Ordinarily I skip the unsubstantiated car and truck mileage cases. They are truly much-of-a-muchness: diaries, spreadsheets, back-of-the-envelope guesstimates, all prepared long after the years at issue, often after the SNOD had issued and trial looms ahead.

But today Suresh Hatte, 2019 T. C. Memo. 109, filed 8/28/19, lets Judge Albert G. (“Scholar Al”) Lauber shows us a rare example.

Suresh was a taxi driver and a real estate appraiser. He claims business expenses for three (count ‘em, three) passenger vehicles he used in his appraisal business. And produces spreadsheets.

“On May 7, 2015, for example, he flew to Detroit, Michigan, to complete a seven-hour training course. His spreadsheet asserts that, on the same day, he made three trips totaling 334 miles to conduct appraisals in Maryland and Virginia.  It is beyond implausible that he flew to Michigan, completed a seven-hour course, flew back to Maryland, and then drove 334 miles to take photographs in the dark.  The spreadsheets allege multiple appraisal trips on four other days on which he attended seven-hour continuing education classes in Maryland.  On cross examination he admitted that the mileage he recorded for those days could not possibly be correct.” 2019 T. C. Memo. 109, at pp. 9-10.

It gets better, but not for Suresh.

“On at least six occasions, the spreadsheets implausibly show two roundtrips to the same address on the same day.  And some of these entries lack credibility for other reasons.  On January 3, 2014, petitioner alleges that he made two trips–one of 34 miles and the other of 36 miles–to the same address in Hyattsville, Maryland.  Since petitioner lived in Hyattsville, these numbers are highly suspect.  And even if we assume that petitioner drove from Hyattsville to Silver Spring and then back to Hyattsville–and did so twice on the same day–the distance from Silver Spring to Hyattsville is less than 10 miles.” 2019 T. C. Memo. 109, at p. 11.

Judge Lauber sums up a lot better than I could. “These examples only scratch the surface of the improbabilities that pervade petitioner’s spreadsheets.” 2019 T. C. Memo. 109, at p. 12.

A word to Judge Courtney D. Jones, newly joined USTC: Look what you have to look forward to.

The move used to be that a real estate operator would increase the rent roll so that he (it was usually “he” in those days) could get a mortgage and let the renters pay it off, while he took the proceeds and bought other investments. The interest was deductible, and amortization was sheltered by depreciation. Of course the investment interest rules and the passive activity rules put paid to that maneuver, but fortune favors the wise.

William C. Lipnick and Dale A. Lipnick, 153 T. C. 1, filed 8/28/19, shows how Wm’s Dad Maurice, a real estate whiz, worked the deal, so Wm doesn’t have the Section 163(d) investment interest cap.

Maurice and his partner owned LLC memberships, and borrowed against their memberships and the assets of the LLCs (real estate, primarily). They distributed the loan proceeds to themselves in a debt-financed distribution. Maurice used the cash to buy investments. For the first couple years (hi, Judge Holmes) Maurice got the passthrough income and interest deduction from the LLCs, the latter subject to the Section 163(d) limitation.

Then Maurice gifts 50% of his ownership interests to Wm, and Wm signs on to what Judge Albert G (“Scholar Al”) Lauber calls “each partnership’s operating agreement.” 153 T. C. 1, at p. 5. Judge, though an LLC may be taxed as a partnership, it isn’t a partnership, it’s the child of a different statute.

But Wm didn’t assume the debts of the LLCs, didn’t use any proceeds to buy investments, and Maurice was relieved of said debt. Maurice treated the relief as taxable capital gain.

Maurice picked up some more debt-financed distributions, paid tax with the investment interest limitation, and died. Wm got more interests in the LLCs under his dad’s will.

Wm claimed the interest the LLCs paid wasn’t investment interest as to him, as he wasn’t liable on the debts and hadn’t used any of the proceeds to acquire any investments.

IRS claims Wm should have been subject to the investment interest limitations, hits him with Section 6662 chops, and a SNOD at no extra charge.

