Judge Goeke has inherited the ongoing never-ending story of John E. Rogers and Frances L. Rogers, et al., 2019 T. C. Memo. 61, filed 5/30/19. Now the story appears to be nearing its end, as we have to do today with the never-ending penalties which IRS wishes to bestow on Mr. and Mrs. Rogers.

Tax Court already blew off the Rogers’ phony deals; see my blogpost “Will It Never End?” 4/17/18, wherein I was reduced to silence by Judge Goeke’s 134-page deconstruction of the Rogers’ neighborhood. But the 20% chops (accuracy and negligence) remained.

Frances wanted innocent spousery, but this went down, as more particularly bounded and described in my blogpost “When All Else Fails – Redivivus,” 7/3/17, and Frances paid. But there were penalties assessed at partnership level, and on brief this time Frances claims Section 6751(b) Boss Hossery, which IRS doesn’t have. So Frances wants out from that set of chops.

No dice, says Judge Goeke.

“However, Mrs. Rogers now seeks to raise section 6751(b) noncompliance against penalties determined in a partnership-level case.  We lack jurisdiction to consider penalties in a partner-level case that were determined at the partnership level.  The Commissioner’s noncompliance with section 6751(b) is a partnership-level defense.  Parties in a partnership-level case may raise noncompliance with section 6751(b) as a defense.  However, a partner may not raise section 6751(b) noncompliance as a defense at the partner level for penalties previously determined at the partnership level.  Under section 6230, partner-level defenses are ‘those that are personal to the partner or are dependent upon the partner’s separate return and cannot be determined at the partnership level.’  Sec. 301.6221-1(d), Proced. & Admin. Regs.  The tax treatment of partnership items and the applicability of any penalty, addition to tax, or additional amount that relates to an adjustment to a partnership item is determined at the partnership level.  Secs. 6221, 6226(f).  Accordingly, Mrs. Rogers is not entitled to a refund of penalties paid with respect to the partnership item adjustments.” 2019 T. C. Memo. 61, at pp. 22-23 (Citations and footnote omitted).

But the footnote is very interesting, because it states (in pertinent part, as my expensive colleagues say), “Sec. 6015 assumes that there is an existing joint tax liability; it does not consider whether the underlying joint tax liability exists.  The requesting spouse cannot seek review of preassessment procedures. Id.  Accordingly, it is unclear whether we would have jurisdiction under sec. 6015(e) to consider sec. 6751(b) compliance.” 2019 T. C. Memo. 61, at p. 23, footnote 8. Will the Graev never close?

Now IRS has eight (count ‘em, eight) lawyers on this case at present, and the number of RAs, SOs, and various supervisors would make up a full-strength infantry platoon, so Judge Goeke has to mix-and-match the Boss Hosses, and sift the lot.

The point of my headline (and my readers will doubtless say “There is a point? How quaint.”) is that a penalty to do with COGS on one of the Rogers’ real estate deals was brought in by IRS’ various counsel.

“The record also establishes section 6751(b) compliance for the section 6662 penalty on …COGS adjustment and the section 6662A penalty for the …adjustment initially determined by respondent’s trial attorneys.  Respondent asserted the penalty attributable to the COGS adjustment for the first time in the amendment to the answer.  Both Attorneys C and P worked on the amendment, but the record does not identify which attorney made the initial determination.  Petitioners did not address this lack of clarity on brief.  AAC C approved the penalty in writing by initialing and dating a draft of the amendment to the answer.  AAC C was both attorneys’ supervisor. Accordingly, we find that respondent satisfied his burden of production for section 6751(b) compliance regardless of which attorney initially determined the penalty.

“AAC C also approved Attorney C’s initial determination of the section 6662A penalty through her emails to the IRS Technical Services Unit.  Section 6751(b) does not require written supervisory approval in any particular form. Moreover, it does not explicitly require a signature; it requires the penalty be ‘personally approved (in writing)’.  Sec. 6751(b)(1); see Graev III, 149 T.C. at 488-489 & n.3 (a supervisor’s initials were sufficient writing).  Accordingly, we find that AAC C’s emails satisfied respondent’s burden of production of section 6751(b) compliance.” 2019 T. C. Memo. 61, at pp.24-25 (Citations omitted).

So beware the amended answer, practitioner. Just be prepared for an off-the-cuff Boss Hoss sign-off.

If tracing basis through a daisy-chain of 1031 like-kind exchanges involving multiple properties is your kind of amusement, check out Charles K. Breland, 2019 T. C. Memo. 59, filed 5/29/19. Judge Pugh shows you what happens if you don’t.

Unfortunately, with burden of proof not shifted from Chas to IRS, Chas’ claimed basis of bortscht (please pardon this arcane technical term) gives way to what was actually paid (even though Chas apparently jumped all the hurdles that Section 1031 imposes).

