No, That’s Not a Typo

Indu Rawat is back. IRS has folded her non-inventory gain when she unloaded her US partnership interest, but Judge David Gustafson has held that the Form 870-LT she and IRS signed did not preclude her fighting whether she was an NRA (not a gunslinger, a Non Resident Alien) or wasn’t taxable on inventory gain per Sections 741 and 751. See my blogpost “Maybe Not So Perduto,” 7/28/22, and the blogposts therein cited.

Now, Indu wants summary J she’s not taxable on inventory gain. She sold out years before the enactment of Section 864(c)(8), so that’s not in play; Grecian Magnesite still is. Sale of a partnership is a sale of a business, not each asset separately, for this case. With the usual exceptions, of course; whatever would we lawyers do without exceptions?

Indu says neither Section 741 nor Section 751 is a sourcing section, and Judge Gustafson buys that. “Admittedly, section 751 and Treasury Regulation § 1.751-1(a)(1) do not tell us the source of the proceeds nor their effective connection to a U.S. business; rather, they tell us the nature of the property considered to have been sold and the nature of the income that is to be taxed (or not). To find the sourcing rules and their effect on the nonresident alien’s liability, we look elsewhere.” T. C. Memo. 2023-14, filed 2/7/23.

The problem is, Section 751 and the Regs. treat inventory gain and receivables gain different to other gain on sale of a partnership interest. And Section 751 explicitly overrides Section 741. Inventory gain is gain other than gain on sale of a capital asset.

Once again, IRS doesn’t cross-move for summary J, but turns to the sourcing rules. Judge Gustafson finds those help IRS. “Consequently, since Ms. Rawat’s motion is based on her contention, which we reject, that the sourcing rule for the Inventory Gain is the general rule of section 865(a)(2), we will deny her motion.” T. C. Memo. 2023-14, at p. 20.

So Indu is out, indubitably, right?

Not on Judge David Gustafson’s obliging watch. He’ll tell your trusty attorneys, however white-shoe their affiliations, how to maybe win their case. Like maybe actually read the law…all of the law.

“Despite our rejection of Ms. Rawat’s principal contention about the effects of sections 741 and 751 and her reliance on the default sourcing rule of section 865(a), she might nonetheless prevail in whole or in part by showing, pursuant to section 865(b), that the source of the Inventory Gain was ‘without the United States’ under sections 861(a)(6), 862(a)(6), and 863. In the pending motion, however, she has not attempted to make that showing.” T. C. Memo. 2023-14, at p. 20.

Obliging? Just file your petition, ask to be assigned to Judge David Gustafson, and sit back. He’ll try your case for you.

Judge Goecke won’t stir it just yet, but the Boechler, P. C., equitable tolling silt is a definite maybe. Island Shoals Henry 430, LLC, Island Shoals Investments, LLC, A Partner Other Than the Tax Matters Partner. Docket No. 31759-21, filed 2/6/23, is nowise behindhand in slipping the Boechler gambit into IRS’ motion to toss the notice partner for late filing in this TEFRA hangover.

TEFRA may be long gone, but the memory (and the cases) linger on. IRS has eight (count ’em, eight) attorneys deployed, against Island Shoals’ three, and it looks like they’ll need every one of them.

Island Shoals claims the FPAA was sent to the wrong address for the TMP, and the Section 6223(d)(2) notice partner mailing wasn’t timely mailed. So Judge Goecke orders an evidentiary hearing on dates and places (what was sent, when and where).

Though Island Shoals’ trusty attorneys are onto something, Judge Goecke thinks they missed the remedy. “Petitioner has not filed a cross-motion to dismiss, but a decision in its favor on either of the arguments it advances appears to require dismissal. See I.R.C. § 6223(e).” Order, at p. 1. (Citation omitted).

But said trusty attorneys have a backstop, in case they lose the evidentiary hearing; and that’s maybe why they didn’t move to dismiss. Judge Goecke deals with the backstop in a footnote.

