While Reg Section 1.6662-2(c) prevents double-chopping for offenses per Section 6662(a) (“For example, if a portion of an underpayment of tax required to be shown on a return is attributable both to negligence and a substantial understatement of income tax, the maximum accuracy-related penalty is 20 percent of such portion”), there’s no such limit for frivolity.

Anthony Dwayne Williams, Docket No. 10275-23L, filed 7/21/24, gets a Section 6702(a) frivolous submission chop ($5K) confirmed, with a $2500 Section 6673 added at no extra charge by STJ Diana L. (“Sidewalks of New York”) Leyden. Anthony Dwayne led off with an all-zeros 1040 MFJ, and played the Subtitle-A-vs.-Subtitle-C wages gambit with Appeals and then with STJ Di, despite warnings that this move is a loser.

Note the warnings given before the Section 6673 chop is imposed. Frivolites would do well to heed these.

Judge Courtney D. (“CD”) Jones issues an all-points-bulletin for gli amici degli amici to put in briefs amicus in Sunil S. Patel and Laurie McAnally Patel, Docket No. 24344-17, filed 7/19/24.

Sunil and Laurie have been here before, of course. See my blogpost “Two Memos, Nothing New,” 3/26/24. But now, they have got something new, chops per Sections 6662(a) and Section 6662(b)(6) for “a 20 percent accuracy-related penalty on the portion of an underpayment of tax attributable to a transaction lacking economic substance within the meaning of section 7701(o).” Order, at p. 1.

The problem is Section 7701(o). It says “The determination of whether the economic substance doctrine is relevant to a transaction shall be made in the same manner as if this subsection had never been enacted.” Order, at p. 2.

Sunil’s and Laurie’s trusty attorneys claim the word “relevance” leaves unaddressed whether the determination of “relevance” writes the two-part test of Section 7701(o)(1)(A) and (B) out of the equation, throwing us back into the pre-act analysis of economic substance (moving the economic needle).

Of course, Taishoff says, ma nishtanah? Or, in English, how do the criteria in Section 7701(o)(1)(A) and (B) differ from past learning?

But Judge CD Jones, a true lawyer, finds (as Sunil’s and Laurie’s trusty attorneys aver) the statutory scheme to be ambiguous.

Any lawyer who can’t find an ambiguity should find another way to make a living. Trust me, Sunil’s and Laurie’s trusty attorneys are the A-Team.

Is there the need for a threshold Section 7701(o) finding of pre-Act relevance before invoking Section 6662(b)(6) and chopping Sunil and Laurie? If so, what are “the circumstance(s) in which the economic substance doctrine is ‘relevant’ within the meaning of section 7701(o)”? Order, at p. 2.

Soi let the parties brief this question, and nothing else; and while they’re about it, let the sundry wits, wags, and wiseacres file motions for leave to file brief amicus, because of the novelty of this issue.

And because your reporter really needs some good blogfodder during the summer doldrums. So come on, chaps, join the partay.

I’ve adverted in the past to the advice from the days of spruce-and-string aircraft: if you want to be an aviator, don’t throw away the ripcord when you bail out. See, e.g., my blogpost “Off the Hook,” 10/19/17.

I proffer the same advice to the six (count ’em, six) trusty attorneys for Pauls Farm Properties, LLC, Eco Terra 2016 Fund, LLC, Tax Matters Partner, et al., Docket No. 7519-20, filed 7/19/24, moving to withdraw as counsel but encountering headwinds from client, who objects.

Judge Patrick J. (“Scholar Pat”) Urda lets IRS file a reply (said trusty attorneys claim IRS didn’t object to their bailout motion), but wants a conference call with all hands. Immediately. A brief docket search shows trial underway, with all sorts of discovery tohubohu, and stips of facts.

Taishoff says said trusty attorneys better have a real good story to tell to get out at this point.

Edited to add, 12/7/24: They told a sufficiently good story to Judge Scholar Pat: the client wasn’t going to pay. See Pauls Farm Properties, LLC, Eco Terra 2016 Fund, LLC, Tax Matters Partner, et al., Docket No. 7519-20, filed 8/21/24. But I’m citing this order because it shows that giving fee estimates can be dangerous to your wallet; once a client hears a number, words in limitation thereof are meaningless. That number is everything.

