Curtis K. Kadau and Lori A. Kadau, Deceased, Curtis K. Kadau, Personal Representative, T. C. Memo. 2025-81, filed 7/31/25 had a successful industrial Sub S, but needed a cash stash. Enter a couple promoters (hi, Judge Holmes) who sold them a Nevis (that’s another Island in the Sun) insurance company.

It’s the usual shaky underwriting, excessive premiums, minimally capitalized, insurance-reinsurance roundy-round. Cash goes in a circle, invested in a single premium life insurance policy that benefitted Curtis. It’s the same old story for 39 (count ’em, 39) pages of Judge Christian N. (“Speedy”) Weiler’s deconstruction of this dodge, until we get to the Section 6662(h)(6) and (i) 40% enhanced chops for undisclosed economic insubstance. Enter Section 7701(o)(i), added by the Health Care and Education Reconciliation Act of 2010. Though Section 7701(o)(i) talks of meaningful economic change other than tax, some commentators weren’t sure if this meant sham transaction as well as want of economic substance. And how do we find out if Sectio0n 7701(o)(i) applies?

In short, though the deal must move the nontax economic needle, did the Act move the commonlaw needle?

“The Act also added a new subsection (o) to section 7701 of the Code, codifying the “economic substance” doctrine. That subsection provides a conjunctive test whereby a transaction is treated as having economic substance only if (1) ‘the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position” and (2) ‘the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.’ I.R.C. § 7701(o)(1). The codified economic substance doctrine applies ‘[i]n the case of any transaction to which the economic substance doctrine is relevant.’ Id. And the determination of whether the economic substance doctrine ‘is relevant’ must be made in the same manner as if section 7701(o) had never been enacted. I.R.C. § 7701(o)(5)(C).

“To date, there has been minimal caselaw addressing these provisions. In none of the microcaptive insurance cases decided to date did this Court address whether the transactions lacked economic substance within the meaning of section 7701(o)(1). Nor did those opinions consider what constitutes ‘adequate disclosure’ of a microcaptive transaction under section 6662(i)(2). The Court has withheld ruling on these questions and ordered additional briefing on the ‘relevancy’ question.” T. C. Memo. 2025-81, at p. 40.

Judge Speedy Weiler does likewise.

“We will accordingly defer ruling on the applicability of the 40% penalty in this report, which will be addressed in a subsequent ruling.” Order, at p. 41.

But the 20% 6662(a)s are in; Curtis’ reasonable reliance and substantial authority arguments fail.

IRS tries to wildcard in a $131K increased deficiency to Curtis’ micro via an out-of-time amendment to the answer, earning IRS BoP on that point, which it doesn’t sustain. IRS says since the micro isn’t an insurance company, its Section 953(d) election fails so the premiums Curtis’ Sub S paid to the micro don’t get Section 831(b) shelter, thus taxable. Curtis’ trusty attorneys say it’s a nontaxable contribution to capital, and Judge Speedy Weiler buys it.

“Here, the objective reality is that [Sub S]} and [micro] entered into contracts that required [micro] to pay if it suffered losses covered by the contracts. We find those contracts are not insurance contracts and that the policies, with their unreasonable premiums, had no legitimate business purpose. Therefore, the premiums are not deductible. These conclusions, however, do not mean that the transfer of funds from [Sub S] to [micro] could not serve an otherwise legitimate business purpose such as the contribution of capital. See Rsrv. Mech. Corp. v. Commissioner, 43 F.4th at 918 (analyzing Rev. Rul. 2005-40). Respondent bears the burden here, and we find he has not otherwise established that the transfer of funds from [Sub S] to [micro] should not be classified as nontaxable contributions of capital.” T. C. Memo. 2025-81, at pp. 38-39. (Citation omitted).

The order in Lucille Pilibos, Docket No.19245-24S, filed 7/30/25, gives only the scantiest recitation of facts, as is usual. Nor does STJ Diana L. (“Sidewalks of New York”) Leyden provide any commentary in granting the motion to appoint petitioner’s daughter as a Rule 60(d) next friend.

Daughter says Luncile is 104 years old and lacks mental capacity to handle her taxes. Daughter holds durable power of attorney for Lucile.

Routine, “garden variety” situation, right?

Except.

Both Lucile and daughter are pro se, and neither is movant. Daughter furnishes a declaration in support of the motion, but movant is stated to be “Respondent.”

