It was the Black ’08. Any of my readers who were practicing in 2007-2008 will remember those years with a shudder. The lenders, watching the collapse of the credit system, were on a tear. Glenn David Cuthbertson a.k.a. David Cuthbertson and Pamela Cuthbertson, 2020 T. C. Memo. 9, filed 1/14/20, were under the gun, and had to get rid of the golf course they needed for their housing development to sell.

So they set up an intrafamily passthrough roundy-round with daughter, son-in-law and old chum, to sell but not divest, and claim a huge tax loss. They allegedly had real estate counsel, but hopefully he did not engineer the scheme nor draft the documents in support thereof.

Since the scene is South Carolina, who better to tell this tale than that obliging jurist and native son Judge David Gustafson?

Maybe the golf course was sold; maybe only the land under the golf course was sold; maybe the clubhouse on the golf course was leased, or abandoned, or maybe not. Maybe only benefits-and-burdens were transferred (or maybe not). Some notes were sold in package (with no separate stated price for each), but could be individually repurchased. And of course Section 453 installment treatment is invoked for land held as inventory (no, you can’t). And Powell on Real Property gets a chawin’ that even Webster would admire.

And Judge Gustafson’s diss of the subjunctive mood in witness’ testimony is a treat. “The Court finds Mr. M’s testimony–to the extent that it was subjunctive–unpersuasive at best, since it was not informative as to what actually happened, and evasive at worst.” 2020 T. C. Memo. 9, at p. 73. (Name omitted).

I must confess that I stopped short of schadenfreude, although it was a struggle. But you have to read this opinion for the document drafting; clessic (and that’s no typo).

No, this is not an episode of the fifty-five year old soap opera. This is yet another in the endless series of counting days from date of mailing of petition to the date whereon the hard-laboring intake clerks and flailing datestampers at The Glasshouse on Second Street, NW, receive same in hot hands.

Judge Vasquez has this one, the story of Michael J. Seely and Nancy B. Seely, 2020 T. C. Memo. 6, filed 1/13/20. But Mike and Nan are bystanders, as the hero of this tale is their trusty attorney, whom I’ll call Scotty.

The SNOD, sent by certified mail to last known address, says last day to petition is June 26. Petition arrives at Glasshouse July 17. The envelope is sealed, undamaged, correctly addressed, and correctly postpaid. But there is no postmark or anything showing when USPS first got it.

IRS moves to toss for late filing. Scotty ripostes with a sworn declaration that he posted it in the mailbox on the corner on June 22.

We all know a USPS postmark is conclusive. Any non-USPS postage mark doesn’t count.

“The regulations prescribe distinct rules for USPS and non-USPS postmarks, sec. 301.7502-1(c)(1)(iii), Proced. & Admin. Regs., but they supply no rules to govern the situation where the envelope has no postmark whatsoever. When a postmark is missing, our caselaw instructs us to deem the postmark illegible and permit the introduction of extrinsic evidence to ascertain the mailing date. The burden is on the party who invokes section 7502 to present ‘convincing evidence’ of timely mailing.” 2020 T. C. Memo. 6, at p. 5 (Citations omitted).

It’s one thing to claim mailing when Tax Court never got the item, and that’s a loser, but here Tax Court did. So Judge Vasquez holds a hearing.

“At the hearing respondent alleged that it takes 8 to 15 business days for the USPS to deliver a piece of mail to a Government agency located in Washington, D.C., from any location in the United States. Petitioners do not dispute this contention, and we deem it conceded. If the petition was mailed on June 26…, the last day to file a petition, then the petition’s delivery date would have fallen within the 15-day window. In a sworn declaration [Scotty] declared that he deposited the petition in the U.S. mail several days earlier, on June 22…. Respondent argues that if the petition had in fact been mailed on June 22…, then it would have been delivered to the Tax Court no later than July 14…, which was a Friday. The petition, however, arrived on Monday, July 17…. Because the petition arrived at the Court later than it should have (16 business days after the alleged mailing date rather than 15), respondent contends that [Scotty]’s declaration is not convincing evidence. We disagree.” 2020 T. C. Memo. 6, at p. 7. (Footnote omitted, but here it is).

