Put the mint jelly (or the applesauce) back in the ZeroKing. Judge James S (“Big Jim) Halpern has taken the chop off the menu. For the vórspeise, see my blogpost “Why The Chop?” 3/13/23.

The trusty attorney for Alberto Delgado & Virginia Delgado, Docket No. 13919-19S, filed 5/4/23, fessed up “… that at least one of their arguments lacked merit: ‘Petitioners . . . alleged (in error) that the validity of the Notice was called into question under Scar because the Notice failed to identify the source of the $25,312 in unreported income reflected therein.’ (Emphasis added.).” Order, at p. 1.(Apostrophes as in original).

Petitioners and trusty attorney further replied to Judge Big Jim’s OSC: “Nevertheless, they claim: ‘[T]hey had genuine doubts about the validity and genesis of the deficiency reflected in the Notice. On the assumption that the Court might disagree, they argue: ‘Petitioners’ case fits those cases in which the Penalty’s deterrent purpose is best achieved via a warning rather than a punitive fine.” Order, at p. 1. (Apostrophes as in original).

So just this once, Judge Big Jim relents.

“We will, in this instance, give petitioners the benefit of the doubt and not impose upon them an I.R.C. section 6673(a)(1) penalty.” Order, at p. 2.

I’m not claiming that said trusty attorney, much less Judge Big Jim, reads my blog. I have neither pride of authorship nor claim to any authority, however attenuated.

But I can say I’m happy with the result.

Noel Coward’s 1942 classic gives me today’s title. Getting a partnership interest in exchange neither for cash nor property, but for services rendered or to be rendered is taxable to the recipient per Section 721, unless Rev. Proc. 93-27, 1993-2 C.B. 343, intervenes. That promulgation provides that if only a profits interest, and not a capital interest, is bestowed on the servant, no taxable gain results.

A profits interest supposes that, were the partnership liquidated eo instante as the grant of the partnership interest to servant, the servant would get nothing. This is the source of the famous “carried interest” beloved of hedgefundies.

Judge Christian N. (“Speedy”) Weiler recognizes ES NPA Holding, LLC, Joseph NPA investment, LLC, Tax Matters Partner, T.C. Memo. 2023-55, filed 5/3/23, as the good and faithful servant when it gets an interest in some consumer lending operations.

It’s a rather complicated buy of Joshus, a/k/a Joshua, s/a/k/a Josh Landy’s (no apparent relation of STJ Adam B. (“Sport”) Landy) operations, whereby ES gets 30% of the restructured bundle. Judge Speedy Weiler needs a couple diagrams (hi, Judge Holmes) to tell the tale, so see T. C. Memo. 2023-55, at pp. 4-7.

If the Islanders had run these plays, they might still be in the playoffs.

Howbeit, the whole question is what was the worth of the bundle as restructured with ES onboard, having contributed neither cash nor property.

IRS claims ES provided no services, and if it did, it got a profits interest because its share was worth a lot more than ES claimed, hence cash out at liquidation.

ES claims Section 7491 BoP shift, but Judge Speedy Weiler speedily shifts to preponderance of evidence, and ES wins anyway.

ES did provide services.

“Considering the text of Revenue Procedure 93-27 § 4, the evidence supports a finding that ES NPA directly (or through its principals), before and after formation, provided services to or for the benefit of the partnership in a partner capacity or in anticipation of being a partner. It is undisputed that the material assets of this partnership are held in NPA, LLC, and the activities ES NPA performed were to and for the benefit of the future partnership. It is of no material consequence that ES NPA’s interest in NPA, LLC is held indirectly through IDS, which is a mere conduit since the liquidation rights in the class C units in both IDS and NPA, LLC are identical. This partnership came about only through ES NPA and NPA, Inc.’s joint ownership of IDS and their ownership interest in NPA, LLC. Other relevant elements here evidencing that the application of Revenue Procedure 93-27 is proper are the presence of entrepreneurial risk and the receipt of a profits interest in the capacity as a partner. Thus, it is entirely reasonable to conclude that ES NPA’s receipt of the class C units meets the intended parameters of Revenue Procedure 93-27 § 4.” T. C. Memo. 2023-55, at p. 12.

