Hewitt is the gift that keeps on giving. And Judge Albert G (“Scholar Al”) Lauber receives even more than I, as today he deals with Montgomery-Alabama River, LLC, Parkway South, LLC, Tax Matters Partner, Docket No. 9254-19, filed 2/25/22.

My readers know I eagerly awaited fresh learning in this case. See my blogposts “‘No Comment’ – Redivivus” 2/2/21, and “It’s Turkeys All the Way Down,” 6/11/21.

Today we have the update on the latter blogpost.  Therein, I chronicled how Judge Scholar Al tossed both IRS’ and the Montys’ motions for partial summary J. But now the Montys are back, wanting renewed summary J that the improvements-out clause is copasetic because Hewitt, and they’re Golsenized to 11 Cir.

IRS folds. Looks like Judge Holmes got it right, so much so that even IRS is folding. “Highly contestable readings of what it means to be perpetual” are on their way out.

But no summary J on that point to the Montys.

“We will accordingly vacate our June 11, 2021, Order insofar as it denied petitioner’s motion for partial summary judgment on the APA question. And we will hold petitioner’s Renewed Motion for Summary Judgment in abeyance pending further developments. This is the course we have followed in other cases presenting this scenario. See, e.g., Oconee Landing Prop., LLC v. Commissioner, T.C. Dkt. No. 11814-19 (Jan. 10, 2022) (order); Wisawee Partners II, LLC v. Commissioner, T.C. Dkt. No. 6105-18 (Jan. 7, 2022) (order). Because we have denied respondent’s motion for partial summary judgment on the ‘donor improvements’ issue–for reasons unrelated to the Eleventh Circuit’s opinion in Hewitt–this case (unless settled) will proceed to trial to determine the proper valuation of the easement, whether or not the regulation is valid. Given the possibility of further appellate developments on the ‘donor improvements’ issue, we think that the most prudent course is to preserve this issue for possible consideration at trial or in post-trial briefs.” Order, at p. 2.

For Oconee, see my blogpost “Price and Value,” 1/12/22; for Wisawee, see my blogpost “Another Silt-Stir,” 1/7/22.

Can Oakbrook be far behind?

CSTJ Lewis (“Master Speller”) Carluzzo doesn’t name which software led Candice L. Busch & Randall P. Busch, Docket No. 14085-20S, filed 2/25/22 astray. But their failure to heed the old saying “take care of the pennies and the dollars will take care of themselves” costs them the Section 6662 five-and-ten chop. Candice & Ron  concede the deficiency, which resulted in the refund of all their withholding.

The software Candice used to do their year-at issue taxes only recognized the whole-dollar amount of any entry. Thus, when Candice entered the Section 163 $21,201.25 deduction (which admittedly the Buschs were entitled to), the computer printed out $2,120,125.

The Buschs claim honest mistake. And any of us could make one. I remember one year when I put the right number on the wrong line of our 1040, wrong by one line; it took a year’s worth of phonecalling to put it right.

CSTJ Lew: “As they see, they had reasonable cause and acted in good faith with respect to the entire amount of the underpayment of tax that resulted from the mistaken entry. They ask the Court to recognize, as they point out that honest mistakes are sometimes made. As a general proposition of life, we agree with petitioners on the point, and we further agree with petitioners’ suggestion that not every mistake made on a Federal income tax return should result in the imposition of an accuracy-related penalty. A person preparing a return might understandably get distracted while doing so and enter the wrong amount for an item, or if not distracted, when transferring numbers from one document to another, transpositions often occur. If a computer-based software program is being used in the process, the limitations and requirements of a software program might not be fully appreciated by the user. Any number of situations could cause an ‘honest’ mistake to be made when amounts are incorrectly reported on a Federal income tax return.” Transcript, at p. 7.

But.

“The mistaken entry is not the real problem. Their mistake was failing to review the return carefully enough to have recognized the erroneous entry before the return was filed. After all, it should go without saying, that a taxpayer’s obligation to prepare and file a Federal income tax return includes the duty to review that return to ensure that the information reported or shown on the return is accurate before the return is filed.” Transcript, at pp. 7-8.