Is IRS counsel furnishing legal advice to daughter and drafting her motion papers? Is this the new normal?

I won’t miss Section 199, the Domestic Production Activities Deduction, perhaps better characterized as the Domestic Headache Production Act. Though repealed some eight (count ’em, eight) years ago, Judge Goeke must still wrestle with questions of software as product in the hands of a user or a service provided by the developer-owner and delivered by use of the software.

We saw some of the wrestling in Bloomberg, L. P., and BATS, for which see my blogposts “The $6 Billion Misunderstanding,” 12/11/24, and “Making a Big Production,” 3/31/22. Judge Goeke compares and contrasts these with J2 Global, Inc., fka J2 Global Holdings, Inc., as agent for J2 Global, Inc. and Subsidiaries, Docket No. 8392-21, filed 7/29/25.

It’s got much to do with the third-party comparable exception in former Reg. Section § 1.199-3(i)(6)(iii)(B), to which the J2s pin their hopes and IRS ignores.

The result is a Mexican (sorry, American) standoff,. whereby each side seeks summary J, but neither gets it.

Even Judge Goeke finally punts. “…we believe that the trial should focus on the extent to which, if any, the software qualifies for the third-party comparable exception. If the third-party comparable exception is satisfied, petitioner would be entitled to some deduction. The evidence currently before us on summary judgment leads us to believe that petitioner provided services in conjunction with access to software.

“The parties should also present evidence at trial relating to whether there was a software license. That fact is relevant to petitioner’s statutory argument. But it is also relevant to the third-party comparable exception. Evidence that establishes that there was a license would demonstrate what customers were paying for. The parties should present evidence to explain the subscription, usage, and other fees and to ascertain the value of the software.” Order, at p. 11.

If divining the number of cherubim who can do a breakdance on the head of a Higgs boson floats your boat, read Judge Goeke’s disquisition. And take along a wee Tylenol…you’ll need it.

The trade press and blogosphere commented extensively on the Tax Cuts and Jobs Act of 2017. The increased personal exemptions and enhanced standard deduction were welcomed, but fewer spotlights were shone on the suspension of the employee unreimbursed business expense deduction and the Section 212 expenses for production of income deduction.

While these latter impacted far fewer taxpayers, in the case of Adrienne Mennemeyer, T. C. Memo. 2025-80, filed 7/28/25, the suspension of the Section 212 deduction was potentially ruinous. Adrienne settled a wrongful termination and defamation case in 2018, wound up with a $1.5 million settlement, but had a 33% attorneys’ fee.

There’s the usual joust about Section 104 physical injury, but Adrienne has no documented medicals, and her fact witnesses’ testimony was less than stellar. Judge Courtney D. (“CD”) Jones tosses it all.

Adrienne’s post-employment business venture fares little better. Her accountant boyfriend just copied whatever numbers Adrienne gave him. Section 274 knocks out her Chevvy Suburban purchase and expenses, and she hasn’t enough paper to get Cohan treatment above what IRS ultimately allows on everything else.

But however devastating leaving out half of the net recovery on her 1040, plus her unreported business income and disallowed deductions, getting taxed on her attorneys’ fees would have been a crusher.

Except.

Adrienne’s trusty attorney raised the Section 62 deduction for attorneys’ fees in civil rights and discrimination cases as an alternative argument.

“Respondent did not address Ms. Mennemeyer’s alternative position and therefore has waived the argument. See Rose v. Commissioner, T.C. Memo. 2019-73, at *35–36. Moreover, we find that Ms. Mennemeyer’s claims against PNC fall within the broad category set forth in section 62(e)(18)(ii). Specifically, Ms. Mennemeyer’s claims against PNC related to her employment relationship with PNC and her claim for lost wages. Accordingly, the parties shall consider section 62(a)(20) when they recalculate the deficiency under Rule 155. See Dern v. Commissioner, T.C. Memo. 2022-90, at *3 n.3 (noting that the Commissioner conceded that the taxpayer was entitled to deduct attorney’s fees and court costs in connection with claim against former employer).” T. C. Memo. 2025-80, at p. 12.

For the Rose story, see my blogpost “A Little Tin Box,” 6/13/19; for Dern, see my blogpost “Hurt But No Foul,” 8/30/22.

While you can’t count on IRS blowing this one again, definitely raise Section 62 wherever you see a glimmer of hope. And maybe the Big Beautiful Whatever will solve the problem.

