The anonymous spouse of John A. Hartmann, T. C. Memo. 2024-46, filed 4/17/24, may well, for all I know, be, like John, “a lawyer with decades of experience.” T. C. Memo. 2024-46, at p. 2.

Unlike John, she hadn’t failed to file returns for any of the four (count ’em, four) tax years, for one of which Judge Courtney D. (“CD”) Jones sustains the NITL which John petitioned.

Judge CD Jones doesn’t state whether spouse kept current with any estimated tax payments. Since spouse is not seeking Section 6015 innocent spousery, the usual litany of somber reasoning and copious citation of statute, regs, and precedent is absent here.

As usual, the story is in a footnote.

“AO H also verified that Mr. Hartmann did not file a joint return with his spouse for any year that he had not filed a return…. AO H noted that Mr. Hartmann’s spouse filed her returns for those years as ‘married filing separately.’” T. C. Memo. 2024-46, at p. 7, footnote 6. (Name omitted).

That’s the best defense to joint-and-several I know.

Keith M. Phillips, T. C. Memo. 2024-44, filed 4/16/24, presents Judge Travis A. (“Tag”) Greaves with a postal reverse. The usual mailed-to-last-known-address SNOD scuffle has petitioner claiming they changed address, and IRS claiming they didn’t. Here, Keith claims he never changed (he was in jail at the time), but his now-deceased ex-spouse, or his son, Keith M. Phillips, Jr., might have done.

So Judge Tag Greaves compares the USPS National Change of Address (NCOA) database datadump to IRS, with how IRS followed the Regs to update its Integrated Data Retrieval System (IDRS). And Judge Tag Greaves finds IRS didn’t.

But one might ask, “who cares?”

Keith claims improper mailing, but wants Tax Court to keep jurisdiction. All my sophisticated readers will cry with one voice “Improper mailing, invalid SNOD, no jurisdiction!” And they’re right. IRS claims SNOD properly sent, petition way late, no jurisdiction. And IRS is right.

And, as you’ll see at the foot hereof, it really doesn’t matter.

But Tax Court does have jurisdiction to decide why it doesn’t have jurisdiction, and Judge Tag Greaves is just the man to do it.

First, BoP. Almost always on petitioner, but here IRS has all the info on how it matched IDRS with NCOA, so IRS has to show they did it. Now last-known-address is a safe harbor; if mailed there, whether actually received or not is immaterial. But if sent elsewhere, petitioner has to have gotten it in time to petition. And Keith didn’t.

But USPS’ system for verifying hardcopy change-of-address forms is admittedly porous, T. C. Memo. 2024-44, at p. 7, footnote 8.

IRS does have presumption-of-regularity, and they sustain that. But Keith proves he was in jail, so maybe Junior was the one who sent the change of address; hence a mismatch.

Anyway, the IDRS transcripts don’t show what, if anything, IRS did to match the NCOA to what the IDRS transcripts they proffer show.

“We do not have to reach the question of whether respondent can generally rely on the IDRS to show evidence of compliance with the last known address regulation. The transcripts respondent provided contain no information relating to the process of matching petitioner’s information to the NCOA Notification…, only the result of such process. Even if the IDRS may be used as evidence of compliance with the regulation, the transcripts provided in this case are not competent and persuasive evidence of respondent’s compliance.” T. C. Memo. 2024-44, at p. 14. IRS loses that one.

And to make matters worse, IRS waffles.

“Respondent’s inconsistent explanations for the change of address further diminish the credibility of the transcripts. In his reply, respondent appears to argue that third-party reporting regarding petitioner’s ex-wife supported his decision to update petitioner’s last known address. Reliance on third-party reporting, excluding the USPS, to update petitioner’s last known address would violate the regulation. See Treas. Reg. § 301.6212-2(b)(1). Respondent asserted the new theory that the change of address was the result of an NCOA Notification in his second supplement to his motion. Respondent failed to provide an explanation for this change in position.” T. C. Memo. 2024-44, at p. 14.

Besides, the FINDSD didn’t match the IMFOLE on the address update previous to the one at issue, although all the others did. Hence, IRS loses.

Judge Tag Greaves dismisses sua sponte for invalid SNOD.

But, lest Keith reach too soon for the Veuve Cliquot Rosé, there’s a footnote.

“Nothing in this Opinion should be construed as limiting respondent’s ability to issue petitioner a new notice of deficiency for [year at issue] that is properly mailed to petitioner’s last known address.” T. C. Memo. 2024-44, at p. 15, footnote 10.

