United States Tax Court electronicutes the Biennial Slaughter of the Innocents, s/a/k/a the written examination for applicants other than attorneys at law (nonattorney applicants) for admission to practice before the United States Tax Court. Applications opened today; check out the (amended) press release.
Note the exam is scheduled for November 8, 2023, and is online only, using the ExamSoft platform. The Tax Court exam casualty list proves that this exam is anything but soft.
Dixieland Boondockery is giving partial summary J a real workout, as IRS and the Dixie Boondockers both want partial summary J every chance they get. Today, it’s the turn of Lake Jordan Holdings, LLC, Lake Jordan Partners, LLC, Tax Matters Partner, Docket No. 16532-21, filed 7/14/23. But the mutual storming of the partial summary J Bastille is less successful than the one France celebrates today.
Judge Patrick J. (“Scholar Pat”) Urda succeeds where the French guards failed, and refuses partial summary J to the Lakers and IRS. Y’all will recollect IRS did the Boss Hoss partial summary J slice back in April; if you don’t, see my blogpost “Wagging the Cattail,” 4/28/23. Maybe so it might could be that maneuver tipped off the Lakers; as my late law partner Sid used to say “Win the motion, educate your adversary.”
Now the issue is the tax year in which the Lakers claimed the $12.7 million conservation easement deduction for the land it bought the month before for $583K; oh, those dilithium crystals!
The original owners formed Holdings box-checked as a partnership and contributed the land in November; they unloaded 96% to Partners on December 29, 2017 and the same day recorded the easement in gross to the 501(c)(3).
Now all my jagged sophisticated readers will yell “TEFRA version of Section 708(b)(1)(B) termination! Holdings ceased to exist at transfer, so they couldn’t record anything!”
Except.
“Lake Jordan filed two short-year tax returns. The first covered the period from September 25, 2017 through December 28, 2017 (12/28 tax year). The second spanned the three days from December 29, 2017 through December 31, 2017 (12/31 tax year). Lake Jordan claimed a charitable contribution deduction of $12,740,000 for its donation of the easement on the 12/31 tax year return.” Order, at p. 2. (Citations omitted). The FPAA covered the 12/31 year.
IRS claims the 12/31 year began 12/30, not 12/29.”He [Com’r] points out that Lake Jordan’s initial 2017 short tax year closes on the date that the partnership underwent the technical termination, i.e., December 29, 2017, and contends that its tax reporting encompasses all events that occur on that date. Drawing on Treas. Reg. §§ 1.708-1(d)(2)(i) and 1.443-1(a)(1), the Commissioner posits that the new post-termination partnership does not open its books for tax reporting purposes until the following day, i.e., December 30, 2017. The Commissioner concludes that the claim of the charitable contribution deduction on Lake Jordan’s 12/31 tax year return thus was claimed in the wrong tax year under section 170(a)(1) and must be disallowed.” Order, at p. 3. (Citations omitted).
The Lakers counter with creation of a new partnership immediately after the technical termination, emphasizing that this new entity donated the conservation easement. Their reporting reflected reality, and nothing in IRC or Regs prohibits such treatment in the context of technical terminations.
Judge Scholar Pat, living up to his cognomen, is unimpressed by both sides’ reasoning.
“Neither party has provided a convincing explanation of the statutory and regulatory scheme that governs tax reporting in the context of technical terminations. To the contrary, each party has focused on one aspect of technical terminations (for the Commissioner, the close of the terminated partnership’s taxable year on December 29; for Lake Jordan, the existence of the new partnership immediately after the technical termination), while failing to demonstrate that those aspects dictate their preferred answers with respect to proper tax reporting. We will not render a decision on this point absent a more solid understanding of tax reporting in this context, which we trust the parties will provide in their posttrial briefing.” Order, at pp. 3-4. (Footnote omitted).
The omitted footnote abovementioned says that summary J doesn’t prevent the need for a trial, as chops (presumably enhanced overvaluation and understatement) and defenses thereto are still on the table.
Note the dates: The Lakers got in on 12/31/17, the last day of TEFRA (BBA 2015 repealed TEFRA effective years beginning 1/1/18). Did the Lakers get the Job 5:12 treatment?
Poker aficionados, of the type who watch endless youtube hours of the exploits of Messrs. Negreanu, Hellmuth, Ivey, et al., doubtless would be invoking the headline hereof long before Judge David Gustafson does so.
Briefly to explain, at tournament hold ’em one has thirty (count ’em, thirty) seconds within which to fold, call or raise, at every turn. One has a limited number of cards, wherewith to buy a thirty-second extension. Players, of course, try to husband these, and stall until another player “calls the clock,” invoking the tournament staff to commence a final non-extendable thirty second extension.
