Unlike the glass through which a much more exalted personage even than Judge Albert G (“Scholar Al”) Lauber looked, this is the story of the solar lenses at the base of the tax scam known as RaPower3. RaP3 was based on energy production credits for the employment of Fresnel lenses (plastic, not glass), supposed to enhance electricity production.

Except the lenses only generated write-offs, not electricity.

Preston Olsen and Elizabeth Olsen, 2021 T. C. Memo. 41, filed 4/6/21, were but one of the more than 200 (count ’em, 200) cases breathlessly awaiting the outcome of the two conjoined Olsen cases.

The Olsens were investors in the scheme propounded by Mr. Neldon Johnson. I’m sure my readers will be glad I eschewed any Olsen & Johnson references, though great was the temptation.

The lenses never worked, at least on a commercial scale. Many broke, and others lay in warehouses, untouched. The Johnson family and friends reaped a bountiful harvest of investor dollars. Check out 2021 T.C. Memo. 41, at pp. 4-7. Finally, the Feds stepped in, and USDCDUT shut down Ra3 and its siblings, and caused the Johnsons to disgorge. 10 Cir was down with that.

The deal was strictly a passive investment with a minimal downpayment and a nonrecourse note (which was never enforced), papered to look like an active trade or business. Preston was “was supposedly “’free to work as little * * * as he would like in his solar business.’” 2021 T. C. Memo. 41, at p. 9.

And Preston didn’t have to pay the note “until after you get your money back from the Dept. of Treasury.” 2021 T. C. Memo. 41, at p. 10. And if the tax law changed, Preston could bail on the any excess he owed. 2021 T. C. Memo. 41, at p. 11. There was a supposed bonus deal if the generated electricity sales exceeded a European telephone number with country code, but that was strictly so that it “’shoots down the IRS theory that you became involved only for the tax benefits. Needless to say, petitioner received no bonus payments.” 2021 T. C. Memo. 41, at p. 12.

Preston actually visited the site, but just saw what he called “looks a little like junk,” 2021 T. C. Memo. 41, at p. 14.

Judge Scholar Al blows off Preston’s claimed travel expenses to scope out the junk.

I should point out that Preston was a partner, specializing in municipal finance, in a Salt Lake City white-shoe. He first thought the deal too good to be true, but went in anyway when he discovered he owed a lot of tax. 2021 T. C. Memo, 41, at pp. 8, 11. I am amazed that he thought this would fly.

Preston and Elizabeth used a CPA who prepared returns for other dodgers…I mean investors, but who bailed after two years’ worth, as IRS was on the case. His recommended successor held on for a year, handed off to a successor who suggested trying an equipment leasing dodge, until IRS handed Preston and Elizabeth the SNODs at issue here.

IRS’ expert visited the site, and found it was a junkyard.

The Johnsons produced their own expert, who “… opined that Mr. Johnson’s system was ‘technically viable to generate electricity,’ but he acknowledged that he did not actually observe any electricity being produced. He testified that Mr. Johnson ‘activated the system’ for a 30-minute period, but the system ‘wasn’t connected to anything’ and ‘wasn’t putting anything on the [electric] grid.’ However, he said he was impressed by Mr. Johnson’s ‘creativity.’” 2021 T. C. Memo. 41, at p. 21.

So am I. Great creativity, but us taxpayers aren’t paying for creative swindles. [Editorial comment.]

OK, no trade or business. No business activity. Preston was strictly passive. And no income produced. Judge Scholar Al does the trudge through the “goofy regulation,” Reg. Section 1.183-2(b) and finds a short circuit. Preston never showed that the lenses he bought, or leased, or whatever, were ever placed in service, that is, set up and ready to go do what they were supposed to do. They don’t have to do it, just be ready to do it. Here, there was no testing, no permitting, no documentation.

And the passive losses, against which there was no passive income, were disallowed for the energy credits in the years at issue.

But the Boss Hoss gallops to the rescue. IRS got no Section 6751(b) Boss Hoss sign-off before whanging Preston and Elizabeth with chops.

No, not a newly-discovered Britcom about a London department store; this is Ch J Maurice B (“Mighty Mo”) Foley’s latest outreach.

He’s seeking “talented and underserved undergraduate or graduate students interested in careers with the federal government” to explore (via the internet) “the inner workings of the U.S. Tax Court, including the opportunity to observe judges and lawyers; attend virtual trials, meetings, and presentations; and assist on projects with departments throughout the Court, including Case Services, Facilities, Finance, Human Resources, Information Technology, Library, and Public Affairs.”

And get paid.

Here’s the skinny: https://ustaxcourt.gov/resources/press/04052021.pdf

And I do fondly hope that these talented and underserved explorers will figure out how to provide links to opinions and orders, so I may link to them in this my blog. And maybe even provide word-searchable online access to all orders and opinions, past and present. Just like the old system that worked so well before the Genius Baristas got hold of the site, and foisted this abomination upon a public that never did them any harm.

