In most circles, failing to report is a severe failing. But maybe not for Judge Mark V. (“Vittorio Emanuele”) Holmes, when Dixieland Boondockery is in play. Here’s Kimberly Road Fulton 25, LLC, Kimberly Road Manager, LLC, Tax Matters Partner, Docket No. 17852-21, filed 5/23/23.

IRS wants five (count ’em, five) experts to testify without first submitting written reports. Rule 143(g) bars this, of course, but IRS claims it hasn’t retained or employed any. The Kimberlys claim there are limits to what freelance experts can testify, which Judge Holmes recognizes, and there are questions concerning the qualifications of the witnesses per FRE 701 and 702 to opine at all. FRCP §26(a)(2), though not briefed by the parties, also has a role, so Judge Holmes lets it all in, subject to objection by  the Kimberlys on the trial to exclude.

IRS wants to call at least one witness from Georgia DCH, which a source tells me is the Georgia Department of Community Health, but the whole panoply will be subject to voir dire as to technical qualifications, if any.

“The Court will exercise its discretion and postpone ruling on any of these other grounds for exclusion until and unless respondent calls for these witnesses and petitioners renew their objections and state their grounds for doing so with the greater precision that cross-examination will allow.” Order, at p. 4.

Taishoff says FRCP §26(a)(2) and Rule 143(g) may be limited to hired guns by their terms, but allowing this move by walk-ons is trial by ambush.

Judge Patrick J. (“Scholar Pat”) Urda has USDCDC and DC Cir to block for him, as he blows through Prince Amun-Ra Hotep Ankh Meduty, 160 T. C. 13, filed 5/23/23. Prince Amun-Ra Hotep Ankh Meduty, hereinafter “Steve,” is an old-time merchant of “run-of-the-mill tax-protester arguments,” 160 T. C. 13, at p. 5.

Steve ran up $100K of taxes and Section 6702 chops, so IRS told State to grab Steve’s passport. Judge Scholar Pat goes through the Action Code 640s in the Form 4340s (160 T. C. 13, at p. 6) showing levies made.

Now SOL has run on some, but not all, of Steve’s open delinquencies, and have been written off.

“The total amount of Mr. Meduty’s tax liabilities thus dipped below the [year at issue] threshold amount after the date of the certifications. This change in circumstances does not suggest that the certification should be reversed. Once a valid certification is made, section 7345(c)(1) and (2) provides that a debt ‘ceases to be a seriously delinquent debt’ only if the debt ‘has been fully satisfied or has become legally unenforceable.” (Emphasis added.) Since at least some of the debt remains outstanding and legally enforceable, this requirement has not been satisfied. See Belton, T.C. Memo. 2023-13, at *16 n.17.” 160 T.C.13, at p. 5, footnote 4. For the Belton story, see my blogpost “Section 7345 – Backdoor CDP?” 1/24/23.

Steve has one valid claim, hence this full-dress T. C. He claims he never got the Section 7345(d) contemporaneous notice of certification. But USDCDC and DC Cir got there first.

“As the U.S. District Court for the District of Columbia recently noted, ‘§ 7345 does not say that a flawed or failed notice renders a certification erroneous.’ McNeil v. United States, No. CV 20-329 (JDB),  2021 WL 1061221, at *5 (D.D.C. Mar. 18, 2021), aff’d per curiam sub nom. McNeil v. U.S. Dep’t of State, No. 21-5161, 2022 WL 4349598 (D.C.  Cir. Sept. 20, 2022). And the structure of section 7345 belies such a conclusion. Subsections (a) and (b) describe when the Secretary of the Treasury must transmit certification to the Secretary of State and identify which debts qualify as “seriously delinquent tax debt.” Neither suggests that notice is a prerequisite to a proper certification by the IRS of a ‘seriously delinquent tax debt.’ See McNeil, 2021 WL 1061221, at *5. To the contrary, ‘subsection (d) says that notice to the taxpayer should be ‘contemporaneous[]’ with certification to State, so it logically cannot be a prerequisite to that certification.’ Id.” 160 T. C. 13, at p. 8.

