Few fields so narrow and technical as the Section 41 Qualified Research Expenses (QRE) have generated so much blogfodder. Today it’s Ramesh C. Kapur and Chandra Kapur, T. C. Memo. 2024-28, filed 3/12/24, fighting over a $186K deficiency and $7K of chops for four (count ’em, four) separate years.

All Judge Cary Douglas Pugh has for today is whether to limit discovery to the two biggest items of a random sample of the 2K -3K projects Ramesh’s Sub S and its couple hundred employees worked on (hi, Judge Holmes), or whether to allow IRS to grill 16 of Ramesh’s employees and go through the whole frame. The employees’ wages are the subject of the deficiency.

It comes down to the third leg in the Section 41 table, the “business component” of the claimed additional research. “We note that entitlement to research credits is based on evaluation of each ‘business component.’ § 41(d)(2)(A); Treas. Reg. § 1.41-4(b). A ‘business component’ generally is defined as a product or process that the taxpayer either holds for sale, lease, or license or uses in its trade or business. § 41(d)(2)(B).” T. C. Memo. 2024-28, at p. 2, footnote 3.

IRS says they can’t evaluate the random sample without knowing what business components the research generated, and Judge Pugh buys that.

Now sampling is a generally-applied method when many projects are involved, and a review of every one of them would cost disproportionate time and  money. While this is an unusual case, in that the parties can’t even agree to use a sample at all, here “…petitioners have not given respondent, or us, enough information about all of the projects to determine whether a sample of two to four projects would be a representative sample.” T. C. Memo. 2024-28, at p. 5.

Ramesh claims the two biggest of the sample projects amount to 72% of all the QRE, but that’s not good enough for Judge Pugh.

“Evaluating compliance with section 41 necessarily involves consideration of the underlying business components. And petitioners agree that they have the burden of showing entitlement to the claimed research credits. See Feigh, 152 T.C. at 270. As we have said previously, ‘[a]bsent an agreement between the parties, project sampling improperly relieves the taxpayer of its burden of proving entitlement to the research credit claimed.’” Betz v. Commissioner, T.C. Memo. 2023-84, at *77 n.30 (citing Bayer, 850 F. Supp. 2d at 538, 545–46).” T. C. Memo. 2024-28, at p. 5.

For Feigh, see my blogpost “The Golden Gophers vs Scholar John – Part Deux,” 5/15/19; for Betz, a/k/a Lincoln, see my blogpost “Uncertainty, Investigation, Experimentation,” 7/6/23.

Of course, there’s always a Plan B, and Judge Pugh has got it.

“to the extent that petitioners believe that the expense is disproportionate they can limit their claim to research credits for QREs relating to the two projects they represent should be the sample. But if they claim more research credits, they must be prepared to substantiate QREs. And nothing bars petitioners from identifying information regarding business components in the sampling frame that then might allow respondent to agree to a representative sample.” T. C. Memo. 2024=28, at p. 6.

So while y’all are sorting out the sample, chaps, file some status reports.

George Thompson’s million-selling 1913 comic monologue reappears as Judge Elizabeth A. (“Tex’) Copeland provides Patricia S. Chappell,  T. C.  Sum. Op. 2024-2, filed 3/11/24, with a Cohan approximation for the cellphone use, equipment,  and “service charges” for the cellphones she and her son used in her tax prep business.

Used to be that cellphones required strict substantiation, like automobiles, but not any more since 2009. Judge Tex Copeland allows more of what Patricia paid during tax season (January through May), and part of what she paid for her son’s phone, despite a written IC agreement with son that he would pay all his own expenses. “…it is not unusual to provide cell phones to independent contractors in order for them to speak to the business’ owner and its clients.: T. C. Sum. Op. 2024-2, at p. 7, footnote 5. That lets the owner avoid call waiting while IC talks to friends on personal phone. And buying the phones invokes Section 179 expensing, even if not claimed as such.

Patricia’s vehicle expense substantiation is truly substandard, but she can show business travel from home office to satellite office, and other trips, so she gets the standard mileage for the business miles her testimony proves, based on what her cellphone software pulls via GPS.

See my blogpost “Pilot Saved by GPS,” 11/14/18, for a similar story.