“Investment interest is defined as interest that is ‘paid or accrued on indebtedness properly allocable to property held for investment.’ Sec. 163(d)(3)(A).  The interest in question was incurred by [LLCs], which owned, operated, and actively managed apartment buildings and other rental real estate.  The loans on which the interest was paid were secured by those real estate assets.  Respondent does not contend that the operating assets held by the partnerships constituted ‘property held for investment.’” 153 T. C. 1, at p. 12. Of course not; the property was used in the trade or business of renting residential property.

The basic idea is that use of loan proceeds dictates character of interest. Borrow to go on vacation, personal interest. Borrow to buy investment property, investment interest plus passive activity rules. Borrow to run business, business debt.

Judge Scholar Al cut to the cliché. “In short, if a taxpayer uses debt proceeds to acquire an investment, the interest on that debt is investment interest regardless of whether the debt originated in a partnership.” 153 T. C. 1, at p. 14.

IRS claims “like father, like son.” If the loan proceeds were used to buy investments (and they were), then any interest paid on said loans, the incidents of which are passed through to the son, is investment interest.

Judge Scholar Al isn’t having it.

“We find no support for this theory in the statute, the regulations, or the decided cases.” 153 T. C. 1, at p. 14.

“William did not receive, directly or indirectly, any portion of the debt financed distributions that the partnerships made to Maurice….Nor did William use distributions from those partnerships to make ‘investment expenditure[s].’  See sec. 1.163-8T(a)(4)(i)(C), Temporary Income Tax Regs., supra.  In short, the facts that caused the passed-through interest to be ‘investment interest’ in Maurice’s hands simply do not apply to William.” 153 T. C. 1, at p. 15.

“Notice 89-35 refers to this scenario as a debt-financed acquisition, as opposed to a debt-financed distribution, and it explains how the regulation applies to partnerships and their partners:  ‘In the case of debt proceeds allocated under section 1.163-8T to the purchase of an interest in a passthrough entity (other than by way of a contribution to the capital of the entity), the debt proceeds and the associated interest expense shall be allocated among all the assets of the entity using any reasonable method.’

“In short, whereas Maurice received a debt-financed distribution, William is treated as having made a debt-financed acquisition of the partnership interests he acquired from Maurice.  See ibid.  For section 163(d) purposes, therefore, the debt proceeds are allocated among all of the partnerships’ real estate assets using a reasonable method, and the interest paid on the debt is allocated to those assets in the same way.  Sec. 1.163-8T(c)(1), Temporary Income Tax Regs., supra.” 153 T. C. 1, at p. 16.

And everyone agrees the real estate owned by the LLCs wasn’t investments, but property used in a trade or business.

And Wm never borrowed anything or bought any investments with the proceeds.

“Respondent urges us to adopt a ‘once investment interest, always investment interest’ rule on the theory that any other approach would ‘place a myriad of additional administrative burdens on both taxpayers and the government.’  But the temporary regulations and IRS guidance clearly dictate different outcomes depending on whether the partner receives a debt-financed distribution or makes a debt-financed acquisition.  See sec. 1.163-8T(c)(3)(ii), Temporary Income Tax Regs., supra; Notice 89-35, supra.  Recognition that partnership interests may change hands is thus an inherent part of the regulatory structure.  And the allocation is no more cumbersome than allocating debt for any other purpose under subchapter K.” 153 T. C. 1, at pp. 20-21.

Wm wins.

And a Taishoff “Good Job” goes to M. I. Sanders and J. E. Misener; though they may be at Blank Rome, they weren’t shooting blanks.

As Ezio Pinza said to Mary Martin in the words of Oscar Hammerstein II. There are times when you’ve flopped the winning hand, and don’t want to fold.

Clutch City Sports & Entertainment LP, Leslie L. Alexander, A Partner Other Than the Tax Matters Partner, Docket No. 16424-18, filed 8/28/19 is on for trial in Philly in October. Both the Clutchers and IRS want a continuance (known as an “adjournment” to us State courtiers).

That Obliging Jurist, Judge David Gustafson, obliges, striking the case from the calendar.

But both IRS and the Clutchers don’t want to let Judge Gustafson out of their clutches (sorry, guys).They ask he retain jurisdiction of the case.

I can understand why.

But Judge Gustafson cannot oblige. “The motion made no showing that would warrant the retaining of jurisdiction, and it cannot now be known when the undersigned judge might be assigned to a future Philadelphia session.” Order, at p. 1.

