It’s the famous 11 (count ’em, 11) factor test, wherein most taxpayers want debt (to sustain interest deductions). But Estate of Thomas H. Fry, Deceased, Ruth M. Fry, Personal Representative, and Ruth M. Fry, T. C. Memo. 2024-8, filed 1/23 /24, want equity, and they get it.

Unusually, IRS wants debt, although IRS is usually fighting for equity.

Why the reversal?

Well, the late Tom (before he became the late Tom) had two Sub S Corps, one that collected garbage and the other that processed it. They worked together; worked from the same location with the same personnel, accountant, etc. But the processing Sub S lost its biggest contract, so Tom infused cash from the collector to the processor by having collector do bank-to-bank transfers to processor.

But when a white knight bought out the whole operation, Tom had a bunch accumulated losses (hi, Judge Holmes) from the processor that he wanted to deduct. IRS said he had insufficient basis in the processor stock, and Section 385, duty of consistency, and doctrine of election, prevent Tom from claiming that the infusions were capital contributions (building basis via deemed distributions from collector).

Judge Christian N. (“Speedy”) Weiler blows off Section 385, at least for Sub S Corps.

“We agree with petitioners’ primary position that section 385(c) does not apply to the facts herein as there was no formal issuance of any instrument evidencing the creation of an interest in stock or equity. The issuance of an interest in debt is typically contained in a promissory note and an equity interest is typically contained in a stock certificate. No such issuance of a promissory note or a stock certificate occurred here. Thus, on the basis of a plain reading of the statute, we hold section 385(c) inapplicable.” T. C. Memo. 2024-8, at p. 12. (Footnote omitted, but it says no court ever held Section 385 bound anybody to an initial characterization.).

The paperwork is nonexistent to prove debt.

Consistency and election go by the board, as Tom’s brilliant accountant shows he corrected the books before audit, and rebuts IRS’ computations of Tom’s basis in processor stock. But Judge Speedy Weiler, like all judges, won’t add, so the actual computation must abide the Rule 155 beancount, as must the impact of the deemed distributions to Tom that went to fund the processor.

A Taishoff “good job, first class,” goes to the late Tom’s (and Ruth’s) trusty attorneys, and accountant.

Note (off-topic): This post is late due to the opening of the New York City Ballet’s Winter season (75th year), with an all-Robbins program, featuring the music of L. (“Maestro”) Bernstein, F. Chopin, and G. Verdi. Of course, also included was “no’ bad jigging,” as they say in the Highlands. And a very touching speech by the winner of the 2024 Janice Levin Prize for promising member of the corps de ballet, Naomi Corti, a young woman from Luxembourg, from whom we’ll see a lot in years to come.

Sure beat writing about Tax Court.

Not syndicated conservation easements, just another case of the Raytheonista sig ints trying to wriggle out of the Section 7121s they signed, giving up their Foreign Earned Income exclusions. These were the experts stationed at Pine Gap, in the Far Outback.

Michael W. Aubin and Kerry A. Aubin, T. C. Memo. 2024-9, filed 1/23/24, features Mike trying to toss the agreement he signed. Judge James S (“Big Jim”) Halpern isn’t buying.

“…petitioners submitted a Motion in Limine, asking that we ‘exclude the Closing Agreement from evidence for the time being.’ Petitioners appeared to argue that the closing agreement was not subject to the business records exception to the hearsay rule, Rule 803(6) of the Federal Rules of Evidence, because ‘the source of the Closing Agreement and circumstances surrounding it lack trustworthiness.’ In support of that argument, petitioners referred to testimony in another case before the Court that, by their description, raised the possibility of forgery of signatures of Pine Gap employees on closing agreements such as Mr. Aubin’s. ‘Based on these circumstances suggesting fraud and criminality regarding signatures on the purported Closing Agreements,’ petitioners advised us, Mr. Aubin ‘no longer stipulates that he signed the purported Closing Agreement.'” T. C. Memo. 2024-9, at p. 6.

Except.

Rule 91(e) only lets you out of a stip if the parties agree, or if the Judge allows it “if justice requires.”

