Far more straightforward than Proust is the story of Robert Ward, Jr., and Swanette Triem Ward, T. C. Memo. 2022-19, filed 3/9/22. Swanette was a painter, but not of abstracts, landscapes, or portraits; her C Corp did warehouses, multifamilies, and highrises.

The deficiency here is a big $4800, but Swanette’s trusty attorney (whom I’ll call Len) has paper and good witnesses, so gets a good result.

Judge Goeke: “Petitioners have substantiated the amounts of the disputed expenses, and the remaining issue is the business purpose of the expenses. The office equipment expenses relate primarily to the purchase of iPads, iPhones, a speaker, and related expenses for service plans and an accessory. Petitioners assert that Sherwin’s employees use these items in the performance of their jobs. On the basis of the record,  we accept petitioners’ assertion as to the business purpose and find that [C Corp] has substantiated the amount and business purpose of each expense.” T. C. Memo. 2022-19, at p. 3.

IRS gets their feet tangled over whether a $38K payment was a loan to Swanette from C Corp, hence a disguised dividend, and when it looks like they goofed, they doubled down. This is a highly dangerous maneuver. Judge Goeke doesn’t buy it.

“However, [C Corp] records establish that the return reported that the loan was made from Mrs. Ward to [C Corp]. Respondent refuses to concede his error and instead argues on brief that the disallowed business expense deductions should be treated as constructive dividends to Mrs. Ward. We reject this new position. There is no relationship between the disallowed expenses and the amount of the purported constructive dividends determined in the Wards’ notice of deficiency. [C Corp]’s failure to substantiate the business purpose of the disallowed deductions does not render the amount a constructive dividend under the circumstances of these cases. There is no indication that the Wards received an economic benefit from the amount of disallowed expenses. Accordingly, we hold that the Wards did not receive any unreported dividends from [C Corp].” T. C. Memo. 2022-19, at p. 4.

But Len can’t help when Bob and Swanette paid for Lucas to take a coding course at Northwestern U. True, Lucas did do coding work for C Corp, fluffing up the website and doing other coding, but never was paid therefor. And there is no agreement anywhere about what Lucas would give back in exchange for the free ride. Of course, when Lucas started the course he was dating Rob’s and Swanette’s daughter. And he married her after.

“While [Lucas] has provided services to [C Corp] free of charge that would have likely cost Sherwin more than the amount of the tuition, we nevertheless find that petitioners have not established that [C Corp] is entitled to deduct the tuition. [Lucas] was not an employee of [C Corp]. The Wards did not have an agreement with [Lucas] that he would perform any services in exchange for the tuition payment. [C Corp] paid the tuition without any expectation of a return and thus did not have a business purpose for the payment. The tuition was a personal expense, and [C Corp] is not entitled to deduct it.” T. C. Memo. 2022-19, at pp. 3-4.

My wily readers will doubtless have exclaimed that Rob and Swanette were better off with gift treatment than deductible tuition-as-salary-and-wages, because no FICA/FUTA/ITW, or income to son-in-law Lucas. Although maybe the years at issue were closed as to Lucas even assuming substantial understatement 6SOL, still going for the deduction was really a bridge too far.

If You Want My Passport

Judge David Gustafson has a message for IRS via Hendrieka Fitzpatrick, Docket No. 12797-21P, filed 3/8/22. Hendrieka wants to fight about her 2013 tax liability, but that ship sailed five years ago.

IRS says Hendrieka has a serious tax delinquency, which also seems to be correct. So IRS moves to toss Hendrieka’s petition. We all know that a Section 7345 certification to State does not let the petitioner relitigate any tax liability. See my blogpost “Ruesch to Judgment,” 6/25/20. All that’s in play is whether the certification is erroneous.

Except.

Section 7345(b)(1)(C)(ii).

A “seriously delinquent tax debt” is one for which “a levy is made pursuant to Section 6331.”

Now before my battle-hardened readers shriek “What about Section 7345(b)(1)(C)(i)? Wasn’t there an NFTL and all remedies exhausted?” Judge David Gustafson notes IRS doesn’t raise that in its answer. All IRS notes is amounts of taxes, chops, interest, and assessment dates. Nothing about NFTL.

Judge Gustafson man-‘splains.

