That’s the lesson Judge Travis A (“Tag”) Greaves has for the eight (count ’em, eight) family-farmer petitioners in John E. Vorreyer and Melissa D. Vorreyer, et al., T. C. Memo. 2022-97, filed 9/21/22. They ran the farm in a bunch entities (hi, Judge Holmes), but we’re concerned here with a Sub S Corp and a general partnership, in which all petitioners had various interests.

But Chris & John were the only shareholders in the SD Corp who ponied up $108K in property taxes on said farm, and $20K for the back utilities bill in Year One. They claim these were contributions to capital, wherefore passed through as deductions to Chris & John on their personal 1040s.

No, says Judge Tag Greaves.

“A taxpayer cannot deduct expenses paid on behalf of another taxpayer. This long-established principle extends to corporations as a corporation’s business is distinct from its shareholders. Thus, a shareholder may not deduct as personal expenses those expenses that further the business of the corporation.” T. C. Memo. 2022-97, at p. 4 (Citations omitted).

Chris & John don’t claim the “further the corporate business” exception, but Taishoff says it’s worth a try. If the county forecloses for back taxes, there goes the farm.

Judge Tag Greaves says a Sub S Corp is no different than a C Corp when it comes to shareholders paying corporate expenses. The S Corp is on its own.

“Although an S corporation’s income or loss eventually flows through to the shareholders, a corporation ‘remains a separate taxable entity [from its shareholders] regardless of whether it is a subchapter S corporation or a subchapter C corporation.’ Russell v. Commissioner, T.C. Memo. 1989-207, 1989 Tax Ct. Memo LEXIS 207, at *10. This means that the business expenses of an S corporation cannot be disregarded at the corporate level for section 162 purposes. See id.  Consequently, the income reaped by an S corporation must be matched at the corporate level against the S corporation’s expenses that were incurred to produce that income before the net income or loss amount can flow through to the shareholders. See § 1366(a)(2) (generally defining the income or loss that flows through to an S corporation shareholder as the S corporation’s ‘gross income minus the deductions allowed to the [S] corporation’ (emphasis added)). This matching is accomplished by reporting such items on an S corporation’s corporate return: Form 1120S.” T. C. Memo. 2022-97, at p. 5.

In Year Two, the partnership bought two “semi-trucks” for $70K. I take that means the motive power component of an 18-wheeler. They wrote off the expense on their Sched F (farming) as repairs and maintenance, but everybody agrees it wasn’t. The two vehicles would have qualified for a Section 179 deduction as business property. But the partnership never amended to take the deduction, and the time to amend has run out.

Judge Tag Graves can’t help.

“Petitioners… request that this Court make the election retroactively on [partnership]’s behalf on the basis of principles of equity. We decline to do so as [partnership]’s circumstances are of its own making.” T. C. Memo. 2022-97, at p. 7.

Remember, pore l’il ol’ Tax Court has no equitable powers.

But check out footnote 10 at page 7. Judge, didn’t you mean that “Respondent does not dispute that the truck expenses are qualifying property, e.g., that the semi-trucks constitute qualifying property whose costs are otherwise eligible for deduction” ?

Again the Rodgers and Hart classic comes to mind as I peruse Judge Albert G (“Scholar Al”) Lauber’s order in  Oconee Landing Property, LLC, Oconee Landing Investors, LLC,  Tax Matters Partner, Docket No. 11814-19, filed 9/20/22.

Judge Scholar Al reviews two (count ’em, two) branches of the hearsay objection, therein, the business record custodian declaration, and the opposing party statement exceptions (what we used to call “admissions against interest”; but I’m showing my age).

Indeed, I (and doubtless all practitioners) could write a book about hearsay and its hydra-like branches. Judge Scholar Al’s book, if he wrote one, would be a classic.

In any case, I direct the attention of candidates for the next Tax Court Admissions Examination to Judge Scholar Al’s order today.

First, the custodian’s declaration.

“Respondent attached to his Motion in Limine the declaration of Christopher T. Graham, Records Custodian of PCLG. Mr. Graham certifies, under penalties of perjury, that: (1) the four documents were prepared at or near the time of the occurrence of the matters set forth therein; (2) the records were kept in the course of PCLG’s regularly conducted business activity; and (3) the records were made by PCLG as part of its regular business practice.

“Mr. Graham’s declaration meets the requirements of FRE 803(6)(A)-(C). As a ‘certification of the custodian,’ Mr. Graham’s declaration complies with FRE 902(11). See FRE 803(6)(D). And petitioner has offered no specific reasons why the source of the documents or their method or circumstances of preparation are untrustworthy. See FRE 803(6)(E). Because the four letters meet the relevant criteria, they qualify for the business records exception. See FRE 803(6).” Order, at p. 2.