“Alternatively, petitioner argues that the deadlines to file a petition in I.R.C. § 6226 are nonjurisdictional and subject to equitable tolling. We understand that we must address this argument only if we decide that the FPAA issued to the tax matter partner was valid and the FPAA was timely mailed to petitioner. Accordingly, we will not address it at this time.” Order, at p. 1, footnote 1.

I am even-handed, favoring neither taxpayer nor IRS. But this time I’m rooting for IRS. I’d love a chance to blog Boechler and Section 6226.

A Taishoff “Thanks, Guys” to the team at Asbury for providing the opportunity..

Madeleine L’Engle’s 1962 young adult classic sums up the arguments of Jacob & Marsha Rozbruch, Docket No. 16739-19L, filed 2/3/23. Jacob & Marsha claim Appeals abused its discretion by not confining its review on remand to the financial information Jacob & Marsha submitted four (count ’em, four) years earlier. Judge David Gustafson remanded with an order to reconsider Jacob’s & Marsha’s claim of CNC “taking into account all of petitioners’ income, expenses, assets, and liabilities as reported by petitioners in their supporting financial documentation.” Order, at p. 5.

Jacob & Marsha had settled a bunch deficiencies and TFRPs (hi, Judge Holmes) with DOJ, but those aren’t in play, except for a now-expired wage garnishment. They had run up an additional $700K of deficiencies and TFRPs, but submitted no new financials, claiming the old stuff was all Appeals could consider.

Judge David Gustafson is extremely well-bred.

“Our remand order can be construed to instruct IRS Appeals to include in its consideration the Rozbruchs’ information ‘as [previously] reported’—but it cannot reasonably be construed to allow consideration of only that previous information. Our instruction was to ‘take[] into account’ that information in the process of  ‘reconsider[ing] petitioners’ financial circumstances.’ Assuming that there might sometimes be an occasion in which, in a remand order, the Court has the discretion to confine IRS Appeals to an existing record, we did not so confine IRS Appeals here;  and it would have been very odd to do so in this situation. The relief that the Rozbruchs request is the status of ‘currently not collectible’; but the remand as they conceive it would have the IRS determine whether to forestall collection (and would have the Court review that determination) on the basis of a showing that they were not collectible four years ago—i.e., to determine not that they are currently not collectible but that they were previously not collectible. Of course, financial information in a CDP hearing can never be up to the minute, but a four-year lag would undermine the logic of CNC.” Order, at p. 11.

CNC means currently not collectible. That status applies at the moment, based upon the current state of financial affairs. Summary J for IRS.

Jacob’s & Marsha’s trusty attorney is an alumnus of The Jersey Boys, whose never-say-die attitude I’ve chronicled here before.

This variation of the Michael Corleone gambit, “don’t ask me about my business,” is played today by Thiele Kaolin Co., KaMin, LLC , Imerys USA, Inc. and Imerys Minerals USA, Inc., and Arcilla Mining and Land Co., LLC. All nonparties, they are seeking to quash IRS subpoenae (this is Judge Patrick J (“Scholar Pat”) Urda’s case, of course) that ask the nonparties about their business.

The case is J L Minerals, LLC, Beasley Timber Management, LLC, Tax Matters Partner, Docket No. 17076-21, filed 2/2/23, who claimed a $16 million conservation easement deduction on the usual GA boondockery they bought for $1.6 million a year-and-a-half before taking the deduction.

The nonparty subjects of the subpoenae are the only miners of kaolin, a clay used “to produce paper, porcelain, paints, and other products.” Order, at p. 1. IRS wants 14 (count ’em, 14). categories of information from the nonparties covering three years. The J Ls claim the boondocks are stuffed with valuable kaolin.

The nonparties claim ” that the subpoenae sought broad swaths of confidential and potentially privileged information that would upend the kaolin market, which is small (there are only three major processors – Thiele, KaMin, and Imerys), secretive, and subject to government scrutiny (as a check against price-fixing). The nonparties asserted that the breadth of the requested information only a few weeks before trial presented a particular burden given that, with one exception, the nonparties had no connection to the issues before the Court.” Order, at pp. 2-3. (Footnote omitted, but it says years before KaMin leased the land to mine it).

