Isn’t Losing Your Case

IRS loses summary J in Johnny H. Brown, Docket No. 14617-17, filed 12/20/21,* but that isn’t necessarily bad. True, IRS also gets a Rule 37(c) deemed admissions order tossed, which deprives them of useful ammo. But Judge James S (“Big Jim”) Halpern says that isn’t the end.

“While Rule 37(c) does not permit the withdrawal of affirmative allegations deemed admitted, see New v. Commissioner, 92 T.C. 1146, 1147-1148 (1989), we have looked to Rule 90(f), permitting the withdrawal of deemed admissions, in considering whether to vacate a Rule 37(c) order, see id. at 1148-1149. Petitioner has averred facts (as to the sales prices of vacuums and the nature of the bank deposits) tending to refute the relevant portions of the deemed admissions. We do not think that the prejudice to respondent would be significant were we to vacate our Rule 37(c) order.  Respondent is free during preparation for trial to ask petitioner for admissions, to which, if he cannot admit the matters for which his admissions are requested, we encourage petitioner to reply.” Order, at p. 9. And Judge Big Jim only tosses so much of the Rule 37(c) as pertains to numbers.

Johnny is a pro se who did a bunch years (hi, Judge Holmes) for tax evasion, but the indictment and the Second Amended Judgment are ambiguous as to whether Section 6651(f) fraudulent failure to file was pled and proven for all years at issue. Since Johnny is pro se, Judge Big Jim also gives him a bye on failure to assign error to the Section 6651(f)s, since he did amend to dispute numbers. If in fact he proves that he didn’t sell all the vacuum cleaners he sold at list price, that shows he made less, and if he can prove he’s entitled to greater COGS or deductions, then he might be OK.

Now it’s true IRS violated Taishoff’s Law of Bedrock Practice: Stipulate, Don’t Capitulate.

“Petitioner does not deny that he was convicted of tax evasion under section  7201 as alleged in count 14 of the indictment, nor does he deny that he failed to file tax returns for the audit years. And while a conviction under section 7201 for tax evasion for a particular year or years collaterally estops the convicted felon from denying fraudulent intent for purposes of section 6651(f) for those years…respondent concedes that there is no estoppel here. He relies principally on the particulars of the conviction and on the deemed admissions to make his case.” Order, at p. 1. (Citation omitted).

IRS’ strategy seems to be that, since maybe Johnny is entitled to more deductions and might show some income isn’t taxable, the Second Amended Judgment might be less than perfect to establish the amount of the chop. And if the numbers come up short on the trial, mox nix.

The good news? IRS has narrowed things down to a trial on numbers. And Johnny has BoP.

*Johnny H Brown Docket No 14617-17 12 20 21

A commenter on my blogpost “From My Scrapbook – 12/16/21,” of even date therewith, suggested that Ch J Maurice B (“Mighty Mo”) Foley had gotten the third person singular personal pronoun wrong for Amaka L. Ezan, Docket No. 30234-21, filed 12/20/21.*

Commenter asserted that “Amaka” is “primarily a female name of African – Nigeria origin that means Precious.” I have not independently verified this assertion, so it is offered for the fact that it was asserted, not for the truth of its content.

However, today Ch J Mighty Mo seems to have been right, although applying Cohan to get there.

“… petitioner filed a First Amended Application for Waiver of Filing Fee. However, like petitioner’s initial application, the amended application is captioned in the name of “Joel Landry Ezan”. Order, at p.1.

Alas, despite the time-honored benevolence I invoked on Amaka/Joel’s behalf in my hereinabove-cited blogpost, Cohan overrides A Christmas Carol, and the Court may bear heavily upon the taxpayer/petitioner “whose inexactitude is of his own making.”

And that goes beyond pronouns, even to filing fee.

“As previously noted in the Court’s Order served December 16, 2021, denying petitioner’s initial application, that caption does not match this case. Consequently, the Court is unable to process the amended application. See Rule 23(a)(1), Tax Court Rules of Practice and Procedure.” Order, at p. 1.