CSTJ Lewis (“The Name of Fame”) Carluzzo gives Whistleblower 6544-19W, T. C. Memo. 2024-74, filed 7/18/24, the Romans 14:4 treatment. Whistleblower 6544-19W, hereinafter sometimes referred to as “Four Nineteen Whiskey,” claims the Ogden Sunseteers shortchanged him with a mere 22% (less sequester), when his other blows netted him 30% (less sequester).

I use the singular masculine personal pronoun for convenience; CSTJ Lew doesn’t distinguish, and English has no singular gender-neutral personal pronoun for human beings. And CSTJ Lew is zealous to protect Four Nineteen Whiskey’s identity.

“While employed by an investment banking firm (IBF), petitioner became aware of various tax strategies developed and marketed by IBF. We think it inappropriate to provide the details and/or nature of IBF’s program. The situation is obviously well known to the parties, and to do so in this Opinion might compromise petitioner’s entitlement to proceed anonymously.” T. C. Memo. 2024-74, at p. 2. I’m not sure on which dodge Four Nineteen Whiskey blew, but I can guess (and so can you).

Howbeit, CSTJ Lew trudges through Prop. Treas. Reg. § 301.7623-4, 77 Fed. Reg. 74798, 74802–03 (Dec. 18, 2012), and finds that the Ogden Sunseteers “proceeded as the regulation directs, and petitioner does not suggest that the regulation is invalid. Respondent’s WBO found only one of the positive factors to apply and increased petitioner’s award from 15% to 22% of collected proceeds. We note that the positive factors included in the regulation do not include one that requires the WBO to take into consideration the fixed percentage amounts of awards that a whistleblower received with respect to related claims.” T. C. Memo. 2024-74, at p. 5. (Citation omitted).

In short, each blow stands on its own. Though Four Nineteen Whiskey says he has more positives than the Ogden Sunseteers allowed, CSTJ Lew says that’s a “matter of opinion,” (T. C. Memo. 2024-74, at p. 5),  and the Ogden Sunseteers’ sliding-scale approach to awards passes the arbitrary-capricious test.

I cannot close without noting that nothing would have been done, and IBF and chums would have scarpered with the boodle they ripped off from us taxpayers, despite Four Nineteen Whiskey’s shouting from the housetops, while the Ogden Sunseteers consumed miles of red tape, assuring us that all’s for the best in this best of all possible worlds.

Except.

“Investigations conducted by Congress and respondent confirmed petitioner’s allegations with respect to the existence of the tax avoidance scheme and the taxpayers involved in it only after petitioner’s information was given to a newspaper journalist who made the tax avoidance scheme public.” T. C. Memo. 2024-74, at p. 2.

OK, curse us journos, threaten us, malign us, ignore us, say we put out “fake news,” we’re “enemies of the people,” fire us when we take a union office (as just happened to a Hong Kong reporter for a prestigious US publication) or tell a story some editor doesn’t want to hear…but as a poet said, like the dust, we’ll rise.

We all know Reg Section 1.6662-2(c) limits the imposition of penalties to only one on the list, even when more than one would give rise to a chop. Thus substantial understatement (five-and-ten) and negligent disregard can only impose one 20% chop. So when Tax Court hands out chops, must they consider more than one?

Before you say “no, why should they?” read Oconee Landing Property, LLC, Oconee Landing Investors, LLC, Tax Matters Partner, T. C. Memo. 2024-73, filed 7/17/24. Judge Albert G. (“Scholar Al”) Lauber heeds IRS’ concern that partner-level adjustments based on the FPAA sustentation of five-and-ten might bail out some partners whose computational adjustments let them slide under the tag.

When Judge Scholar Al slugged the Oconees, he found them liable for the five-and-ten, but never mentioned negligence. IRS wants reconsideration, but the Oconees object: no change in law, no new facts.

“Respondent notes that the applicability of the substantial understatement penalty is based on a mathematical calculation, whereas the negligence penalty is not so conditioned.

“Our decision to forgo determination of the negligence penalty was premised on our understanding that the no-stacking rule prohibited the application of multiple penalties with respect to a given portion of Oconee’s underpayment. See Oconee, T.C. Memo. 2024-25, at *75 n.34. But Treasury Regulation § 1.6662-2(c) makes clear that the no-stacking rule relates to ‘the maximum accuracy-related penalty imposed.’ (Emphasis added.) This Court has jurisdiction to determine partnership items and the applicability of any penalty that relates to an adjustment to a partnership item. §§ 6221, 6226; United States v. Woods, 571 U.S. 31, 39–42 (2013). There is thus no limitation on our ability to determine the applicability of more than one accuracy-related penalty at the partnership level.” T. C. Memo. 2024-73, at p. 3.

