As I stood at the corner of 23rd Street and Fifth Avenue shortly before 11:11 a.m., this morning, waiting for the bus to arrive with the members of my American Legion Post, an Austrian tourist asked me what was going on. Some little time thereafter, an Israeli tourist asked me the same.

While there is no reason why a casual visitor should know what days are legal holidays in the District of Columbia (or anywhere else in Our Fair Land), Austria suffered the loss of a generation of her young men in the ’14 – ’18 massacre. I do not know what history is taught in Israeli schools, so whether World War I (from which today’s observance arose) figures at all I cannot say. And where military service is obligatory, as it is both in Austria and Israel, a veterans’ day parade would involve so many of the population as to comprise more marchers than spectators. So my answer was explanatory (gently).

Howbeit, I was marching again, and attending the wreath-laying ceremony on the Intrepid Air, Sea and Space Museum.

Hence, no tax today.

Some gave little, some gave much, some gave all.

But if this country is to remain free, no one has the right to give nothing.

Jennifer Joy Fields, T. C. Sum. Op. 2022-22, filed 11/10/22, claims the write-off of the $73K her employer carried on its books as owed to her employer when she left her employer, was a gift.

According to STJ Peter (“HB”) Panuthos, “(D)uring the time of petitioner’s employment,  the chief executive officer of [employer] was [Scott]. Text messages and emails between petitioner and [Scott] reflect a relationship between the two outside the workplace.” T. C. Sum. Op. 2022-22, at p. 2. (Footnote and name omitted).

During Ms. Fields’ tenure with employer, there were a couple wire transfers (hi, Judge Holmes) to her or for her benefit, aggregating $73K, which the employer carried in its books as employee advances. When Ms. Fields terminated her employment, the severance agreement provided she needn’t repay, but would get a Form 1099 and would owe whatever taxes were due. She got the 1099, but didn’t report or pay tax.

Ms. Fields had an unsigned version of the severance agreement which didn’t mention forgiveness or 1099s, but STJ Panuthos isn’t buying it.

“While petitioner and [Scott] corresponded after her separation from [employer], their communications do not demonstrate that the payments were intended to be a gift. While petitioner and [Scott] reached an oral compromise regarding the terms of separation, the second, revised draft severance agreement was not signed. Even considering the revised agreement and a relevant provision, it is ambiguous at best. The text of the revised draft severance agreement does not necessarily support petitioner’s position that the employer intended a gift to petitioner. At best, it reflects petitioner’s attempt to recharacterize the payments as a gift, which apparently neither [Scott] nor [employer] agreed to. There is no evidence in the record from which the Court could conclude that [Scott] or [employer] intended to make a gift to petitioner. The payments were made from [employer] to petitioner and recorded as accounts receivables in [employer]’s accounting records. [Employer]’s inclusion of the disputed amount in the signed and executed severance agreement and the subsequent issuance of a Form 1099–MISC indicates that the payments were not intended to be a gift.

“We find petitioner’s testimony that she had a personal relationship with [Scott] is insufficient to support her contention that the payments were a gift.” T. C. Sum. Op. 2022-22, at pp. 5-6. (Names omitted).

Chops follow.

Judge Alina I. (“AIM”) Marshall devotes ten (count ’em, ten) pages of her order in Janice A. Wieslander, Docket No. 18546-19, filed 11/10/22, to a comprehensive pretrial outline, establishing a well-marked pathway to resolution of Janice’s furniture business and horsing around. Judge AIM has devoted great insight and energy to keep both IRS and Janice on the straight-and-narrow.

Here’s an example.

The parties shall “(2) explain their views on the following deductions with respect to petitioner’s horse activity for the taxable year 2010:

(a) schedule C legal and professional services,

(b) schedule C travel,

(c) schedule C utilities;

(d) schedule C meals and entertainment;

(e) schedule C rent/lease – otherbusiness property;

(f) schedule C supplies;

(g) schedule C car and truck expenses;

(h) schedule C office expense;

(i) any other items the party believes to be at issue with respect to the horse activity for taxable year 2010. The parties shall include the following items:

i. the amount reported in petitioner’s return;

ii. the amount of the adjustment made in the notice of deficiency upon which this case is based;

iii. the amount, if any, conceded by either party;

iv. each party’s views as to whether they have the burden of proof with respect to part or all of the item;

v. the legal theories upon which the party intends to proceed with respect to the issue;

vi. specific items of substantiation or other evidence that the party intends to offer at trial to support this item (including number of pages for documents).” Order, at pp. 2-3.