“A ‘levy’ is a seizure of money or property pursuant to section 6331(a); and section 6330 provides a prerequisite to levy: ‘No levy may be made on any property or right to property of any person unless the Secretary has notified such person in writing of their right to a hearing under this section before such levy is made.’ Sec. 6330(a) (1). That is, first the IRS must give the notice and opportunity for hearing provided by section 6330, and then the IRS may actually make a levy pursuant to section 6331.

“However, as we read the motion, it does not allege that a ‘levy [was] made’ pursuant to section 6331, as section 7345(b)(1)(C)(ii) requires, but seems to rely instead on the IRS’s issuance of a notice of intent to levy under section 6331. Paragraph 14 on page 5 of the motion does refer to a ‘levy pursuant to I.R.C. § 6331’; but it states that that ‘levy … was issued’. Strictly speaking, a levy is not ‘issued’; rather a notice of intent to levy is issued, and then a levy (a seizure) may be made. The motion elaborates  (at 5 n.3) on the levy that was said to be ‘issued’ by explaining more precisely that ‘[a] notice of intent to levy for petitioner’s 2013 liability was issued…, notifying petitioner of her collection due process (CDP) rights under section 6330.’ As we read the motion, it stops short of alleging that a levy was actually ‘made’.” Order, at p. 2.

So must there have been an actual seizure? Or is issuance of a writ or mandate to the U S Marshal to go out and seize sufficient, even if the writ or mandate is returned unsatisfied (that is, the Marshal could find nothing to seize)?

In any event, IRS can either fold this case and rescind the certification, or show that at least they sent out the Marshal to grab. But of course, they can fold, decertify, send the grabber, and try again. See my blogpost “Ruesch to Judgment – Part Deux,” 9/22/20.

I was a little late getting this posted today, but there were 792 (count ’em, 792) orders today on DAWSON.

If you want a noncash charitable contribution deduction for household goods (see Sections 170(f)(16)(A) and 170(f)(16)(D)(i)), make sure they came from a well-kept house.

That’s the advice STJ Daniel A. (“Yuda”) Guy has for Cheri L. Rau, 2022 T. C. Sum. Op. 4, filed 3/7/22.

Cheri owned a house she rented over the years to college students. In the year at issue, she sought a $11K noncash charitable for a bunch stuff (hi, Judge Holmes) she took from the house that included “kitchen items, glassware, furniture, bedding, pictures, appliances, and lawn equipment.” 2022 T. C. Sum. Op. 4, at p. 3. IRS conceded $500.

But in the same return, Cheri wants a $9K deduction for building materials to fix the house; the students apparently weren’t good housekeepers.

“During the year in issue, petitioner hired contractors to make substantial renovations to the… house, including roof repairs, flooring and drywall work, replacement of the garage door,  siding, and gutters, remodeling of the kitchen and bathrooms, and landscaping improvements. Petitioner purchased the materials needed for the renovation work, delivered the materials to the house, and oversaw much of the work.” 2022 T. C. Sum. Op. 4, at p. 3.

“Petitioner failed to present objective and credible evidence that the items she donated were ‘in good used condition or better.’ Any suggestion that the donated items were in good used condition is undermined by petitioner’s testimony regarding the state of considerable disrepair at the … house before the items were removed. Respondent’s determination that petitioner is limited to a deduction of $500 for noncash charitable contributions is sustained.” 2022 T. C. Sum. Op. 4, at pp.  9-10. (Citation omitted).

But STJ Yuda does give Cheri some extra deductions for materials.

The trusty CPA who prepared the general ledger and tax returns for Blossom Day Care Centers, Inc., and Barry A. Hacker and Celeste Hacker, T. C. Memo. 2022-16, filed 3/7/22, and their subsequent bookkeeper who took over general ledger duties, used that category for the business credit card expenses run up by Barry and Celeste and adult children but paid for by Blossom, which Barry and Celeste wholly owned, but from which they never received salaries or dividends.

Judge Elizabeth Crewson Paris has the third leg of this marathon.

“Petitioners and their children used the credit cards to make purchases necessary to operate the daycare centers, but they also regularly used them to pay personal expenses. During [four of the years at issue] the Hackers and their children charged thousands of dollars in personal expenses on Blossom’s credit card account, as well as their own AMEX, Citi, and Bank of America credit cards, all of which Blossom invariably paid. In addition to routine personal purchases, such as restaurant meals, auto expenses, and personal medical expenses, the Hackers either used the corporate credit card or had Blossom pay their personal credit card charges for such expenses as college tuition,  vacations, jewelry, and other luxury items. The Hacker children continued to make personal purchases with the credit cards even though they were not employees of Blossom….” T. C. Memo. 2022-16, at pp. 6-7.

