No, not a poker player’s hard luck story; this is the current condition of the Tax Court Bench, with 18 (count ‘em, 18) highly-qualified, hardlaboring judges, “each and every one keen in their vocation,” as the Man From Mumbai put it.

So why is Judge Ronald L. (“Ingenuity”) Buch taxed with poking through the embers of twenty-five (count ‘em, twenty-five) consolidated document subpoena jousts between IRS and Skylab Series of Fortress Insurance, LLC, et al., Docket No. 25669-16, filed 10/31/24?

I’ve asked before now why a law secretary or a magistrate could not sort this out. After all, does it require such heavy artillery as Judge Ingenuity Buch brings to the battlefield to conclude that “(T)he insurance claims accepted or denied by the insurance risk pools that the petitioners participated in is relevant to determine if petitioners were insurance companies.” Order, at p. 4.

For the backstory on Terry L. Wright and Cheryl A. Wright, T. C. Memo. 2024-100, filed 10/30/24, check out my blogpost “‘You’d Better Not Pout’- Part Deux,” 3/15/16*. Terry and Cheryl had a big capital gain when Terry’s business was sold for stock, which he later unloaded. Some dodgefloggers got him into foreign currency exchange options, which he testified on the trial he did to get some tax deductions.

Though his trusty attorneys argue he wanted to make a profit, ex-Ch J L. Paige (“Iron Fist”) Marvel isn’t having any. Section 165(c) bars any non-casualty loss deduction not connected to trade, business, or profit-seeking activity.

“The Wrights realized substantial capital gains on the sale of Mr. Wright’s…stock in the first half of [year at issue]. Mr. Wright credibly testified that in [year at issue] his estate planning attorney and his accountant ‘realized that we could use some tax losses.’ Mr. Wright also credibly testified that he first understood that the foreign currency option transactions at issue would generate a tax loss based on an explanation from his estate planning attorney in fall [year at issue]. [Terry’s and Cheryl’s LLC] then entered into the foreign currency option transactions at issue, which generated a valuable capital loss, just before the end of the Wrights’ [year at issue] taxable year.” T. C. Memo. 2024-100, at p. 10.

IRS’ expert dissects the USD-EUR straddle offset by the EUR-DKK (Danish krone) straddle with a digital kicker, and kicks the kicker to the curb, unsaddling the straddles. It’s the usual Bialystok, a deal that cannot make money but generates a deductible loss offset by an unrecognized gain.

Y’all will recall that 6 Cir knocked out IRS’ argument that the straddles weren’t Section 1256 mark-to-market option contracts. Terry and Cheryl argue that’s “game over.”

“The Wrights also argue that the Sixth Circuit’s opinion in Wright III somehow precludes us from considering any issues other than economic substance. They state that the Sixth Circuit ‘determined that there was one remaining issue on which the Tax Court had failed to rule, the question of economic substance.’ While it is true that ‘[a] holding on an issue by an appellate court must be followed in all subsequent proceedings in the same case in the trial court or on a later appeal in the appellate court,” Pollei v. Commissioner, 94 T.C. 595, 601 (1990), the Wrights’ description of what the Sixth Circuit held in Wright III is highly inaccurate. The Sixth Circuit held that we should not have granted partial summary judgment to respondent because our determination that a foreign currency option could not be a foreign currency contract within the meaning of section 1256 was incorrect as a matter of law. Wright III, 809 F.3d at 881, 883–85. It therefore ‘remanded for further proceedings consistent with [its] opinion.’ Id. at 885. The Sixth Circuit did not state that it was limiting our consideration of any issues on remand.” T.  C. Memo. 2024-100, at p. 20.

Section 165 disallows these tax-motivated losses.

Taishoff notes that the year at issue is more than twenty (count ’em, twenty) years ago. With $603K in deficiency, even though IRS waived the Section 6662(a) chops, when you reckon in the interest, Terry and Cheryl would have done better to pay the tax.

