My apologies to all to whom these presents come, who are proficient in the Italian language, for the above solecisms, not to say butcheries, which I only perpetrate to illustrate the tale of the anonymous preparer who inflicts the Section 6662(a) substantial understatement five-and-ten chop on Patrick M. Hall & Brandis J. Hall, Docket No. 3467-23, filed 6/21/24.

Pat & Brandis have a couple dubious Sched Cs on their 1040 MFJ for year at issue (hi, Judge Holmes). Brandis claimed expenses for a nursing business she formerly ran but was “no longer operational” in year at issue, Transcript, at p. 8. And Pat & Brandis folded the deficiency and everything but the chop. Transcript, at p. 4.

Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan, modestly listing herself in this off-the-bencher merely as “Judge,” tells the tale.

“Petitioners used a tax preparer for [year at issue], who did not sign the return. Petitioners hired him because he was recommended by a family member. The preparer prepared prior years of tax returns for petitioners.” Transcript, at p. 5.

Ch J Kerrigan’s above-referred-to modesty has nothing on said preparer, conspicuous by his absence.

“The tax preparer did not testify. Petitioners did not meet the burden of showing that the adviser was competent. Not only did the preparer not sign the return, he reported expenses for a business that was no longer operational. In addition, he reported Schedule C expenses instead of Schedule E Supplemental Income and Loss, expenses.

“Petitioner wife testified that incorrect expenses were reported on their income tax return. She further testified that she did not fully review their tax return before signing it. Therefore, petitioners are liable for a section 6662(a) penalty for substantial understatement for [year at issue].” Transcript, at pp.7-8.

The modest preparer, having consigned these clients to the five-and-ten, can, I am sure, expect a word from IRS. Perhaps some of his clients might expect to hear from the Constitution Avenue crowd as well.

A well-known, much-utilized, estate planning device seeks to devolve the most valuable asset of most people to their descendants in what testators perceive as the fairest way. As with all attempts at fair distribution, it attracts my interest on the occasions when it doesn’t work.

Simply, the device is to bequeath the family home to all children specifically and equally. Abuse has given rise, among other things, to the Uniform Protection of Heirs Property Act. Practicality has bestowed unanticipated tax complexities when one heir seeks to buy out the other. See my blogpost “Life After Federal Tax Consequences,” 6/17/11.

STJ Peter (“HB”) Panuthos illustrates another such in Edward George Shlikas, T. C. Sum. Op. 2024-10, filed 6/20/24. Here, Section 72(t)(2)(F), (8)(D)(i), combine to hit Edward George with 13K via the 10% whatever-it-is and a Section 6662(a) chop.

Edward George was caretaker of Mom’s home and caregiver to Mom. Edward George gave up his job and his rented apartment to move in with Mom during her last illness. Mom, apparently seeking fairness, bequeathed home to Edward George and bro Greg as joint tenants with right of survivorship. In English, this means last man standing takes all.

Edward George thus must buy out bro Greg’s share with cash from his retirement plans, but can’t prove the cash came from an IRA, a SEP, or a SEP/Simple. Thus, the $10K tax-free first-time homebuyer out is not available to Edward George, who is well below the 59-1/2 age cutoff for the Section 72(t) 10% whatever.

Edward George’s arguments about the arbitrary nature of the statute fall flat. Pore l’il ol’ Tax Court can’t help that.

“Petitioner contends that the imposition of the 10% additional tax on early distributions is arbitrary and capricious as the exceptions under section 72(t)(2) establish arbitrary qualifications. He contends it is arbitrary to allow an exception for using a distribution for higher education expenses per section 72(t)(2)(E) but not for the purchase of a home. He alternatively argues that had he made the distribution just 30 days later in 2020 instead of 2019, he would have qualified for the exception made for distributions under the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136, § 2202, 134 Stat. 281, 340–43 (2020).

“The Court is a court of limited jurisdiction and lacks general equitable powers.  There is no authority in the Code or caselaw for an equitable or hardship exception to the imposition of additional tax under section 72(t) on early distributions from a retirement account.” T. C. Sum. Op. 2024-10, at pp. 4-5. (Citations omitted).

Word to estate planners: Equal shares may be an easy solution for client and planner. For the beneficiaries/legatees, however, equal is not always fair.

