Who are these afecionados is the issue before Judge Jeffrey S. (“Schwer”) Arbeit, but it’s not so hard that summary J can’t resolve it in Blair A. Battersby, et al., Docket No. 1356-23, filed 4/2/26. It’s a chicken farm LLC box-checked to Sub S taxation that turns into Dixieland Boondockery. In year at issue original owners Phil and Teresa swap some stock, so the 10 (count ’em, 10) syndicatees who get 97.5% of the stock claim Section 1377(a)(2) termination affected shareholder status lets them split tax years and make special allocations of the $6.1 million claimed conservation easement deduction.

“Section 1377(a)(1) provides that each shareholder’s pro rata share of any S corporation item described in section 1366(a) for any taxable year is the sum of the amounts determined with respect to the shareholder by assigning an equal portion of the item to each day of the S corporation’s taxable year, and then by dividing that portion pro rata among the shares outstanding on that day (that is, a per-share, per-day basis). See also Treas. Reg. § 1.1377-1(a)(1). Section 1377(a)(2) provides an exception to this per-share, per-day rule if a shareholder’s interest in the S corporation terminates during the taxable year: the S corporation, with the consent of all ‘affected shareholders,’ is permitted to elect to compute pro rata shares of ‘affected shareholders’ as if the taxable year consisted of two separate taxable years. See § 1377(a)(2)(A); Treas. Reg. § 1.1377-1(b)(1). The election under section 1377(a)(2) has no effect on shareholders that are not ‘affected shareholders.’ See §1377(a)(2); Treas. Reg. § 1.1377-1(b). The “affected shareholders” are those shareholders whose interests terminate and all shareholders to whom those shareholders transferred shares during the taxable year. See § 1377(a)(2)(B); Treas. Reg. § 1.1377-1(b)(2). If, however, the S corporation redeems a shareholder’s interest, all the shareholders during the entire taxable year are treated as affected shareholders. See id. 

“The parties share the same understanding of the law. Accordingly both parties acknowledge that unless a shareholder’s interest is terminated because of a redemption by an S corporation, the affected shareholders are limited to the transferors and transferees of the ownership interest.” Order, at pp. 4-5.

Judge Schwer Arbeit finds the paperwork shows the swap was between Phil and Teresa, not a corporate redemption of their stock. Hence only they are “affected shareholders.” Wherefore the syndicatees have only a single tax year and are relegated to per-share-per day straight allocation, no mix-and-match with the claimed deduction.

Of course, there remains the question of the valuation of the easement remains for trial. Order, at p. 1.

Mr. W (name omitted) is, and was during and before the year at issue, Executive Director of the Bessemer Airport Authority, which runs Echo Kilo Yankee, a public-use, business friendly airport with a sincere dedication to serving the entire General Aviation community.  The trusty attorneys for Morgan Run Partners, LLC, Overflow Marketing, LLC, Tax Matters Partner, Docket No. 8669-20, filed 4/1/26, want to put in evidence some of Mr. W’s drafts and e-mails about capital improvements to that striving, thriving installation and testify that maybe so might could be acquiring part of the nearby Dixieland Boondockery at issue here.

Judge Albert G. (“Scholar Al”) Lauber cancels the trusty attorneys’ takeoff clearance and sends them back to the ramp.

“…the trial session beginning April 6, 2026, is limited to deciding a single issue—the FMV of the easement––which will require the Court to determine the FMV of the Morgan Run Property before placement of the easement. In determining the ‘before value,’ we must decide ‘the price at which the [Morgan Run] property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.” Treas. Reg. § 1.170A-1(c)(2). Whether a nearby property owner, such as the airport, considered ‘pursuing’ the Property, at an undisclosed purchase price, without ever communicating any purchase offer to anyone, is not information to which other market participants would be privy. Because this information, even if true, would not be available to a hypothetical buyer with reasonable knowledge of the relevant facts, it is simply not relevant in determining the FMV of the Morgan Run Property.” Order, at p. 3.

Besides, the whole thing is speculative. The drafts are just that, drafts; no showing they ever went beyond that, or if they did, how they ended up. Moreover, throughout discovery IRS asked for “(1) any correspondence with persons interested in acquiring the Morgan Run Property; (2) any offers to purchase the Property; and (3) documentation of any activities with respect to possible industrial development of the Property, including any plans, studies, conceptual designs, permits, permit applications, cost estimates, and/or correspondence with Jefferson County, the State of Alabama, or their respective agencies.” Order, at p. 2. IRS got nothing. The prior owners had Morgan Run zoned residential estate, and the appraisal attached to the Form 8283 stated HBU was residential.

