Continuing my “Toolbox” series, I’m sure the wits, wags, and wiseacres, who follow US Tax Court proceedings without the need of this my blog, have cottoned on to IRS’ routine folds of Section 6662(a) accuracy chops, even when petitioners’ pleadings don’t show anything like a case, and when petitioners don’t even show for trial.

I’m sure a well-oiled counterpart of this useful tool features in every rounder’s toolbox.

Here’s Judge Goeke with another example, Ronnie Mickens & Gloria Jean Mickens, Docket No. 18326-21, filed 2/24/23, an off-the-bencher.

Ronnie & Gloria Jean claim a theft loss to offset their $15K deficiency and accompanying Section 6662(a) chop. IRS folds the chop at the non-trial.

“In their papers, which were filed pre-trial, Petitioners also argue various nontechnical and nonfactual bases to attack Respondent’s determination and this Court’s jurisdiction. They do not address, in any serious way, the adjustments in the Notice of Deficiency, other than to say they were cheated by a contractor. They don’t establish the basis on which such an argument could be sustained as a theft loss. Nor do they seriously attempt to substantiate any of the amounts in dispute in the Notice of Deficiency in any of their Pre-Trial papers.” Transcript, at p. 5.

Long-time readers of this my blog may remember James M. Urtis & Gaetana R. Urtis, who featured in my blogpost “We Wuz Robbed – Part Deux,” 3/5/13. Judge Goeke doesn’t mention Jim & Gaetana, although he wrote the opinion that found Jim & Gaetana did suffer theft loss when their contractor took their money. But Jim & Gaetana put in a case.

Ronnie & Gloria Jean didn’t.

“Petitioners made no attempt to make such an argument in their Pre-Trial papers and failed to appear orproduce any evidence prior to trial. Obviously, Petitioners did not intend to pursue a technical argument in this Court, but rather, argue without any basis that the Court lacks jurisdiction.

“Given Petitioners’ statement to Respondent’s counsel that they would not appear and the fact that they did not attempt to be here when their case was called for trial, we determine that their case should be dismissed for failure to properly prosecute and we sustain Respondent’s deficiency in income tax, although Petitioners prevail relative to the addition to tax pursuant to Respondent’s concession.” Transcript, at p. 6.

Notwithstanding petitioners’ no show, they still dodge the chop.

But No Section 41 Credit

Mr. Robert was President and COO of a Sub S that designed and built scoreboards for high school, college, and sports venues. When competitors began eating Sub S’ lunch, Scott Moore and Gayla Moore, T. C. Memo. 2023-20, filed 2/23/23, called in Mr. Robert to gin up the product line and turn things around. 

No doubt there was increased research, as Sub S’ engineering team delivered tornado-resistant scoreboard trusses, scoreboards that relayed scores, time remaining, and other goodies to fans’ personal electronic devices, cheap ribbons for scoreboards showing ads and pictures, hand-held programmers for scoreboards, and a slim shot clock impervious to errant basketballs flung at Second 23.

But were Mr. Robert’s handsome salary and bonuses creditable to increased research? He did meet with the chief engineer, an admitted researcher, and rode herd on new products. In fact, he spent north of 60% of his time on product development, despite being responsible for supervising the entire staff. True, Gayla, the Sub S owner, did a lot of management, and Scott oversaw the rest; they wanted Mr. Robert focused on new product.

But merely being involved in product development isn’t enough.

Judge Colvin: “An employee performs ‘qualified services’ by either ‘(i) engaging in qualified research, or (ii) engaging in the direct supervision or direct support of research activities which constitute qualified research.’ § 41(b)(2)(B).” T. C. Memo. 2023-20, at p. 8.

True, Mr. Robert had his name on two patents that came out of the research, but he had no timesheets, and the experimentation and technological tinkering was mostly done by staff engineers. His suggestions were certainly useful, and he was lead on some projects, but without specifics of time spent, that doesn’t qualify.

Mr. Robert met extensively with the chief engineer, but it was the chief engineer who supervised the research. Mr. Robert claims he provided “direct support”, but that means secretaries who type up results or machinists who make models, per Reg. Section 1.41-2(c)(3)(ii).

The Moores lose the research credit for the hefty salary and bonus they paid Mr. Robert.

Taishoff says a cheap time-billing computer program on Mr. Robert’s PC or smartphone, such as we attorneys have used for decades, would have saved its cost many times.