So sign up, one and all.

I’ve written about the collision between Workers’ Compensation and Social Security Disability Income, and its knock-on effect on income tax. See my blogpost “Public Service Announcement,” 1/25/21.

Today Judge Nega has an off-the-bencher about the collision between Social Security and the Affordable Care Act, and the inevitable knock-on effect aforesaid.

Here’s Carmen P. Argenziano & Virginia A. Argenziano, Docket No. 18782-19S, filed 4/5/21. It’s Virginia’s problem. Both Carmen and Virginia got Advance Premium Tax Credits for their ACA cover through the FL marketplace; Carmen took Virginia out of the marketplace after the first quarter of year at issue, but stayed in himself.

At some point that year, Virginia got $166K from the Social Security Administration. Except $35K was taken therefrom by her trusty attorney. But their MFJ 1040 omitted Form 8962, reconciling their income with the APTCs they got.

IRS did not omit sending a SNOD to Carmen and Virginia. And Carmen and Virginia did not omit a timely petition.

With the taxable share of the $166K reckoned in, Carmen and Virginia were miles over the 400% poverty line, thus their APTC was zero, not the $10K they claimed.

Carmen and Virginia want the $35K her trusty attorney got taken out of the AGI number.

“In general, income is taxed to the person earning it, even if the right to receive the income is contractually assigned to another person before it is earned. Under this principle, the amount of benefits reported as attorney fees…is considered an amount received by petitioners, even though the SSA paid an attorney the reported fee amount. Petitioners received the benefit from these funds in the form of payment for services required to obtain petitioner wife’s benefits.” Transcript, at pp. 7-8. (Citations omitted).

I make that a 22% contingency fee; par for the course. Cap is 25%; see CFR §416.1530(b).

And the back-end catch-up when actual year’s AGI meets estimated wrong-foots Carmen and Virginia, as it has so many others.

“Petitioners advance they had no knowledge that they would receive back pay from the SSA in the form of a lump-sum payment at the time they were enrolling in the marketplace and that the marketplace instructed them to consider only expected income for [year at issue] when applying for insurance coverage.” Transcript, at p. 8.

The problem is that AGI is increased by whatever Social Security benefits were excluded pursuant to a Section 86(e) election to exclude current year payments for prior years’ benefits.

See my blogpost, “Oh MAGI, I Wish I’d Never Seen Your Face,” 3/11/19. The excluded $166K is the culprit.

“Petitioners’ remaining contentions involve their rights as taxpayers and the alleged lack of accurate information provided by the ACA marketplace application process. Although we are sympathetic to petitioners’ situation, we are not a court of equity, and we cannot ignore the law to achieve an equitable end. The statute is clear: excess APTCs are treated as an increase in the individual’s income tax liability for that taxable year. Sec. 36B(f)(2)(A). Petitioners received APTCs to which they were ultimately not entitled as a result of the lump-sum payment from the SSA.” Transcript, at pp. 11-12. (Citations omitted).

Judge Nega doesn’t state who prepared Carmen’s and Virginia’s return. As chops aren’t mentioned, perhaps IRS waived them. But if there were a paid preparer, that person has already gotten The Phone Call.

Folded-In

My late and much-lamented colleague Stan had a favorite phrase: “Lo and behold!” I can hear his voice as I note the unsealing (or unStealthing) of Kennith Lee and Cathy Lee, Docket No. 20765-19, filed 4/5/21.

I hasten to state that I do not take credit for the foregoing unsealing (or unStealthing). Post hoc, propter hoc remains as fallacious as ever, but it does bring a grimace to my battered visage when I do a bird of Svithjod on Vic Lundy’s granite façade.

Kin and Cath got five (count ’em, five) NODs for nine (count ’em, nine) years’ worth of taxes. Back in 2017, Kin copped to one year of filing a false return, and admitted to underreporting four years. “Petitioners’ underlying tax liabilities in this case arose from their failure to pay the entire income tax reported for the 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, and 2017 taxable years and restitution-based assessments for the 2008, 2009, 2010, and 2011 taxable years.” Transcript, at pp. 4-5.

Kin wanted an IA folding in the current year’s taxes, but he’d defaulted on IAs in the past, hadn’t paid estimateds for ten years, and was unresponsive when the SO said no fold-in.

Cath wanted innocent spousery, but the SO wasn’t buying. And Cath wanted the present year fold-in; ditto. No further input from Cath, so SO closed the file and NODed.

True, the IRM permits a fold-in of unassessed but current liabilities; IRM pt. 5.14.1.4.2(18) (Sept. 19, 2014) (“If it appears a taxpayer will have a balance due at the end of the current year, the accrued liability may be included in an agreement”). But that’s not mandatory, and Tax Court had held a bunch of times that fold-ins are not required. Especially is that so where the taxpayer has a shady record.

