Werner Heisenberg (1901-1976) was a physicist, not an engineer. But his famous uncertainty principle is the model for Judge Travis A. (“Tag”) Greaves’ exhaustive (not to say exhausting) review of the Section 41 additional research credits claimed by Phoenix Design Group, Inc., T. C. Memo. 2024-111, filed 12/23/24.

The Phoenixes are MEPF (mechanical, electrical, plumbing and fire prevention) engineers of great skill and high repute. Only their experimentation to solve uncertainty fails to show both what was uncertain and what they did to resolve the uncertainty. They had timesheets galore, but few details thereon. And their meticulous drawings confounded even their attorneys. “As aptly summarized by petitioner’s counsel, the unexplained design drawings ‘tell[] me nothing.’” T. C. Memo. 2024-111, at p. 36.

Just solving problems isn’t enough. The Phoenixes are masters of that. The scientific method is the key to the credit. And explaining it to a judge is essential.

As Judge Greaves sums it up. “As said before, engineers solve problems you did not know you had in ways you cannot understand. Without an explanation of the work or process of the engineers, we cannot understand how PDG engineers came to the ultimate solutions and determine whether the activities qualify as research within the meaning of section 41. None of the trial projects as a whole or at the shrinking-back level involved qualified research. Petitioner is liable for the accuracy-related penalties as stipulated by the parties.” T. C. Memo. 2024-111, at p. 45.

All the tax sites and pundits are coming up with their year-end strategies; like old-time wedding regalia, some are old, some are new, some are borrowed, and maybe even some are blue. I’ll be in style, and offer a year-end tip with help from STJ Diana L. (“Sidewalks of New York”) Leyden.

Even if you’re not required to file a return (e.g., income under the wire), file anyway. If you don’t, the passage of time will bar your otherwise meritorious refund claim.

Just ask Mary C. deNourie, Docket No. 18182-22, filed 12/23/24. Mary’s income was Social Security and part-time retail clerking, so neither she nor spouse had filed for years. But IRS claimed she got some money from a LLC in year at issue, and hit her with a SND. She and IRS settled out the alleged deficiency at zero, but when Mary claimed a refund of withholding, IRS interposed Section 6511. Mary filed a return six years late claiming the refund, which IRS bounced. The Section 6511 three-and-two limits were long since passed.

STJ Di says it’s harsh but true. If you want a refund, even if you’re not required to file, you’d best file timely to claim it.

“As is true in many of the cases in this field, ‘[w]hile the result may seem harsh where the tax has actually been overpaid by withholding or payments of estimated tax, the result is mandated by the law and is also a problem of the taxpayer’s own creation.’ The situation is not an unfamiliar one, and has been before this Court in a variety of other circumstances.” Order, at p. 6. (Citations omitted).

A short form, like a 1040A or 1040-EZ, might do; try a LITC first. But file. Starts the SOL running, too. And tell ’em Mary sent ya.

After years of seeing requests for sealing records or proceeding anonymously routinely denied, even in whistleblower cases until DC Cir stopped it, I wanted to use the old ice hockey players’ watchword: “If you step on the ice you gonna get hit.” Non-whistleblower petitioners should read and heed. Section 7461 sets a high bar for privacy.

Now nonparty S.Crow Collateral Corp. (SCCC) wants to seal an IRS expert’s report in Richard B. Stillahn & Lisa R. Lang Stillahn, Docket No. 13492-20, filed 12/20/24, to lock out some SCCC’s tax return info IRS got via the audit process. IRS claims transactional relationship between SCCC and an LLC on the one side, and Stillahn on the other. I’ve blogged these situations a few times before now, and generally IRS wins.

Trade secrets, privileged information, and Section 6103 info usually clear the bar, except where, as here, it relates directly to the two lead issues in the case.

Ex-Ch J L. Paige (“Iron Fist”) Marvel spells out the ground rules.

“An item of evidence received by this Court is presumptively a public record open to the inspection of the public. While we may seal a record for good cause, the burden of demonstrating good cause—including whether information is confidential pursuant to section 6103—falls on the party or other affected person moving us to seal the record. SCCC thus bears the burden of demonstrating good cause, and respondent does not bear a burden in relation to SCCC’s Motion to Seal.” Order, at p. 3.

