Unhappily for Erinn Theresa Doyle & David Devon Doyle, 6532-20S, filed 4/14/21, even with CSTJ Lewis (“A Most Delightful Name”) Carluzzo on the case in this off-the-bencher, the law is the sole consideration.

Dave wants “…the Court to allow for an exception to the 39-week rule under the circumstances of their case. They are looking for ‘leniency’, as they put it. Whether it’s called leniency, or equity, or fairness, or sympathy, in effect they are asking that the Court rule in a manner inconsistent with the results demanded by the application of a clear statutory scheme, in this case section 217, to an undisputed set of facts. This the Court cannot do.” Transcript, at p. 8.

To save you the online Google or the dive into your bookshelf, Section 217 governs moving expense deduction, and requires a 39-week stay in the new job unless involuntarily terminated (except for willful misconduct) or moved by the employer although reasonably expecting to stay in new job for the 39 weeks.

Dave’s story is that he moved from CA to HI. to take a job with the State. He quit after less than four (count ’em, four) months on the job.

“He resigned from the job and decided to move back to California for a number of personal reasons, including (1) his belief that certain atmospheric conditions and the frequency of earthquakes presented an unfit environment for his family (as it turned out the area suffered a natural disaster after he left), (2) petitioners’ attempt to sell their California house failed, and (3) Mrs. Doyle’s decision to remain in California in order to care for her father. When Mr. Doyle returned to California…he did not have a job waiting for him.” Transcript, at pp. 4-5.

“Returning to Califnoria [sic] to start a new job was not among his reasons. Consequently the portion of moving expenses allocable to Mr. Doyle’s return to California cannot be deducted, because he did not return there “in connection with the commencement of work at a new principal place of work”. Section 217(a).” Transcript, at p. 7.

Dave realized on the trial that he needs a break, with the law completely against him, but 400 Second Street, NW, in The City on the Potomac, is not the place to look for one.

“While we appreciate and commend petitioners for the decisions, they made in order to ensure and protect the security and health of the members of their family, we are bound in this case, more appropriately constrained, at least with request [sic; should be “respect”] to some of the expenses involved in the moving expense deduction to apply the law as written. Consequently, respondent’s disallowance of the moving expense deduction here in dispute is sustained.” Transcript, at p. 8.

Pore ‘il ole Tax Court has only sympathy, not equity.

Judge Elizabeth Crewson Paris spends 41 (count ’em, 41) pages, and IRS details two (count ’em, two) attorneys, to deal with William E. Flynn, 2021 T. C. Memo. 43, filed 4/13/21.

The said Flynn went down for 108 months plus 3 years’ supervised probation in USDCWDMI (affirmed 6 Cir) for a little scheme called Access.

“Petitioner and his fellow conspirators at Access represented that Access was a successful investment organization with a history of returning large profits to clients. They promoted Access’ connections to little-known, high-yield investment opportunities in world markets that were not available to the general public. Petitioner and his co-conspirators further represented to investors that their principal would be kept in guaranteed accounts in a major world bank and would not be at risk. Access claimed to operate as a tax-free church despite having had no churchlike organization, no building, no worship services, and no activities of a religious nature. Petitioner and his co-conspirators told investors that their returns on their investments would be nontaxable if they purchased a ‘church sub-chapter’ package from Access. Many of the investors Access attracted were retirees who transferred their entire retirement accounts to Access on the representation that Access was eligible to receive the funds in those accounts as nontaxable rollovers and that the investors’ profits would be tax free.” 2021 T. C. Memo. 43, at p. 4.

Billy and his buddies swindled people to the tune of $20 million. Billy himself “… used the funds he received from Marcusse [another crook] and the Access scheme to purchase his personal residence, two bars, and three airplanes as well as to pay for construction of new Billy’s [a bar he ran] and to generally support his lifestyle. In addition, the razzle-dazzle of Billy Flynn’s loan applications enticed the lenders to approve multiple loans to him and his various entities in amounts exceeding $550,000, and the payments on the loans were made from his previously described bank accounts.” 2021 T. C. Memo. 43, at p. 34.