An offer, unaccepted, does not indicate value. Here, there isn’t even an offer.

Discovery closed two (count ’em, two) months ago. This stuff came up in the middle of last month. Judge Scholar Al says this is an ambush and tosses the documents. Mr. W can testify as to facts, and if IRS’ expert spoke to him as petitioners claim, he can testify about that.

Judge Elizabeth A. (“Tex”) Copeland sings out a variant of that old cadence I (and a generation now thinning out) remember so well. Judge Tex Copeland is telling Peter E. Barker-Homek, half of Peter E. Barker-Homek & Shay Serdy, Docket No. 2172-17, filed 3/31/26, that he must sort out his bankruptcy dischargeability issues elsewhere than at The Glasshouse in the City of the Partial Shutdown. 

Peter wants an order clarified, but exactly which order and how it is unclear are themselves unclear. Order, at p. 2. Judge Copeland surmises Peter means whether she or the BJ in whichever of the three (count ’em, three) bankruptcy cases he and Ms. Serdy filed can decide which, if any, of the deficiencies he’s now petitioning are discharged or dischargeable. The last of the bankruptcy cases resulted in an order returning the deficiency case to Tax Court to decide whether there are deficiencies at all, and if so, how much is owed.

Tax Court decides deficiencies, Bankruptcy Court decides dischargeability.

“On this point, we refer the parties to our holding in Neilson v. Commissioner, 94 T.C. 1, 9 (1990), where we clarified that ‘we are without subject matter jurisdiction [to determine dischargeability] and petitioners, if they want a ruling on their dischargeability position, would be required to seek the jurisdiction of the bankruptcy court.’ What this means for Mr. Barker-Homek in this case is that we must conclude our deficiency determination before such deficiency can be discharged in bankruptcy.” Order, at pp. 2-3.

Judge Copeland lays out two (count ’em, two) scenarios this case might follow, but refrains from any more, and strongly suggests the parties settle the numbers.

Peter is rebuked for failing to serve Ms. Serdy (who is mail only, not electronic), leaving the burden on Mr. Jeane and his faithful few.

Oh yes, Peter also moves to reopen the record and recuse Judge Copeland, but those will have to await IRS’ replies. Cain’t hardly wait.

Daniel Isaiah Thody, T. C. Memo. 2026-30, filed 3/30/26, need not worry that he might be twice mulcted for the tax he never paid, as shown on the SFRs he got for the five (count ’em, five) years he never filed. Daniel Isaiah’s business, which his father started, sold airplane parts to DOD. Daniel Isaiah was in jail when he petitioned the deficiencies; his father was in jail during the years at issue, T. C. Memo. 2026-30, at p. 2.

Judge Elizabeth A. (“Tex”) Copeland thinks so little of Daniel Isaiah’s arguments on his own behalf as to give him a Section 6673 frivolity yellow card, T. C. Memo. 2026-30, at pp. 10-11. 

Since Daniel Isaiah did pay the criminal restitution amerced by USDSWDTX, he needn’t pay the $162K twice.

“Although the IRS may have previously collected without assessment or even summarily assessed the restitution liability, it neither assessed nor collected such restitution as a deficiency.  This does not necessarily mean that the IRS is not required to later credit its deficiency assessments for the years in issue with amounts (if any) collected on the restitution. Mr. Thody’s payments on the restitution liability, if any, do not affect the existence of deficiencies for the years in issue; but rather such payments will apply after assessment to satisfy that deficiency or a portion thereof.” T. C. Memo. 2026-30, at pp. 7-8. (Citations omitted; emphasis by the Court).

Restitution is estimated loss to the guvmint; deficiency is adjudicated tax due. Latter may be greater or less, so sort it out in the Rule 155 beancount.

That’s what Judge Ronald L. (“Ingenuity”) Buch finds Barrett Business Services, Inc., 166 T. C. 7, filed 3/30/26, to be when BBS seeks to take the  “Work Opportunity Tax Credit (WOTC) and the Empowerment Zone Employment Credit (EZEC) with respect to its clients’ worksite employees for… (years in issue).” 166 T. C. 7, at p. 2.

Judge Buch finds sufficient Congressional guidance to keep the largesse bestowed on commonlaw employees (the hands-on, tell-the-workers what-and-how-to-do, fire-and-hire types) out of the hands of the backoffice payroll bookkeeper types like BBS.

