Judge Joseph Nega has taken the conn from Judge John Colvin, and Appeals has negotiated the narrow channel Judge Colvin dredged back in 2019 (for which see my blogpost “John Is His Co-Pilot,” 11/18/19), so here endeth the story of Leciel L. Lowery, Jr. & Charlene A. Lowery 13022-17L, filed 8/17/23.

Leciel, y’all will recollect, was the wore out Chesapeake Bay pilot, about to retire but with north of $600K in unpaid taxes, add-ons and chops. Judge Colvin discovered Appeals had been less than thorough with Leciel’s numbers, and remanded with a chart.

Appeals avoided the shoals of Charlene’s AZ trust, the equity in Leciel’s & Charlene’s homestead, and Leciel’s retirement account. Plus they credited the automatic deductions from Leciel’s pay. See Order, at p. 5.

So the joust is about home repairs (not enough proof that same necessary for health or production of income) and upward adjustment of the local living expense allowances per IRM (again, not proven), and Leciel’s decreased pandemic earnings (his ships didn’t come in during COVID).

But the decrease doesn’t matter.

“…we note that petitioners’ reported monthly income was already based on an average of their prior six years of annual income, extrapolated out to a monthly basis. That averaging, which resulted in a monthly amount of $37,307.32, thus already represented a substantial reduction from petitioners’ actual monthly income in 2019 and the first two months of 2020. Having already afforded petitioners considerable leeway in allowing an average monthly income amount lower than their actual income, we conclude that AO C was within her discretion not to allow a further reduction based only on the much smaller and (potentially nonrepresentative) sample size of March and April 2020. See IRM 5.15.1.15 (Oct. 2, 2012) (‘The income and expense information provided must reflect a sufficient time frame to accurately determine the monthly average that could be expected for the entire year . . . extraordinary events that can lead to excessive increases or decreases in income or expenses at a particular time [must be considered].’).” Order, at p. 7. (Name and footnote omitted).

Anyway, whatever the number, Leciel offered less, so harmless error (did not affect outcome).

Steven Jacobowitz, T. C. Memo. 2023-107, filed 8/16/23, learns the hockey players’ watchword from Judge Tamara Ashford.

Steve had a single-member CT LLC, but he never filed Form 8832 or otherwise followed Reg Sections 301.7701-1 through 301.7701. Steve never checked the box electing corporate tax status for the LLC. Therefore, when Steve defaulted on the line of credit he had taken out for the LLC, the lending bank filed Form 1099-C.

The bank did check the box, the one that says “the reason for the discharge was ‘Statute of limitations or expiration of deficiency period.’” T. C. Memo. 2023-107, at p. 3.

Wherefore, (1) the LLC was disregarded and the COD was income to Steve, and (2) Reg Section 1.6050P-1(b)(2)(i)(C) makes expiry of SOL for collection of a debt an identifiable event making the debt uncollectible and therefore canceled.

Steve’s argument that the debt was the debt of the LLC and not his, as he never guaranteed the debt, may be OK by CT law, but Federal law determines taxation. While some entities are mandated to be corporations, single-member LLCs are disregarded unless the member checks the box.

And that he stopped paying on the line of credit years before, and left some furniture for the bank to grab, avails not, as an identifiable event must happen to end liability for the debt (hence cancellation, even if involuntary). And no proof about the furniture, its worth, or that Steve told the bank to take it, or the bank agreed, so Steve can’t claim capital gain for selling the furniture to the bank in exchange for forgiving the debt.

But I do give Steve’s trusty attorney a Taishoff “Good Try” for that move, and for claiming that part of the canceled debt was accrued interest, which should have been deductible as a business expense.

Judge Ashford brushes that one off: ” Petitioner offered no evidence at trial that the…interest, which accrued after the last principal payment was made with respect to the line of credit, would have been an ordinary and necessary business expense. Statements in a party’s brief, such as petitioner’s assertion regarding the interest, are not part of the evidentiary record. See Rule 143(c) (‘[S]tatements in briefs . . . do not constitute evidence.’)… Indeed, the evidentiary record unmistakably shows that [LLC] stopped doing business in 2008 and that 2009 was the last year that [LLC’s] income (or loss) was reported to the IRS, before the interest started accruing in 2010.” T. C. Memo. 1023-107, at p. 10. (Citation omitted).

Check or be checked.