“Based on the circumstances in this case and the testimony proffered at trial, we find no abuse of discretion in the SO declining to include petitioners’ estimated tax liabilities for the 2019 taxable year in the proposed installment agreement and conditioning her acceptance of the agreement on petitioners’ payment of those liabilities, especially given petitioners’ history of noncompliance in paying their estimated taxes for the last ten years and defaults on previous installment agreements.” Transcript, at p. 14.

IRS won’t fold. And wins.

I want to acknowledge Judge Nega’s careful phraseology; a person acting by virtue of a  Form 2848 is a “representative,” not a Power of Attorney.

And to thank the Genius Baristas for unsealing this opinion. For whatever reason.

Clicking just now (1:10 p.m., EDT) on the “Opinions” link on the Tax Court’s new, improved (ya gotta be kidding, right?), jim-handy DAWSON website, I find an off-the-bencher from Judge Nega, Kennith Lee & Kathy Lee, 20675-19L, filed 4/5/21.

Except I don’t.

All there is, is page 1, announcing the opinion and directing the Clerk to send the transcript to parties and counsel. No text of the opinion.

A docket search reveals the file is sealed.

Perhaps it might be well, when a case file is sealed, to indicate that fact in the docket number, as small-claimer and lien & levy cases are marked. How about a prefix, like STL?

I objected last month (not for the first time) to the new rule, apparently parthenogenesized by the Genius Baristas who brought us DAWSON, that if one document in a case is sealed, each and every part of the whole case is sealed.

So what price Rule 27? If it’s obsolete, it should be stricken from the Court rules. If it still has force, to what extent? Must one surry on down to the stoned soul picnic in the locked-down Glasshouse, and bang fruitlessly on the doors? Can one phone in requests for the unsealed documents via the fitty-cent, three-buck cap?

Or will we go back to the old system, which worked well for years?

I can understand the confusion, given the high volume of cases and the virus-induced need to teletubby. But Judge David Gustafson waved off Dean Kalivas last October, when Dean tried to amend his petition but missed the cutoff. See my blogpost “Judge On A Tear – Frivolite Beware!” 10/20/20.

Today Ch J Maurice B (“Mighty Mo”) Foley is dealing with a proposed amendment in Geri M. McNeil, et al, Docket No. 25394-17, filed 4/2/21. It’s all about Dean, the et al., who asked to file an amendment to his petition last month.

Ch J Mighty Mo directs IRS to make known any objection.

What about Judge Gustafson? Was he taken off the case? Maybe I missed the order that did, or maybe the bankruptcy proceedings Dean and Geri were involved in automatically took Judge David Gustafson off the case. Whatever, I would have thought Judge David Gustafson’s order last October is law of the case on the filing of an amended petition. And that order didn’t say “without prejudice.”

But maybe Ch J. Mighty Mo was distracted by IRS’ motion for a new trial. A quick docket search doesn’t show an old trial. Howbeit, Ch J Mighty Mo charitably recharacterizes this as a motion to calendar for trial. How that interfaces with Dean’s try for an amendment to his petition will be interesting to watch.

But in the Courtroom

I’ve been on the case of CLE providers for a long time. “Win your case at discovery” is a long-time favorite of theirs. That movement has produced spin-offs, like winning with pleadings, press and media management, jury selection, and whatnot. The end is not yet in sight.

Hence the title first above set forth at the head hereof, as my sequestered-with-a-Grey-Goose-Gibson colleagues might say.

Why go through a messy trial, with unreliable witnesses, high-priced experts who regularly get shredded on the stand, jurors who might think for themselves, judges who sustain adversaries’ objections and deny ours, hours of preparation, straining to get stuff into evidence against a barrage of flak, endless client handholding, and sweating out verdicts?

Since IRS’ counsel spend far more trial time in US Tax Court than even the hardiest perennials of the Tax Court petitioners’ Bar, I don’t fault the IRS counsel in Bernand T. Swift, Jr. & Kathy L. Swift, Docket No. 13705-16, filed 4/1/21. And it’s no April Fools’ Joke.

Judge Patrick J (“Scholar Pat”) Urda had already fielded a bunch motions in limine (hi, Judge Holmes) last month.

“Two weeks before trial, respondent filed three additional motions in limine. In his first and second motions, respondent asks us to overrule 17 hearsay objections and over 300 relevance objections the Swifts reserved with respect to certain paragraphs and exhibits of the amended first stipulation of facts and the first supplement to it. In his third motion, he requests that we admit over 190 proposed trial exhibits into evidence over relevance and hearsay objections by the Swifts. A week later, the Swifts filed oppositions to each motion broadly sketching the nature of their objections.” Order, at p. 1.

