For background, see my blogposts “Why The Chop?” 3/13/23, and “Why The Chop? – Part Deux,” 3/16/23.

Late last night, 4/11/23, I received the following unsigned text message: “Good evening. I am reaching out with respect to the Delgado case and Judge Halpern’s show cause order re:  6637 penalty. In response to your question, no warning re: imposition of the penalty was given by the court, or penalty sought by Chief Counsel.”

I expect my correspondent meant “6673 penalty.” Indeed, Judge Halpern’s OSC (to which a docket search shows Petitioners’ reply was filed yesterday, 4/11/23) refers specifically to Section 6673(a), the general frivolity delay-of-game penalty. I had thought that Rule 33(b) was implicated, but Judge Halpern did not refer to that Rule.

True, no warning is mandated either by statute or reg, but rarely has the chop been administered under either provision without at least an off-the-bench oral warning. Only in cases of well-documented egregious conduct can I recollect an OSC prelude to an immediate chop. I can’t find a more recent example from Judge Halpern than that set forth in my blogpost “A Further Cautionary Tale,” 4/28/14, nine years ago, when he invoked both Section 6673 and Rule 33(b). In that case, the documented misdoings of attorney Mac were well over the mark.

The Dixieland Boondockery epidemic bids fair to eclipse Son-of-Boss and Boss Hossery mass trials of the past. Today Judge David Gustafson is confronted with 50 (count ’em, 50) conservation easement cases, and the valiant attempts of counsel for both sides to try to corral the stampede, in Garden Lakes Estates, LLC, Garden Lakes Estates Holdings, LLC, Tax Matters Partner, Docket No. 3052-21, filed 4/11/23.

“…the parties filed a joint motion for continuance, in which they gave a helpful description of a group of 50 conservation easement cases related to this one and of counsel’s collaboration in recommending an orderly and economical approach to resolving the cases. We appreciate counsel’s work on these cases, and we agree in principle with the proposition that the economies of the parties and the Court would be served by identifying a small number of ‘exemplar’ cases, scheduling them for trial, and receiving in the non-exemplar cases stipulations to be bound by the outcome in an exemplar.” Order, at p. 1.

Maybe this isn’t quite as bad as the asbestos and other mass tort litigations, but clearly 50 trials are a wee bit much. Nevertheless, corraling the stampede requires more than one experienced cowpoke.

“Counsel understand that a single judge who is assigned to an essentially random sample from among the 50 cases (while other cases are assigned to another judge and others are still in the General Docket under the immediate responsibility of the Chief Judge) is not in a position to adopt the parties’ recommendations and assign judges. But their making their proposal in a single case does provide an occasion for one judge to learn more and perhaps to become able to make a recommendation to Court as a whole.” Order, at p. 1.

So Judge Gustafson propounds some seven (count ’em, seven) headings, which counsel should use to direct case management in a status report. Maybe the parties can draw a chart to show issues and features that align or diverge among the cases.

Clearly, this will provide blogfodder well into my twilight years.

Judge Pugh is not describing her yachting holiday where the Trade Winds blow and the Anegada Passage beckons. Rather, this is the story of David W. Tice, 160 T. C. 8, filed 4/10/23, who runs aground among the shoal waters of Section 932, as Congress both dredges and silts the filing requirements for USVI residents who are, or are not, bona fide residents of Our Insolvent Islands in the Sun at the magic date or dates. If bona fide, their filing with VIBIR starts 3SOL for VI and USA; if not, they need to double-file, if have both USVI-connected and US-connected income, at least for years at issue.

Dave is non-bona fide, but claims the cover-over regime adopted for years long post-years-at-issue should apply retroactively to the two (count ’em, two) years at issue.

Judge Pugh trudges through the convoluted history of Tax Court’s Laocöon-like struggles with Section 932(a) and its regulations (or non-regulations). I’ve blogged all this stuff for the last twelve (count ’em, twelve) years, starting with Appleton (“Statute of Limitations – Maybe Not,” 12/28/10), Cooper (“A Virgin State of Mind,” 4/8/15), Sanders, (“How to Be a Virgin,” 7/5/18), and Hulett (“Another Non-Virgin,” 1/30/18).  And I’m not even counting la famille Vento.

If by now your head isn’t spinning enough, Dave argues that the regulation that would save him if made retroactive violates both the APA and the Fifth Amendment.