And Innocent Spousery Loses

Judge Ronald L. (“Ingenuity”) Buch says Congress meant pore l’il ol’ Tax Court to be limited when innocent spousery is on the table. Paul Andrew Frutiger, 162 T. C. 5, filed 3/11/24, wants innocent spousery. He and spouse got separate NODs; she petitioned hers timely, he was two (count ’em, two) days late.

Paul gets fire support from The Center for Taxpayers Rights, but that doesn’t help. While the veterans’ benefit cases the amicus cite do show Congress cared about giving veterans a break (mirabile dictù), there are several deadlines in 42 U.S.C. § 1395oo(a)(3), and Congress wasn’t talking jurisdiction to Judge Ingenuity Buch’s satisfaction anywhere.

But Section 6015(e)(1)(A) is a specific grant of jurisdiction to Tax Court.

“It provides that a ‘[taxpayer] may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief . . . if such petition is filed . . . not later than the close of the 90th day after the date described in clause (i)(I).’ I.R.C. § 6015(e)(1)(A) (emphasis added). Section 6015(e)(1)(A) expressly provides ‘jurisdiction’ with respect to the Tax Court’s power to hear innocent spouse cases. And while this alone is not enough, see Boechler, P.C. v. Commissioner, 142 S. Ct. 1493, there is a clear link between the parenthetical that contains the jurisdictional text and the 90-day filing deadline; the filing deadline reads as a prerequisite to the Tax Court’s jurisdiction.” 162 T. C. 5, at p. 7. (Emphasis by the Court).

And though parentheticals are afterthoughts or asides, the parenthetical in Section 6015(e)(1)(A) is the real deal.

“In this instance, we do not place any interpretive weight of Congress’s placing the jurisdictional grant in a parenthetical. In Boechler, the Supreme Court noted that a parenthetical ‘is typically used to convey an ‘aside’ or ‘afterthought.’” Boechler, P.C. v. Commissioner, 142 S. Ct. at 1498 (citing Bryan A. Garner, Modern English Usage 1020 (4th ed. 2016)). But in the immediately subsequent paragraph, the Supreme Court cited the parenthetical of section 6015(e)(1)(A) for its relative clarity. Boechler, P.C. v. Commissioner, 142 S. Ct. at 1498–99. 162 T. C. 5, at p. 8, footnote 3.

Yeah, maybe it is dicta, but lower courts don’t blow off the Supremes’ dicta, because it might just could maybe so let the peasants know what their High Mightinesses are thinking.

Yes, innocent spouses are often the victims of abuse, and Congress wants to protect them.

“But just because section 6015 was enacted under taxpayer-favorable legislation does not mean that Congress intended for the filing deadline of section 6015(e)(1)(A) to be nonjurisdictional. As we have stated, section 6015 contains both equitable and nonequitable components. It being enacted under taxpayer-favorable legislation does not make every part of it equitable. Concluding that the filing deadline of section 6015(e)(1)(A) is nonjurisdictional because it was enacted under RRA Title III would require us to go against the clear statutory text and make statutory context the deciding factor. We decline to do so. ” 162 T. C. 5, at p. 11.

RRA was the IRS Restructuring and Reform Act of 1998, the wonderful enactment that gave us the judicially-hobbled Section 6751(b) Boss Hoss. Taishoff says Congress giveth and the courts taketh away.

A brief docket search looks like Paul is Golsenized to 9 Cir, no immoderate pals of the “small court.” Maybe an appeal is coming from the amicus. I’ve reached out to Mandi L. Matlock, Esq., Paul’s trusty attorney, for comment, and to receive a Taishoff “Good Try.”

Judge Albert G. (“Scholar Al”) Lauber comes to the aid of a defunct building contractor, whose trusty attorney, a Jersey Boys alumnus, has to bail in a fee dispute with the client’s principal, after another Tax Court Judge blew off one IRS attempt at summary J.

IRS is still on shaky ground, as Judge Scholar Al treats IRS’ motion for summary J 2 as contested by petitioner, even though “(U)naided by counsel, petitioner did not respond to the Second Motion by our … deadline. However, because respondent’s two Motions are substantially identical, we will treat petitioner’s Objection to the First Motion as responsive to both.” Order, at p. 3.

The issue is unpaid self-reported FICA/FUTA/ITW, which the SO at Appeals refused to let petitioner contest, because self-reported. IRS admits the SO was wrong, and Judge Scholar Al has citations to prove it. A petitioner can contest self-reporteds at Appeals.

