Whenever the dodge du jour goes into high gear, the dodgefloggers ramp up production. The aim, of course, is to get as much merchandise into the market as the market will consume, and sell it off fast. In the course thereof, speed of production overtakes quality. Degraded and defective products enter the market, leading to retrofit attempts that complicate matters, especially when IRS hauls in its favorite gambit, partial summary J.

Of course, this is another GA boondockery.

When 11 Cir kicked out “highly contestable readings of what it means to be perpetual” in Hewitt, IRS substituted the defective deed.

I missed Lodebar Property, LLC, Lodebar Manager, LLC, Tax Matters Partner, Docket No. 11780-20, filed 5/11/22, but Judge Albert G (“Scholar Al”) Lauber sure remembers it, even though he miscites it in Dorchester Farms Property, LLC, Dorchester Farms Manager, LLC, Tax Matters Partner, Docket No. 6441-20, filed 3/7/23, as “Docket No. 1178-20,” Order, at p. 4.

Much the same cast of characters in both. Same appraisers (who’ve been here before), same GA county, similar misdesignations of acreage, similar attempted correction deeds signed by same person, similar trudge through GA law on scrivener’s error.

Judge Scholar Al denies IRS’ motion for partial summary J, sets both down for trial to ascertain the intent of the parties.

Spoiler alert- Taishoff says the intent of the parties was to convey shares in the write-off of semi-worthless GA scrub to  syndicated conservation easement dodgefloggers, who marked the stuff up by a factor of ten, off-loading to highrollers looking to dodge taxes. And those charged with papering the deal were robosigners, copying each deal’s document from the last, not even changing every variable.

Word to IRS- I love summary J, but enough is enough. As Judge Holmes said, it’s all about valuation.

Phuong H. Phan, Docket No. 31743-21S, filed 3/6/23, failed to pick up two (count ’em, two) retirement plan distributions he got in year at issue. One he concedes, but claims he paid off the other, which was a loan from his employer’s 401(k).

Alas, no paper.

Phuong has run into a qualified plan loan offset, the loan being paid by tasking the unpaid balance from the retirement account and treating it as if paid by Phuong, with Phuong picking up the distribution as if he’d gotten cash, hence taxable. Phuong had apparently borrowed from his 401(k) before, but paid those loans back. This time, however, the 1099-R he got from the plan’s trustee showed “… in box 7, a ‘Distribution Code’ of 1M. The instructions for that form indicate the number 1 in the distribution code refers to ‘Early distribution, no known exception, (in most cases, under age 59-1/2)’ .  And the letter M refers to ‘Qualified plan loan offset’.” Transcript, at p. 6.

STJ Diana L. (“Sidewalks of New York”) Leyden explains.

“In general, a loan from a qualified employer plan gives rise to a distribution that is taxable for the year in which the loan is received. However, section 72(p)(2) provides an exception to the general rule where the loan, when adding to the outstanding balance of all other loans from the same plan, does not exceed a specified limit. See IRC section 72(p)(2)(A). Sections 72(p)(2)(B) and (C) further provide that the general rule does not apply where the loan, by its terms, must be repaid in five years from the date of its inception, or was used to finance an acquisition of a home that is a principal residence of the participant, or where the loan is subject to substantially level amortization with quarterly or more frequent payments required over the term of the loan.” Transcript, at p.7.

OK, but if the loan is not repaid per the loan documents, that’s a taxable distribution of the plan loan offset amount.

“A distribution of a plan loan offset amount can occur in a variety of circumstances, e.g. where the terms governing a plan loan require that in the event of the employee’s termination of employment or request for a distribution, the loan be repaid immediately or treated as in default. A distribution of a plan loan offset amount also occurs when under the terms of the governing plan loan, the loan is canceled, accelerated, or treated as if it were in default, e.g. when the plan treats a loan as in default upon an employee’s termination of employment or within a specified period thereafter.” Transcript, at p. 8.

“Accordingly, a distribution occurs at the time in the amount of the then-outstanding balance of the loan if the loan is defaulted, considered a qualified plan offset, or the total amount of the loan exceeds a specified amount.” Transcript, at p. 9.

Phuong must pick up the distribution, but all is not lost: IRS folds the Section 6662(a) chops.

Although restitution ordered as part of the sentence of a criminal conviction is collected “in the same manner as if such amount were such tax,” criminal restitution arises from 18 USC §3663(a)(3). Thus, the usual Section 6213 restraints on assessment don’t apply; see Section 6501(c)(11), and Section 6213(b)(5).

