Richmond Patients Group, 2020 T. C. Memo. 52, filed 5/4/20, is, once again, the story of a pottery trying to dodge the Section 280E traffic.

And, once again, COGS are on the menu. Section 280E, as I have exhaustively (and exhaustingly) blogged, bans Section 162 ordinaries-and-necessaries for potteries. But COGS (Costs Of Goods Sold) aren’t deductions, rather adjustments to gross receipts to establish gross income. Potteries sell pot, so keep inventory, hence can use COGS to offset gross receipts.

RPG is taxed as a C Corp. Getting their Section 162s decimated in Year One, they try a change in accounting method to try capitalizing via Section 263A what they can’t deduct via Section 162. Judge Kerrigan isn’t having any.

“Section 263A includes in COGS only expenses that are otherwise deductible. Sec. 263A(a)(2). Section 280E prohibits taxpayers from taking business deductions under section 162. Therefore, section 263A does not allow Richmond to capitalize indirect costs into COGS that it would not otherwise be able to deduct.” 2020 T. C. Memo. 52, at p. 15.

So overboard go deductions for “rents, compensation of officers, salaries and wages, repairs and maintenance, taxes and licenses, charitable contributions, depreciation, pension and profit sharing plans, employee benefit programs, and other expenses.” 2020 T. C. Memo. 52, at p. 14.

But IRS does give RPG testing and packaging in COGS, 2020 T. C. Memo. 52, at p. 11.

RPG wants to claim it’s a producer, and so get Section 471 indirect costs into their COGS.

Judge Kerrigan tells them they’re smoking…you know the rest.

“…Richmond did not provide live plants, clones, or seeds to its members. Richmond was under no obligation to purchase what its member providers offered for sale. Rather, it purchased bulk marijuana grown by its members for resale. Member providers trimmed the marijuana flowers before Richmond purchased them. No improvements were made to the marijuana from the time it was purchased to the time it was sold. Richmond inspected, sent out for testing, trimmed, dried and maintained the stock, and packaged and labeled marijuana. These activities are those of a reseller and not a producer.” Order, at p. 16. (Citation omitted).

As RPG is taxed as a C Corp, no need for Boss Hossery (that’s for individuals), and RPG didn’t raise it anyway. Besides, IRS had a Section 6751(b) sign-off dated the same day as the thirty-day letter.

I’m frustrated when I think I have a good blogpost, but I can only see one side of the story. Then I have to hedge, pussyfoot and weasel-word, which I would decry in someone else’s piece. Here I must so do, lest I be convicted of having laid blame unjustly.

So perhaps Kent Trembly, Docket No. 25068-17L, filed 5/4/20, may have been right to tell his erstwhile trusty attorney (whom I’ll again call Howie) that “his services are no longer needed or required.” Order, at p. 1.

All y’all will recollect that Judge Gale let Howie off a nonfiled response to an IRS motion for partial summary J, because Corona. And I had a lot to say about IRS’ new tactic of supplementing such motions a couple days (hi Judge Holmes) before the date certain when petitioner’s response to the unsupplemented version was due, and not giving the petitioner extra time to respond. See my blogpost “Time Sensitivity,” 4/13/20.

True, Howie was apparently late even pre-supplement, and didn’t immediately move for more time when he got the supplement. So Kent may have been right to walk to the mound, take the baseball, and send Howie to the showers (no baseball! How awful!).

But I don’t have Howie’s side of the story. His motion papers are unavailable on line, and The Glasshouse is under lockdown, so I couldn’t see them even if I went there. Besides, as that story may involve client confidences that Howie can’t reveal, I won’t bother asking him. If I got such a call, I’d have to respond with NY RPC 1.6. I’m sure NE has the same Rule.

Frustrating.

I can see Lance M. McHarg, Docket No. 4488-20, filed 5/4/20, turning to his trusty attorney (whom I’ll call Josquin) and asking why.

Lance sent a letter to Tax Court, which Ch J Maurice B (“Mighty Mo”) Foley’s minions treated as a petition. Ch J Mighty Mo laid the usual “amend and ante up” order on Lance, whereupon Josquin filed Form 7 and delivered Lance’s sixty Georges.

Now all my sophisticated readers, even though socially-distanced, will shout through their m95s, “No, Rule 23, you need a properly signed original wet-ink Amended Petition.”

And so says Ch J Mighty Mo: “…on or before May 29, 2020, petitioner shall file with the Court IN PAPER FORM a Ratification of Amended Petition, bearing petitioner’s original signature (preferably in blue ink)….” Order, at p. 1. (Emphasis by the Court).