“We are unpersuaded that, if allegations of forgery have been made in another case, ‘manifest injustice” would result from holding petitioners to their stipulation that Mr. Aubin signed Exhibit 3-J. Forgery sometimes occurs. That prospect is not new information. But Mr. Aubin knows—or certainly should know—whether he signed Exhibit 3-J. Petitioners stipulated that he did. Tellingly, in seeking to withdraw that stipulation, petitioners do not deny that Mr. Aubin signed the agreement. They seem to want to use the allegations of forgery in another case as an excuse to place on respondent the burden of establishing Exhibit 3-J’s authenticity. Requiring respondent to prove facts within petitioners’ knowledge would be contrary to Rule 91(a)’s mandate that parties stipulate relevant matters ‘to the fullest extent to which complete or qualified agreement can or fairly should be reached.’ Justice thus does not require putting respondent to the task of establishing what petitioners have already stipulated—particularly when they make no claim that the stipulation is incorrect. Simply put, that forgery may have occurred in another case does not justify relieving petitioners of their stipulation that it did not occur in this case.” T. C. Memo. 2023-9, at pp. 7-8. (Footnote omitted.)

And that the agreement covers years beyond the year in which it was signed is irrelevant, as Section 7121(a) says the agreement may address “any taxable period,” past, passing, or to come.

And the signoff for the IRS came from the officer designated to administering the US-Australian tax treaty. He don’t need no delegation order. And his assistant has a file memo and e-mail confirmation of authority to sign for her boss.

Taishoff says it’s about time to retire this old protester argument. Maybe a couple Section 6673 chops (hi, Judge Holmes) might do the trick.

IRS gets partial summary J.

Well, at least it’s a change from the Dixieland variety.

Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan proposes to amend the Tax Court Rules of Practice and Procedure to codify Boechler, P. C., the case that gave Tax Court the Galatians 3:23 treatment. In short, FRCP 82 is the touchstone of the new regimen.

You can read all about the law as custodian here.

Clair R. Couturier, Jr., Docket No. 19714-16, filed 1/22/24, shows Clair’s trusty attorneys arguing that all of the $26 million Clair got was sales proceeds from his ESOP-qualified stock. IRS claims that the ESOP-qualified was worth $650K at best, and the remaining $25 million-plus for was his two unqualified ESOP plans.

No question there was a rollover of $26 million into Clair’s own IRA when he split from his employer, but unqualified stock (or anything else unqualified, like proceeds from disposition of unqualified) raises the 6% Section 4973 excess IRA contribution tax. So Clair could roll, but not income tax-free or excessive IRA contribution tax-free.

But the worth of the qualified stock is a question of fact (apparently not publicly-traded, and even then, blockage might be a fact question).  No summary J for Clair.

Sydney Roads, LLC, Sydney Roads Investments, LLC, Tax Matters Partner, Docket No. 302878-21, filed 1/22/24, shows IRS again hitting the wall with its favorite tactic in the war on Dixieland Boondockery. Relying on Rev. Rul. 99-5, 1999-1 C.B. 427, 434–35, IRS claims Sydney’s holding period was short of one year when its acquisition of membership interests in a disregarded LLC turned the LLC into a partnership, thus summary J for IRS limiting the worth of the conservation easement.

Except.

Judge Pugh finds the documents submitted by Sydney scupper Rev. Rul. 99-5, or at least raise a fact question as to which flip of interests came before the other. Maybe you can follow the three-card monte hand-offs of membership interests; I can’t. If they run something like this at the Superbowl, there’ll be a lot of flying popcorn.

So IRS falls back on form-over-substance: the deal really was a land sale. The LLC stuff was window-dressing.

Except.

“The application of the substance over form doctrine is inherently factual and generally not appropriate for summary judgment.” Order, at p. 5.

I’m a great fan of summary J, but, as with many things in life, law, and football,  “ya win some and ya lose some.”

Saul Bradley, T. C. Memo. 2023-7, filed 1/22/24, has not only had to face divorce and a death in his family, but two (count ’em, two) years’ worth of deficiencies and chops; and he hadn’t fIled for four successive years thereafter.

But IRS has problems, too. Saul claims he never got the SNOD, so IRS proffers a copy (redacted) of the USPS Form 3877 Proof of Mailing that causes Judge Travis A. (“Tag”) Greaves to admonish IRS as first set forth at the head hereof.

“First, as redacted by respondent, we cannot discern whether Form 3877 was signed by the USPS employee who accepted delivery of the notice. A Form 3877 is not properly completed when a USPS employee does not sign the form. Thus, because the Form 3877 does not contain a visible signature of a USPS employee, it is not properly completed. We have previously held that this omission, together with other omissions, renders the presumption of proper mailing inapplicable.