Billy goes down for fraudulent nonfiling.

We can stop here.

Where The Magic Paper Saves the Day

While infrequent, Tax Court cases, even small claimers, involving New Jersey divorces furnish good blogfodder. Remember Tim Micek? No? I know, it’s been ten years, so see my blogpost “The Magic Paper Saves the Deduction,” 4/7/11.

Today, we have the magic paper again, but it saves the exclusion for Leah J. Regan, Docket No. 16251-17S, filed 4/13/21, an off-the-bencher from Judge Buch.

Leah and her ex Mike divorced in 2003, and Judge Herr in NJ Chancery awarded Leah $6K per month net of tax. Leah and Mike were supposed to agree upon the amount of a tax reserve to be set up so Leah paid no tax on the $6K.

Except of course they didn’t. So Judge Herr twice amended her order, always referring to the monthly payment to Leah as “net of taxes.” Judge Herr sent the parties the last revised order with a transmittal letter.

“In that letter, Judge Herr explained how the modifications she made in her order affected the decision she had previously rendered. Concerning the tax consequences, she noted that she ‘anticipated that counsel would be able to calculate the income taxes [Ms. Ragan] would pay on this unallocated support and her imputed income and be able to supply that “taxable” alimony figure.’ She then explained that ‘[s]ince you have not calculated the amount [Ms. Ragan] needs to receive as alimony to net $6,279 per month * * * I am simply advising Probation to continue to collect the unallocated nontaxable support for [Ms. Ragan] of $6,279.'” Transcript, at pp. 6-7.

IRS hits Leah for year at issue, apparently because Mike took the Section 215 alimony deduction, and claiming Judge Herr’s allocation of tax doesn’t make Leah’s monthly payments nontaxable. Back to the Section 71(b) foursome that TCJA put on hold through 2026.

“The payments must be received by a spouse under a divorce or separation instrument; that instrument must not designate the payment as not includible in gross income and not allowable as a deduction under section 215; the payee spouse and the payor spouse must not be members of the same household; and the liability to make the payments must terminate after the death of the payee spouse. There is no dispute as to three of those elements. The Commissioner and Ms. Ragan, however, disagree as to whether the divorce instrument designates the payment as not includible in the gross income of Ms. Ragan.” Transcript, at pp. 8-9.

IRS wants to forget about Judge Herr’s letter. Judge Buch won’t let them.

While there’s no magic language to effectuate the not-includible-not-deductible piece of the equation, here the transmittal letter shows “… Judge Herr intended for the $6,279 support payments to be net of taxes to Ms. Ragan and excluded from her income. She initially intended to accomplish this by requiring the parties to calculate the amount of a tax reserve, which would have enabled the court to establish a gross alimony amount. When the parties failed to reach agreement as to that tax reserve, Judge Herr altered her initial decision in a … order. In that order, she specified that the support payments would remain at the net amount. In the cover letter accompanying that order, she explained that because the parties could not agree on the tax issues, the support payments were to be treated as nontaxable. Judge Herr even changed her terminology, referring to the monthly payments as “support” in both the…order and the transmittal letter.” Transcript, at p. 10.

IRS claims the letter isn’t part of the divorce instrument.

Judge Buch does a quick dictionary chaw. After all, even a small claimer off-the-bencher needs a dictionary chaw.

“To do so would require that we disregard the clause ‘written instrument incident to such a decree.’ That clause requires that we take into account any instrument that supplements a decree. And the term ‘instrument’ is broader than how the Commissioner would have us define it. Black’s Law Dictionary defines a written instrument as ‘[a] written legal document that defines rights, duties, entitlements, or liabilities.’ It goes on to cite Edward Beal’s Cardinal Rules of Legal Interpretation, for the proposition that ‘[a]n ‘instrument’ seems to embrace * * * any written or printed document that may have to be interpreted by the Courts.’ We are confident that Judge Herr would consider her letter transmitting and explaining her order as a written legal document that defines rights and liabilities. So do we. A letter transmitting an accompanying order written by the same judge who wrote the order that explains the rights and obligations of the parties who are subject to that order fits neatly within the definition of a written instrument incident to a decree.” Transcript, at p. 12.