And, of course, if Lance doesn’t so file, the Court may dismiss the petition for want of jurisdiction.

Except.

How exactly does Lance file this Amended Petition? By USPS mail? PDS?

The following prominently appears on the main Tax Court website:

” Mail sent by standard delivery of the United States Postal Service is being held while the Tax Court building is closed. Items sent through the United States Postal Service or a designated delivery service (such as FedEx or UPS) may, however, be returned as undeliverable. If a document sent to the Court is returned, resend the document to the Court as soon as possible after the Court announces it has resumed receiving mail. Please include with your resubmission a copy of the original envelope or container in which it was first sent. You should retain a copy of any document sent to the Court.”

So Lance should file twice? Once, to comply with the aforesaid order, and, when the first filing gets bounced back to him, file again whenever the current snail-mail embargo gets lifted? And move to vacate if he gets bounced in the meantime?

I guess Lance and Josquin both will ask why.

So do I. Why?

This May Day is not the first day I have asked the above-entitled question. Often, it seems almost no one does, when, in exchange for a carefully-wrought post, I get a couple dozen views (hi, Judge Holmes) from fewer than two-handsful of viewers. Then at rare whiles I post nothing and the floodgates open. But “likes”? I average one “like” for seventy-five posts.

A blogger’s lot is not a happy one. Generally.

Except.

Yesterday I animadverted to Judge Gale’s decree that all the world, being taxed and petitioning same, should be run by electricity. See my blogpost “The Whole Country Had Ought to Be Run by Electricity,” 4/30/20.

Now in that blogpost aforementioned and above-cited (as my high-priced and highly-sheltered-in-place colleagues would say), I noted Judge Gale, like a much more exalted personage, was breathing out threatenings and slaughter against the noncompliant. He would toss their petitions for want of prosecution, as Ch J Maurice B (“Mighty Mo”) Foley would toss those who didn’t ante the sixty George big blind on the spot.

But today, the breathings against the Omaha technophobes and internetedly-unconnected have abated.

Here, solely by way of illustration of the foregoing (as the aforesaid colleagues would say), are Calvin David Goding and Susan Lee Goding, Docket No. 19480-19S, filed 5/1/20.

Note that, at page 2 of said order, yesterday’s breathing is omitted today. “The failure of a petitioner (or intervenor) to comply with this Order may result in the Court dismissing this case for lack of prosecution and entering a decision in favor of respondent,” has vanished.

See supra at the head hereof.

Congress picked up on Whistleblower 21276-12W in 2018, after Judge Julian I Jacobs and I had done two years earlier; see my blogpost “Dares or Forfeits,” 8/3/16. Then Congress codified the result, that whistleblower awards aren’t limited to Title 26 money, but include, without limitation, fines, forfeits and FBARs.

So Bradley Birkenfeld, Docket No. 9896-17W, filed 5/1/20, wants the $2.22 million IRS admits they owe him from the Title 26ers he delivered. And he wants ex-Ch J Michael B (“Iron Mike”) Thornton to make the Ogden Sunseteers fork over his piece of the FBAR chop money IRS got from the 47 (count ‘em, 47) dodgers Brad served up for them.

Ex-Ch J Iron Mike punts the whole thing back to Ogden.

“The parties agree that the Whistleblower Office’s determination is deficient in failing to consider whether non-Title 26 proceeds were collected as a result of petitioner’s information regarding the 47 taxpayers. Respondent has moved to remand this case to the Whistleblower Office to analyze whether any non-Title 26 proceeds were collected from any of the 47 taxpayers and to issue a new determination. Petitioner’s position about respondent’s motion for remand seems to have evolved over time. In petitioner’s initial response to respondent’s motion for remand, petitioner stated that he ‘is not opposed to Respondent’s Motion to Remand if the remand will lead to the development of a complete administrative record, and if limitations are put in place to prevent the remand from leading to further unnecessary delay.’ In more recent filings with the Court, however, petitioner opposes remand as ‘completely unnecessary.’ Petitioner seems to suggest that instead of remanding this case to the Whistleblower Office this Court should decide the question, not passed on by the Whistleblower Office, as to how much of an award, if any, petitioner might be entitled to as a result of non-Title 26 proceeds collected as a result of the information he provided.” Order, at p. 4.

Tax Court isn’t going to unscramble this frittata.

Ex-Ch J Iron Mike will keep jurisdiction, to insure the OS act swiftly. Congress’ codification of the all-proceeds rule came between Brad’s petition and this remand request, so that’s a new wrinkle deserving of remand. Tax Court has to decide based on the administrative record, and everyone agrees that isn’t complete; whistleblower cases don’t get tried de novo in Tax Court.

