Judge Emin (“Eminent) Toro has no present but only sympathy and bad news off the bench for Terry D. Predmore & Theresa A. Predmore, Docket No. 9391-25S, filed 9/25/26. They owe Section 6662(a) accuracy chops with a five-and-ten on the deficiency.

Fire destroyed a substantial portion of the Predmores’ domicile only two days before Christmas in year at issue. They filed their return for year at issue as Terry “always filed his own taxes and in the past did so by obtaining the Internal Revenue Service’s forms and instructions at public libraries.” Transcript, at p. 5. He claimed $315K as a Section 165 casualty loss.

Except.

The year at issue was post-TCJA. Terry’s claim he was going to use part of the house for a dogbreeding business fails because the business hadn’t started, and he was only going to use part of the house anyway. Personal Section 165s are out.

And his insurance company had paid loss of use and personal property cover. Terry claimed he wasn’t sure that the insurance would cover the house itself.

Except.

“Six weeks before they filed their return, the Predmores signed a contract indicating that insurance would be paying for the reconstruction of their home. About a month before they filed their return, the insurance company told the Predmores that the calculations for their dwelling coverage were complete and that actual cash value computations would be completed in about a week. Statements show that the insurance company paid the Predmores $258,332 either 17 days before or 4 days after they filed their return. Three days after they filed their return, the insurance company sent the Predmores a letter confirming that the company had paid out $333,689 on their claim to date.” Transcript, at p. 18.

And yes, ultrasophisicated readers, before you cry out “Section 165(h)(5)),” there were two (count ’em, two) Federally declared disasters in the Predmore’s home State (IN), but they were COVID-related.

While the Predmores may have been unsure about insurance (I always am before the check clears and the SOL runs out), Judge Eminent Toro finds that sincere, “we do not find that belief reasonable in light of all of the circumstances here.” Transcript, at p. 19.

Chop appropriately Boss Hossed.

This time it’s IRS, not Kenton R. Bowen, et. al., Docket No. 2215-24, filed 9/25/26, that’s party to a divorce. Judge Ronald L. (“Ingenuity”) Buch goes off the bench finding IRS proposed “recharacterization would result in tax consequences that are divorced from the economics.” Transcript, at p. 18.

Ken and buddy Scott ran a concert promo outfit fittingly named PromoWest. In case they sold PromoWest to nonpromoters, they created SSKB, LLC, a passthrough to provide management services to PromoWest. PromoWest paid management fees to SSKB when it had cash. PromoWest was promoting and seeking new venues in the Midwest, but like all promoters it was chronically short of cash. Ken and Scott landed a deal with a bank, which loaned money to SSKB but required SSKB to make distributions to Ken and Scott, who of course personally guaranteed payment and performance of the loan terms.

PromoWest, SSKB, and Ken and Scott all reported as written.

“Everyone treated this series of transactions consistently for tax purposes. PromoWest deducted the management fees it paid to SSKB. SSKB reported the management fees it received as income, including those management fees that were redirected to loan repayments. SSKB treated the loan as a loan, in other words, it did not take the loan proceeds into income and it did not deduct any repayments of principal. [Scott and Ken] reported their shares of income from SSKB, which included the management fees paid by PromoWest.” Transcript, at pp. 8-9.

Finally, Ken and Scott sold PromoWest to another promoter who didn’t need a management arm, so SSKB was dissolved and paid off the loan in the same year.

IRS gets creative. “Taken together, the gist of the Commissioner’s adjustments is that he recharacterizes $6 million of the loans to SSKB as a dividend from PromoWest to [Scott and Ken]. The Commissioner treats the dividend as taxable to [Scott and Ken] and non- deductible to PromoWest. If loan proceeds distributed to [Scott and Ken] were actually a dividend from PromoWest, then the loan must have really been made to PromoWest. So the Commissioner’s notices determine that PromoWest ‘was in substance the true debtor with respect to [the] Loans.’ And if the loans were in substance made to PromoWest, then the loan repayments must have come from PromoWest. To reach this result, the Commissioner disallows the management fee deduction claimed by PromoWest, but instead, allows an interest expense deduction to PromoWest. For consistency, the Commissioner reduces SSKB’s income for the now-disallowed management fee.” Transcript, at p. 10. And at trial, IRS claims the management fees paid to SSKB weren’t ordinary and necessary, so no Section 162 treatment for those.