So pay up, Amaka/Joel.

*Amaka L. Ezan 30234-21 12 20 21

Douglas Leon Schnitzspahn, Docket No. 8477-20S, filed 12/17/21*, may have lost his “S” today, as his docket number now is 8477-20 tout court, but the typos in his losing former small-claimer remain.

See my blogpost “‘F’ For Effort,” 10/20/21.

Now if that which was formerly a small case becomes a regular case by virtue of an opinion (no decision yet, as a Rule 155 beancount is pending), do regular case rules apply to the Rule 155 beancount?

Awaiting the trials in the 2021 petition tsunami (34,326 and counting as at 2:30 p.m., EDT, 12/17/21).

*Douglas Leon Schnitzspahn Docket No 8477-20 12 17 21

In the wrinkled skin of Section 6015(c) allocated or apportioned innocent spousery, actual knowledge of the unreported or overdeducted is a particularly deep wrinkle. When IRS folds but non-requestor objects, who has BoP? Will we ever find out, as the Tax Court bench seems uniformly determined to dodge the issue with “preponderance of the evidence”? And this is the one part of innocent spousery where intent of the non-signer to file jointly carries the day; the sacred “signed under penalty of perjury” requirement is set aside.

Now throw spousal abuse into the mix, set Judge Mark V Holmes to stir the cauldron, and we have innocent spousery bouillabaisse ready to serve, in Elizabeth Kitazono, Petitioner and Christopher K. Chung, Intervenor, Docket No. 3961-20, filed 12/17/21.*

Unhappily, because DAWSON won’t let me cut-and-paste from the transcript of this off-the-bencher, I must refer you to the text online (assuming it isn’t sealed because one document out of fifty in the docket was sealed). This is an enforced impediment to my right and responsibility to report accurately, in ipsissima verba, what the opinion says, and a willful obstruction to the free journalism mandated by Section 7461 and the US Constitution, as amended.

Elizabeth says Chris was abusive. He was also an ultra-successful serial entrepreneur, and while they were married they lived in CA, thus community property is in play. Chris did the returns, and reported much wage and investment income, but left out the constructive dividends he took from his corporation. Elizabeth admits she had income and was adequately withheld, but claims she never saw or signed anything. She wants out from Chris’ unreporteds, IRS folds, but Chris says no.

BoP gets less than a paragraph, Transcript, at p. 8. Judge Holmes isn’t wasting his sweetness on the desert air of an off-the-bencher. Totality of facts and circumstances, y’know.

Now did Elizabeth have an “actual and clear awareness, as opposed to reason to know, of the items giving rise to the deficiency”? Transcript, at p. 8. I’ve blogged this question before. See my blogpost “René Descartes, Thou Should’st Be Living At This Hour,” 1/4/18, and even that wasn’t the first time.

Back to Chris and Elizabeth. Community property is out, because Reg. 1.6015-3(c)(2)(iv) takes out the joint ownership exception if that’s the sole reason to impute actual knowledge to Elizabeth. Next, if the requestor was abused, even if actually knowledgeable but didn’t object for fear of physical injury, then actual knowledge doesn’t count.

Even though Judge Holmes finds Chris physically abused Elizabeth three (count ’em, three) times near when the return were filed, that’s not what prevented her from objecting. Before you join me in yelling “WTF!” read on, Transcript, at p. 11. Chris was making a ton of money legitimately, and they’d invested in real estate early in the marriage, and that was doing well. She had corporate checks paying for childcare and daycare for their kids, but Chris told her this was a company plan. Most importantly, even though she knew the source of the unreporteds was Chris’ company, the issue is the items themselves.

Remember, Elizabeth claimed she knew nothing. Judge Holmes says that because the returns for years at issue showed much wage income and real estate investment income, and IRS conceded on the trial a chunk of claimed constructive dividend deficiencies for a couple years (it is Judge Holmes, after all), Elizabeth couldn’t know that part of the cashflow was constructive dividends.