* https://taishofflaw.com/2016/03/15/youd-better-not-pout-part-deux/

If outside basis and closed year excess losses are your thing, read Judge Goeke’s opinion in Surk, LLC, Syrkadian Ventures, LLC, A Partner Other Than the Tax Matters Partner, T. C. Memo. 2024-99, filed 10/29/24. Although this is a TEFRA holdover, the Sections 704 and 705 rules haven’t changed.

Surk had a boxed-checked lower-tier LLC, Outerknown. Outerknown threw up a couple seven-figure losses (hi, Judge Holmes) to Surk. The losses were well in excess of Surk’s outside basis in Outerknown, but Surk deducted them anyway.  IRS passed Surk’s 1065s for both those years, and by the time this case gets to Tax Court, those years are closed. Now IRS issued a FPAA for year at issue.

IRS claims Surk has to limit its deduction for the latest round of Outerknown’s passed-through loss, but folds because Surk got a cash distribution in Year Before Year At Issue which it didn’t add to its outside basis in that year. “Accordingly, respondent concedes that Surk is entitled to the loss deduction that he disallowed in the FPAA. However, respondent continues to assert that Surk must decrease its [Year At Issue] yearend outside basis by the excess losses as he determined in the FPAA.” T. C. Memo. 2024-99, at p. 2

Surk’s trusty attorneys claim that when IRS folded Surk’s loss deduction, game over. Hence the issue about Surk’s increasing its outside basis is new matter per Rule 142, and not properly before the Court.

Judge Goeke has somber reasoning and copious citation otherwise.

“Our caselaw establishes that the Court has jurisdiction to resolve all partnership items even though resolution does not result in a readjustment to the partnership return. We see no reason to distinguish this case where respondent has conceded the loss disallowed in the FPAA but a partnership item adjusted in the FPAA remains at issue. Thus, it is immaterial that respondent has conceded the loss disallowance in the FPAA. We retain jurisdiction so long as an adjustment to a partnership item remains at issue. Outside basis is determined at the partner level.  Thus, it is proper to determine Surk’s outside basis in Outerknown, a lower tier partnership, in this case. Respondent recomputed Surk’s [Year At Issue] outside basis in the FPAA. Accordingly, we have jurisdiction to determine how Surk must calculate its outside basis in Outerknown, and we do so in this case.” T. C. Memo. 2024-99, at p. 4. (Citations omitted).

This case is a Rule 122 fully-stipulated; both sides laid out this issue in the petition and summary judgment motion. True, “(R)espondent changed his reading of the statute and regulations from the one stated in the FPAA and in his previous filings with this Court. However, such a change does not render the basis computation a new matter. The proper interpretation of a statute or regulations is not a new matter. It is the Court’s job to interpret the law irrespective of how respondent did so in the FPAA or how the parties do so in their briefs. Moreover, petitioner had an opportunity to respond to respondent’s argument in its reply brief.” T. C. Memo. 2024-99, at p. 5. Anyway, if it were new matter, then IRS would have BoP, but this is a fully-stiped case, so all facts agreed, no proof needed.

Section 705 requires partners to reduce outside basis (Section 722 says outside basis equals cash and adjusted basis of property contributed to partnership) to extent of flowed-through losses, but not below zero. Any excess losses are carried forward until partners buy fresh basis with taxable distributions or further contributions.

“Specifically, section 705(a) provides that a partner’s outside basis increases by the sum of its distributive share of taxable income ‘for the taxable year and prior taxable years” and decreases by the sum of its distributive share of partnership loss ‘for the taxable year and prior taxable years.’ § 705(a)(1) and (2). Thus, the plain wording of the statute requires that a partner decrease its outside basis by the sum of all current and prior losses. However, in their annual calculation partners cannot reduce their outside bases below zero. §705(a)(2).” T. C. Memo. 2024-99, at pp. 5-6.

Partners must calculate outside basis annually, taking into account all increases and decreases, except for disallowed losses, from formation of the partnership onward. But here, IRS allowed the two closed-year losses, erroneously or not.

Surk’s trusty attorneys  argue that IRS’ only remedy was to issue FPAAs for the closed years.

