I love inventive taxpayers; they are the stuff that blogposts are made on. When the inventors are lawyers, it can get interesting. But when they are judges, it’s open season.

Jose Banuelos and Carol Ann Banuelos, T. C. Sum. Op. 7, filed 5/22/24, is Jose’s story. He is a retired annuitant, a pensioned ALJ (that’s Administrative Law Judge), the people who conduct fair hearings in disputes between people and administrative agencies, State, Federal, and local. They hear everything from Medicaid claims to traffic tickets. Jose works as a fill-in, taking the load from the still-unretired when the cases burgeon.

Jose gets a salary for his eight-hour day plus 3.3 hours for each opinion he writes. He also writes off $25K of unreimbursed business expenses against the $24K of salary and wages shown on his W-2.

STJ Zachary S. (“Highrise”) Fried says “Section 62(a)(2)(C) allows as a deduction from gross income in computing AGI ‘[t]he deductions allowed by section 162 which consist of expenses paid or incurred with respect to services performed by an official as an employee of a State or a political subdivision thereof in a position compensated in whole or in part on a fee basis.’” T. C. Sum. Op. 2024-7, at p. 3.

What means “fee basis”?

IRS says that means compensated by fees paid directly by the public, not paid into the fisc and redirected to the official. See my blogpost “Fee Simple – Not Absolute,” 2/9/16.

But Jose is inventive. The Fair Labor Standards Act “regulations provide that ‘[a]n employee will be considered to be paid on a “fee basis” within the meaning of these regulations if the employee is paid an agreed sum for a single job regardless of the time required for its completion.’ 29 C.F.R. § 541.605(a) (2019).” T. C. Sum. Op. 2024-7, at p. 7.

Unfortunately, AZ Judge Michael Jones lost that one, as more particularly bounded and described in the blogpost above set forth.

No direct payment, not “fee-based.”

Judge Cary Douglas Pugh has some bad news for Brett Stevan Jurries, teamed up with Sherise Julie Bruce, in T. C. Sum. Op, 2024-6, filed 5/22/24. Brett and Julie are splitsville, and Brett, a truck driver with a high school education, deferred to college educated ex Julie, who prepared their year at issue return.

Julie took unreimbursed business expenses on the truck Brett’s boss owned and paid all expenses. Brett applied for and got apportioned Section 6015(c) innocent spousery on some of Julie’s doings, but he claims he should get Section 6015(f) equity for the rest.

This brings in the Big Seven of Rev. Proc. 2013-34, § 4.01. IRS says Brett flunks Condition 2, because he got Section 6015(c) apportionment. No, says Judge Pugh, caselaw says you can still try for equity even if you got apportioned.

But Brett’s claim of fraud to get around Condition 7 fails. Brett says he never got a copy of the return for year at issue, but he had the passwords for the TurboTax return Julie filed, and she never stopped him from checking it out.

But he did check something, the share of the refund Julie gave him.

“Perhaps most damaging is the evidence in the record that Ms. Bruce deposited a portion of the refund from their 2016 joint return into Mr. Jurries’s checking account. Mr. Jurries testified at trial that he knew they could not deduct the expenses disallowed by the IRS because [his boss] owned the vehicle and paid its expenses. He received and kept part of the refund arising from the disallowed deduction. While the math might not work precisely, he has not explained how it would be equitable for him to keep all of the refund he received and leave Ms. Bruce to pay his share of the deficiency back. Nor did he suggest that he should bear the liability for the share of the refund he received attributable to the disallowed deduction.” T. C. Sum. Op. 2024-6, at pp. 6-7.

Brett took the refund, but trashed the equity.

Brett’s trusty attorney, whom I’ll call Bulldog Chris, brought two (count ’em, two) of Gonzaga U’s students along, to see what the Big Leagues, and real clients, are like. Good training.

Judge Ronald L. (“Ingenuity”) Buch answers the question I asked two-and-a-half years ago, with a big assist from SN Worthington Holdings LLC f.k.a. Jacobs West St. Clair Acquisition LLC, MM Worthington Inc., Tax Matters Partner, 162 T. C. 10, filed 5/22/24. The answer seems to be “muy affirmativo, good buddy,” as the Worthingtons opt out of TEFRTA to join the Bipartisan Budget Act crew in the single-shot régime. But IRS has to sink the opt-out, because IRS issued a FPAA, which is history if one elects to go BBA.

IRS claims the Worthingtons’ TMP didn’t sign the election, but folds that in its reply to the Worthingtons’ summary J motion.

IRS claims the Worthingtons don’t have enough assets to satisfy Reg Section 301.9100-22(b)(2)(ii)(E)(4). The Worthingtons say that all they need do is say so, that the Reg Section doesn’t require more.