Mehlek Dawveed, T. C. Memo. 2023-28, filed3/6/23, took a three-year fall in USDCDMD for Federal false claims, wire fraud, and Section 7212 obstruction. IRS gave him a NFTL and NFTL at no extra charge when he failed to pay up. Mehlek requests a CDP, raises SNOD defenses (a no-go), and his argy-bargy about last-known-address fails, as he timely got the notices and timely petitioned.

Mehlek claims he sent in an OIC, but there are no OICs from criminal restitution. Mehlek also claims he sent in a 1040X, but restitution liability and tax liability aren’t the same. As for an IA, Mehlek never sent in Form 433-A and backups.

Judge Albert G (“Scholar Al”) Lauber, who gets his share of such types as Mehlek, is used to this.

“Petitioner’s filings devote little attention to the issues actually raised in respondent’s Cross-Motion for Summary Judgment. His submissions consist largely of cut-and-pasted text, cast in boilerplate legalese, much of which seems to have been downloaded from the internet. He does not allege any genuine dispute of material fact, and we find the case appropriate for summary adjudication.” T. C. Memo. 2023-28, at p. 6.

Since Mehlek can’t challenge his tax liability underlying the restitution order per Section 6201(a)(4), the only standard for review is abuse of discretion, against which Mehlek’s legalese cannot prevail.

His claim that his wife should get innocent spousery fails, as she has to raise it via Form 8857, and she hasn’t. Likewise his claim that he doesn’t own certain realty founders when he can’t produce any evidence of who owns it.

Mehlek has “a potpourri of other arguments,” T. C. Memo. 2023-28, at p. 10, but Judge Scholar Al blows them off.

If I repeat myself, I beg my readers’ pardon, but the Section 6673 guidelines question I raised in the past (see my blogpost “Guidelines – Redivivus” 11/21/22) remains unanswered.

I won’t weary my readers by retelling the protester jive from recidivists Howard R. Edge & Lisa M. Edge, Docket No. 13488-21L, filed 3/3/23. Judge Mark V (“Vittorio Emanuele”) Holmes does that, and even provides some citation of precedent, although not copious. Somber reasoning too is absent. Anyway, the Edges are middle class, educated Texas teachers, Golsenized to 5 Cir., which long ago said “'[w]e perceive no need to refute these arguments with somber reasoning and copious citation or precedent; to do so might suggest that these arguments have some colorable merit.’” Order, at p. 4, footnote 3. (Citation omitted).

Last time around, some fifteen (count ’em, fifteen) years ago, STJ Lewis (“Oh, That Name”) Carluzzo hit Howard & Lisa with a Section 6673 grand chop. Judge Holmes doubles that this time.

I note that the years at issue in the instant proceeding are 1999, 2001, and 2007 for Howard, and 2001, 2007, and 2008 for Lisa. Order, at p. 1. Moreover, the AO in the CDP found that Howard & Lisa hadn’t filed for “at least tax years 2015 through 2019.” Order, at p. 2.

I most respectfully suggest that if one can dodge paying one’s taxes for better than 23 (count ’em, 23) years, at the cost of a couple Tax Court filing fees and a couple grand 6673s (it is Judge Holmes’ order, after all), it’s a wonder that any taxes are paid and collected at all.

There should be serious sanctions for dodgers, protesters, and the wits, wags, and wiseacres who enable them. Judges should have the means and the guidance to impose same. While sentencing guidelines are much disfavored lately, reducing the possibility of challenges to Section 6673 sanctions on the grounds of abuse of discretion is worth enacting. Guidelines might do the job.

Congressional laments about government spending and budget deficits are all very well, but perhaps if the revenue was seasonably collected as Congress enacted, the need for such laments might be lessened.

Oh yes, this is a nonpolitical blog.

Froilan Nigel Villahermosa, Docket No. 6675-19S, filed 3/2/23, doubtless contributed to his employer’s Thrift Savings Plan, which he made with post-tax dollars. But the Section 219 deduction he seeks in respect of same fails.

STJ Diana L (“Sidewalks of New York”) Leyden tells us why in this off-thep-bencher.

“An IRA and a Thrift Savings Plan (TSP) are separately defined by the Internal Revenue Code. Section 7701(a)(37) provides that an IRA means an individual retirement account described in section 408(a). Section 7701(j)(1) provides that TSP is treated as a trust described in section 401(a). To prove his entitlement to claim a deduction for qualified retirement contributions, Petitioner provided a TSP statement detailing his contributions to the TSP in [Year at Issue]. However, contributions to a TSP are not considered qualified retirement contributions as discussed above and thus not eligible to [sic] the claimed IRA contribution deduction. See section 7701(j)(1)(C).” Transcript, at pp. 8-9.

