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.

https://www.msn.com/en-us/news/crime/ramapo-settles-civil-rights-lawsuit-with-developer-claiming-corruption-for-3m/ar-AA1dSqTl?ocid=mailsignout&pc=U591&cvid=fa8ae608826844369b9d117ef37455c4&ei=11

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.

Ex-Ch J L. Paige (“Iron Fist”) Marvel wields the sculptor’s chisel, as she sculpts a Rule 104(c)(2) sanctions order preventing Cindat Manhattan Hotel Portfolio LLC, Docket No. 20935-20, filed 7/6/23 from putting in some documents they failed to produce as ordered.

Of course, the terms of the order are extensively fact-driven, so I’ll skip a lot of them. Briefly, IRS got a third document demand approved, but Cindat came up short.

Cindat had been dilatory leading up to IRS’ motion for sanctions, and hadn’t objected to the scope of the demand (which included such items as “all documents describing how petitioner qualifies as a real property trade or business under IRC § 163(j) and related Regulations,” Order, at p. 4). I should have thought that was worthy of at least an “overbroad” myself, although Judge Marvel says it “initially appears narrow, specifies that the request includes documents describing ‘petitioner’s day-to-day operations with respect to such real property.’” (Idem, as my expensive colleagues would say).

Howbeit, a voluminous response to such a demand isn’t sanctionable as an attempt to bury one’s opponent with paper (or electrons).

“Although we take issue with some of petitioner’s conduct in discovery, we are mindful that we should chart a course that does not result in undue prejudice to petitioner after accounting for the prejudice to respondent and that is consistent with the just, speedy, and inexpensive determination of this case. Cf. Rule 1(d). Rule 104(c)(2) permits us, upon a party’s failure to comply with an order of the Court with respect to Rule 72, to ‘prohibit[] such party from introducing designated matters in evidence.’ We think that it is appropriate to restrict petitioner’s ability to introduce into evidence documents and materials that would have been responsive to paragraphs 23, 33–38, and 40–41 of respondent’s third request for production of documents that have not already been submitted to respondent as of the date of this Order. Petitioner is not entitled to benefit from the late fulfillment of its discovery obligations by choosing which of its late-discovered documents to introduce into evidence, especially since it already had adequate time to undertake discovery.” Order, at p. 5. (Citations omitted).

Note also that during the period within which Cindat was to comply, they changed attorneys, and the incoming attorneys seemed to onboard and work fast. The outgoing are told in a separate order under even date to comply with Rule 24, with which they have not.

Takeaways: (1) Consider change of counsel can soften sanctions, if new crew jump to it.

(2) Maybe not objecting to overbroad demands but using them as cover to do what otherwise would be sanctionable as a document dump.

No, United States Tax Court is not joining in Bob Hilliard’s and Lee Pockriss’ 1959 hit or its account of Fred’s backseat activities. Rather, effective today, all parties in consolidated cases can “electronically file documents simultaneously in all of the consolidated cases.” Check out the latest DAWSON release notes or the DAWSON User Guides for further particulars.

Unhappily, and for no apparent reason, “Entries of Appearance for petitioner representatives and Decisions must still be filed in each case separately.”

DAWSON staggers into the last decade of the Twentieth Century, if not quite the third decade of the Twenty-First.

This date being a national holiday in celebration of independence, US Tax Court is closed. So am I.

As it was formerly, and may still be, the custom for various orators to expound at length on this date, delivering one or the other (or maybe both), I unequivocally state I shall deliver neither.

At least, not here.

Over Tiered Partnerships

Judge Joseph Nega notes the demise of TEFRA in a footnote, but if ever the Bard got it right, TEFRA proves that “the evil men do lives after them.” Just ask Phillips Family, LP, David Phillips, Tax Matters Partner, Docket No. 20369-22, filed 7/3/23.

The Philippians got not an epistle, but two (count ’em, two) FPAAs, dealing with their distributive shares from a partnership in which the Philippians were a partner. I needn’t remind my readers that these tiered partnerships (or box-checked LLCs) were the delivery system of choice for the dodgefloggers like Rogers and Haber. I’m not saying the Philippians are dodgers because I don’t know, and Judge Nega doesn’t go into details.

All Judge Nega has to do is grant IRS’ motion to dismiss for want of jurisdiction.

“If the partnership items of a lower-tier partnership—that is, a partnership in which the partnership that received the notice of FPAA owns an interest—are included in the FPAA of the partnership before us, we are without jurisdiction to determine those lower-tier partnership items.” Order, at p. 2. (Citations omitted).

The Philippians’ trusty attorney folds.

Oh, the footnote? “TEFRA was repealed by the Bipartisan Budget Act of 2015, Pub. L. No. 114-74, §1101(a), 129 Stat. 584, 625.” Order, at p. 2, footnote 3.

It will be interesting to see how a case like this plays out under the new regime. As both partnership items and partner items are to be dealt with in a one-size-fits-all proceeding, will tiers still bar partners in upper-tier partnerships from contesting lower-tier items?