The mortgage interest page of the return has a couple columns (hi, Judge Holmes) to the left of all the other numbers, showing the mistake. CSTJ Lew says it sticks out like a sore thumb.

And besides stiping out the Boss Hoss sign-off (they’re pro se, of course), Candice & Ron give it away on the trial. “At trial petitioners more or less acknowledge that they failed to carefully review the return before it was forwarded to the Internal Revenue Service. It was a mistake for petitioners not to review the return carefully, or as recollected by one of them, not to review it at all after it was prepared. Their failure to review the return carefully was a careless mistake that completely undermines their claim that they acted with reasonable cause and in good faith with respect to the underpayment of tax that, as it turned out, resulted from that failure.” Transcript, at pp. 8-9.

The most dangerous part of any software program is found in front of the keyboard.

I take the immortal words of Surgeon Lt.-Col. John McCrae to welcome the newest Ch J of United States Tax Court, Judge Kathleen Kerrigan. Her term of office commences 6/1/22. I am sure Judge Kerrigan will hold the torch high during her tenure.

Never before having a Taishoff cognomen, I open the field for suggestions. As usual,. no prize for the winning answer, and I reserve to myself the ultimate choice.

Here’s the official word:https://ustaxcourt.gov/resources/press/02252022.pdf

My caption derives from the Federally-Authorized Tax Preparer privilege, enshrined in Section 7525(a)(1). This enactment spreads the invisible shield over advice and communications exchanged with the Circular 230 crowd, EAs, CPAs, ERPAs, and EActs, as well as attorneys at law admitted to practice in any State, Commonwealth or Territory.

IRS is trying to pry loose the shield in Picayune Pearl Aggregates, LLC, Picayune Pearl Aggregates Investors, LLC, Tax Matters Partner, Docket No. 7045-19, filed 2/24/22. The shield has two (count ’em, two) components, work-product and advice.

The Picayune Pearls ain’t so picayune, as they’ve taken a $170 million Section 170 deduction.

But the work product they’re trying to hide was prepared years before the NBAP that kicked off the FPAA that’s at issue here.

Judge Courtney D (“CD”) Jones has this one.

First, the work product doctrine. Work product shields from discovery documents, interviews, statements, memoranda, correspondence, briefs, mental impressions, and tangible things prepared by an attorney in anticipation of litigation or trial. The magic words are “in anticipation of litigation or trial.” There’s got to be a specific claim supported by concrete facts that would likely result in litigation.

Here, “…the documents at issue were prepared well before the Internal Revenue Service (IRS) even issued a Notice of Beginning of Administrative Proceedings (NBAP) on May 24, 2018. Consequently, it is difficult to conceive of a factual predicate that would have made it reasonable for Picayune Investors to anticipate litigation concerning the section 170 deduction at issue when these documents were created in 2015 and 2016.” Order, at p. 3, footnote 5.

Judge, if a client of mine even casually mentioned that they were considering taking a nine-figure charitable deduction for anything, and selling the same to high-rollers with big taxable gains, I’d be eo instante anticipating IRS would be doing the Matthew 24:28 number on them. But the Picayune Pearls lose that one. Note that Judge CD Jones cites a case where even a note from the IRS Art Advisory Panel questioning a deduction is enough to invoke work product for everything thereafter. So keep a lookout for casual billets doux from IRS.

Judge CD Jones defers opining whether the client-attorney variant of FATP covers the documents the Picayune Pearls seek to suppress. The privilege log submitted in support is too vague. The Picayune Pearls did ask for a mulligan via a status report in the first week in April, so Judge CD Jones gives them that.

Of course, if the Picayune Pearls are going to claim good-faith reliance on any thereof, privilege is impliedly waived. Here’s one version of implied waiver: “1) assertion of the privilege was a result of some affirmative act, such as filing suit, by the asserting party; (2) through this affirmative act, the asserting party put the protected information at issue by making it relevant to the case; and (3) application of the privilege would have denied the opposing party access to information vital to his defense.” Order, at p. 4. 5 Cir, to which the Picayune Pearls are Golsenized, has a simpler version, but it’s the same story.

