Echoes of the cigar-loving Marxist quipster today, as Judge Patrick J. (“Scholar Pat”) Urda deals with an insurance broker who places insurance his own life and wants to omit the premiums he received for that purchase from his income.

Doesn’t matter whose life is insured. Premiums paid to brokers for placement of life insurance policies are taxable to the broker.

The case is Donald L. Gould, Docket No. 28019-21S, filed 5/10/23, an off-the-bencher.

“At trial, Mr. Gould credibly testified that he summarized and submitted to his tax return preparer the various commissions that he received for [year at issue] by means of a statement written in long hand. He further explained that it was his understanding from long experience in the life insurance field that commissions received by a broker with respect to insurance purchased on that broker’s own life were not taxable. He asserted that the deduction he claimed for “Premiums Received” was essentially meant to exclude the amount of commissions he received for policies purchased on his own life, consistent with that understanding.” Transcript, at pp. 7-8.

It’s unfortunate that what should be a reduction in premium, like getting a discount from a seller of nondeductible goods, is not exempt, as would be a mere reduction in price. But it’s illegal in most states to rebate insurance premiums (I don’t practice in TX, where Mr. Gould worked during year at issue, so I don’t know their laws, but I’d be surprised if that was allowed).

Anyway, Judge Scholar Pat has somber reasoning and copious citation of precedent (that I’ll exclude).

“As to the deduction, Mr. Gould’s understanding of the treatment of commissions with respect to insurance purchased on a broker’s own life is incorrect. Both this Court and the U.S. Court of Appeals for the Fifth Circuit long ago recognized that commissions on such insurance constitute taxable income. An analogous rule applies in other contexts, such as the treatment of the commission a real estate agent receives for a house that he buys for himself or that a stockbroker receives with respect to his personal account activity. As the deduction here was meant to back out the amount of commissions that Mr. Gould received for insurance purchased on his own life, we accordingly will disallow it.” Transcript, at pp. 8-9. (Citations omitted).

You can bet your life,  buy a house, or trade securities, but you have to pay tax.

Judge Elizabeth A. (“Tex”) Copeland does a deep-dive into the Section 41 additional research credit (it its pre-TCJA iteration), with an almost obligatory dictionary-chaw over the word “use,” the Oxford English Dictionary serving as the pièce de resistance, in Jeffrey A. Harper and Katherine M. Harper, T. C. 2023-57, filed 5/10/23, and finds IRS comes up short in the summary J stakes.

This is another custom engineering-architectural-construction operation. Jeff’s and Kate’s outfit runs up all kinds custom buildings (hi, Judge Holmes), and decomposes massive amounts of brain tissue dealing with the arcana that envelops such things as Marine Corps recruit barracks and 200,000 gallon solar-powered water tanks.

IRS stresses processes, techniques, or inventions, which IRS claims are one-offs. But these could be used in other jobs, and could be components of the outfit’s business operations. Record not sufficiently clear.

Likewise, IRS’ limitation of the word “use” to continuous use in business is too narrow, and Judge Tex Copeland isn’t buying.

There’s also0 argy-bargy about who owns the land and structures once the stuff is built, but (a) I fail to see the relevance, otherwise than if “product” only applies to goods held for sale in ordinary course (way too restricted), and (b) even if relevant, a simple title search (which neither side apparently did) would answer the question as to the land, and the contracts for the structures (which likewise never made it into the record) would answer for the buildings. I never heard of a construction company claiming ownership of the buildings it built for anyone but themselves. Any number of research cases involve one-off projects.

In short, this is a case where summary J doesn’t work, because Jeff and Kate get the benefit of every favorable inference. Judge Tex Copeland rides far and wide through caselaw, and favorably infers at every turn.

Maybe the post-TCJA version (see T. C. Memo. 2023-57, at p. 6, footnote 4) gives IRS a better shot. But as this one is pre-TCJA they’ll have to try the case.

I make the morning line 3 to 1 IRS and Jeff and Kate settle.

Whatever the character of the debt from which it arose, interest not explicitly exempt is taxable. Judge Gale teaches this lesson to Susan D. Rodgers,, T. C. Memo. 2023-56, filed 5/9/23. Susan D.’s loved-once got a wee behind-hand with the child support. Support payments prior to the year at issue came to Susan D. via the State of AL, which extracted same from loved-once; being exempt per Section 71(c) Susan D. never got a 1099.

But for year at issue, The Heart of Dixie gave her one with the payment at issue, at no extra charge. Originally, the Mobile County Circuit Court entered judgment against loved-once for $18K, all of which was called child support arrearages. But apparently on reargument, the MCCC entered the judgment as $16K, of which $5K was arrears and $11K interest.

Taishoff says loved-once, who paid up, wanted to insert a poison pill. If all was characterized as child-support arrears, no tax on Susan D. I wonder if Susan D. was pro se in MCCC as she is in USTC. If she was represented, her trusty attorney missed something.

