Hi, Judge Holmes

First, Judge Elizabeth A. (“Tex”) Copeland gives IRS’ counsel and us a brief lecture on how to seal filed but unredacted exhibits. Here’s Andre Temnorod & Brianna Temnorod, et al., Docket No. 5114-19, filed 4/26/23.

IRS’ counsel phoned Judge Tex Copeland to tell her about the unredacteds. Exactly what the Judge was to do was not specified, but Judge Tex Copeland rose to the occasion as follows.

“The Court informed respondent that a temporary seal could be placed on the filing, but that a Motion would be necessary to permanently seal the documents. As such, the Court placed a temporary seal on the affected filing.” Order, at p. 1.

Leaving aside the split infinitive, both IRS’ counsel and the Temnorods’ trusty attorneys banged in a joint motion the next day, specifying which docs were to be sealed. They seem to have prepared a table showing what and where in each of the five (count ’em, five) consolidated cases the docs sought to be sealed were to be found.

The table is found at p. 1 of the Order. Check it out; it’s a good template if you’re stuck in a like situation.

The lesson is obvious: if you want someone to do something, make it easy for them to do it. With the table, the Judge can order the Clerk to follow the road map.

Second, my colleague Peter Reilly, CPA, informs me that last week 9 Cir affirmed Amr H. Mohsen, T. C. Memo. 2021-99, filed 8/11/21. I’d thoroughly forgotten Amr, as I expect all but readers with the prodigious memory of Mr. Reilly had likewise done, but the backstory is in my blogpost “Look Back? Look Out,” 8/11/21.

I can’t say I’m surprised. But I want to use this opportunity to remind my readers that I do not routinely follow Tax Court orders or opinions beyond their first appearance. Draw no inference or presumption that I will do so in any case. Mr. Reilly and his colleagues in the blogosphere and trade press have time and resources far beyond mine; Mr. Reilly, for example, has the resources of forbes.com, which are far beyond my poor power to add or detract.

If you want to quote an opinion, assuming it’s available as precedent (orders, off-the-benchers, and Sum. Op.s aren’t, but you can try to lift the reasoning and cases therein cited that are precedential), first do a docket search for further developments. If an appeal is taken to the CCA, go to PACER and see what you can find, or if you don’t want to spend the money but can live dangerously, try Google searching. But I won’t do any of that as a rule.

For the benefit of my fellow members of the ABA/NYSBA Joint Subcommittee on Taxation of Cooperatives and Condominiums who will have heard my presentation on the referenced Revenue Procedure tomorrow evening, here are some links to relevant documents. For the backstory, see my blogpost “Medal Count,” 2/12/14.

1) Shea Homes Inc. v. CIR, 142 T. C. 60, 2/12/14, Wherry, J.

https://casetext.com/case/shea-homes-inc-v-commr-1

2) Affirmed, Shea Homes, Inc. v. CIR., 834 F. 3d 1061, (9 Cir., 2016, Fernandez, CJ)

https://law.justia.com/cases/federal/appellate-courts/ca9/14-72161/14-72161-2016-08-24.html

(3) IRS AOD 2017-03; 2017-15 IRB 1072, 4/10/17

https://www.taxnotes.com/research/federal/irs-guidance/actions-on-decisions/irs-won%27t-acquiesce-in-shea-homes-holding-on-completed-contracts/mb8y

4) Rev. Proc. 92-29

Click to access RP92-29.pdf

5) Rev. Proc. 2023-9, 1/27/23

Click to access rp-23-09.pdf

This member of the famous trio (could’a, should’a, would’a) is no help to Cynthia L. Hailstone and John Linford, T. C. Sum. Op. 17, filed 4/24/23. It’s John’s story, as Cynthia is innocent spoused out; IRS can’t prove Cynthia has actual knowledge that John received unreported disability insurance proceeds, and John doesn’t contest Cynthia’s Section 6015(c)(3)(C) exit.

John was an ex-insurance salesman during year at issue. While he was an insurance salesman, his employer provided disability insurance for its employees; John was one such. Although the insurance policy allowed the employer to require participating employees to pay up to 25% of the premiums, the employer elected not to.

You’ve probably already guessed the rest. John got disabled, and got $105K from the disability insurer, which he did not report. John did get a W-2 showing the payment.

STJ Diana L (“Sidewalks of New York”) Leyden has this one, and she gets to the point fast.