IRS says substance over form. Ken and Scott say they can structure their business however they want, but must stick to the structure, and they did.

As for the management fees, SSKB provided them. IRS says Ken and Scott should have been deemed to have provided them directly. OK, says Judge Ingenuity Buch, that might support recharacterizing, but not deductibility.

Substance over form means sussing out the economics.  Cherchez les bucks. Here there were management fees, loans, and loan repayments. On all counts, Ken’s and Scott’s reporting more closely aligned with what they did rather than IRS’ convoluted ballet.

“PromoWest paid for the services of {Ken and Scott]. It received a deduction for the payments made for those services. Whether paid as a salary or a management fee, the consequences would have been the same to PromoWest, a deduction. And the consequence was the same to [Ken and Scott]. Whether received as a salary or as a share of partnership income, it would have been ordinary income to each of them. And this is how they reported it on each of their returns. Petitioners’ form, economics, and tax treatment all aligned.” Transcript, at p. 15.

IRS’ “dividends” argument founders on E&P. Dividends come out of E&P and are paid for specific years, not all in a lump, and here there’s no such link. “The Commissioner’s proposed recharacterization makes no economic sense.” Transcript, at p. 15.

IRS’ treatment of the loan and repayment thereof earns them a Taishoff “Oh Please, First Class.” And a blow-off from Judge Ingenuity Buch.

“The Commissioner’s recharacterization would treat the loan as being a loan to PromoWest, with $6 million of the proceeds deemed to be a dividend to [Ken and Scott]. But SSKB was liable for the loan, and SSKB’s owners are [Ken and Scott]. Under the Commissioner’s recharacterization, [Ken and Scott] would be taxed on the loan proceeds for which they remain liable. This is contrary to the principle that loan proceeds arenot taxable. The Commissioner’s recharacterization would result in tax consequences that are divorced from the economics.” Transcript, at pp. 17-18.

As for repayments, IRS fumbles that one, too.

“Petitioners’ form is consistent with the economics of a loan repayment. In form, SSKB paid interest and repaid the loans from its income and assets. What appears to concern the Commissioner is that the income used to make the loan repayments came from PromoWest. Indeed, PromoWest made the loan repayments on behalf of SSKB. But both economically and for tax purposes, PromoWest treated the loan repayments as amounts paid to SSKB in satisfaction of PromoWest’s obligation to pay management fees. Consistent with that treatment, SSKB took those payments into income. The Supreme Court acknowledged the economic effect of an arrangement such as this nearly a century ago. ‘The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed.’ Old Colony Tr. Co. v. Commissioner, 279 U.S. 716, 729 (1929). Petitioners’ form, economics, and tax treatment are consistent.” Transcript, at pp. 18-19.

True, IRS’ recharacterization is streamlined, but more divorced.

“The Commissioner would treat the loan repayments as loan repayments by PromoWest, without the added step of deeming these to be management fees to SSKB. As loan repayments, the Commissioner would neither tax nor allow deductions for the repayments. But the loan repayments satisfy a loan to SSKB, which is owed by [Scott and Ken]. Because a third party (PromoWest) is reducing SSKB’s liability on those loans, the loan repayments are income to SSKB, and ultimately to [Scott and Ken]. Id. Thus, while streamlined, the Commissioner’s recharacterization would divorce the economics of what occurred from the tax consequences.” Transcript, at p. 19.

Judges always have the last word. Here’s Judge Ingenuity Buch. “Substance over form is a doctrine designed to cause the tax consequences to be aligned with the economic reality of what occurred. The Commissioner seeks to use it to do the opposite.” Transcript, at p. 20.

