MCM Investment Management, LLC, Mark and C’ann McMillin Family Trust Dated  04/09/1990, Tax Matters Partner, 2019 T. C. Memo. 158,  filed 12/10/19, had pith o’ sense and pride o’ worth, as Scotland’s Greatest put it, because Judge Pugh finds that the interests MCMIM held in the family’s real estate business had become worthless when MCMIM said it did.

The McMillins were owners and builders in CA and TX in the early ‘00s, leveraged up the cliché when the Black ’08 hit. They had tiered debt ahead of the equity and debt-for-equity in the business, their accountants had going concern issues, and their senior lenders were threatening fire and slaughter.

The McMillins decided to wind down the business, as a bankruptcy would be catastrophic (and they were personally on some paper).

Even though they were still winding down after year at issue, Judge Pugh allows the $40 million ordinary loss in year at issue, because she finds that, subjectively and objectively, the partnership interests were worthless. Even though intrafamily.

“First, respondent objects that [family business] did not itself acquire the subordinate debt at a discount.  But that was beyond its control because the senior lender would not permit it.  Instead the McMillin children formed [affiliate] to invest new capital in [family business] by acquiring the subordinate debt from an unrelated lender.  Moreover, [family business] and its owners wanted an affiliate to purchase the debt because it ensured that a third-party owner of the debt–such as a distressed debt purchaser–would not push [family business] into bankruptcy.  [Affiliate] later converted the subordinated debt to equity for a legitimate business reason:  to revive [family business]’ balance sheet by reversing its negative net worth, thus enabling [family business] to satisfy its minimum net-worth covenant and put it in a better position in restructuring negotiations with the senior lender.  The debt-to-equity conversion had economic substance for the parties: [Family business] shed significant debt and the risk profile of [affiliate]’s investment fundamentally changed when it traded various creditor’s rights and priorities for higher upside.

“Second, respondent argues that MCMIM and [affiliate] were two pockets of the same pair of pants.  We reject that analogy.  The McMillin entities were separate legal entities.  Respondent has not challenged their separate existence; indeed, he emphasized in his brief that ‘[w]hether the McMillin family entities are recognized as separate entities is not an issue in this case.’”  2019 T. C. Memo. 158, at p. 60. There was a real transfer, for non-tax business reasons.

Worthlessness has two separate but equal parts: subjective and objective (identifiable events).

“We conclude that MCMIM subjectively determined that its partnership interest in [family business] was worthless by the end of [year at issue].  First, MCMIM took the position on its tax return that the partnership interest was worthless in [year at issue]….  Second, the owners and management of MCMIM and Companies testified credibly at trial that they believed MCMIM’s interest became worthless in [year at issue].  They based their belief, in part, on the dramatic and devastating impact of the financial crisis…, [family business]’ consistent operating losses in the years leading up to and including [year at issue], the subordinate position of MCMIM’s partnership interest to [affiliate], and the overwhelming debt burden of [family business] and its project entities.  The owners and management took into account [family business]’ deteriorating cashflow projections during [year at issue].  Those projections showed that [family business] would be unable to satisfy financial obligations owed to the senior lender, the subordinate lender, or the project debt lenders.  Ultimately, the McMillin family decided to wind down [family business] in an orderly manner to maximize value for the creditors.  These facts support our conclusion that MCMIM subjectively believed its partnership interest in Companies was worthless in [year at issue].” 2019 T. C. Memo. 158, at pp. 28-29.

There’s plenty of evidence of identifiable events underpinning MCMIM’s subjective decision that their LLC interests were worthless. They got cashflow projections from competent staff, their Big Four accounting firm was waving red flags, senior debt would have wiped them out in a liquidation, and no lender would look at them except to demand payment.

There was no appraisal here, but there doesn’t have to be, although IRS argues there should have been. Ditto foreclosure. You don’t have to ride the plane into the ground to justifiably bail out.

Having a positive capital account on a K-1 doesn’t mean the interest has residual value. And MCMIM’s operating agreement provides for liquidating preference only if computed per Section 704(b), not per GAAP, as the K-1 did. “Because section 704(b) capital accounts can differ from GAAP capital accounts, the GAAP capital account reported on the Schedule K-1 does not necessarily reflect what liquidating distributions MCMIM would have been entitled to under … the operating agreement.” 2019 T. C. Memo. 158, at p. 40 (citation omitted).

