I’ve often discoursed here concerning the imposition of the Section 6673 frivolity or delay-of-the-game chop. There’s a great divergence on the Tax Court bench as to when and how much to mulct the frivolite/delayer. It seems the consensus is to give a warning before slugging.

But when to warn? From the bench at argument or on trial, in an order, or in the opinion denying the frivolous/delaying maneuver?

Once again, lest I be misunderstood, I firmly believe that trial court judges need the very broadest latitude to control proceedings in their courtrooms, whether personal or digital. No administrative judge or appellate panel can hear a sneer or see a tear, and videotape replays belong in the arena, not the courtroom.

Judge Travis A. (“Tag”) Greaves has a gambit that is worth playing in Todd O. Olson, Docket No. 28000-22L, filed 6/12/24.

Denying Todd’s motion to dismiss, and apparently ignoring IRS’ subsequent motion to dismiss, Judge Tag Greaves throws this case into the general docket.

But on the way out the door, Judge Tag Greaves delivers the following: “Petitioner is warned that any future submissions or statements advancing a frivolous or groundless position may result in the imposition of a penalty under section 6673 in an amount up to $25,000.” Order, at p. 1.

Any successor jurist will, I trust, take notice that the warning has been given, and keep it handy. Just in case. And use this method elsewhere, if required.

However white your shoes (and those of the trusty attorneys for Ranch Springs, LLC, Ranch Springs Investors, LLC, Tax Matters Partner, Docket No. 11794-21, filed 6/11/24, couldn’t be whiter), the basics still apply when you’re moving to exclude proffered evidence.

First, they seek to preclude any evidence “relating to the activities ‘of non-Petitioner entities and other conservation-easement donations.’” Order, at p. 1.

Like what? asks Judge Albert G. (“Scholar Al”) Lauber. Movant has to identify what documents they want out. Failing which, they have objections at trial on whatever grounds the law permits to stifle any irrelevant or impermissibly injurious evidence.

Next, the trusty attorneys want to preclude the expert’s report of IRS’ employed expert. We’ve seen before that this doesn’t work, if the expert is an expert and the report meets the Rule 143(g) checklist. IRS’ expert has been recognized before, and has stated his credentials per Rule 143(g)(1)(D), so the report goes in, but the expert is subject to cross-examination. That entails all the “hired-gun” and “Made As Instructed” lines of attack on credibility and weight of the expert’s report and testimony.

Basics, basics. All of us, novice and old-greyback-from-Wayback, need to remember.

I’ve recently chronicled the mishaps of petitioners with too little paper to substantiate their claimed deductions, adjustments, and credits. But too much paper is as bad. Just ask Carol A. Wright, et al. , T. C. Sum. Op. 2024-9, filed 6/10/24. The als are her ex-Steve, and his current Tami. Among them are a real estate construction entity and a café, fetchingly named Love At First Bite. These generate many and diverse deductions and adjustments (COGS).

The problem is substantiation. IRS concedes chops and some items, but Judge James S. (“Big Jim”) Halpern, confronted with the shoebox gambit (masses of credit card receipts, bank statements, restaurant meal check stubs. etc., “wretched, crinkled, scrawled over, blotched, frowsy”) has had enough.

“We need not (and will not) undertake the task of sorting through the voluminous Exhibits petitioners have provided in an attempt to see whether they have provided adequate substantiation to counter respondent’s adjustments.” T. C. Sum. Op. 2024-9, at p. 14.

Judge Big Jim asked Carol, Tami, and Steve at trial to give him a spreadsheet with items described. They gave him 34 (count ’em, 34) pages showing 278 (count ’em, 278) items, but the descriptions don’t pass Judge Bug Jim’s smell test.

“For many of the entries, the spreadsheet does not merely reproduce the annotations of the purpose handwritten on meal checks and credit card receipts but elaborates on those annotations or supplies text that is illegible on the original receipt.” T. C. Sum. Op. 2024-09, at p. 13.

“They offer a hodgepodge of receipts that left respondent unconvinced. They ask us to accept the receipts, bundled into separate exhibits for each disallowed expense, as substantiation that they spent some stated amount for the disallowed expense and that the expenditure constituted an ordinary and necessary business expense for the related activity (i.e., either [real estate] on [sic; probably “or”] one of the Schedule C activities). Petitioners’ approach brings to mind the shoebox method of presenting evidence.” T. C. Sum. Op. 2024-9, at p. 13 (Citations omitted).