C. S. Lewis, thou should’st be living at this hour.

I am sure I need not ask whether Ken’s and Scott’s trusty attorneys, John, Harlan, and Nic, to whom I award a Taishoff “Good Job, First Class,” have already started on the Section 7430 admins-and-legals motion.

Edited to add, 9/25/26: Before my ultrasophisticated readers berate me for having forgotten the 18 USC §2412(d)(2)(B) net worth cutoff engrafted onto Section 7430(c)(4)(D), I have left a v/m with one of Ken’s and Scott’s trusty attorneys enquiring, and will publish any reply.

Valarie Lindsey, T. C. Memo. 2026-94, filed 9/24/26, completes the four-opinion superfecta the hardlaboring clerks in The Glasshouse on Second Street unleashed upon this blogger who never did them any harm.

Valerie’s trusty attorneys have dissected, sliced, and diced every step of the process from Examination to Appeals to Appeals Processing Support to USPS to prove not only that the SNOD wasn’t mailed, but that it didn’t even exist. I give this dynamic duo a Taishoff “Good Try, Second Class” in the Lost Causes Division.

Judge Courtney D. (“CD”) Jones finds that, despite IRS’ botched record and file keeping, it was and it did.

Cobbling together IRS records (which slide under the hearsay tag via FRE 803(6) business records) there was a SNOD, and the reprint IRS tenders will serve to show it. As for mailing, the PS3817 is admittedly defective, but IRS personnel testimony and certified mail receipt, taken together, establish mailing.

I am reminded of Mark Twain’s famous story of how he and Professor Henry Fairfield Osborn built a brontosaur for New York City’s  Museum of Natural History with nine dinosaur bones and bags of plaster of paris.

Judge Albert G. (“Scholar Al”) Lauber is a seasoned veteran of appraisal mix-and-matches, but Aloke Pal, T. C. Memo. 2026-93, filed 9/24/26, is simply a match.

Aloke switched money from his E*Trade IRA to his E*Trade stock trading account and back again. Of course Morgan Stanley, operator of E*Trade, filed a 1099-R. Aloke petitions the unreported income SND.

“In his Petition he asserted that “E*Trade has used all my 401k and pension [and has] reported false distribution[s] to IRS,” stating that he ‘want[s] his 401k and pension back.’ He asserted that he was a ‘victim of systematic hate/discrimination’ because he had filed whistleblower claims regarding Boeing’s ‘737 Max Program.’ He alleged that he had not received a Form 1099–R reporting any distributions for [year at issue] and that (in any event) he ‘did not recognize ACCT number on the 1099–R.’” T. C. Memo. 2026-93, at p. 3.

Judge Scholar Al helps Aloke out. He runs the account numbers for the IRA and the trading account, and verifies they match.

” The IRS may not rely solely on a third-party report of income, such as a Form1099, if the taxpayer raises ‘a reasonable dispute’ concerning the accuracy of the report. See § 6201(d). Petitioner has not done so. He has supplied no evidence to support his wild assertions that E*Trade stole his money and ‘reported false distribution[s] to IRS.’ The documentary record confirms the accuracy of Morgan Stanley’s reporting and clearly shows that petitioner’s assertions are baseless.” T. C. Memo. 2026-93, at p. 5, footnote 3.

“Petitioner has the burden of proof to show that respondent’s determinations of unreported income are ‘arbitrary or erroneous.’ See supra p. 5. He has supplied no evidence whatsoever to show that the stock transferred into his E*Trade brokerage account came from a source other than his E*Trade IRA. During trial the Court asked him where these shares could have come from, if not from his E*Trade IRA. He had no comprehensible response to that question.

“Petitioner’s submissions in his Posttrial Brief were not a model of clarity. His primary contention, as originally urged in his Petition, was that his retirement assets disappeared or were fraudulently taken by E*Trade. He did not supply an iota of evidence to support those assertions.” T. C. Memo. 2026-93, at p. 7. 