And since Section 7345(e) doesn’t set any SOL on a grabee going into USDC to challenge the grab, Steve isn’t prejudiced if he didn’t get the notice.

Tax Court only has Section 7345 jurisdiction to review if there was a substantial tax liability at time of certification to State. “In short, we do not believe that our jurisdiction to determine whether a certification is erroneous encompasses patrolling compliance with the requirement to provide notice to a taxpayer ‘in simple and nontechnical terms of the right to bring a civil action under subsection  (e).’ See I.R.C. § 7345(d).” 160 T. C. 13, at p. 8.

Judge Ronald L (“Ingenuity”) Buch exercises his ingenuity, finding Reg. Section 301. 6501(c)-1(f)(2) disclosures are adequate to satisfy OVDP, and such disclosures need only substantially comply. Ronald Schlapfer, T. C. Memo. 2023-65, filed 5/22/23, is a Swiss-born naturalized US citizen who made money in banking and finance. Before naturalization but while a green carder, he gifted a universal variable life insurance policy on his nearest and dearest to said nearest and dearest (although he didn’t name them all in his OVDP disclosure that doesn’t matter). He paid the premium for the policy with a small amount of cash and all the stock in his Panamanian Corp (wherein he stashed his securities portfolio).

Ron fessed up with OVDP, but IRS claimed he disclosed the gift in the wrong year because it was incomplete, so 3SOL never ran. Doesn’t matter, says Judge Buch; Reg. Section 301. 6501(c)-1(f)(5) says a gift reported as complete triggers 3SOL even if later incompleted by Reg. Section 25.2511-2.

IRS says even if disclosed in correct year, Ron didn’t strictly comply. Now this is a question of fact, and both sides want summary J.

Ron attached an Offshore Entity Statement, which IRS says Judge Buch should ignore. No, he won’t. Using Section 6501(e) unreported income disclosure, he applies same rules to gift tax. Attachments to returns, if they tell the tale so that IRS knows what return to pull for exam, are enough. IRS looks at 1065s, 1099s, 1120s, and all kinds of other documents to determine taxable transactions.

Now when IRS adopted Reg. Section 301.6501(c)-1(f), they refused to write in substantial compliance, because they couldn’t define it. But they went on to say that omission of any one item wouldn’t necessarily invalidate the disclosure. Give Judge Buch a hole like that, and the late great Jim Brown had nothing on him.

Ron strictly disclosed all the info about the stock. But what he gave was the life insurance policy. So what, says Judge Buch. “Mr. Schlapfer provided enough information to satisfy this requirement through substantial compliance. While he may have failed to describe the gift in the correct way (assuming the gift is the UVL Policy), he did provide information to describe the underlying property that was transferred. Mr. Schlapfer asserts that he chose to disclose the assets held in the insurance policy instead of the actual policy because the OVDP required him to disregard entities holding foreign assets. The UVL Policy’s value comes primarily from EMG stock, so Mr. Schlapfer’s describing the transferred property as EMG stock goes to the nature of the gift. Because this description was sufficient to alert the Commissioner to the nature of the gift, Mr. Schlapfer substantially complied with this requirement.” T. C. Memo. 2023-65, at p. 17. IRS needs enough info to know whether to pull a return for audit, and here they did.

True, Ron left out aunt and uncle from list of donees, noting only Mom. But since the gift was only to family members, all of whom were offshore, doesn’t matter: substantial compliance. Taishoff says note requirement for onshores to disclose gifts from offshores (Form 3520). Different result if any donee was onshore? If onshore donee was not disclosed, how could IRS backcheck for a 3520 from the onshore to see if the 709 numbers were good?