“The other error on Form 3877 relates to the name stamp appearing on the form. This stamp appears to be the name of the IRS employee who issued the notice of deficiency. Form 3877 must be signed or initialed by the IRS agent who issued the notice. We previously held that a stamp signature from a receiving USPS employee was a defect on Form 3877, sufficient when combined with other omissions to prevent application of the presumption of proper mailing. Knudsen v. Commissioner, T.C. Memo. 2015-69, at *6–7, *14–16. Because both the IRS agent and the USPS employee are required by IRS procedure to sign Form 3877, we see no reason why we should treat the stamped signature of the IRS agent in this case differently from the stamped signature of the USPS employee in Knudsen. Therefore, the stamped signature of the IRS agent is a defect on Form 3877. These two errors render the presumption of proper mailing inapplicable.” T. C. Memo. 2023-7, at pp. 6-7. (Citations omitted, but get them for your memo of law file; for the Knudsen story, see my blogpost “Great, But No Substitute,” 4/7/15).

But all is not lost for IRS, although it is for Saul.

“While this evidence is not sufficient to create a presumption of proper mailing, respondent may still satisfy his burden to show proper mailing of the notice of deficiency if the evidence of mailing is otherwise sufficient. An incomplete certified mailing list may serve as evidence that the notice of deficiency was properly mailed to a taxpayer. Here, the possible defects in Form 3877 are minor. Form 3877 bears the USPS stamp, specifies the number of articles received, and lists petitioner’s name and address. Respondent also introduced a copy of the notice of deficiency, which bears the same mailing date and mailing address as the corresponding Form 3877. Petitioner does not contest that the address listed on Form 3877 and the copy of the notice of deficiency was not [sic] his last known address. The preponderance of the evidence supports a finding that respondent mailed the notice of deficiency to petitioner at his last known address.” T. C. Memo. 2023-7, at p. 7 (Citations and footnote omitted). I think you meant “Petitioner does not contest that the address listed on Form 3877 and the copy of the notice of deficiency was his last known address,” Judge.

IRS, better stamp out stamps, lest the next time you may not be so lucky.

Jackson Crossroads LLC, Greencone Investments LLC,Tax Matters Partner, et. al., Docket No. 12235-20, filed 1/19/24 (a very special date in our family), ably represented by trusty (and I’m sure by their clients well-belovèd) attorneys, snipe away carefully at IRS’ wildcard reinforcements. Judge Christian N. (“Speedy”) Weiler is a great one for cutting down post-pleading attempts to wrongfoot adversaries.

In this latest installment, he reminds us of the parties’ previous attempt to tilt the playing field; see my blogpost “Why I Love Summary J – Part Deux,” 12/8/23.

Now the Jacksons claim IRS’ latest wildcards are (a) donative intent, (b) whether the syndicated members of the LLCs are really partners, and (c) whether or not the swath of Dixieland Boondocks at issue is inventory per Section 1221, and thus ineligible for Section 170 Dixieland Boondockery.

First, the obligatory procedural sparring. The Jacksons moved to strike those parts of IRS’ Pre-trial Memo which raised (for the first time) these issues.

“Respondent asserts that petitioner’s Motion to Strike is disguised as a motion in limine, since it is a pre-trial motion that seeks to exclude specific evidence or arguments from being presented during trial and the motion is untimely because it was not filed before the deadline for motions in limine, as set in the … scheduling order. We do find it is appropriate to treat petitioner’s Motion to Strike as a motion in limine. However, we find that the Motion to Strike was filed promptly in response to Respondent’s Pretrial Memorandum which for the first time, raised these two Issues with the Court.” Order, at p. 2. (Footnote omitted, but it says the Jacksons moved to strike within a week after getting IRS’ Pre-trial Memo.). Note “two issues,” because Judge Speedy Weiler says donative intent was disposed of in the above- referenced 12/8/23 order.

As to the remaining issues (Partnership and Inventory), they’re mixed law-and-fact, so arguing they involve a different legal theory alone (which doesn’t require additional or other evidence) won’t save IRS.

“We find the Partnership Issue (Issue 7) and Inventory Issue (Issue 8) to be mixed issues of fact and law. As such, these issues were required to have been pled under our Rules. Because the issues are not contained in any pleadings, and respondent did not seek leave to amend the pleadings prior to trial, permitting respondent to present evidence on these issues at trial will unfairly prejudice petitioner. Therefore, the Court will not consider the Partnership Issue (Issue 7) and Inventory Issue (Issue 8) at trial and on brief.” Order, at pp. 2-3.