Ex-Ch J L Paige “Iron Fist”) Marvel has a review of the caselaw nailing the potteries in pot-friendly States with the Section 280E traffic tickets.

Boulder Alternative Care, LLC, GLG Holdings, LLC, Tax Matters Partner, Docket No. 16495-16, filed 8/28/19, goes for judgment on the pleadings.

They get more than they bargained for. “’ Colorado state-legal marijuana sales do not conflict with the federal Controlled Substances Act or any other federal drug law. Under those circumstances, the Supreme Court has made clear that state law must control. Since Colorado law controls, state legal marijuana sales cannot be considered “prohibited” under federal law.’” Order, at pp. 1-2.

Well, the Boulderers get bowled over (sorry, guys). The motion relies on facts outside the pleadings, thus Rule 120(b) turns the motion into one for summary J. And all y’all know I just love summary J.

The Boulderers get buried in a judicial landslide.

“The precedent regarding the application of section 280E to state licensed marijuana dispensaries is well settled. In Gonzales v. Raich, 545 U.S. 1 (2005), the Supreme Court rejected the argument that the cultivation and possession of medical marijuana, isolated to and policed by a state, somehow removed the activities from the purview of the Comprehensive Drug Abuse Prevention and Control Act of 1970 (CSA). The U.S. Court of Appeals for the 10th Circuit has consistently upheld denials of deductions and credits under section 280E, noting in its most recent pronouncement that ‘[d]espite its legality in many states, marijuana is still a schedule I “controlled substance” under federal law.’ Feinberg v. Commissioner, 916 F.3d 1330, 1333 (10th Cir. 2019), aff’g T.C. Memo. 2017-211, petition for cert. filed, No. 19-129 (July 26, 2019); see also High Desert Relief, Inc. v. United States, 917 F.3d 1170 (10th Cir. 2019); Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187 (10th Cir. 2018), cert. denied, 139 S. Ct. 2745 (2019); Green Sol. Retail, Inc. v. United States, 855 F.3d 1111 (10th Cir. 2017), cert. denied, 138 S. Ct. 1281 (2018). This Court has also consistently applied section 280E, irrespective of any permissive state laws, to disallow deductions and credits with respect to a taxpayer’s trade or business that consists of trafficking in controlled substances. See Alt. Health Care Advocates v. Commissioner, 151 T.C. __ (Dec. 20, 2018); Patients Mut. Assistance Collective Corp. v. Commissioner, 151 T.C. __ (Nov. 29, 2018); Olive v. Commissioner, 139 T.C. 19 (2012), aff’d, 792 F.3d 1146 (9th Cir. 2015); Californians Helpingto Alleviate Med. Problems, Inc. v. Commissioner, 128 T.C. 173 (2007).” Order, at p. 2.

The issue the Boulderers raise is whether State law takes their admitted pottery out of CSA. “Petitioner misreads applicable case law from the Supreme Court, the U.S. Court of Appeals for the 10th Circuit and this Court. As noted above, the courts have consistently held that permissive state laws have no effect on Federal enforcement of the CSA. In following that precedent, we conclude that Colorado’s permissive medical marijuana laws have no effect on the CSA.” Order, at p. 3.

I’ll spare you a collation of my blogposts on this subject.

Ex-Ch J Iron Fist bounces the Boulderers’ motion. It’s unfortunate that the Rules don’t provide for cross-motions for summary J. That would save a lot of time.

The race to the back in the New Gambit stakes goes on apace. See my blogposts “I’m Beginning to See the Light,” 4/9/18, and “The Light at the End,” 8/20/19.

Today Frank M. Dartee, Docket No. 3792-18, 8/27/19, goes for the record…forty (count ‘em, forty) years, in one petition.

Ch J Maurice B (“mighty Mo”) Foley tells the story.

“Petitioner seeks review of purported notices of deficiency and notices of determination concerning collection action allegedly issued to petitioner for taxable years 2000 through 2018. On April 11, 2019, respondent filed a Motion for More Definite Statement Pursuant to Rule 51. On August 5, 2019, petitioner filed an Amended Petition seeking review of purported notices of deficiency and notices of determination concerning collection action issued to petitioner for taxable years 1979 through 2018.” Order, at p.1.