Judge Pugh: “Respondent does not dispute that petitioners paid $322,720 in cash and borrowed $6,720,000 for their acquisition of Dauphin Island 1 or that their cost basis in Dauphin Island 2 was $5,613,287.  Respondent contends that petitioners have not substantiated their $751,953 basis in Dauphin Island 1, carried over from [relinquished property they swapped for the Dauphins] through two successive like-kind exchanges.  The only evidence of petitioners’ basis in [relinquished property] is an excerpt of a depreciation schedule from petitioners’ 2003 Form 1040; they did not offer a settlement statement or deed. But taxpayers cannot rely on tax returns to substantiate a tax item.  The parties’ stipulation also expressly noted that the 2003 return was not audited; thus, this is not a situation where respondent has already reviewed the underlying transaction.  We conclude that petitioners have not adequately substantiated their basis in [relinquished property] or, in turn, the basis that they carried over to Dauphin Island 1.” 2019 T. C. Memo. 59, at p. 12. (Citation omitted).

Well, Chas got foreclosed and went bankrupt, but as this was in 2008, he wasn’t alone.  IRS wants to claim COD for the deficiency between what Chas’ lender got on the “public outcry” at the Courthouse door in Mobile County, AL, and the balance due on Chas’ defaulted mortgage note.

If nonrecourse, that would be a snap. But this loan was recourse, the lender put in a claim on Chas’ post-foreclosure bankruptcy, and Chas claims the lender’s claim got paid in the Ch 11 bankruptcy. Judge Pugh takes as much judicial notice as she can, but the whole bankruptcy file isn’t in evidence, so at best all she can find is that the lender made a claim.

But IRS founders on the “clear and convincing evidence” test to prove the amount publicly outcried wasn’t FMV, and therefore the amount paid was the amount realized by Chas was the outcried.

Chas’ capital loss is a lot less than he claimed.

Takeaway- Doing basis calculations on a multi-property 1031 daisy-chain is a real pain. But not doing them, and not preserving them, is worse.

This is the third trip to USTC for Robert A. Oliveri, 2019 T. C. Memo. 57, 5/28/19, the flying evangelist. I will skip Judge Colvin’s exposition of the numerous defects in Robert O’s alleged deductions, to focus on a requisite for a trip to evangelize or otherwise spread the good news.

“To be deductible under section 170, a contribution must be ‘to or for the use of’ a charitable organization.  In order to meet this requirement, the expense must be subject to coordination, supervision, or oversight by the organization.” 2019 T. C. Memo. 57, at p. 24. And Judge Colvin quotes The Catwoman, Jan Elizabeth Van Dusen. See my blogpost “The $250 Misunderstanding,” 6/3/11.

Well, Robert O’s outfit, the Brothers and Sisters of the Divine Mercy (BSDM) is a 501(c)(3), and is “…responsible to the Pontifical Council of the Laity, a dicastery of the Catholic Church.  Nothing in the record shows that the Catholic Church recognized or had any formal relationship to BSDM.” 2019 T. C. Memo. 57, at p. 4.

But Robert O’s flying evangelism founders on his logbook (which shows “Training”), his personal expenditures, and the want of a commission from BSDM to go forth to wherever. Like an illustrious predecessor, he needs a commission from his high command to go forth. He doesn’t have it.

Very Much Off-Topic

Spoiler Alert: This is a rant,  off-topic, and perhaps even quasi-political.

I must add the title hereof to my extensive and ever-growing list of sins of levity and irreverence, to say nothing of worse ones, the subject of an even-faster-growing list.

Cross Refined Coal, LLC, USA Refined Coal, LLC, Tax Matters Partner, Docket No. 19502-17, filed 5/24/19, is once again vexing that Obliging Jurist, Judge David Gustafson, who, I dare say, never did the Cross Colliers any harm. Here’s the designated hitter, on the eve of a three-day weekend.

The Cross Colliers want to strike an out-of-time IRS document demand, which got enmeshed in The Shut Down, and got overlooked in the unscrambling of the mountain of frittattas generated thereby.

Although from the government, Judge Gustafson definitely is here to help, and not frighten anyone.

Tax Court “was busy recovering from the shutdown and was awash in scheduling issues in numerous cases. Given that context, and given that we had indicated our ‘inclin[ation] to adjust the pretrial schedule’ and had invited the Commissioner to ‘renew his motion after February 15, 2019’, his service of document requests three weeks out of time (under the schedule entered in October 2018) was not unreasonable.” Order, at p. 3.