Of course Aloke claims reasonable cause for nonreporting the IRS distributions to avoid chops.

“In his Posttrial Brief petitioner contends that the ‘reasonable cause’ exception applies. He concedes that transfers were made into his Wells Fargo account, but he insists that he did not know where the transferred assets came from. We did not find this testimony credible. One may enjoy a large bank error in one’s favor when playing Monopoly, but this rarely if ever happens in the real world.” T. C. Memo. 2026-93, at p. 10.

Bradley L. Swain and Linda S. Swain, T. C. Sum. Op. 2026-9, filed 9/24/26, have a Third Amendment problem. They can’t pay their self-reporteds because their “Form 433–A indicated that petitioners’ adult son, adult daughter-in-law, and three grandchildren were living in petitioners’ household. Consequently, petitioners’ claimed expenses resulted in $46 of excess monthly income. Petitioners had not claimed any of those individuals as dependents on their returns. Nor did petitioners provide any explanation as to why the expenses of their adult son, adult daughter-in-law, and three grandchildren should be allowed despite the fact that petitioners had not claimed any of them on their returns.” T. C. Sum. Op. 2026-9, at p. 3.

Taishoff says nor did they provide evidence why none of those quartered on the Swains was incapable of providing any portion of their sustenance.

Judge Benjamin A. (“Trey”) Guider, III, finds Appeals checked the right boxes. People not claimed as dependents don’t count, and Brad and Linda never provided information on the term life policies they alleged they were carrying on themselves. Note IRM 5.15.1.11 (Nov. 22, 2021) allows such policies as necessary expenses.

One wonders who prepared those returns.

Sitaraman Jagannath, T. C. Memo. 2026-92, filed 9/24/26, authored two books and published 23 (count ’em, 23) articles, manages real estate, and has founded and run a 501(c)(3) to help immigrants, from whose bank account he took $590K via an “Over the Counter Withdrawal,” evidenced by a noninterest bearing promissory note from Sit’s real estate LLC, a disregarded entity, supposedly to help his daughter buy headquarters for her 501(c)(3). Except the daughter’s deal didn’t close for two years.

My grizzled, battle-hardened, ultrasophisticated readers have already shouted “Section 4958 excess benefit transaction and did he file Form 4720?” My answers: yes and no. True, IRS conceded section 4958(a)(2) excise tax of $20,000 regarding Mr. Jagannath’s participation as an organization manager in an excess benefit transaction, T. C. Memo. 2026-92, at p. 2, footnote 3.

Judge Christian N. (“Speedy”) Weiler notes Sit never claimed at trial that the $590K was a bona fide loan, T. C. Memo. 2026-92, p. 9, footnote 12. And the Forms 990 filed by the 501(c)(3) said the $590K was a loan to officer. Whoever prepared those forms handed the case to IRS. Except Sit did even better. ” Mr. Jagannath also contends that he never actually received $590,000 from [501(c)(3)]….. Specifically, he testified that he could not recall where the $590,000 went and whether there was a loan.” T. C. Memo. 2026-92, at p. 11.

I’ll spare you the rest. 

As for the Form 4720, see my blogpost “Nigeria Calling? – Part Deux,” 7/26/21, for the whole story.

Meantime, Sit gets hit for “excise taxes under section 4958(a)(1) and (b) of $1,327,500. We further hold that Mr. Jagannath is liable for section 6651(a)(1) failure-to-file additions to tax and section 6651(a)(2) failure-to-pay additions to tax.” T. C. Memo. 2026-92, at p.14.

So says ex-Ch J L. Paige (“Iron Fist”) Marvel to the trusty attorney for SGB Land Company, LLC, Docs Field of Dreams, LLC, Tax Matters Partner, Docket No. 8460-23, filed 9/23/26.

The end run in question is an attempt to insert into evidence a baseline documentation report by Dr K. and an appraisal by none other than the well-known Mr. W.  Are they “historic documents,” admissible for their existence but not for the truth of anything either says, or are they admissible per FRE 803(6) as business records?