Second, statements offered against an opposing party if the statement was made by the party in their individual capacity. As the Oconees are a TEFRA leftover, Judge Scholar Al has to do a deepdive into the identity of each individual to ascertain that each is a party because a partner, or one whose individual tax picture changes because of gain or loss from the partnership. See Order, footnote 2 at p. 3, detailing how TEFRA roped in indirect partners.

An engagement letter goes in as a contract, an independent act with legal consequences.

Relevance gets a mention, but FRE 401 casts so wide a net that Judge Scholar Al finds it easy to let stuff in.

William Goddard, T. C. Memo. 2022-96, filed 9/19/22, and the law firm which he founded, didn’t realize that the CDP is the trial; that every argument you have has to be raised; and that the administrative record has to be built and probed for adequacy.

You can read for yourself Judge Elizabeth A. (“Tex”) Copeland’s deconstruction of Goddard’s and the law firm’s attempts to fight the liability issue in Tax Court. But when it’s all been sifted, Goddard and the law firm participated in the process. And when an AO noted that cases like theirs settled for 50% because of fading memories, and that necessary information was missing from the Exam file in their cases, they did nothing. T. C. Memo. 2022-96, at pp. 11-12.

The issue in this case was the old Section 6707 chops for nonregistration of potentially abusive tax shelters, subsequently repealed (or maybe amended out of existence). See T. C. Memo. 2022-96, at pp. 31-32.

SOL founders on nonfiling of the now-obsolete Form 8264. No filing, no SOL. The 28 USC § 2462 catch-all five-year SOL doesn’t apply when there’s no filing.

There will be more, though. ” We will hold additional proceedings to consider Mr. Goddard’s and [law firm]’s remaining issues raised in their Petitions, namely additional verification issues, the laches defense, the rejection of LGD’s offer-in-compromise, and whether the SOs balanced the need for collection actions with the legitimate concern that those actions be no more intrusive than necessary.” T. C. Memo. 2022-96, at p. 32.

Judge Tex Copeland split this case in two, as if Goddard and the law firm won on any of the issues they raised in this half, that would have ended the case. They didn’t, so it didn’t.

Judge Elizabeth A. (“Tex”) Copeland rejects the inventive pleadings of the trusty attorney for Jo Ann Sharp & Randall W. Sharp, Docket No. 7196-19, filed 9/16/22.  I’ll give said trusty attorney a Taishoff “Good Try,” despite Judge Tex Copeland’s short shrift.

“…Petitioners assert that the ‘federal government’s current regulation of intrastate production and sales of cannabis is no longer necessary and proper under the Commerce Clause.’ Although Petitioners recognize that the Supreme Court ruled to the contrary in Gonzales v. Raich, 545 U.S. 1 (2005), they contend that the reasoning in Raich has been hollowed out by factual and legal developments, including the proliferation of state-sanctioned marijuana businesses (introducing new federalism questions), subsequent Commerce Clause jurisprudence, and the statement of Justice Thomas in Standing Akimbo, LLC v. United States, 141 S. Ct. 2236 (2021), where the Supreme Court declined to review the Court of Appeals for the Tenth Circuit’s decision in the case below.” Order, at p. 1.

But the Supremes have said that, when inferior courts seem to have questioned the rationale upon which a Supreme Court decision rests, a court now presented with the issue where the precedent controls should follow that precedent, leaving it to the Supremes to overrule their former decisions.

As we know, the Supremes are nowise loath to overrule even long-standing precedents. As a betting man, however, I doubt they’ll overrule Raich.

So Judge Tex Copeland denies petitioners’ motion for judgment on the pleadings, and calls for a phoneathon.

But let not said trusty attorney be discouraged; he’s probably got his brief on appeal ready.

I don’t know if Tax Court Judges or STJs wish they could do a Defoe when confronted with an IRS summary J motion from a protester CDP. STJ Diana L (“The Taxpayer’s Friend”) Leyden expends seven (count ’em, seven) pages of “somber reasoning and copious citation of precedent” to see off John Evangelista Trapasso, Docket No. 7739-20SL, filed 9/15/22. While a number of paragraphs must have been cut-and-pastes, there’s enough hand-tailoring to show STJ Di read the file. I would expect nothing less.

But I must again lament the waste of scarce judicial resources on a Form 4852 attempted rewrite of a W-2. Filing a baseless Form 4852 rewrite should be good for an automatic $5K chop, although it isn’t.