Celeste and Barry have been here before. See my blogpost “Stipulate, Don’t Capitulate – One Mo Time,” 7/13/21, and “Headline News?” of even date therewith, as my expensive colleagues say.

Judge Paris has some rewriting to do, as the SNOD numbers need some extensive tweaking, but at close of play, Barry and Celeste are looking at Section 6663(a) 75% fraud chops.

But the moral for accountants is clear. If you don’t know what expenses are business or personal, ask. All credit card statements should be coded. Automobile lease or purchase installment payments must indicate whose vehicle and what purposes each vehicle serves.

And if you set up a category like “loans to shareholder,” “advances,” or “A/R – Officer,” and never see repayments or documentation, be prepared to see your name, if not in a T. C. Memo., then in an IRS computer.

After running successful La-Z-Boy stores in MI, her parents relocated to GA and started opening stores there for the trademarked cocoon. Her dad even got into the green building business, becoming an early exponent of Leadership in Energy and Environmental Design (LEED) certification. He successfully invested in a FL enterprise to get plastic waste out of streams. He even lectured on obtaining LEED certification at Western Carolina University in their construction management program. Dad and Mom sent Jessica Walters, T. C. Memo. 2022-17, filed 3/7/22, to law school, where she interned with the Carolina Mountain Land Conservancy.

But Jessica wasn’t interested in flogging furniture. So the family partnership transitioned into building/consulting environmentally-friendly homes. The flagship was Balsam Home, part of the Balsam Mountain Preserve, a low-density ecofriendly development.

Judge Wells takes up the tale.

“The development sells its landowners club memberships which include access to a golf course, tennis courts, a restaurant, hiking and mountain biking trails, horseback riding, and an educational facility that offers hikes and lessons on fly-fishing and on flora and fauna identification. In addition to private residences BMP has ten cottages,  featuring geothermal water and solar heating systems, where prospective owners may stay.” T. C. Memo. 2022-17, at p. 4.

The family partnership built Balsam Home.

True to their ecofriendly principles, “Balsam Home was constructed with various eco-friendly systems and materials. …while still under construction, Balsam Home received the Energy Star Qualified Home Certificate, which certified that the home met energy standards established by the United States Environmental Protection Agency. Balsam Home… was awarded the USGBC LEED for Homes Gold Certificate  (the highest LEED certification for homes)…. Balsam Home has (among other things) a wine cellar, a dry sauna, a putting green,  indoor and outdoor fireplaces, a dog wash, and a fully functional greenhouse.” T. C. Memo. 2022-17, at p. 4.

Just so you know, this is not a Section 42 low-income tax credit case.

The family held open houses and tours, touting their ecofriendliness and pitching their services. They lived off-site, but did use Balsam Home. They registered motor vehicles, stored wine in the wine cellar (I told you this isn’t a Section 42), used the golf course, and had DirectTV wired in.

They did engage in other deals, but none apparently got beyond the planning stage. They had started during the Black ’08. They did keep separate records for each venture the partnership was in, and did have income, but never covered the losses.

So it’s “goofy regulation” (Reg. Section 1.183-2(b)) time.

The separate records are neutral. While the family never explain their coding methods, their records are thorough. Even though interlarded with personal expenses ($18K for Atlanta Braves season tickets), it looks businesslike.

And Dad’s expertise plus Jessica’s training is enough. They consulted with experts when they built Balsam Home; Dad kept up his green training. And worked on the project personally.

“We find petitioner husband’s testimony credible. We believe that although petitioners employed a landscaping crew to assist with maintenance, they performed most of the maintenance themselves.  Additionally, petitioners’ work in furtherance of [partnership’s] business was not limited to the upkeep of Balsam Home or spending time at BMP. Petitioners engaged with potential clients, consistently advertised in the Western North Carolina Green Building Directory, and attempted to have various articles published about Balsam Home and the green building industry. Petitioner husband’s time dedicated to learning about eco-friendly building likewise shows that petitioners expended substantial time and effort in acquiring knowledge to develop the partnership’s green consulting business. We conclude that this factor weighs in favor of the partnership’s having a profit objective.” T. C. M<emo. 2022-17, at p. 12.

And the family had La-Z-Boy success in MI, transitioned successfully to GA, and Dad did serve on the Board of the FL clean-up hitters, selling out for a profit.

