Archive for the ‘Uncategorized’ Category


In Uncategorized on 04/12/2021 at 16:20

There’s a full-dress T. C. today about corporate welfare, but it’s not political. Ruben De Los Santos and Martha De Los Santos, 156 T. C. 9, filed 4/12/21, had an employee welfare benefit plan for themselves and four (count  ’em, four) other employees of their Sub S. Judge Albert G (“Scholar Al”) Lauber reminds us that Ruben’s welfare plan was a SDLIA, and got his tax benefits taxed back to him as ordinary income per Reg. Section 1.61-22(b), as more particularly bounded and described in 2018 T. C. Memo. 155, filed 9/18/18.

I didn’t blog Ruben’s loss, as I had a full-dress T. C. to deal with that day, and Ruben’s deal was much of a muchness.

But today, Ruben’s trusty attorney earns a Taishoff “Good Try,” claiming that the benefits are a corporate distribution, entitled to Section 301 treatment. Tight-fisted ol’ IRS says no, the SDLIA was a “‘compensatory arrangement’ that afforded benefits to petitioner husband in his capacity as an employee.” 156 T. C. 9, at p. 3.

Ruben (that’s Doc Ruben, MD) incorporated his medical practice as a Sub S, and took all the flow-throughs on the MFJ 1040s for the years at issue. He set up one of the Legacy plans. Legacy was a lead hawker of split-dollar life insurance plans; for the backstory on SDLIAs, see my blogpost “The Split,” 8/27/12.

For Ruben and Martha to be eligible for plan benefits, they had to be employees of the Sub S.

“Under the Legacy Plan as adopted by the S Corp., petitioners were entitled to a $12.5 million death benefit, and the four rank-and-file employees were entitled to a $10,000 death benefit and certain flexible benefits. To fund the promised death benefits the Legacy Plan required the purchase of life insurance. The Trust accordingly purchased a life insurance policy (Policy) insuring petitioners’ lives. The Policy was a ‘flexible premium variable universal life’ policy with accumulation values based on the investment experience of a separate fund. The Policy provided base insurance coverage of $12.5 million, equal to the death benefit that the S Corp. had selected for petitioners. The Policy was a ‘survivor policy,’ under which the insurer would pay $12.5 million to the Trust when the second of petitioners died. The Trust in turn was required to pay $12.5 million to whatever beneficiaries petitioners had designated.” 156 T. C. 9, at p. 5.

So Doc Ruben deducted the $1.862 million the policy cost him as a business expense, while in a couple following years (hi, Judge Holmes) the policy accumulated about $800K in cash surrender value. IRS bounced the deal. Ruben and Martha lost summary J on split-dollarism. So why am I writing this?

Because IRS, Ruben and Martha, and Judge Scholar Al left figuring out what part of the cash surrender build-up gets taxed for what years. Ruben and Martha and trusty attorney claim the benefits are corporate distributions of property, notwithstanding that they agree that the benefits were employee compensation.

Ya see, back in 2018, 6 Cir overturned Machacek, to which I had given short shrift when it was a T. C. Memo. (see my blogpost “A Scrap About Scrap,” 3/28/16). I had cavalierly dismissed Machacek: “And as these SDLIA deals have been blown sky-high so many times, it’s not likely any of my readers will encounter any new ones.” Boy, was I wrong!

6 Cir went off on Reg. Section 1.301-1(q)(1)(i), which says all SDLIA distributions are corporate distributions, and that provision overrides Reg. Section 1.61-22(b).

Judge Lauber isn’t buying.

Golsen to the rescue. Machacek was 6 Cir, but Ruben and Martha are Texians, hence 5 Cir. “To adopt the Sixth Circuit’s construction of section 1.301-1(q)(1)(i), Income Tax Regs., would require us to ignore the plain language of section 301(a), the statute under which the regulation was promulgated. We are not permitted to construe a regulation in a manner that ignores its governing statute or that adds to the statute ‘something which is not there.’” 156 T. C. 9, at p. 16. (Citation omitted).

Section 301(a) says a distribution to a shareholder is only a distribution if it is made in the shareholder’s capacity as such.