“We disagree. As stated above, under section 705(a) a partner must calculate outside basis annually and must decrease its outside basis for the current-year loss as well as all prior-year losses since the partnership began. Treasury Regulation § 1.704-1(d)(2) adopts the section 705 basis adjustment rules although it limits the negative basis adjustment to allowed losses. Thus, it is immaterial that respondent did not issue an FPAA for [closed years] or that those years are closed. Respondent is calculating Surk’s outside basis for yearend [Year At Issue]. For this same reason, we also reject petitioner’s argument that respondent’s position decreases Surk’s outside basis below zero. Respondent’s calculation of Surk’s [Year At Issue] yearend outside basis does not result in an outside basis below zero.” T. C. Memo. 2024-99, at p. 7.

IRS is not trying an end-run around SOL. There’s no attempt to assess tax for the closed years.

“Petitioner concedes that Surk improperly deducted the excess losses for[closed years]. Surk now seeks to disregard its own reporting to claim future tax benefits. If Surk were not required to decrease its outside basis by the previously allowed excess losses, its outside basis would be overstated and would permit loss deductions in excess of Surk’s investment in its Outerknown partnership interest. We hold that for purposes of section 704(d) Surk must decrease its outside basis in Outerknown by all previously allowed losses including the $3,308,767 of excess losses that it deducted for [closed years].” T. C. Memo. 2024-99, at p. 8.

IRS claims Surk is positive $500K in outside basis in Outerknown. But trusty attorneys haven’t done numbers, so let’s have a Rule 155 beancount.

Incidentally, Syrkadian comes in via Rule 248(a) participating partner.

Dixieland Boondockery means valuation trials. Valuation trials mean expert witnesses. Expert witnesses, unlike the butterflies in the 1969 play, aren’t free. For IRS to find expert witnesses means competitive bidding.

So when Boulder Pines Land Holdings, LLC, Boulder Pines Fund Manager, LLC, Partnership Representative, Docket No. 8479-23, filed 10/28/24, want to shift venue from Jacksonville, FL to Atlanta, GA , IRS objects, claiming they “will be prejudiced by changing the place of trial because he has already entered into contracts with experts for this case. Those experts submitted bids and were awarded contracts based on Jacksonville as the place of trial.” Order, at p. 1.

The Boulder Pines claim their fact witnesses will come from around Atlanta, GA, and the boondocks in question are in Green County, GA (and no, I don’t know where that is, either).

Of course, as Judge Elizabeth Crewson Paris points out, both IRS and the Boulder Pines’ trusty and high-priced attorneys have offices in Atlanta, GA. Taishoff says, if googlemaps are telling the truth, it’s a fifteen-minute walk from one to the other.

So, Section 7446 says the Ch J shall prescribe place of trial, giving petitioners the best shot at a trial with as little inconvenience or expense as possible. And Tax Court’s Form 5 obligingly lets petitioners choose their own, as does Tax Court precedent.

So Judge Elizabeth Crewson Paris brushes aside IRS’ objection, and sets venue at The A.

Taishoff says, strange that the aforesaid trusty attorneys, who have almost a luxury box at Tax Court since they practice there so often, chose Jacksonville, FL, for place of trial. I seem to remember, long ago and definitely far away, when canny petitioners picked off-the-wall trial venues as a stall. See my blogpost “Same Time, Next Year” 3/3/17.*

But here trial is set for a couple months from now (hi, Judge Holmes). How come trusty attorneys didn’t notice the inconvenient venue before now?

Poor pro ses get confused by Form 5, simple as it is. The ABA Tax Section, to which august body I do not belong, in a show of solicitude for said poor pro ses, laid a whuppin’ on me when I suggested modifying Form 5 to require petitioners show some nexus between place chosen and the issues for determination at trial. Their high-and-mightinesses said poor pro ses can’t get even the simplest forms right.

Well, as I said another time, maybe the ABA Tax Section was right, as even high-priced trusty attorneys can’t get it right. See my blogpost thus entitled.**

Or maybe, just maybe, the Dixieland Boondockers have found a new tactic.