The Black ’08, however, is not enough to explain the continued losses of the partnership, nor is the residential real estate market speculative says Judge Wells, so IRS wins that one. I respectfully dissent as to the speculative nature of residential real estate, having been involved for 55 (count ’em, 55, and I have) years with residential real estate.

True, the family has money. But their income fluctuated over the years, and a lot of their net worth was created years before the years at issue. So that’s neutral.

Personal pleasure is a tough one. Dad hit the greens at the golf course, and that’s more fun than hitting the bricks. But the record doesn’t show one way or the other.

Bottom line is “(W)e recognize that the partnership’s efforts were not perfectly executed, but its actions overall fall in favor of a conclusion that it was seeking a profit.” T. C. Memo. 2022-17,at p. 17.

A Taishoff “Good Job” to Jessica’s trusty attorneys.

Reading Judge Pugh’s quietus to Global Asset Fund 2009, LLC, Global Asset Recovery, LLC, Tax Matters Partner, Docket No. 25108-17, filed 3/4/22, put me in mind of the late Arthur Kopit’s 1962 Drama Desk winner. This was another of the phony Distressed Asset/Distressed Debt marriages, disguised as partnerships, colloquially known as DADs, of the type made famous by the wrong Mr. Rogers.

Of course, said “partnership” needn’t be dissolved, because it never existed. “…the partner contributions of Brazilian credit card receivables to Global Asset Fund 2009, LLC, in taxable year 2009, upon which the Bad Debt Deduction was claimed, were not valid partner contributions.

“…the partners of Global Asset Fund 2009, LLC, did not join together for a business purpose in taxable year 2009 and consequently, no partnership was formed or existed in that year.” Order, at p. 2.

Wherefore, Global Asset transactions “…are disregarded under the economic substance, substance over form, and step transaction doctrines with regard to its taxable year 2009.” Order, at p. 2.

So Judge Pugh erases $18.5 million of deductions.

But there’s bad news and good news.

First, the bad news. 40% gross overvaluation chop for $18 million, and 20% underpayment for the rest.

Now the good news. “…$8,189 of Other Income reported by Global Asset Fund 2009, LLC, on its 2009 tax return is reclassified as Portfolio Income (Loss) Interest and treated as investment income included in portfolio income. As set forth above, Global Asset Fund 2009, LLC, is disregarded as a partnership for its taxable year 2009 and, consequently, its Portfolio Income (Loss) Interest of $8,189 shall be included in the gross income of its partners based upon their proportionate ownership interests in Global Asset Fund 2009, LLC, as directly and separately owned by them.” Order, at p. 2.

No arguing, Gina C. Lewis, 158 T. C. 3, filed 3/3/22, is an innocent spouse. When IRS hit her with the deficiencies, Gina sent them a letter designated as a Section 7430(g) qualified offer, conceding said deficiencies in full, but reserving the right to claim innocent spousery. IRS ignored the offer and hit Gina with a SNOD. Gina petitioned the SNOD and claimed innocent spousery in her petition, but never gave IRS Form 8857. When IRS and her loved-once Tim the intervenor stiped out the deficiencies thereafter, IRS conceded that Gina was an innocent, and moved for entry of decision, which Gina rejects as an end-run around her claim for admins and legals.

IRS concedes Gina meets the net worth cutoff, and she substantially prevailed as to amount and most significant issue.

Even though Gina loses, I give her trusty attorney a Taishoff “Good Try, First Class.” See 158 T. C. 3, at pp. 3-4 for the qualified offer letter. Nice piece of drafting.

Now Gina never submitted Form 8857 or anything else while the deficiency case was pending, either at exam or to CCISO, when IRS referred her case there. This may have been a justified gamble; “The qualified offer provision may not apply, however, where the ‘judgment [is] issued pursuant to a settlement.’ § 7430(c)(4)(E)(ii)(I).” 158 T. C. 3, at p. 6 (footnote omitted, but it says Gina rejected the offer of entry of decision to avoid the “judgment pursuant to settlement” counter-gambit.)

Judge Pugh disqualifies the offer, because it does not specify the amount offered. As Gina reserves the right to raise innocent spousery on a CDP. “… her offer flunks the requirement in section 7430(g)(1)(B) that the qualified offer ‘specif[y] the offered amount of the taxpayer’s liability.’ An offer that reserves the right to claim relief under section 6015 does not ‘specif[y] the offered amount of the taxpayer’s liability’ because the amount of liability offered depends on potential—and reserved—application of section 6015 and cannot be determined until availability of section 6015 relief is considered (or reservation of the right to claim it is withdrawn).