“Mr. Schlapfer provided all the documents identified in the instructions. His Forms 5471… enclosed balancesheets, statements of net earnings, dividends paid, and operating results. Furthermore, his Offshore Entity Statement stated that ‘[t]axpayer is taking into account all of the income earned by the accounts underlying [Corp] in the enclosed Amended U.S. Individual Tax Returns during the years he controlled and beneficially owned [Corp].’Although Mr. Schlapfer did not provide all the financial documentation listed in the regulation, he provided the information identified in the [year at issue] Form 709 instructions, which was enough to show the IRS how he determined the fair market value of the [Corp] stock. Therefore, he substantially complied with this requirement.” T. C. Memo. 2023-65, at p. 18.

And since the variable life insurance policy was largely funded by the Corp stock, and its value will vary as the Corp’s portfolio fluctuates, that’s good enough.

Ron wins on SOL.

Takeaway- For OVDP and FBAR practitioners, take a look at Judge Buch’s reasoning. Then compare and contrast with Judge Christian N. (“Speedy”) Weiler’s deconstruction of Barbara Fairbank’s situation; see my blogpost “FBAR SOL? FUBAR,” 2/23/23.

Schwenk Gilbert’s ode to the London Fire Brigade echoes through Judge David Gustafson’s exhaustive trudge through the tangled credit elect cascade of Scott Alan Webber, Docket No. 14307-18L, filed 5/22/23. Judge Gustafson has to go through 10 (count ’em, 10) years of confusing and nonexistent correspondence to find that, If Scott ever had a credit to cascade, it was long since quenched by refund thereof.

This is a liability issue, and since there was no SNOD, it gets tried de novo, with Scott getting BoP at no extra charge.

“… Mr. Webber’s burden is not simply to show that he is entitled to an overpayment that we should then direct the IRS to credit against his liability; rather, he must show that the IRS did allow a credit. If this seems like an unfairly difficult project, we must bear in mind the alternative—i.e., that a taxpayer might halt IRS collection of his liability in one year merely by claiming that he overpaid his liability in a different year. If that were so, then any CDP case could be expanded to become a comprehensive audit of a taxpayer’s plenary situation with the IRS. Tax could not be collected in any year until all claims had been resolved for all years. This is not the nature of a CDP case. Rather, in a CDP case we are generally restricted to the determination year but may take note of a credit that has been allowed by the IRS and that therefore ‘indisputably exists’ (not a mere claim of a credit by the taxpayer).” Transcript, at p. 23.

Scott can’t carry the burden. He claims a ten-year cascade, but that should be beyond a CDP, as if there’s no credit elect in year previous to year at issue, game over. But, as usual, Judge Gustafson goes the extra. Even then, there’s no indisputable evidence of an allowed credit for the base year. At best, there are “mixed signals”, Transcript, at p. 28. An ambiguity, maybe?

Anyway, Scott loses.

CSTJ Lewis (“The Name”) Carluzzo has good advice for frivolites of the Section 6702 all-zeros persuasion. If you’re sending in more than one all-zeros returns, get down to the local stationer’s boutique and buy a rubber stamp that says “COPY.” And lay about you with a will.

Clearly a lot of people remember Gwen Kestin and her 1040X barrage; my blogpost “From the Serious to the Frivolous,” 8/29/19, has accumulated 808 (count ’em, 808) views to date, fourth on the all-time individual blogpost list. And Christian Silver, Docket No. 3372-20L, filed 5/22/23, must have gotten the word, as he sends two (unlabeled) copies of his late-filed return to IRS headquarters and to Treasury. The original return was late-filed seven months earlier.

IRS hits Chris with three (count ’em, three) Section 6702 $5K chops, and follows with a NITL, but the SO at Appeals drops one of the three.

In today’s off-the-bencher, CSTJ Lew finds that since Chris asked for refunds from withholdings from his wages, he got wages, so his all-zeros means game over on liability. And CSTJ Lew is not to be trifled with by frivolites playing the Kestin gambit.