“Section 105 governs amounts received under accident and health plans. While the statutory framework is admittedly confusing, section 105 works as follows. First, section 105(a) provides a more specific rule than the general income inclusion rule under section 61 for when amounts received by an employee through accident or health insurance for personal injuries or sickness are excludable from income. If a disability payment under a disability insurance policy is not attributable to contributions by an employer or paid by the employer and the payment meets the requirement of section 105(c), then it is excludable from gross income.” T. C. Sum. Op. 17, at pp. 4-5. (Citation and footnote omitted).

As for contributions by the employer, that means contributions not included in employee’s gross income. If employee paid tax on the employer’s contributions, the proceeds are excludable.

“While petitioner argues that the policy allowed the company to choose an option to permit an employee to pay part of the premiums, the record is clear that the company did not choose that option and did not allow employees to pay any amount of the premiums. Rather, the record shows that the policy premiums were paid by the company. Therefore, under section 105(a) the amounts of the disability payments were paid under a policy for which the contributions (premiums) were paid by the company, and the exclusion under section 105(c) does not apply. Rather,  under section 61 the disability payments petitioner husband received… are includible in his gross income.” T. C. Sum. Op[. 2023-17, at p. 5.

Unfortunately for John, the “confusing statutory framework” doesn’t prevent a Section 6662(a) five-and-ten understatement chop if the Rule 155 beancount breaks bad.

“Petitioner husband asserts that he should not be liable for the penalty because he ‘did not feel that taxes were due on that disability amount.’ However, petitioner husband does not dispute that he received the disability payments nor that he received the Form W–2 that reported them. Petitioner husband did not rely upon a tax adviser or accountant to prepare petitioners’ tax return. Rather, he used a commercial tax return preparation software program. He testified that he did not see a prompt for reporting the disability payments, and thus, he did not report them.” T. C. Sum. Op. 17, at p. 6.

I will refrain from commenting upon a tax system that requires disabled persons to engage tax advisers or accountants. Some of my best friends are tax advisers or accountants.

We bloggers dread above all else running out of blogfodder. Taxes, supposedly one of only two sure things in this world, give me hope, which is why I’m here. But though the ground is unchanging, the landscape is undergoing constant change. Petitioners who once served up banquets now only provide the funeral baked meats to coldly furnish forth the table.

So once again Judge Albert G (“Scholar Al”) Lauber turns to the Grim Reaper of Serial Blowerdom, Mandy Mobley Li, 22 F. 4th 1014 (DC Cir, 2022). And under the sickle, if not the hammer, falls Suzanne Jean McCrory, Docket No. 15366-20W, filed 4/21/23.

It seems like yesterday that Judge Scholar Al shot down a couple Suzanne Jean’s claims for reward (hi, Judge Holmes). In fact it was yesterday; see my blogpost “Fighting Joe’s Spirit,” 4/20/23. Y’all will recall Suzanne Jean claimed she had 60 (count ’em, 60) Forms 211 sitting with the Ogden Sunseteers. Well, she lost two yesterday, and today another three are goners.

“This case is on all fours with Li. IRS classifiers recommended that petitioner’s claims be rejected because her ‘allegations are not specific, credible, or are speculative.’ Accepting the classifiers’ recommendations, the WBO decided not to forward petitioner’s information to an IRS examination team, and no action was taken against any Target on the basis of information that petitioner submitted. Because the IRS did not ‘proceed[] with any administrative or judicial action,’ the D.C. Circuit’s decision in Li dictates that we grant respondent’s Motion to Dismiss for Lack of Jurisdiction.” Order, at p. 3.

Fifty-five claims to go. The outlook isn’t bright for Suzanne Jean, nor for any aspiring serial blower.

I lamented the death of Whistleblower Indomitable, Fighting Joe Insinga; see my blogpost “Death of a Star,” 10/27/21. Here is his successor, Suzanne Jean McCrory, T. C. Memo. 2023-51, filed 4/20/23. Suzanne has been here before, of course, many a time and oft. Suzanne Jean stripmines the public record, overhauling the same to stir up litigation, and seeking the bubble 30% in the teeth of Mandy Mobley Li.