“Applying the regulations to petitioner’s offer illustrates the problem. Petitioner offered to concede ‘100% of the tax and 100% of the penalties’ for [years at issue], subject to a reserved right to claim relief from joint and several liability under section 6015. Respondent’s acceptance of that offer would not ‘fully resolve the taxpayer’s liability, and only that liability . . . for the type or types of tax and the taxable year or years at issue in the proceeding’—that is, petitioner’s federal income tax liabilities for [years at issue]—because her tax liabilities might be (and were) reduced to zero after consideration of her reserved right to claim relief from joint and several liability under section 6015(c). See Treas. Reg. § 301.7430-7(c)(3).” 158 T. C. 3, at pp. 9-10.

Now before my ultra-hip readers cry out as one “What about Regulation § 301.7430-7(e) (example 4), which discusses whether a taxpayer may reduce the amount the taxpayer will pay pursuant to a qualified offer after the offer is accepted by the Commissioner by applying net operating loss carryovers?”

Well, in the NOL case, the liability amount is fixed. Adjustments not at issue in the case at Bar may serve to offset payment. But Gina reserves the right to unfix the liability amount in advance, and that’s a bridge too far.

Taishoff says the bottom line is that judges love settlements. Settlements clear dockets and of course conserve scarce judicial resources (translation: “save judges work”). Anything that encourages settlements is good. Making IRS pay for settlements discourages settlements. That is bad.

Unhappily for trusty attorney, those who sail too close to the wind often end with wet underoos.

Clary Hood, founder of his eponymous grading and excavation company, is an American success story. Starting out of high school as a Cat skinner (that’s driving a Caterpillar excavating rig) in his father’s business, he went out on his own with “…only two employees and a hodgepodge of used equipment valued at no more than $60,000 before growing into a 150-person company with nearly $70 million in revenue by the end of [the second of the two years at issue]. ” Clary Hood, Inc., T. C. Memo. 2022-15, filed 3/2/22, at p. 4.

And it was no sleighride; Clary rode out two (count ’em, two) recessions, cutting his own pay to zero and his employees’ to as low as he could, walking away from Walmart when they tried to squeeze him, selling excess equipment, personally guaranteeing loans and completion bonds, and working 80-hour weeks.

And unlike some hard-driving entrepreneurs, he hired a first class team of executives who worked as hard as he did.

So when they had two (count ’em, two) great years back-to-back, and Clary was beginning to think of ““a changing of the guard”,” T. C. Memo. 2022-15, at p. 47, his executives thought Clary had been undercompensated for all the years he had kept the company going, and had their CPAs do a heavy-duty calculation for Year One (but not Year Two). And the Board of Directors (Clary and Mrs. Clary) voted Clary a very healthy bonus in each year. And Clary and Mrs. Clary never declared a dividend.

IRS claims excessive compensation, and whangs Clary with hefty deficiencies and five-and-ten understatement chops.

Judge Travis A (“Tag”) Greaves clearly appreciates Clary, the kind of man who made this country great. But rendering nondeductible disguised dividends deductible as salary and wages is a no go.

Now reasonable compensation is often in the eye of the beholder, beheld through multifactored lenses. While Clary’s attorneys try independent investor as the sole test, only one CCA bought that, and 4 Cir, whence Clary is Golsenized, never bought it.

Now for the reason for the headline first written at the head hereof, as my already-on-their-second-Grey-Goose-Gibson colleagues would say. Read from page 34 to page 39; those are Clary’s experts. Then read from page 39 to 42; that’s IRS’ expert, who allowed Clary more than IRS did in the SNOD. In a big-ticket case like this, where technical issues abound, one can’t just take an expert’s report and put it in evidence. One needs to do a thorough cross-examination in advance. While it’s easy to play Monday-morning quarterback, it sure looks like somebody missed a block or two here.

I won’t mention letting Clary testify about income tax considerations and the changing of the guard.

While I’m no pitchman for CLE programs, I suggest someone should run one on “Win Your Case by Woodshedding Your Experts.”

Worse, while his trusty CPAs did a great job providing good faith cover for Clary for the chops on the Year One deficiency, no evidence was proffered as to Year Two. However thin the rationale might be for Year Two, ya gotta try it.

As an old Army engineer, I agree the Cat skinners do a better job than the paperers.