“The only matter that deserves attention is petitioner’s claim made in the petition that a sec. 6702 penalty has been imposed on a copy of his original return as we have held that the imposition of a section 6702 penalty on the copy of a frivolous return is not appropriate. See Kestin v. Commissioner, 153 T.C. 14, 19 (2019). On the forms themselves, however, neither document is expressly identified as a ‘copy’ of the other,  and both are considered purported returns as each claims a refund. See Callahan v. Commissioner, 130 T.C. 44, 53 (2008). It follows, and we hold, that respondent has met his burden of proof in this case with respect to the imposition of both penalties, and petitioner is liable for both section 6702 penalties here in dispute.” Transcript, at p. 8.

Word to the stationers: Lay in a big stock of “COPY” stamps. And tell ’em Lew and Lew sent ya.

Vincent Fumo, Docket No. 17603-13, a coupled entry with Docket No. 17614-13, filed 5/19/23, finds himself in the posture delineated by George Gordon, as Judge Albert G. (“Scholar Al”) Lauber finds Fumo had a chance to cross-examine witnesses, challenge admission of evidence, and put on witnesses and evidence of his own.

Fumo has been here before, but it’s late as I write this, so I won’t catalogue all his appearances. Now he is fighting both income tax (with concomitant Section 6663 fraud chops) and Section 4958 excess benefits 25% tax (and no, I didn’t know what that was, either). IRS claims Fumo milked Pennsylvania State Senate and Citizens Alliance, an organization exempt under I.R.C. § 501(c)(3), and got benefits in the form of farm equipment, political polling, and work done by Senate employees and contractors for his benefit. Hence the 25% excess benefits excise tax.

Fumo claims the excess benefits evidence came in only because it was relevant to the Section 4958, and shouldn’t have been used to claim a bigger deficiency (underreporting) and enhanced fraud chops.

IRS moves to conform pleadings to proof per Rule 41(b).

“Petitioner contends that the matters described in respondent’s Motion were included in the record of the income tax case only because it was consolidated with the excise tax case. We are not sure that is right: Respondent may well have presented the same evidence in both cases had the two not been consolidated. In any event, the two cases were consolidated, the evidence was presented, and petitioner had the opportunity to contest it.” Order, at p. 2.

As usual, the issue is surprise. Did IRS ambush Fumo so he couldn’t put in evidence, object to IRS’ evidence, put on his own witnesses, or cross-examine IRS’ witnesses? No, says Judge Scholar Al; Fumo did all of the above.

Fumo says letting IRS put in the extra stuff prejudiced him, because it cost him money. But this is true whenever such a motion is granted. The point is, Fumo had a chance to defend, and did.

Maybe the defense here is a motion in limine; whatever evidence goes in for the excise tax is limited to the excise tax issue. Might not work if, as here, there’s substantial overlap (excess benefit is income to beneficiary), but worth a try. And worth considering where multiple categories of taxes are at issue.

Judge Morrison issues a puzzling off-the-bencher in Leslyn Jo Carson & Craig Carson, Docket No. 23086-21S, filed 5/18/23. This small-claimer involved the six-figure deductions for what IRS claimed was Leslyn Jo’s kids’ rodeo activities, wherein said kids made appropriately small money. IRS says this is a Section 183 hobby loss case.

But Leslyn Jo shows the deal she had with her Mom’s revocable trust, which owned an actual ranch, whereat the kids did rodeo somewhat. The deal was that Mom sold cattle, took gross proceeds and paid tax thereon, while Leslyn Jo paid the expenses and deducted same.

IRS wants to allocate expense between Leslyn Jo’s Mom’s cattle and the kids’ rodeoing, but Judge Morrison isn’t wearing it.