Looks like counsel for both sides (anonymous, thanks to the veil DAWSON spreads over counsels’ appearances; is somebody afraid of the public finding out something?) are running the same play, but IRS is trying to prove that the race is not to the Swift (sorry, guys).

Judge Scholar Pat is not playing.

“At this point in the pre-trial process, the Court is unable to discern the merits of the parties’ respective positions. Accordingly, we will deny respondent’s motions without prejudice so that we might have the opportunity to consider these arguments as to admissibility in the context of trial.” Order, at p. 1.

Judge Scholar Pat rightly eschews these fancy-Dan manœuvres. Go try the case.

Edited to add, 4/2/21: Turns out one can find counsels’ appearances by getting the printable docket list on the Tax Court website. This useful information was buried in a 3/7/21 release note. Why the same information could not be included in the online, non-print version is nowhere explained.

Doubtless y’all will recall we left Complex Media last month with a Rule 155 beancount, after the Complexes were let off the hook on their Section 351 tax-free incorporation, to reckon up the effects of their sale, specifically some Section 197 IP intangibles.

Refresh your recollection with my blogpost “A Challenge,” 2/10/21. And get those crutches and that large whiskey I spoke of then ready. Judge James S. (“Big Jim”) Halpern has 103 (count ’em, 103) pages of REVISION of the Complexes’ saga in Complex Media, Inc., 2021 T. C. Memo. 14 (REVISED), filed 3/31/21.

The Section 197s need to be created post-8/10/93 (check), need to be used in a trade or business (here magazine-publishing; check), and mustn’t be self-created (here created by seller; check).

But if you’re the lucky recipient of these in a Section 351, you get the transferor’s basis (here seller-created, wherefore basis is bupkis, if you’ll pardon an arcane technical term).

Judge Big Jim, no mean unscrambler of multilevel, multiparty corporate fritattas, called for help. “Identifying the issues that remain for decision has proved to be a challenge, leading to our request that the parties address in supplemental briefs a series of questions posed in an order dated April 24, 2020. Our efforts were not entirely successful.” 2021 T. C. Memo. 14 REVISED, at p. 21.

The parties seem to agree that the deal was a Section 351 tax-free incorporation. If it were a sale, the Complexes’ basis in the Section 197s would have been north of $7 million, with taxes to the seller to match.

But the deal goes out of control because of the buyout of the dissentient partner. The $3 million cash supposedly paid to acquire these Section 197s was in fact paid to the departing partner. He turned in the shares he got in the tax-free incorporation immediately and got said cash. That breaks the 80% control group required to comply with Section 351. In short, a give-and-go torpedoes the tax-free exchange.

Trying to rope in the preferred shareholders of the acquirer doesn’t help, as they didn’t get back the same stock they gave up. Anyway, they didn’t control the acquirer, as they needed one of the common shareholders to go along.

And the duty of consistency requires the Complexes to stick to their story.

But the story doesn’t end there.

“In sum, petitioner’s ineligibility to invoke grounds that would render its contracts unenforceable or call into question respondent’s interpretation of those contracts does not prevent it from disavowing the form of the transactions implemented under them.” 2021 T. C. Memo. 14 REVISED, at p. 55.

But what must the disavower prove in order to escape from the deal it created?

“…we now conclude that the additional burden the taxpayer has to meet in disavowing transactional form relates not to the quantum of evidence but instead to its content–not how much evidence but what that evidence must show by the usual preponderance. The Commissioner can succeed in disregarding the form of a transaction by showing that the form in which the taxpayer cast the transaction does not reflect its economic substance. For the taxpayer to disavow the form it chose (or at least acquiesced to), it must make that showing and more. In particular, the taxpayer must establish that the form of the transaction was not chosen for the purpose of obtaining tax benefits… that are inconsistent with those the taxpayer seeks through disregarding that form.” 2021 T. C. Memo. 14 REVISED, at p. 64. (Emphasis by the Court).

After a lengthy probe of tax consequences, Judge Big Jim finds that the Complexes aren’t trying for tax consequences other than they had sought. “Substance over form” applies to taxpayers as well as to IRS.

But there’s still the problem of valuing what the Complexes got. They got cash and a note, and tangibles as well. But the note, calling for future payment, wasn’t worth face value. And the value of the rest isn’t clear either. So our old friend Cohan is reprised, and the Section 1060 and Rev Rul. 68-55 play their parts.

And when the dust settles, we get a Rule 155 beancount again. Mark Twain got it right: “Well you’ve got to admire men that deal in ideas of that size and can tote them around without crutches.”

Today, for the first time, there are 400 (count ’em, 400) followers of this my blog.

Ward MacAllister and Mrs. Astor, thou should’st both be living at this hour.