So MCMIM winds up with both pride o’ sense (they were right their interests were worthless in year at issue), and pith o’ worth (even though worthless).

I’ve inveighed against trial-by-ambush before. When it came to Indians, accountants, pro ses or ranchers, I was there. So today, I continue my “don’t ambush” series with the above-entitled.

Here’s Brent Lamb & Deanne Lamb, Docket No. 4748-18, filed 12/9/18.

Brent & Deanne are on for trial on Monday. Thursday evening their trusty attorney files a motion for summary J “calling into question the validity of Treas. Reg. 1.274-5T. The following morning, counsel for the Commissioner filed a motion in limine asking the Court to preclude any argument regarding the validity of that regulation.” Order, at p. 1.

Judge Buch is not amused.

Aside from the Rule 121 60-day pretrial cutoff for summary J motions without leave of Court (and you’d best have a real good story for that one), “(T)he Court’s record shows no indication of the validity of Treas. Reg. 1.274-5T being raised at any time before the filing of Mr. Lamb’s pretrial memo. And although Mr. Lamb initially filed his case pro se, counsel has been in this case since December 2018.” Order, at p. 1.

A quick docket search shows the Lamb’s pretrial memo was filed 12/2/19, last Monday.

You can see where this is going.

“The regulation Mr. Lamb seek to challenge relates to substantiation requirements for certain expenses. See I.R.C. § 274(d) and Treas. Reg. 1.274-5T. What is required for substantiation, by its very nature, affects what might be included in evidence at a trial. And it may affect what evidence is gathered for trial and what subpoenas are issued for trial. Seeking to change the evidentiary foundation upon which a case is based mere days before trial is an unfair surprise to both the opposing party and the Court.” Order, at pp. 1-2.

No go. IRS’ motion in limine granted.

Don’t ambush the judge. Don’t even ambush the IRS.

It’s Crystal Clear

Mark C. Klopfenstein, 2019 T. C. Memo. 156, filed 12/9/19, and his trusty attorneys got Appeals to drop $1.6 million in asserted Section 6707 preparer chops down to $169K, and stiped out for that. Examination claimed Mark was a “material advisor” who failed to dish about a bunch of Section 6111 reportables.

My ultra-sophisticated readers have already shouted “What SNOD? Section 6707s are assessables, they don’t need no SNOD!”

And Appeals never determined anything, whether for or against Mark: they just folded on all but the $169K, and Mark agreed to that. But Mark and trusty attorneys want Section 7430 admins (no legals because no litigation).

Judge Albert G (“Scholar Al”) Lauber gives IRS summary J.

“Congress intended section 7430(c)(7) to ‘protect the Commissioner from claims by taxpayers that positions taken by, for example, the Examination or Collections Division personnel, before issuance of a notice of deficiency or of the decision of Appeals, are not substantially justified.’ The statute accordingly ‘immuniz[es] the Government against claims for costs until the IRS’s position has crystallized in an Appeals Office decision or notice of deficiency.’ Because the Appeals Office in this case did not take a position that was ‘crystallized’ into either of those documents, petitioner cannot be considered ‘the prevailing party’ under section 7430(a).  See Friends of the Benedictines in the Holy Land, Inc. v. Commissioner, 150 T.C. 107, 114 (2018) (“When the Government fails to take a position at all, * * * a taxpayer cannot be the prevailing party.’). 2019 T. C. Memo. 156, at pp. 9-10 (Citations and footnote omitted).

For the story of the friendless Benedictines, see my blogpost “Friendless in the Holy Land,” 2/21/18.

The only thing Appeals ever put in writing was the settlement stip, so if that was the triggering determination for IRS’ position, then IRS had to be justified, because Mark signed off on it.

So once again, Examination and Collection have free-fire to herk-and-jerk, make heavy-duty demands, bludgeon and bullyrag, until the frustrated civilian calls them (at substantial expense), and then Appeals (supposedly independent) does a folderoo, and IRS walks.

As Judge Wells observed in Benedictines, supra, there’s a gap in the statute, but it is not up to Tax Court to fill it.

Yo Congress, it’s yours.

Judge Goeke adds to the holiday joy at Populous Holdings, Inc., Docket No. 405-17, filed 12/9/19, by allowing the Section 41 qualified research credits it claims for the two years at issue, encompassing more than 100 (count ‘em, 100) contracts and subcontracts for its architectural design services.