As an Authority even more exalted than STJ Peter (“HB”) Panuthos put it, it comes to bring not peace, but a sword.

Today being a Federal holiday in the City of the Taxed Unrepresented, United States Tax Court is closed.

I cannot therefore provide more than an abbreviated version of Leviticus 25:10: “…proclaim liberty throughout all the land unto all the inhabitants thereof. It shall be a jubilee unto you; and ye shall return every man unto his possession, and ye shall return every man unto his family.”

“Don’t frivol,” says long-time CPA and tax attorney of the year for several years Judge Elizabeth A. (“Tex) Copeland to Vito Manente, Docket No. 1013-23, filed 6/18/24, as she tags Vito, a CPA, not only for his deficiency but that of loved-once Denise. Though they’ve since split, they were married and filed MFJ for year at issue, and her signature on the petition is sufficiently imperfect to put Denise out of court.

Vito tries a “wages aren’t income until you buy something with them” variation on the wages-aren’t taxable Subtitle A – Subtitle C gambit.

“As to the… receipts, Mr. Manente admitted at trial that he would be subject to taxation on ‘gains from labor.’ However, he advanced the unsupported legal proposition that such gains were only taxable if the monies received in return for labor were invested and then sold to convert them to ‘gains.’ He claims wages are not taxable in and of themselves and cited to select text from multiple cases including Supreme Court cases. However, he entirely ignored the ultimate holdings of the cases he cited.” Transcript, at p. 7.

Judge Tex Copeland plays the Crain-Wnuck defense, classic variation.

“We will not further dissect Mr. Manente’s additional unsupported arguments or refute them with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have colorable merit.” Transcript, at pp. 8-9. (Citations omitted).

However, IRS’ trial prep is a wee bit less than stellar.

Vito is in line for a five-and-ten substantial understatement chop, but IRS’ papering only includes a belated declaration from one claiming to be a supervisor, which doesn’t get into evidence because too late for Vito to cross-examine the alleged supe. Judge Tex Copeland isn’t best pleased.

“The evidence accepted into the record does not identify the name of the examining agent who proposed the penalty, so we cannot determine that [alleged supe] was in fact the immediate supervisor of the examining agent who proposed the penalty. While it is clear that Mr. Manente has advanced only frivolous arguments in support of his return position and that his underpayment was substantial, the Commissioner has not met his burden of production for the section 6662 penalty and we cannot sustain the penalty determination.” Transcript, at p. 12.

Wot, no CPAF?

And IRS fails to show Vito and Denise got a tax benefit from a year-at-issue NJ income tax refund in any prior year, thus failing to get that into the deficiency.

Judge Tex Copeland can’t send off Vito without the obligatory Section 6673 yellow card.

“We end by noting that Mr. Manente’s return positions are unbecoming to his position as a CPA. We warn Mr. Manente that under section 6673(a), this Court has authority to impose a penalty of up to $25,000 for making frivolous or groundless arguments in proceedings before us. Because this appears to be the first case that Mr. Manente has brought to trial in our Court, we will not impose a penalty at this time. We may not be so lenient if he repeats his performance in the future.” Transcript, at p. 13.

Though the contrast between the two cases is great, here are examples of the lengths to which taxpayers (or rather, nontaxpayers) go to avoid paying up. And what happens when they don’t.

First, Robert W. Smiley, Jr., An Incompetent Person, Margaret T. Smiley, Guardian, et al., T. C. Memo. 2024-66, filed 6/18/24. Rob had an impressive c.v. “Robert was honorably discharged from the Navy in 1964 after serving in a combat zone off the coast of Vietnam. He thereafter became an attorney and was a member of the State Bar of California during the taxable years at issue in these cases. He also served on the faculty of the University of California, Los Angeles.

“During his career Robert held himself out as a leading expert on ESOPs and their implementation.” T. C. Memo. 2024-66, at p. 4. And Rob had the creds to prove it. He was an adjunct professor, lecturer, and co-author of a textbook.

Unhappily, Rob turned to the dark side. When a furniture company with too much cash in its ESOP wanted to sell out, Rob employed a friendly bank teller in a rural supermarket branch, his own longtime personal attorney, and a brigade of controlled entities, to lead IRS on a 46 (count ’em, 46) page steeplechase. And apparently this isn’t the only time he pulled off such a maneuver, although Judge Gale doesn’t want to hear about it. Order, at pp. 41-42, footnote 52.