Leigh C. Fairbank and Barbara J. Fairbank, T. C. Memo. 2023-19, filed 2/23/23, are enmeshed in the toils of the Foreign Bank Account Registration multiplex reporting whirligig, but it’s Barbara’s story.

Judge Christian N. (“Speedy”) Weiler has the story. Barbara’s loved-once, from whom she split 41 (count ’em, 41) years ago, was a high-rolling CPA who dodged $18 million in tax by shoveling cash from his oil companies to Liechtenstein, Switzerland, and New Zealand, finally fleeing to New Zealand but settling with IRS for a couple years’ (hi, Judge Holmes) worth of his skullduggery. Though Barbara gets innocent spousery for some years, her current problem begins with the divorce settlement

In the course of renegotiating the property split-up, Barbara had cash sent to a Swiss establishment, a trust. She also used a BVI corp, officered by her Swiss bankers, to funnel further moneys to Switzerland, specifically UBS.

You can see where this is going, especially when Judge Speedy Weiler discusses Barbara’s and Leigh’s tax returns.

“For the tax years at issue, petitioners timely filed their joint Forms 1040, which were prepared by RH, a CPA in California. In preparing petitioners’ annual tax returns, Mr. H would send them a tax organizer, on which petitioners generally checked ‘No’ to the question about foreign bank accounts. Consequently, the tax returns contain no information concerning UBS account… or Establishment. Moreover, for the tax years at issue, petitioners did not report any income or deductions relating to UBS account…, make an election under either section 1295 or 1296, file Form 3520, Annual Return To Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, or file Form 3520–A, Annual Information Return of Foreign Trust With a U.S. Owner, with respect to … Establishment. Furthermore, for the tax years at issue, on Forms 1040, Schedules B, Interest and Ordinary Dividends, Part III, petitioners answered ‘No’ to the questions of whether they ‘have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account’ or whether they ‘receive[d] a distribution from, or were . . . the grantor of, or transferor to, a foreign trust.’” T. C. Memo. 2023-19, at p. 11. (Name omitted).

Of course, when the Swiss dished on the nasties they were pulling, Barbara got The Letter (the one UBS sent to their customers with targets on their backs), IRS swooped in, and Barbara spilled the legumes on Switzerland and the BVI.

Barbara then filed Form 5471 and the FBARs, which earned her a bunch SNODs (hi again, Judge Holmes) at no extra charge.

Barbara’s trusty attorneys claim the Establishment is a CFC, but all the Swiss paperwork says “trust.” Form of entity doesn’t matter, function does. And as no US Court had jurisdiction over Establishment (paperwork says all disputes to go Liechtenstein), Establishment is a foreign trust, and subject to FBAR.

While IRS can’t establish that Barbara was the owner of the trust, which her loved-once had set up, she had enough command and control over the corpus to put her under the Section 678 mandate.

Now for SOL: Section 6501(c)(8) says the magic three-year SOL runs from when the taxpayer gives IRS the Section 6038 skinny. Barbara’s trusty attorneys say they gave that to the RA at Exam, which triggers SOL, as no specific form is provided for in the statute.

“Petitioners’ citation of section 6501(c)(8) and their argument on brief that the period of limitations has run is incomplete. Section 6501(c)(8) refers the reader to the requirements under section 6048; therefore, a detailed analysis of a taxpayer’s statutory obligations under section 6048 is necessary. We conclude that Mrs. Fairbank, as the deemed U.S. owner of… Establishment, has failed to provide any written return to respondent setting forth a full and complete accounting of… Establishment’s activities for the years at issue. See I.R.C. § 6048(b)(1). Similarly, we conclude that Mrs. Fairbank, as… Establishment’s U.S. beneficiary, has failed to make any return that includes the name … Establishment and which outlines the aggregate amount of distributions she received during each of the tax years at issue from… Establishment. See I.R.C. § 6048(c)(1).” T. C. Memo. 2023-19, at p. 24. (Footnote omitted).

Besides, clarity is needed here; if Tax Court suggested something less than a full filing would do, the uncertainty would help neither IRS nor taxpayers.

IRS used the partial summary J gambit back in November to establish Boss Hossery, and Barbara’s claim of reliance on Mr. H. goes nowhere, as the tax organizer said nothing.

I haven’t seen a Tax Court dispute about venue in years, maybe because Zoomietrials make venue obsolete. Oh, there are still pro ses who want regular trials where only small-claimers are heard, but those are quickly disposed of.