Ch J Mighty Mo, in a more mellow mood than is his wont, tells IRS to forget about a more definite statement from Frank, but to look and see whether there is anywhere to be found either NOD or SNOD issued to Frank for any of those years. Then tell Ch J Mighty Mo whether there is anything that would confer jurisdiction.

Is there a Section 6673 on the horizon?

All y’all (going to Texas next week, so I’ve got to warm up) will remember Denise Celeste McMillan, 2019 T. C. Memo. 108, filed 8/26/19, who has twice appeared in this my blog. You don’t? Well, see my blogposts “Who Would These Burdens Bear,” 6/12/15, and “Sad Tales,” 11/3/15.

Denise has a never-say-die approach. She’s been litigating in Tax Court five times before this case, And Judge Mark V Holmes schedules them all.

“Ms. McMillan’s litigation experience also includes five previous cases in the Tax Court.  She and the Commissioner settled three of those cases, but the other two went to trial with one going to appeal and then to the Supreme Court.  See McMillan v. Commissioner (McMillan II), T.C. Memo. 2015-109 (finding no trade or business in horse activity in which petitioner’s one horse had died); McMillan v. Commissioner (McMillan I), T.C. Memo. 2013-40 (finding no trade or business in horse activity in which petitioner’s one horse had neither been bred nor competed in eight years), aff’d, 697 F. App’x 489 (9th Cir. 2017), cert. denied, 138 S. Ct. 1010 (2018).” 2019 T. C. Memo. 108, at p. 9.

She’s a dab hand at correcting defective trial transcripts, too, “…such as when she wrote ‘should be “breeding,” not “breading” — was Spellcheck broken?”. 2019 T. C. Memo. 108, at p. 13. I’ve often had the same feeling when I see some deposition and trial transcripts here, although I’m a wee bit more douce in my corrections.

She’s the kind of unit owner that makes Board of Managers members cringe. She got a $70K settlement for noise and mold, which she excluded from income, but her physical harm argument loses, especially when her CPA warns her.

“While cross-examining Ms. McMillan the Commissioner’s attorney established that she didn’t consult any of her attorneys about her return position.  She did, however, admit that she asked a CPA she’d retained in the 1990s whether the exclusion for pain and suffering awards was still in place, and he told her that it’s now more ‘narrowly defined’ and applies only when someone is ‘physically ill.’  Rather than suggest reasonable reliance that might excuse a section 6662(a) penalty, see sec. 6664(c)(1); Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 98 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002); sec. 1.6664-4(b)(1), Income Tax Regs., this testimony shows that Ms. McMillan knew that the exclusion she was relying on was limited, that she had reason to question whether she qualified for it, and that she didn’t follow up to make sure her position was reasonable.  It’s also another reason to question her testimony about her physical symptoms–of which there’s no contemporaneous evidence and the treatment for which she could not remember.  The Commissioner therefore met his burden of showing that Ms. McMillan did not reasonably rely in good faith on professional advice, and that she had neither reasonable cause nor good faith in failing to report her settlement with the HOA.” 2019 T. C. Memo. 108, at pp. 48-49. But IRS counsel can’t come up with the Section 6751(b) Boss Hoss sign-off for the additional deficiencies IRS laid on Denise, so she avoids the chops.

My colleague Peter Reilly, CPA, a fan of hobby loss cases, will find little joy with Denise’s horse breeding/showing business. Denise shipped the late Goldrush, her last horse, to Australia in 2008, where the late Goldrush became the late Goldrush, and never replaced him. Since this case is appealable to 9 Cir, Judge Holmes walks through the Section 183 “goofy” regulations, even though Judge Posner in 7 Cir would have let him take a holistic approach.

Either way, Denise is beating a dead horse.

Denise tried the home-office deduction, but the office was the livingroom in her 800 sq ft unit, and Judge Holmes has four reasons for disallowing that deduction, the chiefest of which is “(E)ven if her lawsuits and websites were somehow trades or businesses–and we find that they weren’t–she still couldn’t take the deduction if she used her living room for anything else, and her testimony that she never used any part of it for anything other than business is simply impossible for us to believe.” 2019 T. C. Memo. 108, at p. 42.

I’m sure Denise will be back in Tax Court. Petitioners like her is what keeps bloggers writing.