“Respondent stated that according to the USPS, it can take three to five business days for a piece of mail dropped into a collection box to reach Washington, D.C., from any location in the United States. Once sorted, mail is transported to a New Jersey location for irradiation, which takes an additional 5 to 10 days, and then returned to Washington, D.C., to be delivered. On the basis of this information it can be inferred that a petition can take as little as 8 business days and up to 15 business days to arrive at the Tax Court after being mailed.” 2020 T. C. Memo. 6, at p.7, footnote 3.

IRS claims Scotty is a day late and a lot more than a dollar short.

Judge Vasquez notes that while Mike and Nan’s petition was en route, there fell the Fourth of July holiday. Taking judicial notice that this is a Federal holiday which impacts holiday closures, staff shortages and higher than normal mail volumes, he finds Scotty beat the tag.

Scotty was timely. Just. I expect, however, that he won’t use that mailbox again.

At Least For Chops

Sandy Shockley’s midco attempt to dodge tax on the family’s nine-figure unload of their broadcasting empire has heretofore been discussed in my blogpost “Gude Faith, He Maun Fa’ That,” 6/22/15.

Now it’s the turn of her fellow-transferees, some investment LLCs unrelated to the Shockleys, and the Wisconsin State Investment Board. Here’s Alta V Limited Partnership, Transferee, et al., 2020 T. C. Memo. 8, filed 1/13/20.

The non-Shockley transferees claim they gave up some put rights, to sell their shares back to the Shockley corporation, but these hadn’t matured when the midco sale went down, so Judge Mary Ann (“S.E.C.” = She Eschews Cognomens) Cohen tosses the “reasonably equivalent value” counter to the Wisconsin Uniform Fraudulent Transfers Act (WIUFTA). Since the put rights hadn’t matured, and since the shares to which the put rights attached had been sold, they had no value.

“We conclude that petitioners’ incidental surrender of their right of redemption as part of the transfer of their … shares constitutes neither value nor reasonably equivalent value. We have previously held that … received nothing in exchange, or, at best, received petitioners’ shares of … stock, which–because of the distributions essentially liquidating [corporation]–were worthless. It follows under the facts presented here that petitioners’ right of redemption was equally worthless. Thus, the deemed transferor [corporation] did not receive value, reasonably equivalent or otherwise, in exchange for the proceeds from the sale of its assets.” 2020 T. C. Memo. 8, at p. 31.

And as we saw in my above-cited blogpost, good faith on the transferee’s part plays no role. The creditor is the beneficiary. Calling it a fraudulent transfer is a misnomer; the transferee may be pure as the driven cliché, but that avails naught.

But we shouldn’t get the chops, say the non-Shockley transferees. The creditor gets their claim, not a bonus. And there is lots of supporting caselaw.

Except.

“Petitioners held substantial percentages of the outstanding stock and were each represented on the [corporation] board. The [corporation] board considered the various sale options… and elected to proceed with an intermediary transaction…. Petitioners were also represented throughout the transaction. Significantly the intermediary transaction could not have taken place without petitioners’ consent. Even if the other [corporation] board members and shareholders had elected to proceed, they did not control a sufficient number of shares to compel petitioners to participate….” 2020 T. C. Memo. 8, at p. 37.

IRS concedes the Section 6651(a)(2) addition, but tries to wild-card in Section 6651(a)(3) in their seriatim brief. No go with that, but Section 6662(a), Section 6651(a)(1), and interest are all OK.

I also call it “blogfodder.” The internet cognoscenti call it “content.” But whatever the name, it’s what keeps readers reading and followers following. And it doesn’t matter if your webpages load in three seconds (good, according to said cognoscenti) or eleven seconds (bad, you lose readers). Nobody will look if you haven‘t got something useful to tell them.