Judge Gale tells us what. “A taxpayer’s gross income generally encompasses all income from whatever source derived, specifically including interest. § 61(a)(4). For divorced or separated taxpayers, alimony or separate maintenance payments were generally also includible in the recipient’s gross income during the year at issue (and were deductible from the payer’s gross nincome). §§ 71(a), 215(a). This general rule is inapplicable, however, for payments in an amount fixed by the terms of a divorce or separation instrument that were made or treated as made to support the payer’s children. § 71(c). Consequently, such child support payments were not includible in the gross income of the recipient (and were not deductible by the payer). See Temp. Treas. Reg. §1.71-1T(c), Q&A-15. Interest paid on a child support arrearage is, however, includible in the recipient’s gross income under section 61(a)(4).” T. C. Memo. 2023-56, at p. 4. (Footnote omitted, but it says TCJA put paid to this stuff, but this case is pre-JCTA).

Interest is payment for loss of use of money; it doesn’t matter where the money came from.

The saga of Whistleblower 972-17, filed 5/8/23, such as it is, continues. Last year, you’ll remember, Judge Emin (“Eminent”) Toro directed IRS to disgorge unredacted documents, blowing off IRS’ Section 6103(h)(4)(A) blocking maneuver. For the backstory, see my blogpost “Whistleblower Confidential,” 7/13/22.

Judge Eminent gave IRS a chance to claim that some or all of the unredacted “would identify a confidential informant or seriously impair a civil or criminal tax investigation,” Section 6103(h)(4). Time ran out eleven (count ’em, eleven) days ago, but IRS’ and 972-17’s trusty attorneys filed a status report with the results (sealed, of course).

So Judge Eminent orders any dispositive motions by 6/5/23, with replies due 30 (count ’em, 30) days later.

Why do I mention this routine order? Because we may finally be seeing if Tax Court (or anyone else) can shake any money out of the Ogden Sunseteers post-Mandy Mobley Li, DC Cir’s gift of perpetual holiday to the OS.

Judge Eminent says his opinion in 139 T. C. 1, the subject of my above-referred-to blogpost, addressed “some, but not all, of the issues in the case. ” Order, at p. 1.

The biggest issue is whether IRS used Whistleblower 972-17’s material. And no motion is going to dispose of that, record rule or no record rule.

It’s been a busy day for Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan. After having cleared the QR codes for Glasshouse attendees, she announces the online arrival of posttrial briefs filed by Tax Court admittees and amici on and after 8/1/23. Drag-and-drop, here we come!

All hands, remember Rule 27: redact, redact, redact.

Earlier filings available from the Tax Court Copycats.

Perhaps my focus on chops (that is, penalties) has been too acute of late. It is possible to take a topic to the point of weariness, if not obsession. And I recognize that my readers have other and different issues to occupy their attention.

Still and all, is it only today’s vagaries of the Genius Baristas of Dawson’s Creek, that have blotted out the link to register for Judge Buch’s discovery seminar, as well as the transcript of his off-the-bencher in Michaelene J. Formanack, Docket No. 12846-22L, filed 5/5/23?

A docket search shows there were 18 (count ’em, 18) pages of transcript, detailing the $7500 Section 6673 chop, and the one-for-two Section 6702s. But none appear on the public opinions website, only the order directing Ms. Servoss to lay the bad news upon Michaelene.

Word to the Genius Baristas: Forget Bit.ly, and put the registration link where it will work. And put up the entire transcript of Judge Buch’s opinion in Michaelene’s case. Judge Buch deserves much better at your hands.

Edited to add: The opinion in Michaelene J Formanack is only 14 (count ’em, fourteen) pages, and the Genius Baristas found the handle, so it’s online now. IRS couldn’t find some documents, so one Section 6702 chop goes by the board, but Section 6702s for a Form 843 refund claim and a 1040X all-zeros are sustained, and Michaelene has a long record of protester jiving, so $7500 chop.

Still no registration link for 5/31/23.

It’s near enough thirty-five years since President Reagan left office, but his famous catchphrase lives on. “The seven most dangerous words in our language” are first set forth at the head hereof. IRS finds this out today once again, as Judge Morrison quashes beyond resuscitation IRS’ subpoena to one Steven Perlstein.

The case is Kirk Stevens & Shannon Stevens, Docket No. 2824-20, filed 5/4/23.

I’ve no idea who Mr. Perlstein might be, or what role, if any, he plays in Kirk’s & Shannon’s drama, nor does Judge Morrison tell us. But Kirk & Shannon definitely want Mr. Perlstein sequestered, impounded, and removed far from the clutches of the agents of the fisc.

“Petitioners seek an order from the Court quashing the subpoena. Petitioners seek other relief, to wit: finding that the Perlstein subpoena is invalid;  prohibiting respondent from further communications with Perlstein; prohibiting respondent from communicating that it might issue a subpoena to any foreign person or preparing and providing a subpoena to any foreign person; requiring respondent to answer the questions set forth in paragraph 24 of the motion and any other questions that the Court determines are necessary to evaluate respondent’s actions; and such other and further relief as the Court deems just and proper.” Order, at p. 1.

And that’s just for starters.