Of course, at least in 5 Cir, if their petition was artfully drafted, the Picayune Pearls could claim reliance on statutes, regs, decided cases, administrative practices, policies, and procedures, and never mention what their lawyers and CPAs told them. Practice tip: Take a look at the Schlumberger case, discussed in Order, at p. 5.

It’s been a couple years (hi, Judge Holmes) since I last visited the anecdote told by the late essayist and raconteur Harry Golden. It was the story of an immigrant who, after many years, finally attained US citizenship. Triumphantly forsaking his native tongue, he spoke only broken English thereafter, affecting to understand no other. Even when his wife would address him in their native tongue, he would turn to his US-born children and ask them “Vot did she set?” Thereupon his wife would bombard him with choice language.

I’m sure Judge Courtney D (“CD”) Jones is far too well-bred to use any such language. But she has the same question as Harry Golden’s new-fledged citizen when it comes to 11 Cir’s celebrated decapitation of IRS’ reading of the Proceeds Regulation, s/a/k/a Reg Section 1.170A-14(g)(6)(ii), improvements-out, prior-claims-in.

Both IRS and Cub Creek Preserve, LLC,  Southern Land Protectors, LLC, Tax Matters Partner, Docket No. 12401-20, filed 2/23/22, want partial summary J. But with chops still on the table, any form of summary J won’t obviate the need for a trial.

Howbeit, Judge CD Jones has the latest silt-stir, the post-Hewitt fallout.

Y’all remember the Coalholders lost on both improvements-out, prior-claims-in. IRS wants a “dission” to like effect for the Cubcreekers. But, while IRS quibbles about the Cubcreekers principal place of business, everyone is betting this case goes to 11 Cir. There’s no stip taking the case out of Golsen. And the Cubcreekers weren’t dealing with improvements, only prior claims.

For those who tuned in late, “prior claims” means that, if the easement is judicially extinguished, prior claims against the servient tenement must come out of any proceeds (like a condemnation or eminent domain award) before the 501(c)(3) protector gets anything.

So vot (sorry, what) did 11 Cir mean when they shot down IRS’ reading of the Reg?

“Though the motions before us address the prior claims provision, not a donor improvements provision (as the deed does not appear to contain a donor improvements provision), respondent’s position is based primarily on his assertion that the prior claims provision fails to satisfy the requirements of Treas. Reg. §1.170A-14(g)(6)(ii). It is not entirely clear at this time whether the Eleventh Circuit invalidated Treas. Reg. §1.170A-14(g)(6)(ii) in its entirety, or whether the court invalidated that regulation only insofar as it is interpreted to disallow deductions based on carve-outs for improvements. We also note that the validity of Treas. Reg. §1.170A-14(g)(6)(ii) remains pending before the Sixth Circuit. See Oakbrook Land Holdings, LLC v. Commissioner, No. 20-2117 (6th Cir. Oct. 16, 2020). Under these circumstances, we conclude that summary judgment based upon an application of Treas. Reg. §1.170A-14(g)(6)(ii) to the prior claims provision would be inappropriate.” Order, at p. 4.

Oh, what a lovely silt-stir.

I haven’t followed pro basketball since Clyde Frazier and Dave DeBusschere, but today Judge Nega follows the careers of Zach Randolph and Michael Conley, two millionaires whose untaxed millions are cause for the jumpball between IRS and Hoops, LP, Heisley Member, Inc., Tax Matters Partner, T. C. Memo. 2022-9, filed 2/23/22.

Hoops formerly owned the Memphis (ex-Vancouver) Grizzlies of the National Basketball Association, whose principal activity was once described as “every twenty-four seconds ten millionaires jump in the air.” Messrs. Randolph and Conley were, prior to and in the year at issue, employed by Hoops under the terms of the NBA Uniform Player Contract.