OK, but what was the partnership worth at the instant ES got its interest? Our old pal willing buyer and BFF willing seller come in holding hands. It falls to judges to weigh, balance, learn, mark, and inwardly digest the lucubrations of dueling experts.

But Joshus-Joshua-Josh got on the stand, and we should all have such witnesses, whatever their names are.

“Determining credibility is the province of the Court, and we find the testimony of Mr. Landy, a neutral third-party regarding the nature of the transaction at issue, to be credible and unbiased. We find nothing in the record to dispute a finding that the transaction was arm’s-length and bona fide. We decline to adopt respondent’s expert’s opinion of value.” T. C. Memo. 2023-55, at p. 16.

Value zero. ES wins deficiency, and chops go by the board. Moreover, if you’re setting up, or defending, a carried-interest case, this opinion has good stuff.

It was a Torts 101 standby in my young day (and probably still is). In damage suits by persons bitten by an alleged vicious dog, the owner/defendant was allowed to prove that the dog had never bitten anyone before, hence the owner was not on notice of the dog’s alleged propensity, so not required to curb same.

My readers, probably as bored as I am with my retelling of the random imposition of (or refraining from imposing) Section 6673 frivolity chops, have probably already begun rolling their eyes as I tell the tale of Tammy Louise Blaszak, Docket No. 34180-21, filed 5/2/23, an off-the-bencher from STJ Peter (“HB”) Panuthos.

Tammy Louise is one who “advances frivolous constitutional and statutory arguments that her wages are not income subject to federal income tax purposes and that because of her status as a ‘state national’, the IRS does not have any authority over her.” Transcript, at p. 8.

Of course STJ Panuthos “advised petitioner that she might become liable for a penalty under section 6673 and explained the circumstances for the application of that penalty. Despite the Court’s admonishment, petitioner has persisted.” Transcript, at p. 8.

No Section 6673 chop, however.

 IRS asks for and gets the Section 6662(a) five-and-ten if the Rule 155 beancount bears it out.

I note STJ Panuthos didn’t impose the Section 6673 frivolity chop, notwithstanding that “(I)n a prior order, served August 18, 2022, petitioner was admonished for advancing frivolous arguments and we noted that petitioner was involved in a federal district court case in the Western District of Michigan where she was again warned for making similar frivolous arguments.  Blaszak v. United States, No. 1:21-CV-1093, (W.D. Mich. June 10, 2022).” Transcript, at p. 8.

I did note Judge Buch’s grant of a bye to George Luniw, notwithstanding his extensive frivolity record, 5/2/23. See my blogpost “Please Read My Blog,” 4/18/23. And for Judge James S (“Big Jim”) Halpern’s OSC without warning to trusty attorney for the Delgados for some unspecified “intercourse” with IRS at exam, see my blogpost “Why the Chop?” 3/13/23.

Again I have to beg that I be not misunderstood. Judges have to run their own courtrooms. Disruptive behavior and timewasting maneuvers need to be squelched on the spot. I don’t like restrictive guidelines proposed by those who never tried a case to a verdict or represented a live client. But I would propose a one-bite rule for frivolites: one clear warning, explaining the reasons and the consequences for further clowning. If no repentance, then the chop.

Interest on US Savings Bonds is taxable. This should surprise no one, but Anthony Vennard Hitchman, T. C. Sum. Op. 2023-18, filed 5/2/23, thought the bond he inherited from his late father got a step-up in basis for the interest accrued thereon, so he only owed the interest accrued from when he inherited until when he cashed it in.

STJ Diana L (“Sidewalks of New York”) Leyden puts Anthony wise.

“Interest on U.S. savings bonds is fully taxable. Treas. Reg. § 1.61-7(b)(3). A taxpayer who owns a U.S. savings bond can elect to report the income on his federal income tax return. Id. Under section 454(a) a bond owner for whom the entire interest is includible in income at the maturity of the bond may elect to treat the annual interest as income. An election is made simply by including the interest as income on a tax return, and that election is binding for all subsequent years. I.R.C.  § 454(a). If no such election is made, the interest accumulates, and when the bond matures, the accumulated interest is taxable in the year the bond matures or is redeemed. I.R.C. § 454(c) (flush language).” T. C. Sum. Op. 2023-18, at p. 5.