Judge Scholar Pat says citizens must help the Government, but he’ll narrow the subpoenae to only the year at issue, and provide firewalls to protect confidential information. The nonparties are the only game in town when it comes to kaolin, and that would help Judge Scholar Pat figure this out, so they have to dish somewhat. IRS is not pulling a last-minute desperation search for a case, nor is this coming at the end of a long trial.

So the nonparties can testify by Zoomiegram for no more than 3 hours each, and while they needn’t provide paper, they must be prepared to testify about contracts, policies and procedures.

Amanasu Environment Corporation, Docket No. 5192-20L, filed 2/1/23, finally got the NOD more than thirty days after mailing, although an attempt to deliver was made five (count ’em, five) days before the thirty day clock ran on petitioning the NOD. Amanasu says the NOD was addressed wrong, to “Vanclover BC V6R1E4,” rather than “Vancouver BC V6R1E4,” Order, at p. 2. And that error may have impeded and delayed delivery, as IRS can’t show how Canada Post handles and delivers mail, including without limitation the name of the postie who was on duty that day, Order, at p. 3, footnote 3.

Amanasu amends its petition to raise Boechler, P. C., equitable tolling. That’s good enough for ex-Ch J L. Paige (“Iron Fist”) Marvel to toss IRS’ summary J motion. Question of fact whether delayed delivery prejudiced Amanasu.

OK, so maybe Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan might consider whether a two (count ’em, two) day delay in receipt of Deirdre’s petition prejudiced IRS. Deirdre Lenz, Docket No. 33904-21, filed 2/1/23, used FedEx 2 Day AM, to send in her petition on the last day. Of course, FedEx 2 Day AM is not one of the “blessed communion, fellowship divine” in Notice 2016-30, 2016-18 I.R.B. 676, effective April 11, 2016, and therefore gets no benefit from Section 7502 mailed-is-filed. Deirdre says “… she was unable to reach any person by telephone at the Internal Revenue Service (IRS) and consequently ‘was not aware that there were postal delivery options that were unacceptable by the IRS.’” Order, at p. 3.

Deirdre, don’t feel like the Lone Ranger. Reaching IRS by phone can be an expedition.

So what’s the difference?

On this last day of January, when I’m driven to poring over 576 (count ’em, 576, and I have) orders to extract whatever poor blogfodder may be in their barren electrons, I find two familiar faces from long ago and far away.

Thornell Johnson, Docket No. 17082-22SL, filed 1/31/23, wants simultaneously to dismiss and to obtain summary J, so Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan gives IRS three weeks to responds to both motions. Thornell gets the same three weeks to respond to IRS’ motion to file a late answer. Thornell was here last in 2013; see my blogpost “A Rant – Part Deux,” 4/3/13. Kicked up quite a ruckus; let’s see what happens this time.

Arthur M. Bialer, Docket No. 6983-19W, filed 1/31/23, was also here, but more recently; see my blogpost “The Whistle Blown On Summary J?” 12/2/19. Art seems to have been a precursor of Van Bemmelen. This time there’s a procedural joust about whether a Rule 161 is available to review an interlocutory order as well as a final, dispositive order. Judge David Gustafson says yes it is, despite Rule 161 residing in Title XVI of the Rules, dealing with post-trial matters.

Doesn’t help Art, though; Judge Gustafson says he reviewed all Art’s objections before. But the reason I mention this is that Judge Gustafson wants to see the outcome of Michael R. Lissack’s appeal to DC Cir. You’ll remember, maybe, Mike’s appearance here in my blogpost “A Piece of the Action – Part Deux,” 8/17/21.

While I’ve stated before that I don’t undertake to cover appellate courts, and my readers should do their own Shepardizing, I might just make an exception this one time. Mike was a client years ago in an unrelated matter. And it might be interesting to see if DC Cir goes again to the bullpen for outside counsel to explain the anfractuosities of Section 7623 and its erroneous cross-reference, as they did for Mandy Mobley Li. One hopes the appellate court charged with exclusive jurisdiction over whistleblower claims is up to the task its own self.