This time Judge Albert G (“Scholar Al”) Lauber, specialist in the realms of unsuccessful blowerdom, sends off Suzanne Jean because the Ogden Sunseteers decided to “‘Reject the Claim: Allegations are not specific, credible, or are speculative.” As to Target 1, ‘[r]eview of [IRS databases] appear[ed] to show all income [was] reported’ on information returns for tax years 2019 and 2018. As to Target 2, the classifier found that tax may not have been paid on a ‘small portion of interest for the 2019 tax year,’ but that this amount was de minimis and ‘would be below tolerance to pursue.’ Petitioner’s claims as to both Targets were thus ‘[r]ecommended for rejection by classification.” T. C. Memo. 2023-51, at p. 2.

Suzanne Jean’s fishing grounds are tort judgments against tobacco companies, specifically the punitive damage components and interest. Suzanne Jean herself claims 60 (count ’em, 60) Forms 211, and counting.

Suzanne Jean claims she has other claims of like tenor, so it’s premature to dismiss these two. So what, says Judge Scholar Al. Whatever the OS do or don’t do with the others, these are toast.

Judge Scholar Al is probably grateful to DC Cir, and Mandy Mobley Li, for setting up the master toss of all serial blowers.

But Suzanne Jean will soldier on, in the spirit of Fighting Joe.

No, that’s not a misprint, rather it is the intro to Judge Emin (“Eminent”) Toro’s send-off of the trusty tax advisers of Gladys L. Gerhardt, et al., 160 T. C. 9, filed 4/20/23. Gladys is lead-off for la famille Gerhardt, who contribute low-basis, high-FMV property to a charitable remainder annuity trust (CRAT), which promptly cashes out, buying with said cash single payment immediate annuities, payable over a five-year term, the payout of which Gladys and la famille claim is exempt from income tax, bar some small amount of interest.

Judge Eminent refers us back to Furrer, for which see my blogpost “From Boondocks to Cornfields,” 9/28/22. The CRAT may be exempt, but payouts to nonexempts are taxable at highest rate. And said trusty tax advisers also advised the Furrers, 160 T. C. 9, at p. 4, footnote 5; the too-successful dodgeflogger paints a target on every floggee.

The sale of the appreciated properties by the CRAT triggered gain to the CRAT, although nontaxable to the CRAT per Section 664. The CRAT got Gladys’ carryover basis, so sale generated gain; and Section 1245(a) makes that gain ordinary income when distributed.

“The Gerhardts resist the straightforward analysis set out above. In their telling, the Code does a lot more than exempt the CRATs from paying tax on built-in gains realized when contributed property is sold. According to the Gerhardts, the Code also relieves them from paying tax on the distributions that were made possible by the CRATs’ realization of the built-in gains. As they put it, ‘all taxable gains (on the sale of the asset[s contributed to the CRATs]) disappear and the full amount of the proceeds [is] converted to principal to be invested by the CRAT.’ Pet’rs’ Opening Br. 6–7 (emphasis added). In the Gerhardts’ view, ‘[i]t becomes obvious that Congress intended [this treatment] to promote charitable giving while offering large tax benefits as incentives.” Id. at 7. The gain disappearing act the Gerhardts attribute to the CRATs is worthy of a Penn and Teller magic show. But it finds no support in the Code, regulations, or caselaw.” 160 T. C. 9, at p. 26.

Judge Eminent gave Gladys’ trusty counsel a chance to distinguish their case from Furrer. I’ll let Judge Eminent tell what happened.

“But, tellingly, their briefs fail to mention the case at all. Their silence confirms our view that the reasoning in Furrer applies with equal force here.” 160 T. C. 9, at pp. 26-27. (Footnote omitted, but, as usual, the footnote tells the whole story.)

“This is particularly notable given that the Gerhardts’ counsel in these cases also represented the Furrers. Moreover, neither the Gerhardts’ Opening Brief nor their Reply to Respondent’s Opening Brief cites a single case in support of their position. As we have already explained, no such support exists.” 160 T. C. 9, at p. 27, footnote 36.

Besides this, a couple of the Gerhardts swapped some hog buildings and related property in a 1031 like-kind exchange. That was valid, but rather than deferring gain, IRS claims Section 1245 turns depreciable “a single-purpose agricultural or horticultural structure,” per Section 1245(a)(3)(A), (D) into ordinary income. And the couple can’t prove otherwise.

Two other Gerhardts faced five-and-ten Section 6662 understatement of tax chops. They never put in evidence as to their preparer’s qualifications.

I can see these Midwestern CRAT games next on IRS’ list of reportables, right below the Dixieland Boondockery.

