Office

Ch J Kathleen (“TBS =The Big Shillelagh”) Kerrigan shows Greatest Common Factor, T. C. Memo. 2023-39, filed 3/23/23  how to substantiate a deduction for a home office. GCF is a C Corp, and claims home office expenses of $13K in each of the two (count ’em, two) years at issue. The Section 280(A) disallowance of home-related deductions doesn’t apply to C Corps.

Ch J TBS: “A C corporation ‘may deduct payments made to lease home office space from an employee (or from its owner) as rent if they are ordinary and necessary expenses [under section 162] directly connected with or pertaining to the corporation’s trade or business.’ Here there is no evidence in the record indicating that there was any such rental agreement. Further, there is no evidence that petitioner expended any of its funds in maintaining the alleged home office. There are therefore no grounds on which petitioner, a C corporation, could deduct the expenses related to Mr. [50% shareholder]’s home office under section 162.

“We also note that even if Mr. [50% shareholder] were the taxpayer, he would not be entitled to home office deductions because the dwelling was not  ‘exclusively used on a regular basis . . . as the principal place of business for any trade or business of the taxpayer.’” § 280A(c)(1)(A).” T. C. Memo. 2023-39, at pp. 3-4 (Citations and name omitted).

But Mr. 50% shareholder has other problems. He worked as a subcontractor on top secret military projects, and the only income GCF showed was what Mr. 50% shareholder got paid from the prime contractor.

“During the years in issue petitioner’s only income was from [prime contractor]. Mr. [50% shareholder]’s work for [prime contractor] was performed at the Los Angeles Airforce Base. Because of the classified nature of his work for [prime contractor], Mr. [50% shareholder] was not allowed to take home any work. Accordingly, we sustain respondent’s disallowance of petitioner’s home office deduction.” T. C. Memo. 2023-39, at p. 4. (Names omitted).

I eschew any political comment.

Back last September, I blogged how STJ Diana L (“The Taxpayer’s Friend”) Leyden dealt with frivolites who persisted in frivoling. See my blogpost “The Shortest Way With Dissenters,” 9/15/22. Took STJ Di seven (count ’em, seven) pages.

Judge Pugh plays a Defoe gambit of her own, and sends off Darcy-Mae Englert, T. C. Memo. 2023-38, filed 3/22/23, in a mere four (count ’em, four) pages, with a sustained deficiency, and a $1K Section 6673 chop at no extra charge. No somber reasoning, but copious citation of precedent.

Judge Pugh has a template for the entire Bench when confronted by the all-zeroes, my-wages-aren’t-taxable jive. I reprint it here as a public service.

“In general, we do not address frivolous arguments with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit. Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984); see, e.g., Cabirac v. Commissioner, 120 T.C. 163 (2003), aff’d per curiam without published opinion, No. 03-3157, 2004 WL 7318960 (3d Cir. Feb. 10, 2004); Rowlee v. Commissioner,  80 T.C. 1111, 1120 (1983) (rejecting the taxpayer’s claim that he is not a person liable for tax); Waltner v. Commissioner, T.C. Memo. 2014-35 (laying out and rejecting a litany of frivolous positions), aff’d, 659 F. App’x 440 (9th Cir. 2016). Petitioner’s assertion that her wages are not income has been identified by the Secretary as a “frivolous position[].” I.R.S. Notice 2010-33, 2010-17 I.R.B. 609, 609. And courts have repeatedly done the same. See, e.g., Walker v. Commissioner, T.C. Memo. 2022-63; Briggs v. Commissioner, T.C. Memo. 2016-86; Lovely v.  Commissioner, T.C. Memo. 2015-135, aff’d, 642 F. App’x 268 (4th Cir.  2016).

“Petitioner is subject to tax under the Internal Revenue Code.  Petitioner repeatedly asked for legal and statutory proof that her wages are taxable. These are but a few of the cases that have rejected arguments that she has raised. Applying the law to the facts of this case, we find that petitioner received taxable wages… and we sustain respondent’s deficiency determination.” T. C. Memo. 20-23-38, at p. 3.