And in case the parties get discursive or otherwise wander from the path, “(T)he parties shall label each item pursuant to the numbering system used herein (e.g., when addressing the deduction for schedule C legal and professional service expenses related to taxable year 2010 for the horse activity reported on petitioner’s return, the heading of the section shall be marked (2)(a)(i)).” Order, at p. 3.

I’ve known 20-year drill sergeants who were less precise.

So says Judge Christian N. (“Speedy”) Weiler in Green Valley Investors, LLC, et al., Bobby A. Branch, Tax Matters Partner, 159 T. C. 5, filed 11/9/22. In Judge Speedy Weiler’s crosshairs is Notice 2017-10, 2017-4, I.R.B. 544. Bobby’s boys want partial summary J that said notice is invalid for want of notice-and-comment, hence the Section 6662A reportability chops on top of the understatement, underpayment, overvaluation, and whatever else IRS can think of are a no-go.

Of course, this is more Dixieland syndicated boondockery. And Bobby’s boys are represented by The Golden Hoard, the Peach State’s answer to The Jersey Boys.

The issue is whether Notice 2017-10, requiring highlighting of syndicated conservation easements, is legislative or interpretative.

“Legislative rules impose new rights or duties and change the legal status of regulated parties.” 159 T. C. 5, at p. 8. (Citations omitted).

OTOH, “Interpretative rules merely advise the public of an agency’s construction of the statutes it administers. Unlike interpretative rules, legislative rules have the force and effect of law.” 159 T. C. 5, at p. 9. (Citations omitted).

In the case of Bobby’s boys’ tax dodges, their returns were already filed for years at issue when the notice was issued. But Judge Speedy Weiler isn’t going to decide retroactivity here.

So which is it?

Spoiler alert, it’s legislative.

“The act of identifying a transaction as a listed transaction by the IRS, by its very nature, is the creation of a substantive (i.e., legislative)  rule and not merely an interpretative rule. See 5 USC §533. Identifying a transaction as a listed transaction does not merely provide the IRS’s interpretation of the law or remind taxpayers of preexisting duties. Rather, and as we will detail below, identifying a transaction as a listed transaction imposes new duties in the form of reporting obligations and recordkeeping requirements on both taxpayers and their advisors. Notice 2017-10 exposes these individuals to additional reporting obligations and penalties to which they would not otherwise be exposed but for the notice. Creating new substantive duties and exposing taxpayers to penalties for noncompliance ‘are hallmarks of a legislative, not an interpretive, rule.’” 159 T. C. 5, at pp. 9-10 (Citations and footnote omitted).

My diligent readers can, if they wish, read the remaining 14 (count ’em, 14) pages of Judge Speedy Weiler’s opinion. Judges Foley, Gustafson, Morrison, Buch, Ashford, Urda, Copeland, Jones, Greaves, and Marshall did, and they agree.

Judge Pugh agrees with the result, but digs into whether the enactment of Section 6707A, where Congress tried to hit the moving target of the ever-more-inventive manœuvres  of ever-more-inventive dodgefloggers, repealed or otherwise suppressed 5 USC §533. And she finds it doesn’t; and anyway, if IRS needs further weapons, there’s the “good cause” exception (5 USC §553(b) among others.

There’s always an exception somewhere, guys. Once again, IRS must decompose a little more brain tissue before taking a quick-and-easy approach. Judges Paris, Ashford, Copeland, and Ch J Kerrigan agree.

Judge Toro also concurs in result, going back over the American Jobs Creation Act, whence spring Section 6707A. Notice-and-comment is an attempt to democratize an otherwise autocratic and bureaucratic ipse dixit. And Judge Copeland agrees with this, too; she’s becoming the Tax Court bench’s successor to Tevye the Dairyman.