Judge Gustafson, like a very much Higher Authority, was willing to help both sides get out of commitments that The Shut Down and the rehabilitative steps necessitated thereby rendered unduly burdensome. Hence the title of this blogpost.

So the motion to strike the document demand is denied, and let the Cross Colliers and IRS play nice and sort out the rest of their problems.

The Glasshouse Bargain Basement seems to be going full-bore, as Terri A. Singleton, Docket No. 16064-18, filed 5/23/19, gets her “dission” from Ch J Maurice B (“Mighty Mo”) Foley, erstwhile guardian of the Tax Court fisc, on a stip, apparently ponying neither waiver nor sixty smackers.

Terri got tossed for want of payment on Monday, got reinstated yesterday (order of dismissal vacated), and today she and IRS stip out, which stip gets entered as a decision, with no word of chops. Or the sixty bucks.

The late Justice Potter Stewart’s immortal phrase echoes from the wordprocessor of His Honor Big Julie, Judge Julian I Jacobs, hereinafter HHBJJJIJ, to toss Constance H. Briley, 2019 T. C. Memo. 55, filed 5/22/19, as Connie seeks innocent spousery.

Connie should have known that two (count ‘em, two) straight years of six-figure losses on the MFJ 1040s she filed with now-ex spouse was dodgy, since now-ex’s construction business was flourishing. Even though HHBJJJIJ can’t find any extravagant living, Connie testifies she was sure that the business was making money for more years than those at issue.

Connie had “…a degree in industrial psychology, [and] was employed as a recruiter and human resources department generalist.” 2019 T. C. Memo. 55, at p. 2. So she had no financial education background.

Still and all, “(W)e believe petitioner had reason to know of the understatement of tax on her and Mr. Briley’s joint Form 1040 for each of the years involved.  Petitioner was college educated.  Even a cursory review of each year’s tax return would have revealed that the return reported a large negative income and caused a reasonably prudent individual in the shoes of petitioner to question the accuracy of the negative income.

“Admittedly, much of the negative income in [years at issue] arises from NOL carryforwards, and petitioner does not have a financial education.  But having a sophisticated financial education is not necessary to understand petitioner’s and Mr. Briley’s joint tax returns.” 2019 T. C. Memo. 55, at p. 15.

I wonder if Connie knew about Section 263’s capitalization requirements, which her now-ex and his aggressive preparer Mr. Shaft, of a well-known national tax prep franchisee, blew past to generate the aforementioned NOL and carryforwards thereof. I’m not so sure as HHBJJJIJ that Connie knew about that; however, it’s a much less close question that she should have asked.

Connie is Golsenized to 4 Cir. Is an appeal worth it?

Anyway, big negatives on a MFJ 1040, when no obvious financial stress, are shady, even if you know nothing about tax, aren’t a great recipe for innocent spousery. You should know it when you see it.

Cross Refined Coal, LLC, USA Refined Coal, LLC, Tax Matters Partner, Docket No. 19502-17, filed 5/22/19, once again pits the Cross Colliers’ squad of lawyers against IRS, but that Obliging Jurist, Judge David Gustafson, isn’t playing.

The Cross Colliers apparently weren’t minded to play nice; neither was IRS, despite Judge Gustafson’s objurgation set forth in my blogpost “Discovery In Lieu of Trial,” 4/18/19.

The Cross Colliers want to depose and gain admissions from IRS about a certain Chief Counsel Memo (CCM) that has something to do with Section 45, whereunder the Cross Colliers claim all manner of tax breaks for their alleged partners.

Judge Gustafson is a trial judge in a court with limited discovery and a long history of “play nice” pretrial stuff.

Besides, Judge Gustafson is trying this case about these facts, these parties, the law and the regs.

“Cross’s entitlement to the credits at issue in this case will be decided by applying the law to the facts about Cross and its transactions. All of the facts that the Commissioner knows about Cross he learned from Cross. Cross makes no allegation that, in responding to discovery, the Commissioner has withheld any facts about Cross. Rather, the principal dispute now before us concerns facts about other entities and their transactions. But such facts will have no bearing on the outcome of this case.

The Court will not adjudicate the correctness of the CCM. Neither party argues that the CCM has precedential value nor that we should defer to it in any way. We do not expect to attempt to distinguish Cross’s facts from those in the CCM. We do not expect to evaluate the CCM’s conclusions as to other taxpayers nor to determine whether, in issuing the CCM, the Office of Chief Counsel had an adequate factual or legal predicate for those conclusions. If the CCM was factually unsupported and legally without merit, that would not help Cross; and if instead the CCM was factually impeccable and legally brilliant, that fact would not help the Commissioner. Consequently, Cross’s efforts in discovery to learn more about the background of the CCM are misdirected.” Order, at p. 3.