It seems Keith never filed a return for year at issue, so SOL wide open.

When it comes to dubious arguments about paperwork, shady stories about motivation, and hard-to-believe, soft-serve testimony, the stuff coming out of the ultra-top-secret Australian outback Pine Ridge stakeout is equal to, or better than, any Dixieland Boondockery. Take a wee decko at Robert Y. Diaz and Brittany L. Diaz, T. C. Memo. 2024-43, filed 4/16/24.

Judge Albert G. (“Scholar Al”) Lauber, whatever his other undeniable accomplishments, admits that “(N)either party called a handwriting expert as a witness, and this Court professes no expertise on the subject.” T. C. Memo. 2024-43, at p. 11. Nevertheless and notwithstanding the foregoing, Judge Scholar Al finds Robert, s/a/k/a “‘Rob,’ ‘Rbt,’ or ‘R.’”, T. C. Memo. 2024-43, at p. 12, did in fact sign the Section 7122 closing agreement with IRS; he would be taxed as a US citizen, not as an Australian. Turns out Australian taxes are higher.

But Rob, Rbt., or R claims his signature was forged, by whom he saith not. So his trial is bifurcated, while we await the outcome of the appeal in Cory Smith, before finishing this case.

Judge Scholar Al, goes through the bushelbasketful of paperwork Rob, Rbt or R denies signing, wondering why Rob, Rbt or R chose higher Australian taxes (which he never paid), and properly filed two (count ’em, two) years’ worth of 1040 MFJs not claiming Foreign Earned Income Exclusion, and then amended to claim FEIE.

Perhaps, as usual, the answer is in a footnote. And maybe so might could be this explains the entire Australian Outbackery.

” A 19-page post-trial brief was submitted on petitioners’ behalf. It is devoted largely to technical questions about tax treaties, Australian law, and other matters irrelevant to the signature authenticity issue. Petitioners admitted at trial that they were ‘working with’ a lawyer named John Castro. Mr. Castro did not enter an appearance in this case; he is not admitted to practice in this Court (or apparently in any other court); and he was recently indicted for tax crimes. See Press Release, U.S. Dep’t of Justice, Mansfield Man Charged in Fraudulent Tax Return Scam (Jan. 10, 2024), https://www.justice.gov/usao-ndtx/pr/mansfield-man-charged-fraudulent-tax-return-scam. The Court believes that petitioners’ post-trial brief was likely ghost-written by Mr. Castro or someone associated with him. That brief devotes less than a page to discussion of the signature authenticity issue. On that page it asserts that “the Closing Agreement contained a witness signature section” and finds it suspicious that Mr. Christensen did not sign the Closing Agreement as a witness to petitioners’ signatures. But the Closing Agreement does not have “a witness signature section”; the Closing Agreement has signature lines only for the taxpayers, their representative (if any), and the Commissioner of Internal Revenue. Witness signature sections were contained in the other three documents Mr. Diaz signed on August 13, 2015—the Declaration, the Employee Purchase Agreement, and the Payroll Deduction Authorization. Mr. Christensen duly signed each of those documents as a witness and/or approving officer for Raytheon.” T. C. Memo. 2024-43, at pp. 12-13, footnote 1.

And note petitioners’ prior counsel (who is apparently admitted to USTC) bailed pre-trial, “…indicating that she had represented them ‘pursuant to a third-party payor agreement that is no longer in existence.’ We granted that Motion and petitioners thereafter proceeded pro sese.” T. C. Memo. 2024-43, at p. 6.

Although the above is one takeaway from this morning’s Tax Court webinar on discovery (the “F” is for emphasis), Judge Travis A. (“Tag”) Greaves gave us a lot more. Tax Court Judges and STJs are pragmatists; if there’s a real takeaway, it’s “keep your eyes on the prize.” What do you need to win, or at least to mitigate damage?

In most cases, the stuff you’re fighting about is peripheral. If this is a run-of-the-mill deficiency case following Exam, IRS probably has all the evidence they need, and so do you. In a CDP, everything should have gone in at Appeals.

Of course, the big-ticket scenic-façade-conservation cases have to be fought at discovery. The phony, jacked-up valuations crash and burn with regularity. I note one panelist remarked in passing that her practice involved defending appraisers; I’m sure that panelist is an expert in discovery.

But for all practitioners, read the Rules, both USTC Rules of Practice and Procedure and the FRE.

And this webinar shoiuld really have been recorded and made available to those who were unable to view it this morning, and for all applicants for admission to USTC.