As for reconsideration, Judge Scholar Al has a footnote at hand.

“Petitioner incorrectly characterizes respondent’s Motion as a request ‘to reverse [the Court’s] ruling on the negligence penalty.’ The Court in its prior opinion made no ruling on the negligence penalty; that is the error of which respondent complains. Petitioner urges that reconsideration is inappropriate because respondent cites ‘no intervening change in law’ and ‘no new evidence.’ That is true, but those are not the only grounds for seeking reconsideration. Another ground is to correct ‘substantial errors of law or fact,’ and that is the ground respondent urges. Petitioner contends that respondent failed to produce partner-level evidence showing that individual partners would not be subject to the substantial understatement penalty. This argument is silly: Respondent could not possibly know, in this TEFRA partnership proceeding, whether individual partners in future partner-level proceedings would have a ‘substantial understatement’ of tax, which will obviously depend on their individual tax circumstances. Respondent is simply arguing that the error in our prior opinion creates a risk of prejudice to him in future partner-level proceedings, and that is sufficient to justify his Motion.” T. C. Memo. 2024-73, at pp. 4-5, footnote 4. (Emphasis by the Court).

And this is yet another reason why I don’t mourn TEFRA.

Catherine L. LaRosa, 163 T. C. 2, filed 7/17/24, seeks innocent spousery from IRS’ collective activity to get back an erroneous refund of interest. Way back when, Catherine’s spouse got nailed for tax fraud by the MD authorities, whereupon IRS hit spouse with a jeopardy assessment. Spouse settled out with IRS, while reserving the right to fight the computation of interest. Apparently spouse had what a certain Nobel laureate in Literature called “high office relations in the politics of Maryland,” and IRS gave back the money, 163 T. C. 2, at p. 3.

IRS subsequently brought a Section 7405 action to get the money back. Catherine says include her out, per Section 6015(f) equity. IRS says negatory, Tax Court has no jurisdiction over refund of interest; no tax, no SNOD, no NOD.

Judge Ronald L. (“Ingenuity”) Buch, never one to check a flop, says all Catherine needs for Section 6015(f) is a set of Hamiltons and a timely petition, per the explicit terms of the statute.

“The Commissioner is mistaken when he argues that we lack jurisdiction over Mrs. LaRosa’s request for innocent spouse relief. Mrs. LaRosa satisfied both requirements for our jurisdiction: She submitted to the Commissioner a request for equitable relief pursuant to section 6015(f), and she timely filed a Petition with the Tax Court. For this purpose, we consider the Commissioner’s letter… to be ‘the Secretary’s final determination of relief available to the individual’ because it explicitly set forth the Commissioner’s final determination that ‘[i]nnocent spouse doesn’t consider relief for erroneous refunds.’” 163 T. C. 2, at p. 6.

But Catherine hasn’t got the nuts. True, IRS sued under Section 7405, which allows suit for taxes erroneously refunded; those are rebates of tax. But not every refund is a rebate of tax.

“Section 7405(b) provides an avenue to recover an erroneously refunded tax. But the mere fact that the Commissioner prevails in an erroneous refund suit does not give rise to an unpaid tax. Courts have held that once a tax liability is paid in full, that tax liability is extinguished unless it is revived by an erroneous rebate refund. And while the government can recover an erroneous rebate refund by filing suit under section 7405(b), it can also recover through an erroneous refund suit erroneous nonrebate refunds, which are not considered tax. Thus, determining whether an erroneous refund gives rise to an unpaid tax turns on whether the erroneous refund is a rebate or nonrebate refund.” 163 T. C. 2, at p. 10. (Citations omitted).

There are refunds arising out of miscalculated tax; those are rebates. But Catherine’s spouse paid all the tax due before IRS sued for the erroneously refunded interest. There’s no miscalculated tax, overpaid tax or underpaid tax.

While IRS can issue a SNOD to assess an underpaid (because erroneously refunded) tax, there is no underpaid tax here.

No innocent spousery for Catherine. But her trusty attorneys, including without in any way limiting the generality of the foregoing (as my expensive colleagues say), the Harvard Fierce Fighters and Georgetown’s finest, s/a/k/a The Right Catherine, get a Taishoff “Good Job, Second Class.”