* https://taishofflaw.com/2017/03/03/same-time-next-year/

** https://taishofflaw.com/2017/12/15/maybe-the-aba-tax-section-was-right/

Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan is compelled to deal with a statutory imposition in Estate of Faiya R. Fredman, Deceased, Docket No. 11397-24, filed 10/25/24, because none of IRS counsel, the co-trustee of the late Faiya’s “properly executed trust document,” Order, at p. 1, or petitioner Stephen A. Fredman, seems to understand that Section 2203 makes executor “any person in actual or constructive possession of any property of the decedent.”

Ch J TBS first ordered IRS to state whether they hit the co-trustee with the SND for the estate tax. IRS said they hit Steve, who has standing to represent the estate, and anyway the estate was not going to be probated.

Taishoff says, more correctly, no probate proceedings were going to be commenced. Wills get probated, estates get administered, either by executors or administrators, will or no will. The IRC, disregarding all these State anfractuosities, takes the view we expressed at schoolyard tag so long ago: “anyone around my base is it.”

So Ch J TBS, like frustrated counsel at a deposition facing a recalcitrant witness, orders IRS’ counsel to file written response and “state therein whether the notice of deficiency upon which this case is based was issued to Stephen A. Fredman as the statutory executor of the decedent’s estate within the meaning of I.R.C. section 2203.” Order, at pp. 1-2.

For a full takeout on statutory executorship, see my blogpost “The Case of the Reluctant Executor,” 12/1/11.*

* https://taishofflaw.com/2011/12/01/the-case-of-the-reluctant-executor/

Judge Alina I. (“AIM”) Marshall has an abbreviated abbreviation for the Section 6213(a) Statutory Notice of Deficiency, namely, SND, with which I will henceforth use to replace my previous SNOD, thereby saving me a keystroke. Thanks, Judge; at my age, every little bit helps.

But this avails not the trusty attorney and trusty CPA for Scott Hampton Cumbee and Sharalene R. Cumbee, Docket No. 17312-22L, filed 10/25/24. S&S never petitioned the SND, so their professionals’ nonreceipt of the SND and failure to get the exam file (though trusty attorney got the CDP admin file from Appeals) avails them not.

Trusty attorney does get a Taishoff “Good Try, Forlorn Hope Class” for the argy-bargy about the exam file. When your client can’t swear they didn’t get the SND and their last known address hasn’t changed for a decade, you’ve got to try anything not actually frivolous. And IRS issued a dubious 30-day letter, later corrected.

The Taxpayer First Act gets an airing here, but as with such enactments, IRS complies at the barest minimum “for the benefit of customer service.” Order, at p. 5.

Blowing the 90-day cutoff on a SND is always fatal outside 3 Cir. How long that gap will last is anybody’s guess.

The lawyers’ ideal is not having to try a case. Paradoxical as it sounds, winning fast is better than winning slow. Deft, economical, and fast wins clients’ hearts., Doing it isn’t easy, but even failing at a fast win can shorten the path to victory.

Two examples.

Amgen Inc. & Subsidiaries, Docket No. 16017- 21, filed 10/24/24, a patience-testing, long-running discovery joust, narrows the trial spectrum further with a failed Rule 91(f) deemed admitted ploy. Judge Christian N. {“Speedy”) Weiler discharges the OSC to admit, finding IRS’ expert shortchanged the Court by failing “to discuss the methodology he used to prepare the segmented financial statements. Additionally, the validity and reliability of Mr. [Expert]’s methodology is legitimately in dispute. Respondent has expressed his intention to call Mr. [Expert] as a fact witness, and we believe this presentation at trial is the best mechanism to resolve the ongoing disputes over the segmented financial statements.” Order, at pp. 2-3. Classic case of “sweat your witnesses before trial, and your adversary’s witnesses on the trial.” Does help if you know where the witness should be sweated.

