Judge Patrick J (“Scholar Pat”) Urda weighs up both the venial and mortal sins of Bernard T. Swift, Jr. and Kathy L. Swift, T. C. Memo. 2024-13, filed 2/1/24, their microcaptive insurers, and the reinsurance pools into which same was plunged, and finds same did not operate an insurance business as commonly understood. Rather, the whole thing was a roundy-round untaxed cash stash, courtesy of Section 831(b).

To get the tax shield, the microcaptive has to have less than $1.2 million annual premium (hence micro) and, though owned by the ownership of the captor, must diversify its risk so as to satisfy the age-old principle that “by said mischaunce shall no man be undone, but that the losse fall lightlie upon manye, and not heavily upon fewe,” as the Act of Queen Elizabeth the First (1601) put it.

BT (that’s Doc BT) owned a string of urgent care walk-in clinics, of the “usual litany of sprained ankles, sore throats, runny noses, eye injuries, and whatnot” variety. T. C. Memo. 2024-13, at p. 3. Many doctors passed through the system, but tort-reforming Texas kept malpractice recoveries low. So Doc BT had a lot of taxable cash, and rising commercial malpractice premiums. So he did the cruise-destination number, setting up offshore microcaptives (in the BVI) electing onshore Section 953 tax treatment, with supposed pool reinsurers staying in friendly offshore islands (St. Kitts), and writing exotic policies, purportedly to spread the risks.

There’s fifty (count ’em, fifty) pages of deconstruction, but the bottom line is no one not terminally insane would pay the premiums the reinsurers were getting, unless they were getting back better than 97% as retrocessionaire, and paying almost no losses and no taxes.

Judge Scholar Pat quotes Avrahami, Caylor Land, Szyzgy, Rent-A-Center, and hoc genus omne to hit the microcaptives and Doc BT with deficiencies and the five-and-ten 20% substantial understatement chop.

At first glance, why a motion to change caption in Arthur M. Bialer, 6983-19W, filed 2/1/24, should require five (count ’em, five) attorneys from IRS counsel to reply is truly befuddling. But the motion is unique, in that it seeks to erase Art from 4-1/2 years and 152 docket entries by simply giving him a nom de guerre in lieu of the name by which he has been known in Tax Court and on this my blog the while.

As to the latter, see my blogpost “The Whistle Blown on Summary J,” 12/2/19, “All Those Old Familiar Faces – One Mo’ Time,” 1/31/23, and “Slamming The Window,” 10/11/23.

As to the five attorneys, Judge David Gustafson elaborates why he can’t oblige.

“Where proceeding anonymously is permitted, Rule 345 requires the public filing of redacted versions of the documents. Petitioner proposes no procedure by which his name might be redacted from all prior documents in the record and replaced with a pseudonym. Theoretically one would submit redacted copies of all 152 filings in this case, on which petitioner’s name would be obscured every time it appears, and then the originally filed documents would all be sealed, and the new redacted versions would be filed, so that the Tax Court’s public record in this case would no longer disclose petitioner’s identity. But petitioner has not submitted (nor proposed a process for submitting) such redacted versions.” Order, at p. 6.

Apparently Art discovered that prospective employers could find out he was a blower with a simple online search, four-and-one-half years into the process. Blowers do get special protections from possible bad effects of blowing via Tax Court Rule unavailable to the ordinary petitioner, but blowers have to ask for them upfront. Tax Court can’t unring bells.

Mike’s trusty attorney doesn’t help. “We cannot ascribe any weight to petitioner’s counsel’s assertion that he has only just learned that Tax Court orders are publicly accessible on the Court’s website, if this is proposed as a reason that the delay should be excused. Whether he knew the particular means by which our orders can be publicly accessed on the internet, he must have known (and his first request to proceed anonymously shows that in fact he did know) that one way or another the Tax Court is a ‘court of record’ (sec. 7441) and its records are public records (sec. 7461) to which the public has access (see Rule 27(b)(2). At numerous times throughout the pendency of this case, the parties have filed and objected to, and the Court has ruled on, requests to seal specific documents.” Order, at p. 4. If these documents weren’t public, why fight over sealing or unsealing them?

And that ten (count ’em, ten) items were sealed back in June, 2021, doesn’t mean everything was sealed. Or so says Judge Gustafson, although steady readers of this my blog will recollect that back in 2021 sealing one document sealed them all. See my blogpost “Beeves,”  7/16/21.

Better the dude should read my blog; most of the time he wouldn’t even have to read the Tax Court website. Apparently his client does read somebody’s blog.