“… petitioners additionally request the Court exclude and prevent respondent from using in any manner in this case Perlstein’s informal interview, 148 pages of documents obtained by respondent from by Perlstein and described in the Reply (and any other statements, documents or information respondent might have obtained from Perlstein); and exclude the report of respondent’s expert, Dr. Levy,  because of its alleged extensive reliance on the allegedly improperly obtained interview from Perlstein.” Order, at p. 2.

Sounds like Mr. Perlstein spilled enough beans to put Heinz out of business.

IRS folds. They just wanted to help.

“Respondent concedes that the subpoena is unenforceable and claims that it was issued only so that Perlstein’s cost of traveling to the place of trial would qualify for reimbursement by respondent under respondent’s internal policies.” Order, at p. 1.

Makes sense, because Mr. Perlstein is residing in Israel, and place of trial is San Francisco, CA. Perlstein could blow all his frequent flyer miles and then some.

Howbeit, subpoena quashed, ruling reserved on the rest of the relief sought.

And No Registration Link

Those making personal appearances at The Glasshouse in the Stateless City need no longer provide personal information via the Denso Wave. Admin Order 2023-1 goes into effect today, May 5, 2023.

And the Bit.ly registration link for Judge Ronald L. (“Ingenuity”) Buch’s long-awaited discovery webinar is broken. Sign up however you can. The fun starts 5/31/23.

Edited to add: QR is dead, long live QR! The Bit.ly link for Judge Buch’s webinar is still broken, but you can register via the QR code on the downloadable flyer.

Judge Ronald L. (“Ingenuity”) Buch, a brilliant lawyer, seems a modern-day descendant of Mark Twain’s lawyer-hero David Wilson. More so as David Wilson, Esq., was a citizen of Dawson’s Landing, and Judge Buch works out of Dawson’s Creek.

I draw the parallel because, beside legal acumen and outside-the-box thinking, Judge Buch, like Pudd’nhead Wilson, finds that “now and then a merchant got him to straighten out his books.” The Tragedy of Pudd’nhead Wilson, Ch. II.

Like Wilson’s heroic courtroom rescue of the Capello twins, Judge Buch rescues Faysal Warfa & Aisha Ibrahim, Docket No. 7562-19, filed 5/4/23 from some of Faysal’s sloppy bookkeeping.

To avoid any political inference being drawn, as this is a firmly nonpolitical blog, I will not talk about people like Faysal being those who made this country, including without in any way limiting the generality of the foregoing, my own ancestors and those, no doubt, of my readers, or the need for similar takers of entrepreneurial risks and willingness to work hard and long.

You can read Faysal’s CV at Transcript, pp. 4-5.

As usual, Faysal’s bookkeeping lagged behind his endeavors. People who build countries generally are too busy to keep books. And those who bankroll them, like Mr. Mowlid Hussein, tell somewhat sketchy tales of cash in envelopes, and then change their stories when the cash is too big to fit in the usual #10. Transcript, at p. 9.

Still, there are enough credible tales and bank statements to shore up Faysal’s story about his Ethiopian real estate and construction business that got halted by political instability.  So not all the money Faysal got was his, and therefore unreported income.

But Faysal couldn’t prove it all, despite his modest lifestyle (rented homes, a 2011 GMC truck in MN; must be the ultimate rustbucket), and no proof of reasonable cause. Judge Buch saves what he can, but the Rule 155 beancount may result in Section 6662(a) chops for Faysal & Aisha.

Fortunately for Jacob Bright, Docket No. 10095-22, filed 5/4/23, though his recordkeeping was defective, and the bespoke preparer to whom he turned for his unreviewed return for year at issue shunted Jake’s return to the preparer’s daughter, who was better at fiction than tax preparation, Jake hits the jackpot when Judge Ronald L. (“Ingenuity”) Buch takes Jake’s case.

Judge Ingenuity Buch, with diligence exemplified by such a distinguished career as his, and ingenuity that can only be applauded, wades through W-2Gs, and miscellaneous receipts from such high-class venues as Mystic Lake Casino, Treasure Island Resort and Casino in Minnesota, and Diamond Jo Worth Casino in Iowa. Transcript, at p. 4.

Jake gambled to supplement his income as a storm damage repairer, with the usual result. “His bank account records show that his account frequently had a low or negative balance in [year at issue]. Mr.  Bright recognizes and regrets the negative effect that gambling has had on his life.” Transcript, at p. 4.

Judge Buch wades through casino records, even though recognizing that slot wins below $1200 don’t make it onto the tallies. Jake was primarily a slotshot, the worst form of gambler, though he did bet sports and blackjack.

Out of the morass, Judge Ingenuity Buch finds the path trod by the Cohanim.

“Although the casino records do not capture the full picture, they provide a sufficient basis upon which we can make an estimate.  Because each casino’s records report Mr. Bright’s activity in a different way, our estimation method differs per casino.” Transcript, at p. 12.

At close of play, Jake is stuck with the winnings the preparer’s daughter put on the return he didn’t review, but he has $191,756 of losses allowed, and IRS drops the Section 6662 chops.

I know it would be shockingly illegal and Judge Buch would never think of it, but if Jake tips the dealers and the servers at the casinos, he should definitely tip out Judge Buch. Or maybe make an appropriate charitable donation. And join GA: twelve steps save lives.