Taishoff says that since Elizabeth had a BA in biology and worked at the San Francisco Zoo during years at issue, Transcript, at pp. 3-4, I would make a wee wager with Judge Holmes (if that were ethically permissible, which I know it isn’t) that Elizabeth couldn’t define “earnings and profits,” “basis in stock” or “constructive dividend” with a running start and a five-pound handicap; stakes to be a couple ales at Jake’s Saloon.

Judge Holmes lets her off, but needs a Rule 155 beancount for the concessions.

*Elizabeth Kitazono Docket No 3961-20 12 17 21

For the backstory on Mitchel Skolnick and Leslie Skolnick, et al., 2021 T. C. Memo. 139, filed 12/16/21*, see my blogpost “Horsefeathers,” 6/3/19. And to my colleague, Peter Reilly CPA, here’s another “goofy regulation” case for your reading pleasure.

It’s Mitch’s case, as his former spouse and her successor are in it only because MFJ. Mitch, heir to a vitamin-pill fortune, was introduced to harness racing (that’s trotters and pacers, another horse-drawn Hoover for your loose cash) by Daddy. He retired from his successful software development company to run Daddy’s operation, but quit after a family feud. He and a Cornell grad (Eric, the al), who had made out selling insurance to Daddy and others, founded Bluestone Farms, a partnership-taxed LLC.

On the trial, Eric testified that Daddy “…warned Eric that, if he invested in the syndicate, he might lose all his money, but that he would meet interesting people he would otherwise not have met. Eric testified at trial that both predictions proved ‘prophetic.’” 2021 T. C. Memo. 139, at p. 5.

So Mitch and Eric bought the farm (literally, a NJ dairy farm) and started breeding Standardbreds. Mitch liked this because it was like computer programming, figuring which stallion to breed with which mare. But Mitch and Eric, and a passive investor they brought in, went through four (count ’em, four) business plans, each one losing more money than the last. Mitch, fortunately, had the trust fund Daddy set up for him.

Judge Albert G (“Scholar Al”) Lauber goes through Mitchel’s unsuccessful horsing around and his more successful drain of Bluestone cash for his personal expenses. Bluestone eventually racked up $7 million in losses over 12 (count ’em, 12) years. And Bluestone’s recordkeeping was not of the best. But the result comes out to between 150% and 300% of expenses to income, until one year (not at issue) when it did make a profit, finally breeding a winner.

That’s about the right ratio for winning to losing tickets, be it flat or sulky; believe me, I know.

Mitch and Eric used credentialed CPAs, each with his own. And Bluestone did survive one year’s audit with a “no change,” although Section 183 wasn’t considered.

Now comes the SNOD, the initial expert joust more particularly bounded and described in my blogpost hereinabove cited, and the trial, with five (count ’em, five) experts, four horsemen and one farmland appraiser. Before doing the usual mix-and-match Judge Scholar Al does some pruning of the experts’ testimony “… excluding portions of certain reports as irrelevant, outside the scope of their expertise, or invasive of the province of the Court.” 2021 T. C. Memo. 1390, at p. 27. Right on, Judge; give these guys a nose and they’ll take a furlong.

The Section 183(d) two-of-seven for horsing around is out for the years at issue; none showed a profit. So comes the trudge through the “goofy regulation.”

Some of the operating accounting and operations were professional grade, but the partners’ capital accounts, contributions, and distributions were a mess. There were business plans, but these were out of date for most of the years at issue, and. nothing was done to staunch the losses. Mitch and Wife Two lived on the farm rent-free, had the farmhouse disassembled nail by nail and rebuilt to their specifications, and prettied the place up to the extent of $35K for their wedding, all using Bluestone money and paying none of it back.