And Brad’s motion for more discovery can await the result of the remand.

In any case, Brad doesn’t get his loot until all is said and done.

“In petitioner’s motion for partial summary judgment, petitioner requests an adjudication that he is entitled to ‘immediate payment’ of the $2,229,553 award that the Whistleblower Office determined based solely on the Title 26 collected proceeds. The relevant regulations provide: Payment of an award will be made as promptly as the circumstances permit, but not until there has been a final determination of tax with respect to the action(s), as defined in paragraph (d)(2) of this section, the Whistleblower Office has determined the award, and all appeals of the Whistleblower Office’s determination are final or the whistleblower has executed an award consent form agreeing to the amount of the award and waiving the whistleblower’s right to appeal the determination.” Sec. 301.7623-4(d)(1), Proced. & Admin. Regs. (emphasis added).” Order, at p. 6.

There’s nothing worth discussing so far among the orders issuing today from the off-site computers, now the loci tenens of US Tax Court. But on the Tax Court website there is a reference to Notice 2020-23, 4/9/20, which I blogged at the time without much thought; see my blogpost “Le Quinzième Juillet,” 4/10/20.

In the further editing I did to that blogpost, I danced around the issue I now raise.

Section 6213 sets firm filing deadlines for petitions from SNODs, and Section 6330 does likewise for petitions from NITL NODs. That these deadlines are jurisdictional, and not affirmative defenses, rests on the stays of collection and other enforcement actions therein set forth. This is a necessary corollary to the Section 7421 Anti-Injunction Act, which bars any injunction of IRS’ powers of collecting the revenue. Filing a Tax Court petition serves as a preliminary injunction (what we State courtiers call a temporary restraining order, or TRO), preventing IRS from doing the Assyrian while determination of the petition is pending, thus putting a loophole in Section 7421. And Congress obviously wanted to limit any such stay.

Now all the foregoing are acts of Congress. Only Congress can change an act of Congress. The Supreme Court may hold an act unConstitutional, thus unenforceable, but the act remains, however toothless. I remember a meeting with IRS representatives many years ago, when a Bar Association committee asked for restraint in enforcing a very onerous and burdensome tax lien statute. The reply was: “We are sworn to uphold the law. Meet with your Senators and Representatives.”

So how does IRS decide that the present crisis, however dire, desperate and unprecedented, allows them to set aside the law, extend the statutory period for filing, and in effect abrogate Section 7421? Or does Notice 2020-23 mean that IRS can commence collection after March 13, only to have that action reversed and set aside on July 15 if a petition is filed before then?

I entirely agree that relief is required. The requirement that petitions must be on paper, wet-inked and snail-mailed is long since outdated and burdensome. And to bounce the snail-mail filings during the current emergency, only to require them to be re-mailed whenever the emergency ends, is worse.

Lest I be contemned as a closet Libertarian, I stress that this is not a political attack on IRS or Treasury or anyone else. I impute no nefarious motives. As Prof. Paisley taught us long ago On The Hill Far Above, danger invites rescue.

But as a lawyer, I am acutely aware that human nature in unchanging. Separation of powers is the best defense against the human propensity for overreaching. The remedy must come from Congress.

According to Judge Gale, Woody Guthrie had the right idea back in 1941. In any event, all those eager petitioners clutching their sixty-buck-tickets-to-Tax-Court, who got bounced from the Omaha NE trial session back on 3/18/20, and assigned to Judge Gale’s division for case management by order of the Ch J, are now to be run by electricity.

Solely by way of illustration, here’s Connice D. Kelly & Richard Kelly, Docket No. 3935-19, filed 4/30/20, to give you the Talking Omaha song.

“As noted, mail delivery to the Tax Court has been suspended while the Tax Court’s eAccess system, including eService and eFiling, remains fully operational. In these circumstances, it is imperative that petitioners (or intervenors) who are currently filing documents with, and receiving documents from, the Court by paper mail instead register for eAccess in order to continue litigating their case. Accordingly, the Court will direct any petitioner (or any intervenor) in this case who currently receives paper service and/or files in paper form to register for eAccess within 30 days or show cause why such registration is not possible. The Court will also direct any such person to consent to eService and use eFiling in his or her case. Additionally, the Court will direct the parties to file a joint status report as set forth below.” Order, at p. 2. (Footnote omitted).

eAccess is free; IRS already uses it, so this is for petitioners.