Not only do I scan the Tax Court website, but I also check with my colleagues and look for sources to see what hasn’t yet hit the blogosphere or the trade press. There’s a lot of digging that goes nowhere, so when I get a tip and it turns out to be less than productive, it’s disappointing.

Back in September, I wrote up Giorgio P. Martinelli, Docket No. 4122-18, filed 1/10/20; see my blogpost “Yes, Giorgio,” 9/20/19. I was told there was a real human-interest story here, as well as a technical review of the Section 6038D megachops for offshore undisclosed bank accounts. Nothing came out in the summary J motion then, because Rule 121(e).

So when I saw today’s order from Judge James S (“Big Jim”) Halpern, it was a real letdown. Case continued on joint motion from next month’s trial calendar in my home town. Move, settle or talk, but none of that is going to bring out any of the details of a cross-examination or the technical analysis that even a T. C. Sum. Op. would do. The odds are there won’t be a trial, and the real story will remain untold.

Disappointing.

Again misquoting Shakespeare, I turn to the story of Pengcheng Si, Docket No. 18748-18, filed 1/10/20, as told by that Obliging Jurist, Judge David Gustafson.

Pengcheng moves to toss the SNOD that brought him to Tax Court on the apparently viable ground that it was not mailed to Pengcheng’s last known address, and therefore invalid.

Judge Gustafson, as obliging as ever, assumes Pengcheng is right. That’s unusual, because I’d expect the USPS National Address database, Pengcheng’s previous returns, and a couple Forms PS3817 (hi, Judge Holmes) to get some play here.

But none of this matters, because Pengcheng’s petition arrived at Tax Court three (count ‘em, three) days before the 90-day window slammed shut. And it addressed all material details of the SNOD.

Judge Gustafson reminds us that “(O)ur jurisdiction thus depends on the timely filing of the petition, measured by reference to the date of mailing of the SNOD.” Order, at p. 2. And Pengcheng made the cutoff.

The “last known address” is a savings clause for IRS. Section 6212(b)(1) says it is “sufficient” if a SNOD is mailed to the taxpayer’s last known address. “That is, this subsection does not explicitly require mailing to any particular address but provides that mailing to the last-known address is ‘sufficient’.” Order, at p. 2.

But even if not mailed to the last known address, the SNOD is nevertheless valid if the taxpayer got it, by whatever means, in time to petition timely.

This clearly happened.

So let the Chambers administrator promptly call Pengcheng, because he’s on for trial on Monday.

Stephen Thielking of Oden & Thielking, C.P.A.s, P.C. (O&T), is back, but his qualification as appraiser of non-publicly-traded stock doesn’t help him when he appraises the shares from one of his son Ed’s companies as it goes into the ESOT of another of his son’s companies, in Ed Thielking, Inc., 2020 T.C. Memo. 5, filed 1/9/20.

Steve was here before, pseudonomously, in my blogpost “Appraising the Appraiser,” 6/27/18, but there he wasn’t appraising any family stuff. And Steve wasn’t invariably successful in his other trips to 400 Second Street, NW. See 2020 T. C. Memo. 5, at p. 3, footnote 2.

Besides Steve’ unsigned and unstated qualifications in every appraisal, parents can’t appraise their kids’ stock, at least for tax purposes. And neither Ed nor Mrs. Ed (Amy) performed any services for their Sub S, so their 401(a)(16) and 415(c) contribution limits were zero. Might be a good idea to show some income and withholding from your Sub S if you want ESOT largesse.

Amy hadn’t the requisite service to qualify as a participant in the ESOT.

Steve and Ed claim substantial compliance, but ex-Ch J L Paige (“Iron Fist”) Marvel, cool as ever, refrains from guffaws. Steve and Ed don’t come close.

Of course, the ESOP and ESOT plans were never amended when required. Steve claims they were, but “…the Department of Labor and the IRS seized the ESOP’s records from its accountant.” 2020 T. C. Memo. 5, at p. 22. Now this move worked for Andy Ross; see my blogpost “A Good Excuse,” 9/28/12. But IRS asked for Ed’s documents eight (count ‘em, eight) months before said seizure, and Ed gave them nothing.