Though Mitch makes much of the horse-by-horse recordkeeping, that alone doesn’t evidence an intent to make a profit. And here Judge Scholar Al makes an observation close to my heart. “Wine enthusiasts may keep detailed records about every bottle of wine in their cellars, including date of purchase, acquisition price, tasting notes, and anticipated period of drinkability. * * * Maintaining such records does not mean that the person is engaging in the activity with the intent to make a profit. It just shows that he or she is a serious hobbyist as opposed to a careless amateur.” 2021 T. C. Memo. 139, at p. 38.

Judge, I have  written records, spanning forty-six years, of every wine, and almost every spirit, I’ve drunk, with extensive notes of provenance, cost, date, place, food (if any), and labels or copies thereof. I’ve never made a dime, nor intended to, but it’s been a great ride.

True, Mitch talked to experts, but never showed he asked about making money, only about running a top-class operation. Mitch and Eric were office types; they hired people to do the dirty work. And while the land did appreciate over the years, it was farmland, and Reg. Section 1.183-1(d)(1) requires farming activities, though separate from landholding, must offset the net cost of landholding. With telephone number losses from horsefarming, no way could that happen. Yes, the one horse who turned out to be a big winner finally came in after the years at issue, but Mitch had sold a piece of that horse to someone else. Both Mitch and Eric had heavy-duty other income, so they were using their horsing around to get us taxpayers to subsidize their horsestuff. They want to rely on the “no-change” audit from a single early year to prove an NOL, but that exam didn’t go into goofy regulationdom. Their records are only a statement of claim, not proof.

Finally, Mitch and Eric had fun, socialized with top-drawer Standardbreeders and owners, and lived the lives of the rich and famous.

Relying on their CPA, Mitch tries to get out of a late-filing add-on for one year. The return was a year late, but the CPA said, because he thought no tax was due, it could wait while he was busy with other matters. Except there’s a personal, non-delegable duty to file on time. But because both Mitch’s and Eric’s respective CPAs have a bushelbasketsful of credentials and years of experience in the horse game, no accuracy chops.

*Mitchel Skolnick 2021 T C Memo 139 12 16 21

From time to time, and at any time, I may post handy practice tips, or observations of Glasshouse doings. Some may seem obvious, but that means you’re a grizzled, battle-hardened tax war veteran; so spare an indulgence for the newbie. We were all newbies once.

First, it seems Ch J Maurice B (“Mighty Mo”) Foley is requiring forma pauperis claimants to get the Form Without a Number, the Application for Waiver of Filing Fee, right the first time. No Mulligan for Amaka L. Ezan, Docket No. 30234-21, filed 12/16/21.*

“Petitioner has not checked the boxes indicating whether or not he receives income from five of the six possible sources listed on the application. Additionally, the caption on the application does not match the caption of this case.” Order, at p. 1.

So application denied, and Amaka has until January 27 to stump up the sixty Georges.

I would have thought Ch J Mighty Mo, notwithstanding the unprecedented burden of 34,000+ petitions laid upon him and The Glasshouse Gang so far this year, would give Amaka a chance to amend his app; after all, as a much finer writer than I put it, this “…is a good time; a kind, forgiving, charitable, pleasant time; the only time I know of, in the long calendar of the year, when men and women seem by one consent to open their shut-up hearts freely, and to think of people below them as if they really were fellow-passengers to the grave, and not another race of creatures bound on other journeys.”

Next, though the carpenters may take Sappho’s advice to raise high the roof beams, we lawyers should see to the foundations, without need for advice from Judge Christian N. (“Speedy”) Weiler. Judge Speedy Weiler plows through a bunch motions in limine (hi, Judge Holmes, greetings the season) in Leigh C. Fairbank & Barbara J. Fairbank, Docket No.13400-18, filed 12/16/21.** Once again the meticulous Helvetian attorney Britta Delmas (insert here Swiss equivalent of “Esq.”) shows how business records are to be certified. Britta’s been here before; see my blogpost “Forever Swiss – Part Deux,”2/19/20.