“Ordinarily, under our Rules, these types of documents would be offered into evidence as expert testimony reports and subject to the requirements of Rule 143(g). At trial, the testifying expert witness would identify the document as his own, and we would mark and receive it into evidence as the witness’s testimony. However, per its Pretrial Memorandum, petitioner does not intend to call either Dr. K or Mr. W to testify at trial. Consequently, petitioner does not contend that these documents are expert witness reports. Instead, recognizing that the documents constitute hearsay otherwise, petitioner argues that they are admissible for the truth of the matter asserted under Rule 803(6) of the Federal Rules of Evidence, commonly known as the business records exception to hearsay.” Order, at p. 2 (Footnotes omitted, but they say experts’ written reports go in as direct subject to cross, and if these aren’t, everyone agrees they’re hearsay.) (Names omitted).

Problem is, they’re not trustworthy, which caselaw says is essential.

“These documents are devoid of vital information on the circumstances in which and for which they were created and, most importantly, the impact of those circumstances on the methodologies and calculations used. This is information that can only be provided by the authors. For example, respondent correctly points out that the appraisal report contains a spreadsheet that vaguely claims to draw from ‘cost estimate[s] provided by developers,’ but provides no clarification whatsoever on who those developers were or how they came up with the costs. Additionally, we do not have sufficient information on how Dr. K or Mr. W  were compensated for the production of these documents or their broader involvement with the transaction at issue, facts which necessarily color the reliability of the ultimate valuations used….” Order, at pp. 2-3. (Names omitted).

And here comes the safety valve.

“Rule 803(6)(E) of the Federal Rules of Evidence provides the exact kind of safety valve that trial court judges need to prevent the use of the business records exception to circumvent the traditional expert testimony rules.  Respondent has given us ample reason to rely on it here.” Order, at p. 3. (Citation omitted).

There was a T. C. Memo. today, Brenton E. Williams and Octavia P. Williams a.k.a. Octavia Pearl, T. C. Memo. 2026-91. It was Octavia’s story and the aftereffects of a hurricane, but it turns on documentation, of which petitioners have none. No novel concepts here.

Toscano Holdings, LLC, Toscano Investments, LLC, Tax Matters Partner,  T. C. Memo. 2026-90, filed 9/22/26 (Here’s lookin’ at you, Kid, to the GoMD) says they got a raw deal at Appeals, so wipe the FPAA that knocked their Dixieland Boondockery down from $38 million to $6 million.

Judge Elizabeth Crewson Paris says the past is prologue, she won’t rewrite it, and Toscano can go to trial de novo. 

Toscano first refused to extend SOL so Exam could take a second look, then six (count ’em, six) months later offered to extend, but by then Exam had sent the file to Tech to craft the FPAA. Then after Toscano petitioned the FPAA, they got remanded to Appeals. The first Appeals hearing was postponed to avoid impacting the criminal trial of W the appraiser (who was acquitted on all counts). Then the hearing took place, with which Toscano finds fault.

Judge Paris won’t invalidate the FPAA. Toscano can go to trial and fight the one real question, valuation.

Once again, Greenberg’s Express rolls on.

Two (count ’em, two) years ago I asked whether pleading reliance on Section 6662(e)(3)(B)(i) objectivity was a good tactic. “Whether this is a good tactic remains to be seen,” I wrote in my blogpost “A Note of Sympathy,” 11/14/24. It did work for Amgen back then, according to Judge (then STJ) Jeffrey S. (“High-Rise”) Fried, and it works now for Eaton Corporation & Subsidiaries, Docket No. 2607-23, filed 9/22/26, a special day hereabouts.

Judge Albert G. (“Scholar Al”) Lauber recalls Judge High-Rise Fried’s analysis, and goes along with it, though of course not citing it as precedent, which it can’t be. But note well, practitioner: you can use the reasoning in an order as persuasive and mention the order.