Backstory: ” The WOTC allows employers to claim a tax credit for a percentage of wages paid to individuals of a ‘targeted group.’ See I.R.C. §§ 38(a), (b)(2), 51(a) and (b)(1). individuals of a ‘targeted group’ include certain veterans, ex-felons, individuals with disabilities, or long-term unemployment recipients. I.R.C. § 51(d)(1). The EZEC allows employers to claim a tax credit for a percentage of qualified zone wages paid for services performed by qualified zone employees who both live and work in an empowerment zone. See I.R.C. §§ 38(a), (b)(9), 1396(a), (c)(1), (d)(1). An empowerment zone is an area suffering from high poverty and unemployment in an urban or rural area designated under section 1391(a) by either the Secretary of Housing and Urban Development or he Secretary of Agriculture. See Rev. Proc. 2021-18, § 2.01, 2021-15 I.R.B. 1007, 1007; H.R. Rep. No. 103-111, at 792 (1993), as reprinted in 1993-3 C.B. 167, 368; see also I.R.C. § 1393.” 166 T. C. 7, at pp. 3-4.

While the statutes don’t define “employer,” commonlaw is the rule. BBS’ try to use Section 3401(d)(1) statutory employer cover falls short. Section 3401 is specifically limited to Title C employment taxes. Employment taxes aren’t income taxes.

And for those who care about legislative intent, Judge Buch has the following: “Congress enacted these credits to encourage employers to hire disadvantaged individuals who live and provide services in economically distressed areas. Congress intended the credit to help these disadvantaged individuals and to revitalize these economically distressed areas. Barrett provides employment-related services to its clients, which include payroll services. Barrett is not the entity that is providing the work opportunity for disadvantaged individuals or in distressed economic areas. A statutory employer who pays wages for services provided to another person is not Congress’s intended beneficiary of these credits.” 166 T. C. 7, at p. 10. My kind of judge.

Section 3504 agency only subjects agents of employers to the same liabilities as employers, not the same benefits. And as these are cross-motions for summary J, and the agency relationship is a fact question, Judge Buch can’t tell if BBS is an agent of the various employers who retain their services. 

That’s what British-American Tobacco wanted Anthony A. Klein and Barbara N. Klein, T. C. Memo. 2026-29, filed 3/30/26, to help their customers do. AA was sole shareholder of a C Corp that made the foil elements that power the “heat not burn tobacco” market. Lacking the plant to deliver what BAT needed, yet diffident about committing to one big customer and borrowing to upgrade, AA got BAT to give the C Corp $4.3 million, which no one disputes went into the upgrade.

Judge Elizabeth A. (“Tex”) Copeland, ever a stickler, finds the papering of the deal a wee bit sketchy, so when the C Corp claims BAT made a nontaxable nonshareholder contribution to capital per Section 118(a), she goes with IRS’ claim that Section 118(b) blows away the smoke.

“The parties do not contest that the $4.3 million was bargained for, that it benefited C Corp. in an amount commensurate with its value, or that it contributed to the production of additional income.” T. C. Memo. 2026-29, at p. 9.

The problem is Section 118(b).

“In particular, section 118(b)(1) excepts from contributions to capital contributions ‘in aid of construction or those made by ‘a customer or potential customer.’ The parties do not dispute that BAT’s funds were used to construct the leasehold addition or that, at the time BAT provided the $4.3 million, BAT bought foil heaters in significant quantities from Thermal and intended to continue doing so. Thus, the $4.3 million NVT provided was both ‘in aid of construction’ and made by a ‘customer or potential customer’ of C Corp. Accordingly, section 118(b)(1) excepts the funds from being nonshareholder contributions to capital excludable from gross income under section 118(a) and requires their inclusion in income.” T. C. Memo. 2026-29, at p. 11. (Footnote omitted, but it says that alone is enough to torpedo C Corp.’s argument.)

But though AA loses, he avoids chops. C Corp. could reasonably have believed that the dodgy deal papering really vested title to the improvements in BAT. “Moreover, both [C Corp.] and [BAT] acted relatively consistently in implementing these provisions throughout their relationship. [C Corp.] used the [improvements] and the leasehold addition only to make foil heaters for [BAT]. When [BAT] instructed [C Corp.] to destroy the [improvements] it had bought to produce [BAT]’s heaters, [C Corp.] did so despite misgivings. {C Corp.] likewise sought written permission from [BAT] to use the leasehold addition; but having received no response, left the leasehold addition empty and unused.” T. C. Memo. 2026-29, at p.11.