Judge Gustafson finds that such a rule might be well-suited to the Ogden Sunseteers, whose lethargic ways have become commonplace. Here again is blower Richard E. Lacey II, Docket No. 9761-16W, filed 7/13/23.
Back in 2020, Judge Gustafson remanded Rich back to Ogden. The Sunseteers were careful as always not to strain themselves.
“In the more than three years since then, the WBO has been reviewing Mr. Lacey’s claim. On May 4, 2023, the WBO issued to Mr. Lacey a Preliminary Denial Letter. Mr. Lacey provided comments dated May 31, 2023. Given the age of this case, we expect that the WBO is giving prompt consideration to Mr. Lacey’s comments.” Order, at p. 1.
“Prompt consideration” in Judge Gustafson’s courtroom means the sooner of “(a) 30 days after the date on which the WBO issues a final ruling on Mr. Lacey’s claim, or (b) October 5, 2023.” Order, at p. 1.
I am surprised the Ogden Sunseteers didn’t invoke Mandy Mobley Li, the gift that keeps on giving, and claim “got nuttin’, go ‘way.”
But as Rich is hanging in there, it is as well that someone calls the clock.
It seems Judge Elizabeth Crewson Paris has joined STJ Adam B. (“Sport”) Landy on the Tax Court order board anonymous squad. Their SPTOs now appear without their names. Are there more to come?
Janet R. Braen, et al., T.C. Memo. 2023-85, filed 7/11/23 had her hash and the als’ hash settled long before Judge Patrick J. (“Scholar Pat”) Urda got this case. Janet and the family Sub S were trying to add some granite to their quarrying empire in Rockland County, NY. They spent $3.4 million buying the land, but found out that NYs NIMBY crowd were a lot harder to deal with than granite.
After knocking heads with town and village, Our Fair State’s Department of Environmental Conservation saw Janet and the als off conclusively. So Janet and the als sued the town to undo a particularly comprehensive zoning plan that would have shredded whatever was left of their equity. To settle, the town dropped the zoning, and Janet and the als sold most of the land to the town in what they claimed was a bargain sale, and claimed a hefty Section 170 charitable.
I won’t go into the battling appraisals, except to state that Excelsiorland boondockery takes second place to no one, certainly not Dixieland boondockery.
Of course, notwithstanding a couple CPAs in attendance (hi, Judge Holmes), Janet and the als get the Form 8283 wrong, and the post-event Contemporaneous Written Acknowledgement from the town attorney spills the beans on the settlement.
Quid pro quo means no deduction. See my blogpost “Listen to Your Lawyer,” 6/19/14, for a case that Judge Scholar Pat quotes in extenso.
So the deduction being toast, the boondockery mix-and-match only serves to hand Janet and the als the substantial valuation misstatements chop.
They settled, and that settled their hash.
Edited to add, 7/15/23: Maybe this case isn’t a one-off.
Judge Tamara Ashford has to slalom through two Circuits (11 and 4), as the real estate development and sales operations of William G. Allen, T. C. Memo. 2023-86, filed 7/11/23, span NC, FL, SC, and TX. And Mr. A has split up his operations among S Corps, LLCs, LPs, and trusts, so as to effect what old sailors called “waterpart contankments.”
“He testified that his goal was to limit liability, and he did that by creating many different legal entities which held few assets that judgment creditors could go after.” T. C. Memo. 2023-86, at p. 23. Judge Ashford cannot tell how well said unrelated creditors may have fared, but when Mr. A. claimed telephone numbers in bad debts when the cash he funneled to these multifarious outfits vaporized, their thin capitalization, interrelatedness, and inability to raise funds from any conventional lender sinks the whole bunch.
Judge Ashford compares and contrasts 4 Cir’s and 11 Cir’s debt-vs-equity approach, and chooses 11 Cir as more comprehensive (13 categories, while 4 Cir has only 11).
While Mr A wins three categories (there are notes, they had fixed maturities although some of these were subsequently amended, the “debt” did not give rise to enhanced control over debtors as Mr. A. controlled them all to begin with, and there was some marginal priority over other creditors), there were none of the usual lender safeguards (no effort to enforce, and no real right to enforce, no interest payments and only spotty principal repayments), thin capitalization (Mr. A’s sterling reputation. and business acumen are too intangible, and every business should have those), repayment contingent upon success and not operations, no outside lender would lend on these terms, and the rest are neutral.
Mr. A. never consulted anyone before he prepared the relevant tax returns, so no good faith reliance.
Takeaway- Pretty paper doesn’t go very far.