Although his Bachelor of Science degree is in accounting, not engineering, Judge Christian N. (“Speedy”) Weiler is a great fan of “the greatest engine yet devised for the discovery of truth,” as Dean Wigmore put it.

Cross-examination, done properly, can unearth, unhorse, undo, and unravel, if anything can.

I’ve said it before, but it deserves repeating: everybody’s testimony looks the same on paper; nobody’s testimony looks the same on the stand.

So Judge Speedy Weiler denies summary J to Green Valley Investors, LLC, Bobby A. Branch, Tax Matters Partner, et. al, Docket No. 17379-19, filed 3/2/22. The Greeners want partial summary J that their appraisers are Section 170 qualified, and that their appraisals clear the Reg.  §1.170A-13(c)(3) bar.

IRS says no, because they want to depose said appraisers. My readers will doubtless recall said activist appraisers tried to intervene to prevent any such deposition, and got sent off. If you don’t, see my blogpost “No Likely End,” 2/11/22. In the same order, Judge Speedy Weiler sent IRS off,  when they sought to depose, because the Greeners’ good faith reliance on whatever the appraisers produced is a question for Bobby Branch, TMP, not the appraisers.

Except maybe Judge Speedy Weiler is starting to backtrack. Cross-examination needn’t happen only at trial.

“When considering the elements of a qualified appraisal and appraisers, it appears that petitioners may have satisfied these legal requirements. However, viewing the facts and inferences in a light most favorable to respondent, we cannot conclude such as a matter of law, since there remains material facts in dispute between the parties. Respondent sought to compel the depositions of Mr. V, Mr. W, and Mr. M—which petitioners objected to—and this Court denied, without prejudice, by order served on February 11, 2022. This Court acknowledges that it would likely benefit from this cross examination testimony from these witnesses prior to ruling on the issues before the Court. Accordingly, we are compelled to deny petitioners’ motions for partial summary judgment at this time.” Order, at p. 3. (Names omitted).

So does IRS move again to depose? Has IRS cleared the Rule 74(c)(1)(B) “extraordinary” bar? If IRS moves again and wins, is this going to be a mini-trial?

To quote the youtube Tennessee (ex-Niagara Falls) gearjammer, “Rev up yer engines!”

Edited to add, 3/2/22: I couldn’t agree with Judge Speedy Weiler more: any trier of fact would definitely benefit from cross-examination of every witness, fact or expert, before ruling on the issues before that trier. But where is this cross-examination to take place? In a deposition? Triers of fact don’t attend depositions. And again, everybody’s testimony looks the same on paper. Unless there’s a trial, that paper is all a trier of fact will see. So all the deposition does is give the adversary impeachment material. I fail to see how that helps the trier of fact where the expert witness must proffer his/her/their report, which is their direct testimony per Rule 143, well in advance of trial. The adversary has plenty of time to develop their cross-examination. And nobody’s testimony is the same on the stand, which is why Rule 74(c)(1)(B) there. To make sure the trier of fact can see and hear the witness on the stand.

ChJE (Chief Judge Elect) Kathleen (watch this space) Kerrigan denies both ACRIS depreciation (Section 168(a)) and bonus depreciation (Section 168(k)) to John D. Lord and Belinda Lord, T. C. Memo. 2022-14, filed 3/1/22. Congress remains obdurate: marijuana is a controlled substance, wherefore “(I)n the absence of new legislation from Congress, the legislative intent of section 280E remains unchanged; shifts in public sentiment and legalization of marijuana do not change the purpose or applicability of section 280E.” T. C. Memo. 2022-14, at p. 8.

John was a member of an LLC and shareholder in a Sub S, both of which were CO med potters. Both took ACRIS and bonus for year at issue. Neither LLC nor Sub S kept books per GAAP. Though not required to keep books per GAAP, even under the Section 471 “clearly reflect income” standard, John has no evidence to show that the method used conforms to the best practices in the medicinal herbage trade or business.

And Section 263A(2)(a) bars deducting any cost related to a 280E prohibited trade or business.

Of course, John’s Constitutional arguments are nonstarters.

So John is stuck with basic Section 471, as refined by IRS. But IRS has given him a thwacking great deficiency and chops at no extra charge.

My sources tell me that medical pot is legal in 38 (count ’em, 38) States and Our Nation’s Capital. If the Senators and Representatives of all those States wished to change the present law, they could. But this is a nonpolitical blog.