I said long ago that a lawyer’s list of favorite indoor sports must include second-guessing someone else’s trial strategy. Of course, it’s both cheap, easy, and, like counting everybody else’s money (another favorite), leaves no aftertaste.

That said, I can’t help but think that STJ Diana L. (“Sidewalks of New York”) Leyden is thinking as I’m thinking: why didn’t counsel for Kristine K. Fringer, Docket No. 6856-23L, filed 4/15/24, raise innocent spousery? It’s not that counsel didn’t know about Section 6015.

“Petitioner and [divorced spouse] did not check the box for innocent spouse relief nor did petitioner submit Form 8857, Request for Innocent Spouse Relief, with the Form 12153. At the hearing on respondent’s motion [for summary J], petitioner’s counsel conceded that petitioner did not and would not file a request for innocent spouse relief.” Transcript, at p. 6.

Note that the NFTL at issue results from three (count ’em, three) years’ worth of MFJ self-reporteds and unpaids. Counsel says “(D)ivorce decree mandates that [divorced spouse] is responsible and holds his ex-wife Krinstine (sic) K. Fringer harmless from any and all taxes with regard to filed returns when they were married. [Divorced spouse] has totally turned his business and personal life to the positive, is finally current with his tax filings, and is in the process of filing an offer-in-compromise to settle his outstanding tax liabilities.” Transcript, at p. 6.

Of course, IRS says divorced spouse isn’t current, and the divorce decree is irrelevant as against IRS.

Kristine loses.

Turns out counsel represented both divorced spouse and Kristine, at least when the 12153 was filed requesting the CDP. STJ Di doesn’t stress this, but one has to wonder.

I’ll wager someone is getting The Phone Call.

Christopher S. Pascucci and Silvana B. Pascucci, T.C. Memo. 2024-43, filed 4/15/24 (get those returns to the post office or PDS, if you haven’t e-filed or gotten an extension) were victims of the late Bernie (“The Bandit”) Madoff. Chris and Silv got $200K from the Fund for the Plundered, but their combined $17.2 million loss only yields a $9 million Section 165 theft loss for the cash they directly gave The Bandit’s phony hedgefund.

Chris and Silv had a bunch variable life insurance policies (hi, Judge Holmes) with two (count ’em, two) insurers that were both acquired by Met Life. But the choice of investment vehicles that funded the policies was limited to nonpublic hedgefunds, and how those funds in turn invested the money was totally out of Chris’ and Silv’s control. In order to prevent taxation of the gains from the funds, Chris and Silv could exercise zero command and control over what the funds invested in. And though the fund at issue (Tremont) funneled cash to Rye, which funneled in turn to The Bandit, that wasn’t enough to let Judge Gustafson decide that Chris and Silv were the victims of theft, even though the Fund for the Plundered said they were.

The key is investor control. See my blogpost “Keep Your Hand Upon the Dollar,” 6/30/15. These policies were structured so that Chris & Silv had no command and control, because only if they didn’t have such control could they defer tax on their gains. Both State law (NY and MO) and the policies themselves said the insurance companies owned shares in the the funds in which the premiums were invested.  If a neon was robbed, it was the insurance companies.

True, Chris’ and Silv’s insurance policies were worth a lot less, but they still had them, and the terms thereof hadn’t changed. And to let Chris and Silv avail themselves of favorable tax treatment on gains, while giving them a write-off for losses, doesn’t move Judge Gustafson.

“The Pascuccis cannot have it both ways: They cannot simultaneously enjoy the tax deferral benefit of not owning assets in the separate accounts and also claim a tax deduction that is a benefit available only to someone who did own the assets.” T. C. Memo. 2024-43, at p. 25.

IRS makes two (count ’em, two) motions for summary J in Carl B. Barney, Docket No. 5310-22, filed 4/12/24, winning one and losing the other, incidentally invoking yet another Taishoff rant that Tax Court should clean up the whole summary J process by Rule (rather than the current SPTO), namely, setting a deadline for summary J motions, requiring all applications for summary J to be made in a single motion (and, if desired, seeking alternative relief in each), permitting cross-motions, and limiting out-of-time motions.

But that’s just me. It would seem no one else cares. Except Carl does, as this will cost him $12 million via Section 6662(h) gross valuation misstatement on the for-profit coileges he sold and gifted in a complex series of transactions, the details of which you can find in Order, at pp. 2-3..