“Petitioner expresses concern that blog posts on the internet reveal information about this case. That is, he acknowledges that such information is already available on the internet, and our own simple internet search using his name yielded links to copies of orders that we issued in this case (i.e., links on non-Tax Court websites that, of course, we do not control). The toothpaste is out of the tube.” Order, at p. 5.

Modesty forbids my speculating on whether Judge Gustafson reads my blog.

Motion denied.

Takeaway, a classic “Those who read it don’t need it, and those who need it won’t read it”: Like the hockey players say, “Ya step on the ice, ya gonna get hit.” If you want anonymity, ask for it from the getgo, and tell a real good story, as clear and convincing as you can make it.

Intrafamily buyouts get “extra scrutiny,” which is taxspeak for flyspecking, nitpicking, and full-body-searching, so it is rare for any friends-and-family deal to emerge without many plucked feathers. So Cynthia L. Huffman and Estate of Chet S. Huffman, Deceased, Cynthia L. Huffman, Executor, et al., T.C. Memo. 2024-12, filed 1/31/24, manage to dodge some of IRS’ box-barrage.

And a Taishoff “Good Job” to Cindy’s trusty attorneys; no Beverly Hillbillies they, although I wonder why an arms’-length agreement that would have satisfied Section 2703(b)’s one-off safe harbor never got into evidence, although they ultimately do shoot the Section 2703(b)(2) rapids. See T. C. Memo. 2024-12, at pp. 18-20. True, this is ultra-fact-specific, but aren’t all of these?

There is the obligatory valuation joust, with a well-known valuation firm taking a major gut-punch: why choose comparables from the bottom quartile for key-person discount? IRS’ expert chooses the median, and that carries the day, bar one adjustment. I’ll wager an ale or two that the Rule 155 beancount proves this an expensive miscue. T. C. 2024-12, at p. 27.

The real homerun for Cindy’s trusty attorneys is avoiding chops on the gift tax on the bargain sale from parents to son. Parents’ long-time accountant bailed when this deal was going down, getting papers was a tooth-pull, and parents reasonably relied on advice that gift tax not due, satisfying all the Neonatology boobytraps.  Son and family C Corp do get some late-filings and late-paying add-ons. See T. C. Memo. 2024-12, at pp,. 44.

Takeaway- When families get ready to do the torch-throw, they’d best get appraisals lined up, comparables on deck, accountants and attorneys at the ready. And tell ’em Cindy sent ya’.

Judge Emin (“Eminent”) Toro unpacks all the conundra he raised back two (count ’em, two) years ago, and lets in the whole admin record in Sydney Ann Chaney Thomas,  162 T. C. 2, filed 1/30/24.

For the backstory, see my. blogpost “Eminently Evidentiary,” 4/26/22. But the short answer is that, even though the two letters from Sydney Ann’s friends are hearsay, they’re part of the admin record, and Section 6015(e)(7) mandates that Tax Court consider the entire admin record in their de novo review of innocent spousery.

Sydney Ann loses equitable innocent spousery based on lavish lifestyle, but the importance of this case to practitioners is FRE 802 allowing otherwise inadmissible hearsay into evidence when Congress says OK. And Congress did say OK in Section 6015(e)(7). To allow IRS to nitpick and cherrypick the admin record would defeat Congress’ plain intent.

“… the Commissioner’s assertion that the Federal Rules of Evidence should be applied to limit our review of the administrative record in innocent spouse cases would seem to swallow our scope of review in such cases, potentially rendering much of the administrative record subject to challenge. It would make little sense for proceedings in which Congress has instructed us to review the administrative record to devolve into lengthy disputes over which aspects of the record may actually be considered. And section 6015 does not permit such an outcome.” 162 T. C. 2, at p. 8.

But that doesn’t mean everything in the admin record must be accorded equal weight.

“Of course, as in a case we review for abuse of discretion, here (where we review de novo) there may be questions as to whether evidence in the administrative record is probative and reliable. And, in determining whether evidence in the administrative record is probative and reliable, we may consider indicia of reliability such as whether a document is or contains hearsay. We necessarily consider such questions as part of our de novo review of the claims Ms. Thomas advances. The Commissioner, however, is not entitled to strike portions of the administrative record on hearsay grounds. Rather, based on the congressional command in section 6015(e)(7), Ms. Thomas is allowed to rely on the administrative record for whatever it can bear.” 162 T. C. 2, at p. 10 (Citations and footnote omitted).  The omitted footnote says IRS could have called the authors of the disputed letters to test their credibility as witnesses on the trial, but didn’t.