No, not the 1960 Peter Sellers jailbreak Britcom; rather, Judge Colvin confronts again the problem of the wannabe real estate pro who has a day job,  and therefore must show that his real estate stretch for year at issue is greater than his day-job stretch. It’s a small claimer, Gregory F. Teague and Rachel S. Teague, T.C. Sum. Op. 2023-16, filed 4/19/23. IRS needs four (count ’em, four) attorneys to fight over a $6800 deficiency from their rehab-and-flipping of three ME cabins.

It’s Greg’s story, as Rachel doesn’t make the cut, and spouses can’t tack on time. “Petitioners appear to contend that they qualify as real estate professionals if we count the total time they both spent working on the cabins. However, in the case of a joint return, the requirements for qualification as a real estate professional are satisfied only if either spouse separately meets the requirements. §469(c)(7)(B). Petitioners do not contend that Mrs. Teague separately qualifies as a real estate professional, and so we do not further consider time she spent in these activities.” T. C. Sum. Op. 2023-16, at p. 5.

Greg’s day job is selling cable tv subscriptions in 60 housing developments. He could work remotely. How much of his time was taken up thereby in year at issue is, in the absence of any logs or contemporaneous records, a wee bit unclear. “At trial Mr. Teague gave several inconsistent estimates of the amount of time he worked for [cable tv company]… including: 40 hours per week (two times), more than 30 hours per week  (two times), 20 to 40 hours per week (three times), and 1,840 hours per year (once). He also varyingly [sic] testified that he took almost six weeks (once) and 29 days (once) of vacation in [year at issue]. Because Mr. Teague held a full-time position… and testified twice that he worked 40 hours per week and once that he worked 1,840 hours per year for [cable tv company] (40 hours per 52 weeks less six weeks of vacation), we find that he worked for [cable tv company] 40 hours per week for 46 weeks (1,840 hours) in [year at issue].” T. C. Sum. Op. 2023-16, at p. 5.

Great witness. I wonder how Greg’s trusty attorney felt as he listened to the foregoing. The rest of Greg’s testimony fares little better.

“We accept Mr. Teague’s testimony that he was at the cabins 102 days in [year at issue]. This claim is consistent with the number of days stated in petitioners’ counsel’s pretrial email…. However, we do not accept petitioners’ claim that Mr. Teague averaged 12 hours of work per day for those 102 days. Petitioners’ claim fails to take into account time he spent eating and participating in recreation activities with his family and friends or [cable tv company] work interruptions.” T. C.  Sum. Op. 2023-16, at p. 6. Judge Colvin lists all the recreational activities in which Greg participated, including without in any way limiting the generality of the foregoing (as my on-their-second-Hanger-10-Gibson colleagues would say) taking “a few minutes to jump in the lake and cool off for a few minutes.” T. C. Sum. Op. 2023-16, at p. 7.

Judge Colvin allows Greg 304 of the 1224 hours he claims. As for Greg’s claim he could multi-task, taking cable tv phonecalls while beavering away on the cabins, he provided no reliable way to divide the time thus spent.

IRS folds the chops, but Greg loses the deficiency.

Takeaway- Buy the timekeeping software if you’re trying for real estate pro.

Obviously you are reading my blog, dear reader, so this blogpost clearly is not meant for you. But Judge Patrick J (“Scholar Pat”) Urda, to whom I most respectfully extend the above-captioned invitation, might wish to do so.

George Luniw, T. C. Memo. 2023-49, filed 4/18/23, escapes the Section 6673 frivolity chop despite his all-zeros returns for the two (count ’em, two) years at issue. True, George’s three (count ’em, three) previous trips to Tax Court never resulted in a full-dress T. C., or a T. C. Memo.,  or even a humble Sum. Op.

But back in November, 2019, CSTJ Lewis (“The Name”) Carluzzo handed George a couple 6702 frivolous return chops (hi, Judge Holmes) in an off-the-bencher. See my blogpost “IRS Goes Two For Three,” 11/20/19.

But Judge Scholar Pat is technically correct. Off-the-benchers aren’t precedent and can’t be cited.  “We have not found that Mr. Luniw has made these or similar frivolous claims in previous cases. We thus will choose not to impose this penalty at this time. We caution Mr.  Luniw, however, that he risks penalties under section 6673 if he presses these or similar arguments in the future.” T. C. Memo. 2023-49, at p. 7.