“And were we to find Treasury’s election parameters arbitrary and capricious, the consequence would be to’hold [that part of the regulation] unlawful and set [it] aside,’ 5 U.S.C. § 706(2), not make it applicable for the years in issue. Although petitioner contends that the consequence of the regulation’s invalidity is that “the[r]egulation applies to [p]etitioner’s taxable years 2002 and 2003, thus making the  [n]otice of [d]eficiency untimely,’ petitioner does not explain how invalidating a regulation not applicable for the years in issue could make it applicable for the years in issue. Nor could we identify any legal basis for in effect rewriting a regulation in this way.” 160 T. C. 8, at p. 12.

Dave loses.

If you’re cruising the Virgins and have income, jump overboard.

That’s what Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan decides is what counts when Section 6702(a) frivolity chops are on the menu in Srbislav B. Stanojevich, 160 T. C. 7, filed 4/10/23.

Srbi ‘s 1041’s for his “grantor-type” trust for each of the four (count ’em, four) years at issue reported interest income, but claimed “…federal income tax withheld in an amount equal to the amount of the interest/total taxable income reported on the return, that [trust]’s ‘[t]otal tax’ for the year was zero, and that [trust] was entitled to receive an overpayment equal to the amount of the withheld tax. The returns included as attachments various Forms 1099 that petitioner had prepared and that reported payments to and from [trust]. Some of the Forms 1099 also reported the amounts of withheld federal income tax that the returns reported were withheld federal income tax.” 160 T. C. 7, at p. 3.

Srbi claims the frivolity chops don’t involve him, because the returns weren’t his, but rather the trust’s. Apparently disregarded entity doesn’t play a role, because the statutory language places the burden on the “person files what purports to be a return of a tax imposed by this title,” Section 6702(a). And Reg. Section 1.6012-3(a)(1) requires the fiduciary of a trust to file Form 1041.

Ch J TBS goes through the indicia of frivolity in 160 T. C. 7, at pp. 6-8, and Srbi tags all the bases.

“We now need to determine whether a taxpayer may be assessed a section 6702(a) penalty for filing a frivolous return that is not his personal return. We read section 6702(a) to answer that question in the affirmative. We read nothing in section 6702 that conditions the applicability of section 6702(a) on a person’s filing of his or her personal income tax return. In fact section 6012(b)(4) points to our contrary reading through its mandate that the return of a trust ‘shall be made by the fiduciary thereof,’ or in other words, by its trustee. See also §7701(a)(6) (defining the term ‘fiduciary’ as a ‘trustee . . . or any person acting in any fiduciary capacity for any person’).” 160 T. C. 7, at p. 9.

Judge David Gustafson also displays the human touch in Keith Barclay Nelson & Christine Alicia Kourtides, Docket No. 231439-21L, filed 4/10/23.

“The CDP process is one of the remedies Congress has created to assure that tax collection is reasonable and humane–but in the end,  the IRS is required to collect the taxes that are due. The liabilities at issue in this case arose and should have been paid beginning as early as April 2017–nearly six years ago. Petitioners have enjoyed six years of the IRS’s forbearance, and at some point the IRS must use the means at its disposal (i.e., levy) to collect those taxes.” Order, at p. 3.

But he does suggest that Keith & Christine can try a Rule 161 reconsideration, or try for an IA with IRS. Truly reasonable and humane.

I learn a lot from clients. Many years ago, a client taught me that one’s credibility and trustworthiness can be established simply by showing up when and where you’re expected to be. Being a couple minutes early (hi, Judge Holmes) can often make a difference, in these days of added security.

That obliging jurist, Judge David Gustafson, is clearly a strong adherent of showing up. Here, he tells a representative how to do it, in IE & J Co, CMD, LLC, Docket No. 16245-22-L, filed 4/7/23.

“The Court will hear argument on the cross-motions for summary judgment at or soon after the calendar call of the Court’s upcoming session…. The parties should arrive before 10:00 a.m. and should go to the front of the courtroom and report their presence to the trial clerk stationed there. Petitioner would be well advised to arrive no later than 9:30 a.m.  in order to consult with the volunteers from the Lower [sic] Income Tax Clinic who will be present to advise and consult with self-represented taxpayers. Petitioner should understand that the Court is scheduling this hearing on the motions in order to make available to petitioner this helpful resource.” Order, at p. 3.

I like the idea of a “Lower Income” tax clinic. The Low Income Tax Clinics are for persons of low income, but most people’s income is lower than someone else’s, and the “Lower Income” clinics sure fill a need. I hope the clinic is able to litigate the case, as it is a rarity, a Section 6721 failure-to-file-information returns. I’ve blogged only three (count ’em, three) in the last twelve years.