“These general rules, unambiguously stated at the outset of the section 301regulations, necessarily apply to (and limit) the subsequent, more granular provisions. Those subsequent provisions often refer to “distributions to shareholders” or “property transferred by a corporation to a shareholder,” without explicitly saying–each and every time–that the distribution or transfer is being made to the shareholder “in his capacity as such.” But there was no need for Treasury to include that verbiage in these more granular provisions because the general rules stated at the outset limit the scope of the regulations to distributions by a corporation with respect to its stock.” 156 T. C. 9, at pp. 18-19. (Footnote omitted).

And since it’s compensation, it’s subject to FICA/FUTA. Adopting 6 Cir would mean an employer could give each employee a couple shares stock (hi again, Judge Holmes) and dodge withholding on the benefits.

Finally, Ruben and Martha elected to have their Sub S taxed as a partnership, and there are no Section 301 “distributions” to partnerships.

Ch J Foley, and Judges Gale, Gustafson, Paris, Morrison, Kerrigan, Buch, Nega, Pugh, Ashford, Urda, Copeland, Jones, Toro, Greaves, Marshall, and Weiler all agree.

I bet IRS is hoping Ruben’s trusty attorney appeals.


In Uncategorized on 04/09/2021 at 13:12

For those coming late to the party, and therefore puzzled by the title first set forth at the head hereof (as my expensive colleagues would say), dig my blogpost “More TEFRA Tohubohu,” 9/12/17. Judge Mark V Holmes will explain.

Today Judge Patrick J (“Scholar Pat”) Urda eschews Genesis 1:2 in the original, but brings order to the random walk that is pretrial document discovery in Janet R. Braen, et al., Docket No. 24929-17, filed 4/9/21.

As is not uncommon, the joust is about what the Braens did or didn’t produce.

Seems this is a conservation easement case, and the original cost of the land is at issue. IRS asked for some documents on the very last permissible day before the pretrial discovery cutoff hit. This was preceded by two (count ’em, two) years’ worth of demands and productions.

The Braens claim that they don’t have, or can’t find, some stuff, and Judge Scholar Pat is down with that.

For the rest, Judge Scholar Pat tosses the problem back to the parties.

“We note that trial is less than a month away and that the Commissioner did not file the motion to compel discovery until the last day of the discovery period. In this circumstance, we will give the Braens a slight reprieve. If documents responsive to request number 2 have already been produced in response to other formal or informal discovery requests, they do not need to produce the documents again (unless they so choose) and may instead identify those documents and the date of previous production in a written response to the Commissioner. Should the Braens fail to comply with this order, the Commissioner may file an appropriate motion.” Order, at p. 2. And Scholar Pat gives the Braens just over a week to do it.

IRS’ counsel is unhappy with the organization of the documents they did get. The Braens claim that’s how they keep records in the ordinary course of their business.

“The Commissioner also takes issue with the organization of the Braens’ document production, faulting them for failing to correlate the response with a request. Our rules do not impose such an obligation. Rule 72(b)(3) provides that ‘[a] party shall produce documents as they are kept in the usual course of business or shall organize and label them to correspond to the categories in the request.’ Here, the Braens have produced the documents as they are kept in the usual course of business, which is a permissible method of production.” Order, at p. 4.

Maybe there should be an embargo on those “win your case at discovery” CLEs. Too much tohubohu, too little progress in resolving the case.


In Uncategorized on 04/08/2021 at 15:43

Combing through the Tax Court orders for blogfodder today, with nary an opinion or press release in sight, I came upon a motion and a name that brought back memories.

Ryszard Sala, Docket No. 3423-21, filed 4/8/21, has an attorney. We all know that attorneys must e-file in Tax Court.


Old Bill Wise is still in there pitching. Having once again moved for such relief, Ch J Maurice B (“Mighty Mo”) Foley graciously allows that “William J. Wise is exempted from efiling requirements for purposes of this proceeding.” Order, at p. 1.

All y’all must surely remember Old Bill, eh what? No? Old Bill has been around practicing law in Tax Court for sixty-two (count ’em, sixty-two) years. See my blogpost “(Old) Technophobes, Rejoice!” 12/18/13.

On a day when my internet crashed and I shot three hours trying to get minimal service restored, I needed something to make me feel so young. Old Bill, thanks. Joe Myrow and Mack Gordon got it right.