His late father never having so elected (Taishoff says “who does?”), Anthony gets hit for the whole boat.

As the poker players say. That means the best possible hand, given the community cards, what cards the player holds, and what other cards remain in the hands of the other player(s), undealt, or mucked. IRS has such a hand in Roy A. Nutt and Bonnie W. Nutt, 160 T. C. 10, filed 5/2/23.

Roy and Bonnie e-filed their petition at 11:05 p.m., local time, on the last day per the SNOD. Problem was, local time was CDT, as Roy and Bonnie resided in AL. Alas, Rule 22(c) says a “paper will be considered timely filed if it is electronically filed at or before 11:59 p.m., eastern time, on the last day of the applicable period for filing.”

Judge Ronald L (“Ingenuity”) Buch also finds that FRCP 6(a)(4) requires filing in the court’s time zone on the cutoff date.

And the DAWSON website instructions for filing petitions says the same.

Section 7502 mailed-is-filed, doesn’t help, as technophobic Congress only included snail mail and PDS in the category of the saved, not electronic means.

The old 6:00 a.m. the day after, more particularly bounded and described in my blogpost “Technologically Challenged,” 3/21/16, is ancient history.

So Ron’s and Bonnie’s filing was too late by six (count ’em, six) minutes, as their filing hit the Glasshouse computer at 12:05 a.m., the day after the last day to file.

If it’s any consolation, AFAIK Ron and Bonnie hold the record for the latest bounced petition from a SNOD.

Taishoff says this rule, though a classic “bright-line” easy of application and ironclad of proof, seriously shortchanges citizens and taxpayers in the Far West and across the Pacific. The US tax system and therefore Tax Court’s jurisdiction is worldwide. Why should we in the Eastern time-zone catch a break denied to our fellow citizens in Samoa and Guam?

Islander

Good-faith belief in one’s Virgin (Islander) status is insufficient, says 11 Cir. Wherefore, no summary J for Estate of Anthony R. Tanner, Deceased, Marglen M. Tanner, Personal Representative, T. C. Memo. 2023-54, filed 5/1/23. This, more or less, is a reprise of Tice, for which see my blogpost “Cruising the Virgins,” 4/10/23.

The late Anthony, prior to becoming the late Anthony, filed with VIBIR for the two (count ’em, two) years at issue, both of them pre-2008 and thus not subject to the Reg. Section 1.932-1(c)(2)(ii) good-faith out if filed with VIBIR and carried over to IRS.

The Estate tries the same move that Dave Tice made, panning the Reg. for APA and due process, but that fails for the same reasons as in Tice.

No one can find the carried-over VIBIR return for Year Two, so Judge Buch can’t decide what was filed. Taishoff says on that basis, with Estate having BoP, they’re losing that one on the trial.

As for Year One, it’s a question of fact whether the late Anthony was or was not a bona fide Virgin (Islander). Hulett (ex-Coffey) says good faith is not enough, and that’s an 11 Cir case. This case is Golsenized to 11 Cir.

“Because the Eleventh Circuit has squarely held that Mr. Tanner had to be a bona fide USVI resident for his USVI returns to trigger section 6501(a), and we must presume for purposes of deciding this Motion that he was not one, we cannot grant summary judgment on this ground.” T. C. Memo. 2023-54, at p. 9.

Note that the SNOD was issued ten (count ’em, ten) years after the second year at issue’s return was filed. Exactly how the Estate is to prove the late Anthony’s Virginity is a good question.

This headline is almost longer than CSTJ Lewis (“The Magnificent Name”) Carluzzo’s opinion in Nick A. Kolev, T. C. Memo. 2023-53, filed 5/1/23. In fact, this three-pager is the shortest T. C. Memo. I’ve seen in many a long day.

Nick’s refund got nicked for $881.92 by the local child support crew, but Nick claims he and loved-once worked it out between themselves so the local supporters’ nick was “fraudulent.” Except Nick claimed a credit for the $881.92 on his year at issue return, which IRS first allowed, and then on the same day disallowed.