When IRS Boss Hosses the Section 6663 fraud chop, Rob’s guilty knowledge sinks any defenses he might have had.

“Most significantly, Robert went to considerable lengths to conceal his income and assets. As a general practice, he preferred to work with a specific bank teller who was willing to make transactions for him in a way that would obscure the identity of the originating entity. In the specific context of the S acquisition and the transfers of funds from [overfunded] Plan #010, he channeled money through multiple bank accounts held at different financial institutions in order to hide the sources and destinations of the funds. He also obscured the identities of the lenders who financed the S acquisition, and who would ultimately be repaid with Plan #010 funds, by borrowing money through an entity that was not directly involved in the transaction—namely, M. He covered up the payment of Plan #010 funds to the Smiley Trust by manufacturing sham transactions involving E stock that he reported on his personal income tax return. And the entire scheme was papered over by a trail of Forms 5500 that created an appearance that S might simply have restructured its pension plan, but which actually dead-ended into nonexistent plans that never received any of the money that was supposedly transferred to them.” T. C. Memo. 2024-66, at p. 41. (Names omitted).

Across the country, Atif A. Khan & Huma A. Khan, Docket No. 15025-21, filed 6/17/24, run up only half so many pages as Rob and Margaret, but give Judge Courtney D. (“CD”) Jones a solid workout. True, Huma gets hurt in a vehicle accident, but Atif leaves no stall unoccupied. I haven’t seen so many adjournments (they call ’em “continuances” in Federal courts), or requests to find counsel (despite getting the LITC lists several times), since my salad days in the last millennium in NYC Landlord-Tenant part.

And their first lawyer bails with an ABA Model Rule 3.1 out. Order, at p. 2.

Atif & Human get tossed with a sustained deficiency. And Judge CD Jones gives them the Section 6673 yellow card at no extra charge.

Don’t try either of these gambits at home. Or anywhere else.

“I Sing the Bounce Electronic.” I may sing the bounce electronic, but Hector Manuel Lopez, Docket No. 17719-21L, filed 6/14/24, certainly doesn’t. Told by the SO during his CDP to file some overdue 1040s, Hector claims he did. The SO checked by whatever means were available to her, couldn’t find them, and bounced Hector’s CDP.

Judge Nega tells the story.

“On the Petition, petitioner states that the 2020 tax returns ‘were electronically filed but they were rejected.’ The record does not reflect any attempt to communicate the attempted filing of a 2020 return to SO W during the CDP proceeding. An uncommunicated, unsuccessful filing of a tax return is not, by itself, enough to qualify as timely compliance with SO W’s request that petitioner file his Form 1040 for tax year 2020. We find that SO W did not abuse her discretion in concluding the CDP proceeding and issuing the notice of determination under this timeframe.” Order, at p. 6. (Name and citations omitted).

I see Tax Court is hosting a celebratory outreach to honor Nina E. (“The Big O”) Olson, the long-time honcho of Taxpayer Advocate Service. Might be well if her successor could tell IRS to work out a way to verify bounced filings and let Appeals know that at least petitioner tried to comply. Pro ses don’t know to do that.

Buy Out, Not Sell Out. Every closely-held entity needs a succession plan. The time it takes to settle an estate, or even empower an adm’r/ex’r/persrep to act, in many jurisdictions runs the Ukraine War a close second. Been there, done that (the estate, I mean).

But the plan has to benefit the entity, not the heirs/successors of the succeeded. Smuggling valuable equity to the widow(er)/kiddies at cut-rate prices falls foul of Section 2703. Thus Judge Elizabeth A. (“Tex”) Copeland instructs Estate of Douglas W. Anderson, Deceased, Roger L. Anderson and Beth Anderson, Co-Executors, Docket No. 37600-21, filed 6/14/24.

The co-ex’rs claim the terms of the buyout of the late Doug’s shares in the family C Corp was FMV. Except the kiddies sued the co-ex’rs in PA court, claiming they were swindled, the redemption price of the late Doug’s shares effecting a windfall for the other beneficiaries. They settled out, but the settlement agreement never got to IRS nor to Judge Tex Copeland. Taishoff, an old cynic, isn’t surprised; probably would have sunk their IRS case.

