That’s what British-American Tobacco wanted Anthony A. Klein and Barbara N. Klein, T. C. Memo. 2026-29, filed 3/30/26, to help their customers do. AA was sole shareholder of a C Corp that made the foil elements that power the “heat not burn tobacco” market. Lacking the plant to deliver what BAT needed, yet diffident about committing to one big customer and borrowing to upgrade, AA got BAT to give the C Corp $4.3 million, which no one disputes went into the upgrade.

Judge Elizabeth A. (“Tex”) Copeland, ever a stickler, finds the papering of the deal a wee bit sketchy, so when the C Corp claims BAT made a nontaxable nonshareholder contribution to capital per Section 118(a), she goes with IRS’ claim that Section 118(b) blows away the smoke.

“The parties do not contest that the $4.3 million was bargained for, that it benefited C Corp. in an amount commensurate with its value, or that it contributed to the production of additional income.” T. C. Memo. 2026-29, at p. 9.

The problem is Section 118(b).

“In particular, section 118(b)(1) excepts from contributions to capital contributions ‘in aid of construction or those made by ‘a customer or potential customer.’ The parties do not dispute that BAT’s funds were used to construct the leasehold addition or that, at the time BAT provided the $4.3 million, BAT bought foil heaters in significant quantities from Thermal and intended to continue doing so. Thus, the $4.3 million NVT provided was both ‘in aid of construction’ and made by a ‘customer or potential customer’ of C Corp. Accordingly, section 118(b)(1) excepts the funds from being nonshareholder contributions to capital excludable from gross income under section 118(a) and requires their inclusion in income.” T. C. Memo. 2026-29, at p. 11. (Footnote omitted, but it says that alone is enough to torpedo C Corp.’s argument.)

But though AA loses, he avoids chops. C Corp. could reasonably have believed that the dodgy deal papering really vested title to the improvements in BAT. “Moreover, both [C Corp.] and [BAT] acted relatively consistently in implementing these provisions throughout their relationship. [C Corp.] used the [improvements] and the leasehold addition only to make foil heaters for [BAT]. When [BAT] instructed [C Corp.] to destroy the [improvements] it had bought to produce [BAT]’s heaters, [C Corp.] did so despite misgivings. {C Corp.] likewise sought written permission from [BAT] to use the leasehold addition; but having received no response, left the leasehold addition empty and unused.” T. C. Memo. 2026-29, at p.11.

Most importantly, C Corp. never took depreciation on the improvements.

A Taishoff “Good Try, Second Class,” to AA’s trusty attorney.

Three for the scrapbook, all filed today.

Morgan Run Partners, LLC, Overflow Marketing, LLC, Tax Matters Partner, Docket No. 8669-20, is an eve of trial attempt to wildcard into evidence a bunch screenshots of engineering drawings (hi, Judge Holmes) of a proposed distribution center that maybe so might could have been erected on the boondocks at issue in the year at issue. No go, says Judge Albert G. (“Scholar Al”) Lauber. “The report must therefore be complete in itself; the expert cannot provide explanatory testimony from the witness stand to supply analysis that is missing from the report. In other words, the expert ‘must show his work’ in the text of the report in order to satisfy these requirements. Skolnick, 117 T.C.M. (CCH) at 1322; ibid. (‘Rule 143(g) expressly requires that the report itself include the facts and/or data considered by the witness in forming his opinions.’) (emphasis added). The Court must exclude a witness’s testimony altogether if the report fails to comply with these requirements. See Rule 143(g)(2).” Order, at p. 2. For Skolnick, see my blogpost “Horsefeathers,” 6/3/19. And though engineers might present their conclusions with drawings, Rule 143(g) requires more; show your work and bases for conclusions, and make it plain for nonengineers.

Chad Burris & Julie Burris, et al., Docket No. 18712-22, for once isn’t about Dixieland Boondockery; it’s mobile solar generators. Chad’s & Julie’s trusty attorneys are slow-playing discovery via Rule 102(3) supplementation. Judge Cary Douglas (“C-Doug”) Pugh is unhappy and threatens to bar from evidence on the trial any documents not timely produced per IRS’ demands. Taishoff says it’s more likely that said trusty attorneys aren’t slow-playing documents that help their side but documents that sink them. Maybe a better remedy is needed.

Potts Mountain Investors, LLC, Potts Mountain Reserve IP, LLC, Tax Matters Partner, Docket No. 8731-23. Sorry, guys, I hoped for one day clear of Dixieland Boondockery but it’s like Charles Dickens’ King Charles’ head in David Copperfield. This is a rehash of every shotdown argument against the 40% enhanced understated-overvalued chops. Reading it saves wasted motions.