The late great Dr Eric Berne would find an embarras de richesses in US Tax Court. To begin with, CSTJ Lewis (“Not Chief In Name Only”) Carluzzo has no patience for IRS counsel’s gameplaying in Ralph B. Marra, Docket No. 24599-17L, filed 8/23/19.

IRS claims Ralph had an opportunity to contest liability at the CDP, but didn’t, so wats summary J. Ralph wants a remand.

CSTJ Lew: “According to petitioner, his challenge to the amount of the underlying liability, or at least a portion of it, was raised at the administrative hearing by the submission of a Form 1127, Application for Extension of Time for Payment of Tax Due to Hardship, to the respondent’s settlement officer. We note that a similar challenge is made in the petition.” Order, at p. 1.

So summary J goes down.

“The parties disagreement over petitioner’s entitlement to challenge the existence or the amount of the underlying liability in this proceeding, not to mention their apparent disagreement over whether petitioner had reasonable cause for his failure to pay the underlying liability, see sec. 6651(a)(2), requires that respondent’s motion be denied because genuine issues of material fact remain in dispute, see Rule 121.” Order, at p. 2.

But CSTJ Lew isn’t sending Ralph and IRS back to Appeals, either.

“Turning our attention to petitioner’s motion, we fail to see what could be accomplished by further administrative review and action that could not otherwise be given effect by the parties without a remand.” Order, at p. 2.

Maybe CSTJ Lew is going to try this one.

But IRS isn’t the only gameplayer today.

Elizabeth Koham, Docket No. 5227-18L, filed 8/23/19, is part of a designated hitter coupled entry. Elizabeth tries a ploy with Judge Buch, who is definitely not playing. Elizabeth wants an OIC, and isn’t getting it. She and co-petitioner sent in a Form 433-A claiming “patently excessive monthly expenses.” Order, at p. 1.

“On their 433-A, Mr. Bereliani and Ms. Kohanmehr listed among monthly expenses: $7,500 for food, clothing, and miscellaneous, $9,500 for housing and utilities, and $1,000 for public transportation. They also listed a $250,000 student loan debt as a monthly expense, labeling it as a total debt, but offering no information about the monthly loan expense.” Order, at pp. 1-2, footnote 4.

This is not the way to ingratiate oneself with the court. Especially when one’s RCP is $312K and one offers an OIC of $2500.

But one does get “somber reasoning and copious citation of precedent” at no extra charge.

Today’s episode of the story of Richard R. Raley, Docket No. 15789-17, filed 8/22/19, lets Judge Buch tell us that stipulations don’t solve every issue.

“The Commissioner filed a document captioned ‘Respondent’s Designation of Deposition Testimony To Be Used At Trial.’ This appears to be an attempt to put into the evidentiary record of this case a deposition of a non-party taken pursuant to a stipulation under Rule 81(d), Tax Court Rules of Practice & Procedure. The mere fact that a deposition was taken by stipulation does not automatically mean that a party can put that deposition into the evidentiary record of the case. See Rule 81(i).” Order, at p. 1.

The deposition can be used to impeach the witness, or by the adverse party for any purpose, but to let the deposition in for any purpose requires judicial oversight. See Rule 81(i)(3).

Neither side can smuggle the deposition in while Judge Buch is on the case.

Sometimes the taxpayer gets a lot more than sixty bucks’ worth of justice from US Tax Court. Taryn L. Dodd, 2019 T. C. Memo. 107, filed 8/22/19, a legal secretary who got tagged with $1 million of real estate sales proceeds based on an erroneous 1040, never got a chance to contest her liability, even though she got a CDP and a remand.

The remand went to the same SO who had quick-pitched Taryn before.

Judge Albert G (“Scholar Al”) Lauber doesn’t think much of what justice Taryn got before now.

“We remanded this case after respondent conceded that the SO had abused her discretion by failing to consider petitioner’s challenge to her underlying liability and by failing to give petitioner enough time to submit information relevant to her request for a collection alternative.  Given these concessions by IRS counsel and the terms of our remand order, one might have expected the Appeals Office to take all steps reasonably necessary to accomplish the purpose of our remand.  Unfortunately, this is not what happened.”  2019 T. C. Memo. 107, at pp. 8-9.