George Azeh & Daniele Ambatta, Docket No. 1841-22, filed 4/6/23, claimed three (count ’em, three) personal exemptions, one each for George and Danielle, and one for a minor child from George’s previous marriage. George’s other minor child’s exemption belonged to George’s loved-once, per divorce decree.

George lost his previous job, got a new one that didn’t provide health cover, so joined the WI exchange. You can see where this is going.

George seems to have thought that he had a family of four, but he didn’t. The other minor child’s tax incidents go to loved-once. So the $100K 400% of poverty for year at issue for four families shrinks to $83K for threes.

“When determining family size, the size of the family is equal to the number of individuals the taxpayer is permitted to deduct as personal exemptions. § 36B(d)(1).” Transcript, at p. 7.

George’s and Daniele’s MAGI was $91K. Their APTC was $23K. So being $8K over the limit gets them a $23K deficiency. And $23K in insurance premiums is north of 25% of their MAGI.

IRS magnanimously folds the Section 6662 chops.

Judge Christian N. “Speedy” Weiler: “Finally, while we are sympathetic to the arguments made by Mr. Azeh at trial, we are unable to provide equitable relief from this tax deficiency, as we are obligated to apply the law as written by Congress.” Transcript, at pp. 8-9.

“The law as written by Congress” has been the target of enough condemnation from all points of the political spectrum to require no comment from me on this avowedly nonpolitical blog. So, instead of quoting Ebenezer Scrooge (which might be taken as political), I can only once again invoke Charles Dickens’ immortal words from Chapter 10 of Little Dorrit.

I’m more than a little chary of handing out a Taishoff “Good Job” for anything less than a shootdown. Not merely a victory, but a demonstration of skill and thinking outside-the-cliché, is the standard here.

So I’m more than a little puzzled at Judge Alina I. (“AIM”) Marshall’s send-off to Ruby Tang, Docket No. 6020-21S, filed 4/5/23 and IRS’ counsel. Ruby claimed $96K in medicals and $25K on her 1040 for year at issue, for none of which did she adduce any proofs on the trial. IRS counsel did produce Boss Hossery for the $5K Section 6662(b)(1) substantial understatement chop that IRS included in Ruby’s $25K SNOD at no extra charge.

“At trial, Petitioner presented evidence regarding events in the administrative record that took place prior to the issuance of the notice of deficiency, asserting that the lack of audit on a particular date invalidated the notice.  Petitioner did not present evidence or testimony regarding her medical and dental expenses or her charitable contributions.” Transcript, at p. 2.

Needless to say (but I’ll say it anyway), Greenberg’s Express hauls away the past; SNODs get tried de novo. “Although Petitioner seeks to identify missing signatures and irregularities in Respondent’s documents, we generally do not look behind a notice of deficiency to review what occurred during the course of an examination. See Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324 327 (1974).” Transcript, at pp. 5-6.

Ruby does have an attempted save in the goalmouth.

“Section 7605(B), however, opens a narrow exception to that rule. Section 7605(B) provides that no taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer’s books of account shall be made for each taxable year unless the taxpayer requests otherwise, or unless the secretary after investigation notifies the taxpayer inviting [sic; “indicating”?] that additional inspection is necessary.

“Petitioner argues that the Internal Revenue Service account transcript for her [year at issue] tax year shows two audits, but it does not. Petitioner identifies the … date on the Form 4549-A report of income tax examination changes, sent with her notice of deficiency and notes that this date differs from the one on the civil penalty approval form that was also sent with Petitioner’s notice of deficiency. These different dates do not indicate that a second audit occurred.” Transcript, at p. 6.

But the transcript here is somewhat less than clear. “We have held that the Commissioner does not conduct a second examination and he does not obtain any new information. Estate of Sower v. Commissioner, 149 T.C. 279 289 (2017). We have also held that there was no second examination when a taxpayer failed to meet his burden, to show that there was a second examination of his books of account when the Commissioner issued a notice from the returns already in his possession. Id.” Transcript, at pp. 6-7.

Judge, I think you meant “We have held that the Commissioner does not conduct a second examination when (not “and”) he does not obtain any new information.” For the Sower story, see my blogpost “A Lot Less Portable,” 9/11/17.

Ruby filed before the April 17 due date for the year-at-issue return, and claims IRS blew the SOL, but SOL doesn’t start running until due date, so SNOD is timely.

Judge AIM’s send-off to the parties is the strangest I’ve yet encountered.

“Ms. Tang, thank you for your work on this case.  And thank you to Mr. [IRS counsel], who is not here. I hope you have a wonderful weekend.” Transcript, at p. 10.