Entrepreneurs are not CPAs, and should not be held to their standards. I once told a RA at Exam that I did not intend to be a bookkeeper, and if I had wanted to be I would have been. All that said, clear, easily decipherable records are the gold standard. Shoebox or RedWeld if you will (see my blogpost “The Shoebox RedWeld System,” 12/8/21), but be prepared to defend your recordkeeping with something better than “here’s a bunch paper.” (Hi, Judge Holmes).

Sam Goldwyn said that of oral agreements, but it holds true for written agreements the party to be charged therewith never signed. So says Judge Elizabeth A. (“Tex”) Copeland to IRS in Tibor Gyarmati, Docket No. 33671-21, filed 6/7/24.

IRS thought they had a deal, and. moves for entry of decision. Tibor claims he can prove a higher basis for the property he sold, which is a heavy feature of the deficiency at issue. Tibor is a wee bit tardy coming up with the documents he claims supports his position, which IRS says they don’t.

Tibor won’t sign the proposed stipulated decision document (PSDD).

“The PSDD Respondent emailed to Mr. Gyarmati … can only be viewed as an offer of settlement. The parties never signed a settlement stipulation or other such document delineating the terms of the settlement. Respondent never received a signed executed copy of the PSDD and no such document was filed with this Court. There is not enough in the record indicating the accepted terms of settlement that Respondent wishes for us to enforce. While we do not condone Mr. Gyarmati’s late delivery of the Exhibits to Respondent and believe such documents require significant clarification by Mr. Gyarmati, we cannot enforce a settlement in this case. We will therefore deny Respondent’s Motion and allow the parties to provide evidence of the remaining issues for decision at the scheduled remote trial setting for this case.” Order, at p. 3.

Taishoff says the best way to effectuate a settlement is to tell the parties to go try the case. A review of the procedural history, for which read the order, shows that Judge Tex Copeland wisely eschews head-banging here; that train left. If petitioner won’t sign, let petitioner try the case. And IRS again finds that short-circuitry is not a cure-all.

Oleg Kolomiyets, T. C. Sum. Op. 2024-8, filed 6/6/24, gets reminded of the above-captioned truism by STJ Zachary S. (“Highrise”) Fried. While pulling down six figures as a full-time, commission-based loan processor, Oleg also ran Millhouse Advisors, a sole proprietorship engaged in real estate advisory services (nature of which unexplained).

Millhouse hemorrhaged cash, losing over $100K via Section 162 ordinarys-and-necessarys, according to Oleg’s Sched C. And Oleg has bank and credit card statements.

He doesn’t have “…separate books of account for Millhouse, nor did he maintain a bank account in the name of the business. Petitioner maintained a personal checking account with USAA Federal Savings Bank (USAA) and two credit card accounts with USAA.” T. C. Sum. Op. 2024-8, at p.2.

Unhappily, “According to petitioner, he is entitled to a deduction for one-half of the expenditures shown on the bank and credit card account statements. However, petitioner did not connect the expenditures shown on the bank and credit card statements to deductions for business expenses claimed on his return. Moreover, petitioner failed to explain how the items purchased related to, let alone were ordinary and necessary business expenses of, Millhouse or any other trade or business. Finally, petitioner presented no evidence that would satisfy the section 274(d) substantiation requirements for expenses related to car and truck expenses. It follows that petitioner is not entitled to deduct these expenses.” T. C. Sum. Op. 2024-8, at p. 4.

The Section 6662 five-and-ten understatement chop applies.

Takeaway- You won’t get a toaster any more, but some banks offer cash for a new business account if you use it. A good idea. And keep those books and records. A little time with elementary accounting software will save much grief. And tell ’em Oleg sent ya.

Laura Elizabeth Mann, Docket No. 9643-23S, filed 6/5/24, tells a tale of a series of fraudulent returns filed in her name by an accountant to STJ Peter (“HB”) Panuthos, but only one of those returns is at issue, and Ms. Mann filed no other for that year.

STJ Panuthos tells us nothing about the source of the deficiency, but I cannot think it can be anything but third-party reporting.

Howbeit, Ms. Mann admits the deficiency.

“In her pleadings as well as at trial, petitioner acknowledged that the omitted income determined by respondent was not reported on her [year at issue] tax return. Further, petitioner indicated that the deficiency of $5,508 for [year at issue] was correct. However, petitioner contends that the filed [year at issue] return was not authorized to be filed by her, and that an accountant improperly and ‘fraudulently’ filed a return on her behalf. Petitioner also contends that the situation was similar for tax years [Year Minus Six] through [Year Minus One], in that returns were ‘fraudulently’ filed on her behalf.” Transcript, at p. 4.