But the NPB (which my source tells me is the Neue Privat Bank, now or formerly of Zurich) seems not to have the equivalent of the meticulous Ms. Delmas. “…the Court finds the NPB records to be business records under Fed. R. Evid. 803(8); however, unlike the [Delmas-certified] records there has been no ‘Certification of Business Records’ executed by a legal representative of NPB Bank. Accordingly, we do not admit the NPB records into evidence as self-authenticating foreign business records in advance of trial. See Fed. R. Evid. 801(d)(2), 803(6), 902(11), (12). Respondent remains free to lay a foundation to overcome any objection as to the authenticity of these records. See Fed. R. Evid. 901.” Order, at pp. 3-4.

Good question for the Tax Court admissions examination. And good checklist item for practitioners.

*Amaka L Ezan Docket No 30234-21 12 16 21

**Leigh C Fairbank Docket No 13400-18 12 16 21

I’m driven to use the lingo of the opposable-thumbed virtuosi, they who transmit whole volumes of stuff by thumbs alone, while hanging from subway straps and holding their smartphones at impossible angles. For the traditionally-handed, that means “shaking my head.”

First up, Bryan Edward Menge, Docket No. 22622-16, filed 12/15/21.* Menge has a seriatim bœuf concerning “many years and thousands of hours of the petitioner’s life spent trying to resolve tax related issues with the IRS that started in 2011 and were directly caused in part or in whole by the unlawful violations * * * by US government contractors, officials and employees of HUD, of the Federal District Court for the District of Rhode Island, the Kent County Superior Court, the DOL, and the IRS.” Order, at pp. 3-4. Apparently there was a HUD $60K holdback from a construction contract payment to Menge’s eponymous construction outfit, from which Menge his own self was credited with $2660 ITW.

Menge wants to fight about the holdback in Tax Court. A definite nonstarter, but Menge wants to fight so badly that he gets a $500 Section 6673 frivolity chop from Judge Tamara Ashford, even though he wins. He’d been warned about frivolizing before.

Ya see, IRS handed Menge a deficiency, which they concede in full. But it’s not only Menge’s obduracy that has me shaking my head; clearly, he hasn’t a clue about courts, or is so frustrated he doesn’t care.

Here’s the deficiency: “…respondent determined a deficiency in petitioner’s Federal income tax of $0.78, an addition to tax pursuant to section 6651(a)(1) of $802.95, and an accuracy-related penalty pursuant to section 6662(d) of $1,070.60 for the 2013 taxable year.” Order, at p. 1.

Seventy-eight (count ’em, seventy-eight) cents of tax and $1873 in add-ons and chops? And for this we’ve had a bunch orders and motions (hi, Judge Holmes)? SMH, indeed.

Speaking of Judge Holmes, he has an off-the-bencher today, Chung Yung Chong & Anita Chong, Docket No. 8551-20, filed 12/15/21.** Reading about Chung Yung’s securities investments (for which he claims long-term capital losses above the standard $3000 per year), I am reminded of Greg and Sue Raifman, and their unerring nose for fraud; see my blogpost thus entitled.

I’m moved, though, by Judge Holmes’ lament for the vanishing Form 1040. “…I need to discuss…whether the Chongs are entitled to long-term capital losses of more than $3000 for the years at issue. This was a particularly difficult topic to understand in the context of this case. We didn’t have a Form 1040. We had an electronically-filed form, and it was not at all clear what the source of these alleged long-term capital losses were.” Transcript, at p. 5.

Takeaway- Might be a good idea to have a printable Form 1040 handy as a back-up to the e-Filed version to use as an exhibit, when trying your case with a Senior Judge.

*Bryan Edward Menge Docket No 22622-16 Filed 12 15 21

**Chung Young Chong Docket No. 8551-20 12 15 21

Generally, we lawyers have inquiring minds. It’s not enough to know what, or who, or when; before all, it is to know why. That is true, even if “why” is totally irrational. Once we know why, we can deal with the consequences.