Anyway, the terms of the buyout (appraisal of shares at any time up to 24 months prior to exit), the various appraisals with different amounts, plus the lawsuit (with missing settlement agreement), require a trial. No summary J for the Estate.

Taishoff, an old cynic, says watch this case settle out.

When Dixieland Boondockery is the “nôtre chef propose” plat on the prix fixe menu, you may be sure that expert testimony is heading up the hors d’oeuvres. And so it is with Ranch Springs, LLC, Ranch Springs Investors, LLC, Tax Matters Partner, Docket No. 11794-21, filed 6/13/24. Judge Albert G. (“Scholar Al”) Lauber digs right in.

To begin with, if you’ll pardon an arcane technical term, the fier kashes of expertise: (1) will the expert’s specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (2) is the testimony based on sufficient facts or data; (3) is the testimony the product of reliable principles and methods; and (4) does the expert’s opinion reflect a reliable application of the principles and methods to the facts of the case.

Sufficient facts and date means more than an expert’s say-so. An expert’s experience certainly counts, but her/his report must be more than the two pages TL (name omitted), a member of Ranch Springs, proffers.

OTOH, the report of JS (name omitted) might pass muster, but it was wild-carded in after the Scheduling Order cut-off.

“The [JS] report was not exchanged with respondent and lodged with the Court by the deadline established by the Pretrial Scheduling Order. The Court may exclude an expert report where the opposing party is denied a reasonable opportunity to tender its own expert report in response. See Rule 143(g)(2). Untimeliness apart, the [JS] report in several respects fails to comply with the requirements of Rule 143(g) governing expert witness reports. For both reasons we will exclude his testimony from the forthcoming trial.” Order, at p. 4. (Footnote omitted).

The missing footnote says JS is not a percipient witness, that is, one who was on the scene when the deal went down, but one brought in after the fact to bolster one party’s position. Allowing JS in would let him make an end-run around the Scheduling Order, ambushing IRS.

Expert TF’s addendum (name omitted) might make the cut, if petitioner’s witness B (name omitted) will swear that he relied upon the stuff in TF’s addendum to reach his own conclusions. But TF can’t testify his own self, nor add to what B attached to his own report.

But wait, there’s more, as the midnight telehucksters say.

TF has a rebuttal report to counter IRS’ expert. But much of it is a direct report, which mostly ignores IRS’ expert, despite the requirement that rebuttal is limited to rebutting the opponent’s expert, point by point, not raising new or different matters.

Judge Scholar Al properly leaves disposition to trial, where it belongs.

“The Court is currently inclined to strike some, but not all, of [TF]’s proposed rebuttal report as a disguised affirmative opening report that was untimely filed. We will hear argument at trial regarding the portions of his report that are properly regarded as providing true rebuttal, either at the start of trial or when [TF] is called as a witness, as the parties prefer.” Order, at p. 7.

Finally, Judge Scholar Al has to deal with who are party opponents per FRE 801(d)(2), to allow in admissions against interest by direct and indirect parties, who are roped in by old Section 6231(a)(2). Judge Scholar Al lists those who IRS claims are roped in, but the Ranch Springs can contest that at trial.

Which is where most of this argy-bargy belongs.

No, not a bulletin about US military aid in a foreign war. IRS seems to have a new weapon in its fight against syndicated dodges. Judge Elizabeth Crewson Paris judge-‘splains in Albero Holdings, LLC, Albero Investors, LLC, Tax Matters Partner, Docket No. 16284-21, filed 6/13/24.

“According to petitioner, respondent has inappropriately informally contacted seventy-five Members by letter or telephone. Petitioner asserts that ‘respondent’s phone call and letter campaign needlessly caused confusion, stress, and anxiety among Members.’ Petitioner argues respondent failed to identify his role in this proceeding, threatened to issue subpoenas for trial or depositions should Members not comply with respondent’s requests, and requested information that was not relevant to this case or might be privileged.” Order, at p. 2.