Judge Gale thinks that noticed dodgery is exempt from the APA, because Section 6707A says “by notice,” tout court.

Judge Nega says this kind of highroller dodgery damages the core of our voluntary compliance system, beyond the loss of revenue. Congress, he says, knew that, and adopted a rapid response régime.

“I disagree that Congress failed to ‘expressly’ override the application of the APA to the IRS process incorporated into law by the AJCA. The nature of the legislation as well as the legislative history associated with it that the opinion of the Court finds unpersuasive leads me to the conclusion that Congress did not intend to enact the AJCA penalty regime subject to the time-consuming notice-and-comment procedures of the APA. In the light of congressional knowledge of the existence of the APA when enacting the AJCA, I cannot agree that Congress added a penalty regime to enforce the existing IRS rulemaking without addressing an obvious APA vulnerability, at least, to the then-listed transactions.” 159 T. C. 5, at p. 46.

Lest I be misunderstood, I am not saying that IRS can ride roughshod over due process. There is still judicial review of the transaction itself. There has yet to be a trial, wherein confrontation, rules of evidence, cross-examination, appellate review, and representation of the parties by able counsel of their sole choice, play their full and essential roles. Justice must be done, and be seen to be done.

Click to access n-17-10.pdf

The United States Tax Court website needs a pop-up banner: LIMITED JURISDICTION – NOTICE OF DEFICIENCY OR NOTICE OF DETERMINATION ONLY: CAN’T HELP WITH ANYTHING ELSE

This would have saved James D. Semelroth & Carol E. Semelroth, Docket No. 18750-22S, filed 11/8/22, sixty dollars and almost three months’ time. All Jim & Carol had to show Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan was “a voluminous collection of copies of various IRS communications in the form of other notices and letters that related to such payments or lack thereof.” Order, at p. 1.

“Such payments” were the so-called economic stimulus payments, which Jim & Carol claim they never got.

What’s missing from this picture? A SNOD or NOD.

Replying to IRS’ motion to toss for want of jurisdiction,”(P)etitioners then went on to highlight an extensive saga of efforts to resolved the matter administratively with the IRS, including attempts to request assistance from the Taxpayer Advocate Service and the U.S. Congress. Conversely, petitioners did not allude to or attach any further notices from the IRS that could bear upon the jurisdictional query before the Court.” Order, at p. 3.

Ch J TBS provides the usual boilerplate enumeration of Tax Court’s circumscribed jurisdiction, with copious citation to the statutory fetters wherewith Congress has thus bound the “small court” Prometheus to the rock at 400 Second St., NW.

I can’t say whether Jim & Carol find this essay worth the sixty bucks that vanishes when their petition is tossed, despite Ch J TBS’ sympathies for their plight. “…while the Court is sympathetic to petitioners’ situation and understands the challenges of the circumstances faced and the good faith efforts made, the Court on the present record lacks jurisdiction in this case to review any action (or inaction) by respondent in regard to petitioners’ taxes. Congress has granted the Tax Court no authority to afford any remedy in the circumstances evidenced by this proceeding, regardless of the merits of petitioners’ complaints.” Order, at pp. 3-4.

On this day of all days, in the face of an almost overwhelming temptation, I must eschew political comment. Adding my puny voice to the ultimate storm now raging could only provoke and not calm. So I shall simply state that any government that fails to respond to the perceived needs of its populace … but you know the rest.

Post-Hewitt, the “very contestable reading of what it means to be perpetual” has devolved into the battle of the appraisers that Judge Holmes envisioned two years ago; see my blogpost “They Always Must Be With Us,” 5/12/20. Wherefore IRS is back to playing “win your case anywhere but on the trial,” seeking to toss petitioners’ experts, be they retained or specially employed, or merely “percipient,” that is, engaged or involved when the events giving rise to the controversy took place; what we old State courtiers call “eyewitnesses.”

Judge Christian N. (“Speedy”) Weiler isn’t having any of it in Buckelew Farm, LLC f.k.a. Big K Farms LLC, Big K LLC, Tax Matters Partner, Docket No. 14273-17, filed 11/7/22.

