(b) but stated it was ‘without prejudice to respondent’s right to reassess the civil penalty under I.R.C. § 6694(b) for the [year at issue] pursuant to the procedures prescribed in the Internal Revenue Code, to the extent permitted by law.’” T. C. Memo. 2023-137, at pp. 14-15.

Don argues SOL on the chop, but a Section 6694(b) chop can be assessed “at any time.”

And a below-the-liner, although not a finding by the Court and not preclusive, is enforceable in accordance with its terms and the law.

For more about these landmines, see my blogpost “Three Point Play,” 10/25/21.

Judge Elizabeth A. (“Tex”) Copeland has issued a corrected opinion in Estate of James E. Caan, Deceased, Jacaan Administrative Trust, Scott Caan, Trustee, Special Administrator, 161 T. C. 6, filed 11/14/23, replacing the 10/18/23 opinion under same caption.

For the backstory, see my blogpost “The Wrong Corleone,” 10/18/23.

However, Judge Tex Copeland has not marked or identified the corrections made, and the Genius Baristas have obliterated the earlier version of this opinion, so I am unable to enlighten you as to exactly what has changed. However, the Estate still loses for the same reasons (so far as I can tell): rollover not of same property (partnership interest redeemed for cash, and cash deposited), and made in tranches far beyond the 60-day cutoff.

I’ve so often sung the praises of motions for summary judgment, both partial and full-dress, that I was loath to risk the patience of my readers, few but mighty, with another encomium. But Judge Albert G (“Scholar Al”) Lauber has given me a fresh example.

In Long Leaf Property Holdings, LLC, Long Leaf Manager, LLC, Tax Matters Partner, Petitioner, James Shaw & Tyson Rhame, Intervenors, Docket No. 11982-16, filed 11/13/23, there were cross-motions for partial summary J. See my blogpost “Line Up and Wait,” 8/31/22, for the backstory. IRS had its motion tossed, but the Intervenors’ cross-motion was held in abeyance.

This is Dixieland Boondockery, so maybe it’s time for trial-by-valuation.

Except.

“…the parties informed the Court that they had reached a settlement. We therefore canceled the trial of this case…vacated all pending deadlines under any orders of this Court, and directed the parties to submit decision documents or file a stipulation consenting to entry of decision…. We will thus deny as moot intervenors’ Motion for Partial Summary Judgment.” Order, at p. 1.

Motions for summary J can remind litigants of Dr. Samuel Johnson’s prisoner under death sentence: “Depend upon it, sir, when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully.”

Motions for summary J can concentrate your mind and your adversary’s wonderfully. Maybe even to a mutually acceptable result.

I mean Rule 25(a)(5), defining legal holidays. Rule 10(d) is also in play in a secondary role. The City Without a Vote, State Without a Number, has decided that today, 10 Nov 2023, shall be observed as Veterans’ Day.

Hence Tax Court is closed: no orders or opinions, not even a Press Release.

Apparently no successor to STJ Jennifer E. (“Publius”) Siegel has been found for the post of Public Affairs, as a month-old announcement is the latest thing on the website, and no update for the next similar event has yet been posted. If the government is shut down, will Tax Court function?

Whatever, I’ll march tomorrow, with my American Legion Post. If you’re on Fifth Avenue tomorrow morning, drop by and say “hello.”

Trust Judge Mark V. (“Vittorio Emanuele”) Holmes, however casual his grammar, to make complex matters simple. I’ve blogged my way through many a Section 6404(h) abate-debate, but none that I can remember cuts to the chase as fast as Shehzad A. Latif, Docket No. 6271-22S, filed 11/9/23, an off-the-bencher.

Simple facts. Shehzad had a 401(k) he tried to roll custodian-to-custodian when he changed jobs, but the roll missed stays and ran aground. Shehzad had to take the distribution, tried to work with IRS, but got hit for the tax and interest despite his admittedly good-faith efforts.

IRS doesn’t seek chops, apparently because of said good-faith, but tax and interest must be paid. Shehzad is fighting interest.

“These cases are a relatively small part of the Tax Court’s docket, and we still haven’t quite figured out some of the underlying ways that we should analyze these. The standard of review in these cases is clearly abuse of discretion. It says so in the statute.” Transcript, at p. 4.

Judge Holmes actually tried this one, rather than do the usual administrative record page-flip, but in the end, mox nix.

The two delay-of-the-game moves, invoking interest abatement by IRS, are managerial acts and ministerial acts. Managerials are losing the file or making personnel assignments (too many cooks or too few, or swapping personnel around). Ministerials are the mechanicals after all discretionary steps have been taken.

“A decision concerning the proper application of Federal tax law , or other Federal or state law is not a ministerial act.” This last sentence of Reg. Section 301.6404-2(b)(2), says Judge Holmes, “…applies to both definitions of managerial and ministerial acts.” Transcript, at p. 6.

Shehzad doesn’t claim IRS lost the file, bobbled the personnel assignments, or didn’t push the completed papers fast enough. He argues the blown rollover.

“…this would be a great argument for defending himself against the penalty, and evidently the IRS thought so because it didn’t determine any penalty in the end. But interest is all about the time value of the money owed. That’s why the IRS has to routinely pay interest on refunds, but also why taxpayers, why Mr. Latif, who delayed a bit in paying the extra tax they owed, have to pay interest on what they owe.” Transcript, at pp. 6-7.