See my blogpost “Unfogged,” 3/26/24.

A week back from my visit to my nearest and dearest in East Texas, in which I got a ringside seat at a Cat 1 hurricane at no extra charge (and you can have my next one for free), I am reminded of the old East Texas wisdom “Pigs git fed, hogs git et.” See my blogpost “Cullifer’s Travails,” 10/8/14.

Corning Place Ohio, LLC, Corning Place Ohio Investment, LLC, Tax Matters Partner, T. C. Memo. 2024-72, filed 7/17/24, puts Judge Albert G. (“Scholar Al”) in mind of Dixieland Boondockery at its finest, although the Cornings are dealing with a Cleveland, OH, historic structure.

But the Cornings do it in right Dixieland style.

They “acquired a historic office building in downtown Cleveland, Ohio, and proceeded to renovate it into luxury apartments. The renovation was undertaken pursuant to a ‘rehabilitation plan’ approved by the National Park Service (NPS) and the State of Ohio, both of which awarded historic preservation tax credits. The partnership used the tax credits to finance the renovation.” T. C. Memo. 2024-72, at pp. 2-3.

But why stop there? That only leaves them, with no cash in the deal, and a high-priced rental operation, or a condo sellout. Au contraire, the Cornings go for the gold, or, as Judge Scholar Al puts it, they gild the lily.

“Gilding the lily, the partnership then granted a conservation easement over the very same property, claiming a $22.6 million charitable contribution deduction on the theory that it had relinquished valuable development rights. The ‘lost development rights’ allegedly consisted of the notional opportunity to add a 34-story vertical addition ontop of the historic building. Apart from being structurally implausible and economically unsound, adding 34 floors of steel and concrete atop the building would have required the partnership to forfeit the Federal and Ohio tax credits upon which it relied to finance the renovation. As a condition of receiving those credits, it had pledged that the rehabilitation plan would entail no rooftop improvements ‘visible from the street.’ Needless to say, a 34-story addition on top of the building would have been visible from the street. Finding that the 34-story tower was a chimerical concept ginned up solely to support a wildly inflated appraisal, we will sustain the Commissioner’s disallowance of the charitable contribution deduction and his imposition of a 40% penalty under section 6662(h)1 for a ‘gross valuation misstatement.’” T. C. Memo. 2024-72, at p. 3.

You can read Judge Scholar Al’s 45 (count ’em, 45) page gelding the lily. The appraisal is based on stock plans, never used. The same appraiser was working on the NPS credits and the conservation easement. All the experts were part of ” a cottage industry in Cleveland that specialized in supplying data for ‘lost development rights’ appraisals of historic buildings. As of the date of trial, H and L had worked with S on 50–60 ‘vertical expansion’ projects, all of which were connected to conservation easements, and none of which was ever built.” T. C. 2024-72, at p. 12. (Names omitted).

And of course their plans and appraisals were done after the NPS-Ohio State credits were given, the terms of which guaranteed that the proposed vertical expansion could never be built. They had nothing to lose, literally.

Once again, leg-before-wicket, as the single-member (disregarded) LLC, parent of the Cornings, contributed the property before the new member came on board. The new member created Corning, which improperly claimed the deduction. See T. C. Memo. 2024-72, at p. 22-26.

The usual shredding of the petitioner’s appraisers follows.  And the chop.

Judge Gale has a blast from the past for us today, as Edward L. Berman and Ellen L. Berman team up with Cousin Annie Berman in 163 T. C. 1, filed 7/16/24, to explore the interface between Section 1042 deferral of ESOP stock gains with Section 453 installment sale reporting. Into that statutory goulash jumps the improbably-named but larcenously-inclined Yuri Debevc Derivium, the alchemist who claimed to turn capital gains into non-taxable debt; long-time readers of this my blog will recall Greg and Sue Raifman, entrapped by ol’ Yuri in my blogpost “We Wuz Robbed,” 8/7/12.

Briefly, the Bermen had $4 million in ESOP stock they wanted to turn to cash. Yuri got them to sell same back to the ESOP for the ESOP’s promissory notes, and buy some A-rated variable rate notes from listed outfits on margin, which they sold to him for 90% of face (he selling same at par and keeping the change). The variable notes were Qualified Replacement Property, so would defer gain from sale back to ESOP until sale or payoff of the ESOP’s notes. Except Yuri and the Bermen tried to disguise the sale of the variable notes as a loan, which triggered gain. The ESOP couldn’t pay the notes they gave the Bermen.