All my faithful readers will doubtless recall S. Rep. No. 105-174, at 65 (1998). This document denounced the rogue IRS examiners who brandished heavy-duty penalties wherewith to bludgeon settlements out of terrified taxpayers with meritorious ciaims but without cash to pay high-priced counsel. There resulted Section 6751(b), the Boss Hoss sign-off.
Of course, this was diluted to the point where a random chickenscratch was sufficient, whether the chickenscratcher so much as looked at the CPAF before e-signing.
Formerly, the joust concerning the date of the chickenscratch and the first intimation of chops to petitioner took place toward the end of trial. But necessity is the mother of cliché. Confronted with the syndicated conservation easement tsunami, and witnessing the short-Circuiting of IRS’ carefully-constructed “highly contestable readings of what it means to be perpetual,” IRS pulled the hysteron proteron.
IRS moves for partial summary J that the Boss Hossery is A-OK.
Rock Cliff Reserve, LLC, Five Rivers Conservation Group, LLC, Tax Matters Partner, et al., Docket No. 12482-20, filed 7/10/23, is part of a consolidated group facing “(1) a section 6662(h) gross valuation misstatement penalty; (2) a section 6662A accuracy-related penalty on understatements with respect to reportable transactions; (3) a section 6662(e) substantial valuation misstatement penalty; (4) a section 6662(d) substantial understatement penalty; and (5) a section 6662(c) negligence penalty. These penalties corresponded to the downwards adjustment of the amount of charitable contribution deductions claimed by petitioners.” Order, at p. 2.
There followed “a second set of penalty approval forms, which listed a section 6662(a) accuracy-related penalty on the basis of both negligence or disregard of rules or regulations and substantial understatement of income tax. These penalties corresponded to the downward adjustment of the amount of other deductions claimed by petitioners.” Idem, as my expensive colleagues would say.
Despite the Five River gang’s defense, IRS prevails, and the chops stick.
“Both penalty approval forms were electronically signed by Ms. S before the issuance of the FPAAs to the TMP of petitioners, at a time when Ms. S still possessed the discretion to withhold approval. See Kroner v. Commissioner, 48 F.4th at 1279 n.1; Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1071 (9th Cir. 2022), rev’g and remanding 154 T.C. 68 (2020). As this Court has repeatedly held, ‘a manager’s signature on a civil penalty approval form, without more, is sufficient to satisfy the statutory requirements’ of section 6751(b)(1). See Salacoa Stone Quarry, LLC v. Commissioner, T.C. Memo. 2023-68, at *6.” Order, at p. 4. (Name omitted). I have blogged all, or almost all, of these.
The Five River gang’s attempt to gin up a fact question based on want of a PDF-generated datestamp on the e-signed CPAFs founder upon the “general working principle” of presumed official regularity. Order, at p. 4, footnote 8.
So now the highrollers who bought into this consolidated dodge can contemplate the gargantuan gazumph into which the Five River syndicators have led them.
Nice bludgeoning, IRS.
I can’t quote the exact language from Judge James S (“Big Jim”) Halpern’s off-the-bencher in Kenneth G. Kozimer, Docket No. 13547-20S, filed 7/10/23, because the Genius Baristas have again issued the transcript in uncuttable format.
Briefly, Judge Big Jim disallows Ken’s pre-TCJA Section 212 deduction of $22K for custodial fees charged against his IRA. Judge Big Jim says Ken didn’t prove that he, rather than the custodian of the IRA, paid the fees from the IRA.
I think Judge Big Jim got it wrong: if Ken wants the deduction from this tax-favored vehicle, he has to take a distribution in that amount and then pay the fees himself. But if Ken is neither older than 59-1/2 years of age, nor a beneficiary of The Law of Fifty and Five, he’s got the 10% whatever-it-is, so he’s worse off claiming the deduction than letting it ride and hoping either he earns it back or his MRDs are lower whenever he has to take them because his balance is lower.
In any event, the rationale that the custodian paid the fees from Ken’s balance is no different than when I write a check and my bank, as custodian of my money, pays the check. If the issue is the tax-favored status of IRAs, then deemed distribution defeats the deduction.
It’s been near enough nine (count ’em, nine) years since I last discoursed on this major disconnect between USDC (and most State courts) and US Tax Court practice. I’ve come back for the benefit of those who have joined since we last called at this port.
Depositions of parties are routine in most courts; the forms for FRCP 27 motions or State court equivalent are at the top of every litigator’s toolchest.