In that same year, Hoops sold out, owing Messrs. Randolph and Conley deferred compensation (all fully-earned and not subject to substantial forfeiture, but unpaid) of some $12.6 million, but discounted to present value at year of sale of $10.673 million. The buyer assumed all the obligations of Hoops, including, but in no way diminishing, limiting, or abridging the generality of the foregoing, the aforesaid $12.6 due the gentlemen aforesaid.

Hoops filed its Form 1065 for year at issue without deducting the $10.673 as wages. They amended to do so, whereupon IRS whanged them with a FPAA. Hoops claims asymmetry: they have to pay tax on the COD for the $10.673 (Hoops is off the hook for the $12.6 ultimate payoff), but that was wages to Messrs. Randolph and Conley.

Despite some really ingenious argy-bargy by their trusty attorneys, whose shoes pass the Mark 9:3 test, Judge Nega and Section 404(a)(5) are too much.

Section 404(a) says if deferred compensation would be deductible (like wages), same can only be deductible subject to the limitations of Section 404(a).

“Section 404(a)(5) provides that, in a case of a nonqualified plan, a deduction for deferred compensation paid or accrued is allowable for the taxable year for which an amount attributable to the contribution is includible in the gross income of the employees participating in the plan.” T. C. Memo. 2022-9, at p. 8. Everyone agrees that the NBA plan is nonqualified.

Of course Hoops is an accrual-basis taxpayer, thus bringing in Section 461.

Ascertainable amount (check), there is in fact a liability (check), and economic performance has taken place (all-events: check). So there would be a recognizable tax event.

Except.

“The regulations under section 461, however, further instruct that if, as here, the taxpayer uses an accrual method of accounting, ‘[a]pplicable provisions of the Code, the Income Tax Regulations, and other guidance published by the Secretary prescribe the manner in which a liability that has been incurred is taken into account.’ Treas. Reg. §§ 1.461-1(a)(2)(i), 1.446-1(c)(1)(ii)(A). Thus, under the regulations,  the initial question is whether another provision of the Code or the Regulations prescribes the manner in which the deferred compensation liability is taken into account.” T. C. Memo. 2022-9, at p.10. (Citations omitted).

Enter Section 404(a(5).

“… section 404(a)(5) is the applicable Code provision that governs the deductibility of and prescribes the manner in which a deferred compensation liability is taken into account. Under the plain text of section 404(a)(5), a deduction for deferred compensation is taken into account only for the taxable year in which an amount attributable to the contribution is includible in the gross income of the employee and then only to the extent allowable under section 404(a). See Treas. Reg. § 1.404(a)-12(b)(1). T. C. Memo. 2022-9, at p. 10.

The statute aims to match payment (and deduction thereof) by the employer with receipt by (and payment of tax by) the employee.

Hoops was let off the obligation to pay Messrs. Randolph and Conley, so that’s part of the gain on the sale.

Jamie Lee Hicks, Jr., T. C. Memo. 2022-10, filed 2/23/22,looked like an also-ran for sure, but as he came to the head of the stretch, the Shared Parenting Plan (SPP) he tendered post-exam saved the tax treatment of one of his two (count ’em, two) kids, even though he was noncustodial and the kid was not a qualifying child.

Jamie Lee lived apart from Oddimissia for the whole of the year at issue, but the minors they had produced lived with Oddimissia and her mom, Juanita. Jamie Lee did provide more than half both kids’ support, and they didn’t provide more than half of their own. Oddimissia claimed the kids as dependents; the SPP said she and Jamie Lee each could take one. IRS bounced Oidmissia’s return.

Although Jamie Lee never attached the SPP to his return, and of course there was no Form 8332 or written equivalent. And the year at issue is post-2008, so the divorce decree or separation agreement can’t satisfy Reg. Section 1.152-4(e)(1)(ii), (h).

But Judge Nega finds the SPP can fill the bill.

Jamie Lee can wild-card in the SPP. The 2017 proposed regs. (Prop. Reg. Section 1.152-5(e)(2)(i), 82 Fed. Reg. at 6387) say until they become final, the taxpayer can put in a Form 8332 or substitute as long as the year is open. And since the year at issue is open, per Section 6503(a)(1), by stiping in the SPP IRS has waived attachment to Jamie Lee’s return.