Petitioner claims CNC because its only assets are claims against a general contractor who owes it money and is also defunct, and petitioner is broke, a not-unfamiliar story to NY dirt lawyers. Why the petitioner didn’t lien the job is also a good question, but that’s for another day.

IRS claims the footfault at Appeals was “inconsequential,” because petitioner didn’t raise liability at Appeals. Judge Scholar Al says they did, but the SO shut them down.

So back to Appeals for Accolade Construction Group, Inc., Docket No. 793-22, filed 3/8/24, a red-letter day in our family’s calendar.

And Judge Scholar Al stays with the case.

When confronting low-or-no-income operations, IRS seems to be claiming indocumentado in the SNOD, but raising both hobby loss (Section 183 goofy regulation) and Section 195 start-up in the runup to trial. Today Judge Ronald L. (“Ingenuity”) Buch lets it in.

Matthew M. Hutchings & Shari L. Hutchings, Docket No. 13321-20, filed 3/7/24, have been here before. See my blogpost “Expand Rule 51,” 12/22/23. Matt & Shari did substantiate most of their claimed expenses, although they flunked vehicle use (but is a Ford F350 really a passenger vehicle, Judge?) and some construction stuff.

But today they lose an off-the-bencher, and the facts are pretty nearly a walkover for IRS, even though Judge Ingenuity Buch gave IRS BoP on hobby loss and startup.

“Happy Eating [the Hutchings’ operation] did not have an official website or present itself to the general public. It did not have separate bank accounts, credit cards, or records. The supplies used to repair and maintain the property were purchased using the Hutchings’ personal credit cards. Furniture and services were purchased using the Hutchings’ personal credit cards. Creditors were paid using the Hutchings’ personal credit cards or with personal checks or wire transfers from the Hutchings’ personal bank accounts. The Hutchings did not treat Happy Eating as an active trade or business.” Transcript, at p. 14.

True, Shari ran a couple soft openings (hi, Judge Holmes) in year at issue and subsequent year, but these were market tests where she got reactions but no diñero; maybe she might have made money down the road, but she didn’t try in year at issue.

Matt’s & Shari’s trusty attorneys L&L did well to shift BoP, but the facts remain.

And remember, starters-up, get a bank account and a business credit card for the new venture off the bat. You maybe so can’t get a toaster from the bank anymore, but they could give you cash and you might could just save your deductions.

I had to find a substitute for the worn-out shot-across-the-bows cliché, so I took my simile from the PRC-Philippines Second Thomas Shoal standoff. But the story is the same: Tax Court’s adoption of the one-explicit-warning before handing out a Section 6673 frivolity chop.

Today’s contestant is Charles Scott and Linder Scott, T. C. Memo. 2024-27, filed 3/7/24. They’ve tried the same arguments before (see T. C. Memo. 2024-27, at p. 3), but Judge Courtney D. (“CD”) Jones put paid to them in the Order cited in this opinion.

Now Judge Christian N. (“Speedy”) Weiler has Charles’ latest attempt to resuscitate his previous losers.

“In a prior proceeding we ruled against these same petitioners, considered these same arguments, and ultimately determined that these disability payments to Mr. Scott are taxable, since we found no evidence to suggest that the payments at issue were attributable to an injury or sickness sustained through Mr. Scott’s active service in the armed forces, the Coast and Geodetic Survey, or the Public Health Service. See Scott v. Commissioner, No. 3330-18 (T.C. Oct. 22, 2021) (No. 52).

“Again, considering the evidence before us, we hold petitioners’ argument to be without merit, and we will sustain the adjustment to income as determined in the notice of deficiency.” T. C. Memo. 2024-27, at p.3.

I didn’t blog Charles’ 2021 case, as there was a more interesting Child Tax Credit case that day.

But Judge Speedy Weiler opens the valve on the water cannon.

“We take this opportunity to warn petitioners that the continued assertion of these same arguments, having now been considered twice by this Court, may result in a penalty of up to $25,000 under section 6673(a).” T. C. Memo. 2024-27, at p. 3.