Three weeks ago, a reader asked why IRS hadn’t considered a passive activity attack on Paul and Pat Wondries, whose highly-skilled manager ran their cattle ranch with hardly a word from his bosses; see my blogpost “Good Help Hard to Find,” 1/9/23. Professional management was the key to sustaining Paul’s and Pat’s business deductions.

IRS fails to raise the Section 183 hobby loss defense effectively in Mathew Daniel Craddock and Chasta Crenshaw Craddock, T. C. Sum. Op. 2023-4, filed 1/30/23.

STJ Adam B. (“Sport”) Landy tells the tale in a footnote.

“In his Pretrial Memorandum… respondent asserted that petitioners were not engaged in a trade or business with the intent to generate a profit during the year in issue, and therefore the deductions claimed relating to Mr. Craddock’s consulting activities should be limited to the amount of gross receipts reported on the return under section 183. Although this issue was raised during the examination, it was not incorporated into the notice of deficiency mailed to petitioners, and respondent failed to raise this issue in his Answer. … respondent filed a Status Report apprising the Court that he is unable to determine why the issue was not included in the notice of deficiency, and he, therefore, conceded the issue. At trial, respondent confirmed his concession.” T. C. Sum. Op. 2023-4, at p. 2, footnote 2.

IRS had four (count ’em, four) attorneys on this small-claimer, with a $4K deficiency after Mat’s $31K in business deductions go down for want of documentation. Mat’s log for his Ford F-150 does account for every mile, but doesn’t distinguish between business and personal; it shows him simultaneously in two States on the same day; and his bank statements, supposedly corroborative, confirm Mat was buying fuel in one State while simultaneously present in another. T. C. Sum. Op. 2023-4, at pp. 6-8. The remaining $14K of deductions fare no better.

So in this case, IRS’ omission of hobby loss was no loss.

Takeaway- The SNOD is IRS’ case. What it leaves out is as important as what is put in.

Ever since the early days of this my blog, I’ve awarded Taishoff “Good Tries” for attempts, gambits, ploys, hail-marys, however denominated, which in my sole, complete, unfettered, and freely-abused discretion merit a gradation of same.

Today, Webster Williams, Docket No. 20603-19, filed 1/27/23, having gotten IRS to wave off the SNOD it issued him for taxable year 2017, goes for the gold.

IRS moves for entry of decision that Webster is in the clear for taxable year 2017. And Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan does so, while rejecting Webster’s counter. And it’s a beaut.

“The IRS concedes that there is ‘no deficiency in tax and no additions to tax due from the Petitioner, nor are there any overpayments due to Petitioner, for the 2017 taxable year’. In the interest of allaying any possibility of ambiguity, because the Petitioner’s circumstances are unlikely to change until February, 2035, the Petitioner respectfully requests the concession include all years from 2016 through to and including 2034, so that upon his release from prison, he will begin his ‘new life’ with a clean slate. If, for some unforeseen reason, the Petitioner is released from prison earlier, he will begin filing at his earliest filing period occurring after his release, and from that point forward, unless re-incarcerated (due to unforeseen reasons).” Order, at p. 1.

Ch J TBS is almost regretful as she refutes Webster’s award-winning maneuver.

“However, because the Court has jurisdiction only over the notice of deficiency for 2017 upon which this case is based, there is no authority in the context of this proceeding to offer relief for other years and in other forms as sought by petitioner.” Order, at p. 1.

Ya gotta admire Webster: nothing small-minded about him. He gets a Taishoff “Good Try, hors classe.”

JOAN. Thou are a rare noodle, Master. Do what was done last time is thy rule, eh?

G. B. Shaw, Saint Joan, 1920

I’ve been waiting for an order tossing a day-late deficiency petition, to enable me to fire a broadside at Hallmark Research Collective, Inc.,  159 T. C. 6 (corrected), filed 12/5/22. And Letitia D. Morant, Docket No. 37844-21S, filed 1/26/23, provides me the opportunity.

Letitia used UPS Ground and handed the Brown Bombers her petition with time to spare, but alas, the packet hit Tax Court a day late. As UPS Ground is not one of the “blessed communion, fellowship divine” of Private Delivery Services, more particularly bounded and described in Notice 2016-30, 2016-18 I.R.B. 676, effective April 11, 2016, and inculcated by Ch J Kathleen (“TBS= The Big Shillelagh”) at p. 3 of said Order, she tosses Letitia.