In Uncategorized on 04/07/2021 at 20:36

I’ve been looking for a chance to echo Niagara Falls’ gift to the internet gearjammers. I thank Andrew Mitchell Berry and Sara Berry, 2021 T. C. Memo. 42, filed 4/7/21, Andy’s brother Ronald Gene, and their (nonworking) 68 Camaro, for giving me the chance. But ex-Ch J L Paige (“Iron Fist”) Marvel shuts ’em down.

Mostly it’s an indocumentado with the Section 274 overlay. Andy and RG claim that the $250K they got from a client of their construction company to convert an old nursery into condos was trust funds, for which they got oral OKs from said client by telephone to disburse. They did some building, but also disbursed funds to pay for the auto racing.

Except the Camaro never ran in year at issue. So we get the “goofy regulation” hobby loss into the mix.

Andy and RG want a BoP shift, but since they never gave the RA any paper on the audit, they’re out under Section 7491(a)(2).

Andy and RG were sole signatories on the “trust fund” account, there was only a notation on the check that funded the account that it was for the condo project, and ex-Ch J Iron Fist doesn’t buy the telephonic OKs.

At best the racing car was a start-up. The argument that it served to advertise the construction business founders.

“Although petitioners testified that the 68 Camaro featured advertising for [construction business] and that they met business contacts at the racetracks, no company logo or wordmark is visible in the only photograph of the car in the record, and the record lacks any credible evidence that those contacts led to any business for [construction business]. ” 2021 T. C. Memo. 42, at pp. 14-15. (Footnote omitted, but ya gotta love it).

“The photograph was a side view of the car taken at a race Andrew won in [year after year at issue]. Petitioners first testified that there was a [construction business] sticker on the side of the car but, after viewing the photograph, claimed the sticker was on the car’s rear window.” 2021 T. C. Memo. 42, at p. 14, footnote 6.

I’ve been told I write the most entertaining tax blog. Maybe so, but I must give credit to the Tax Court Bench and the litigants who appear before them. I hope they all keep revving their engines for many years to come.


In Uncategorized on 04/07/2021 at 20:04

TEFRA, the dinosaur lumbering towards extinction, still leaves footprints in its wake. Today, it leaves its mark on bankruptcy, even when the bankruptcy case is dismissed. So Eric Hall is left by the roadside, in Roadhouse Wines, Eric Hall, A Partner Other Than The Tax Matters Partner, 17109-019, filed 4/7/21.

Judge Kathleen Kerrigan tosses Eric, who wanted in as a partner other than the tax matterer. Eric petitioned the FPAA for the year at issue when the tax matterer did not, claiming Section 6226(b) weigh-in rights. Two (count ’em, two) years after the year at issue, Eric had filed Chapter 13 wage-earner. When he petitioned in USBCNDCA, Eric hadn’t filed his own 1040 for year at issue,

Eric’s bankruptcy petition gets tossed for failure to convert to Chapter 7 per 11USC§1307(c). Not discouraged thereby, Eric tries to file an amended Form 1065 for Roadhouse six years after the year at issue.

Seven (count ’em, seven) years after year at issue, and five years after Eric’s bankruptcy toss, Eric petitions the FPAA.

“No partner may file a petition under section 6226(b) unless such partner would be treated as a party to the proceeding. Sec. 6226(d)(2). Generally, each person who was a partner during the taxable year is treated as a party to an action filed pursuant to section 6226(b). Sec. 6226(c)(1). However, a partner is not treated as a party if the partnership items of such partner for the partnership taxable year became nonpartnership items by reason of one or more of the events described in section 6231(b), which events include conversion by reason of the partner’s filing of a bankruptcy petition. Secs. 6226(d)(1), 6231(b)(1)(D), 6231(c)(1)(E); sec. 301.6231(c)-7(a), Proced. & Admin Regs..” Order, at p. 3.

Though her explanation is a little jumbled, Judge Kerrigan sets it all out.

“Upon the filing of a petition in bankruptcy, a partner’s partnership items convert to non-partnership items if certain conditions are present and consequently, such partner no longer has an interest in the outcome of these proceedings. The partner’s partnership items convert into nonpartnership items as the filing of the date of the petitioner, if: (1) the partner is named as a debtor in the petition; (2) the partnership’s taxable year has ended prior to the filing of the petitioner; and (3) the government was able to file a claim in bankruptcy for the tax attributable to the partnership items.” Order, at p. 3. (Citations omitted).