The leftover from yesterday. Tibor Gyarmati, T. C. Memo. 2026-27, filed 3/26/26, gets hit for overstating basis when he can’t establish that the furniture he included in the sale of his condo was actually there, not destroyed by Hurricane Andrew, and cost what he claimed. The worst piece of paper…but you know the rest.

For the backstory on Royalty Management Insurance Co., T.C. Memo. 2026-26, filed 3/26/26, see my blogpost “Capturing Captivity,” 9/16/24. 

But Judge Albert G. (“Scholar Al”) Lauber left himself some mopping-up, as he must consider “… whether we should sustain the 40% accuracy-related penalty that applies in the case of a tax underpayment attributable to a ‘nondisclosed noneconomic substance transaction.’ See §§ 6662(b)(6), (i), 7701(o); Royalty Mgmt., T.C. Memo. 2024-87, at *53–54.” T. C. Memo. 2026-26, at p.2.

The issue here is “adequate disclosure.” Did the return for year at issue let enough cat out of the bag?

” Section 7701(o) codifies the ‘economic substance’ doctrine. That provision, applicable to ‘any transaction to which the economic substance doctrine is relevant,’ provides a conjunctive test whereby a transaction is treated as having economic substance only if (1) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position and (2) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into the transaction. § 7701(o)(1). ‘The determination of whether the economic substance doctrine is relevant . . . shall be made in the same manner as if [section 7701(o)] had never been enacted.’ § 7701(o)(5)(C).” T. C. Memo. 2026-26, at p. 3.

Section 831(b) treatment isn’t a Congressional incentive to permit microcaptives to deduct insurance premiums that don’t provide insurance. Relevance of economic substance analysis isn’t forestalled by favorable treatment of real expenses that provide real insurance; nowhere does the IRC allow deduction of phony expenses.

And the “insureds” had no interest except tax dodging. 

As for disclosure, “Sheperd Royalty filed a return on Form 1120S, U.S. Income Tax Return for an S Corporation, for [year at issue]. In computing its net income, it claimed a deduction of $1,110,206 for ‘insurance’ expenses. That figure included the $1,099,900 of premiums at issue here, but those premiums were not broken out separately as a distinct item. Apart from listing a deduction for ‘insurance,’ Sheperd Royalty’s return disclosed no facts whatever—either in the return or in an attached statement—about the microcaptive insurance arrangement. Because Sheperd Royalty was a passthrough entity, the Sheperds reported their distributive shares of its income and deductions on Schedule E, Supplemental Income and Loss, included in their [year at issue] joint return. But their individual return likewise disclosed no facts about the microcaptive insurance arrangement.” T. C. Memo. 2026-26, at p. 10. There wasn’t an iota of specific information about the microcaptive. 

Section 6662(i) enhanced chop sustained.

I said it back in 2022: “…dear reader, before you groan ‘Oh no, not another GA boondockery,’ know I said it first. But I have to blog it; you can stop reading now and ignore it.” See my blogpost “Price and Value,” 1/12/22.

Judge Albert G. (“Scholar Al”) Lauber is in the same unhappy boat as I. Making its third appearance in this my blog is Hancock County Land Acquisitions, LLC, Southeastern Argive Investments, LLC, Tax Matters Partner, T. C. Memo. 2026-28, filed 3/26/26. 

The Hancocks fold the discounted cash flow method of valuation when their appraiser who furnished the Form 8283 backup appraisal fails to testify on the trial. The sales-comparison method doesn’t help, as their argument that their land is too unique craters. There are 10 (count ’em, 10) sales close enough for Judge Scholar Al to find their $763K per acre valuation of these boondocks “an order of magnitude that is light years away” from any rational number. T. C. Memo. 2026-28, at p. 29. And the investor testimony the Hancocks proffered only proved the investors were buying tax write-offs.

The tax loss insurance the Hancocks bought was for their investors’ benefit, hence not a partnership expense and not deductible by the partnership. The Hancocks do get a $25K appraisal fee deduction, despite the appraiser having been retained by the promoter; the Hancocks were the beneficiary. They also get some additional title expenses. The rest of the claimed Section 162 partnership deductions are indocumentados. 

And as their trusty accountant also had a piece of the deal, reasonable reliance doesn’t offset the substantial understatement 20% chop Judge Scholar Al lays on whatever the gross valuation misstatement chop (no reasonable reliance offset for that) didn’t cover.