Not so at The Glasshouse on Second Street, NW. Just ask IRS’ counsel in Michael Davis & Amy L. Davis, et al., Docket No. 14870-20, filed 7/7/23. Here, depositions are “an extraordinary method of discovery that can only be taken pursuant to an order from the Court. These depositions are available only where a party or nonparty witness can give testimony that is discoverable within the meaning of Rule 70(b) and where such testimony practicably cannot be obtained through informal consultation or communication under Rule 70(a)(1), interrogatories under Rule 71, requests for production of documents under Rule 72, or consensual depositions under Rule 74(b). The decision to require an individual to submit to a nonconsensual discovery deposition is a matter that is solely within the discretion of the presiding judge. In addition to the essential criteria that the moving party must show under Rule 74(c), the Court weighs various factors to determine whether a particular case warrants an extraordinary discovery method.” Order, at p. 3. (Citation omitted).
And the Factors Three are: 1) Whether the movant has established a specific and compelling basis for the deposition; (2) Whether the movant intends the deposition to serve as more than substitute for cross-examination at trial; and (3) Whether the movant has had prior opportunities to obtain the desired information or could obtain it through other means or from another source.
Judge Christian N. (“Speedy”) Weiler flunks IRS on all three.
First, IRS hasn’t shown they can’t get the information they seek from a less invasive approach. They wanted to sit Mike down for eight hours to bukh about “transactional details of this case, the knowledge and belief of Messrs. Davis and [Partner], and their reasonable cause and good faith, including any reliance on third parties.” Order, at p. 4. (Name omitted). Judge Speedy Weiler says they haven’t shown they can’t get this otherwise.
Second, IRS hasn’t shown that the deposition would do more than set up cross on the trial.
Finally, Mike and Partner have declined an informal meet-up, but claim they’ll answer written interrogs, and maybe will do a face-to-face if they can agree on scope and ground rules. Judge Speedy Weiler is willing to wait and see.
And IRS can always try again, later.
Did I mention this is another Dixieland Boondockery? No wonder IRS has gone full-court-press.
Even when you have all of them, you still need to show who did what and have some notion of what time they spent doing it. Unhappily, Dennis Lincoln and Julia Lincoln, T. C. Memo. 2023-84, filed 7/6/23, didn’t even have the first three (the Trio Grande of the Section 41 Research Credit pre-TCJA) in most of the nineteen (count ’em, nineteen, and Judge Mega definitely has) projects for which Dennis and Julia claim the passthrough credit from the family Sub S.
One thing these Section 41s are good for: they’ll tell you more about a trade, business, or industry than you’d ever want to know. Judge Nega has written a book about removing Volatile Organic Compounds from the air. I thought those only had to do with wine, like certain esters. But what did I know? This business runs from 3M Post-It Notes to hamburger buns.
While you can Cohan a number when you can show someone did something that satisfied the Trio Grande, it has to be more than a de minimis activity like sending an e-mail. “The record contains an email from Mr. Betz to a Maxon representative asking about how to meet Celanese’s cold temperature specifications in designing the gas train. We further find that Mr. Betz’s email activity was an investigative activity within the meaning of the section 174 regulations. See Treas. Reg. § 1.174-2(a)(1). However, allocating a de minimis, estimated amount of wages to Mr. Betz’s email activity, pursuant to the Cohan rule, would be futile; we alternatively hold that Mr. Betz’s email activity was not part of a structured process of experimentation and thus fails to clear the higher bar of section 41(d)(1)(C).” T. C. 2023-84, at pp. 89-90. (Citations omitted).
And you have to show who did what, even if you don’t have timesheets or logs.
Organizational memorybanks play a role. A lot of the experimentation was done in years prior to years at issue. The Sub S had years of experience.
Quality control testing doesn’t count. And repairs and maintenance of new equipment doesn’t count, either.
Worse, five of the contracts the Sub S signed reserved to the customer all rights in whatever the Sub S produced. Thus, the contracts put the “fun” in “funded”, that is, research paid for by the customer. Three were not funded, but as no Qualified Research Expenditures were made in any of them, it doesn’t help.
Inexplicably, although the Sub S hired a high-priced consultant to scope out and compute their Section 41s, this is what they had to say about the Section 6662a negligence and five-and-ten understatement chops: “In posttrial briefing, petitioners made the single statement, as a proposed finding of fact, that they ‘are not liable for penalties under section 6662(a),’ with a supporting citation of the ‘Entire Record.’ Petitioners made no other statement or argument in their posttrial briefing with respect to their liability for accuracy-related penalties; nor did petitioners argue on brief that they had reasonable cause and acted in good faith with respect to any underpayment.” T. C. Memo. 2023-84, at pp. 112-113.
Judge Nega remarks that a skeletal assertion does not preserve a claim. Anyway, Judge Nega says he wouldn’t have bought reliance on the consultant even if they tried it, T. C. Memo. 2023-84, at p. 113, footnote 53.
Taishoff says maybe not, but why not worth a try? Especially where, as here, the chops are substantial.
Taishoff Law 