And that a proceeding for unauthorized disclosure per Section 7431 is ongoing in USDCDID doesn’t matter. The sealing or otherwise of the expert’s report doesn’t only affect the parties (and participants, willing or unwilling), but the public at large.

The real capper is this: “SCCC, however, has not specifically identified each item of disclosed return information to which it objects and has not explained with particularity how section 6103(h)(4)(C) should apply to each such item of information.” Order, at p. 3.

So SCC’s trusty attorney’s request to brief the matter really doesn’t answer the question why this stuff should be secret.

So to all who ask that I not comment on their cases, I can only paraphrase ex-Ch J Iron Fist: “Even if you don’t step on the ice, you gonna get hit.”

I had not blogged the precvious Tax Court Appearances of Marie Claudia Estorge, Docket No. 36014-21W, filed 12/20/24. The most IRS came up with, whether or not from Marie’s blow, was under $300K on a non-individual; hence Section 7623(b)(5) locked her out regardless.

Marie is a fighter in the Fighting Joe Insinga tradition, but it’s a lost cause. Though she’s pro se, either she knows the ropes or has a helper who does.

I’m only noting the case because I think Judge Courtney D. (“CD”) Jones walked past a promising path to settling the summary J vs. stipulated facts dispute in Whistleblower cases.

Here’s Judge CD Jones: “… in cases in which judicial review is based solely on the administrative record, Rule 121(a)(2) does not apply, and the parties must provide “statement[s] of facts with references to the administrative record.” Rule 121(j). In this context, summary judgment serves as a mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record or whether the WBO’s determination was ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.’ Van Bemmelen, 155 T.C. at 72 (quoting Kasper v. Commissioner, 150 T.C. 8, 21 (2018)). In conducting this analysis, we do not substitute our judgment for that of the agency, but instead confine ourselves to ensuring that its determination was ‘within the bounds of reasoned decisionmaking.’ Id. (quoting Dep’t of Com. v. New York, 139 S. Ct. 2551, 2569 (2019)). With respect to factual matters, this includes accepting the agency’s determinations as long as they are not clearly erroneous. See Kasper, 150 T.C. at 23 (citing Fargo v. Commissioner, 447 F.3d 706, 709 (9th Cir. 2006), aff’g T.C. Memo. 2004-13).” Order, at p. 5.

Taishoff says there are no “stipulated facts” in a record-rule whistleblower case. There’s a filed administrative record, which the parties either agree is complete as to what the WBO had before it, or have attempted and failed to enlarge. But the Court may not look behind except for manifest injustice.

In essence, this is the equivalent of the old commonlaw writ of certiorari to review, ordering the decider of fact to certify the record to the body charged to review, which can then to sustain or reverse the decision based on that record solely.

Adopt such a Rule, call it what it is, and the ambiguity first noted by Judge David Gustafson in Bialer (see my blogpost “The Whistle Blown on Summary J,” 12/2/19*) will vanish leaving not a wrack behind.

But alas, without a Tax Court Bar Association to support rational Rule amendments, I fear it will be a long long way to certiorari.

* https://taishofflaw.com/2019/12/02/the-whistle-blown-on-summary-j/

Jackson Crossroads, LLC, Greencone Investments, LLC, Tax Matters Partner, T.C. Memo. 2024-111, filed 12/19/24, has some GA boondocks they claim is a great source of Lower Paleozoic metamorphic granitic gneiss, the stuff they make aggregate from, which is used in construction. They claim the property is worth $23 million (and there’s a picture at p. 6) showing what might be). Conjoined with them is Long Branch Investments, LLC, Greencone Investments, LLC, Tax Matters Partner, who are out on a limb over a bulk industrial distribution park on some nearby boondocks (picture on p. 8); they claim $14.6 million.

Of course, after the syndicated conservation easements put together by a couple good ol’ boys (hi,  Judge Holmes) who met at an Atlanta Braves game reduce these goldmines to “planted loblolly pine and natural hardwood forest areas as well as fields planted with soybean, chufa, corn, and wheat. The property also had two intermittent streams and two small, man-made ponds. In addition, a pole shed and dilapidated hunting camps stood on the property,” T. C. Memo. 2024-111, at p. 9, the whole shebang ain’t wuth nuthin’.

They say.