Boss Hossery first, as IRS makes the now-standard motion that the Boss Hoss has been thoroughly doped and nobbled. Judge Christian N. (“Speedy”) Weiler brushes aside Carl’s argument concerning inconsistent numbers in the SNOD, the explanation thereof, the Form 4089–B, Notice of Deficiency-Waiver, attached to the Notice of Deficiency, and sundry metadata, thus: “…respondent goes on to cite us to contemporaneous emails between the RA and his immediate supervisor as being the most helpful and specific evidence of respondent’s compliance with section 6751(b). Respondent goes on to note how our decision in Clay v. Commissioner, 152 T.C. 223 (2019) has been reversed in three U.S. Courts of Appeals, including the Ninth, Tenth, and Eleventh Circuit Courts of Appeal, and that we should abandon our prior decision in Clay and apply these circuit decisions going forward as to the interpretation of section 6751(b). Lastly respondent contends how— at a minimum—the ‘factual anchors’ of his motion are not in dispute and therefore summary judgment regarding his compliance with section 6751(b) remains appropriate here.” Order, at p. 5.

Judge Speedy Weiler finds the e-mails and the PDF-watermarked signoff on the CPAF satisfy Boss Hossery.

But the Section 6662(a) chop (from which the Section 6662(h) chop depends) is another story. Carl claims the whole shebang started when he tried to revoke his Section 453 installment treatment of the sale. Carl tried Section 453(d) revocation, believing he could do so with an amended return. Wrong; Section 453(d)(3) says you need Com’r approval; Carl got audited, asked at Exam, but never got the OK to revoke.

Carl claims abuse of discretion.

“The exercise of discretionary authority granted to respondent will not be disturbed unless we find there was an abuse of discretion. However, the determination or question abuse of discretion is factual, with an elevated burden of proof usually defined as rising to the level of arbitrary and capricious.

“We agree with petitioner’s contention that our review for abuse of discretion must consider a full review of respondent’s actions, including the administrative record. At this point we find it to be premature for us to consider respondent’s actions. Furthermore, the question of abuse of discretion is an inherently factual question, and best determined at trial on the merits. ” Order, at p. 7. (Citations omitted, but get them for your memo of law file).

Although Carl’s trusty attorneys deserve a Taishoff “Good Job,” which I’m giving them, note that IRS claims that preventing avoidance of tax is a proper ground for rejecting a revocation (Order, at p. 6), although no citation of authority is provided. Taishoff wonders if there were such authority, why it wasn’t cited, if it were conclusive.

Judge Cary Douglas Pugh punts on this one, because IRS’ position that a new accounting method (a change from the old) is in play without Section 446(e) approval is not an ambush, but inherently factual, so no summary J, either for IRS or for BRC Operating Company LLC, Bluescape Resources Company, LLC, Tax Matters Partner, et al., Docket No. 12922-16, filed 4/11/24.

Y’all may recollect Bluescapers’ previous appearance in this my blog. If not, check out my blogpost “Cost of Goods Not Sold,” 5/12/21. But all that happened there was to rule out COGS, not Section 162 ordinary-and-necessary, which card the Bluescapers now play.

So IRS now ripostes “Bluescape cannot change its method of accounting to deduct the Estimated Drilling Costs under section 162 or capitalize them under section 263(a) without first obtaining approval of the Secretary as required under section 446(e).” Order, at p. 3.

Bluescapers claim this is an ambush; they need new evidence, and the discovery and expert witnesses clocks have run.

But that falls short of what Bluescapers need to preclude IRS from putting in that defense on the trial.

“They do not expressly claim that respondent’s accounting method defense is a ‘new matter’ under Rule 142(a) rather than an alternative legal theory. Nor do they identify what new or additional evidence would be required at trial to respond to the accounting method defense different from the evidence they intend to present in their affirmative case.” Order, at p. 3. (Footnote omitted but see below).

Judge Pugh cites the cases that Bluescapers missed; except they really aren’t squarely on point. One didn’t consider whether the change-in-method (not mentioned in the pleadings) was either new matter or new issue; the other called a Section 481 argument a “new theory” and shifted BoP to IRS per Rule 142(a). Order, at p. 4, footnote 3.

Bluescapers didn’t put in details why the change-in-method argument ambushed them. Anyhow, they should have known from their previous kerfuffle over COGS that IRS was arguing their accounting method didn’t adequately reflect income.

“…both parties ask that we address application of the economic performance prong of the all events test in section 461(h), an inherently factual inquiry not appropriate for summary adjudication on the record before us. And we would not reach petitioners’ argument that the economic performance requirement does not apply to items of gross income governed by section 451 if we conclude that the estimated drilling costs can be deducted under section 162.” Order, at p. 4.

So go try the case, and save your legal arguments for your briefs.