Nevertheless, I repeat my warning from my blogpost above-cited: “The Cincinnati (that’s the reviewers of innocent spousery, not Washington’s officers) will start vigorously pruning the admin record, to keep out anything that helps the innocent. So keep copies of everything you send to the Cincinnati, and get itemized receipts for what you sent. Be prepared for a top-fuel challenge to the admin record proffered at petition time if what you sent, like love for the late great John Lennon, ‘has a nasty habit of disappearing overnight.’”

May not be evidence of absence, as the cliché says, but it sure excites suspicion.  No one has communicated to me, nor has, AFAIK, anyone in the trade press or blogosphere explicitly stated, any reason for the abrupt departure last August of ex-STJ Eunkyong Choi from the Tax Court bench.

I said in my blogpost “The Rest Is Silence,” 1/16/24, “‘The rest is silence.’ Maybe for Horatio; not for me it isn’t.”

Wherefore I am left to speculate on a very slender basis, furnished by the esteemed head of Harvard Law School’s LITC, Keith Fogg, Esq., in that pillar of the trade press Tax Notes, under dates of 6/22/23 and 7/11/23. Prof. Fogg scooped me good and proper, as I was chasing other game those dates. Good job, first class, Sir.

I must repeat myself: “I am no purveyor of conspiracy theories, neither do I make mysteries where there are none.” See my blogpost “Omertà at the Glasshouse?” 1/18/24.

Nevertheless, and notwithstanding the foregoing, was ex-STJ Choi fired for making a rookie error? Moreover, one that was very publicly called out?  

Lucius Annaeus Seneca

Judge Mark V. Holmes is quoting Letters from a Stoic, and he sure needs a stoical disposition to deal with the discovery antics of both sides in Ardan Holdings, LLC, Ardan Investors, LLC, Tax Matters Partner. Docket No. 17483-21, filed 1/26/24. This is a highest-and-best-use scrap in a Dixieland Boondockery, mining variation.

Case is on for trial next month in Columbia, SC, the parties having taken Judge Holmes’s suggestion from my blogpost “Endangered Species,” 9/6/23.

I’m not going to paraphrase or digest the thirteen (count ’em, thirteen) pages Judge Holmes needs to deal with the barrage and counterbattery fire of admissions, documents, insufficiencies, sufficiencies, and sanctions.

I’ll just observe that discovery has gotten completely out of hand; from the play-nice described in my blogpost above-cited, the parties have gotten “crabbed,” “persnickety,” “evasive under the circumstances,” and have engaged in piling on in interrogatories to dodge the 25-question limit of Rule 71(a). Courts have had problems trying to find a formula to decide what is a discrete subpart of an interrogatory, so Judge Holmes has to parse each one, and toss whatever he finds over the limit.

I’ll further observe that just because one partner in the deal has separate counsel from counsel to the (box-checked) partnership, that’s no excuse for counsel for the partnership not to make reasonable inquiry of that partner as to what they did with the realty before they contributed  it to the partnership.

True discovery geeks can read the rest for themselves.

Judge Holmes finally calls a halt to these shenanigans.

“Petitioner filed another pretrial motion this Tuesday to argue some more about its Rule 91(f) motion. The Court must observe that the parties in this case have not been litigating the pretrial phase of this case entirely in the informal, reasonable, and cost-efficient way our rules and customs encourage. We can rule on this motion by observing that it is not provided for in the pretrial order that set deadlines in this case with an eye to making sure it can be tried on time late next month. ‘When you are travelling on a road, there must be an end; but when astray, your wanderings are limitless.’ Lucius Annaeus Seneca, Letters from a Stoic 37 (Richard Mott Gummere trans., 2016).” Order, at p. 12.

Judge Holmes’ famous dictum in Oakbrook is really getting a workout. IRS is seeking summary J knocking out charitable land deals with “very contestable readings” (Oakbrook Land Holdings, LLC v. Comm’r, 154 T.C. No. 10 (U.S.T.C. May. 12, 2020), at p. 127) of the Section 170 Regulations. And Judge Emin (“Eminent”) Toro is not buying IRS’ grasping at straws in Elgin 78, LLC, Suzanne Foster 2004 Revocable Trust, Tax Matters Partner, Docket No. 26892-21, filed 1/26/24.

It’s an outright fee donation, not an easement, but IRS’ attack is straight out of the conservation dodge playbook.