To qualify, the research has to be “unfunded.” That means it can’t be paid for by “any grant, contract, or otherwise by another person (or governmental entity).” Order, at p. 2. Moreover, payment for the research must be contingent upon the research producing a successful result for the payor, and the researchers must retain substantial interests in the products of the research (no work for hire).

Populous had fixed price contracts. This means that, if the research doesn’t at first succeed, the cost of trying again falls on Populous.

“In general, fixed priced contracts have been considered unfunded research, qualifying the contractor for the credit. See Geosyntec Consultants, Inc. v. United States, 76 F.3d 1330 (11th Cir. 2015); Fairchild Indus., 71 F.3d 868. Fixed price contracts are inherently risky for the contractor if the research is unsuccessful. Under fixed price contracts, the contractor must remedy failed research at its own expense. Fixed price contracts ‘generally place maximum economic risk on contractors who ultimately bear responsibility for all costs and resulting profit or loss.’” Order at p. 3 (Citation omitted).

“None of the contracts expressly requires research; thus, none of the contracts expressly states that petitioner is being paid for research. Petitioner is paid for a work product at a fixed price. The work product included the need to perform research. If its research failed, petitioner would be required to incur additional expenses without additional compensation. Petitioner bore the financial risk of research failed. The capped expense reimbursement does not relate to research expenses and does not change our holding….” Order, at p. 3.

Right to reuse the research must be retained by the party claiming the credit. Increased knowledge or added professional experience doesn’t count.

Now per the contracts the clients owned all the documents, renderings, mock-ups, models, studies, manuals, as-built plans, and copyrighted the exterior features of the buildings, which Populous couldn’t use elsewhere without the client’s permission. And all that was left, says IRS, is repetitive, non-project-specific, pre-existing and other stuff not identifiable with the project.

But that’s just copyright, says Judge Goeke. “There were no provisions in these contracts that prohibited petitioner from using the research it performed or that required it to pay the client for use of the research.” Order, at p. 5.

Don’t conflate research with project. While the research gets folded into the project, it’s the project the client buys, not the research.

But since the amount of the SNOD here differs from that set forth in the stip of settled issues, do a Rule 155 beancount.

Now why Judge Goeke didn’t designate this enlightening order escapes me.

I take the title of this blogpost from a much finer writer than I, but I suggest the proposal is nonetheless valid.

I wish I had a better order than Francis Anthony Gallo, Jr., Docket No. 19986-19, filed 12/6/19, but I’ll take my blogfodder as I find it. Francis didn’t bother signing his petition from a SNOD, but Ch J Maurice B (“Mighty Mo”) Foley, already in a holiday mood, has given Francis until 12/30 to ratify, unlike the Ch J’s usual one-week toss. Maybe Francis sent in the sixty smackers, to prove he was for real. The order does not state.

Howbeit, Francis now wants out, moving to dismiss his (unsigned) petition.

“In his Motion petitioner states/indicates that he no longer wants to have the Court redetermine the proposed … income tax liability determined by respondent (the IRS) against him in the … deficiency notice upon which this case is based.” Order, at p.1.

Well, we’ve seen this before. See my blogpost “Good Call,” 7/14/17, when then-Ch J L Paige (“Iron Fist”) Marvel warned a pro se that, by dropping the petition, he forfeited his chance to try his case in Tax Court. The ninety days gone, no petition for redetermination of a SNOD lies, and a CDP doesn’t help, because the pro se had a chance to contest and didn’t. One swing at the baseball, chaps.

As I said then “(A)nd Ch J Iron Fist’s second chance language should get into every order when a pro se asks to drop the case to talk to IRS. This ‘drop the case and we’ll talk’ stuff should be retitled ‘come into my parlor, said the spider to the fly.’”

So I modestly propose the following.

Rather than just denying the motion to dismiss and telling the pro se to sign the petition, with a reminder that if he doesn’t he loses his chance to fight the deficiency in Tax Court, put the case on report track, with a quick-kick reporting schedule.

IRS and pro se are ordered to work to resolve and submit decision document in thirty (count ‘em, thirty) days. If they can’t file a decision document, a joint report (or separate if they can’t agree), stating what facts to which they can stip, what principles of law ditto, and a schedule for going forward to resolve whatever they haven’t yet been able, on or before Day Thirty, then the Court will decide what to do, including without in any way limiting the generality hereof, tossing the petition for want of prosecution.

If there are any signs of stalling or gameplaying at Day Thirty, the Judge can toss or sanction, as the facts may appear.