There’s more, of course, as ex-Ch J Iron Fist provides a checklist of every indicium of phony plan one could ask for.

Practitioners, add this one to your toolkit. And don’t do it.

MOX NIX

I’m not sure if Adams Challenge (UK) Limited, 154 T. C. 3, filed 1/8/20, is related to Adams Offshore Services, Ltd., but they both seem to be dealing with Section 638(1) and the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains, UK.-U.S., July 24, 2001, T.I.A.S. No. 13,161 (entered into force Mar. 31, 2003), and its 1975 edition.

For Adams Offshore’s story, see my blogpost “Sea Hunt,”12/9/14.

Challenge time-chartered its specialty boat to a US outfit decommissioning damaged or played-out oil wells on the Outer Continental Shelf. This was some boat.

Judge Albert G (“Scholar Al”) Lauber: “The Challenge Vessel was equipped with state-of-the-art specialized systems. These included a ‘class 2 dynamic positioning system,’ a nine-man ‘saturation diving system,’ a helipad, and a hydraulic deck crane capable of lifting 100 tons. A dynamic positioning system enables a vessel to maintain a reasonably stationary position above an underwater worksite. The vessel plants transponders on the sea floor, then triangulates data from those transponders to keep its position stable over a particular spot. A saturation diving system enables divers to work at greater depths for longer periods. Divers live in a sealed, pressurized chamber that is lowered to working depth. This permits the divers to be ‘decompressed’ only once at the end of their tour of duty, thus reducing the risk of illness. Saturation diving is a highly specialized form of diving. In 2015 only 336 commercial divers were recognized by the U.S. Coast Guard as regulated saturation divers.” 154 T. C. 3, at pp. 4-5, footnote omitted.

Would you believe one of my nearest and dearest is one of the 336?

Well, the actual decommissioning was done by the US outfit. The Challenge claimed they had nothing to do with exploring or exploiting on the Continental Shelf.

Judge Scholar Al says Section 638(1) is broad enough to cover. And the treaty language and the Section 638(1) language mean the same thing.

Now before you all shout “effectively connected! Permanent establishment!” Section 638 makes Continental Shelf exploring and exploiting effectively connected, even if not anchored.

And exploitation includes decommissioning, because the oil leases under which the exploiters operate require them to clean up.

The Section 638 regs say the work of cooks on oil rigs and MDs who helicopter out to treat crew is “related to” exploitation. Definitely a purpose-built specialized boat fits in. Now there is a Fed Cir case that says foreign companies insuring the oil rigs aren’t liable for US tax, because insurance is too remote. And the one insurance example in the Section 638 regs doesn’t overrule Section 953. So Section 953, limiting effectively-connected US insurance business to dry land, is independent of Section 638(1). Taishoff notes that if it wasn’t, European companies, which insure and reinsure the huge oil rig exposure, would run away.

Judge Lauber cuts to the cliché.

“One does not need an advanced degree in linguistics to appreciate the similarities between the text of the statute, the section 638 regulation, and the Treaty. Section 638 extends U.S. tax jurisdiction over the OCS ‘with respect to mines, oil and gas wells, and other natural deposits.’ The regulation provides that U.S. tax jurisdiction extends over the OCS ‘to the extent * * * [that] persons, property, or activities are engaged in or related to the exploration for, or exploitation of, mines, oil and gas wells, or other natural deposits.’ Sec. 1.638-1(c)(4), Income Tax Regs. And the Treaty provides that an enterprise is deemed to carry on activities through a permanent establishment in the United States, and thus be subject to U.S. tax jurisdiction, where its activities are ‘carried on offshore * * * in connection with the exploration * * * or exploitation * * * of the sea bed and sub-soil and their natural resources situated in that State.’ Treaty art. 21(1) and (2).” 154 T. C. 3, at p. 40.