Froilan also has the not-uncommon timing problem with his Section 25A American Opportunity credit. He paid in one year for qualifying expenses applicable to the next. He claimed he made other payments, but had no proof. Bursars’ receipts are sometimes hard to interpret.

Commonwealth Underwriting & Annuity Services, Inc., T.C. Memo. 2023-27, filed 3/2/23 (Happy Palindrome Day!) is sure it’s an insurance company exempt per Section 501(c)(15), but IRS is sure it isn’t.

CSTJ Lewis (“To Spell It Is To Love It”) Carluzzo likewise finds it hard to reconcile Commonwealth’s argument that the $82 million it got in Year One, and the $2 million it got in Year Two, are “arguably” premiums, but not “premium income,” for Section 501(c)(15)(A)’s cutoff of $600K of premium income per year, with Commonwealth’s other assertion that the annual “maintenance fees” it got were somehow premium income and below the $600K.

Supposedly the $82 million and the $2 million went straight into trust funds operated and controlled by an unrelated and insubordinate entity.

“Insurance premiums are includable in an insurance company’s gross income. See Avrahami v. Commissioner, 149 T.C. 144, 174–75 (2017). Petitioner acknowledges that the purchase payments ‘constituted the funds used to make annuity payments.’ This appears to fit squarely within the definition of a premium. See NationalAssociation of Insurance Commissioners, Statement of Statutory Accounting No. 51—Life Contracts, para. 5 (explaining that a premium ‘shall be recognized as income on the gross basis (amount charged to the policyholder) when due from policyholders’). Petitioner’s contention that the purchase payments were not ‘retained, controlled or utilized by’ petitioner is contradicted by its own annuity contracts, which provide that the assets held in the segregated trust accounts and subaccounts ‘remain the property of” petitioner. Moreover, petitioner has not provided any authority suggesting that the premiums were not premium income. Therefore, petitioner has not established that its gross receipts did not exceed $600,000 during either year in issue,  thereby failing to satisfy the financial test in section 501(c)(15)(A).” T. C. Memo. 2023-27, at p. 6.

For the backstory on Avrahami, see my blogpost “The Selfies – Eclipsed,” 8/21/17.

But even if Commonwealth somehow persuaded CSTJ Lew that $84 million that went to fund the annuities they sold were somehow not premiums, they have another problem.

“On the other hand, if the purchase payments are not properly treated as premiums, then petitioner would seem to have no premium income because petitioner has failed to establish that the maintenance fees it received should be considered ‘premiums.’ Viewed in that manner, petitioner fails the prong of the financial test that requires more than 50% of its gross receipts to consist of premiums. See § 501(c)(15)(A)(i)(II).” T. C. Memo. 2023-27, at p. 6.

CSTJ Lew must have had fun with this one.

Discovery geeks, rejoice! Judge Alina I (“AIM”) Marshall has a potpourri of handy hints, hacks, and hoot ‘n’ hollers for y’all. Here’s Jackson Stone South, LLC, Jackson South Investments, Docket LLC, Tax Matters Partner, Docket No. 12271-20, filed 3/1/23.

The Jackson Stones have the first team defending their $19 million conservation easement write-off on some SC scrub. IRS is using its latest ploy, the salami summary J, whereby IRS seeks partial summary J on a single issue at a time. Here in The Empire State the judges can rein in such gameplaying. Judge AIM Marshall gives IRS summary J only that the FPAAs are valid, as they were served on all hands, both past TMP and present TMP. Query whether Forms 8822-B, Change of Address or Responsible Party—Business, are alone sufficient to override the TMP designation in the last-filed 1065. See Reg. Section 301.6223(a)-1(a)(1). Howbeit, IRS tagged all baserunners, and any extra FPAAs are mere surplusage. See my blogpost “The TMP Is Dead – Long Live?” 2/17/16.

Boss Hossery is in play, especially as overvaluation chops hover vulture-like. But the Jackson Stone’s trusty attorneys demand IRS pony up the Designation to Act or Notification of Personnel Action (SF-50) for MMC to serve as Supervisory Internal Revenue Agent in the Small Business/Self-Employed (SB/SE) division of the IRS for the RA who proposed the chops. IRS demurs, claiming unduly burdensome, but Judge AIM Marshall says pony up, along with other requested documents.

IRS can’t depose the ex-TMP, as they can’t show they couldn’t get the info via interrogatories. Depositions of nonparties are extraordinary.

But the ex-TMP must respond to the document subpoena, either by handing over documents or saying he hasn’t got any. His attorney stated at a hearing that ex-TMP handed everything to successors, but that’s not enough. Either move to quash or ante up.