STJ Di does show John Evangelista a Section 6673 yellow card.

Today Judge Ronald L. (“Ingenuity”) Buch gives us a history of the Swiss investment (bank) account, the Section 1296 Passive Foreign Investment Company maneuver, in Estate of Brett L. Clemons, Sr., Deceased, Brett Lee Clemons, Jr., Personal Representative, T.C. Memo. 2022-95, filed 9/14/22.

Brett Sr. decided to stash cash away from about-to-be-ex Mrs. Brett Sr., by parking same with UBS, who0 ran same through an investment account, which the Swiss managed to Brett Sr.’s complete satisfaction, which he acknowledged in writing to the Swiss, but never to IRS. When the Federales finally blew the doors off the Swiss stashery, Brett Sr tried the Swiss branch of a German bank, until finally an IRS subpoena pries from Brett Sr’s attorney enough info to nail Brett Sr for Section 6663 fraud chops on his deficiencies, plus add-ons for late filing.

Of course, under the current FBAR offshore show-and-tell regime, with massive chops for nondisclosure of foreign accounts, this sort of dodging has lost a lot of adherents.

As the old stock exchange ads used to say, this notice appears as a matter of record.

Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan has been wielding a big “DENIED” stamp lately as the boondockery conservation easements seek the Hewitt refuge. But Judge Albert G (“Scholar Al”) Lauber is nowise loath to join in.

Today, the target is Long Leaf Property Holdings, LLC, Long Leaf Manager, LLC, Tax Matters Partner, Docket No. 11982-16, filed 9/13/22.

The Longleafs are aiming at the two-week-old order I blogged on 8/31/22, in my blogpost “Line Up And Wait.”

The Longleafs get the “DENIED” stamp.

Reminds me of the flailing datestampers at the Glasshouse.

A correspondent asks when will we get to the real issue: valuation.

I can only quote Judge Holmes’ dissent in Oakbrook: “Today we uphold a regulation that will invalidate who knows how many other conservation-easement deductions, and will almost certainly lead to appeals in multiple circuits. If the Commissioner continues to seek gross-misvaluation penalties, we will also have to figure out in a great many cases how to determine which portion of an underpayment is attributable to a valuation misstatement and which is due to a failure of the conservation easement altogether, when it might justly be said to be attributable to both. See PBBM-Rose Hill, 900 F.3d at 214.

“I fear that our efforts to clear cut and brush hog our way out of the volume of conservation-easement cases we have to deal with has left us a field far stumpier than when we began.”

We’ve been hearing a lot about grand jury subpoenas and testimony lately, so in case some of the testimony may spill over into the realm of taxes, I’ll extract from Judge James S (“Big Jim”) Halpern’s discussion of what happens when the grand jury meets Tax Court, in Alan Brian Fabian, T. C. Memo. 2022-94, filed 9/13/22.

Al’s grand jury tour begins with his phony sale-and-leaseback operation and its unraveling in Bankruptcy Court. While Al’s C Corp was in Bankruptcy Court, the FBI got involved and called in IRS. IRS Special Agent F (name omitted) investigated, and suggested nailing Alan for money laundering and a Section 7206(1) filing false returns for a couple years (hi, Judge Holmes).

Alan cops to mail fraud and filing false returns in USDCDMD. Alan’s plea bargain, to which IRS is explicitly not a party, says IRS can pursue whatever remedies it may have. IRS does, and SA F’s pictures, descriptions, and accounts are front-and-center. Alan asserts that this is grand jury testimony, and cannot be revealed.

“…the district court issued its order granting the United States’ motion to disclose grand jury material to the IRS. The court made its order pursuant to Rule 6(e)(3)(E)(i) of the Federal Rules of Criminal Procedure (District Court’s Rule 6(e) order), finding that there was a particularized need to grant limited disclosure of grand jury material in connection with another judicial proceeding, viz, this case,  i.e., Fabian v. Commissioner, dkt. No. 25589-14. In pertinent part, the district court ordered that grand jury material in petitioner’s criminal case ‘shall be disclosed’ to the Tax Court, limited, however, to the disclosure of ‘information and records related to the resolution of the alleged tax deficiencies and penalties for the tax years 2002, 2003, and 2004.’” T. C. Memo. 2022-94, at pp. 17-18.

Alan’s argument that SA F wasn’t expressly authorized to disclose is a nonstarter.

