Cross Refined Coal, LLC, USA Refined Coal, LLC, Tax Matters Partner, Docket No. 19502-17, filed 8/1/19, has been a good source of blogfodder, but today that Obliging Jurist, Judge David Gustafson, has outdone himself.

Here is an essay on the trial subpoena to nonparties per Section 7456(a)(1), and its proclivity to subvert Rule 70(a)(2) and the play-nice discovery that pervades Tax Court litigation. And give us stealth on steroids.

IRS hits six (count ‘em, six) nonparties with trial subpoenas, the Cross Colliers want them quashed, but the nonparties apparently don’t care.

“We are sympathetic to petitioner’s complaint about the possible difficulty it might suffer from having to review newly produced documents during trial for purposes of determining whether petitioner should object to their admission into evidence. However, we do not yet know whether there will in fact be any documents produced by the third parties, nor whether respondent will offer them into evidence, nor in what quantities. If respondent’s use of the subpoenas actually were to result in prejudice to petitioner, then its objections on that basis could be evaluated at that time.

“Our standing pretrial order does requires that exhibits be exchanged before trial, and sometimes an exception to this requirement is made in the case of documents received from a third party at the trial session, where the proffering party had no prior opportunity to receive and exchange them. However, if respondent’s use of the subpoenas in this case were to result in a large number of previously undisclosed documents being offered at trial, we would expect to inquire about whether the last-minute production of the documents was actually imposed on respondent through no fault of his own, or whether instead the subpoenas were a blameworthy last-minute attempt to obtain documents that he could have attempted to obtain in time to comply with the standing pretrial order. But we will not now try to anticipate and adjudicate that dispute, since it may not even arise. For that reason,we will deny without prejudice petitioner’s request, ‘[i]n the alternative, … [that] the Court should prohibit the introduction of subpoenaed documents at trial.’” Order, at p. 2. No quash, though.

True, we don’t know what, if anything, the six, or any of them, has or has not. But if there is any serious doubt about what any of them has, this is the biggest fishing expedition since Jonah’s unsuccessful bail on the trip to Nineveh.

And the prospect that, at calendar call, or worse, on a date and time certain, six eighteen-wheelers pull up to the courthouse, each drops its tailgate, and turns a forklift loose on forty million (count ‘em, forty million) documents, is too frightening to contemplate.

If you think I’m being unusually hyperbolic, re-read my blogpost “The Forty Million – Part Deux,” 5/15/15.

Discovery geeks may salivate, but trial lawyers blench.

This is a golden opportunity for wags, wits, wiseguys and wiseacres to play games.

Time for a legislative fix.

And, Judge Gustafson, please oblige this poor blogger by designating orders like these. Even though you must admonish the Cross Colliers “Petitioner cites orders in its motion, but we remind petitioner that ‘Orders shall not be treated as precedent’. Rule 50(f).” Order, at p. 2.

The latest in the series that I have found is Ream Hanna, Docket No. 22599-18, filed 8/1/19. That’s not to say that a couple other “dissions” (hi, Judge Holmes) haven’t escaped my eagle eye.

It’s the usual story. Ream was tossed for nonpayment after having been told twice to ante up the sixty bucks. Two months later, Ream and IRS come to terms and stip out.

“To permit entry of the stipulated decision” (Order, at p.1), Ch J Maurice B (“Mighty Mo”) Foley vacates the toss.

Yesterday Geofrey Austin Calvert got tossed two (count ‘em, two) days after his petition cleared the threshold of the Glasshouse at 400 Second Street, NW, because the sixty bucks wasn’t stapled thereto.

So I assume if Geofrey Austin can stip out, he gets his “dission” for free also.

The star of my blogpost “A. Nonymous, Serial Blower,” 6/28/17, took my advice, and took up Judge James S (“Big Jim”) Halpern’s suggestion, and ran to DC Cir to maintain his anonymity. And got help from a court-appointed amicus; Mr. Qian and his team get a Taishoff  “Good job!”

And my colleague Peter Reilly, CPA, ever on the trail of follow-ups to my blogposts, has found In Re: Sealed Case, 124 AFTR 2d 2019-XXXX, filed 7/26/19.

And Senior Circuit Judge Ginsburg doesn’t buy Judge Big Jim’s need to tell all.

Judge Big Jim thought that serial blowers, using publicly-available information and with no inside dope, therefore bound to lose under Section 7623, should be made known.