Most importantly, C Corp. never took depreciation on the improvements.

A Taishoff “Good Try, Second Class,” to AA’s trusty attorney.

Three for the scrapbook, all filed today.

Morgan Run Partners, LLC, Overflow Marketing, LLC, Tax Matters Partner, Docket No. 8669-20, is an eve of trial attempt to wildcard into evidence a bunch screenshots of engineering drawings (hi, Judge Holmes) of a proposed distribution center that maybe so might could have been erected on the boondocks at issue in the year at issue. No go, says Judge Albert G. (“Scholar Al”) Lauber. “The report must therefore be complete in itself; the expert cannot provide explanatory testimony from the witness stand to supply analysis that is missing from the report. In other words, the expert ‘must show his work’ in the text of the report in order to satisfy these requirements. Skolnick, 117 T.C.M. (CCH) at 1322; ibid. (‘Rule 143(g) expressly requires that the report itself include the facts and/or data considered by the witness in forming his opinions.’) (emphasis added). The Court must exclude a witness’s testimony altogether if the report fails to comply with these requirements. See Rule 143(g)(2).” Order, at p. 2. For Skolnick, see my blogpost “Horsefeathers,” 6/3/19. And though engineers might present their conclusions with drawings, Rule 143(g) requires more; show your work and bases for conclusions, and make it plain for nonengineers.

Chad Burris & Julie Burris, et al., Docket No. 18712-22, for once isn’t about Dixieland Boondockery; it’s mobile solar generators. Chad’s & Julie’s trusty attorneys are slow-playing discovery via Rule 102(3) supplementation. Judge Cary Douglas (“C-Doug”) Pugh is unhappy and threatens to bar from evidence on the trial any documents not timely produced per IRS’ demands. Taishoff says it’s more likely that said trusty attorneys aren’t slow-playing documents that help their side but documents that sink them. Maybe a better remedy is needed.

Potts Mountain Investors, LLC, Potts Mountain Reserve IP, LLC, Tax Matters Partner, Docket No. 8731-23. Sorry, guys, I hoped for one day clear of Dixieland Boondockery but it’s like Charles Dickens’ King Charles’ head in David Copperfield. This is a rehash of every shotdown argument against the 40% enhanced understated-overvalued chops. Reading it saves wasted motions.

The leftover from yesterday. Tibor Gyarmati, T. C. Memo. 2026-27, filed 3/26/26, gets hit for overstating basis when he can’t establish that the furniture he included in the sale of his condo was actually there, not destroyed by Hurricane Andrew, and cost what he claimed. The worst piece of paper…but you know the rest.

For the backstory on Royalty Management Insurance Co., T.C. Memo. 2026-26, filed 3/26/26, see my blogpost “Capturing Captivity,” 9/16/24. 

But Judge Albert G. (“Scholar Al”) Lauber left himself some mopping-up, as he must consider “… whether we should sustain the 40% accuracy-related penalty that applies in the case of a tax underpayment attributable to a ‘nondisclosed noneconomic substance transaction.’ See §§ 6662(b)(6), (i), 7701(o); Royalty Mgmt., T.C. Memo. 2024-87, at *53–54.” T. C. Memo. 2026-26, at p.2.

The issue here is “adequate disclosure.” Did the return for year at issue let enough cat out of the bag?

” Section 7701(o) codifies the ‘economic substance’ doctrine. That provision, applicable to ‘any transaction to which the economic substance doctrine is relevant,’ 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 the transaction. § 7701(o)(1). ‘The determination of whether the economic substance doctrine is relevant . . . shall be made in the same manner as if [section 7701(o)] had never been enacted.’ § 7701(o)(5)(C).” T. C. Memo. 2026-26, at p. 3.

Section 831(b) treatment isn’t a Congressional incentive to permit microcaptives to deduct insurance premiums that don’t provide insurance. Relevance of economic substance analysis isn’t forestalled by favorable treatment of real expenses that provide real insurance; nowhere does the IRC allow deduction of phony expenses.

And the “insureds” had no interest except tax dodging. 