Judge Christian N. (“Speedy”) Weiler ain’t so sure, although he blows off IRS’ usual attacks on the appraisals. Most of the objections get brushed off with “they comply with the Regs, so your objections go to weight, not admissibility”. Of interest is IRS’ invocation of Reg. Section 1.170A-13(c)(5), the so-called knowledge regulation. The test is whether a reasonable person would see that the appraisal was way out of line with reality. But Judge Speedy Weiler says this has to be equal to the cataclysmic own-goal testimony from the appraiser in Oconee Landing Property, LLC, Oconee Landing Investors, LLC, Tax Matters Partner, T.C. Memo. 2024-25; see my blogpost “Four-To-One,” 2/22/24*. In short, were the LLC managers in cahoots with the appraiser?

Not here, says Judge Speedy Weiler; just the “a relatively normal back-and-forth between client and appraiser,” T. C. Memo. 2024-111, at p. 26. Judge, did you ever hear the hypertechnical phrase “mach gresser, mach veyniger“?

The appraisers are in, but the appraisals are out. There are what the USPAP call extraordinary assumptions, and irrational exuberance. CSX isn’t rebuilding their railway to suit. Judge Speedy Weiler carefully slices, dices, dissects, and shaves the worth of the two easements to about $1.1 million for the Jacksons, and $1.5 million for the Long Branchers.

Plus 40% overvaluation chops.

* https://taishofflaw.com/2024/02/22/four-to-one/

Adrian D. Smith & Nancy Smith, et. al., Docket No. 13382-17, filed 12/18/24, are part of a firm of architectural designers with a worldwide clientele. Here, they’re enmeshed in a brouhaha over Section 41 additional research credits for a trio castles (hi, Judge Holmes), one each in Dubai, Saudi Arabia, and Abu Dhabi.

Judge Christian N. (“Speedy”) Weiler tosses IRS’ summary J motion because of ambiguous language in the contracts. To whom do the results of the research belong? IOW, is this work-for-hire, in which case no credit. And is this funded research, that is, upon whom does the risk of failure fall? Judge Speedy Weiler lays out the conflicting contractual paragraphs.

It comes down to whether the petitioner was paid for research or for results. And foreign copyright and IP law are also in play. IRS’ claim that petitioners’ failure to give a Rule 146 notice before invoking foreign law is treated as a “no hurt, no foul.” These are offshore deals, so from the get go foreign law must be considered. Order, at p. 12.

Plenty of drafting hints (and landmines) here. This is what happens when the large print giveth and the small print taketh away.

Mario G. Duckett, Docket No. 6697-22, filed 12/17/24, has two ex-spouses to pay in year at issue (pre-TCJA). The ladies come away with $117K between them, but Mario gets his Section 215 alimony deduction for a mere $82K, leaving Mario holding a $35K nondeductible bag.

Separation and death are the problems.

Mario’s marital settlement agreement (MSA) incident to divorce from ex-2 provided Mario had to dump some stock and options, from the proceeds of which he had to pay ex-2 the lesser of $30K or whatever he got. But the heading of the section of the MSA that spells this out reads “Equitable Distribution of Marital Property.” The MSA section relating to periodic installments of alimony is entitled “Support.” That section only deals with periodic payments, and that IRS folds.

Mario’s trial testimony that the stock money was intended to offset a higher monthly payout demanded by ex-2 doesn’t get it. “However, the subjective intent of the parties is not determinative of whether a payment constitutes alimony.” Transcript, at p. 9.

Remember, family lawyers, while your documents don’t have to track the statutes word for word, if you separate property settlement too far from alimony, your clients will have separation anxiety when their returns get examined.

Death? That’s the usual Section 71(b)(1)(D) death of either party cancels obligation. Mario obligingly testifies nobody ever mentioned death at the negotiations of the MSA. Game over, of course.

Now the TCJA put paid to all this stuff for years after 2018. But in case it ever comes back, beware!

Thus spake the trusty attorneys for Raju K. Mukhi, Docket No. 15315-19, filed 12/16/24. Y’all who are from around my blog will recollect that Raju lost the nonassessable joust over Section 8039 furriner chops. What, no? See my blogpost “È Pur Nonassessable,” 11/18/24*.

Now, as trial looms, the fight becomes over the evidence of Raju’s offshore dealings, and the certification of Ms. Eveline Schmocker-Meier, an employee of Clariden Leu in Zurich, Switzerland. She is certifying a bunch documents (hi, Judge Holmes) allegedly exemplifying Raju’s Helvetian hijinks.