Carl B. Barney, Docket No. 5310-22, filed 10/24/24, is back for the fourth (count ’em, fourth) time on the pretrial trail. Modifying, amending, and supplementing my previous comments, the Rules should allow omnibus motions in complex cases, so all these contentions can get sorted out once for all. This one-issue-per-motion Rule 54(b) approach is a timewaster in complex cases, with sophisticated counsel and judges. And discovery disputes should be handled by law secretaries (as in our NY State courts) or US Magistrates (as in USDCs), without tying up STJ and Judges. We might need fewer judges if they didn’t need to do busywork.

Carl counterpunched when his trusty advisers blew the opt-out from Section 453 installment treatment (didn’t get Com’r’s consent) by entering into a deal with his controlled Sub S Corps to cut the price of the for-profit colleges they sold his self-settled trust, which then sold them on to a genuine 501(c(3) giving Carl a big bargain-sale write-off. Carl cut the price by wiping out one promissory note and eviscerating the other, after IRS started auditing the deal.

Carl claims the notes are contingent payment debt obligations, hence reduction in purchase price and not cancellation of debt. IRS says not, because fixed interest rate. Carl says interest rate can vary if CPI-U fluctuates over a trigger, but IRS says it hasn’t for thirty (count ’em, thirty) years prior to execution of Notes, thus “so remote as to be negligible.” Carl says it has, and cites examples.

Judge Christian N. (“Speedy”) Weiler again finds more disputes. IRS says seller was insolvent, hence Section 108(e)(5)(B)(ii) precludes reduction in purchase price treatment. Judge Speedy Weiler says that’s a question of fact, and even if seller was solvent, IRS still argues that the reduction can’t be carried back to date of sale. Likewise, the terms of the purchase price reduction need to be established. And there remains the question of the FMV of the sold colleges: IRS claims the appraisal upon which Carl bases his bargain-sale charitable donation is excessive.

So the parties get a shopping list.

Brian Dean Swanson, Docket No. 4812-22L, filed 10/23/24, the GA schoolteacher with a rounder’s heart (see my blogpost “Rounders’ Day, Again, 4/22/24*) is back, and Judge Alina I. (“AIM”) Marshall has to deal with Brian Dean’s withdrawal or non-withdrawal of his wages aren’t income 1040.

“The penalty against petitioner was not assessed under section 6702(b), but rather under section 6702(a) for having filed a frivolous tax return for [year at issue]. Petitioner never made a ‘specified frivolous submission’ as that term is defined in section 6702(b)(2)(B). Thus, the withdrawal mechanism of section 6702(b)(3) has no application here.” Order, at p. 8.

Brian Dean sent in a 1040 showing zero wages, asking for a refund of the withholding, based on a frivolous position.

There are three (count ’em, three) tests for a frivolous filing, and Brian Dean checks all the boxes.

“If a taxpayer submits a Form 1040 in an effort to obtain a refund, the document necessarily ‘purports to be a return.’ By claiming a refund due for [year at issue], the Form 1040 petitioner submitted therefore satisfies the first requirement. By reporting none of his teaching wages as taxable income and attempting to ‘correct’ a Form W–2 to do so, while simultaneously reporting thousands of dollars of corresponding income tax withholding, the return also satisfies the second requirement, in that it ‘contains information that on its face indicates that the self-assessment is substantially incorrect.’ Finally, such reporting is based on at least two positions that the Secretary has identified as frivolous—that a taxpayer may file a return reporting zero income and zero tax liability even if the taxpayer received income during the period for which the return is filed and that wages and other compensation received for the performance of personal services are not taxable income—such that the third requirement is also satisfied.” Order, at p. 7. (Citations omitted).

He later claimed to withdraw the position. But his attempted withdrawal is of no effect, because it is the filing, not the assertion of the position therein, that is penalized.

Brian Dean says the IRM lets a frivolite withdraw, even when he doesn’t file a proper return.