IRS wants privilege waiver on all Eaton’s attorneys and CPAs, as Eaton asserts Section 6662(e)(3)(B)(i) as basis for their good-faith reliance argument to avoid net Section 482 adjustment chops. Eaton specifically does not mention experts, saying they relied on an objective test. IRS agrees, and Judge Scholar Al says it’s “100%” objective, but it still shows state of mind, and that brings in everything.

Judge Scholar Al doesn’t agree that asserting good faith reliance means all privileges are waived.

“We addressed a similar question in a discovery Order issued in Amgen, Inc. v. Commissioner, No. 15631-22. The IRS argued that the taxpayer, by advancing defenses to penalties, had implicitly waived privilege over various documents. We noted that an implied waiver of privilege may occur where the party claiming the privilege raises an issue as to its own knowledge, intent, or state of mind. T.C. No. 15631-22 (Order served Nov. 11 [sic], 2024, at 7). But the taxpayer there, in asserting penalty defenses, ‘ha[d] not pleaded any specific allegations relating to its own knowledge, intent, state of mind, or the reasonableness of its actions.’ And the taxpayer did not ‘rely on privilege[d] communications’ as a basis for its penalty defenses. Ibid. We accordingly ruled that no waiver of privilege had occurred.” Order, at p. 2.

Judge, the issue date of Judge Fried’s order was 11/14/24; 11/11/24 was Veterans’ Day, a public holiday in the District of Columbia. I trust Tax Court was closed, appropriately.

“Reduced to its essentials, respondent’s argument seems to be that a taxpayer is precluded from raising a defense to a transfer-pricing adjustment unless it waives privilege over all communications relating to that issue, even though the taxpayer does not intend to rely on those communications as a basis for its defense. The taxpayer would thus face a dilemma: it would have to waive privilege as a condition of exercising its right to assert a penalty defense, regardless of the nature of the defense it seeks to assert. In practical effect, this would impose a huge burden on taxpayers’ ability to secure privileged advice from their lawyers and tax advisors. This does not strike us as an appealing argument. It is especially unappealing on the facts of this case, where the penalty defense Eaton seeks to raise is 100% objective and in no way implicates its state of mind.” Order, at pp. 2-3. (Footnote omitted, but it says the order I blogged back on 4/6/15 raised a general good faith reliance defense, not the Section 6662(e)(3)(B)(i) defense, so doesn’t apply. See my blogpost “Never Call Retreat,” 4/6/15.)

Chaps, read my blog. I cover all this good stuff.

Their key witness, who could save Albert L. Hawk & Kelley G. Hawk, Docket No. 13467-25, filed 9/21/26, north of $1.7 million in deficiency, chops and interest, refuses to testify except remotely. Al & Kelley’s trusty attorneys already tried for a remote testimony or a deposition, but Judge Albert G. (“Scholar Al”) Lauber wasn’t having it the first time, nor this time on reconsideration. Key witnesses need to be live and in person.

I spent a good deal of time in an earlier post about diligent follow-up by client and trusty attorney. True, with much less than a million USD in play, one rapidly hits a paywall, especially when there’s no payday at the end of the trail. But when one gets north of the seventh figure, a proper regard for both ends of your green silken wallet mandates a certain largesse. Like a round-trip first-class ticket, premium room, and a couple slap-up dinners. (Hi, Judge Holmes)

Here, the key witness (I’ll call him The Englishman) resides in the UK and paid Al some $4 million. Al claims this is a loan. The Englishman provided affidavits and documents at Exam in support. But now he refuses to cross the pond.

Those with a mind debased by years of practicing law might suspect The Englishman is suffering from Hamlet’s Complaint, that “sicklied o’er with the pale cast of thought” thing. Or maybe Bert Kroner’s munificent pal Mr. H (see my blogpost “Imaginary Friend?” 6/1/20.

When your case depends upon a key witness, the kind of follow-up I earlier described is just the prologue. If any doubt remains, be prepared to settle. Fast.