Hallmark gets a mere nod at p. 2 of said Order. The Order itself might have been written long before the Supremes tried to bring discipline to the whole Congressional jurisdiction-vs-equitable-tolling conundrum in Boechler, P.C., 596 U. S. _____ (2022).

With deepest respect (because I like Judge David Gustafson as a person and respect him as a jurist), all his magnificent opinion in Hallmark says is “of course it’s jurisdictional, we’ve always done it this way.”

Taishoff says “Rare noodle, the Supremes said that isn’t good enough. Hallmark doesn’t address the core issue, that filing a deficiency petition in Tax Court is like the automatic stay in bankruptcy, 11 USC §362. IRS needs to know when they can start collecting. A late-filed petition resuscitated by equitable tolling, which could take place at any time, creates chaos in the collection process. That’s not the case with equitable tolling in a CDP case, because the NITL or NFTL has already issued; the actual levy may be stayed, but the Supremes ignored that (or maybe it wasn’t argued in Boechler, P.C.). But how does the Boechler reasoning not apply in deficiency cases as well as CDPs?”

I doubt Ms. Morant has the money to challenge Ch J TBS’ toss of her petition. But I hope some day-late deficiency petitioner does.

Though an Authority even greater than STJ Diana L. (“Sidewalks of New York”) Leyden has decreed that the laborer is worthy of his hire, he’s not worthy of ducking the Section 6662 chops when he’s a pharmacist and the 1040 at issue says he’s a “laborer.”

Even the Harvard LITC, under their redoubtable leader Temple Keith (“Phileas”) Fogg, can’t extricate Ashenafi Getachew Mulu, 2023 T. C. Sum. Op. 2, filed 1./25/23, from the toils of the late David Clerie, unregistered preparer and friend of the Ethiopian immigrant community. Ash realized the immigrant’s dream of owning his own home and was fitting up the upper floors to rent. The late Dave, PTIN-less but inventive, let his fancy roam when he did Ash’s return for year at issue.

STJ Di: “Petitioner’s [Year at Issue] federal income tax return prepared by Mr. Clerie claimed deductions and reported expenses related to the purchase of the house and costs incurred with respect to the rental of the second and third floors. With respect to his real estate petitioner claimed passive activity losses on Form 8582, Passive Activity Loss Limitations, and deductions on Schedule E, Supplemental Income and Loss, thatwere related to the purchase of the house. However, petitioner substantiated only $9,500 in repairs and conceded the remainder. Petitioner also claimed deductions for car and truck expenses on Schedule C, Profit or Loss From Business, and reported his principal business or profession as a ‘driver,’ in part because he used his vehicle to drive his parents and others in his community to church and to commute to his jobs. Petitioner concedes he is not entitled to those deductions.

“During the [Year at Issue] petitioner worked as a pharmacist. However, the [Year at Issue] return prepared by Mr. Clerie listed petitioner’s occupation as ‘Laborer.’” 2023 T. C. Sum. Op. 2, at p. 3.

When time to file drew near and Ash hadn’t gotten his return, he hunted down Dave, found one Motoban, who claimed to be Dave’s brother and heir to his tax practice and who e-filed Ash’s return using FreeTax. Ash never reviewed the return.

“If petitioner had reviewed his return, he would have noticed that his occupation was listed as ‘Laborer.’ Petitioner was a pharmacist, and the obvious listing of his occupation as laborer should have prompted him to question the accuracy of the return. Further, given that he was aware that for [Year ast Issue] he was claiming tax deductions with respect to real estate and had not done so in the past, petitioner was put on notice that he should have reviewed the return with respect to such deductions. Therefore, regardless of whether he understood the rules regarding depreciation or deducting real estate expenses, petitioner had a duty to review the return and exercise prudence before filing it. He did not do so.” 2023 T. C. Sum. Op. 2, at p. 7.

Substantial underpayment chops for Ash, and one in the loss column for the Harvards.