And the new item is inventory, an addition to IRS’ avoid-trial-at-any-price contestable readings of Section 170, specifically Section 170(e). Judge Christian N. (“Speedy”) Weiler brushed off IRS’ attempt to add this to IRS’ attack on Jackson Crossroads LLC, Greencone Investments LLC, Tax Matters Partner, et. al., Docket No. 12235-20, filed 3/6/24. But IRS wants Rule 161 Reconsideration, based on “Rock Cliff Reserve, LLC et. al. v. Commissioner (Docket No. 12472-20) and Order dated November 15, 2022, in Oconee Landing Property, LLC et. al. v. Commissioner (Docket No. 11814-19).” Order, at p. 2, footnote 2.

The brushoff in question took place back on 1/19/24, a special date in our family. For the brushoff, see my blogpost “When Fact Met Law,” 1/19/24.

Now reconsideration in light of other Tax Court orders is a bit novel.

“Unlike motions for reconsideration of findings of fact and opinions, there is no specific rule governing the standards with respect to motions for reconsideration of Orders of this Court. See Rules 161 and 162, of the Tax Court Rules of Practice and Procedure. Under Rule 161, reconsideration is intended to correct substantial error, either of fact or law, and facilitates the introduction of new evidence the moving party could not have previously introduced with due diligence. However, reconsideration is not the appropriate forum for rehashing previously rejected legal arguments or for tendering new legal theories to reach the end result desired by the moving party. Deciding whether to grant a motion for reconsideration lies within the discretion of the Court.” Order, at p. 2 (Citations omitted).

Here, the FPAA, which the Jacksons claim never raised inventory, raised a general “you didn’t comply with Section 170 and the Regs” which IRS claims puts in play treatment of “property held for sale in ordinary course.”

Judge Speedy Weiler buys it.

“Although these orders are not formal precedential decisions or reports of this Court; we are inclined to reconsider the issue on brief. Furthermore, after hearing the evidence in this case, we find there is no unfair surprise or prejudice to consider the Inventory Issue on brief. Furthermore, petitioner remains free to argue, on brief, that respondent has failed to properly plead the Inventory Issue or that the issue has no application in this case.” Order, at p. 3.

For Rock Cliff, see my blogpost “Broad Spectrum,” 9/13/23. I blogged the quoted Oconee order for Judge Albert G. (“Scholar Al”) Lauber’s take on expert witness testimony, not the inventory bit.

Takeaway- All the evidence about attempted subdivisions and sales of houses, with co-ventures with developers, to show before HBU, is a double-edged sword; was the land held for development and sale rather than for investment? Inventory? Fact question, but tricky.

Let me be clear, I’m not starting, engaged in, or continuing a vendetta or nitpicking party  against IRS. Neither am I claiming holier-than-thou status, whether against petitioners, intervenors, or respondent. Sloppiness should be called out, because we’re all prone to taking the shortcut or the slippery slope.

Yeah, I’ve been called a curmudgeon. By the second generation member of a family I represented on and off for over forty years. I’ll accept that. But I’ll say it again: sloppiness, whatever its source, should be called out.

I know IRS is shortfunded, shortstaffed, and shortstacked, especially when dealing with hangovers from Congress’ strewing of unguided largesse on taxpayers fleeing to Our Insolvent Islands in the Sun, as more particularly encountered in Amgen Inc. & Subsidiaries, et. al., Docket No. 16017-21, filed 3/5/24.

Judge Travis A. (“Tag”) Greaves shoots down this try at a Rule 91(f) quick-kick facts-and-evidence-deemed-established OSC because IRS’ counsel tries for an inside-the-park without touching first, second, or third. Or even hitting the ball.

The parties were sparring over segmented P&Ls, which Amgen first claimed they didn’t have, but thereafter came up with some of the years at issue. Following back-and-forth on the completeness and accuracy thereof, IRS sent Amgen its version, and a stipulation consenting to same, which failed to attach the exhibits referred to therein. Amgen objected.

Judge Tag Greaves: “Respondent’s motion is deficient in several respects. First, respondent failed to attach to his motion the segmented financial statements referenced in his draft Joint Third Stipulation of Facts Second Financial Stipulations as required by Rule 91(f)(1)(B). Without these exhibits, we will not require petitioner to stipulate to their accuracy. Respondent’s motion further fails to set forth sources, reasons, and basis for claiming that the financial statements should be stipulated as required by Rule 91(f)(1)(C). Respondent did not explain the documents he consulted nor his process in constructing the segmented financial statements. Finally, respondent’s motion did not show that petitioner had reasonable access to this information in accordance with Rule 91(f)(1)(D).” Order, at p. 3.