Next time maybe George is not so lucky.

This greeting from the old wildcatters echoes in North Donald LA Property, LLC, North Donald LA Investors, LLC, Tax Matters Partner, T.C. Memo. 2023-50, filed 4/18/23. Of course, you’ve sussed out by now that this is more Dixieland Boondockery, LA land bought for $2975 per acre in March and syndicated for a conservation easement charitable deduction of $471,000 per acre in December of the next year.

IRS wants Boss Hoss partial summary J, and Judge Albert G (“Scholar Al”) Lauber gives IRS that much. IRS’ paperwork is perfect. But the perpetuity attack falters. The former owners the Donald family, first reserved to mine for clay, but quitclaimed that away. Mineral reservations are a no-no “‘if at any time there may be extraction or removal of minerals by any surface mining method.’ Section 170(h)(6)  provides that “the term ‘qualified mineral interest’ means . . subsurface oil, gas, or other minerals, and . . . the right to access to such minerals.” T. C. Memo. 2023-50, at p. 7.

IRS claims the Donalds reserved the right to mine for subsurface clay, but the Donalds say no, they quitclaimed that away. Judge Scholar Al finds the quitclaim deed is ambiguous (surprise, surprise!), so no summary J on perpetuity.

“…any subsurface minerals to which the Donald family reserved rights ‘may be withdrawn or extracted . . . only by means of unitization through unit wells located on other lands or by directional drilling beneath the surface of the [tract] by means of wells located on other lands.’” T. C. Memo. 2023-50, at p. 9. “Unitization” means consolidating oil and gas on lands in different ownership, not solid minerals.

Unitization is done by agreement. But the headline first set forth at the head hereof refers to the old-time practice of acquiring land with no oil under it but abutting land that does, and drilling on the slant (deviating) to steal said oil. My Texan connections tell me that said phrase had better be accompanied by a smile, or the consequences may be dire.

So there must be a trial. See ya later, deviator!

I well understand sympathetic petitioners getting a bye in an off-the-bencher, when IRS’ counsel doesn’t offer to drop the Section 6662 five-and-ten chops. Judge Ronald L. (“Ingenuity”) Buch does stretch matters a wee bit in Lucell Trammer, III & Sharonda M. Trammer, Docket No. 6615-22, filed 4/18/23.

Their tax situation is complicated. Lu is an IT consultant, who is employed but also freelances and works through a referral service. So he has W-2, 1099, and direct payment from his own customers. Sharonda is a traveling social worker for the State.

“The Trammers filed tax returns for 2019 and 2020, reporting their income and myriad personal and business expenses. To prepare those returns, they took their receipts to a return preparer who decided how and where to report items on the Trammers’ returns. Some of the personal expenses, such as home mortgage interest were reported in multiple places and double or triple counted. Many personal expenses, such as home maintenance and improvement, were reported as business expenses. Indirect business expenses were reported as direct business expenses.” Transcript, at pp. 4-5.

IRS disallowed the whole shebang. “At trial, the Trammers offered testimony and documents to support many of their expenses, but their evidence generally failed to establish either the amount of a particular expense or its deductibility. But they clearly established that the errors were those of their return preparer on whom they relied.” Transcript, at p. 5.

OK, the disallowance sticks. But Lu & Sharonda are clearly in five-and-ten trouble (Section 6662(d)(1) says substantial understatement is greater of 10% of understated tax or $5K), as they deducted $50K and only get the standard.

Judge Buch: “The Trammers relied on a return preparer to whom they had been referred. They supplied the return preparer with necessary and accurate information each year, and the return preparer decided what to do with that information.  The Trammers reasonably relied in good faith on their return preparer’s judgment. Accordingly, the section 6662 accuracy-related penalty does not apply for the years in issue.” Transcript, at p. 15.

We’re not told what qualifications this bespoke preparer had, if any. We don’t know Lu’s or Sharonda’s level of tax sophistication, if any. But what level of sophistication is required to question the same item deducted two or three times?

Lest I be misunderstood, I’m not beating up on Lu & Sharonda, much less on Judge Buch. The petitioners may well deserve a bye, and Judge Buch saw them and heard the whole story. I did not.

But preparers of the kind herein described are another story.

It might be interesting to know if IRS paid a visit to said bespoke preparer and went through some of the other returns they prepared.