And for the technophobes or the internetedly-unconnected, there’s this: “…on or before June 1, 2020, any petitioner (or intervenor) in this case who currently files in paper form and/or receives paper service from the Court by mail shall register for eAccess, by calling (202) 521-xxxx or emailing Admissions@ustaxcourt.gov. Any such person shall also consent to eService and use eFiling in his or her case. If any such person is unable to register for eAccess, consent to eService, and/or use eFiling, he or she shall, on or before June 1, 2020, either telephone the undersigned’s chambers administrator at (202) 521-xxxx and leave a voicemail, or send an email to X@ustaxcourt.gov, providing: (1) his or her name and docket number, (2) his or her telephone number, and (3) the reason(s) he or she is unable to register for eAccess, consent to eService, and/or use eFiling. Petitioners (and intervenors) are advised, however, that no documents can be filed with the Court at the foregoing email address or any other Court email address.” Order, at pp. 2-3 (Names and numbers omitted).

Well, now for the ancient lawyers’ question: what happens if someone doesn’t?

“The failure of a petitioner (or intervenor) to comply with this Order may result in the Court dismissing this case for lack of prosecution and entering a decision in favor of respondent.” Order, at p. 3.

And to wile away your enforced idle hours, guys, all y’all can Zoom (or phone, or smoke signal) to IRS’ counsel and whip up “…a joint report regarding the then-present status of this case, which shall: (1) identify the issues in the case; (2) describe the information the parties have exchanged; and (3) state the progress the parties have made in resolving each of the identified issues.” Order, at p. 3.

And get same on Judge Gale’s screen on or before 6/30/20.

Judge Elizabeth A (“Tex”) Copeland warns Aaron G. Filler, Docket No. 23581-17, filed 4/29/20*, that he can’t relitigate his NOL for the year at issue, but both he and IRS can put in papers post-trial and post-briefing to show when IRS first breathed the “P” word.

That’s “P” as in penalties. Aaron contested these on trial and on brief, but that was before Clay and Frost. For those who tuned in late, for Clay, see my blogpost “Indians Not Taxed – Not!” 4/24/19. For Frost, see my blogpost “Burdens Heavy to Bear” – Part Deux,” 1/7/20.

So it’s time to set the record straight, which means maybe a reopener to establish “…whether petitioner received, prior to the…supervisory approval date, a 30-day letter or similar communication of an intent to assert a penalty as to [year at issue] and a right to appeal that penalty.” Order, at p. 2.

Now the rule for Boss Hossery is taxpayer challenges the chops from the getgo, whereupon IRS gets either burden of production (per statute) or burden of proof (per judicial interpretation) (and if you can see this practically otherwise than as a distinction without as difference you’re a better lawyer than I am). Once IRS shows dates of first communication of chops to taxpayer and Boss Hoss sign-off, petitioner can refute them, if they can.

But lest Aaron become elated, Judge Copeland has a warning: “We caution petitioner that this is not an opportunity to readdress IRS approval of his … net operating loss, and that section 6751(b) does not require the IRS to notify taxpayers of the intention to impose a penalty before taxpayers waive their appeal rights. In fact, if petitioner was unaware that the IRS intended to impose a penalty at such time, then that supports respondent’s position as to the section 6751(b) issue.” Order, at p. 3.

So, folks, out with your papers.

And thanks, Judge, for designating this order. I’d thought of blogging it, but the Anderson order absorbed a lot of oxygen. Now I see the significance.

*Aaron G Filler 23581-17 4 29 20

Not Gonna Happen

Pace Paul Simon’s 1972 hit (is it really 48 years? Oh, little darlin’ of mine, I can’t for the life of me, remember a sadder day…), the mother and child reunion will not take place. STJ Panuthos says no in William French Anderson & Kathryn D. Anderson, Docket No. 23789-16, filed 4/29/20.

STJ Panuthos is following Judge Nega’s toss of IRS’ partial summary J motion by tossing IRS’ issue preclusion try. IRS wants to prevent Wm French from claiming that a business associate, desirous of stealing the business from Wm French, got him sent up for sexually abusing a minor child. Now Wm French went all the way to the Supremes, and all he got was the same 14 (count ‘em, 14) years hard time the CA Superior Court gave him to begin with.

For the backstory, see my blogpost “Mother and Child Reunion,” 2/13/19. STJ Panuthos rules on IRS’ renewed try for a protective order redacting the names of the mother and father (and twin sister) of the abused person (now an adult). “The Court will not repeat the discussion and conclusions described in the February 13, 2019 Order. No different or new circumstances have arisen that would cause the Court to alter the prior conclusion. The Court will deny respondent’s motion for a protective order.” Order, at p. 4.