As for disclosure, “Sheperd Royalty filed a return on Form 1120S, U.S. Income Tax Return for an S Corporation, for [year at issue]. In computing its net income, it claimed a deduction of $1,110,206 for ‘insurance’ expenses. That figure included the $1,099,900 of premiums at issue here, but those premiums were not broken out separately as a distinct item. Apart from listing a deduction for ‘insurance,’ Sheperd Royalty’s return disclosed no facts whatever—either in the return or in an attached statement—about the microcaptive insurance arrangement. Because Sheperd Royalty was a passthrough entity, the Sheperds reported their distributive shares of its income and deductions on Schedule E, Supplemental Income and Loss, included in their [year at issue] joint return. But their individual return likewise disclosed no facts about the microcaptive insurance arrangement.” T. C. Memo. 2026-26, at p. 10. There wasn’t an iota of specific information about the microcaptive. 

Section 6662(i) enhanced chop sustained.

I said it back in 2022: “…dear reader, before you groan ‘Oh no, not another GA boondockery,’ know I said it first. But I have to blog it; you can stop reading now and ignore it.” See my blogpost “Price and Value,” 1/12/22.

Judge Albert G. (“Scholar Al”) Lauber is in the same unhappy boat as I. Making its third appearance in this my blog is Hancock County Land Acquisitions, LLC, Southeastern Argive Investments, LLC, Tax Matters Partner, T. C. Memo. 2026-28, filed 3/26/26. 

The Hancocks fold the discounted cash flow method of valuation when their appraiser who furnished the Form 8283 backup appraisal fails to testify on the trial. The sales-comparison method doesn’t help, as their argument that their land is too unique craters. There are 10 (count ’em, 10) sales close enough for Judge Scholar Al to find their $763K per acre valuation of these boondocks “an order of magnitude that is light years away” from any rational number. T. C. Memo. 2026-28, at p. 29. And the investor testimony the Hancocks proffered only proved the investors were buying tax write-offs.

The tax loss insurance the Hancocks bought was for their investors’ benefit, hence not a partnership expense and not deductible by the partnership. The Hancocks do get a $25K appraisal fee deduction, despite the appraiser having been retained by the promoter; the Hancocks were the beneficiary. They also get some additional title expenses. The rest of the claimed Section 162 partnership deductions are indocumentados. 

And as their trusty accountant also had a piece of the deal, reasonable reliance doesn’t offset the substantial understatement 20% chop Judge Scholar Al lays on whatever the gross valuation misstatement chop (no reasonable reliance offset for that) didn’t cover.

It’s a tale I’ve told many times: the injured party who settles out and finds that the award is entirely taxable. The 1996 Small Business Job Protection Act did eliminate the need for a tort judgment but left the personal physical injury or physical sickness requirement for Section 104 exclusion. This recognized the trend in the law towards no-fault and other statutory remedies that eliminated the need for a finding of fault. Ser my blogpost “The Egg and I,” 1/22/15.

Physical injury may have been at the core in Toni C. Perry, Docket No. 4647-25, filed 3/25/26, an off-the-bencher from Judge Nega, but the stip of settlement in her State law case didn’t make that clear enough.

“Pursuant to the settlement agreement, the lump sum that petitioner received was for a general release of all claims except for those related to her Connecticut Workers’ Compensation Commission Claim…. Petitioner presented evidence and testimony of physical injuries unrelated to this settlement and many predating the alleged date of the back injury she claims underlies the settlement. Petitioner did not testify or provide any evidence to show that any portion of the settlement proceeds were used or designated for amounts paid for medical care attributable to those injuries.” Transcript, at p. 7.

Workers’ Comp is the exclusive remedy for on-the-job physical injuries, except for employer intentionally-inflicted injuries or employer-created dangerous conditions.

Toni’s testimony shows she didn’t understand the settlement but that’s not the issue.

Toni is represented here by the Quinnipiac University Law School’s LITC. Who represented her in the PI case is not stated, but I won’t unload on him/her. CT has a high bar to avoid Comp exclusivity, and Toni’s employer has plenty of resources to fight a tort claim. Pleading physical injuries on the job will get a swift motion to dismiss for want of jurisdiction.

“Petitioner’s counsel argued that petitioner could just as easily sued for workers’ compensation. But see CONN. GEN. STAT. sec. 31-284(a) (2025); Suarez v. Dickmont Plastics Corp., 639 A.2d 507, 510 (Conn. 1994). They then continued [sic; probably should be “contended”] that this somehow supports their position that the settlement is not taxable under section 104. While the Court takes no position on the proper tax treatment of this alternative, it is clear that the lawsuit settled here did not give rise to proceeds that are eligible for exclusion under section 104(a)(2).” Transcript, at p. 8.