Yeah, I’ll bet Ruby had a fine weekend, having gotten a $30K gazumph off the bench.

Judge Alina I. (“AIM”) Marshall provides the latest entry in my “Play Nice” series. Winona W. Smitherman & Richard E. Smitherman, Docket No. 8552-21, filed 4/4/23, are frivolites of the wages-aren’t-income species. Judge AIM warns Win & Rich at commencement of trial that their pleadings are without merit, and to come up with real arguments.

Win & Rich use the “trade or business includes public office” Section 7701 (a)(26) argument, but “includes” doesn’t exclude everything else.

Judge AIM brandishes the Section 6673 yellow card. But petitioners “were polite and brief at trial, and this is the first time petitioners have advanced such arguments before the court.” Transcript, at p. 10.

But don’t try it again, guys.

I proffer this off-the-bencher as an example of how warning should be given before the Section 6673 chop (or the Rule 33(b)) variety) is imposed.

I’ve chronicled any number of petitioners who come seriously unglued when Reg. Section 1.274-5T strict substantiation tags out their car and truck expenses, whether as the now-sequestered unreimbursed employee business expense deduction or expenses for production of income. CSTJ Lewis (“The Name Alone Suffices”) Carluzzo says “mox nix, year-at-issue is pre-TCJA, treat both the same” so Noah Schmerling and Susana Schmerling, T. C. Sum. Op. 2023-14, filed 4/4/23, get $12K of travel expenses using the BMW X3 he leased from his boss allowed.

“Petitioners prepared a noncontemporaneous mileage log showing petitioner’s use of his leased BMW X3 during [year at issue]. Petitioners’ mileage log does not show a beginning destination, nor does it state the business purpose of the use of the automobile, as required under Temporary Treasury Regulation § 1.274-5T(b)(6). Nonetheless, petitioners’ mileage log substantially complies with the ‘adequate records’ requirement of the regulations; to the extent their log is deficient, they have provided corroborative evidence sufficient to establish the required elements. See Treas. Reg. § 1.274-5(c)(2)(iii); Temp. Treas. Reg. § 1.274-5T(c)(2).

“We have reviewed the evidence and compared the mileage log with [Boss’] commission list records and petitioners’ credit card and bank statements. Taking into account petitioner’s personal use of the BMW X3 and the extent to which petitioners have properly substantiated expenses for travel, car and truck, and rent or lease of other business property, we find that petitioners are entitled to deduct $12,000 attributable to actual expenses.” T. C. Sum. Op. 2023-14, at p. 9.

Noah is sales manager for a BMW dealership. He gives “tips” to certain fellow employees, and auctioneers at used car auctions, whereat Noah buys vehicles for his boss to offload, and some of those are ordinary and necessary enough to be allowed as deductions. Noah also gets bonuses directly from BMW and commissions for the sale of extended warranties from an entity unrelated to his boss the dealership. No one claims Noah is an employee of either, but the income is inseparable from his work as sales manager at the dealership, so no Schedule C treatment for Noah.

I don’t know if CSTJ Lew would buy a used car from Noah, but he sure bought Noah’s mileage log.

Two Sum. Op.s from the NY Duo of STJs Diana L. (“Sidewalks of New York”) Leyden and STJ Eunkyong (“N’Yawk”) Choi today.

Magdy A. Ghaly and Laila Ryad, T. C. Sum. Op[. 13, filed 4/3/23. Magdy lost his job, drew down  from his “retirement company” (IRA? 401(k)?) and defaulted on a loan therefrom. He started new accounts two years later, to try to replenish what he had taken. Of course, he neither reported nor paid tax on what he had taken out. And was under 59-1/2 when he took it out. IRS drops the chops. Of course, Magdy has to pay the tax and interest.

Robert L. Drocella and Pamela M. Drocella, T. C. Sum. Op. 2023-12, filed 4/3/23. Rob and Pam, both full-time employees, claim real estate pro status on their six real estate rentals. Rob and Pam never establish what hours they worked as employees, but did have logs of time worked on the real estate. IRS stips to the logs, but not the truth or otherwise thereof. The logs show Rob meets the 750 hour test, but Pam does not. Even so, in the absence of proof of what hours each spent in their day jobs, they can’t pass the Section 469(c)(7)(b)(i) test: more than one-half of the personal services performed in trades and businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates. No proof the hours Rob spent on the day job were less than those he spent on the real estate. Takeaway- The 750 hours aren’t enough. Hours spent on real estate must be greater than half of all the personal services you provide.