OK, the Bermen have gain. And Section 1042(e) says gain must be picked up in year of disposition of QRP, which would be year when the Bermen did the “loan” deal with Yuri. But the Bermen got nothing that year, and only got paid something in the next.

The Bermen claim their 1042 election was defective because of their defective opt-out from Sub S status to C Corp (only C Corp stock qualifies for Section 1042 treatment), but they’re a day late per Section 1362(e)(2)(B), and anyway duty of consistency means their position, taken for a year now closed, bars them from revoking it now. Likewise, their claim that their Section 1042 election was induced by fraud fails, because there was no mistake as to then-existing fact, only as to legal consequences.

But the Bermen can use Section 453 to throw gain into the next year, because any payment received after the year of sale automatically invokes Section 453 installment sale reporting.

See 163 T. C. 1, at pp. 27-32 for the rundown. It’s a technician’s delight.

Judge Gale has been here before; see my blogpost “Expedite Litigation and Avoid Unnecessary Trials,” 9/25/20.

It must be vacay time in Our Nation’s Capital, because no opinions from Tax Court today. But the hardlaboring clerks and flailing datestampers are going all out, as the paper and electrons keep flying.

North Donald LA Property, LLC, North Donald LA Investors, LLC, Tax Matters Partner, Docket No. 24703-21, filed 7/12/24 but served today, has unleashed a barrage of expert reports worthy of the pen of a Francis Scott Key. Judge Albert G. (“Scholar Al”) Lauber has generously lodged them all at the Glasshouse Guest House.

Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan is less hospitable toward Marsha Francina Constantine, Docket No. 9722-24, filed 7/15/24. Marsha Francina wants to file a CPAF, which Ch J TBS says is mistitled, and a Certificate of Service of Motion for an Order under Federal Rule of Evidence 502(d), likewise misnamed. Ch J TBS says these are Exhibits, and Marsha Francina should talk to IRS’ counsel, whose identity and whereabouts will be made plain when IRS counsel answers her petition, due by 8/16/24. Meantime, their fate is unknown.

But not so Marsha Francina’s separate Motion for an Order under Federal Rule of Evidence 502(d) and a Motion to Enforce a Refund of Overpayment Pursuant to Rule 260 that appear to be the same document filed as a Civil Penalty Approval Form. Those get tossed.

In another development, discussion is starting up on IRS’ settlement offer for non-petitioned SCEs (that’s taxspeak for Dixieland Boondockery). My colleague Peter Reilly CPA thinks it’s a sweet deal; I think there’s a thorn or two amongst the proffered roses. I do hope IRS publishes a Notice as to how successful the program is when the results starting coming in. The proof of the pudding, and all that.

The trust form of ownership is popular and problematic, especially when sole trustees forget formalities. I can’t say that Richard K. Archer, MD, forgot or neglected appropriate formalities when running Richard K. Archer M.D. P.A. Profit Sharing Plan & Trust, acting through its sole Trustee and Administrator Richard K. Archer. And I can’t ask him, because he’s dead.

Howbeit, the late Richard petitioned a retirement plan disqualification, before becoming the late Richard. But he petitioned sub nom. Richard K. Archer, Docket No. 11375-20R, filed 7/12/24. IRS objects, saying the trustee is the real party in interest, acting for the trust, and Judge Elizabeth A. (“Tex”) Copeland agrees.

When an individual dies, Rule 63(a) lets a duly authorized successor substitute in and prosecute the case. Burt the late Richard is a trustee, not an individual, and the trust itself is facing the consequences. Still, the individual decedent situation is the nearest analogy Judge Tax Copeland can find. And the late Richard’s adm’r says they can’t represent the trust.

“Most retirement plans, as entities, have other individuals who can represent their interests before this Court in the event one of the representatives or fiduciaries passes away. The same is true with most employers that sponsor retirement plans. However, that is not the case here. Dr. Archer, the plan trustee and administrator when the Petition in this case was filed, was the only individual with capacity to act on behalf of Petitioner and had complete control over the retirement plan.

“Without a representative who can further Petitioner’s interest, this case must be dismissed, and the determinations made in Respondent’s … Final Revocation Letter must be upheld.” Order, at p. 2.

Trust disqualified for years commencing after 12/31/11. Could be very expensive.

Warning to those with self-settled trusts of whatever kind: get a backup. And tell ’em Richard sent ya.