It’s a tale I’ve told many times: the injured party who settles out and finds that the award is entirely taxable. The 1996 Small Business Job Protection Act did eliminate the need for a tort judgment but left the personal physical injury or physical sickness requirement for Section 104 exclusion. This recognized the trend in the law towards no-fault and other statutory remedies that eliminated the need for a finding of fault. Ser my blogpost “The Egg and I,” 1/22/15.

Physical injury may have been at the core in Toni C. Perry, Docket No. 4647-25, filed 3/25/26, an off-the-bencher from Judge Nega, but the stip of settlement in her State law case didn’t make that clear enough.

“Pursuant to the settlement agreement, the lump sum that petitioner received was for a general release of all claims except for those related to her Connecticut Workers’ Compensation Commission Claim…. Petitioner presented evidence and testimony of physical injuries unrelated to this settlement and many predating the alleged date of the back injury she claims underlies the settlement. Petitioner did not testify or provide any evidence to show that any portion of the settlement proceeds were used or designated for amounts paid for medical care attributable to those injuries.” Transcript, at p. 7.

Workers’ Comp is the exclusive remedy for on-the-job physical injuries, except for employer intentionally-inflicted injuries or employer-created dangerous conditions.

Toni’s testimony shows she didn’t understand the settlement but that’s not the issue.

Toni is represented here by the Quinnipiac University Law School’s LITC. Who represented her in the PI case is not stated, but I won’t unload on him/her. CT has a high bar to avoid Comp exclusivity, and Toni’s employer has plenty of resources to fight a tort claim. Pleading physical injuries on the job will get a swift motion to dismiss for want of jurisdiction.

“Petitioner’s counsel argued that petitioner could just as easily sued for workers’ compensation. But see CONN. GEN. STAT. sec. 31-284(a) (2025); Suarez v. Dickmont Plastics Corp., 639 A.2d 507, 510 (Conn. 1994). They then continued [sic; probably should be “contended”] that this somehow supports their position that the settlement is not taxable under section 104. While the Court takes no position on the proper tax treatment of this alternative, it is clear that the lawsuit settled here did not give rise to proceeds that are eligible for exclusion under section 104(a)(2).” Transcript, at p. 8.

No, not any anomaly caused by divergent spousal tax incidents; this is about a penalty practitioners may incur when representing both spouses. Judges have repeatedly warned that representing both spouses can be dangerous to your practice’s health.

Judge Christian N. (“Speedy”) Weiler doesn’t warn the trusty attorneys for Thomas Van Alsburg & Valerie Van Alsburg, Docket No. 3959-20, filed 3/25/26, in hæc verba, because in their case it’s too late. I expect The Phone Call here, but the rest of y’all can learn.

A month after Tom & Val stiped out their deficiencies for the two (count ’em, two) years at issue, they move to vacate the stip and let Val amend the petition to claim innocent spousery. Of course, a stiped decision doesn’t become final until ninety-one (count ’em, ninety-one) days after entry, Section 7481(a)(1). But IRS objects, and there’s a problem.

“Mrs. Van Alsburg, for the first time, now seeks innocent spousal relief some six years after filing her Petition and after the Court has entered its Decision. Petitioners’ Motions essentially seek to permit petitioners to file an amended Petition and now raise for first time a new affirmative defense, without providing a valid reason as to why it was not presented prior to the Proposed Stipulated Decision.” Order, at p. 3. (Footnote omitted, but see infra, as my expensive former colleagues would say).

“Mrs. Van Alsburg alleges that she had no knowledge or reason to know of the understatements, but petitioners presented no evidence to prove that this lack of knowledge just occurred after the stipulated decision was entered based on any mistake inadvertence, [sic] surprise, excusable neglect, newly discovered evidence, or fraud.” Order, at p.3, footnote 3.

Takeaway- Every intake checklist must provide for a thorough conflicts search, but not merely between the proposed client(s) and present or former clients. Too many well-credentialed practitioners have come seriously unglued when representing both spouses. 

No, not a variant on the mashbill nor another premium limited-release. I don’t even know if Judge Christian N. (“Speedy”) Weiler is a fan of Kentucky’s fine distillments. 

But I must give a second Taishoff “Good Job, First Class, With Swords and Diamonds” to Woodford, s/a/k/a Woody, the trusty attorney for Kenneth Walker & Juli A. Walker. Docket No. 2801-24L, filed 3/24/26. Woodford gets Judge Speedy Weiler to reverse his 1/12/26 decision, for whose antecedents see my blogpost “Obamasnod,” 1/8/26. 