The Girl of My Dreams remarked yesterday on my use of the word “leisurely” to define United States Tax Court practice, for which see my blogpost “Modest Experience,” 8/15/23. She remembered my tales of State courtiering in the early days, when waiting six months for decision in a motion for a summary J was unheard of, and administrative judges wore out bullwhips from cracking same at the dilatory. “Three years with discovery incomplete?” she said, incredulous.

Today she can look at Daniel E. Larkin and Christine L. Larkin, T. C. Memo. 2023-106, filed 8/16/23, involving Docket Nos. 14886-08, 19940-09. You can pay three figures for Scotch younger than those petitions. But this is a remand from DC Cir, to redo four (count ’em, four) “‘discrete errors acknowledged by the Commissioner’ affecting the correct amounts of the deficiencies, additions to tax, and penalties due from petitioners for the years at issue.” T. C. Memo. 2023-106, at p. 2. I’ve blogged Dan’s & Christine’s earlier trips to USTC.

And that’s all Judge Gale does. The Larkins’ attempts to get IRS to abate previous years’ assessments and re-assess corrected ones, to allow foreign earned income credits that the Larkins failed to substantiate, and their belated attempt to challenge chops based on Boss Hossery, all fail, either because of Section 7486 correctability, or the limitations of remand. DC Cir, after all, affirmed everything but the four errors.

So this case establishes that Judge Gale, unusually, can add.

Judge David Gustafson is too modest. I am sure he has a better grasp of the principles of debt-vs-equity than he allows in Aventis, Inc. and Subsidiaries, Docket No. 11832-20, filed 8/15/23. And in the extremely unlikely case that he really “has modest experience with debt-vs.-equity issues,” Order, at pp.  1-2, he can check out my blogposts “The Scottish Play,” 6/19/12, and “The Baseball Fan Is On The Job,” 10/27/21.

Of course, neither he nor I can have any recent experience with FASIT qualification issues, as Financial Asset Securitization Investment Trusts, a species of subprime-mortgage-meltdowns-on-steroids, cratered in 2004 in the wake of Enron of infamous memory. These, which supposedly bundled short-term debt (credit card, quick-kick car loans), began in 1996; by the time Congress saw what damage these off-balance-sheet gameboys did, the game was long since up.

However, Aventis wants to go to trial after three (count ’em, three) years, with discovery still incomplete. Aventis suggests Judge Gustafson close down discovery on the debt-equity issue, bifurcate, and try that issue.

No, says Judge Gustafson, remarkably unobliging.

“…we perceive that the deliberate pace of the development of the case has been attributable to both parties, and that an abrupt acceleration and a soon cut-off would be unfairly disadvantageous to the Commissioner.

“As for bifurcation, it is true that sometimes bifurcation of a case to allow discovery and dispositive motions related to a single issue may be appropriate–usually where a relatively simple issue may resolve the entire case. But in this instance, the debt-vs.-equity issue that Aventis would press is fact-intensive.” Order, at p. 1.

But Aventis has the Taishoff fallback.

“We do not forbid the filing of a motion for summary judgment on October 30, 2023, as Aventis has forecast, but we do not anticipater [sic] that such a motion would move the case forward.” Order, at p. 1. Given the leisurely pace of such motions, bifurcating would likely lead to denial of summary J, necessitating rejoinder, and trying both issues together. Anyway, “… a single trial on both issues will likely enable the Court to understand and resolve each of the two issues better than if it addresses the issues seriatim.” Order, at p. 2.

So set up a discovery schedule and propose a trial date.

Maybe Anticipater was the father of Antipater, and thus the grandfather of Herod, who ordered the Slaughter of the Innocents. Fits right in with Tax Court.

Thus thought Gary J. Sinopoli, Jr. and Melissa M. Sinopoli, et al., T.C. Memo. 2023-105, filed 8/14/23, when he and the als, franchisees of a fitness gym operation, decided to organize C Corps to place the advertising for their fitness gym operation, marking up the advertising costs to funnel cash from the franchised gym operation into the C Corps, gaining an enhanced advertising Section 162 deduction.

Judge Goeke notes IRS didn’t challenge the Forms 1120 from the C Corps.

But the deductions for the payments Gary and the als made to the C Corps crater. “Petitioners instructed [Gym]’s local advertisers to bill the marketing companies, and [Gym] began to pay fees to the marketing companies (marketing fees). The marketing fees were the marketing companies’ only source of income. The marketing companies did not perform marketing or other services for other businesses. They did not report any wage expenses on their corporate returns.” T. C. Memo. 2023-105, at p. 5. Note that, without the C Corp intermediaries,  the overage would have been profit to Gary and the als, passed through from their Sub S that ran the fitness operation, with FICA/FUTA implications.