“Our precedents make clear that this provision imposes several requirements on any document that a taxpayer offers as a written declaration for purposes of section 152(e). First, it must be signed by the custodial parent. Second, it must not place any conditions on the custodial parent’s declaration that he or she will not claim a child as a dependent. And third, it must otherwise meet the manner and form requirements the Secretary has prescribed by regulation.

“The Shared Parenting Plan meets all of these requirements. In addition to bearing Oddimissia’s signature, it grants petitioner the unconditional right to ‘claim’ one child ‘every year for tax purposes unless [the] parties reach another agreement in writing.’ We are aware of no written agreement between Oddimissia and petitioner that limits this right. Although the state court modified the Shared Parenting Plan in its [subsequent] order (which neither Oddimissia nor petitioner signed, though the order represents that they both agreed with its terms), those modifications did not diminish, for federal income tax purposes, the right that Oddimissia granted to petitioner in the Shared Parenting Plan. Rather, the [subsequent] order purported to expand that right by allowing petitioner to claim both children instead of just one. The agreement reflected in the Shared Parenting Plan therefore remains in effect, regardless of the later state court order purporting to expand on that agreement.” T. C. Memo. 2022-10, at p. 8 (Citations omitted.) (Footnotes omitted, but one says because neither Jamie Lee nor Oddimissia signed the subsequent order, Jamie Lee can deduct only one kid).

Word to the family law bar: This may be a template for saving qualifying relative status for noncustodial children. Note that the law and regs are subject to change, so YMMV.

I’ve described more than once the process we called in my young day “head-banging.” See my blogposts “Old-Time Head-Banging,” 6/5/15, and “Old-Time Head-Banging – Part Deux,” 9/4/20.

Judge David Gustafson, ever obliging, has migrated the process from robing room to telephone. See Christopher S. Pascucci & Silvana B. Pascucci, Docket No. 2966-19, filed 2/22/22.

Judge Gustafson wants a phoneathon to discuss trial prep, and lists six (count ’em, six) items to discuss. These deal with experts, stips, exhibits, pre-trial memos (and the hope that maybe an off-the-bencher might obviate the need for post-trial memos), the schedule for the week of trial (a week? Must be quite a case; there’s some high-priced counsel here), and whether to do a dry-run of dealing with exhibits, equipment, and housekeeping.

But there’s an item 7 to which I want to draw attention. “Whether the parties have exhausted all reasonable possibilities of settling this case.” Order, at p. 1.

Taishoff’s Translation: “Hey guys, y’all sure you want me to try this case?”

As by ukase Presidents Washington and Lincoln are conclusively presumed to have been born again on the third Monday in February, and as same is celebrated as a public holiday in the City Taxed but Unrepresented, the United States Tax Court is closed today.

So am I.

Don’t Step in It

I note the Tax Court announcement of the death of Judge Ruwe today, and it brought to mind the recent death of a highschool classmate, whose urbane sense of humor was a delight so many years ago. The title of today’s blogpost is in his memory.

Judge Albert G (“Scholar Al”) Lauber finds a welcome bifurcation in Heinrich C. Schweizer, Docket No. 3679-18, filed 2/18/22.

The fight is over valuation of a donation of artwork. Heinrich never provided a qualified appraisal and attached same, and a summary thereof, to his return for the year at issue. IRS won partial summary J on disallowance, but Heinrich interposed the reasonable cause defense, a question of fact.

But both Heinrich’s trusty attorneys and IRS counsel agree that only two (count ’em, two) issues need to be tried: did Heinrich have reasonable cause to omit the appraisals, and, even if he didn’t and loses the deduction, was his faith good enough to avoid the Section 6662(a) chops?

Judge Scholar Al is down with that, because if IRS wins the first point, they needn’t try the valuation issue.

And I’ll wager that Heinrich and his attorneys are hoping a good showing on the trial will get them a good settlement of the case, without expensive dueling experts.

Bifurcation may be a useful addition to the toolchest.