First, the description of the property donated. “Respondent points out that a letter from the Lutheran Church-Missouri Synod Foundation to Elgin 78 acknowledging receipt of the donated property appears to describe the property differently from the appraisal. Specifically, respondent highlights that the letter explicitly excludes from the donated property a 70 by 130 feet parcel of land at the southwest corner of Lot 8, while the Appraisal does not make clear whether that parcel is part of the donated property.” Order, at p. 2. But the maps attached to the appraisal seem to show the excluded property was excluded, and the Elgins get the favorable inference.

Second, the appraisal doesn’t state the expected date of the donation. So what, says Judge Eminent; the Form 8283 states the actual date, and the appraisal is no older than 30 (count ’em, 30) days before, so Reg. Section § l.170A-13(c)(3)(ii)(C) is satisfied thereby. Substantial compliance, y’know.

Third is because 1 and 2 above, the appraisal doesn’t state FMV of donated property.  Because 1 and 2 above, IRS loses.

Finally, all three (count ’em, three) appraisers didn’t sign the Form 8283. Reg. Section § 1.170A-13(c)(5)(iii) requires all appraisers to sign, and they all signed the appraisal itself. IRS doesn’t say how that doesn’t satisfy the Reg.

Was it Einstein who said that doing the same thing and expecting a different result is insanity?

Judge Courtney D (“CD”) Jones, responding to an IRS motion to clarify her order in William J. Cade and Mary E. Cade, Docket No. 7723-23L, filed 1/25/24, discusses the engrafting of Section 6330(c) (NITL) procedure onto Section 6320 (NFTL) practice.

Judge CD Jones does so in the context of an IRS motion to clarify her remand to Appeals.

IRS repeats essayist and raconteur Harry Golden’s anecdote, manty-times-told in this my blog, but always worthy of repetition.

Here it is from its first iteration, “Vot Did She Set?” 6/25/13:

“The late essayist and raconteur Harry Golden told the story of an immigrant who, after many years, finally attained US citizenship. Triumphantly forsaking his native tongue, he spoke only broken English thereafter, affecting to understand no other. Even when his wife would address him in their native tongue, he would turn to his US-born children and ask them “Vot did she set?” Thereupon his wife would bombard him with choice language.”

No rude language from Judge CD Jones, of course, but Her Honor thought her order was clear enough. She’d ordered a remand per both Section 6320 and Section 6330. IRS says this is a petition from a NFTL CDP; there never was a Section 6330 NITL.

“The Court is troubled by the lack of a clear record in this case, including whether petitioners received a notice of deficiency for the tax years at issue. The Court also notes that section 6320 incorporates portions of section 6330 with respect to the conduct of hearings. See § 6320(c) (incorporating certain procedural provisions of section 6330); see also Katz v. Commissioner, 115 T.C. 329, 334 (2000) (observing that section 6320(c) incorporates certain procedural rules set forth in section 6330). Thus, it is not evident that clarification of the Court’s Order is necessary.” Order, at p. 2.

But just in case IRS is still befuddled, “… the Court agrees that jurisdiction in this case is based, in part,  on a Notice of Determination that sustains a Notice of Federal Tax Lien under section 6320. As a result, it appears that the Court would lack jurisdiction to order Appeals to hold a section 6330 hearing. See Ramey v. Commissioner, 156 T.C. 1, 11 (2021) (observing that the Tax Court’s jurisdiction under section 6330(d)(1) depends on the issuance of a valid notice of determination and a timely petition). Thus, to the extent clarification is necessary, the Court will grant respondent’s motion.” Order, at p. 2.

For Wiley Ramey’s story, see my blogpost “We Don’t Need No Authority,” 1/14/21.

So this is a Section 6320 case.

Once again, the Jersey Boys’ alumni association is trying to get taxpayers off the fraud hook when their bent-penny preparers did the nasty, unbeknownst to their taxpayer-clients. Front and center is BASR and the USCAFC, with its tripartite view of the SOL as it affects the innocent.

Judge Patrick J. (“Scholar Pat”) Urda is just the judge for this one, Stephanie Murrin, T. C. Memo. 2024-10, filed 1/24/24. The usual sad tale: many years ago, Steph (and apparently spouse, although spouse is now former spouse and doesn’t appear in this case; 6015?) fell in among a thief, apparently none other than Duane (“The Pain”) Howell. For the backstory on Duane (“The Pain”), see my blogpost “The Fraudster’s Toolbox,” 6/17/16.

One of Duane (“The Pain”)’s clients were the Finnegans, who got nailed for deficiencies arising from Duane (“The Pain)’s fraudulent returns (but not fraud chops), long after 3SOL had run.

This case is largely a replay of my above-cited blogpost, except  for Judge Scholar Pat’s evisceration of BASR.