Deductions disallowed.

So it pays to advertise…if you do advertise.

Zola Jane Pugh, 160 T. C. 2, filed 8/14/23, has discovered that, notwithstanding she had her US passport renewal denied for seriously delinquent tax debt per Section 7345, petitioned said denial, and twice failed to reply to IRS’ summary J motions, she “as an alien foreign national, is exempt from taxation and has been all her life.”  160 T. C. 2, at p. 3.

Keeping a straight face, Judge Elizabeth A. (“Tex”) Copeland notes parenthetically ” (Ms. Pugh provided no documentation or other supporting evidence for this claim.)”. Ibid., as my expensive colleagues would say.

So Zola Jane wants to dismiss her petition. I can see a CDP with the protester “not a Federal citizen” jive coming; check out 160 T. C. 2, at p. 3, footnote 4: “In her Petition, Ms. Pugh checked the box indicating that she had received a Notice of Determination Concerning Collection Action. We dismissed that claim for lack of jurisdiction under sections 6320 and 6330 because the Commissioner confirmed that Ms. Pugh had not received such a notice. However, we retained the case because we have jurisdiction to hear the section 7345(e) claim that Ms. Pugh conveyed in the remaining portions of the Petition.”

So again we have the deficiency-vs-everything-else trudge. I suppose it’s now too late to suggest that Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan amend the Tax Court Rules of Practice and Procedure to incorporate FRCP 41 wherever the bar of Section 7459(d) does not prevent.

Though IRS at first objects to dismissal, they relent, despite the two (count ’em, two) summary J motions that Zola Jane ignored. “… we do not see sufficient grounds to second-guess the Commissioner’s assertion that he will not be prejudiced by dismissal. In fact, upon dismissal the Commissioner’s certification of Ms. Pugh as an individual with a ‘seriously delinquent tax debt’ will remain in place. We conclude that the Commissioner will not suffer clear legal prejudice if we grant Ms. Pugh’s Motion, in effect treating this case as if it had never been commenced.” 160 T. C. 2, at p. 6.

No, not a typo for the 1884 Joris-Karl Huysmans Symbolist novel. This is a catch-up for which I’m grateful to my colleague Prof. Bryan Camp, a Texas non-Technophobe, for picking up on Michael G. Parker and Julie A. Parker, T. C. Memo. 2023-104, filed 8/10/23, which I missed. Thanks, Prof.

Briefly, Mike was sole officer, director and shareholder of a Sub S that was the sole member of a bunch tiered LLCs (hi, Judge Holmes), wherewith Mike carried on his real estate wheeling and dealing. The whole shootin’ march came unglued, with unrelated buyers taking over the loans which encumbered both the real estate and the LLC memberships which the Sub S owned. The loans were nonrecourse as against the Sub S, but Mike had personally guaranteed the loans.

Mike claimed Section 108(a)(1)(B) insolvency exclusion of the cancellation of debt resulting from the unrelated buyers taking over the loan obligations and letting the Sub S off the hook. Passthrough, right?

Judge Nega says wrong. A Sub S is a corporation; it exists separately from its shareholder. Attributes and incidents may pass through; when tax events in the same year impact both Sub S and shareholder, Tax Court has unified jurisdiction over both. When nonrecourse debt cancellation is connected with the sale of the asset encumbered thereby per Section 61(a)(3), the Sub S had to add the cancelled debt as part of its gain on the sale of the assets. That Mike had guaranteed the debt and was personally on the hook had nothing to do with what the Sub S was required to recognize on the sale. And once recognized, flowed through.

Running everything through the unrecognized LLCs owned by the passthrough Sub S does not change the result.

This is a tangled fact pattern, so a classic YMMV is warranted here.

Judge Mark V. Holmes believes he’s seen the last shot in Cannon Corporation and Subsidiaries, Docket No. 12466-16, filed 8/11/23. Cannon and the subs are still fighting over Rev. Proc. 2011-14, 2011-4 I. R. B. 330, and Rev. Proc. 2012-39, 2012-41 I.R.B. 470.