Judge Travis A. (“Tag”) Greaves referees the fracas.

First, classic hearsay. Out-of-court statements offered for the truth thereof, not subject to cross-examination, are out. And you can’t cross-examine pieces of paper or concatenations of electrons. But there are a bunch exceptions: whatever shall we do without exceptions?

“… foreign business record of a regularly conducted activity satisfies both a hearsay exception and the authentication requirement if the record meets certain criteria. Fed. R. Evid. 803(6), 902(11), (12). First, the record must have been made at or near the time of the event by someone with firsthand knowledge or through information transmitted by that person. Fed. R. Evid. 803(6)(A). Documents such as financial statements that are prepared periodically satisfy this timing requirement.” Order, at p. 4.

The documents must be kept in the ordinary course of a regularly-conducted business, and be kept as a regular practice. Hence, material prepared for litigation or other one-offs don’t make the cut. “Regularly integrated with day-to-day business affairs” is the magic language.

And the custodian or other qualifying witness, while not necessarily having first-hand knowledge of the process, must know enough to be able to testify with specificity about it. And has to be able to testify about it without showing that the stuff is untrustworthy.

Of course, the other side has to be able to see and review the stuff, FRE §803(6)(D), 902(11).

Last scene of all that ends this strange eventful history, the document’s certification must have been signed “in a manner that, if falsely made, would subject the certifier to a criminal penalty in the country where the certification is signed.” Fed. R. Evid. 803(6)(D), 902(12). In addition to these considerations, “[t]he principal precondition [of this exception] is that the records have sufficient indicia of trustworthiness to be considered reliable.” Order, at pp. 4-5. (Citation omitted).

OK, but how about authentication?

Needn’t be conclusively established, but only a preponderance of evidence presented. Circumstances where document produced and content of document are the tests. Here, documents produced in response to an IRS IDR, or which have binding legal force (like contracts), or admissions against interest, make the cut.

Judge Tag Greaves’ examination of foreign-source documents is worth a read by anyone learning, or reviewing, objections to documentary evidence.

* https://taishofflaw.com/2024/11/18/e-pur-nonassessable/

Maybe most lawyers can’t add, but not Judge Tamara W. (“Math Whiz”) Ashford. My offer of proof in substantiation of the foregoing is Leon A. Greenblatt III and Leslie N. Jabine Greenblatt, T. C. Memo. 2024-109, filed 12/16/24.

This is a multi-decade, multi-corporate joust over $36 million in NOL carryforwards, unreported income, and Section 351 corporate give-and-gos, which go off largely on want of substantiation.  Takeaway- Packrats win; save every scrap of paper. Back up your harddrives. Put a litigation hold on everything.

Leon left too much to his ex-partner, but the ex hired a topnotch CPA and gave him all the stuff he asked for, thus saving Leon from massive chops.

It’s entirely too fact-based to paraphrase or abstract, but Judge Ashford stays with it. If you’ve got a tangled twenty-plus-year NOL, Judge Ashford has written an essay here on how to unscramble it.

Daniel J. Bealko, T. C. Memo. 2024-110, filed 12/16/24, eschews such feeble steps as seeking collection alternatives, inventing instead a novel tax credit to offset IRS’ levy on his annuity in support of collection the $7.4 million in back taxes he owes.

IRS applied the grab to the oldest IRS applied the grab to the oldest year, as SOL was about to run. IRS didn’t release its lien for that year until after the levy was complete. Dan takes the levy as a refundable credit for his most current year, claiming that if IRS grabs current income to pay past debts he can never wipe out his total debt, as the levies just keep cascading, wiping out current income so he can’t pay tax thereon, as the years roll on.

Judge Albert G. (“Scholar Al”) Lauber can’t hand out “Good Try” Awards for originality but can refer to classical mythology.

“…petitioner does confront a practical problem, and we understand why he feels frustration akin to that of Sisyphus, who could never get the huge rock all the way up the hill. At trial we suggested that a sensible course of action may be to submit to the IRS a request for collection relief, in the form of an offer-in-compromise or an installment agreement, and seek assistance from a Low Income Taxpayer Clinic or the Taxpayer Advocate Service in that endeavor.” T. C. Memo. 2024-110, at p. 4.

But as Daniel didn’t seek a CA via a CDP for the levy as issue, he’s stuck.