The problem I first noted back in 2023 has not abated; see my blogpost “Endangered Species,” 9/6/23.

Judge Courtney D. (“CD”) Jones, noting the age of Railroad Valley Mining Company, LLC, RVMC Partners, LLC, Tax Matters Partner, Docket No. 13683-20, filed 7/28/25, directed the parties to file a stip of agreed facts a couple weeks ago (hi, Judge Holmes).

Now she wants them to talk about a trial date sometime in the fall of 2026.

“As to location, the Court understands that petitioner requested Atlanta, Georgia as its place of trial (Doc. 3). However, there are several hundred, potential multi-week trials, in which petitioners in other cases have requested the same place of trial.” Order, at p. 1.

The Dixieland Boondockery tsunami will overwhelm The Big Peach Federal courthouse, so Judge CD Jones wants IRS and the Railroaders to take the show on the road.

“…the Court will order the parties to confer on an alternative place of trial, or failing an agreement, then two alternative places of trial for each side. (The Court has permanent courtrooms in the following cities that, among others, could be viable alternative trial locations: Washington, D.C., Jacksonville, FL, Tampa, FL, New Orleans, LA, Winston-Salem, NC, Columbia, SC, and Nashville, TN.)” Order, at p. 1.

Atlanta, GA’s Federal courtrooms are an endangered species still.

And that highlights yet again the need for Tax Court to move these cases, both physically and temporally. I commend Judge CD Jones for putting feet to the cliché.

Ch J Patrick J. (“Scholar Pat”) Urda brings some discipline to the discovery process in Capitol Places II Owner, LLC, Historic Preservation Fund 2014 LLC, A Partner Other Than The Tax Matters Partner, Docket No. 16536-23, filed 7/25/25.

Dates matter, so let’s schedule them. PTSO set 4/7/25 as last day for exchange and lodging of rebuttal reports. The Capitolists’ expert rebuttal witness R (name omitted) already testified to rebut IRS’ expert’s report at partial trial session 5/8/25. The Capitolists move for leave to file R’s supplemental rebuttal report 7/23/25, which IRS opposes 7/25/25 (improperly filed, says Judge Scholar Pat, but spoiler alert, the supplemental report isn’t going in anyway).  Further trial scheduled for 7/28/25.

The Capitolists claim R’s report will rebut an IRS fact witness and opine about legal permissibility of the use of, or changes to the façade of, that “three-story classical revival masonry building designed by James Urquhart, an architect prominent in early 20th-century Columbia.” See my blogpost “Historically Insignificant,” 1/2/25, for more.

Judge Scholar Pat isn’t having this.

 “…the rebuttal expert report relates to the upcoming testimony of a fact witness, M…. Ms. M has yet to testify so we struggle to see what there is to rebut. Instead, this appears to be an attempted end-run around our Rules. To the extent that the report relates to legal permissibility, Fund seeks to offer expert testimony that it could have offered in its case in chief. It failed to do so and we will not endorse the twin fictions that this is proper rebuttal or acceptable under our Rules.” Order, at p. 2. See Rule 143(g)(2) for the 30-day cutoff on experts’ reports.

So stand down R, right?

No, says Judge Scholar Pat. R can talk, not report.

“Although Ms. R testified in rebuttal to Mr. F’s [IRS’ expert] report, this testimony took place before Mr. F himself testified. We will permit testimony by Ms. R for the limited purpose of rebutting trial testimony by Mr. F that was not directly covered in his report. We will not permit cumulative testimony or testimony on points contained in Mr. F’s report (which Ms. R had the opportunity to rebut previously). Likewise, Ms. R may testify in rebuttal to Ms. M.” Order, at p. 2. (Names omitted).

“Win Your Case By Discovery Bamboozlery” seems to be a hot CLE topic.

No, not the Colbert-Paramount kerfuffle; this is not a political blog. Rather, this concerns the lawsuit between the children of the late Betty and the Estate of the late Stanley Fulton, arising out of the 1977 divorce settlement between Betty and Stan. The parties settled out for $472 million, which the Estate deducted on the 706.

IRS disallows the deduction. The ex’rs claim the settlement is legit. The latest round of Estate of Stanley E. Fulton, Deceased, Michael B. Fulton and Elizabeth Fulton Jones, Co-Executors, Docket No. 7200-22, filed 7/24/25 features client-attorney privilege.