“The Court declines to refocus the Commissioner’s challenge to the Schedules F deductions by determining what relatively small part of the activities reported on the Schedules F consisted of rodeo activities rather than ranch activities. To do so would be difficult in this case. Although Mrs. Carson kept meticulous details of the expenses that were deducted on the Schedules F, and although these records would have allowed the Court to more precisely sort the expenses between ranching and rodeo, Mrs. Carson did not bring the records to trial.  She believed–correctly–that the Commissioner did not challenge the substantiation behind the deductions. Without the substantiation, the Court cannot sort the deductions between ranch and rodeo without resorting to rough justice. Under these unique circumstances, I hold that the Commissioner has waived the right to refocus his challenge on the relatively narrow rodeo activities. I further hold that the activity or activities reported on the Schedules F for 2017 and 2018 were engaged in for profit.”  Transcript, at pp. 9-10.

OK, none of this merits the description “puzzling.” But this does.

“I recognize that the Commissioner contends that there is a mismatch of income and expenses in that the revenue from the ranch, which consisted primarily of proceeds of selling cattle, was reported on the returns of Mrs. Carson’s mother, while expenses of the ranch were reported on the Carsons’ Schedules F. This mismatch appears to be primarily attributable to the business arrangement between Mrs. Carson and her mother, whereby Mrs. Carson paid expenses of the ranch and her mother received the revenues from the ranch, rather than the hobby-loss distinction made by section 183. A mismatch of income and deductions is not prohibited under the Code per se, but may be relevant in determining the appropriateness of accounting methods and in determining the appropriate allocation of income and deductions between partners. However, these legal issues are not before the Court.” Transcript, at p. 10.

What’s puzzling is that IRS’ counsel never picked up on Subchapter K after hearing Leslyn Jo’s account of the deal with Mom. This is a partnership with special allocations; whether this split-up would survive a Section 482 reallocation is another story.

Leslyn Jo objected to IRS putting in evidence as to years not at issue, but in a Section 183 hobby loss out-years are relevant whether engaged in for profit (e.g., did the activity ever make money; did taxpayer change operations or amend business plan after losses).

And Craig sat this one out, but he gets whatever deficiency the Rule 155 beancount comes up with, at no extra charge.

Footnote- I mention Cardiovascular Center, LLC, T. C. Memo. 2023-64, filed 5/18/23 just for the record. It’s a classic Section 7436 classification of all employees and the boss’ girlfriend. Not a single factor in favor of IC, and an EE landslide. SSA Section 530 avails naught: no long-standing industry practice, and no Forms 1099-MISC nonemployee compensation anywhere.

I invoke the work that got Defoe thrown in jail for the story of Scott Coombe, Docket No. 5152-20, filed 5/17/23. When it comes to the shortest way, CSTJ Lewis (“It’s That Name Again”) Carluzzo takes it with a vengeance in this off-the-bencher.

“The issue for decision is whether petitioner received certain compensation for services during 2016 and failed to report that income on his [year at issue] federal income tax return (return).

“Petitioner was employed by BSC during [year at issue]. He was paid for the services he provided to that company during that year. The payments that he received from BSC are shown in BSC’s records and reported on a Form W–2, Wage and Tax Statement, that BSC issued to petitioner. That compensation, which is not reported on his [year at issue] return, constitutes income that is includable in petitioner’s [year at issue] income and nothing else need be said on the point. See § 61(a)(1). Respondent’s determination of the deficiency as shown in the notice is sustained.” Transcript, at p. 4. (Name omitted).

CSTJ Lew ties the record set by Judge Pugh. See my blogpost “The Shortest Way With Dissenters – Part Deux,” 3/22/23.

Judge Emin (“Eminent”) Toro has an appetite for a good dictionary chaw and romp through statutory thickets, and gets both in United Therapeutics Corporation, 160 T. C. 12, filed 5/17/23. UTC did enhanced research via clinical trials of Section 45C orphan drugs over a four (count ’em, four) year stretch.