And Judge Speedy Weiler awards Woodford’s clients $8788.50 in Section 7430 legals and admins, as well as quashing the APTC IRS assessed without first issuing a SND.

Moreover, IRS folds.

Honest representation at reasonable rates, that’s Woodford’s style.

I note STJ Peter J. (“HB”) Panuthos’ Order permitting IRS to amend its answer out of time in Ashref Zarmuh, Docket No. 7127-22, filed 3/23/26, as a cautionary tale.

IRS moves to amend out of time (that means late) to up the deficiency and the Section 6662(a) chop. Ashref’s trusty attorney objects this gives IRS “a second bite at the apple.” Order, at p. 2.

STJ HB Panuthos tells the story.

“The increased deficiency and penalty arise from gross receipts on Form Schedule C of an unsigned Form 1040 provided to respondent by petitioner’s counsel as part of informal discovery. The Form Schedule C was not part of the Form 1040 electronically filed by petitioner.” Order, at p.1.

Amendment of pleadings is granted absent prejudice.

“Petitioner has not demonstrated that he would be prejudiced by allowing respondent to assert an increased deficiency at this time. The case is not calendared for trial and no formal discovery is reflected on the record. Additionally, respondent will bear the burden of proof on this increased deficiency, pursuant to Tax Court Rule 142, thus further ameliorating any potential prejudice.” Order, at p. 2. (Citation omitted).  

Practitioner, make sure you have your client’s documents, all of them, in-hand, before you ever draft a petition. If time is short, file a generic petition and amend later. E-filing can be hazardous as well as helpful; make sure you have reviewed all documents as-filed before you file.

Edited to add, 3/23/26: Especially beware of some of these “free file e-file” software services, which don’t permit the filing of schedules.

That tactic doesn’t work in Judge Courtney D. (“CD”) Jones’ division, although the approach of the Cup playoffs makes us old-time fans recollect the great Bobby Clarke of the Broad Street Bullies doing that thing again and again.

Gurpreet S. Padda & Pamela B. Kane, Docket No. 7260-19, filed 3/20/26, and IRS tell Judge CD Jones that really truly they only need 90 (count ’em, 90) days more to stip out both this case and Docket No.15807-22.

Judge CD Jones says that’s cool but move the puck (although she puts it more elegantly than I).

“The Court appreciates the parties’ representations and will grant the requested 90 days to file a stipulated decision. Nevertheless, the Court notes that the Petition in Docket No. 7260-19 was filed more than six years ago (see Doc. 1), and the Petition in Docket No. 15807-22 was filed more than three years ago (see Doc. 1). Given the age of the cases, the parties are advised that the Court will be inclined to restore each case to the general docket so that it can be calendared for trial, if a proposed stipulated decision is not filed in 90 days.” Order, at p. 1.

I’ve often before now suggested that either the Ch J or an administrative judge traverse the dockets and bestir dilatory litigants to “stip out or try the case now.”  Moreover, she “strongly encourages the parties to meet in person, if at all possible.” Order, at p. 1. (Emphasis by the Court).

It would be presumptuous of me to award Taishoff “Good Jobs” to Judges but I can express hearty agreement with Judge CD Jones’ approach.

No, not an award from the Bureau of Prisons. Michael Smith, T. C. Memo. 2026-25, filed 3/19/26, is imprisoned in one tax year by Section 86(d)(2)(A).

Mr. Smith applied for and got SSDI. But in the year wherein he was paid both a lump sum and periodic payments he was also gainfully employed. SSA wanted our money back, so Mr. Smith paid it back over the following two (count ’em, two) years.

He never reported the SSDI payments in the year received.

Mr. Smith says it’s like he was loaned money (nontaxable) which he paid back, but the statute forecloses Judge Albert G. (“Scholar Al”) Lauber from seeing it that way.

“We understand why petitioner views his predicament in this way, but this Court is bound by the provisions of the Code. Petitioner does not dispute that he received SSDI benefits in 2022, and he must include those payments in gross income to the extent provided in section 86. His repayments during 2023 and 2024 do not affect his 2022 tax liability because the payments he received during 2022 are reduced only by ‘any repayment made by the taxpayer during the taxable year.’ § 86(d)(2)(A) (emphasis added). This rule is one example of the ‘annual accounting principle’ that governs computation of taxable income generally.” T. C. Memo. 2026-25, at p. 4.

Generally (love that word!), each year stands on its own.

Claim of right is also barred by the explicit words of the statute.