Judge, I think you meant “The partner’s partnership items convert into nonpartnership items as of the date of the filing of the petition.” Bankruptcy courts don’t file the petitioner’s date, or the petitioner, much as the creditors might wish.

Howbeit, IRS had a chance to file as creditor in Eric’s abortive bankruptcy proceeding. And of course the year at issue was long since over.

That Eric’s bankruptcy petition got tossed doesn’t matter; it was filed, and IRS put in its claim.

March out Eric.


In Uncategorized on 04/07/2021 at 16:53

In my long and checkered career I never heard a client tell me that when I asked how s/he had calculated or derived some figure. But ex Tax Court semper aliquid novi, as Aristotle (or Pliny the Elder, or whoever) remarked never.

STJ Diana L (“The Taxpayer’s Friend”) Leyden has an off-the-bencher to prove the foregoing. Fwazi Nona, Docket No. 6514-20S, filed 4/7/20, “…has a bachelor’s degree in accounting, with a minor in finance, and is currently employed as an IRS revenue agent.” Transcript, at p. 5.

That’s someone who does audits.

Fwazi claims $10K of Sched A deductions, and Sched C other expenses of $500; (b) travel expenses of $600; (c) taxes and licenses expenses of $200; (d) supplies expenses of $250; (e) office expenses of $700; (f) legal and professional services expenses of $250; (g) insurance (other than health) expenses of $600; (h) car and truck expenses of $12,156; and (i) advertising expenses of $500; and a Schedule D loss of $3,000.” Transcript, at pp. 4-5.

And how does Fwazi come up with these numbers?

“When petitioner was questioned as to how he came up with the dollar amounts for his claimed deductions his response was ‘I guessed.’ He did not track his expenses and did not provide the Court with any evidence to substantiate his claimed deductions. Petitioner also acknowledged that these expenses he claimed as deductions under Schedule C were in fact expenses he incurred as an employee and should have been claimed on Schedule A. Either way petitioner did not substantiate any of his claimed deductions and thus, the Court sustains respondent’s proposed disallowance of these expenses.” Transcript, at p. 8.

Fwazi, you made my day.  




In Uncategorized on 04/06/2021 at 16:14

Unlike the glass through which a much more exalted personage even than Judge Albert G (“Scholar Al”) Lauber looked, this is the story of the solar lenses at the base of the tax scam known as RaPower3. RaP3 was based on energy production credits for the employment of Fresnel lenses (plastic, not glass), supposed to enhance electricity production.

Except the lenses only generated write-offs, not electricity.

Preston Olsen and Elizabeth Olsen, 2021 T. C. Memo. 41, filed 4/6/21, were but one of the more than 200 (count ’em, 200) cases breathlessly awaiting the outcome of the two conjoined Olsen cases.

The Olsens were investors in the scheme propounded by Mr. Neldon Johnson. I’m sure my readers will be glad I eschewed any Olsen & Johnson references, though great was the temptation.

The lenses never worked, at least on a commercial scale. Many broke, and others lay in warehouses, untouched. The Johnson family and friends reaped a bountiful harvest of investor dollars. Check out 2021 T.C. Memo. 41, at pp. 4-7. Finally, the Feds stepped in, and USDCDUT shut down Ra3 and its siblings, and caused the Johnsons to disgorge. 10 Cir was down with that.

The deal was strictly a passive investment with a minimal downpayment and a nonrecourse note (which was never enforced), papered to look like an active trade or business. Preston was “was supposedly “’free to work as little * * * as he would like in his solar business.’” 2021 T. C. Memo. 41, at p. 9.

And Preston didn’t have to pay the note “until after you get your money back from the Dept. of Treasury.” 2021 T. C. Memo. 41, at p. 10. And if the tax law changed, Preston could bail on the any excess he owed. 2021 T. C. Memo. 41, at p. 11. There was a supposed bonus deal if the generated electricity sales exceeded a European telephone number with country code, but that was strictly so that it “’shoots down the IRS theory that you became involved only for the tax benefits. Needless to say, petitioner received no bonus payments.” 2021 T. C. Memo. 41, at p. 12.