Darcy-Mae frivoled even after being warned at trial to read Notice 2010-33 before sending in her post-trial brief. “Even after reading Notice 2010-33 as we advised, petitioner did not heed its warning: she submitted the same frivolous arguments post trial. We also warned petitioner at trial that we would take into account everything she said at trial and submitted in writing posttrial when we considered whether to impose the section 6673 penalty. Therefore, we will impose a penalty of $1,000 under section 6673(a)(1) on petitioner for continuing to take frivolous positions.” T. C. Memo. 2023-38, at p. 4.

Build a record. Lay out the law. That’s how to chop frivolites.

Judge Albert G (“Scholar Al”) Lauber has mastered many puzzles. Expert witnesses and the wrinkly skin of tax law hold no peril for Judge Scholar Al. But today he outdoes himself. He deconstructs that terror of the self-reporting, the infamous Social Security Benefits Worksheet—Lines 6a and 6b.

Charles Lin and Amy Lin, T. C. Memo. 2023-37, filed 3/21/23, didn’t bother reporting any taxable social security benefits. Along with blowing off their real estate losses (claimed taxes and depreciation on entire building without providing any allocation to rented space), Judge Scholar Al does both a number and the numbers on Charles’ and Amy’s social security, parsing each subsection of Section 86 to provide chapter and verse for each calculation.

Judge Scholar Al nimbly hopscotches through such twice-tangled locutions as “Section 86(a)(1) generally provides that, for any taxpayer described in subsection (b), gross income includes Social Security benefits in an amount equal to the lesser of (A) one-half of the Social Security benefits received or (B) one-half of the excess described in subsection  (b)(1).” T. C. Memo. 2023-37, at p. 7.

Judge Scholar Al’s calculations and explanations are found at pp. 7-9. Every practitioner ought to have this in the toolkit in case the software crashes.

The Amended Tax Court Rules of Practice and Procedure bring Rule 147 into the Twenty-First Century with the amendment to Rule 147(a)(3): “Notice to Other Parties Before Service. If the subpoena commands the production of documents, electronically stored information, or tangible things, then before it is served on the person to whom it is directed, a notice and a copy of the subpoena must be served on each party.”

It’s been almost eight (count ’em, eight) years since Judge Mark V Holmes and I began our campaign against the Stealth Subpoena, which old Rule 147 permitted by omitting the FRCP Rule 45(a)(4) notice to all parties where production of documents or things is sought. See my blogpost “The Stealth Subpoena,” 7/16/15.

Even though then Ch J L Paige Marvel bawled me out at a Tax Court Judicial Conference for mentioning the anomaly, I’m glad Judge Holmes’ and my pertinacity have finally prevailed.

Judge Emin (“Eminent”) Toro is loath to unload a Section 6673 chop on Kimberly Stoltz, Docket No. 5618-21, filed 3/20/23 (Happy Palindrome Day!). Kim was “courteous” on the trial (Transcript, at p. 16), and that caused Judge Eminent to “take no pleasure in imposing this penalty.” (Idem.)

But Kim had been warned pretrial that her wages-aren’t-taxable arguments have been shot down every time, and she went forward with them anyway.

And Kim was looking at non-filing, nonpaying, and non-estimated add-ons besides the deficiency, all of which she got.

Judge Eminent carefully reviews the Leyshon factors (see my blogpost “Another Rounder’s Day, 6/3/15), and can’t cut Kim any slack. $500 Section 6673 chop.

Looks like there may be a crackdown on frivolities at The Glasshouse on Second Street, NW.

Ex-Ch J Maurice B (“Mighty Mo”) Foley’s farewell to chieftainship in the Court he has served so well has finally been accepted by his successor, Hon. Kathleen (“TBS = The Big Shillelagh”) Kerrigan. Here are the Amended Tax Court Rules of Practice and Procedure.

Check it out. Effective as of 3/20/23.

Here’s how the Court responded to the comments received.