Judge Ginsburg: “It simply does not follow that the public must know the serial filers’ names in order to determine either the extent to which serial filers affect the work of the Tax Court or whether any particular whistleblower is a serial filer. As the Appellant correctly points out, the Tax Court can serve those interests by alerting the public to the serial filer’s history and by explaining the burdens that serial filers impose upon the court; indeed, that is precisely what it did in this case. The use of a unique pseudonym (John Doe, Jane Roe and the like) in all the cases filed by a particular filer would similarly inform the public in the two respects identified by the Tax Court.” (Citation omitted).

A. Nonymous remains A. Nonymous, and the serial goes unspilled.

Thanks, Mr. Reilly.

While Ch J Maurice B (“Mighty Mo”) Foley is quick-pitching petitioners who don’t stump up the sixty Georges supernaculum (as the classically-inclined put it), STJ Diana L (“Sidewalks of New York”) Leyden goes all-out for Warrenton S. London & Carlene C. London, Docket No. 2624-19, filed 7/31/19 a designated hitter.

Warr & Carlene were somewhat sketchy when they tried to delineate what IRS did wrong in bouncing some of their claimed Sched A and Sched C deductions. And their understanding of Tax Court procedure was less than clear and distinct.

They wanted a response to interrogatories before IRS filed its answer. That’s a Rule 70 no-no, besides dissing Branerton and not playing nice.

Finally, STJ Di, after multiple attempts to get Warr & Carlene to focus on specifying IRS’ miscues (if any), admonishes Warr & Carlene.

“If Mr. and Mrs. London do not file a proper petition as the Court directed in its Order dated April 17, 2019, the Court will grant respondent’s motion and Mr. and Mrs. London will lose the right to litigate their case before the Court. This Court is the only venue where a taxpayer may challenge a proposed deficiency in tax before paying the tax. If their case is dismissed, the IRS will assess and may move to collect the increased tax proposed in the notice of deficiency. After the increased tax is assessed, if Mr. and Mrs. London would like to continue to challenge the increased tax, they would have to pay the full amount due and file a timely claim for refund with the IRS. If that claim is denied and they wanted to dispute the denial, they would have to file an action in either the U.S. District Court District of Maryland or the U.S. Court of Federal Claims. Accordingly, the opportunity to challenge the IRS’ proposed deficiency without first paying the tax is one that should not be squandered.” Order, at p. 2.

So STJ Di gives Warr &Carlene a list of LITCs and a couple weeks (hi, Judge Holmes) to come up with an acceptable amended petition.

No, today’s discussion isn’t taken from the Tax Court Rules. There is no Tax Court Rule 8. This is the “quick pitch” rule in Major League Baseball, and it is illegal.

The commentary to said Rule states, in pertinent part (as my already-in-the-luxury-skybox colleagues would say), “A quick pitch is an illegal pitch. Umpires will judge a quick pitch as one delivered before the batter is reasonably set in the batter’s box. With runners on base the penalty is a balk; with no runners on base, it is a ball. The quick pitch is dangerous and should not be permitted.”

Well, Ch J Maurice B (“Mighty Mo”) Foley isn’t on the mound, there are no runners on base nor umpires at 400 Second Street, NW, so Geofrey Austin Calvert, Docket No. 14013-19, filed 7/31/19, won’t get to first base.

But Geof really got a quick pitch today.

“The petition in the above-docketed matter was filed on July 29, 2019. Because petitioner failed to pay the Court’s filing fee, it is ORDERED that this case is dismissed.” Order, at p. 1.

Petition tossed in two days? When the official Form of Petition lists the filing fee last among the required enclosures, with no warning that if said payment is not enclosed the petition will be tossed instanter (again as said high-priced colleagues would say) if not included?

Maybe so the official Form of Petition should be changed.

Hisham N. Ashkouri and Ann C. Draper, 2019 T.C . Memo. 95, filed 7/30/19, have provided me with some blogfodder, but now the party’s over. Hish and Ann didn’t follow Rule 151(c), separately stating and numbering their facts and conclusions of law with citations to the record. That left a lot of issues conceded. And their substantiation was well below par.

Boss Hossery goes by the board, even with an assist from Clay. See my blogpost “As Cold as the Clay,“ 5/17/19.