“Here, the SO was fully aware of petitioner’s position concerning her underlying tax liability….  But the SO did not advise her, either in the letter scheduling the supplemental hearing or during the hearing itself, of the factual information that was needed to resolve that challenge.  And rather than give petitioner a reasonable extension of time to supply that information, the SO closed the case the very next day.

“On the record before us, we find that there exists (at the very least) a question of material fact as to whether the SO abused her discretion in handling this case on remand.  We will accordingly deny respondent’s motion for summary judgment.  We will also direct respondent to show cause why this case should not be remanded once again for the conduct of a supplemental hearing–ideally, before a different SO–that is genuinely designed to get to the right answer concerning petitioner’s underlying tax liability … and (if her underlying liability challenge is rejected) concerning her request for a collection alternative.” 2019 T. C. 107, at pp. 10-11.

Why IRS had four (count ‘em, four) attorneys assigned to this summary J fiasco, and not one patient SO to the remanded CDP, makes me question IRS’ allocation of scarce resources.

Next up, Santiago Guiterrez, 2019 T. C. Sum. Op. 23, filed 8/22/19. Santiago had a court order awarding him and his partner custody of his partner’s two minor grandchildren, as their father had deserted and couldn’t be found, and their mother abandoned them and died. Santiago was the sole support of them and his partner’s 19 year old daughter (whom he claimed was a student, except her school transcript showed she wasn’t).

CSTJ Lewis (“A Man Worthy of the Name”) Carluzzo gives Santiago the two minors for all the child bennies and HOH, but not the 19 year old.

Both the minors are qualifying foster children for year at issue (Sec. 152(f)(1)(C). But they qualify both for Santiago and for partner. Except Santiago wins the tie-breaker as he’s the only one with gross income.

So it’s a Rule 155 beancount, to take the 19 year old out of the mix for EITC and kiddie creds.

And Santiago used a paid preparer, who had creds, and he acted in good faith. No chops.

It is this blogger’s oft-repeated lament, whenever reporting a pro se’s obvious misunderstanding of the law, whether advertent or inadvertent, that “Those who read it don’t need it, and those who need it won’t read it.”

Today STJ Daniel A (“Yuda”) Guy gives us another example, Anthony Barfield, Docket No. 322-19, filed 8/22/19.

AB got tossed in May a year ago, when he petitioned before the SNOD had been mailed to him. I’ve blogged that often enough; see my blogpost “Illegal Procedure,” 12/1/16 and the posts cited therein. So IRS hit him with the SNOD, which he now petitions, saying Section 7481 finality renders the SNOD invalid, as IRS had their chance.

Except IRS didn’t. AB filed a “years petition,” when neither SNOD nor NOD has issued for a bunch of years. STJ Yuda explains: “Such a petition, commonly known as a “years petition”, does nothing other than allege for a substantial number of consecutive years that the taxpayer did not receive any jurisdictionally relevant IRS notice, such as a notice of deficiency or a notice of determination, that would permit an appeal to the Tax Court. A ‘years petition’ is a manifestation of protest from tax deniers and tax protestors.” Order, at p. 2, footnote 2.

I’ve blogged this gambit often enough. I was unaware it had acquired a popular name.

“Returning now to the present case, it bears mention that petitioner did not pay the filing fee when he filed his petition nor did he file at that time an affidavit or declaration containing specific financial information regarding the inability to pay the filing fee. By Order dated February 7, 2019, the Court directed petitioner to pay the filing fee or submit an application for waiver on or before March 25, 2019. Petitioner did not comply with this Order.” Order, at p. 3, footnote 3.

So STJ Yuda could toss AB for nonpayment, but instead gives IRS judgment on the pleadings, nails AB for the deficiency and the chop.

And AB gets the Section 6673 yellow card at no extra charge.” Finally, the Court takes this opportunity to remind petitioner that section 6673(a)(1) authorizes this Court to impose on a taxpayer a penalty not to exceed $25,000 whenever it appears that proceedings have been instituted or maintained by the taxpayer primarily for delay or that the taxpayer’s position in such proceedings is frivolous or groundless. Although the Court will not impose such a penalty in this case, petitioner is warned that the Court may not be so forgiving if he returns to the Court and advances frivolous and groundless arguments in the future.” Order, at p. 4 (Citation omitted).