Once again, in NJ, when people divorce, the magic paper saves the day.

Transfer pricing geeks and Section 482 reallocators will no doubt be eagerly awaiting the stiped out decision forecasted in Altera Corporation and Subsidiaries, Docket No. 6352-12, filed 4/13/21.

For the rest of the civilized world, the Altera fight was over stock-based compensation with offshores. You’ll find the backstory in my blogposts “Sixteen Lawyers – Part Deux,” 7/27/15, “Aspirational Goals,” 7/24/16, “Cut Uncut,” 8/17/18, and “Cut Out,” 12/2/19.

That is, we’ll know the upshot unless the Genius Baristas seal the whole shebang.

I find it a wee bit unfortunate that the results of major litigations, based upon which we advisers must advise clients in big ticket matters, are kept from public view. I understand not revealing Section 6103 lockouts, discovery manœuvers, trial tactics, negotiating strategies and ploys, trade secrets, and privileged information. But stipulated decisions reveal none thereof.

Decisions are how we can judge how the whole system is working. The whole aim of tax advising is discovering if the lion will bite otherwise than by sticking one’s head in its mouth.

There’s a full-dress T. C. today about corporate welfare, but it’s not political. Ruben De Los Santos and Martha De Los Santos, 156 T. C. 9, filed 4/12/21, had an employee welfare benefit plan for themselves and four (count  ’em, four) other employees of their Sub S. Judge Albert G (“Scholar Al”) Lauber reminds us that Ruben’s welfare plan was a SDLIA, and got his tax benefits taxed back to him as ordinary income per Reg. Section 1.61-22(b), as more particularly bounded and described in 2018 T. C. Memo. 155, filed 9/18/18.

I didn’t blog Ruben’s loss, as I had a full-dress T. C. to deal with that day, and Ruben’s deal was much of a muchness.

But today, Ruben’s trusty attorney earns a Taishoff “Good Try,” claiming that the benefits are a corporate distribution, entitled to Section 301 treatment. Tight-fisted ol’ IRS says no, the SDLIA was a “‘compensatory arrangement’ that afforded benefits to petitioner husband in his capacity as an employee.” 156 T. C. 9, at p. 3.

Ruben (that’s Doc Ruben, MD) incorporated his medical practice as a Sub S, and took all the flow-throughs on the MFJ 1040s for the years at issue. He set up one of the Legacy plans. Legacy was a lead hawker of split-dollar life insurance plans; for the backstory on SDLIAs, see my blogpost “The Split,” 8/27/12.

For Ruben and Martha to be eligible for plan benefits, they had to be employees of the Sub S.

“Under the Legacy Plan as adopted by the S Corp., petitioners were entitled to a $12.5 million death benefit, and the four rank-and-file employees were entitled to a $10,000 death benefit and certain flexible benefits. To fund the promised death benefits the Legacy Plan required the purchase of life insurance. The Trust accordingly purchased a life insurance policy (Policy) insuring petitioners’ lives. The Policy was a ‘flexible premium variable universal life’ policy with accumulation values based on the investment experience of a separate fund. The Policy provided base insurance coverage of $12.5 million, equal to the death benefit that the S Corp. had selected for petitioners. The Policy was a ‘survivor policy,’ under which the insurer would pay $12.5 million to the Trust when the second of petitioners died. The Trust in turn was required to pay $12.5 million to whatever beneficiaries petitioners had designated.” 156 T. C. 9, at p. 5.

So Doc Ruben deducted the $1.862 million the policy cost him as a business expense, while in a couple following years (hi, Judge Holmes) the policy accumulated about $800K in cash surrender value. IRS bounced the deal. Ruben and Martha lost summary J on split-dollarism. So why am I writing this?

Because IRS, Ruben and Martha, and Judge Scholar Al left figuring out what part of the cash surrender build-up gets taxed for what years. Ruben and Martha and trusty attorney claim the benefits are corporate distributions of property, notwithstanding that they agree that the benefits were employee compensation.