IRS points out that none of the other “fraudulent” returns resulted in a deficiency.

It’s a most puzzling tale, but STJ Panuthos tells us nothing more, except that the out years are beyond his jurisdiction.

Deficiency confirmed, chops conceded.

We’ve all gotten the e-mails, ostensibly from a friend: “it’s my son’s/daughter’s birthday, and I need to buy him/her something and I’ve lost my wallet. Buy a $100 gift card from X retailer and send me the numbers. I’ll pay you back.” Of course, your friend’s e-mail addressbook has been hacked, and this is a scam: you’ll never see the money again.

Ian D. Smith, T. C. Memo. 2024-65, filed 6/4/24, blows the whistle on corporate skullduggery of this type. Target furnishes services to customers, who pay with “gift certificates” (this is an old case); target pays employees therewith, reporting neither income from said certificates nor paying FICA/FUTA/ITW thereon. What employees report is nowhere stated.

Ian has been here before, of course; see my blogposts “What Price Glory?” 6/7/17, and  “The Blower Remanded,” 4/23/20.

We know from the first of the cited blogposts that the “amount in dispute” is everything IRS claims from target, from whatever source derived, not just what the blower provided. This to clear the Section 7623(b) $2 million threshold for mandatory 15% – 30% award. But the blower’s payout is limited to IRS’ take from what the blower provided, not from what IRS otherwise turned up.

Judge Morrison reviews the administrative record line by line, and at close of play, Ian’s information only gets him 15% thereof, of which 5.7% is sequestered.

True, IRS already had target in crosshairs, but hadn’t yet pulled the trigger.

Taishoff says Congress needs to fix this. Blowers put lives, fortunes, and sacred honor on the line when they blow, and that’s no exaggeration, as caselaw has shown. Congress howls about government spending and wasted taxpayer money, but when it comes to collecting the revenue to pay for this, they’re parsimonious with resources and rewards. Time to reward people whose efforts yield big paydays adequately.

Alan Hamel and Estate of Suzanne Hamel, Deceased, Alan Hamel, Special Administrator, T. C. Memo. 2024-62, filed 6/3/24, are caught in two time warps, and neither one helps. Judge Christian N. (“Speedy”) Weiler explains.

Alan and the late Suzanne (before she became the late Suzanne) were caught up in a son-of-BOSS digital option dodge, Palm Canyon X, years ago. After Alan and Suzanne got a SNOD, IRS gave the partnership an FPAA which featured a bunch chops (hi, Judge Holmes). These were litigated in Tax Court fifteen (count ’em, fifteen) years ago and affirmed in DC Cir.

Judge Speedy Weiler determined that the 1997 amendments to Section 6221 made chops a partnership-level matter in FPAAs, whether same were merely computational or required individual fact-finding at partner level. No SNOD required, and no separate partner-level proceeding required. All this of course is pre-Bipartisan Budget Act of 2015, which leveled the levels post-1/1/18. Alan and the late Suzanne are bound by the old decision, which Tax Court cannot now alter.

But what about 3SOL? The SNOD here is well beyond, but IRS claims Alan and the late Suzanne were unidentified partners. They hadn’t furnished IRS with information required by Reg. Section 301.6229(e)-1T, and no incorporation by reference of other documents has any effect.  That IRS sent Alan and Suzanne an NBAP doesn’t mean they satisfied the identification requirements of the aforementioned Reg.

Alan’s and the late Suzanne’s arguments that IRS knew all along were defeated in Gaughf Props., LP. See my blogpost “A Busy Day,” 9/10/12.

So chops are off the menu, but deficiencies are definitely on.

Not Joseph Spiezio’s and Louise Spiezio’s, says Judge Christian N. (“Speedy”) Weiler, in the eponymous  T. C. Memo. 2024-64, filed 6/3/24. Joe’s LLC elected Sub S treatment, and later merged with another. While this was happening, Joe’s LLC acquired another outfit. That outfit was embroiled in a dispute with a multi-employer pension fund, which ended up in USDCSDNY. When the dust cleared, Joe’s LLC (of whose membership interests he was 100% owner) was hit with about $3.9 million in liabilities to the pension fund along with other players. Joe’s LLC alone was hit with $325K in addition, but Joe was not held individually liable. Subsequently, the pension fund went after Joe and others, but not his LLC, for unpaid liabilities in excess of $3 million; this they settled out for $2.8 million, and Joe personally signed confession of judgment for that.