The Buckalews tried to wildcard in an expert’s report, and IRS tried to wildcard in two (count ’em, two) of their own, both sides claiming theirs weren’t specially retained or employed for the trial. Then IRS moves to toss all of the Buckalews’ experts, alleging Rule 143 violations.

So Kumho Tire and Daubert get a good airing, as does the reminder that “(R)ule 143(g)(1) is modeled after and contains identical language found in Federal Rule of Civil Procedure 26(a)(2)(B). Furthermore, Rule 1 notes how we are to give weight to the Federal Rules of Civil Procedure in instances where there is no applicable rule of procedure. If a party fails to properly disclose an expert witness under Federal Rule of Civil Procedure 26(a), the party may not use the witness ‘unless the failure was substantially justified or is harmless’ Fed. R. Civ. P. 37(c)(1).” Order, at p. 3.  (Footnote omitted).

“Moreover, federal courts are to acknowledge the differences between percipient witnesses who happen to be experts from those experts who, without prior knowledge of the facts giving rise to litigation, are recruited to provide expert opinion testimony.” Order, at p. 5. (Citation omitted).

The Buckalew’s wildcard expert passes muster with Judge Speedy Weiler. Another had his opinion attached to the Buckalews’ original return, so IRS’ claim they were ambushed is nonsense, as one of their wildcards produced an 800 (count ’em, 800) page rebuttal report. And the Buckalews’ other experts will either not testify, or has been called by IRS for their case in chief, and the last is the preparer of a subdivision plan for the property who is only being called to testify that he did so.

In short, IRS’ latest tactic to dodge actually trying a valuation case falls flat.

A Taishoff “Good Job,” goes to Jeffrey S. (“no phone”) Reed and the team at Kilpatrick Townsend.

Among the casualties of the DAWSON shift, with its concomitant obliteration of the old Tax Court website, was the designated order, which I called the designated hitter. If you remember, the designated order was one which the Judge or STJ designated for whatever reason, and therefore was given special mention in the list of the day’s orders.

While some judges and STJs may have overused that function (which may have contributed to its removal, although no public explanation was ever given), and other Judges and STJs never used it (ditto), for bloggers like me it saved a great deal of time.

Opinions are not issued on the majority of working days and never (well, hardly ever) issued on Fridays. Press releases are even rarer. So I perforce must root through orders for blogfodder.

It’s rarer still when fewer than 200 (count ’em, 200, and I have) orders show up. The overwhelming majority are one-page “file status report” or “continuance GRANTED” or “pay the sixty bucks.” Then there’s the Standing Pretrials deluge, hundreds of orders for trials that will never happen; tossed for want of prosecution or settled out.

Of course, one can use the search function for number of pages, using the Charlie Dickens Weller principle: “Vidth and visdom, Sammy, alvays grows together.” And this works most of the time.

But sometimes there’s an interesting twist in a one-or-two-pager, like Michael S. Debalski, Docket No. 17146-22S, filed 11/4/22.

Mike, self-represented of course, filed a petition and tried to amend, but that got treated as duplicative petitions, so Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan tossed the first back in August. Now Mike wants to “dismiss” the surviving petition.

We all know that Section 7459(d) requires entry of decision for IRS in the full amount of the SNOD. So Ch J TBS says “(B)ecause this case is based on a notice of deficiency issued to petitioner for 2020, the Court is required to enter a decision and, accordingly, the petition in this case may not be withdrawn with or without prejudice by petitioner.” Order, at p. 1.

OK, Ch J TBS is trying to save a pro se from himself; maybe IRS’ counsel is talking settlement and Mike thinks that dropping the petition will help him get a good settlement. Except, of course, that if talks break down, Mike has lost his chance to contest the SNOD.

So maybe a wee clarification is in order. Perhaps something like this: “Because this case is based on a notice of deficiency issued to petitioner for 2020, the Court is required to enter a decision in favor of Respondent in the full amount of the deficiency stated in said notice. Therefore, the Court will deny this motion. If Petitioner nevertheless wishes to agree to pay all or part of the full amount stated in said notice, Petitioner should consult with Respondent’s counsel in this case, and move for entry of decision in the agreed amount. If Petitioner and Respondent’s counsel cannot agree by December 5, 2022, they shall file a status report.”