I understand Ch J Mighty Mo wants to move cases; that’s his job. And he’s not teaching a law school class in Tax Court law and practice; that’s not his job. But there’s no Tax Court Office for the Self-Represented deer-in-the-headlights pro ses. So maybe that’s my job.

The title is neither misspelling nor misprint. The Coalholders are back, but they’re out on parol. Here’s Coal Property Holdings, LLC, Coal Land Manager, LLC, Tax Matters Partner, Docket No. 27778-16, filed 12/6/19.

All y’all will recall that Judge Albert G (“Scholar Al”) Lauber stitched up the Coalholders back in October, but if y’all do not, please to see my blogpost “Diamonds Are Forever,” 10/28/19.

Now the Coalholders want to be reconsidered. They want to call “…two witnesses to testify concerning the purpose or proper interpretation of the alternative allocation clause.” Order, at p. 2. This “alternate allocation clause” was the reset if the conservation easement was judicially extinguished. It also had the famous “any prior claims” clause.

Judge Scholar Al ain’t buying.

“First, neither in its response to the motion for summary judgment nor in its sur-reply did petitioner express a desire to call these two witnesses to testify concerning the purpose or proper interpretation of the alternative allocation clause. Nor did petitioner contend that there existed a genuine dispute of material fact to which the testimony of these witnesses would be relevant. Rather, petitioner contended that the alternative allocation clause was not a condition subsequent saving clause at all, but instead constituted a permissible ‘interpretative provision.’” Order, at p. 2.

There is nothing to interpret. The “alternative allocation clause” was the same kind of savings clause that countermanded the earlier provision giving the 501(c)(3) all the boodle. That’s what torpedoed the Palmolives, among others. For the Palmolives’ story, see my blogpost “No Joy Forever – Because Golsen,” 10/11/17.

Anyway, TN law (the property is in TN) says if no ambiguity, use plain language. “The Supreme Court of Tennessee has ruled that, “[i]f the contractual language is initially deemed unambiguous, its ‘plain meaning’ should be used, without recourse to matters extraneous to the text of the agreement.’ Individual Healthcare Specialist, Inc. v. BlueCross BlueShield of Tennessee, Inc., 566 S.W. 3d 671, 691 (Tenn. 2018). Petitioner contends that its proposed testimony would be ‘strictly a function of why the language was drafted as it was.’ To the extent such testimony would be offered to contradict the plain language of the easement deed, it would be prohibited by the parol evidence rule. See id. at 696-697. To the extent the testimony would be offered for another purpose, it is unclear what relevance it would have or why it should cause us to reconsider our Opinion.” Order, at p. 3.

Oral testimony cannot be used to vary a written instrument, unless clearly ambiguous or fraudulent. This document is neither. If you’re now unhappy with what you wrote, you should have read it more closely.

But the Coalholders have another argument.

“…petitioner contends that, as a matter of public policy, the alternative allocation clause should be given force because it would maximize the amount of proceeds received by the charitable donee in the event of a future judicial extinguishment of the use restriction. But this would likely be the situation with many saving clauses in charitable contribution cases, as was true in Palmolive Bldg. Iny’rs, LLC v. Commissioner, 149 T.C. 380 (2017). There, the easement deed specified an allocation of proceeds that the Court found impermissible under the governing regulations. Id. at 398. The easement deed contained a saving clause stating that if any provision conflicted with the regulations, there would be a deemed amendment of the deed to make it compliant with the regulations. Id. at 404. The Court declined to enforce the saving clause, even though doing so would have yielded an interpretation theoretically benefitting the charitable donee. We take the same approach here.” Order, at p. 3.

Put more forcefully, you Coalholders aren’t getting a $155.5 million rip-off of the American taxpayers (of whom I am one) for strip-mined, garbage property the promoters of this scam bought for bortscht (pardon the abstruse technical term) and got a $32.5 million paycheck for selling to the putative ripper-off, by claiming a 501(c)(3) might get ten cents more if a court ever blows this thing off maybe if ever.

Got me?

Again, Seriously Off-Topic

Fans of USTC, read no further. I am in my music critic mode. Please return later.

I wanted to hear Yefim Bronfman again, after the very tiny morsel I got last October (see my blogpost “Music and Moujik,” 10/4/19). He was served in a hearty helping today with Jaap van Sweden and the New York Philharmonic at Geffen, which is far less appetizing than Welser-Möst and the Cleveland at Carnegie.