I’ve mused before on this my blog why Form 6 Ownership Disclosure Statement is such an obstacle to entity petitioners. It is a single-page form. It asks only three (count ’em, three) questions. I dare say in 95% of the petitions filed in US Tax Court, the answer to all three questions is “NONE.”

Yet today, 12/14/21, a very special day in our family, I see no fewer than six (count ’em, six) orders giving petitioners more time to file Form 6. The petitioners are all conducting, or, I assume, assert they are conducting, or have in the year(s) at issue conducted, business operations to the extent that principals thereof had to know how to read and write at least well enough to graduate from lower school.

I have in the past suggested modifying Form 6, by adding the words, in bold-faced capital letters “YOU CANNOT LEAVE THIS FORM BLANK; IF “NONE” WRITE “NONE”. See my blogpost “Even Good Accountants,” 3/25/19.

But no; the form, last modified almost ten years ago, retains its 1 Corinthians 1:23 characteristics.

And it doesn’t provide for signature by post-TEFRA representatives.

Ch J Maurice B (“Mighty Mo”) Foley joins in the words of Nobel Laureate R. A. Zimmerman’s 1967 chanson, as he announces “…today that order search is now available in the DAWSON case management system. In addition to being able to search for orders by case name or docket number, the public may search for orders by keyword or phrase, by judge, or by date range. ‘Today’s Orders’ will continue to be available on the Tax Court website.”

Here’s the gladsome news.

So the Genius Baristas and the 18Fs (if they’re still on-scene) have joined the Isaiah 9:2 brigade.

Now, my merry readers, join with me in the words of the Project Farmer of youtube.com: “We’re gonna test that!”

In the best (??) traditions of DAWSON, if one document in a docket extending ten (count ’em, ten) years is sealed (even without a Rule 27 or Rule 103 order), the entire docket is sealed, so forget searching by name or number or anything else.

Ah, DAWSON, what sins are committed in thy name!

Judge Joseph Nega regretfully shuts down Vardan Antonyan’s Paradise Acres, as Vardan’s plan never gets nearly operational. Here’s the story: Vardan Antonyan and Margarita Safaryan, 2021 T. C. Memo. 138, filed 12/13/21*.

Vardan wanted to make the desert bloom, so he started with 10 acres “in the middle of the Mojave Desert, approximately 1 mile away from any road and 120 miles away from petitioners’ residence.” 2021 T. C. Memo. 138, at p. 2. Vardan says he wants to subdivide the land into plots, get USDA organic certification, and rent to farmers.

Unlike so many hobby losers and busted starters-up, Vardan had a business plan. This “…first required him to construct a nonlivable outdoor structure, similar to a barn, on the property. The business plan then required him to obtain a certification from the U.S. Department of Agriculture (USDA) certifying that the land complied with the standards set forth for organic farming. Finally, the business plan provided for the installation of an irrigation system on the property and the construction of an access road to the property.” 2021 T. C. Memo. 138, at p. 3.

Vardan did build a water storage tank to catch whatever rainfall one might find in the middle of the Mojave Desert, bought some materials and rented some vehicles, did some building work (but the barn never got done), never got the USDA certification, and never put in the irrigation system.

And Vardan was less than stellar on the stand. “Assuming, arguendo, that none of the steps in petitioner husband’s business plan was necessary to rent the property, petitioners nevertheless failed to produce any evidence to establish that petitioner husband held the property out for rent during [year at issue]. Other than petitioner husband’s incredible testimony, petitioners failed to produce any evidence to establish that petitioner husband was actively managing and engaging with potential customers to rent the property during [year at issue] or that he received any offers from potential customers.” 2021 T. C. Memo.138, at p. 12.

Vardan’s deductions are dried up.

Takeaway- So many start-ups and Section 183s founder for want of a written business plan. But having the plan isn’t enough. My colleague Peter Reilly, CPA, has often said that, while a plan certainly helps,  if it’s not executed it’s nothing.

*Vartan Antonyan 2021 T C Memo 138 12 13 21