“Applying principles of U.S. tax law, we discern no appreciable difference between the terms “related to,” “connected with,” and “in connection with.” These terms appear throughout the Code and seem to be used interchangeably. Compare sec. 162(e) (denying deduction for expenses incurred ‘in connection with * * * influencing legislation’), with sec. 162(q) (denying deduction for payment ‘related to sexual harassment’). Both terms regularly appear close to each other in the same Code provision, with no apparent difference in meaning. Compare sec. 6103(h)(2)(A) (referring to a proceeding ‘in connection with’ determining a taxpayer’s liability), with sec. 6103(h)(2)(B) (referring to treatment of an item ‘related to’ resolution of an issue in such proceeding). “ 154 T. C. 3, at p. 42.

IRS wins, but any deductions or credits allowable to Challenge must await another day.

Yes, I know that the Year of the Rat begins January 25; I also know that the next Year of the Horse will not begin until February 17, 2026, to celebrate the end of the TCJA tax reshuffles.

But Tax Court is determined to rush the seasons, as we’ve seen with a couple recent full-dress T. C.s (hi, Judge Holmes) highlighting the Section 6751(b) Boss Hoss prerequisites. So maybe this is the Year of the Boss Hoss, 6751.

Howbeit, there’s a slew of Orders today, setting forth the checklist for IRS’ assertion of non-electronic chops.

One such is Alan Schwartz, Docket No. 1696-19S, filed 1/8/20. And even though this is a small claimer, Al is petitioning the chops in the SNOD. So IRS must play by the rules.

“Respondent cannot assess an accuracy-related penalty under section 6662(a) unless he has complied with the requirement of section 6751(b)(1), which provides:

“No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination….” Order, at p. 1.

Alright, already, STJ Diana L Leyden, we got the point. But maybe IRS didn’t, so STJ Di gives them a checklist.

“To show compliance with this provision, respondent must show (1) the identity of the individual who made the ‘initial determination’, (2) an approval of the penalty ‘in writing’, (3) the identity of the person giving approval and his or her status as the ‘immediate supervisor’ and (4) evidence that the supervisory approval was obtained no later than the issuance to petitioner(s) of the initial formal communication of proposed adjustments that includes penalties and provides the taxpayer the right to protest those proposed adjustments, such as a 30-day letter or Letter 525. See sec. 6751(b)(1); Clay v. Commissioner, 152 T.C. 223, 249 (2019).” Order, at p. 1.

For the Clay story, see my blogpost “Indians Not Taxed – Not!” 4/24/19.

So, IRS, here’s what you do.

“If respondent wishes to continue to assert the accuracy-related penalty under section 6662(a) in this deficiency case, he shall file a status report and attach thereto any relevant documents to demonstrate compliance with section 6751(b)(1). Alternatively, if respondent conclude that he did not comply with the requirement under section 6751(b)(1) with respect to the accuracy-related penalty under section 6662(a), he should consider conceding that penalty and notify the Court by filing a status report.” Order, at p. 2.

And IRS gets until January 29 to figure out how to proceed.

So get out those fireworks and put on your dragon suit. This is the Year of the Boss Hoss.

Judge Pugh unpacks another of the 6751(b) Boss Hoss conundra, which have taken over my blog and Tax Court’s opinions, in Charles L. Frost, 154 T. C.2, filed 1/7/20 (wasn’t his name all over those old American Express card advertisements? The specimen cards all bore the name Charles L. Frost).

Judge Pugh seems to echo a much more exalted authority who inveighed against experts in the law, who loaded people with burdens heavy to bear.

IRS hit Charles L. Frost with SNODs for three (count ‘em, three) years, but had a CPAF for the last such year only. Thus, chops for Years One and Two are off the table per Graev. Charles L. Frost had his share of LLC operating losses denied for want of proof of basis in his membership interest, and his travel expenses for want of Section 274 substantiation. Although an EA who qualified based upon prior IRS service, Charles L. Frost had recordkeeping problems.