I haven’t heard enough of van Sweden’s work to see if he has conquered the NY Philharmonic’s limitless helping of self-satisfaction. I think Mitropoulos started this conceit, which has survived even Bernstein and Mazur, and which Boulez nourished. Howbeit, if today was a fair example, he has a ways to go.

He finally caught something of Beethoven’s manner after a finicking, precious treatment of the start of the first movement of Beethoven’s Second Symphony. The first movement ended well, and the second movement almost sang as it should. Unfortunately for me, and showing my age, I remember the second movement for the famous Prohibition-era lament “How Dry I Am,” which cropped up in an Irving Berlin musical, although Berlin never wrote it. Van Sweden managed to get the third and fourth movements well-defined, despite the usual deficiencies in woodwinds and brass. Give ’em a SNOD, says I.

This concert was a matinee for the card-carrying set (I mean the Medicare card-carrying set, of whom I am one). Wherefore it was perhaps appropriate that Steven Reich, now well into his eighties, was shuffled onstage to receive applause for the New York premiere of his Music for Ensemble and Orchestra. Of that piece I cannot say much in a blogpost meant for family reading. It was co-commissioned by six (count ‘em, six) orchestras on three continents; it should be promptly decommissioned. Minimalist music is truly minimalist for me; a very little goes a very long way.

But Yefim Bronfman was his usual self in the Beethoven Fourth Piano Concerto, although that kind of usual is very unusual. Finally, unlike two months ago at Carnegie, I got to hear him in-person with enough to do.

Great expression: he made the second movement truly tragic, as it is the cry of a suffering soul against the pitiless hammerblows of fate. Beethoven says as much in that five minutes as he did in the famous first movement of the Fifth Symphony. The second movement of the Fourth Piano Concerto is truly the final exam for any world-class pianist.

Any of my readers with elephantine memories may recall my criticism of “the boy lord of the piano,” Benjamin Grosvenor. The boy lord thought, some years back, that thump substitutes for skill. If you’re not already tired of this, see my blogpost “Very Much Off-Topic: A Musical Rant,” 4/21/17.

Bronfman showed today that he could out-thump the boy lord when that was called for (and there’s plenty of good stuff to thump in the Fourth Piano Concerto). But when it comes to expression, the boy lord has a lot of growing up to do.

Beethoven wrote great music for the piano. Franz Liszt wrote great piano music. Shaw said there is all the difference in the world between the two. Bronfman knows this, and can do it.

Judge David Gustafson, ordinarily a patient man, is draining his tank with Alan David Cooper, Docket No. 4123-19, filed 12/5/19, a designated hitter. Judge Gustafson Crained Alan for 25 of the 26 years he petitioned; the one survival is the year at issue. Alan is apparently a fan of Peter Hendrickson, author of the Protesters’ Bible; for the skinny on Pete, see my blogpost “Cracking Up,” 2/27/14, when Judge Buch devoted 63 (count ‘em, 63) pages of opinion to skewering Pete’s masterpiece.

So now IRS wants summary J for the $2400 in tax and $239 in chops that Alan owes, plus a Section 6673 frivolity chop to cool Alan’s ardor for Pete and his work. Judge Gustafson told Alan to come forward with non-frivolity on the tax and chops, to rebut IRS’ assertions.

Of course Alan didn’t. That would be too easy.

Instead, Alan “…asked the Court to issue ‘an order to dismiss this case without prejudice in this matter to either side.’ We believed it was possible that this might be Mr. Cooper’s attempt to concede the case, which would have rendered moot the Commissioner’s motion on the merits. However, Mr. Cooper’s inclusion of the phrase ‘without prejudice’ seemed (depending on what he meant by it) problematic under section 7459(d) (discussed below).” Order, at p. 3.

Trust Judge Gustafson to seek, with almost the fervor of Diogenes, for meaning. He told IRS to respond, and Alan can riposte with an explanation of what he means by “without prejudice.” It seems Alan was confused about IRS’ response, because he claimed IRS ignored his response, except that he didn’t respond the second time.

Howbeit, now Alan wants “…to use another forum (a CDP hearing that he believes he can obtain) to maintain his challenge against the IRS’s determination of his [year at issue] liability. We cannot see, from what he states, that a CDP hearing could be actually available to him or that, if it were, he would be able to challenge his [year at issue] liability in such a hearing, since he received an SNOD for [year at issue] (see sec. 6330(c)(2)(B)).” Order, at p. 5.