Ya see, back in 2018, 6 Cir overturned Machacek, to which I had given short shrift when it was a T. C. Memo. (see my blogpost “A Scrap About Scrap,” 3/28/16). I had cavalierly dismissed Machacek: “And as these SDLIA deals have been blown sky-high so many times, it’s not likely any of my readers will encounter any new ones.” Boy, was I wrong!

6 Cir went off on Reg. Section 1.301-1(q)(1)(i), which says all SDLIA distributions are corporate distributions, and that provision overrides Reg. Section 1.61-22(b).

Judge Lauber isn’t buying.

Golsen to the rescue. Machacek was 6 Cir, but Ruben and Martha are Texians, hence 5 Cir. “To adopt the Sixth Circuit’s construction of section 1.301-1(q)(1)(i), Income Tax Regs., would require us to ignore the plain language of section 301(a), the statute under which the regulation was promulgated. We are not permitted to construe a regulation in a manner that ignores its governing statute or that adds to the statute ‘something which is not there.’” 156 T. C. 9, at p. 16. (Citation omitted).

Section 301(a) says a distribution to a shareholder is only a distribution if it is made in the shareholder’s capacity as such.

“These general rules, unambiguously stated at the outset of the section 301 regulations, necessarily apply to (and limit) the subsequent, more granular provisions. Those subsequent provisions often refer to “distributions to shareholders” or “property transferred by a corporation to a shareholder,” without explicitly saying–each and every time–that the distribution or transfer is being made to the shareholder “in his capacity as such.” But there was no need for Treasury to include that verbiage in these more granular provisions because the general rules stated at the outset limit the scope of the regulations to distributions by a corporation with respect to its stock.” 156 T. C. 9, at pp. 18-19. (Footnote omitted).

And since it’s compensation, it’s subject to FICA/FUTA. Adopting 6 Cir would mean an employer could give each employee a couple shares stock (hi again, Judge Holmes) and dodge withholding on the benefits.

Finally, Ruben and Martha elected to have their Sub S taxed as a partnership, and there are no Section 301 “distributions” to partnerships.

Ch J Foley, and Judges Gale, Gustafson, Paris, Morrison, Kerrigan, Buch, Nega, Pugh, Ashford, Urda, Copeland, Jones, Toro, Greaves, Marshall, and Weiler all agree.

I bet IRS is hoping Ruben’s trusty attorney appeals.

For those coming late to the party, and therefore puzzled by the title first set forth at the head hereof (as my expensive colleagues would say), dig my blogpost “More TEFRA Tohubohu,” 9/12/17. Judge Mark V Holmes will explain.

Today Judge Patrick J (“Scholar Pat”) Urda eschews Genesis 1:2 in the original, but brings order to the random walk that is pretrial document discovery in Janet R. Braen, et al., Docket No. 24929-17, filed 4/9/21.

As is not uncommon, the joust is about what the Braens did or didn’t produce.

Seems this is a conservation easement case, and the original cost of the land is at issue. IRS asked for some documents on the very last permissible day before the pretrial discovery cutoff hit. This was preceded by two (count ’em, two) years’ worth of demands and productions.

The Braens claim that they don’t have, or can’t find, some stuff, and Judge Scholar Pat is down with that.

For the rest, Judge Scholar Pat tosses the problem back to the parties.

“We note that trial is less than a month away and that the Commissioner did not file the motion to compel discovery until the last day of the discovery period. In this circumstance, we will give the Braens a slight reprieve. If documents responsive to request number 2 have already been produced in response to other formal or informal discovery requests, they do not need to produce the documents again (unless they so choose) and may instead identify those documents and the date of previous production in a written response to the Commissioner. Should the Braens fail to comply with this order, the Commissioner may file an appropriate motion.” Order, at p. 2. And Scholar Pat gives the Braens just over a week to do it.

IRS’ counsel is unhappy with the organization of the documents they did get. The Braens claim that’s how they keep records in the ordinary course of their business.