Just a thought.

Too late, alas, is Judge Morrison to exhume the dockets that were sealed by the DAWSON debacle (I mean rollout). That has since been fixed, but Judge Morrison shows us the way to bring ’em back alive in Charles G. Berwind Trust for David M. Berwind, David M.  Berwind, D. Michael Berwind, Jr.; Gail B. Warden, Linda B.  Shappy and Valerie L. Pawson, Trustees, et al., Docket No. 21268-08, filed 11/3/22.

It seems there was litigation by and among the petitioners in USDCEDPA, followed by an appeal to 3 Cir. twenty-some years ago.

The parties stiped that the 3 Cir’s disposition of the case was reported. But the relevant page in Federal Reporter Third Series is only a list of decisions without published opinions.

“These documents are apparently unobtainable on Lexis, Westlaw, or Pacer.” Order, at p. 2.

The Genius Baristas would be proud.

Judge Morrison, being “Inclined to take notice” of the facts of said documents, sends the hardlaboring clerks from the Glasshouse to the Keystone State to bring copies of decision, opinion, and remand directly from their opposite numbers in USDCEDPA and 3 Cir. And sets the same forth at length.

He wants to give petitioners and IRS a chance to comment before he takes judicial notice. Since FRE 201(e) lets parties have a hearing on request on the propriety of such judicial notice, any party objecting to such inclination can “file a memorandum, not to exceed fives [sic] pages, on why the Court should not take judicial notice of the above-referenced facts.” Order, at p. 2.

Unfortunately, when the new, improved (don’t get me started) jim-handy DAWSON website obliterated years of orders, opinions, and decisions because one (count it, one) document in the docket had been sealed, no Judge or STJ took judicial notice of the entire docket, and set every unsealed document forth at length.

I hope it wouldn’t be considered unseemly if I were to award Judge Morrison a Taishoff “Good Job.”

Administrative Remedies, That Is

I’ve styled Judge David Gustafson The Obliging Jurist. Like Geoff Chaucer’s Clerke of Oxenford, his orders are full of moral virtue, and “gladly wolde he lerne and gladly teche.”

Today he directs his teaching both to IRS and to Trace T. Watkins & Lauree L. Watkins, Docket No. 20981-18, filed 11/2/22. After an allegedly prolonged waltz around promised substantiation for Trace’s & Lauree’s indocumentado SNODs, Trace & Lauree produced “a few new documents,” at the sight of which IRS folded and settled. Order, at p. 4.

Now Trace & Lauree want Section 7430 legals & admins, and so move. IRS claims delay of the game, excessive legals & admins claimed, and failure to exhaust administrative remedies.

But Judge Gustafson needs “… additional filings, in order to determine whether a hearing is necessary or whether instead the motion can be decided on the parties’ written submissions.” Order, at p. 1.

“A taxpayer exhausts his or her administrative remedies if (1) before filing a petition, he or she participates in an IRS Appeals conference, or (2) if no IRS Appeals conference is granted, the taxpayer,  before issuance of a notice of deficiency in the case of a Tax Court petition, (a) requests an IRS Appeals conference and (b) files a written protest if a written protest is required to obtain an IRS Appeals conference. Treas. Reg. § 301.7430-1(a) and (b)(1).