No one questions the total tax due shown on Nick’s return. IRS assessed that exact amount. “It appears that the assessment was made pursuant to section 6201(a)(3), which authorizes respondent to summarily assess erroneous federal income tax prepayment credits. Although no explanation for the reassessment has been provided, perhaps the credit was treated as a prepayment credit because the credit was claimed in the area of the return where income tax prepayment credits are claimed.” T. C. Memo. 2023-53, at p. 2.

Almost two (count ’em, two) years later, IRS gives Nick a SNOD at no extra charge. Except the amount of deficiency shown is “$0.00.”

“The Notice [SNOD] references the credit and includes the amount of the credit in the ‘balance due,’ but it identifies the credit as an “adjustment to prepayment credits not subject to deficiency’ procedures.” T. C. Memo. 2023-53, at p. 2.

Nick agrees (“more or less”) that he’s not entitled to a Federal tax credit, but he wants the money back from the local supporters. He doesn’t put in evidence whatever notices he got from the local supporters.

That’s the lesser of Nick’s problems. Has Tax Court jurisdiction at all?

IRS claims at trial there’s a deficiency for the claimed $881.92 credit. But that’s not what the SNOD says. “Respondent claims that although the Notice [SNOD] shows a zero deficiency, there is actually an $881.92 deficiency in petitioner’s [year at issue] federal income tax because petitioner subtracted the credit from his [year at issue] tax liability. Petitioner’s return, however, shows otherwise;  although the credit increased petitioner’s refund, it did not reduce his income tax liability as shown on the return. Respondent described the manner in which the Notice [SNOD] was drafted as some sort of mistake and argued that the Court should proceed as though the credit reduced the amount of tax shown on the return. Mathematically and in reality, however, it did not.” T. C. Memo. 2023-53, at p. 3. (Footnote omitted, but it says this isn’t a case of an ambiguous SNOD; the SNOD clearly says “Deficiency $0.00.”). And the SNOD says the overstated credit is not subject to deficiency procedures.

No deficiency, hence no jurisdiction.

Another vanishing act worthy of Penn and Teller.

IRS’ salami-slice tactic, going for partial Boss Hossery summary J, goes on apace. The discovery counter-gambit, alleging the real Boss Hosses are OCC attorneys who masterminded the Notice 2017-10 shot-across-the-bows of the Dixieland Boondockers, isn’t faring so well.

Judge Patrick J. (“Scholar Pat”) Urda gives the right-about-face to Lake Jordan Holdings, LLC, Lake Jordan Partners, LLC, Tax Matters Partner, Docket No. 16532-21, filed 4/28/23, when they try this on. IRS makes the usual move for partial Boss Hossery, with affidavits from RA and immediate supe. The Lakers want discovery; wasn’t the real decider of overvaluation chops the overbosses at OCC?

“Lake Jordan questions whether RA C actually made the initial determination to assert penalties. In raising this issue, it points to the IRS’s enforcement push in the conservation easement context and evidence that RA C was working hand-in-glove with lawyers from the IRS Office of Chief Counsel with respect to this case. Following Lake Jordan’s line of thinking, if one of these lawyers (or higher-level officials) made the initial determination to assert penalties, that person’s supervisor, not SRA B, would have been the right person to consider penalty approval. Lake Jordan seeks additional discovery to prove its theories.” Order, at pp. 3-4. (Names omitted).

Now Judge Scholar Pat is hip that summary J shouldn’t be granted if there’s outstanding discovery; summary J finds factual issues, doesn’t dispose of them.

Except the key is that there was proper supervisory approval before first communication to taxpayer that chops were on the menu.

“Whether RA C or SRA B received direction or advice from IRS higher-ups or lawyers before the formal communication of penalties to Lake Jordan is of no moment. ‘We do not second-guess the extent of the RA’s or the supervisor’s deliberations about whether penalties should be imposed,’ but instead ‘confine our search to seeking evidence of written supervisory approval.’ Cattail Holdings, T.C. Memo. 2023-17, at *11; accord Raifman v. Commissioner, T.C. Memo. 2018-101, at *61; Belair Woods, 154 T.C. at 17. There is no dispute that RA C recommended the penalties asserted in the FPAA and that her immediate supervisor SRA B approved them in writing. The Commissioner has established compliance with section 6751, and any further discovery on this general topic is unnecessary and irrelevant.” Order, at p. 4. (Names omitted).