Moreover, Amgen disputes the accuracy of the latest iteration of the statements. And the parties did seem to be working on discovery in good faith.

Now, it’s true that Amgen (and the Subsidiaries) have deployed 21 (count ’em, 21) lawyers, only one of whom is in-house and the balance ultra-whiteshoe, but IRS has 16 (count ’em, 16) to oppose, not exactly Davey-Crockett-Alamo odds. So why not follow the Rule 91(f) checklist? IRS knew about Amgen’s objections at the end of December, Order, at p. 2. Check my chronology there.

Motion for OSC denied.

This Golden Oldie is most often used to bar petitioners from injecting IRS’ Exam miscues and delictions into a deficiency de novo trial. The past isn’t even prologue.

So while Curtis K. Kadau & Lori A. Kadau, Docket No. 286-21, filed 3/4/24, may have told Exam a different story (in writing) than they told on the stand at trial, IRS can’t avoid being run over by Greenberg’s Express, 62 T. C. 324 (1974), when they try to introduce documents Curtis & Lori gave Exam and Appeals.

Judge Christian N. (“Speedy”) Weiler tells it.

“The government often argues that materials relating to a taxpayer’s audit or administrative proceedings are irrelevant because the issues before this Court are de novo. See Greenberg Express, 62 T.C. 327; see also Moya v. Commissioner, 152 T.C. 182 (2019). This argument is predicated on Section 6214(a), through which, upon a timely filed petition, we have jurisdiction to redetermine the correct amount of the deficiency.

“In Greenberg’s Express, 62 T.C. at 328, we explained that, because a trial before the Court is a proceeding de novo, the Court’s ‘determination as to a petitioner’s tax liability must be based on the merits of the case and not any previous record developed at the administrative level.’ The principle articulated in Greenberg’s Express – that the Court will not generally look behind a notice of deficiency – has been repeatedly upheld by appellate courts.” Order, at p. 2. (Copious citation of precedent omitted).

Taishoff says that Moya is a weak reed to support Greenberg’s Express. See my blogpost “The Taxpayer Bill of Goods,” 4/17/19. I said then “this case was hardly well-litigated, and I’m sorry we didn’t get a better fact pattern and record in a precedent-setting case.” We had a pro se and a muddled argument from IRS; Judge James S. (“Big Jim”) Halpern deserved better, and so do we.

“While in this case it is respondent who seeks to offer and introduce documents petitioners furnished in audit, we find the documents to be immaterial as they were not introduced by petitioner, nor were they offered as impeachment evidence by respondent during cross-examination.

“We conclude that our holding in Greenberg Express applies here and precludes the introduction of these three administrative documents. Our redetermination of petitioners’ tax liability will be based on the merits of the case and the record, as developed at trial.” Order, at p. 2.

Amazing! Eight (count ’em, eight) attorneys from IRS, and no one picked up on prior inconsistent statements to impeach.  See FRE §613.

No, not a London pickpocket, a Debtor-In-Possession, the Chapter XI trustee of his own bankruptcy estate. Gregory K. Crowell petitioned a NOD from the CDP in the name of Gregory K. Crowell Bankruptcy Estate 17-13624, Index No. 19992-22L, filed 3/1/24.

Problem was, USBCSDOH had confirmed Greg’s plan of liquidation, and had appointed THB (name omitted) trustee of the liquidating trust set up thereunder. Nevertheless, Greg apparently signed a subsequent 1041 for the trust, despite the trust agreement’s directive that THB file 1041s. Howbeit, by the time this landed on STJ Adam B. (“Sport”) Landy’s desk, USBCSDOH had confirmed the plan, all trust reports and distributions had been filed and made, and TBH had been discharged and released. There is no record of appointment of a subsequent trustee.

True, a DIP has all the powers and duties of a trustee in a Chapter XI prior to confirmation of a plan of reorganization. Thereafter, all the foregoing vests in the court-appointed trustee, as the bankruptcy estate ceases to exist, and the liquidating trust takes its place. Greg was ousted by operation of law eo instante.

STJ Sport Landy tosses Greg’s petition for want of a petitioner with proper authority.

OK, let us suppose Greg runs back to USBCSDOH, seeks appointment as successor trustee to TBH, and gets appointed. Equitable tolling?