Of course, Joe promptly filed Ch 11, and merged his LLC as aforementioned. The Bankruptcy Court let Joe and the merged entity off the pension fund hook for $2.3 million, which the merged entity raised by selling its assets and paying the $2.3 million out of proceeds.

Whether or not Joe’s LLC is disregarded for tax purposes, it still has an independent existence for everything else. Joe never claims NOL for the pension fund payout until he amends his returns for years at issue to carry back $3 million (or something, T. C. Memo. 2024-64, at p. 2).

IRS claims all-events test not satisfied in year for which NOL claimed, that the merged entity paid and not Joe or his now-non-existent LLC, and that Joe is estopped to argue that he was personally on the pension fund hook, as he argued otherwise in USDC and Bankruptcy Court.

Judge Speedy Weiler finds the survivor of the merger existed pre-merger and made all the payments. Whether Joe’s LLC was a disregarded or not, it paid nothing, and Joe’s confession of judgment means nothing because Joe paid nothing.

And even if Joe were entitled to an NOL, the payment giving rise thereto was established on the trial to have been after the year where a pension find payment could have been deducted. See Section 404(a)(6).

IRS has Boss Hossery buttoned up, but Joe claims good faith. IRS says Joe’s preparer was a disbarred attorney; so what, says Judge Speedy Weiler. That doesn’t make the preparer incompetent, and IRS didn’t prove he was. But Joe and Louise “are not permitted to ignore their obligation to ensure that their tax returns accurately reflected their income for the 2015 and 2016 tax years. Considering Mr. Spiezio’s legal education and business experience, coupled with the Spiezios’ knowledge of the prior IRS audits disallowing their earlier NOL carryforward, we cannot conclude that they relied on their tax preparer in good faith and that the incorrect returns resulted solely from their adviser’s own errors.” T. C. Memo. 2024-64, at p. 11. Joe was a St. John’s (Queens County) graduate and a graduate of City University of New York law school, and ran a couple businesses (hi, Judge Holmes).

Leave to amend is liberally granted, provided no prejudice or unfair surprise. But when IRS seeks to amend its amended answer to inject the anti-abuse provisions of Reg. Section 1.460-4(k)(4) into the scrimmage over their completed construction method of accounting, Otay Project LP, Oriole Management LLC, Tax Matters Partner, Docket No. 6819-20, filed 5/31/24, cries foul.

Otay has been here before, of course. They’ve got tiered partnerships and a huge (like $867 million) basis step-up; for backstory, see my blogposts “Speedy Is As Speedy Does,” 5/14/21, and “The Best Discovery,” 11/1/21. Otay’s trusty attorneys have given IRS a lot of trouble when they’ve sought to amend.

IRS was arguing economic substance, but wants to insert the anti-abuse provisions of Reg. Section 1.460-4(k)(4). Otay’s trusty attorneys yell IRS is wild-carding “a brand-new matter into this case more than three years since filing his amended answer by now challenging the CCM [Completed Contract Method] of tax accounting used by petitioner since its inception in year 1999, and only some five months prior to trial.” Order, at p. 4.

Judge Christian N. (“Speedy”) Weiler doesn’t care for IRS’ belated timing, but if five (count ’em, five) months before trial doesn’t give the Otays enough time for discovery, he’ll maybe give more.

“While not ideal timing, we cannot say that the First Amendment to the Amended Answer will create unfair surprise or prejudice to petitioner, should the Court grant respondent’s Motion for Leave to Amend. The issue seems to be a legal dispute, relating the application of the anti-abuse rule of Treas. Reg. § 1.460-4(k)(4) and the Partnership’s use of the CCM accounting method. We also accept respondent’s premise that evidence required to invoke the CCM anti-abuse rule is coextensive with the evidence required to test the economic substance of petitioner’s restructuring and/or the partnership anti-abuse rule of Treas. Reg. § 1.701-2(a). See Treas. Reg. §1.701-2(b)(3).” Order, at p. 4.

Note that in the second of my two above-referred-to blogposts, the Section 701 anti-abuse argument was raised.

Howbeit, “to negate the potential for prejudice – should petitioner need additional time to conduct discovery or a delay (in completion) of trial in light of respondent’s First Amendment, the Court is inclined to grant such a request, if made, by petitioner.” Order, at p. 5.