The Cross Colliers want Judge Gustafson to require IRS to dish on the CCM per FOIA, but Judge Gustafson isn’t playing USDCJ, whether or not IRS bargained away a relevance objection on that material. “We will not use the resources and authority of the Tax Court to compel disclosures extraneous to our proper business.” Order, at p. 4.

And if the Cross Colliers are sweating that IRS might be smuggling in evidence about other taxpayers, then Judge Gustafson will call them on it. “In the unlikely event that the Court were to be forgetful or inattentive on this point at trial, we would expect petitioner’s counsel to remind us of the ruling we make in this order.” Order, at p. 4.

Trial is August 5, 2019. Get with it.

Only a sip away for Mary Bui, 2019 T. C. Memo. 54, filed 5/21/19. IRS claims Mary omitted $355K of canceled debt from her return for the year at issue. Mary gets about $48K from Judge Goeke, but gets hit for the rest.

We remember the Qualified Principal Residence Indebtedness largesse, now off the books but active for Mary’s year. The problem is that Mary can only show $12K of one of the mortgage loans out from under which she walked was used to expand and repair the driveway in principal residence. The $10K of custom drapery doesn’t count. The magic words are “…used to acquire, construct, or substantially improve the taxpayer’s primary residence, and that residence must secure the loan.” 2109 T. C. Memo. 54, at p. 10. If the debt wasn’t so secured and so used, no dice.

And anyway, Section 108(h)(4) limits Mary’s QPRI exclusion to about $5K, the difference between what debt was canceled and what wasn’t QPRI.

Mary claims she was insolvent when debt canceled, and IRS agrees. So Section 108(a)(1)(B). But Mary was only underwater around $42K, and you can’t cancel more debt than gets you to zero.

Mary tries for a goal-line save, but has forgotten, or never heard, Taishoff’s Law:  “Stipulate, Don’t Capitulate.”

“Petitioner suggests that respondent did not accurately account for her assets and liabilities when calculating her insolvency.  However, petitioner stipulated respondent’s insolvency calculations and has offered no coherent argument as to why the calculations are in error.” 2019 T. C. Memo. 54, at p. 12.

When it comes to TFRP liens and levies, 11 Cir. says it doesn’t fly, even though Tax Court thought it did. I didn’t blog Romano-Murphy v. Commissioner, T.C. Memo. 2012-330, nor the vacation and remand thereof in 816 F.3d 707 (11 Cir., 2016), for which omissions I now apologize and remedy.

Judge Morrison has the remand in Linda J. Romano-Murphy, 152 T. C. 16, filed 5/21/19. 11 Cir told Tax Court figure out what to do about IRS’ violation of Section 6722(b)(3)(B); IRS assessed first and determined afterward. That, says 11 Cir, is a no-no.

Here’s the short answer.

“…we hold that the assessment is invalid and that the Office of Appeals abused its discretion in upholding the proposed levy and the filing of the notice of lien to collect the assessment.  We do not sustain the determination of the Office of Appeals.” 152 T. C. 16, at p. 6.

Every IRS argument to the contrary is met by “but that’s not what 11 Cir said.” Wherefore I’ll spare you IRS’ multifarious attempts to rescue their $346K lien, which take up about 70 pages of Judge Morrison’s prose.

For a refresher on the entire IRS collections process, read this opinion.

IRS claims harmless error. Even if Linda didn’t get a determination before assessment, she got the same kind of hearing she would have gotten. No good, says Judge Morrison. Because 11 Cir.

“…the timing of assessment affects the ‘procedure used’ for collecting a tax liability.  Here we cannot be sure when the assessment of the trust-fund-recovery penalty would have taken place had the IRS made a final administrative determination before the assessment.  Therefore, its error potentially had a bearing on the ‘procedure used’ for collecting Romano-Murphy’s penalty. Furthermore, Romano-Murphy had a right, under the Eleventh Circuit opinion, to a pre-assessment administrative determination of her liability.  A pre-assessment determination is fundamentally different from a post-assessment determination.  A person seeking a post-assessment determination may be simultaneously dealing with collection actions, such as proposed levies and notices of liens.  The harmless-error rule therefore does not apply.” 155 T. C. 16, at pp. 58-59 (Citation and footnote omitted, but the footnote matters. It says IRS claims it can just redetermine and reassess, as SOL hasn’t run. So what, says Judge Morrison. The old assessment is no good, and that you could do a new one doesn’t validate the defective old one.)

Finally, Linda wants an injunction, but since IRS (which improperly took the “litigation hold” off her file and restarted collection) has reinstated the “litigation hold,” and anyway, the underlying assessment is invalid, there’s no basis for collection.

Linda was pro se throughout. She gets a Taishoff “Good job, first class.”