Preston actually visited the site, but just saw what he called “looks a little like junk,” 2021 T. C. Memo. 41, at p. 14.

Judge Scholar Al blows off Preston’s claimed travel expenses to scope out the junk.

I should point out that Preston was a partner, specializing in municipal finance, in a Salt Lake City white-shoe. He first thought the deal too good to be true, but went in anyway when he discovered he owed a lot of tax. 2021 T. C. Memo, 41, at pp. 8, 11. I am amazed that he thought this would fly.

Preston and Elizabeth used a CPA who prepared returns for other dodgers…I mean investors, but who bailed after two years’ worth, as IRS was on the case. His recommended successor held on for a year, handed off to a successor who suggested trying an equipment leasing dodge, until IRS handed Preston and Elizabeth the SNODs at issue here.

IRS’ expert visited the site, and found it was a junkyard.

The Johnsons produced their own expert, who “… opined that Mr. Johnson’s system was ‘technically viable to generate electricity,’ but he acknowledged that he did not actually observe any electricity being produced. He testified that Mr. Johnson ‘activated the system’ for a 30-minute period, but the system ‘wasn’t connected to anything’ and ‘wasn’t putting anything on the [electric] grid.’ However, he said he was impressed by Mr. Johnson’s ‘creativity.’” 2021 T. C. Memo. 41, at p. 21.

So am I. Great creativity, but us taxpayers aren’t paying for creative swindles. [Editorial comment.]

OK, no trade or business. No business activity. Preston was strictly passive. And no income produced. Judge Scholar Al does the trudge through the “goofy regulation,” Reg. Section 1.183-2(b) and finds a short circuit. Preston never showed that the lenses he bought, or leased, or whatever, were ever placed in service, that is, set up and ready to go do what they were supposed to do. They don’t have to do it, just be ready to do it. Here, there was no testing, no permitting, no documentation.

And the passive losses, against which there was no passive income, were disallowed for the energy credits in the years at issue.

But the Boss Hoss gallops to the rescue. IRS got no Section 6751(b) Boss Hoss sign-off before whanging Preston and Elizabeth with chops.


In Uncategorized on 04/06/2021 at 10:52

No, not a newly-discovered Britcom about a London department store; this is Ch J Maurice B (“Mighty Mo”) Foley’s latest outreach.

He’s seeking “talented and underserved undergraduate or graduate students interested in careers with the federal government” to explore (via the internet) “the inner workings of the U.S. Tax Court, including the opportunity to observe judges and lawyers; attend virtual trials, meetings, and presentations; and assist on projects with departments throughout the Court, including Case Services, Facilities, Finance, Human Resources, Information Technology, Library, and Public Affairs.”

And get paid.

Here’s the skinny:

And I do fondly hope that these talented and underserved explorers will figure out how to provide links to opinions and orders, so I may link to them in this my blog. And maybe even provide word-searchable online access to all orders and opinions, past and present. Just like the old system that worked so well before the Genius Baristas got hold of the site, and foisted this abomination upon a public that never did them any harm.

So sign up, one and all.


In Uncategorized on 04/05/2021 at 21:46

I’ve written about the collision between Workers’ Compensation and Social Security Disability Income, and its knock-on effect on income tax. See my blogpost “Public Service Announcement,” 1/25/21.

Today Judge Nega has an off-the-bencher about the collision between Social Security and the Affordable Care Act, and the inevitable knock-on effect aforesaid.

Here’s Carmen P. Argenziano & Virginia A. Argenziano, Docket No. 18782-19S, filed 4/5/21. It’s Virginia’s problem. Both Carmen and Virginia got Advance Premium Tax Credits for their ACA cover through the FL marketplace; Carmen took Virginia out of the marketplace after the first quarter of year at issue, but stayed in himself.

At some point that year, Virginia got $166K from the Social Security Administration. Except $35K was taken therefrom by her trusty attorney. But their MFJ 1040 omitted Form 8962, reconciling their income with the APTCs they got.

IRS did not omit sending a SNOD to Carmen and Virginia. And Carmen and Virginia did not omit a timely petition.

With the taxable share of the $166K reckoned in, Carmen and Virginia were miles over the 400% poverty line, thus their APTC was zero, not the $10K they claimed.

Carmen and Virginia want the $35K her trusty attorney got taken out of the AGI number.