This move will not help Alan.

“But whether or not a CDP hearing for [year at issue] could be available to Mr. Cooper, and whether or not section 6330(c)(2)(B) would bar a liability challenge in such a hearing, we must deny his motion to dismiss this case ‘without prejudice’, by which he evidently means that the dismissal of this case would leave him without any loss of the right to litigate elsewhere his [year at issue] income tax liability.” Order, at p. 5.

Of course my readers know that, if Alan timely petitioned a valid SNOD, the only legally permissible dismissal of his case would be a decision in favor of IRS for the entire deficiency, per Section 7459(d). And Alan would have given away his only chance to contest liability. The quid pro quo, of course, is to get the automatic stay of collection while a deficiency proceeding is pending, you have to win or go home. There are no free temporary restraining orders in Tax Court. You can’t get the stay, drop the case, and try again.

But Alan isn’t done yet.

Alan also separately moved “…’to dismiss and/or vacate this case with prejudice in this matter against Respondent’ (emphasis added). If this means we should dismiss the case without redetermining the deficiency, then the second motion must be denied for the same reason as the first motion–i.e., section 7459(d). If the motion asks us to sustain the SNOD and to redetermine the deficiency as zero because of respondent’s supposed misbehavior, then we must also deny the motion on that ground. In the first place, the status report does not reflect the wrong-doing that Mr. Cooper supposes; but even if it did, he does not cite any authority for the proposition that, as a sanction for respondent’s supposed misbehavior in the litigation, we could determine a zero deficiency in the petitioner’s income tax. We will not do so.” Order, at p. 6.

As aforesaid, IRS wants a Section 6673 frivolity chop. And Judge Gustafson warned Alan he was pushing hard, especially with this transparent attempt at a strategic retreat to buy time via a CDP.

Judge Gustafson could nail Alan, but this is the first time Alan is in USTC, so he gets the yellow card.

No, I’m not ordering two shots of a joint venture between The Lairds of Kilmarnock and Lem Motlow’s outfit; although that would be a fascinating whiskey.

This is the story of Earl A. Skarky, Docket No. 1727-18*, filed 12/5/19, an off-the-bencher from ex-Ch J Michael B (“Iron Mike”) Thornton. It’s yet another horse tale, albeit not a hobby horse. Still and all, to my good friend and colleague Peter Reilly, CPA, gib a’ kook, as Grandma would say.

Earl was a mandatorily-retired heavy-hitter in an OK law firm. Earl moved to Lexington, KY, and bought the farm. Not in that sense, of course. He bought a 55-acre farm and started acquiring and disposing of various horses, claiming he wanted to start a horse-breeding venture.

Alas, “…petitioner had acquired 13 horses from the Humane Society. He did not intend to sell these horses, and [immediately before year at issue] he had disposed of all but one of these horses and had acquired two Tennessee  Walkers. At that time he also had five horses that had been retired from his wife’s therapy business in Washington State. Of these five horses only one was a potential breeder but because of health issues it had to be gelded.” Transcript, at pp. 4-5.

Tennessee Walker is apparently some breed of horse that never winds up in the daily double, so I can’t tell you any more about them. Earl did buy two mares in foal and started training their offspring, but they hadn’t done anything in the year at issue except get bridle-trained by a trainer Earl hired. Earl did buy a stallion (type unspecified) that year. In subsequent years, Earl bought some retired police horses (all gelded) and two Clydesdales.

Earl did claim a $1.4 million farm loss for the year at issue, based on $3250 of income from boarding a couple horses (hi, Judge Holmes), and a bunch of depreciation, Section 179 quick write-offs, and his commuting expenses from Lexington to OK to do some work at his old firm.

Earl had a residence in OK, showed up once a month for a week there to service his old client, and earned his real money there. Hence his tax home is OK, not KY, so no deduction for travel.

Earl’s trial testimony obviates the need for ex-Ch J Iron Mike to trudge through the “goofy regulation,” 1.183-2(b).

“As of [year at issue] petitioner had not yet sold any horses from his breeding activity. In fact, as of [year at issue] petitioner was still uncertain what type of horses would be best to breed and was still investigating different possibilities. As of the time of trial, petitioner has not entered into any breeding agreements and has not received any fees for breeding horses. Petitioner testified that he hoped his horse-breeding activity would become operational by 2020.” Transcript, at p. 5.