“Here, we understand petitioners to argue that they met this requirement, claiming on brief that they ‘asked for a meeting with appeals which was not granted.’  (Doc. 316 at 26, 27). But petitioners do not cite any record evidence that they requested an IRS Appeals conference either orally or in writing prior to receiving an NOD. (Doc. 316 at 26). Furthermore, little information is presented about the timing of petitioners’ purported request for an IRS Appeals conference or about which tax year or years an IRS Appeals conference was requested. Petitioners’ argument is unclear and apparently fails to show that they exhausted all available administrative remedies prior to filing their Petitions. Moreover, the circumstantial evidence regarding IRS Appeals’ activity on petitioners’ … tax years seems to suggest that IRS Appeals did not review these years prior to the filing of the Petitions in Tax Court—presumably because either no IRS Appeals conference was granted (a hypothesis difficult to square with the explicit invitation in the 30-day letters), or none was requested. We will therefore require petitioners to file a supplement to their motion for costs, wherein they should provide any available evidentiary support for their allegations that (1) they requested an IRS Appeals conference for any or all the tax years at issue, and (2) they did so prior to filing their Petitions in Tax Court. A failure to make a showing of these crucial facts may result in denial of their motion for costs. See § 7430(b)(1); see also Treas. Reg. § 301.7430-1(a) and (b)(1). The facts about the nature and timing of any requests petitioners made for an Appeals conference should be established by affidavit (or an unsworn declaration made under penalty of perjury in lieu of affidavit pursuant to 28 U.S.C. §1746). No hearing would be warranted in this case without a showing that admissible evidence supporting exhaustion of remedies is available to be offered at a hearing.” Order, at p. 5.

But IRS is not faultless. IRS “… maintains that ‘[p]etitioners unreasonably protracted litigation by failing to produce all relevant documents until the eve of the third trial date’ (Doc. 312 at 32-33) and that respondent was finally provided on such date a ‘few new documents that could give some justification to lowering his settlement offer[.]’ (Doc. 312 at 16). However, respondent neither identifies the supporting documents nor explains their contents, and it would be helpful to the Court to understand precisely what documents petitioners provided pre-trial (but had not provided previously) that prompted settlement of the case, so that we may adequately evaluate whether petitioners could or should have provided them sooner and whether respondent’s position throughout the examination and litigation was substantially justified. See § 7430(b)(3), (c)(4)(B).” Order, at pp. 5-6.

I can’t close this post without noting that it’s late because Jaap van Sweden and the NY Philharmonic played a stormer tonight with the Bruckner Seventh Symphony. A performance to remember.

Nick and Vinny are the controlling shareholders of Parkway Gravel, Inc., and Subsidiaries, Docket No. 10819-21, filed 11/1/22; they are also the sole partners of V&N Partnership. V&N had an option (nature of which not stated) with respect to some DE real estate that Parkway sold six (count ’em, six) years after the option agreement. Parkway got $11.1 million, which was split between V&N (who sold its option to the purchaser) and Parkway.

IRS claims want of economic substance, and Parkway (a C Corp) should pick up the entire gain. Parkway says “…multiple bona fide business purposes existed for the agreement, including to dedicate [the Partnership] to the purpose of maximizing the value of the property…, (ii) the Partnership ‘had the time, ability, and funding necessary to help maximize the value of the property’…, and (iii) the ‘bona fide business purpose of the Option Agreement materialized into an increased value of over $4 million’.” Order, at p. 2.

How exactly this was done by V&N and not by Vinny and Nick as controlling stockholders of Parkway is what IRS wants to know. And apparently another corporation, which bears surnames identical to those of Vinny and Nick, provided services to Parkway, the precise nature of which excite IRS’ curiosity.

STJ Eunkyong (“N’Yawk”) Choi has this one.

IRS has sent interrogatories to Parkway, some of which were answered sufficiently, but the third corporation’s particulars are sufficiently obscure so Parkway is ordered to do better. STJ N’Yawk Choi dwells on Rule 71(b); “I don’t know” is not a sufficient answer unless one can state one has made reasonable inquiry and gotten hold of reasonably available information.

Parkway has offered to supplement the responses it has provided to the interrogatories if  further information becomes available. While this may be an appropriate response where the relevant information is in the hands of others, here it falls short.

“With respect to Parkway’s offer to supplement its response to Interrogatory 9 if more information becomes available, we note that the persons who provided the services to the Partnership (and who would ostensibly possess such information) are the controlling shareholders of Parkway, which would raise significant questions should more information be forthcoming at a later date.” Order, at pp. 3-4.

That means, translated from Judgespeak, “Oh yeah? You sure about that? Let me help you out.”

“We will give Parkway 14 days to provide a further supplement to its responses to Interrogatories 9 and 10, if it so wishes.” Order, at p. 4.

When you’re on both sides now, like Joni Mitchell, you’d better tell the whole story.