“Petitioner’s reliance on the Internal Revenue Manual (IRM) is also to no avail. It is true, as petitioner points out, that IRM 5.20.10.4.3(a) (May 20, 2014) states that if the IRS determines that a taxpayer has submitted a tax return subject to a section 6702(a) penalty but the taxpayer timely responds to a Letter 3176C by filing a valid return withdrawing the frivolous argument ‘or withdraw[ing] the frivolous argument without filing a valid return,’ the section 6702 penalty will not be assessed. But, as petitioner fails to acknowledge, the IRM also states that the required response to remedy a frivolous return—be it a corrected return, a statement withdrawing the frivolous position, or otherwise—is to be ‘determined on a case by case basis.’ IRM 25.25.10.6 (Sept. 15, 2017). Despite what petitioner would lead us to believe, the IRM does not unequivocally provide for the withdrawal of a frivolous return. And even if it did, it is a well-settled principle that the IRM does not have the force of law, is not binding on the IRS, and confers no rights on taxpayers.” Order, at p. 8. (Citations omitted).

Judge AIM Marshall has an interesting footnote, Order, at p. 8, footnote 7. Even if Section 6702(a) did let Brian Dean withdraw his frivolity without filing a proper return, he sued for a refund in USDCSDGA and, when tossed for frivolity, appealed to the Elevenses, who affirmed the toss and hit Brian Dean with $8K in sanctions.**

So much for his “withdrawal.” But could a repentant frivolite withdraw, not file, and duck the Section 6702 chops? Judge AIM Marshall needn’t decide that here, so she doesn’t.

* https://taishofflaw.com/2024/04/22/rounders-day-again/

** https://law.justia.com/cases/federal/appellate-courts/ca11/23-11739/23-11739-2023-08-30.html

My heart sinks when I see that heading on the Tax Court homepage. Too often it means a metaphorical “‘ollow square” in which “they’ve taken of his buttons off and cut his stripes away,” as the Man from Mumbai said.

But today brings cause for a Luke 15:7* as Charles E. Hammond III, Esq., is back.

Welcome.

* https://www.biblegateway.com/passage/?search=Luke%2015%3A7&version=NIV

** https://ustaxcourt.gov/resources/press/10222024.pdf

Proponents of dubious expense deductions cling to the man who gave his regards to Broadway. They seek thereby to turn the merest crowd-scene walk-on into a star turn. This gimmick was part-way closed by Section 274 and the “temporary” regs, soon to become Medicare-eligible. And while not outright repudiated, 5 Cir and 7 Cir, among others, have themselves clung to Judge Learned Hand’s famous qualification: Georgie didn’t keep records, and “probably could not have done so,” 39 F.2d at p. 543. Se my blogpost “A Rarity,” 5/19/20*, for more.

But in these cyberomniscient times, when everyone has “all ye know, and all ye need to know” in his/her back pocket, the all-seeing, all-knowing application (“app”) puts in the hands of even the most technophobic the means to chronicle, characterize, and spread  forth every expenditure, so that “the proofs, the figures, were ranged in columns before me.”

And that is the undoing of Gary Thomas, Docket No. 10795-22, filed 10/23/24. Gary carts around golf carts for a national trucking firm. Though an EE and not an IC, Gary incurs expenses, like tolls, scale fees, layovers, delays, and overnight lodging, in addition to those more particularly bounded and described in Dave Dudley’s 1980 classic exposition of “this truckin’ life I lead.”

Gary wants to take these as unreimbursed business expenses. But Judge Ronald L. (“Ingenuity”) Buch stomps on the brakes. Turns out the national trucker kept track of what Gary was up to, and laid out what reimbursements he received. So when Gary sent in the two (count ’em, two) years of missing 1040s claiming same, he’s trapped by the app.

“Mr. Thomas manually maintained a log of his expenses. He maintained this log because the information was reported to him using a mobile application and not in hard copy. His manual log bears a striking similarity to what [employer] ultimately reported in its payroll system.” Transcript, at p. 4.

Gary didn’t provide any evidence of employer’s reimbursement policy. Nor did he show he had expenses beyond those in his handwritten copy of what employer’s app sent him, which employer’s payroll records confirm. Deductions disallowed.

Taishoff says, is the smartphone the end of Cohan?

* https://taishofflaw.com/2020/05/19/a-rarity/