Judge Buch: “… SN Worthington’s election satisfied the requirement that it represent that it had sufficient assets to satisfy an imputed underpayment. SN Worthington timely submitted a signed Form 7036, which included the following text: ‘This partnership . . . [h]as sufficient assets, and reasonably anticipates having sufficient assets, to pay the potential imputed underpayment that may be determined during the partnership examination.’ The form and the wording were designed by the Commissioner. By submitting a document with this specific text, SN Worthington complied with the plain text of Treasury Regulation § 301.9100-22(b)(2)(ii)(E)(4).” 162 T. C. 10, at pp. 10-11.

IRS argues that merely representing without proving adequacy frustrates the purpose of the statute. But the statute doesn’t state its purpose, and the partners are individually liable for any shortfall. Anyway, making a false statement on a tax return or document invokes Section 7206(1), which means three (count ’em, three) years hard and a $100K fine.

IRS says that the Worthingtons jerked them around with TEFRA type arguments while the SOL ran on year at issue, hence equitable estoppel. Yes, says Judge Buch, there was guilty silence, but no concealment of fact. IRS had the election form, and whether the Worthingtons had the assets is  irrelevant. IRS knew that the Worthingtons claimed the BBA, not TEFRA, but went ahead with a FPAA. Hence, FPAA invalid, no jurisdiction.

Wanna bet IRS amends the reg?

Nick and Vinny come out winners, as their option, split-the-sales-proceeds, and 1031, turn out winners, even as their percipient expert witness fails to slip her non-Rule-143-compliant report past Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan, in Parkway Gravel, Inc. & Subsidiaries, T. C. Memo. 2024-59, filed 5/21/24.

For the backstory, see my blogpost “Both Sides Now,” 11/1/22.

Even though Nick and Vinny are on both sides, both Parkway, a C Corp their fathers started, and V&N, their own partnership, followed the advice of my esteemed colleague Peter Reilly, CPA: if you set it up, follow it.

V&N took the laboring oar in rezoning and implementing. Their pre-existing option to buy Parkway’s gravel pit passed State law muster. They had multiple entities, but always kept them separate enough, billing and cross-billing when workers and materials were exchanged, and separating operations.

If IRS’ attempt to stick Parkway with the whole gain via sham transaction or assignment of income had been what Vinny and Nick intended, their tax posture would have been better, since the replacement property in the 1031 of Parkway’s share of the land sales proceeds  cost enough so V&N’s piece could have been deferred in the 1031 as well, and the mortgage interest for the replacement property would have been less.

Ch J TBS has a review of DE contract law, and a thorough discussion of sham transaction, both factual sham and legal (economic) sham. Factuals never happened as described; legals did, but didn’t move the economic needle. Nick’s and Vinny’s both happened as described, and did move the needle.

Being on both sides doesn’t wreck a well-documented, carefully-executed deal. A Taishoff “Good Job,” to Vinny’s and Nick’s advisors.

Long-time readers of this my blog will recollect that I have often in the past exulted or lamented about readership in “strands afar remote.” Cases in point: long-running pleas for Bolivian recognition, and delight when Eswatini swam into my ken.

So when no fewer than five (count ’em, five) readers from Laos, the first from that country, showed up one day last week I was readying a celebratory post.

Until.

Watching YouTube videos randomly for my weekend amusement, I struck another ad for a VPN service, which I routinely ignore. My ultra-hip readers know these are Virtual Private Networks, that hide and disguise the user’s location and data by means of intricate server jiggery-pokery, so that one sitting at one’s computer in Brooklyn, New York, appears to the world at large as if ensconced in a cave in Waziristan.

Whereupon, the penny dropped. At last.

I have no way of knowing how many of the hits I’ve enjoyed are utterly bogus. At least some, probably many, conceivably most.

So much for WordPress’ vaunted “Countries” list, and my “frantic boast and foolish word,” as the Man from Mumbai put it. Goodbye to all that.

Estate of Sally J. Anenberg, Donor, Deceased, Steven B. Anenberg, Executor and Special Administrator, 162 T.C. 9, filed 5/20/24, plays a variation on the Unsinkable Virginia V. Kite. For the story of Virginia V., see my blogpost “Transferred Part Means Transferred All,” 10/25/13.

Before Sally became the late Sally, the canny trustee of her late husband’s QTIPs, stepson Steve, got Sally and the remaindermen to agree to terminate the trusts under CA law, whereby vesting in Sally all the shares of the C Corp she and late husband owned. Then Sally sold said shares to the remaindermen in exchange for nine-year, AFR-interest bearing, secured and partly-guaranteed promissory notes with face value equal to FMV of shares.

IRS wants summary J that termination of trust was a transfer by Sally without consideration, therefore gift taxable, per Section 2519.

No, says Judge Emin (“Eminent”) Toro, and so say all the Tax Court bench.