But Hish’s casual treatment of payment for preparation of a business plan for an abortive property development in Tatarstan (where nobody reads my blog, alas), by having payment sent to his wholly owned C Corp, isn’t fatal, though claimed a dodge by IRS only in an amendment to its answer, thus saddling itself with burden of proof.

“Although petitioners fail to cite any evidence in the record in support of their claim that [C Corp], rather than Mr. Ashkouri, was entitled to the payments in issue, we will accept the claims they make in their opening brief as sufficient to avoid treating them as having conceded the issue.  Instead, we will treat the issue as turning on the resolution of a factual dispute:  whether [C Corp] or Mr. Ashkouri was entitled to the payments made by Mr. S.  Because respondent raised the issue by amendment to his answer, he bears the burden of proof on the determinative factual question.  For the reasons explained below, we conclude that he has not met that burden.” 2019 T. C. Memo. 95, at p. 49. (Name omitted).

Though Hish went back and forth in his trial testimony, the record shows both Hish and his C Corp were working on the business plan.  And the Tatar client didn’t care what tax treatment Hish or his C Corp got. IRS claims C Corp didn’t recognize the payment, but the evidence IRS produces shows that the C Corp did.

“In the face of conflicting evidence concerning the identity of the party entitled to payment for the … business plan, we conclude that respondent has not met his burden of proving that petitioners should have included Mr. S’s payments in their taxable income for [year at issue].  The Court found Mr. Ashkouri to be a credible witness.  When forced to distinguish between his role as proprietor, on the one hand, and his role as officer and sole shareholder of [C Corp], on the other, Mr. Ashkouri testified that {C Corp] prepared the business plan.  Because the preparation of the business plan required design work, Mr. Ashkouri’s claim is consistent with his description of the roles of his proprietorship’s and {C Corp]’s businesses.  To the extent that some of petitioners’ responses to discovery requests conflict with Mr. Ashkouri’s testimony at trial, those inconsistencies may be explained either by faulty recollection- corrected after examination of the relevant documents (and before respondent amended his answer to assert unreported income)–or, again, a certain casualness in distinguishing among the roles Mr. Ashkouri filled in his various, interrelated business ventures.” 2019 T. C. Memo. 95, at pp. 52-53.

State income tax refunds cause Judge James S. (“Big Jim”) Halpern a lengthy detour, but whether AMT deprived Hish and Ann of any tax benefit, thus rendering said refunds taxable income, must abide a Rule 155 beancount.

Neither side covered themselves with glory. The moral is careful preparation. And more careful preparation.

A legitimate front is every dodger’s desideratum. But legitimacy hangs on the operation of the front. We saw that in my blogpost “Charity Is As Charity Does,” 8/26/13.

“It’s what you do, not what you say you will do.”

Today STJ Daniel A. (“Yuda”) Guy confronts Giving Hearts, Inc., 2019 T. C. Memo. 94, filed 7/29/19, ostensibly a charitable fundraiser but actually a lead-generator for a home-improvement-flogger.

Window Plus was the home-improver, and sold via telemarketing. Unfortunately, the National Do Not Call Registry severely limited their marketing plan. So they devised Giving Hearts, which would call prospects using the charitable exemption from Do Not Call, seek donations but flogging the home-improvements, and tried it out.

The trial balloon burst when the MI State AG dropped in,  and blew the whistle to IRS when the prospects complained about the phony pitch.

Giving Hearts passes the organizational test. Its paperwork says all the proper mantras. It is organized for charitable purposes. And it operates, “…(at least in part) to further a charitable purpose.  In short, petitioner collects donations from Window Plus and transfers those funds to other charitable organizations.  Petitioner correctly asserts that the Code does not preclude the use of for-profit enterprises, such as Window Plus, to solicit or collect charitable donations.

“What petitioner overlooks or fails to acknowledge, however, is that the standard for tax-exempt status prescribed in section 501(c)(3) requires that an organization be ‘operated exclusively’ for an exempt purpose.” 2019 T. C. Memo. 94, at pp. 11-12. (Footnote omitted).

And what the Window Plus crowd was doing doesn’t pass muster.

“Petitioner’s corporate sponsorship agreement, by design and in effect, permits for-profit businesses (such as Window Plus) to invoke its name as part of a telemarketing pitch intended, first and foremost, to generate sales leads and revenues.  In other words, although telemarketing calls are ostensibly made on petitioner’s behalf, the real purpose of the calls is business promotion.  As the corporate sponsorship agreement and the telemarketing pitch make clear… a participating business would be obliged to make a charitable contribution to petitioner only when a potential customer agreed to an in-home product demonstration.” 2019 T. C. Memo. 94, at p. 13.