“The consequence of the District Court’s Rule 6(e) order was to authorize a disclosure of a grand jury matter. The order did not specify a particular actor authorized to make the disclosure but simply ordered that the referenced grand jury material in petitioner’s case ‘shall be disclosed.’ Implicit in that order is that someone otherwise prohibited from disclosing the material may, with impunity,  disclose it to one of the permitted recipients, i.e., to the Tax Court. SA F may well have been a member of the class of persons otherwise prohibited from disclosing the material, but the order freed her, as it did everyone in that class, to disclose the material within the parameters set by the order. To the extent SA F’s testimony touched on grand jury material in petitioner’s criminal case, we see no violation of the grand jury secrecy rule established by Rule 6(e)(2)(A)  and (B) of the Federal Rules of Criminal Procedure.” T. C. Memo. 2022-94, at pp. 24-25.

Hint to the criminal defense bar: Don’t forget IRS when you settle your case.

Lakeisha Degourville, T. C. Memo. 2022-93, filed 9/12/22 shows the need for good trial preparation. Yes, Lakeisha’s was less than sterling, although the GA authorities had seized her records. But IRS’ wasn’t of the finest, either.

Lakeisha ran her own tax prep business and a hair salon. The tax prep “… was recognized as one of the largest tax return preparation companies in Columbus, GA, had continuous operations from 2009 until 2014, and employed approximately 18 persons on average.” T. C. Memo. 2022-93, at p. 2.

Unhappily, Lakeisha went down for State income tax evasion. IRS hit her for $439K of unreported income, plus a Section 6663 fraud chop. Judge Wells has the story; it’s the usual dealings in cash, claiming false filing status (HOH vs MFS), and lack of recordkeeping. While Lakeisha claims the GA authorities have all her records, she never asks for them before trial nor has kept back-ups. Hint: if your records are subpoenaed, copy them. If seized, demand they be produced if you need them for trial.

What I want to focus on is the Section 32(k)(1)(B)(i) 10-year lockout for EITC. Lakeisha and spouse both claimed EITC and claimed separate residences. IRS claims this was fraudulent, and wants Judge Wells’ “approval” to impose the lockout. But IRS asks for this in an Amendment to Answer, as the “approval” was never mentioned in the SNOD. Hence IRS has Rule 142(a)(1) BoP, as this is new matter requiring different proof.

Using belt-suspender-and-crazy-glue, IRS wants the 2-year Section 32(k)(1)(B)(ii) lockout if somehow Lakeisha avoids the fraud chop, T. C. Memo. 2022-93, at p. 17, footnote 6. But iRS does this in its Simultaneous Opening Brief, again earning BoP.

The result is a schemozzle at the trial.

“Respondent contends in the Amendment to Answer that petitioner improperly claimed the EITC in ‘various preceding tax years’ but neither alleges nor offers proof of a prior determination of fraud. Respondent does not identify nor allege the ‘most recent taxable year’ for which there was a final determination that petitioner’s claim to the EITC was due to fraud. Respondent does not clarify his view of the role played by the state conviction or any unidentified prior determinations by this Court. It follows that respondent has provided insufficient pleadings and supporting facts to permit the Court to determine compliance with section 32(k)(1) under a plain and ordinary reading of the statute.” T. C. Memo. 2022-93, at p. 17.

The 2-year lockout craters for the same reason.

Hint: If you have a bright idea that you never pled before, know what you have to prove and be ready to prove it.

I’ve hewn and shaped the Bard’s famous line from Hamlet, to show another example of how 11 Cir’s evisceration of Reg Section 1.170A-14(g)(6)(ii) upends previously-granted summary J.

I didn’t blog the earlier appearances of Battelle Glover Investments, LLC, Battelle Investment Group, LLC, Tax Matters Partner, Docket No. 6904-19, filed 9/12/22. This case featured another “highly contestable reading of what it means to be perpetual,” same-old.

Now, of course, post-Hewitt, whatever such are still in the Rule 161 30-day reconsideration window are up for grabs. Of course the Battelles move, Judge Courtney D (“CD”) Jones reconsiders, ditches her prior orders, gives the Battelles summary J that Reg Section 1.170A-14(g)(6(ii) is invalid, and  tells IRS to try the fact question of the dueling Forms 8283, for which see Order at pp. 6-7. Was there or was there not a missing statement of cost basis?

When it comes to this South East Conference of marked-up boondockery, it’s Hewitt that’s the destiny that shapes the parties’ fates.

Edited to add, 9/12/22: From a source, “I believe this CE [conservation easement] agreement had the same flaw as TOT and Plateau, that is a FIXED sharing in $$ condemnation etc, which they later corrected by an amended deed. Not a fixed %. That’s twist on facts in Hewitt.” The source went on to express surprise at the dueling 8283s. Indeed, most unusual; should be an interesting trial (or evidentiary hearing).