Without more details as to Albero’s operations, I can’t tell if Albero is a dodge, but I can reasonably surmise that the Members are investors in whatever Albero does. I can guess, perhaps inaccurately in this case, that said Members are highrollers with big gains to be offset with whatever losses, deductions, or credits Albero generates. And whatever the underlying facts, no doubt the Members are flustered and stressed by IRS’ bombardment of what they supposed to be the rear areas. Promoters and advisers are doubtless receiving a bombardment of their own, whatever warnings and disclaimers they issued when the Members joined up. In my experience, investors read offering memoranda only when preparing to sue; see infra, as my expensive colleagues would say.

Here, Judge Paris refuses a Rule 103 protective order, without prejudice.

“Petitioner does not explain why the documents and information respondent seeks are not relevant to this case, but merely makes this conclusory statement. Yet, petitioner also states that respondent’s requests ‘overlap significantly with data already provided by petitioner or additional data to be provided by petitioner.’ Assuming petitioner is not providing or planning to provide respondent with irrelevant information, this would suggest that the documents and information respondent seeks are relevant. In any case, petitioner provides no specific explanation as to why the documents and information respondent seeks are not relevant to this case.” Order, at p. 2.

Petitioner also asserts privilege, but isn’t specific as to whom or what.

“Petitioner argues that it is inappropriate for respondent to contact third parties, including Members, and that respondent must send all requests for information from third parties through petitioner. Petitioner provides no authority for its position. Additionally, it is not clear to the Court why it would be any less burdensome for the third parties should petitioner’s counsel be the one to set up the informal meetings or gather information rather than respondent’s counsel.” Order, at p. 3.

Oh, btw, “(P)etitioner’s counsel does not represent the third-party Members, and respondent has indicated that petitioner’s counsel is also likely adverse to the Members because certain Members have filed a class action lawsuit against petitioner.” Order, at p. 3.

Taishoff says he would not be surprised, even in cases where all is harmony between Member/investors and TMP/representative, that a barrage such as IRS unleashed in Albero doesn’t cause said harmonious Member/investors to ask for recommendations for class-action counsel.

I’ve often discoursed here concerning the imposition of the Section 6673 frivolity or delay-of-the-game chop. There’s a great divergence on the Tax Court bench as to when and how much to mulct the frivolite/delayer. It seems the consensus is to give a warning before slugging.

But when to warn? From the bench at argument or on trial, in an order, or in the opinion denying the frivolous/delaying maneuver?

Once again, lest I be misunderstood, I firmly believe that trial court judges need the very broadest latitude to control proceedings in their courtrooms, whether personal or digital. No administrative judge or appellate panel can hear a sneer or see a tear, and videotape replays belong in the arena, not the courtroom.

Judge Travis A. (“Tag”) Greaves has a gambit that is worth playing in Todd O. Olson, Docket No. 28000-22L, filed 6/12/24.

Denying Todd’s motion to dismiss, and apparently ignoring IRS’ subsequent motion to dismiss, Judge Tag Greaves throws this case into the general docket.

But on the way out the door, Judge Tag Greaves delivers the following: “Petitioner is warned that any future submissions or statements advancing a frivolous or groundless position may result in the imposition of a penalty under section 6673 in an amount up to $25,000.” Order, at p. 1.

Any successor jurist will, I trust, take notice that the warning has been given, and keep it handy. Just in case. And use this method elsewhere, if required.

However white your shoes (and those of the trusty attorneys for Ranch Springs, LLC, Ranch Springs Investors, LLC, Tax Matters Partner, Docket No. 11794-21, filed 6/11/24, couldn’t be whiter), the basics still apply when you’re moving to exclude proffered evidence.

First, they seek to preclude any evidence “relating to the activities ‘of non-Petitioner entities and other conservation-easement donations.’” Order, at p. 1.

Like what? asks Judge Albert G. (“Scholar Al”) Lauber. Movant has to identify what documents they want out. Failing which, they have objections at trial on whatever grounds the law permits to stifle any irrelevant or impermissibly injurious evidence.

Next, the trusty attorneys want to preclude the expert’s report of IRS’ employed expert. We’ve seen before that this doesn’t work, if the expert is an expert and the report meets the Rule 143(g) checklist. IRS’ expert has been recognized before, and has stated his credentials per Rule 143(g)(1)(D), so the report goes in, but the expert is subject to cross-examination. That entails all the “hired-gun” and “Made As Instructed” lines of attack on credibility and weight of the expert’s report and testimony.

Basics, basics. All of us, novice and old-greyback-from-Wayback, need to remember.