“The Commissioner also takes issue with the organization of the Braens’ document production, faulting them for failing to correlate the response with a request. Our rules do not impose such an obligation. Rule 72(b)(3) provides that ‘[a] party shall produce documents as they are kept in the usual course of business or shall organize and label them to correspond to the categories in the request.’ Here, the Braens have produced the documents as they are kept in the usual course of business, which is a permissible method of production.” Order, at p. 4.

Maybe there should be an embargo on those “win your case at discovery” CLEs. Too much tohubohu, too little progress in resolving the case.

Edit to add, 4/26/21: No, not a conservation easement. Listening in on the trial today (wretched voice quality), looks like a bargain sale to a municipality. But a valuation case, nevertheless.

Combing through the Tax Court orders for blogfodder today, with nary an opinion or press release in sight, I came upon a motion and a name that brought back memories.

Ryszard Sala, Docket No. 3423-21, filed 4/8/21, has an attorney. We all know that attorneys must e-file in Tax Court.

Except.

Old Bill Wise is still in there pitching. Having once again moved for such relief, Ch J Maurice B (“Mighty Mo”) Foley graciously allows that “William J. Wise is exempted from efiling requirements for purposes of this proceeding.” Order, at p. 1.

All y’all must surely remember Old Bill, eh what? No? Old Bill has been around practicing law in Tax Court for sixty-two (count ’em, sixty-two) years. See my blogpost “(Old) Technophobes, Rejoice!” 12/18/13.

On a day when my internet crashed and I shot three hours trying to get minimal service restored, I needed something to make me feel so young. Old Bill, thanks. Joe Myrow and Mack Gordon got it right.

I’ve been looking for a chance to echo Niagara Falls’ gift to the internet gearjammers. I thank Andrew Mitchell Berry and Sara Berry, 2021 T. C. Memo. 42, filed 4/7/21, Andy’s brother Ronald Gene, and their (nonworking) 68 Camaro, for giving me the chance. But ex-Ch J L Paige (“Iron Fist”) Marvel shuts ’em down.

Mostly it’s an indocumentado with the Section 274 overlay. Andy and RG claim that the $250K they got from a client of their construction company to convert an old nursery into condos was trust funds, for which they got oral OKs from said client by telephone to disburse. They did some building, but also disbursed funds to pay for the auto racing.

Except the Camaro never ran in year at issue. So we get the “goofy regulation” hobby loss into the mix.

Andy and RG want a BoP shift, but since they never gave the RA any paper on the audit, they’re out under Section 7491(a)(2).

Andy and RG were sole signatories on the “trust fund” account, there was only a notation on the check that funded the account that it was for the condo project, and ex-Ch J Iron Fist doesn’t buy the telephonic OKs.

At best the racing car was a start-up. The argument that it served to advertise the construction business founders.

“Although petitioners testified that the 68 Camaro featured advertising for [construction business] and that they met business contacts at the racetracks, no company logo or wordmark is visible in the only photograph of the car in the record, and the record lacks any credible evidence that those contacts led to any business for [construction business].” 2021 T. C. Memo. 42, at pp. 14-15. (Footnote omitted, but ya gotta love it).

“The photograph was a side view of the car taken at a race Andrew won in [year after year at issue]. Petitioners first testified that there was a [construction business] sticker on the side of the car but, after viewing the photograph, claimed the sticker was on the car’s rear window.” 2021 T. C. Memo. 42, at p. 14, footnote 6.

I’ve been told I write the most entertaining tax blog. Maybe so, but I must give credit to the Tax Court Bench and the litigants who appear before them. I hope they all keep revving their engines for many years to come.

TEFRA, the dinosaur lumbering towards extinction, still leaves footprints in its wake. Today, it leaves its mark on bankruptcy, even when the bankruptcy case is dismissed. So Eric Hall is left by the roadside, in Roadhouse Wines, Eric Hall, A Partner Other Than The Tax Matters Partner, 17109-019, filed 4/7/21.