“In general, income is taxed to the person earning it, even if the right to receive the income is contractually assigned to another person before it is earned. Under this principle, the amount of benefits reported as attorney fees…is considered an amount received by petitioners, even though the SSA paid an attorney the reported fee amount. Petitioners received the benefit from these funds in the form of payment for services required to obtain petitioner wife’s benefits.” Transcript, at pp. 7-8. (Citations omitted).

I make that a 22% contingency fee; par for the course. Cap is 25%; see CFR §416.1530(b).

And the back-end catch-up when actual year’s AGI meets estimated wrong-foots Carmen and Virginia, as it has so many others.

“Petitioners advance they had no knowledge that they would receive back pay from the SSA in the form of a lump-sum payment at the time they were enrolling in the marketplace and that the marketplace instructed them to consider only expected income for [year at issue] when applying for insurance coverage.” Transcript, at p. 8.

The problem is that AGI is increased by whatever Social Security benefits were excluded pursuant to a Section 86(e) election to exclude current year payments for prior years’ benefits.

See my blogpost, “Oh MAGI, I Wish I’d Never Seen Your Face,” 3/11/19. The excluded $166K is the culprit.

“Petitioners’ remaining contentions involve their rights as taxpayers and the alleged lack of accurate information provided by the ACA marketplace application process. Although we are sympathetic to petitioners’ situation, we are not a court of equity, and we cannot ignore the law to achieve an equitable end. The statute is clear: excess APTCs are treated as an increase in the individual’s income tax liability for that taxable year. Sec. 36B(f)(2)(A). Petitioners received APTCs to which they were ultimately not entitled as a result of the lump-sum payment from the SSA.” Transcript, at pp. 11-12. (Citations omitted).

Judge Nega doesn’t state who prepared Carmen’s and Virginia’s return. As chops aren’t mentioned, perhaps IRS waived them. But if there were a paid preparer, that person has already gotten The Phone Call.


In Uncategorized on 04/05/2021 at 19:38


My late and much-lamented colleague Stan had a favorite phrase: “Lo and behold!” I can hear his voice as I note the unsealing (or unStealthing) of Kennith Lee and Cathy Lee, Docket No. 20765-19, filed 4/5/21.

I hasten to state that I do not take credit for the foregoing unsealing (or unStealthing). Post hoc, propter hoc remains as fallacious as ever, but it does bring a grimace to my battered visage when I do a bird of Svithjod on Vic Lundy’s granite façade.

Kin and Cath got five (count ’em, five) NODs for nine (count ’em, nine) years’ worth of taxes. Back in 2017, Kin copped to one year of filing a false return, and admitted to underreporting four years. “Petitioners’ underlying tax liabilities in this case arose from their failure to pay the entire income tax reported for the 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, and 2017 taxable years and restitution-based assessments for the 2008, 2009, 2010, and 2011 taxable years.” Transcript, at pp. 4-5.

Kin wanted an IA folding in the current year’s taxes, but he’d defaulted on IAs in the past, hadn’t paid estimateds for ten years, and was unresponsive when the SO said no fold-in.

Cath wanted innocent spousery, but the SO wasn’t buying. And Cath wanted the present year fold-in; ditto. No further input from Cath, so SO closed the file and NODed.

True, the IRM permits a fold-in of unassessed but current liabilities; IRM pt. (Sept. 19, 2014) (“If it appears a taxpayer will have a balance due at the end of the current year, the accrued liability may be included in an agreement”). But that’s not mandatory, and Tax Court had held a bunch of times that fold-ins are not required. Especially is that so where the taxpayer has a shady record.

“Based on the circumstances in this case and the testimony proffered at trial, we find no abuse of discretion in the SO declining to include petitioners’ estimated tax liabilities for the 2019 taxable year in the proposed installment agreement and conditioning her acceptance of the agreement on petitioners’ payment of those liabilities, especially given petitioners’ history of noncompliance in paying their estimated taxes for the last ten years and defaults on previous installment agreements.” Transcript, at p. 14.

IRS won’t fold. And wins.

I want to acknowledge Judge Nega’s careful phraseology; a person acting by virtue of a  Form 2848 is a “representative,” not a Power of Attorney.

And to thank the Genius Baristas for unsealing this opinion. For whatever reason.