At the risk of yet again wearying my readers with a repetition (not to say regurgitation) of Judge Holmes’ observation in Oakbrook, Dixieland Boondockery cases are well-suited to valuation resolution. Thomistical-Talmudical torturing of the language of Section 170 is time-wasting tohubohu. Go try the case.

I had hoped that I should not again have to refer to The Stealth STJ. I am no purveyor of conspiracy theories, neither do I make mysteries where there are none. I had thought that a reader or source would furnish a simple explanation of ex-STJ Eunkyong Choi’s departure after an exceedingly short tenure, giving me the Psalm 141:5 treatment at no extra charge. And perhaps the nonreportage thereof by Public Affairs was a mere oversight.

But it didn’t happen. So I sought for enlightenment both from Second Street, NW, and from such sources as I could find. The results would have done Stonewall Jackson proud.

The trade press carried a story (that I didn’t pick up, as the trade press routinely scoops me with its boundless resources) that ex-STJ Choi had, two (count ’em, two) months prior to her alleged departure date, mistakenly issued a bunch OSCs (hi, Judge Holmes), which Judge Ronald L (“Ingenuity”) Buch had to mop up. But that hardly accounts for a speedy and unheralded departure, otherwise than by post hoc propter hoc fallacious reasoning.

The opacity of Section 7443A is no help. As far as Congress is concerned, STJs serve at the pleasure of the Chief Judge, who seems to be able to do the Matthew 8:9 number whenever, subject only to the Tax Court budget.

So what’s the point? (My readers have asked that more than once).

Tax Court’s expansive reading of Section 7461 has caused petitioners to lay bare everything once they cross the electronic threshold of The Glasshouse in the City of the Unenfranchised. Successful Rule 27 motions seem to require clear and convincing proof of irreparable injury to person or purse despite no such statutory requirement, and Rule 103 protective orders seem limited to trade secrets.

Only whistleblowers, even serial blowers, are broadly protected; see In Re Sealed Case, 931 F.3d 92 (DC Cir, 2019).

But does this door swing one way only? I’ve had more than one complaint in my blogging career from litigants with piteous tales that Tax Court laid bare “(T)heir homely joys, and destiny obscure; Nor Grandeur hear with a disdainful smile The short and simple annals of the poor,” as a much better writer than I put it. And no redress could be had.

Are the judges above all that? So it seems. I need not and will not advert to ethics and the Supremes, as that trenches on the political, into which pit I will not drag this my blog, nor fall myself. At least, not here. But how about pore l’il ol’ Article One Tax Court? No court is less political, as again and again opinions state that the Court must follow the law as Congress promulgated it.

So what about Section 7461?

The leading privacy case is Willie Nelson, Docket No. 1174-85, filed 12/12/85. STJ Cantrel said it clearly: “In these cases, members of the public have an interest in free access to the facts and in understanding disputes that are presented to this forum for resolution. They also have an interest in assuring that courts are fairly run and judges are honest. Nevertheless, the presumptive right to access may be rebutted by a showing that there are countervailing interests sufficient to outweigh the public interest in access.” Order, at p. 919. (Citations omitted)(emphasis added).

OK, I’ll buy that. If there are “countervailing interests sufficient to outweigh the public interest in access,” what are they? Or if even mention thereof would defeat the outweighed countervailings, say so.

But if the petitioner has to let it all hang out, why not Tax Court?

Judge Morrison has one of his off-the-benchers, and it certainly justifies the title first set forth hereinabove at the head hereof, as my expensive colleagues would say.

Jacqueline Garcia-Bravo, Docket No. 26566-22, filed 1/1/7/24, wanted the Section 25A(b)(1) American Opportunity Credit for herself and her son. Except JGB was over the AGI limit for the Lifetime Learning Credit, Section 25A(c)(1). And JGB had already used up her four-year American Opportunity Credit.

So only son is still in the hunt.

“At trial, petitioner contended that her qualified tuition and related expenses for [year at issue] include four expenses for which petitioner introduced receipts into evidence (the expenses for the two computers, the office chair, the laptop messenger bag, and the ink cartridge for a printer). Petitioner also contended that qualified tuition and related expenses include the expenses of books paid by petitioner, through her son, at the college bookstore for her son’s course of study. The books were paid for in cash and petitioner did not introduce receipts for them into evidence. These five types of expenses are the only expenses that petitioner contended at trial are qualified tuition and related expenses.” Transcript, at p. 6.

But all son’s college required were the books.