Judge Kathleen Kerrigan tosses Eric, who wanted in as a partner other than the tax matterer. Eric petitioned the FPAA for the year at issue when the tax matterer did not, claiming Section 6226(b) weigh-in rights. Two (count ’em, two) years after the year at issue, Eric had filed Chapter 13 wage-earner. When he petitioned in USBCNDCA, Eric hadn’t filed his own 1040 for year at issue,

Eric’s bankruptcy petition gets tossed for failure to convert to Chapter 7 per 11USC§1307(c). Not discouraged thereby, Eric tries to file an amended Form 1065 for Roadhouse six years after the year at issue.

Seven (count ’em, seven) years after year at issue, and five years after Eric’s bankruptcy toss, Eric petitions the FPAA.

“No partner may file a petition under section 6226(b) unless such partner would be treated as a party to the proceeding. Sec. 6226(d)(2). Generally, each person who was a partner during the taxable year is treated as a party to an action filed pursuant to section 6226(b). Sec. 6226(c)(1). However, a partner is not treated as a party if the partnership items of such partner for the partnership taxable year became nonpartnership items by reason of one or more of the events described in section 6231(b), which events include conversion by reason of the partner’s filing of a bankruptcy petition. Secs. 6226(d)(1), 6231(b)(1)(D), 6231(c)(1)(E); sec. 301.6231(c)-7(a), Proced. & Admin Regs..” Order, at p. 3.

Though her explanation is a little jumbled, Judge Kerrigan sets it all out.

“Upon the filing of a petition in bankruptcy, a partner’s partnership items convert to non-partnership items if certain conditions are present and consequently, such partner no longer has an interest in the outcome of these proceedings. The partner’s partnership items convert into nonpartnership items as the filing of the date of the petitioner, if: (1) the partner is named as a debtor in the petition; (2) the partnership’s taxable year has ended prior to the filing of the petitioner; and (3) the government was able to file a claim in bankruptcy for the tax attributable to the partnership items.” Order, at p. 3. (Citations omitted).

Judge, I think you meant “The partner’s partnership items convert into nonpartnership items as of the date of the filing of the petition.” Bankruptcy courts don’t file the petitioner’s date, or the petitioner, much as the creditors might wish.

Howbeit, IRS had a chance to file as creditor in Eric’s abortive bankruptcy proceeding. And of course the year at issue was long since over.

That Eric’s bankruptcy petition got tossed doesn’t matter; it was filed, and IRS put in its claim.

March out Eric.

In my long and checkered career I never heard a client tell me that when I asked how s/he had calculated or derived some figure. But ex Tax Court semper aliquid novi, as Aristotle (or Pliny the Elder, or whoever) remarked never.

STJ Diana L (“The Taxpayer’s Friend”) Leyden has an off-the-bencher to prove the foregoing. Fwazi Nona, Docket No. 6514-20S, filed 4/7/20, “…has a bachelor’s degree in accounting, with a minor in finance, and is currently employed as an IRS revenue agent.” Transcript, at p. 5.

That’s someone who does audits.

Fwazi claims $10K of Sched A deductions, and Sched C other expenses of $500; (b) travel expenses of $600; (c) taxes and licenses expenses of $200; (d) supplies expenses of $250; (e) office expenses of $700; (f) legal and professional services expenses of $250; (g) insurance (other than health) expenses of $600; (h) car and truck expenses of $12,156; and (i) advertising expenses of $500; and a Schedule D loss of $3,000.” Transcript, at pp. 4-5.

And how does Fwazi come up with these numbers?

“When petitioner was questioned as to how he came up with the dollar amounts for his claimed deductions his response was ‘I guessed.’ He did not track his expenses and did not provide the Court with any evidence to substantiate his claimed deductions. Petitioner also acknowledged that these expenses he claimed as deductions under Schedule C were in fact expenses he incurred as an employee and should have been claimed on Schedule A. Either way petitioner did not substantiate any of his claimed deductions and thus, the Court sustains respondent’s proposed disallowance of these expenses.” Transcript, at p. 8.

Fwazi, you made my day.