“We have previously declined to revisit our precedent in light of the Federal Circuit’s opinion, noting that each of the judges on the panel wrote separately and that ‘it is unclear . . . which interpretation of sect[ion] 6501(c)(1) would prevail.” Finnegan, T.C. Memo. 2016-118, at *18 n.6. Laying out the scorecard: (1) the author of the majority opinion concluded that section 6501(c)(1) ‘suspends the three-year limitations period only when the IRS establishes that the taxpayer acted with the intent to evade tax,’ BASR, 795 F.3d at 1342; (2) the author of the concurring opinion reasoned that ‘it is the taxpayer (or possibly his authorized agent) who must have the requisite “intent to evade tax,”’ id. at 1351 (O’Malley, J., concurring); and (3) the author of the dissenting opinion agreed with our holding in Allen, id. at 1357–61. (Prost, C.J., dissenting).

“The Federal Circuit’s position on the precise point before us is not clear. We further note that ‘there is no jurisdiction for appeal of any decision of the Tax Court to the [Federal Circuit]’ in any event. Finnegan, T.C. Memo. 2016-118, at *18 n.6; see I.R.C. § 7482(a)(1).” T. C. Memo. 2024-10, at p. 4.

So Golsen is off the boards.

Too bad, and I mean it. Steph gets hit, notwithstanding that she didn’t intend to defraud, and no one said she did.

Tax prep is, as I have said too often, the Wild West. Absent cover from Congress (best of British luck wi’ that, Squire), IRS is helpless. Every attempt to impose discipline (hey, Supremes) on the tax prep rodeo gets shot down in court. And I can’t say no, because it’s for Congress to prescribe the reach and grasp of every Federal agency; a society as complex as ours can’t be governed by gunfights at the OK Corral. Time, and past time, for Congress to act.

It’s the famous 11 (count ’em, 11) factor test, wherein most taxpayers want debt (to sustain interest deductions). But Estate of Thomas H. Fry, Deceased, Ruth M. Fry, Personal Representative, and Ruth M. Fry, T. C. Memo. 2024-8, filed 1/23 /24, want equity, and they get it.

Unusually, IRS wants debt, although IRS is usually fighting for equity.

Why the reversal?

Well, the late Tom (before he became the late Tom) had two Sub S Corps, one that collected garbage and the other that processed it. They worked together; worked from the same location with the same personnel, accountant, etc. But the processing Sub S lost its biggest contract, so Tom infused cash from the collector to the processor by having collector do bank-to-bank transfers to processor.

But when a white knight bought out the whole operation, Tom had a bunch accumulated losses (hi, Judge Holmes) from the processor that he wanted to deduct. IRS said he had insufficient basis in the processor stock, and Section 385, duty of consistency, and doctrine of election, prevent Tom from claiming that the infusions were capital contributions (building basis via deemed distributions from collector).

Judge Christian N. (“Speedy”) Weiler blows off Section 385, at least for Sub S Corps.

“We agree with petitioners’ primary position that section 385(c) does not apply to the facts herein as there was no formal issuance of any instrument evidencing the creation of an interest in stock or equity. The issuance of an interest in debt is typically contained in a promissory note and an equity interest is typically contained in a stock certificate. No such issuance of a promissory note or a stock certificate occurred here. Thus, on the basis of a plain reading of the statute, we hold section 385(c) inapplicable.” T. C. Memo. 2024-8, at p. 12. (Footnote omitted, but it says no court ever held Section 385 bound anybody to an initial characterization.).

The paperwork is nonexistent to prove debt.

Consistency and election go by the board, as Tom’s brilliant accountant shows he corrected the books before audit, and rebuts IRS’ computations of Tom’s basis in processor stock. But Judge Speedy Weiler, like all judges, won’t add, so the actual computation must abide the Rule 155 beancount, as must the impact of the deemed distributions to Tom that went to fund the processor.

A Taishoff “good job, first class,” goes to the late Tom’s (and Ruth’s) trusty attorneys, and accountant.

Note (off-topic): This post is late due to the opening of the New York City Ballet’s Winter season (75th year), with an all-Robbins program, featuring the music of L. (“Maestro”) Bernstein, F. Chopin, and G. Verdi. Of course, also included was “no’ bad jigging,” as they say in the Highlands. And a very touching speech by the winner of the 2024 Janice Levin Prize for promising member of the corps de ballet, Naomi Corti, a young woman from Luxembourg, from whom we’ll see a lot in years to come.

Sure beat writing about Tax Court.