Today’s blogpost brings a venue dispute to Judge Albert G (“Scholar Al”) Lauber, Tax Court’s resident GA boondockery expert. North Donald LA Property, LLC, North Donald LA Investors, LLC, Tax Matters Partner, Docket No. 24703-21, filed 2/23/23, wants the trial next year (or maybe later) in Birmingham, AL.

IRS says they can’t get dedicated space in The Magic City for the four (count ’em, four) week trial Judge Scholar Al foresees; the Donalds say they’ll need two weeks for their case, after enough discovery to put trial off for a year, so Judge Scholar Al is prepared for four weeks of dueling appraisers.

Here’s the tip-off, as Judge Scholar Al gets a wee bit plaintive over the scuffle.

“It appears that many potential witnesses may reside in Georgia. We ask the parties to consider whether Atlanta (or another city in the Southeast where the Court has dedicated space) would be a reasonable venue for trial instead of Birmingham.  Although the Court generally defers to individual taxpayers’ requests for place of trial, the equities may differ where (as here) the taxpayer is a partnership with numerous investors residing in different locations.” Order, at p. 1.

I’ll bet the “numerous investors” couldn’t find this particular scrubland with a Cub Scout and a roadmap. But Sir Paul McCarney’s and the late great John Lennon’s 1966 classic sums up the syndicated easement fallout: here, there, and everywhere.

PS- On one of our State Bar Association’s listserves, a colleague inquired about a bargain sale of realty to a charity. I referred her to the syndicated easement battles, for insights into necessary appraisals. I reckon the fallout from the boondockeries will spread to other charitable deals, here, there, and everywhere.

“Until Lawyers Get Involved”

How often did we hear that old jibe thrown at us! And it’s true for Green Cove Rock, LLC, GH Manager, LLC, Tax Matters Partner, Docket No. 30791-21, filed 2/22/23.

The Green Cover Rockers got an FPAA with Section 6663(a) fraud chops thrown in at no extra charge. IRS, using a precision-bombing partial summary J motion, wants Judge Goeke to sign off on the procedures and timetable for the sustaining Section 6751(b) Boss Hossery.

Note the RA at Exam didn’t propose fraud chops when preparing the FPAA, deeming it premature. But OCC gets involved when FPAAs hit the radar, so Judge Goeke goes over the IRM and Tax Court precedent.

That’s when lawyers get involved.

“Senior Counsel AAG, a Chief Counsel attorney, reviewed the proposed FPAA in accordance with IRS procedures set forth in the Internal Revenue Manual (IRM). See I.R.M. pt. 2.7.2.5.1(d) (May 10, 2019) (Chief Counsel is required to review all FPAAs before issuance). Her immediate supervisor was Associate Area Counsel MM. Ms. G concluded that the fraud penalty applied and recommended it be assessed. Mr. M agreed with Ms. G’s recommendation in a signed document. Thereafter, by a signed memorandum to Ms. G… RA K and his immediate supervisor, LM, stated that ‘we accept/concur with Senior Counsel’s recommendation’ to assess the fraud penalty.” Order, at p. 2. (Names omitted).

All this happened before the FPAA was issued, and the Green Cove Rockers got word of fraud chops.

IRS says either the RA at Exam and his Boss Hoss, or Ms. G at OCC and her Boss Hoss, is sufficient Boss Hossery. The Green Cove Rockers say no.

Judge Goeke quotes Graev. “…nothing in the text or legislative history of section 6751(b) suggests that the identification of the person who made the initial determination should turn upon the penalty’s inclusion or non-inclusion in a notice of deficiency.” For the backstory, see my blogpost “Stir, Baby, Stir – That Silt,” 12/20/17.

Anyway, OCC reviews FPAAs, and if by some chance OCC hadn’t authority to impose Section 6663(a) chops, the RA at Exam and his Boss Hoss certainly did, and everybody went by the book and signed off.

Note the sequencing and timing. This is the latest IRS maneuver to nail down fraud chops Boss Hossery pretrial.

James William Avery, T. C. Memo. 2023-18, filed 2/21/23, is a lawyer who started as a car show fan with his 30-yr old collectible Ferrari, but finding that dull, transitioned to racing his rebuilt Dodge Viper. Jim was a wee bit casual about filing and paying his income taxes, and Judge Albert G. (“Scholar Al”) Lauber doesn’t care for that.

Jim does escape two (count ’em, two) years of Section 6651(a)(2) late-pay add-ons, because IRS doesn’t introduce the SFRs, relying on Jim’s late-filed returns instead, but since IRS processed only one year’s return, Jim avoids the add-ons for the other two years. See T. C. Memo.  2023-18, at p. 13.