“Respondent contends that the book expenses are unproven as to the amount paid. However, petitioner and petitioner’s son credibly testified that eight books were purchased at a cost per book of at least $100. Under the Cohan principle, we reasonably estimate that the cost of each book was $100 and that the total cost of the books was $800. To the extent respondent contends that the book expenses were not ‘required’ within the meaning of the Code and the Regulations, we find that the book expenses were required for the enrollment and attendance of petitioner’s son for courses of instruction at the college he attended.

“In conclusion, we hold that the $800 cost of the books are qualified tuition and related expenses within the meaning of section 25A(b)(l).” Transcript, at p. 7.

Thus Judge Albert G (“Scholar Al”) Lauber disposes of Section 7806(b)’s injunction that location of a Code section raises no inference, implication, or presumption of its contents. Clair R. Couturier, Jr., T. C. Memo. 2024-6, filed 1/17/24, says that it doesn’t matter where Congress placed Section 4973, it’s still a chop and thus Boss Hossable.

Clair’s been here before; he sought sealing back in 2019 (denied), tried estoppel against IRS (ditto), and his expert played the Michael Corleone classic gambit last September and lost.

Today, Clair claims the 6% excise tax on his $25 million excess IRA contribution is unBoss Hossed.

“The flush text of section 4973(a) refers to this exaction four times, in each case describing it as a ‘tax.’ The term “penalty” appears nowhere in section 4973(a) or in any of the provision’s other six subsections. The statute’s plain text thus establishes that the exaction imposed by section 4973 is a ‘tax’ under the Code.” T. C. Memo. 2024-6, at p. 4.

Besides, Subtitle D, Chapter 43, has many excise taxes triggered by pension plans and the like. Judge Scholar Al lists them, and notes that many of them direct conduct by the taxed, but that’s nothing new. And as for the 6% being “punitive,” some of the others run to 100% in Section 4975.

Chops are off in Subtitle F, and Boss Hossery has its very own Subchapter C. And additions to tax apply to the Section 4973; if it weren’t a tax, there could be no additions.

Finally, Section 6751(b) was enacted to prevent examiners from coercing settlements by using chops as chips. “Needless to say, a revenue agent could not plausibly assert a section 4973 excise tax at the conclusion of an ordinary income tax audit in an effort to induce settlement. Because section 4973 exactions cannot be used as ‘bargaining chips’ in this way, Congress is unlikely to have envisioned section 6751(b) as applying to them.” T. C. Memo. 2024-6, at p. 8.

Clair wants a functional analysis, but Judge Scholar Al says it’s simple statutory interpretation, and when Congress says “tax” they mean “tax.”

Running rental real estate is a hands-on business; notwithstanding Section 469(c)(2), which shoehorns all rental real estate into passivity, anyone other than a pure investor, who hands all operational control to a manager, is finding tenants, collecting rents, making repairs or contracting for them (and riding herd on contractors), dealing with governmental and quasi-governmental authorities having or asserting jurisdiction, vendors, and utility providers, and getting entangled in the legal system.

Since a lot of rental real estate is Mom-and-Pop, a key to establishing an active deduction from a compulsorily passive business is showing material participation, like doing all of the above for at least 100 hours per tax year, and doing more than anybody else.

Judge Morrison has the story in an off-the-bencher, Krishan K. Gossain & Kavita Gossain, Docket No. 21812-22, filed 1/16/24. Krish claims pro status, but his 9-to-5 gig gives him too many non-real estate hours.

He does hit the 100 hour cutoff for the Section 469(i)(1) $25K special real estate allowance, and doesn’t fall foul of the $100K AGI disallowance barrier.

Best of all, Kav’s hours count too.

“Section 469(h)(5) provides that in determining whether a taxpayer materially participates in an activity, the participation of the spouse of the taxpayer is taken into account. A regulation elaborates that, in the case of any married individual, any participation by such person’s spouse in the activity during the taxable year (even if the spouse does not own an interest in the activity and even if the spouses do not file a joint return) is treated as participation by such person in the activity during the taxable year. Treas. Reg. § l.469-5T(f)(3).” Transcript, at pp. 9-10.

But Krish is on his own for pro status, which he must attain to break the $25K barrier which separates the professionals from the also-rans.

“The hours he worked on the rental properties include only the hour [sic] he personally worked on the rental property, not the hours Mrs. Gossain worked on the rental properties. §469(c)(7)(B) (first flush sentence).” Transcript, at pp. 12-13.