QTIPs are an exception to an exception to an exception, 162 T. C. 9, at p. 9. For the marital estate tax deduction, property must vest in surviving spouse on death of first to die. If less than 100% vests, deduction limited to what does vest. But if a qualified terminable income interest in property (QTIP) vests in survivor, entire worth of property is deductible if executor so elects, even if remainder goes to others. See Section 2056(b)(7)(B). The idea is that the married individuals are a unit, so estate tax falls upon second to die. And any disposition of the QTIP income interest by survivor is a disposition of the entire QTIP property, thus triggering potential gift tax. Estate tax and gift tax are pari materia, operating together.

IRS claims Sally made a gift of the property, either when she consented to termination of the QTIP trusts and got the C Corp stock, or when she sold the stock for the notes.

“In the Estate’s view, the … transactions, taken together, amount to no more than a permissible conversion of Sally’s qualifying income interest for life in the QTIP into an equivalent interest in other property. Under the applicable regulations, the Estate says, such conversions are not a disposition under section 2519. And in the alternative, the Estate argues, even if there was a disposition when Sally received the Trust’s assets or later sold the shares, no gift tax is due because Sally did not make a gift. Instead, Sally received full and adequate consideration for the property she was deemed to transfer.” 162 T. C. 9, at p. 13.

Judge Eminent agrees with the Estate.

The termination wasn’t a gift, as Sally swapped her interest in the trusts for the stock itself. Thus no diminution of Sally’s taxable estate. There was no remainder, and no control over the stock, that she gave away.

As for the sale of the stock for the notes, that happened after the QTIP trusts terminated, hence Section 2519, which sank the Unsinkable Virginia V., was no longer in play.

“It is axiomatic that a surviving spouse must hold a qualifying income interest for life to implicate section 2519. Such a property interest is defined by the Code and exists only when the surviving spouse is entitled to all income from the property, payable annually or more frequently, or has a usufruct interest for life in the property, and no person (including the surviving spouse) has the power to appoint any part of the property to any person other than the surviving spouse (unless such power is exercisable only after the death of the surviving spouse). See I.R.C. § 2056(b)(7)(B)(ii); Treas. Reg. § 20.2056(b)-7(d)(1). When the [CA] Superior Court terminated the Marital Trusts, the property interest Sally received was outright ownership of the [C Corp] shares, not an income interest. And because the Marital Trusts terminated, the property interest Sally received was unencumbered by any restrictions that were placed on it while it was in the Trusts, including restrictions that would have limited distributions to individuals other than Sally. For these reasons, Sally no longer held a qualifying income interest for life as defined by section 2056(b)(7)(B)(ii). Consequently, her sale of the Al-Sal shares for promissory notes could not trigger section 2519.” 162 T. C. 9, at p. 19. (Footnotes omitted).

The Unsinkable Virginia V.’s advisers were trying too hard. The annuity deal she got was a real Bialystok (named after the famous Producer), guaranteed to crater, so Virginia V.’s estate would get nothing. Here, however, IRS did not urge form-over-substance, because Sally got the stock.

All IRS’ arguments depended upon the trust property leaving the surviving spouse’s hands. Here it didn’t.

Taishoff says, note this is partial summary J for stepson Steve. The worth of the notes Sally owned at date of her death remains to be determined.

But however this ultimately plays out, a Taishoff “Good Job, First Class,” goes to the late Sally’s trusty attorneys.

Douglas D. McGinty, Docket No. 25152-21L, filed 5/17/24, reprises the  classic advertising jingle of America’s first consumer installment lender, but Judge Cary Douglas Pugh finds Douglas has missed the mark, Order, at p. 3. footnote 3.

Douglas first suggested an OIC or IA in his Form 12153, but never ponied up the Form 433-A and back-ups. My sophisticated readers have already moved on; failure to paper your CDP is a dead loser.

And so it is here. Douglas claims he needs more time to get a loan to pay off his tax bill in full, as COVID and Hurricane Ida have hampered his efforts. Judge Pugh says mox nix; no papers means NOD is sustained.

The Order doesn’t specify what sort of loan Douglas was seeking, as it’s immaterial in this context, but I note that AFR may be cheaper than HFC or its brethren.

Translated from the language of textonics, shaking my head yet again. Mark G. Strom, T. C. Memo. 2024-58, filed 5/16/24, MD and MBA, with an illustrious resumé and eight-figure net worth, laments that he has run up an 83 (or maybe 84) million dollar tax bill (chops and interest included) fighting over wife Bernee’s $100 million stock options that went poof with dot.com. T. C. Memo. 2024-58, at p. 61.

Tough, says Judge Gale. “It may be the case that the Stroms do not have the means to pay the entire tax liability. However, that is not the proper inquiry. Rather, the question before the Court is whether, after paying his reasonable living expenses, Dr. Strom can pay any portion of the joint tax liability for 2000.” T. C. Memo. 2024-58, at p. 62.