And don’t blame the MI AG.

“Petitioner contends that ‘the investigatory and intervening action’ undertaken by the State of Michigan and respondent created an appearance of self-dealing (between petitioner and Window Plus) and impaired its ability to recruit other businesses to participate in its corporate sponsorship program.  Petitioner misses the point.  Simply put, whether other for-profit enterprises participated in petitioner’s corporate sponsorship program would not alter the fact that petitioner was not operated exclusively for one or more exempt purposes as discussed herein.  See sec. 1.501(c)(3)-1(c)(1), Income Tax Regs.” 2019 T. C. Memo. 94, at p. 14.

Tax won the Jim Dandy (Grade 2, $600K) at Saratoga today.

I can’t escape.

Though I can testify to his prepossessing appearance and demeanor, that Obliging Jurist Judge David Gustafson is, for whatever reason, camera shy.

Especially when both Cross Refined Coal, LLC, USA Refined Coal, LLC, Tax Matters Partner, Docket No. 19502-17, filed 7/26/19, and IRS OCC’s bombers want to haul their “…various computer equipment and other electronic devices including cell phones with picture taking capabilities, laptop computer, screen, projector, and necessary cables/cords for the purpose of presenting evidence at the trial….” Order, at p. 1.

And even though trial is scheduled to start on a Monday, the Cross Coalers and the OCC bombers want to begin hauling in and setting up on the preceding Friday. I suppose their roadies and techies need to do sound checks and tape the marks for the attorneys and witnesses on the courtroom floor.

Judge David Gustafson is down with all the foregoing, provided he gets names of the roadies and techies who are doing the hauling and setting up.

But no recording, whether audio or video, of the proceedings in the courtroom without express leave from Judge Gustafson.

“…no such equipment shall be used in the courtroom to take photographs or video or to make audio recordings without express leave of the Court. Counsel shall be responsible to assure compliance with this order by their clients, witnesses, and other personnel.” Order, at p. 2.

That’s unfortunate. If people, especially self-representeds but also auto-admittees, could watch an actual Tax Court proceeding without having to sit in the courtroom, they’d have a much better idea of what they’ll be expected to do when their case goes to trial.

And I’m sure the Jersey Boys and the rest of the regulars would be pleased to enlighten as well.

Thus spake Don Schlitz in that all-time classic. But what Don was talking about is different to what Chief Special Trial Judge Lewis (“Don’t Bet Against That Name”) Carluzzo imparts to Jun Wu in 2019 T. C. Sum. Op. 17, filed 7/25/19.

Ev’ry gambler knows that the secret to survivin’ when at the table at 400 Second Street, NW, or any of its satellite locations, is paper…lots and lots of paper. Diaries, bank statements, the plastic cards the casinos give out for you to prepay your bets, canceled checks, spreadsheets, and anything else you can write down, print out, or electronically retrieve.

Jun Wu didn’t.

Jun Wu the gambler falls foul of the “goofy regulation,” Section 1.183-2(b), because Jun had no business (game) plan, and only the W2-Gs the casinos gave him at no extra charge.

“…he did not conduct the gambling activity in a businesslike manner.  Other than the win/loss statements provided by the casinos, petitioner did not maintain any records for the activity, and he did not develop or follow any form of business plan.  See Carmody v. Commissioner, T.C. Memo. 2016-225, at *20-*23 (holding that a taxpayer was not engaged in horse-racing activity for profit when he did not have a written business plan, did not use spreadsheets and invoices to minimize losses or generate profits, and did not engage in any meaningful financial management with respect to his horse-racing activity). Gambling is routinely thought of as a recreational activity, see sec. 1.183-2(b)(9), Income Tax Regs., and while we have noted that no one factor is determinative, the recreational aspect of the gambling activity coupled with his failure to treat the activity as a trade or business from its inception go a long way in undermining his claim that he conducted the activity as a trade or business.” 2019 T. C. Sum. Op. 17, at pp. 10-11.

As for Carmody, see my blogpost “Cleaning the Stables,” 12/14/16.

While my colleague Peter Reilly, CPA, seems to be sanguine about prospects of winning a hobby loss Section 183 goof, I still would look first to the paper. It’s the secret to survivin’, and not only for gamblers.