There’s case-specific argy-bargy about IRS’ responses to interrogatories. Judge AIM Marshall says IRS’ pre-trial memo, experts’ reports,. and rebuttal reports have been filed since the Jackson Stones served their interrogatories, so they have what they need.

Discovery geeks, this is your kind of order.

Word to Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan: While you’re scrutinizing ex-Ch J Maurice B (“Mighty Mo”) Foley’s proposed revisions to the Rules from a year ago, you might want to consider our Excelsior approach to summary J. Judges can establish cutoff dates for such motions. Might prevent salami slicing.

STJ Diana L (“Sidewalks of New York”) Leyden reprises her five-year-old adherence to IRS’ computer software in Scott Edward McPherson and Michele Einspar, Docket No. 22322-21S, filed 3/1/23. This is Scott’s story. He’s a patent attorney, and says he’s good with data.

Except.

“Petitioner-Husband testified that as a patent attorney, he is very good with data. Unfortunately, with respect to his business and tax records, Petitioner-Husband completely failed to keep or maintain the data necessary to support the claimed disallowed deductions.  Accordingly, the Court sustains Respondent’s disallowance of the deductions set forth in the Notice of Deficiency….” Transcript, at p. 10. 

OK, another indocumentado.

But there’s the Section 6662(a) accuracy chop on the table, either negligence or the five-and-ten understatement variety, and not a Boss Hoss in sight.

But somehow that’s just fine.

“Based on this record, the Court concludes that the accuracy-related penalty for substantial understatement was automatically calculated through electronic means and did not require a supervisor’s approval.  IRC section 6751(b)(2)(B). Therefore, Respondent has met his burden of production.” Transcript, at p. 10.

“This record” features the following. “Petitioner-Husband is an attorney and has testified he is very adept at maintaining data. Nevertheless, Petitioners did not provide the Court with the necessary substantiation or data. Petitioner-Husband’s testimony was vague and self-serving. Petitioner-Husband conceded he did not keep good records. The record does not convince the Court that Petitioners exercised reasonable care and good faith with respect to the disallowed deduction.” Transcript, at p. 11. 

All that said, once Exam disallowed enough of Scott’s deductions, there had to be a five-and-ten penalty. But Exam’s decision to disallow enough of Scott’s deductions was the trigger, and that’s what needs supervisory approval. Otherwise, Section 6751(b)(2)(B) is easily subverted; just run a computer program to input Scott’s numbers, hit “disallow the deductions”, and press “ENTER.”

As I said five (count ’em, five) years ago, “So every time IRS wants to chop a taxpayer they can use a computer program rather than pencil-and-paper to do the arithmetic, and thereby dodge the second look Congress mandated in Section 6751(b)?” See my blogpost “I Sing the Penalty Electronic,” 5/16/18.

That’s the story of Estate of Richard D. Spizzirri, Deceased, John J. McAtee, Jr., Personal Representative, T. C. Memo. 2023-25, filed 2/28/23. Rich was a lawyer and biotechie who built up a gross estate north of $81 million, while having three wives, four kids with Wife One, and two kids, each with a different Mom while estranged from Wife Four, with whom he had an expensive, extensive, and much-amended Prenup, dealing with Rich’s Manhattan penthouse, Aspen house, Miami condo (which he owned with yet another lady), and Hamptons hangout.

I can’t say Judge Patrick J (“Scholar Pat”) Urda is envious, but he carefully catalogues all the ladies to whom Rich paid heavy-duty cash, with not a 1099-MISC nor W-2 in sight, making all same gifts and thus part of estate.

Ol’ Rich was quite a lad. Until the end. Whereupon follows litigation with Wife Four in CO (Rich was a wee bit casual in complying with Prenup), his ex’r’s second request for extension to file Form 706 hits Section 6081(a), so late filing add-on; as estate isn’t individual, no Boss Hossery needed.

The various payments to Wife Four and her three (count ’em, three) kids from previous marriage fail for want of consideration. Waiving support is good consideration, but Section 2043(b) prevents turning taxable gifts into support obligations. The Prenup carefully divides all the various rights that Wife Four waives, and Judge Scholar Pat is not going to smoosh them together and redraft the Prenup. 

 “The Estate responds that the claims at issue were supported by [Wife Four]’s waivers of spousal support and equitable distribution, asserting that the value of the waivers exceeded the value of the claims at issue. The Prenup refutes the Estate’s argument, expressly specifying the property that [Wife Four] would receive in the event of a dissolution of marriage ‘in consideration of her relinquishment of any rights she has or might have at such time to maintenance or support and any claims she has or might have to equitable distribution.’ The property promised to [Wife Four] in Article V in consideration for the waiver of her spousal rights in the case of divorce is distinct from the property settled on [Wife Four] and her children in Article IV (as modified) in exchange for inheritance rights. We see no reason to redraft the parties’ agreement to reallocate the consideration that they specified for the relinquishment of certain rights.” T. C. Memo. 2023-25, at p. 15. 