Dr. Strom wants innocent spousery. But he knew all about the stock options (ignorance of tax consequences doesn’t count, as that would be ignorance of the law, the ultimate nonstarter) and the warnings from high-priced counsel that, at best, he had “reasonable basis” for the position he and Bernee reported on their 8275 (the “please audit me” form). “Reasonable basis” may spare some chops, at best.

But the e-mails, the draft documents, the proceedings in USDCWDWA and appeal to 9 Cir (who really socked it to Dr. Strom), the untangling of bank statements, the catalogue of Saint Lucia international business corporations and AK asset-protection trusts, all set forth in extenso by Judge Gale in 75 (count ’em, 75) pages, makes me wonder why Dr. Strom kept fighting for 20 years while the interest clock kept ticking.

Even his own experts told him it was an uphill fight.

Every strategy but an exit strategy.

I’ve heretofore acknowledged the brilliant job the trusty attorney for Sarah S. O’Nan, T. C. Memo. 2024-57, filed 5/15/24, whom I’ll call Louie, did for his young, widowed and broke client, getting her back the $123K IRS took from the proceeds of sale of the OH marital domicile. See my blogpost “Relief = Refund,” 9/18/23.

IRS did beat Louie when STJ Peter (“HB”) Panuthos determined the date whereon arose the lien for late spouse’s unpaid taxes, from which Sarah got innocent spousery. See my blogpost “Love Is Strong As Death,” 6/18/20.

But Louie’s settlement offers omitted the magic number Section 7430, and the magic words “qualified offer.” Even worse, the tax liability at issue wasn’t Sarah’s (she was innocent), so Section 7430(c)(4)(E) says no legals or admins for Louie or Sarah. Even were that not so, Louie’s brilliant equitable argument was a case of first impression, so IRS was justified because Louie was the first to raise the point that, when innocent spousery prevails after a lien arises, the lien secures only what the innocent spouse owes.

Judge Elizabeth A. (“Tex”) Copeland has the bad news for Louie and Sarah, which you’ll have to read for yourself, since the Genius Baristas posted it in a PDF which prohibits dragging-and-dropping.

You can win a case with brilliant strategy (not putting in the mortgage note where it might hurt your client) and a winning original argument (innocent spousery after the lien arises means only what the innocent owes is subject to the lien), and IRS still wins.

Bummer.

I had thought Rule 41(a) prohibited embedding a proposed amendment to a pleading within the motion for leave to amend. But here is Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan apparently hewing an exception for the trusty attorney for Frederick W. Gruber & Ellen N. Gruber, Docket No. 3891-24, filed 5/14/24, whom I’ll call AJ.

AJ filed an amended petition today, approximately three (count ’em, three) weeks after IRS answered. As we all know, Rule 41 (a) says once a responsive pleading has been filed, amendment of one’s previous pleading is permissive, not as-of-right. Moreover, AJ didn’t move separately, but just filed his amendment.

Ch J TBS, generous, gives AJ same-day service.

“…petitioner’s First Amendment to Petition is recharacterized as petitioner’s Motion for Leave to File First Amendment to Petition (Embodying First Amendment to Petition).” Order, at p. 1.

Even better, “…petitioner’s just-referenced Motion for Leave is granted nunc pro tunc as of May 14, 2024, and the First Amendment to Petition is hereby filed as of such date.” Order, at p. 1. Apparently IRS doesn’t care.

Except.

When IRS does, Judge Travis A. (“Tag”) Greaves is willing to listen. See Amgen Inc. & Subsidiaries, Docket No. 15631-22, filed 5/14/24.

“Respondent does not allege that the amendment will cause unfair surprise or prejudice. Instead, he argues that the amendment does not sufficiently set forth the grounds on which petitioner disputes the alternative penalties. Petitioner’s amendment provides fair notice that it plans to contest all of the penalties and the basis for the challenge. Thus, we are satisfied that petitioner’s amendment sufficiently complies with our Rules. Therefore, we will grant petitioner’s Motion for Leave to File First Amendment to Petition.” Order, at p. 1.

And Amgen’s trusty attorneys, all 20 (count ’em, 20) of them, followed the Rule, and lodged their proposed amendment simultaneously with filing their motion.

Taishoff says isn’t it time for Ch J TBS to adopt our NY system, where we embed our proposed amended pleadings within our motions for leave, at least where we have sophisticated litigants and attorneys? I can see not snow-blinding the hapless self-represented with embedded motions for leave, but I can’t think either OCC or Amgen’s trusty and blindingly white-shod attorneys, much less Judge Tag Greaves or Ch J TBS, are unable to deal with the motion as embedded with their exemplary ability.