Bringing, I hope, a logical, practical answer to the conundrum I’ve spent too much time unscrambling, and incidentally wasting my readers’ time, CSTJ Lewis (“A Name As Brilliant As The Man”) Carluzzo briefly and convincingly slips the Gordian knot binding how and when to administer chops for delay of the game and frivolity.

Andrew Ethan MacTaggart, Docket 7648-22L, filed 3/17/23 is a protester-type rounder. He was in Tax Court a couple years ago (hi, Judge Holmes) with his wages-aren’t-taxable and the-right-guy-didn’t-sign-the-paper arguments, all which earned him a bunch Section 6702 frivolity chops. Transcript, at p. 8, par. 13.

Nowise daunted, Andy E. is back with the same merchandise, and it doesn’t sell this time either. CSTJ Lew: “Petitioner next argues that the compensation he received as an employee …is not subject to federal income tax. Suffice it to state that it is, see section 61(a)(1) and the many cases cited in the respondent’s pretrial memorandum applying that statute, and nothing else need to be said on the point in response to his argument.” Transcript, at p. 6, par. 7.

But the point (yes, there is one; I’m almost getting cogent in my old age) comes after IRS folds certain Section 6702(a), but leaves others on the table. Then IRS makes an oral motion for imposition of Section 6673 frivolity chops on top. Given the record here, that’s not an off-the-wall ask.

But CSTJ Lew sees the true goal of all Tax Court proceedings.

“Petitioner certainly deserves the imposition of a section 6673 penalty in this case, but we are concerned that the imposition of a section 6673(a) penalty in any amount could cause yet a further delay in the collection of justifiable and long overdue federal tax liabilities that petitioner owes. That being so, respondent’s oral motion will be denied.” Transcript, at p. 11.

To be sure, the “just, speedy, and inexpensive determination of every case” is important. But, like freedom, it isn’t free.

So collect the revenue. Yes, the scarce resources of Tax Court cannot be squandered, nor the Court’s orderly procedures disrupted, to satisfy juvenile rounders’ antics. But having their goods grabbed also encourages the recalcitrant to get with the program.

Grab them by their wallets, and their hearts and minds will follow.

An IRS partial summary J motion works in Nassau River Stone, LLC, GH Manager, LLC, Tax Matters Partner, T.C. Memo. 2023-33, filed 3/16/23. FL boondockery this time; Judge Albert G (“Scholar Al”) Lauber finds whoever had to sign when did sign when. How closely they looked at what they signed before they signed doesn’t matter. Boss Hossery OK.

“Petitioner alternatively contends that RA K should not be regarded as having made the ‘initial determination’ because his case activity record ‘shows that he spent only 64 hours on [p]etitioner’s [a]udit.’ But section 6751(b)(1) does not inquire into the depth or comprehensiveness of IRS officers’ review; it simply requires supervisory approval of the penalty recommendation. As we have said before: ‘The written supervisory approval requirement . . . requires just that: written supervisory approval.’ We have repeatedly rejected any suggestion that a penalty approval form or other document must ‘demonstrate the depth or comprehensiveness of the supervisor’s review.’ We do not second-guess the extent of the RA’s or the supervisor’s deliberations about whether penalties should be imposed. We confine our search to seeking evidence of written supervisory approval.” T. C. Memo 2023-33, at p. 8, footnote 3. (Name and citations omitted, but the cites are all cases I’ve blogged).

So before you ask “So what else is new?”, check out how Judge Scholar Al describes the Nassau Riverines’ seven (count ’em, seven) trusty attorneys’ attempts to raise questions of fact in this procedural joust.

“Petitioner struggles mightily, but in vain, to gin up a dispute of material fact.” T. C. Memo 2023-33, at p. 6. “Tilting at windmills, petitioner vainly probes for a dispute of material fact.” T. C. Memo. 2023-33, at p. 9.