The issue today is Section 7491(c) burden of production.

No question the CPAF was duly Boss Hossed long before IRS breathed Word One of penalty to Charles L. Frost. And IRS trotted out the CPAF on the trial. So what happens next?

Judge Pugh: “We hold that the Commissioner’s introduction of evidence of written approval of a penalty before a formal communication of the penalty to the taxpayer is sufficient to carry his initial burden of production under section 7491(c) to show that he complied with the procedural requirements of section 6751(b)(1). Because the Civil Penalty Approval Form indicated approval of the penalty for a substantial understatement but not for negligence, respondent has not satisfied his burden as to the penalty for negligence.” 154 T. C. 2, at pp. 21-22.

Now what? Must IRS prove they never communicated with Charles L. Frost prior to getting the Boss Hoss sign-off?

No, you can’t prove a negative.

“The burden now shifts to petitioner to offer evidence suggesting that the approval of the substantial understatement penalty was untimely–e.g., that there was a formal communication of the penalty before the proffered approval. If a taxpayer makes that showing, we will weigh the evidence before us to decide whether the Commissioner satisfied the requirements of section 6751(b)(1). This rule is faithful to the requirement that the Commissioner come forward initially with evidence of written penalty approval. By shifting the burden to the taxpayer after the Commissioner makes the initial showing, we avoid imposing the burden of proving a negative (i.e., that there were no prior formal communications). If the taxpayer introduces sufficient evidence to contradict the Commissioner’s initial showing, then the Commissioner can respond with additional evidence and argument, and the Court can weigh all of the evidence (that is after all the business of judging). And evidence of prior formal communication (if it exists) would be available to the taxpayer since he would have received such a communication and therefore could introduce it to challenge a claim that the supervisory approval was timely. In other words, the rule we articulate today will not require the Commissioner to show that there was no prior formal communication as part of his initial burden.” 154 T. C. 2, at pp. 22-23.

The beloved bright-line test is triumphant. There must be a duly documented Boss Hoss sign-off before a formal consequential communication from IRS manifesting a clear intention to chop the taxpayer. Then the taxpayer must come forward with evidence (another pet peeve of mine is the phrase “credible evidence”; can there be incredible evidence?) that there was earlier formal communication. Then the Court can decide.

Of course, if any of the bullying/bludgeoning so deplored by Congress has taken place, the RA did it without “formal communication” long before the Boss Hoss sign-off, which in any case was superfluous, as the bullied/bludgeoned taxpayer signed the Statement of Agreed Changes conceding their meritorious case, which never reached Tax Court.

As the players say, “If the ref don’t see it, the ref can’t call it.”

The Chicago White Sox are playing in the 6751(b) league today, but they strike out on the Notice of Proposed Adjustments (NOPA).

It’s not a “determination,” says Judge Buch. Here’s Tribune Media Company f.k.a. Tribune Company & Affiliates, 2020 T. C. Memo. 2, filed 1/6/20.

The magic language? “Based on the information we now have available and our discussions with you, we believe the proposed adjustment listed below should be included in the revenue agent’s report. However, if you have additional information that would alter or reverse this proposal, please furnish this information as soon as possible.” 2020 T. C. Memo. 2, at p. 20.

But there was no 30-day letter, giving the Sox a chance to appeal. So once again, the silt becomes Clay.

“The first formal communications of the initial determinations of the penalties to which section 6751(b)(1) applied were the notice of deficiency… and the FPAA …. The Commissioner did not send … any document that conferred the opportunity for an administrative appeal, which can be one of the important indicia of formality. Nor did the Commissioner send any other written communication purporting to determine a penalty with any sense of finality. As a result, the notice of deficiency and the FPAA were the Commissioner’s first formal written communications … informing them that the Commissioner had determined to assert penalties.” 2020 T. C. Memo. 2, at p. 17.

And that was what got the Boss Hoss sign-offs.

We all want certainty, bright lines. The issue is what goes on between the lines.