Judge Adam B. (“Sport”) Landy sorts out communications relating to tax reporting, as to which privilege is waived via reasonable reliance defense. There is a squad of white shoes with whom the ex’rs consulted. The communications regarding settlement of the lawsuit remains protected, but tax reporting is not.

“We agree with petitioners that the waiver of attorney-client privilege only extends to the documents relating to the advice they received regarding the deductibility of the settlement payments on Form 706. Because petitioners have asserted a reasonable reliance defense, any information regarding their return position is not only relevant, but it is also vital to respondent’s burden with respect to the accuracy-related penalty. To the contrary, the settlement negotiations themselves, and the probate and trust proceedings, stemmed from different parties litigating in another forum applying non-tax procedural and substantive law. Therefore, any advice petitioners received in the those matters, even if from the same attorneys, is separate and distinct from that advice they received regarding the deductibility of the creditors’ claim. Consequently, the Court determines that insufficient evidence exists to show that respondent would be prejudiced by the protection of those documents. While the advice regarding the probate proceeding, trust proceeding, and settlement of the creditors’ claims may be relevant, we determine that the advice is not so vital to prejudice respondent. Accordingly, respondent’s Motion is denied with respect to those documents.” Order, at p. 5.

Likewise, communications between and among various attorneys may be protected from waiver by the common interest doctrine.

“‘The common interest doctrine permits parties whose legal interests coincide to share privileged materials with one another in order to more effectively prosecute or defend their claims.” Hunton & Williams v. U.S. Dep’t of Just., 590 F.3d 272, 277 (4th Cir. 2010); see also United States v. Austin, 416 F.3d 1016, 1021 (9th Cir. 2005). This privilege ‘protects not only the confidentiality of communications passing from a party to his or her attorney but also from one party to the attorney for another party.” United States v. Austin, 416 F.3d at 1021; see also In re Grand Jury Subpoenas, 902 F.2d 244, 249 (4th Cir. 1990) (‘[P]ersons who share a common interest in litigation should be able to communicate with their respective attorneys and with each other to more effectively prosecute or defend their claims.”). The common interest doctrine does not require a formal written arrangement or active litigation.” Order, at p. 4. Waiver must be agreed by all parties; no one party can give up the privilege.

IRS gets some stuff, but a lot is protected. For now, at least.

I echo the words of Billy Grammer’s 1959 smash hit when I see the third (count ’em, third) appearance of Dennis M. Curtin, Docket No. 32212-15, filed 7/23/25, in this my blog. Dennis is a Virgin Islander holdover from the days of Congress’ unguided largesse to our Insolvent Islands in the Sun, with its bifurcated tax arrangement between Virgin Islands Bureau of Internal Revenue and the IRS.

Trial is fast approaching after a mere ten (count ’em, ten) years since petition (practically a Tax Court newbie), when IRS seeks to amend its answer to raise “a new issue for years 2001 through 2004.” Order, at p. 1.

The “new issue”?

“[Denny’s wholly-owned VI LLC] did not file an entity classification election, and accordingly is treated as a corporation separate from its owner under Treas. Reg. 301.7701-2(b)(2) (because it was a foreign entity with a single member with limited liability). For years 2001 through 2004, the Commissioner argues that Mr. Curtin was not a bona fide resident of the USVI and did not satisfy his income tax obligations by paying all income tax to the USVI. Accordingly, the Commissioner argues that if he is successful on either issue, then Mr. Curtin was required to file a Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, for [Denny’s wholly-owned VI LLC] for each year. The Commissioner alleges that, because Mr. Curtin has never filed a Form 5471 for [Denny’s wholly-owned VI LLC], the assessment period for the income tax return remained open under section 6501(c) as in effect for years 2001 through 2004.” Order, at p. 2.

IRS further claims no prejudice to Denny, because his years-at-issue records are “meticulous”, and IRS would be prejudiced if Denny wins on SOL.

Judge Ronald L. (“Ingenuity”) Buch isn’t buying.

“The Commissioner does not provide a reason for raising this argument this late in the proceedings. The Commissioner argues that had Mr. Curtin properly reported his interest in [Denny’s wholly-owned VI LLC], then the Commissioner would have been able to timely issue the notice of deficiency with respect to these years. However, the Commissioner does not provide a reason for why he is raising this defense a mere five weeks before trial. The Commissioner was aware of the existence of [Denny’s wholly-owned VI LLC] when he issued the first notice of deficiency in these consolidated cases on September 15, 2015. Accordingly, the Commissioner has had nearly ten years to investigate this entity to raise this issue.