But Wm French still wants to prove he didn’t do it. He wants to deduct his legals in defending the criminal case, per Section 162 ordinary-and-necessary.

No, Wm French isn’t claiming he’s in the child-molesting business. He says he “…was the ‘Father of Gene Therapy’, that he was the former Director and founder of the Gene Therapy Laboratory at the University of Southern California and the owner of many biomedical companies around the world.” Order, at p. 2. It would seem he claims his partner(s) set him up, therefore his legals were to protect his businesses.

“We conclude that respondent has not satisfied the second condition for collateral estoppel, that the issues presented are in substance the same as those resolved in the earlier litigation. There is no doubt about petitioner’s conviction of a crime. The conviction was upheld on appeal. Petitioners have advised that they are prepared to stipulate to that conviction. They do not seek to deny that petitioner was convicted of the crimes for which he was charged. Petitioners seek to link the legal expenses incurred in defense of the criminal charges with Dr. Anderson’s business activity. Petitioners have the burden of proof on this issue. To be entitled to the claimed legal expense deduction they must establish that the expenditures were ordinary and necessary expenses paid or incurred in a trade or business. Section 162; Commissioner v. Tellier, 383 U.S. at 690-695. While petitioners’ burden is substantial in this case, it does not mean that they should be denied an opportunity to prove their case. The issue in this tax case is not the same as the issue in the criminal case. The Court strongly urges the parties to communicate and stipulate facts pursuant to the Court’s rules.” Order, at p. 3.

I can see Jeff Epstein’s estate trying this one. But it didn’t do so good for Big Jim Cavanaugh. See my blogpost “Well-Settled No Deduction – Part Deux,” 1/27/12.

And Maybe Their Helpers Can’t Either

Judge Buch has a designated hitter off-the-bencher, Orlando F. Cabanday & Teresa H. Cabanday, Docket No. 5068-18, filed 4/28/20, in further proof (as if any were required) of the title of this sermonette.

Orlando parted acrimoniously from his firm and hung out his shingle. I left my last firm after the boss and I exchanged assurances of the greatest personal esteem and affection, and did likewise. I sympathize with Orlando. No support staff, and no revenue to support one.

Orlando’s trouble, of course, is that he can’t substantiate expenses. I once told a RA that if I had wanted to be a bookkeeper, I would have been one. Orlando was in a like fix.

Judge Buch, whose cursus honorum has been far from the short and simple annals of the poor like Orlando and me, has a certain fellow feeling, and allows Orlando some deductions above what IRS was willing to give.

“The Cabandays’ testimony about specific vendors noted above and their nexus to the law practice was credible. Because the credit card statements and cancelled checks verify those specific payments, the Cabandays met their burden of proof as to those expenses. As to the remaining expenses, they did not, and therefore the Commissioner’s disallowance is sustained.” Transcript, at pp. 10-11.

But Orlando, perhaps recognizing his own shortcomings (notwithstanding he had passed three parts of the CPA exam, Transcript, at p. 4), hired one Mr T to reconstruct his expenses. And that gentleman produced some extraordinary results.

“In reconstructing Mr. Cabanday’s expenses, Mr. T had imperfect records to work with. For example, the law firm wrote a check to IPS in the amount of $25,000, but on the portion of the check where the amount is written in words, the check merely said twenty-five. That check cleared for $25. When Mr T tabulated that check, he took the numeral amount of $25,000, resulting in an overstatement of $24,975. Also, a check to Mr. C for $8,050 was dated January 5, 2014, and Mr. T tabulated it in 2014. On closer examination, however, the check sequence and the date the check cleared the bank show that the check was written in early 2015.

“Mr. T also made mistakes of his own. When Mr. T tabulated checks payable to ODG, he mischaracterized a $200 check as $42,212. And in the Court’s own tabulation of expenses… the Court found a $332 payment to NLS and a $2,000 payment to AMK omitted from Mr. T’s summary.

“The Commissioner suggests something nefarious in these errors. The $25,000 error relating to IP is understandable giving the manner in which the check was written. The $42,212 error relating to ODG is more difficult to plausibly explain, but the evidence is insufficient to conclude that there was an affirmative intent to mislead. Regardless of these errors, Mr. T’s summary was not admitted for the truth of the matters set forth therein.” Transcript, at pp. 7-8. (Names omitted).

Fortunately for Orlando and the equally hapless Mr. T, Judge Buch thoroughly disproves the canard that titles this blogpost.

“The Court calculated the expenses … directly from the bank and credit card records; they were not taken from any summaries or demonstrative exhibits.” Transcript, at p. 8.

There’s one lawyer here who can add, and he’s on the bench.