For the backstory on Cattail, see my blogpost “Highly Contestable – Redivivus,” 2/14/23. I blogged both Raifman and Belair, but I’m on deadline with no time to look them up.

Howbeit, I expect to see the counter-gambit played in 11 Cir, if the case gets there.

I add Judge Christian N (“Speedy”) Weiler’s admonition to Timothy Hildebrand, Docket No. 3791-21, filed 4/27/23, to my overflowing list of “Those who need it won’t read it, and those who read it don’t need it” items. Two (count ’em, two) years after petitioning, all the while making motions and entering into a stiped decision and order, Tim moves to seal the entire docket, although his original petition neither disclosed his SSAN nor his income.

“Generally, official records of all courts are open and available to the public for inspection and copying. As a general rule the official records of the Tax Court are open and available to the public for inspection and copying. Thus, when one files a lawsuit, one generally steps into the light.” Order, at p. 2 (Citations omitted). Or, as the hockey players say, “You step on the ice, you gonna get hit.”

Tim has concerns, and they aren’t frivolous. “Petitioner’s concerns about identity theft are not by any means frivolous. All litigants, including the roughly 30,000 taxpayers who file petitions in this Court every year, share those concerns.” Order, at p. 2.

But Rule 27(a), with which Tim complied and which he never suggests has been violated in his case, provides what protection Tax Court can give him.

“Petitioner has not demonstrated that the presumption in favor of access to the Court’s records is overcome. In filing his Petition more than two years ago, petitioner did not keep confidential his information and other facts reflected in his Petition or the record. While he alleges the risk of economic harm, petitioner fails to state any exceptional circumstances that exist in his own case. We therefore hold that he has not made a showing that the sealing of the record in his case is warranted.” Order, at p. 3.

Takeaway (unnecessary for my readers, but for the record): If you want sealing, request at petition. Tell your story and make it good.

I agree with the old Midwesternism “I don’t chew my cabbage twicet.” But for me, that means “twicet in the same place.” So here is an echo of my very brief spiel last evening to the Joint ABA/NYSBA Subcommittee on Taxation of Cooperatives and Condominiums.

This is of interest to tax advisers to sponsor/developers of phased or larger-scale Homeowners’ Association or Condominium projects. These are also part of the communities we serve, although our primary focus is on individual owners, sellers and buyers, and lenders, and Boards of Managers or Directors.

The materials on which I base these remarks are found in my blogpost “Rev. Proc. 2023-9,” 4/25/23. You can read these for yourself. My pet peeve is those CLE presenters who drone on, reading their written materials to us attendees, as if we were functionally illiterate. Presumably we attorneys and CPAs can read English, and maybe even understand what they read. Tell me what’s written between the lines.

There was a lot wrong with old Rev. Proc. 92-29; the intro to Rev. Proc. 2023-9 lists them in extenso. The two I focus on are the burdensome reporting and recordkeeping requirements, but worse is the mandatory extension of SOL, which is not limited to matters concerning the amenities, but to the entire project and the operations of the taxpayer generally. I know of no developer who availed themselves of this farrago. In fact, neither Tax Court nor 9 Cir mentions this Rev. Proc. in Shea Homes. I wonder if IRS’ counsel even mentioned it in their pleadings.

I note that, at page 9 of Rev. Proc. 2023-9, IRS speaks of any reasonable method of defining the project. Is IRS tacitly abandoning its fight against Shea Homes, notwithstanding AOD 2017-03?

Howbeit, I suggest you analyze Rev. Proc. 2023-9, if your practice involves sponsor/developers. I’d be interested to hear what that advisory community has to say, specifically, how many developers are likely to avail themselves of the safe harbor offered thereby.

Finally, a morning-after thought. Maybe IRS will keep AOD 2017-03 alive as a weapon against the envelope-pushers who try to abuse Shea Homes.