“The ‘presumption of regularity’ likewise supports the actions of the IRS officers here. ‘The presumption of regularity supports the official acts of public officers and, in the absence of clear evidence to the contrary, courts presume that they have properly discharged their official duties.’ It remains a well-settled rule that ‘all necessary prerequisites to the validity of official action are presumed to be complied with.’ * * * * Petitioner offers no evidence, much less ‘clear evidence’, to overcome this presumption.” T. C. Memo. 2023-33, at p. 10. (Copious citation of precedent omitted).

The point (and yes, I have one, for a change)? Judge Scholar Al shows the Nassau Riverines no Section 6673 yellow card, no Rule 33(b) OSC, not even a tiny reprimand, for eleven (count ’em, eleven) pages of wasted valuable Tax Court time and electrons.

But there’s a $17 million syndicated conservation easement deduction here. When Alberto and Virginia Delgado were fighting over a $49K employment discrimination settlement, Judge James S (“Big Jim”) Halpern laid an OSC on them and their counsel without any visible notice or warning for a delay-of-the-game chop, for arguments no more windmill-worthy than what was raised here. See my blogpost “Why The Chop?” 3/13/23.

Now lest I be misunderstood, judges have to run their own divisions without constantly looking over their shoulders. Trial judges see and hear the parties and counsel. They have to deal on the spot with the honest but ignorant pro ses, the rounders, wits, wags, and wiseacres, inept counsel, extras from Judge Judy reruns who wandered into the wrong courtroom. I don’t want a set of rigid guidelines for off-the-bench chops.

What I do want is a warning, whether in a previous case, a pretrial phoneathon, an order, or from the bench in a hearing, and a chance, however brief the circumstances require, for the errant litigant or litigator (or both), to repent and cure the transgression. If any remain obdurate, then let judicial wrath descend upon them heavily.

Judge Patrick J (“Scholar Pat”) Urda and Judge Albert G (“Scholar Al”) Lauber were joined by litigators from the private and public sectors (one each) for a causerie on expert witnesses. Practitioners found it interesting.

The SPTO paragraph 4 calls for a motion to file an expert witness’ report. Apparently some practitioners just file the report, others just file a notice of report and file, and some actually comply with the order. Judge Scholar Al said he didn’t mind not having to stamp yet another motion GRANTED, and the matter was left undecided. Taishoff says the SPTO is an Order, not a suggestion, and suggests the motion route. That way the record is clear, and your compliance with the SPTO manifest.

There was lamentation over the asymmetry of access to technical data underlying an expert’s opinion. Especially is this the case where industry standards and practices are at issue. The petitioner, being engaged in the industry for years, may have contacts with access to highly technical data, and employ individuals with decades of experience. IRS has none thereof. While there was a general feeling that the parties should play nice in discovery, I cannot think that the petitioner, with monumental deficiencies and chops on the block, would willingly hand over the goods. Rule 143(g)(3) allows expert testimony as to industry standards without the need for a written report. I guess I can add to my “Stealth” file the Stealth Expert.

Finally, the “hot tub.” This apparently was a thought of the late Judge Laro. The judge would call the experts together out of the presence of the attorneys and attempt to find upon what principles they could agree, to narrow the divide between their respective reporting positions. These concessions could serve to shorten the trial and make it easier to find the correct result. I cannot think too many attorneys would agree to this, and I am sure their clients, who are paying this high-priced talent to win their case and not engage in a philosophical excursus, would not.

But it was an interesting seminar. I look forward to the next, when Judge Ronald L (“Ingenuity”) Buch will take the lead.

Rule 33(b), that’s why. I was puzzled (see my blogpost “Why The Chop?” 3/13/23), and did some research. Though rarely invoked, and my research showed only for grievous infractions, Rule 33(b) permits a sua sponte chop for proceedings that cause “unnecessary delay or needless increase in the cost of litigation.”

The Rule doesn’t require a warning, but was the conduct here so egregious that no warning should have been necessary before the OSC? If the parties or their trusty attorney were recidivists, or ignored a warning, might it not have been well to spell that out in the opinion?

Yet another reason why some sort of guidelines for imposing sanctions are needed.