Clearly Earl is neither a trial lawyer nor a tax lawyer, or he might have deduced that that testimony sank him without trace. Note that the trial took place five (count ‘em, five) years after the year at issue.

Ex-Ch J Iron Mike don’t need no factors. This isn’t a hobby loss, this is a start-up.

“Until the activity is functioning as a going concern and performing the activities for which it was organized, expenses related to that activity, including depreciation expenses, are not ‘ordinary and necessary’ expenses’ currently deductible under section 162 (nor are they deductible under section 212) but rather are ‘start-up’ or ‘pre-opening’ expenses. See Hardy v. Commissioner, 93 T.C. 684, 687-688 (1989); Piggly Wiggly Southern, Inc. v. Commissioner, 84 T.C. 739, 745-746 (1985) (citing Richmond Television Corp. v. United States, 345 F.2d 901 (4th Cir. 1965), aff’d, 803 F.2d 1572 (11th Cir. 1986)). ‘Start-up expenditures’–i.e., expenses incurred ‘before the day on which the active trade or business begins,’ sec. 195(c) (1) (A) (iii)–may be deducted only over time under section 195. The costs of starting up a new trade or business or a new income-producing activity are inherently capital because they are expenses of creating or acquiring a capital asset. See Johnsen v. Commissioner, 794 F.2d 1157, 1162 (6th Cir. 1986), rev’g, 83 T.C. 103 (1984).” Transcript, at pp. 10-11.

Whatever their success at breeding, training, buying or selling, these horsey types provide great blogfodder.

*Earl Skarky 1727-18 12 5 19

I’ve repeated more than once the remark made by an old-time stick-and-string racing yachtsman, who survived a hurricane off Bermuda, and wrote about how he survived it. “Six months after, someone sitting in your warm, dry and safe livingroom, with the second glass of your whiskey in his hand, will tell you what you should have done.”

Well, I won’t place Judge Goeke in an analogous position, but in Charles V. Fortin, Docket No. 22406-18W, filed 12/4/19, Judge Goeke tells the Ogden Sunseteers, who didn’t exactly cover themselves in glory in Richard E. Lacey II, what they should have done.

For the Lacey contretemps, see my blogpost “The Whistleblower Office – Blown,” 11/25/19.

“Petitioner filed a whistleblower claim with the Internal Revenue Service’s Whistleblower Office (WO)… alleging that taxpayer A failed to properly report petitioner’s receipts on Form 1099-K, Payment Card and Third Party Network Transactions, and petitioner’s Form reported income that belonged to taxpayer A and should have been reported on taxpayer A’s Form 1099-K. The WO referred petitioner’s claim to an employment tax specialist who determined that petitioner’s claim did not present any tax issues and taxpayer A correctly reported gross receipts on Forms 1099-K.” Order, at p. 1.

Whereupon the Ogden Sunseteers bounced Charles’ Form 211, and Judge Goeke gives IRS summary J bouncing Charles’ petition.

Lest I be misunderstood, I’m not saying the Ogden Sunseteers should just be an open shower, pouring every off-the-wall story and every serial blower’s cut-and-paste from the public record onto the heads of the operating types. That would be just as arbitrary as sending nothing to operations, claiming nothing collected, and bouncing every blower, meritorious or not.

But here was at least a germ of a claim, so on it went. And the employment tax subject matter expert had the chance to vet it and decide to pursue or forebear.

Charles went a little too far.

“In his petition, petitioner asks the Court to issue a directive to taxpayer A to correctly report gross receipts on the information returns and to restore his whistleblower claim.” Order, at p. 2.

“Petitioner seeks to litigate whether taxpayer A properly reported receipts on information returns and restore his whistleblower claim. However, in whistleblower cases, we have jurisdiction only with respect to the award determinations. See sec. 7623(b). We do not have jurisdiction to determine whether taxpayer A violated tax law or to review taxpayer A’s reporting obligations. Nor do we have authority to direct the IRS to commence an examination or action against taxpayer A on the basis of petitioner’s whistleblower information.” Order, at p. 2. (Somber reasoning and copious citation of precedent omitted).

If someone hits you with income you don’t want, blowing the whistle on the hitter is a novel approach, but don’t try this at home (or anywhere else). I can just see the protester-defier crowd dropping Forms 211 on those who send the 1099s that get them hauled.

Judge Goeke closes with a statement that the Ogden Sunseteers did the right thing.