“Additionally, allowing this issue to be added at this late date would prejudice Mr. Curtin. Discovery is closed. And even if no discovery would be required, addressing this issue would require petitioner to scour his records during the remaining few weeks before trial. Allowing the Commissioner to raise a new issue after discovery has been closed for over a year and on the eve of trial would prejudice Mr. Curtin.” Order, at p. 3.

Of course SOL must be pled and proven. It’s an affirmative defense.

Taishoff says I don’t see why Denny has to “scour his records” to see if he filed Form 5471 for any of four (count ’em, four) years at issue; Form 5471 gets attached to whichever of personal, partnership, or corporate tax return you filed, or amended return if you forgot to file Form 5471 with the original return. The returns for relevant years have to be front-and-center among Denny’s “meticulous records” in his trusty attorneys’ trial notebook.

Btw, I got the Form 5471 question wrong on the SEE for Enrolled Agent.

That said, Judge Ingenuity Buch got it right. It took IRS ten years to figure this out. That I got the question wrong doesn’t excuse them. The glacial pace of Tax Court practice encourages such dilatory behavior. They “laid around and played around this ol’ town too long/Summer’s almost gone and winter’s comin’ on.”

Time to travel on.

Not the 2008 Eugene Marten novel thus entitled, this is my comment on the unending silt-stir engendered by the sloppy drafting of Section 6751(b) and the unintelligent judicial gloss that renders this defective legislation an impediment rather than a remedy.

In River Moss Property, LLC, River Moss Management, LLC, Partnership Representative, T. C. Memo. 2025-79, filed 7/22/25, IRS employs nine (count ’em, nine) attorneys. Why this run-of-the-mill partial summary J motion needs a T. C. Memo. and nine IRS counsel, when the River Mosses only interpose what Judge Rose E. (“Cracklin’) Jenkins calls unconvincing objections and requests for discovery that will not lead to essential information.

Given this case is Golsenized to 11 Cir, whose view is that as long as supe can supervise when signoff occurs, Section 6751(b) is satisfied.

I note that among the baseball team IRS has assigned to this case, three (count ’em, three) of those attorneys are part of the team who first gave notice of the chops to the Moss Rivers.  Cf. T.C. Memo. 2025-79, at p. 1 with p. 3. “Senior Counsel Richard J. Hassebrock recommended assertion of that penalty by including it in the Answer. Mr. Hassebrock’s immediate supervisors, Associate Area Counsel Louis H. Hill and Strategic Litigation Counsel Alexandra E. Nicholaides, approved the civil fraud penalty in writing.”

Fortunately IRS gets partial summary J, lest the aforesaid three attorneys be confronted with ABA Model Rule of Professional Conduct 3.7(a), which is engrafted into Tax Court practice by Rule 201(a).

 But such proceedings are a waste of time.

Only seven (count ’em, seven) small-claimer T. C. Sum. Op.s as we near the end of month seven of 2025. In contrast, CSTJ Zachary S. (“High-Rise”) Fried has issued thIs date 96 (count ’em, 96) SPTOs for small-claimers. How many ya think CSTJ High-Rise Fried will actually try?

STJ Jennifer E. (“Publius”) Sigel has John Henry Besaw, T. C. Sum. Op. 2025-7, filed 7/21/25, a simple Section 170 noncash, definitely not Dixieland Boondockery.

John Henry “…stated that it was his understanding that the elements required by law for noncash charitable contribution deductions were to include the name and address of the donee organization and the description of donated property, not anything about the value of the donated items. He contends that is why he did not include the values of the donated items on his [year-at-issue] tax return. Petitioner did not testify, and the Court does not find that it was impractical to obtain receipts for the donated items that included descriptions of the items donated.

“Although the Court believes petitioner donated items to charitable organizations in [year-at-issue], the record before the Court shows that petitioner did not satisfy the substantiation requirements of section 170(a)(1) and Treasury Regulation § 1.170A-13. Regardless of whether petitioner met the requirements for deducting charitable contributions of $250 or more, or for deducting charitable contributions of property valued in excess of $500, none of the receipts he provided from the charitable organizations for his donations included any descriptions of the donated items; therefore, petitioner is not  entitled to deduct noncashcharitable contributions for tax year 2019. See I.R.C. § 170; Treas. Reg. § 1.170A-13(b)(1).” T. C. Sum. Op. 7, at pp. 5-6.