It’s a tangled trail, and I haven’t blogged every step. Howbeit, check out my blogpost “No Method, No Madness,” 6/5/18, for a general view. And as deliberative privilege plays a role in denying the Cannons’ second attempt to get document discovery, see my blogpost “The Stealth Boss Hoss,” 4/3/20. The current iteration is to be found in the Order, at pp. 3-4.

Judge Holmes says he’s already decided the plain language of Rev. Proc. 2011-14 says that Form 3115 change in accounting method can’t be used to shoehorn multiple years’ Section 179D deductions into a single year. And the Cannons did properly file Forms 1120X for all but one year (but that the year with the biggest deduction) of the six (count ’em, six) years at issue.

The Cannons claim IRS drew them offside, but Judge Holmes isn’t taking it.

Looks like the Cannons fired their last shot.

Judge Albert G. (“Scholar Al”) Lauber is sympathetic to the plight of Michael J. Golden, T. C. Memo. 2023-103, filed 8/10/23, who was “unable to timely file his 2015 return because of the ‘double load’ placed upon him while he was working simultaneously as a program manager in the civilian sector and as a senior military officer in the United States Navy Reserve.” T. C. Memo. 2023-103, at pp. 4-5.

But alas, Section 6512(b)(3) limits Judge Scholar Al to finding neither deficiency nor overpayment. As MJG didn’t file his 2015 return until after IRS had sent him a SNOD based on third-party reporting in 2021, he is locked into the two-years-from-payment lookback. While the late-filed return does show a $5K overpayment, Appeals increased the overpayment to $6K. T. C. Memo 2023-103, at p. 2.

Problem is, all the overpayment is based on withholdings.

Judge Scholar Al judge-‘splains. “Petitioner’s tax payments for tax year 2015… consisted entirely of withholding from his wages. Under section 6513(b)(1), income tax deducted and withheld from an employee’s wages is deemed to have been paid on April 15 of the following tax year—in petitioner’s case, April 15, 2016. Because this date was almost five years (and thus more than two years) before the date on which the notice of deficiency was issued, we lack jurisdiction to determine a refund of petitioner’s overpayment.” T. C. Memo. 2023-103, at p. 4.

One can’t help sympathizing with “‘loyal and law- bidding [sic] citizens’ like him.” T. C. Memo. 2023-103, at p. 5.

The method-vs-madness joust in determining whether an appraisal qualifies under the various rubrics of Section 170 (façade, scenic, conservation, artistic) has furnished forth blogfodder for more than ten (count ’em, ten) years. Solely by way of illustration of the foregoing, see my blogpost “Method to His Madness,” 6/18/12. That was when the famous 1994 IRS Audit Techniques Guide first assumed prominence.

Today, Michael Davis & Amy L. Davis, et al., Docket No. 14870-20, filed 8/8/23, brandish its successor the Conservation Easement Audit Techniques Guide to defeat IRS’ motion for summary J knocking out the appraisal in support of of Mike’s & Amy’s (and the al’s) Dixieland Boondockery.

IRS, perennially short-stacked, uses summary J as a panacea. I’m a great fan of summary J, but it can’t cure all ills.

IRS claims Mike’s & Amy’s appraisal “was riddled with errors that constituted gross negligence and was not prepared in accordance with generally accepted appraisal standards, as required under section 170(f). The appraisal purports to adhere to the Uniform Standards of Professional Appraisal Practice (USPAP), but respondent argues that the appraisal ‘flouts’ these standards.” Order, at p. 2. IRS wants the appraisal and the deduction tossed, and a finding that Mike & Amy did not act with reasonable cause.

Judge Christian N. (“Speedy”) Weiler finds that Mike’s & Amy’s appraiser did follow the Guide.

“To the extent respondent believes that the appraiser’s method was ‘sloppy or inaccurate, or haphazardly applied,’ that ‘is irrelevant.’ Id. (quoting Schiedelman v. Commissioner, 682 F.3d 189, 197 (2d Cir. 2012)). The appraiser is required to identify the method used under the regulations, not demonstrate that the method used was reliable or probative.” Order, at p. 3.

For the backstory on Scheidelman, see my blogpost above referred to. Anyway, the reliability and accuracy of the methodology and specific basis of valuation isn’t appropriate for summary J. If there’s method, then madness is for trials. Generally Accepted Appraisal Standards aren’t the only game in town.

Reasonable cause likewise is facts-and-circumstances. See Reg. Section §1.6664-4(b)(1). That means trials.

IRS’ counsel are a couple yards (hi, Judge Holmes) short of a “Good Try.” But I love the “flout.”