Judge Albert G. (“Scholar Al”) Lauber is far too well-bred to utter a misquotation of Alfonso Bedoya’s famous line from the Bogart classic. But he does give us an exegesis of the celebrated “badges of fraud” in the Dixieland Boondockery context.

“The traditional ‘badges of fraud’ were developed by the courts chiefly in cases involving unreported income. During 2017, the tax year at issue, [petitioner] engaged in little or no business activity and had no income; the dispute between the parties focuses on an allegedly overstated deduction. In a case such as this, several traditional badges of fraud—e.g., understating gross income, concealing income or assets, failing to file tax returns, and dealing extensively in cash—may have little salience because they will be absent almost by definition. Other badges of fraud—e.g., providing testimony that lacks credibility, giving implausible or inconsistent explanations of behavior, and failing to cooperate with tax authorities—are incapable of complete evaluation at the current stage of this litigation, with a trial scheduled six months down the road and discovery still on-going.” North Donald LA Property, LLC, North Donald LA Investors, LLC, Tax Matters Partner, Docket No. 24703-21, filed 4/10/24, at pp. 5-6.

The Donalds want summary J that IRS can’t prove fraud, so drop the 75% chop. The Donalds rely on Mill Road 36 Henry, where the 40% overvaluation chop, but not the 75% fraud chop, was applied, because IRS failed to produce badges, and the Donalds say they told all on their 1065 and attachments, so no concealment or obfuscation.

“Following a one-week trial, the Court sustained (in large part) the disallowance of the charitable contribution deduction and the imposition of a 40% penalty for a ‘gross valuation misstatement.’ But the Court held the fraud penalty inapplicable, finding that ‘[t]he evidence [did] not establish an attempt by [the taxpayer] to conceal or deceive in the Commissioner’s administration of tax collection’.” Order, at p. 4. (Citations omitted).

Judge Scholar Al wants to wait for the trial. He goes into what IRS might prove after discovery, like documents that were backdated, discussions of sensitive topics carried on by telephone and in person rather than e-mail as keeping inadequate records and manifesting intent to conceal.

But all this can wait until discovery is complete.

That’s what Section 104(a)(2) exclusion of damages is all about, and it gets expensive for Estate of Roman J. Finnegan, Deceased, Kevin C. Tankersley, Personal Representative, and Lynnette Finnegan, et al., T. C. Memo. 2024-42, filed 4/10/24.  But it’s even more expensive for the State of IN, whose governmental child protectors were found to have trampled upon the Constitutional rights of the late Roman and Lynnette and their children to the tune of $31.35 million by the jury in USDCNDIN (reduced to $25 million by post-trial stip).

There’s no medical evidence on the trial or thereafter of specific physical injury, only a conclusory doctor’s report that maybe the late Roman and Lynnette and children had PTSD as a result, and a deposition question or two, and one on the trial.

The late Roman’s and Lynnette’s trial attorney did a great job, but the evidence of physical injury, if there was any, never made it into the record.

But if anyone built a record in this case, it’s Judge Nega. He goes over every pleading, every  interrogatory, every deposition, the bill of particulars, pretrial and post-trial motions, the expert report, the request for jury instructions, the jury instructions as given, the opening statements and closing statements, the proposed jury charge, the charge as given, the jury verdict, defendants’ motion for judgment as a matter of law, the judgment as entered, the Settlement Agreement, the general release…everything but the menu in the USDCNDIN judges’ cafeteria…to find any trace of physical injury or the physical effects of PTSD.

And he takes up 28 (count ’em, 28) pages to show it.

Judge Nega finds only “(T)he jury verdict did not mention PTSD specifically or physical injury or physical sickness generally.

“Of the plaintiffs, only Roman had a known diagnosis of PTSD at the time of the district court litigation and subsequent execution of the Settlement Agreement, and, across 14 witnesses’ testimony, Roman’s PTSD was referenced only once.” T. C. Memo. 2024-42, at p. 35.

“With the vast ocean of evidence before us concerning the district court litigation, references to PTSD make barely a drop in the bucket. Rather, the image that overwhelmingly emerges is that the damages were paid not as compensation for PTSD but for violations of plaintiffs’ constitutional rights stemming from defendants’ conduct and the emotional pain caused therefrom.” T. C. Memo. 2024-42, at p. 36. (Footnote omitted, but it says that even if PTSD were a factor, petitioners put in no evidence to show how great a factor).

I offer Judge Nega’s analysis as a template for PI lawyers who want to build a record for Section 104(a)(2) exclusion. Ya gotta get physical.