Testimony for what the various ladies did for the cash they got isn’t enough for Judge Scholar Pat.

The ex’r couldn’t establish that repairing the decks at Aspen was necessary to preserve structural integrity (hence deductible), and not to fix up the house for sale (not deductible).

As for the late filing add-on, “(T)he Estate finally contends that the net amount due on the date prescribed for payment was zero because it remitted an overpayment before the filing deadline and that the penalty should be based on that amount. The penalty for the late filing of estate tax returns applies, however, even when full payment is made on time.” T. C. Memo. 2023-25, at p. 19. But IRS goofed on the deficiency number, omitting a timely payment the ex’r made, so the add-on gets reduced.

Now we tax geeks get the rap that we’re all about the numbers, recordkeeping, OCD types. But I can’t imagine even the geekiest among us handing out a 1099 after.

The reputed dying words of a Manhattan real estate dynast furnish forth the caption for Judge Tamara Ashford’s deep-dive into valuation of a closely-held family Sub S, owner of the largest residence in America still in the beneficial hands of the original owners’ family, Biltmore, in Asheville, NC, the home of the Vanderbilts, now a Gilded Age Disneyland.

This is the story of Estate of William A.V. Cecil, Sr., Donor, Deceased, William A.V. Cecil, Jr., Co-Executor, T. C. Memo. 2023-24, filed 2/28/23, conjoined with estate of Bill, Sr.’s deceased spouse Mary.

The late Bill, Sr., and the late Mary, ere they became the late Bill, Sr., and the late Mary, split-gifted (Section 2513(a)) a bunch voting and nonvoting stock (hi, Judge Holmes) in the family Sub S to trusts for the grandkids, and filed the requisite Forms 709. IRS responded with a $13 million SNOD.

Judge Ashford, clearly a connoisseur of familial lockdowns, spends five (count ’em, five) pages of her opinion describing how the Vanderbilt heirs tied up, locked up, barricaded, and otherwise fortified the family patrimony against ne’er-do-well descendants, and predatory spouses current and ex; held semi-annual meetings to inculcate even in eight-year-old infants the duty to protect, preserve, and defend, etc.; entered into voting trusts, amended certificate of incorporation and by-laws…you get the picture.  T. C. Memo. 2023-24, at pp. 5-9.

With closely-held stock, you get valuations. Oh boy, do you get valuations! After IRS and Jr. put in two experts each, Judge Ashford swims through an alphabet soup of appraisal methods. IRS has one expert solely for the art works and collectibles. But at close of play, IRS’ lead expert has the best valuation, without the tax affect of Sub S vs C Corp (of which more hereinbelow) and without lack of control discount, although his lack of control number is taken into account. Jr’s lead appraiser furnishes the discounts for lack of marketability for each class and block of shares.

I thought Tax Court put paid to tax affect years ago. That’s discounting the worth of Sub S stock (no tax at entity level) to match with C Corp stock (entity level tax, then tax on distribution at shareholder level) for comparables. After citing all the cases that said so, Judge Ashford looks back to Judge Holmes’ blockbuster opinion in Estate of Jackson to sidestep the question, as Judge Holmes didn’t slam the door. And here, both IRS’ lead and Jr.’s lead opine that tax affect must play a role.

“As we observed in Estate of Jackson, there is not a total bar against the use of tax affecting when the circumstances call for it. Now given that each side’s experts… totally agree that tax affecting should be taken into account to value the subject stock, and experts on both sides agree on the specific method that we should employ to take that principle into account, we conclude that the circumstances of these cases require our application of tax affecting. While Messrs. [IRS] and [Jr.] do not agree on the specific rate that applies here to implement tax affecting (Mr. [IRS] determined the rate to be 24.6% while Mr. [Jr.] determined the rate to be 17.6%), we consider it appropriate on the basis of the record (and relying on Mr. [Jr.]’s opinion in this regard) to set that rate at 17.6%. We emphasize, however, that while we are applying tax affecting here, given the unique setting at hand, we are not necessarily holding that tax affecting is always, or even more often than not, a proper consideration for valuing an S corporation.” T. C. Memo. 2023-24, at p. 27. (Names omitted).

For Estate of Jackson, see my blogpost “The Opinion You’ve All Been Waiting For,” 5/3/21.