Section 45C orphans are drugs that would treat or cure diseases so rare that the Big Pharma beancounters wouldn’t spend a dime on them, but people would die for want of them. So Congress strewed some ill-defined largesse by way of a dollar-for-dollar credit against tax for those who sought them out. Everyone agrees UTC did that kind of research and incurred creditable costs.

But since our old chum the Section 41 enhanced research credit is also applicable, Section 45(C)(c)(2) attempts to harmonize the two. Absent this enactment, which UTC says is a dead letter and should be ignored, taxpayers could run research over a bunch years (hi, Judge Holmes), average the costs, and if the last year’s expenses after deducting the average yielded a better break than ignoring them and taking the last year alone for Section 45C, take the Section 41 enhanced rather than the Section 45C straight.

Clear? Thought not. So try the tables at 160 T. C. 11, at pp. 10-12.

Judge Eminent puts the issue thus. “Section 45C(c) provides that qualified clinical testing expenses must be excluded from all section 41 calculations, except that, under section 45C(c)(2), qualified clinical testing expenses that are also qualified research expenses must be included ‘in determining base period research expenses for purposes of applying section 41 to subsequent taxable years.’ The parties agree that the qualified clinical testing expenses at issue are qualified research expenses. So the only question before us is whether ‘base period research expenses’ are relevant to United Therapeutics’ research credit computation for [year at issue].” 160 T. C. 11, at p. 13.

The term “base period research expenses” is defined neither in Section 41 nor Section 45C. Happily, everyone agrees that the expenses at issue are research expenses for both statutes.

There follows an exhaustive, not to say exhausting, slog through the rules of statutory construction. UTC’s trusty attorneys need find no other way of making a living; they drag out any ambiguity, be it as thin even as a spider’s web, to entrap Judge Eminent. But he conquers all, and decides that the statute says what it means, and means what it says.

And it means UTC loses.

Two statutes that have endured their share of political flak unite in Memorial Hermann Accountable Care Organization, T.C. Memo. 2023-62, filed 5/16/23. MHAC claims they’re exempt, as they provide healthcare for Medicare patients and other insureds, and participate in the Medicare Shared Savings Program (MSSP). This split-up of guided largesse rewards healthcare providers who keep costs down and performance up.

As some of my nearest and dearest have been, and may again be, involved in the Memorial Herrman hospital complex, high performance thereof is top priority.

501(c)(4) exemption requires a civic organization, not for profit, and operated exclusively for social welfare. You’ll remember some political groups had a dust-up with IRS some years back over their 501(c)(4) status, with political hoot-‘n’-hollerin’. MSSP is a subset of the much-contemned ACA. So Ch J Kathleen (“T.B.S. = The Big Shillelagh”) Kerrigan, a follower of President Theodore Roosevelt, speaks softly but carries a big stick.

It’s the split with the insurers that sinks MHAC, which exhausted its administrative remedies, so Section 7428(a)(1)(E) ropes in Tax Court.

“Petitioner fails to qualify as an organization described by section 501(c)(4) because its non-MSSP activities primarily benefit its commercial payor and healthcare provider participants, rather than the public, and therefore constitute a substantial nonexempt purpose. While petitioner’s stated goal of providing affordable healthcare to patients is an admirable one, the provision of healthcare alone is insufficient to qualify for recognition of exemption under section 501(c)(4). Petitioner’s non-MSSP activities benefit primarily the commercial payors and healthcare providers with which it contracts. To that end, petitioner contravenes the requirements of section 501 by conducting business with the public in a manner similar to a for-profit business. See Treas. Reg. § 1.501(c)(4)-1(a)(2)(ii).

“Furthermore, petitioner has failed to demonstrate that its non-MSSP activities benefit the public. There is no evidence that petitioner has coordinated with the State of Texas to administer healthcare to the Greater Houston community, and petitioner has not otherwise shown that its non-MSSP activities promote the common good and general welfare of the community.” T. C. Memo. 2023-62, at p. 8. (Citation omitted).