Jim tried to write off $330K of “advertising” expenses, against his substantial law practice  income; Judge Scholar Al has tables showing what IRS allows and what they don’t. Jim claims he advertised his law practice on his Viper, but he raced in CO (where the Viper sat in a garage) and practiced in IN. There is some caselaw establishing that auto racing is advertising, but Jim doesn’t make the cut. Too much fun, ad space too small, and too little business attributable to the racing. See my blogpost “‘Rev Up Yer Engines!'” 4/7/21.

IRS admits Jim didn’t get the SNODs they sent him, so he is contesting from a denied CDP. IRS agrees to a remand once they sort out what Jim owes after Judge Scholar Al get through, so Jim can put in a CA.

Jim claims reliance on CPAs past and present for late filing, but that doesn’t fly. The duty is on the taxpayer and is non-delegable. Besides, Jim’s income is from his law practice, and he should know what he made.

I know what I made. Believe me, after COVID lockdown, dead and retiring clients, I know what I made.

Tax Court watchers are on the qui vive for Judge Patrick J. (“Scholar Pat”) Urda’s webinar exploring the issues and challenges when expert witnessing is on the agenda. The March 16 special should be mandatory for all Tax Court practitioners and other interested parties. See my blogpost “St. Patrick’s Day Countdown,” 2/10/23, for the skinny.

Today Judge Scholar Pat gives us a preview in J L Minerals, LLC, Beasley Timber Management, LLC, Tax Matters Partner, Docket No. 17076-21, filed 2/21/23.

IRS and JL both want to have experts testify on industry practices in kaolin mining, JL in chief and IRS in chief and rebuttal. Both rely on Rule 143(g)(3).

Judge Scholar Pat man-‘splains.

“This Rule prohibits the testimony of experts without a written report where that testimony ‘is based on . . . detailed, technical information’ but permits the Court discretion to allow such testimony in rebuttal to another expert or when testifying about, inter alia, industry practice. JL Minerals seeks to present expert testimony without a written report on industry practice relating to forestry, rural land practices, and borrow pits. The Commissioner requests permission to present such testimony as part of his case-in-chief or in rebuttal to expert opinion regarding the kaolin and mining industries.” Order, at p. 1.

“…we are unable to determine either the expertise of the witnesses or the relevance of the testimony that the parties seek to present. A decision whether any such testimony constitutes relevant expert testimony, much less whether it satisfies Rule 143(g)(3), thus is premature.” Order, at pp. 1-2.

Judge Scholar Pat denies both of their motions, but they can try again on the trial.

An abbreviated version of Mark Twain’s famous geological putdown gives me the title for this sermonette. IRS counsel are as big fans of summary J as I am. The motion is almost SOP, and stuns most self-representeds into silence. Since Monique E. Franco, Docket No. 33045-21S, filed 2/21/23, never replied to the answer, didn’t contest the Rule 37(c) deemed admissions motion, and didn’t reply to the motion for summary J, it looks like a slam dunk.

Except.

STJ Adam B. (“Sport”) Landy finds IRS’ claim of a Section 6663 fraud chop blocks the shot, as Monique’s petition is sufficient to call for a trial.

“Ms. Franco’s contentions that an amended return was filed without her knowledge, that her signature was forged on this amended return, and that she is entitled to innocent spouse relief are material issues of fact that are in dispute. Consequently, the Commissioner’s motion cannot be granted.” Order, at p. 2.

Where intent is at issue, as it must be in tax fraud cases, a trial is necessary to assess demeanor and credibility. Even a trifling investment of disputed fact is enough.

It’s that day again, the one when George Washington and some or all of his successors-in-office are honored by public holidays, Federal or State as the case may be.

In the Stateless City, it is a public holiday, however denominated, so United States Tax Court sports its oak.

That means nothing for me to report.

Enjoy the day off.

Assessable chops (those that do not require a prerequisite SNOD) entitle the recipient to contest liability in a CDP when IRS attempts to collect the tax underlying the chop. This arises most often in the context of Section 6702 frivolous returns.

Araya AnRa, Docket No. 6805-22SL, filed 2/17/23, gives Judge Nega the opportunity to declare “no contest,” in an off-the-bencher.

Araya gets a bunch Section 6702 chops for three (count ’em, three) years of zero-returns and Section 4852 restatements. At the trial, she claims the usual protester “hodgepodge of unsupported assertions, irrelevant platitudes, and legalistic gibberish.” Transcript, at p. 15.

No contest of liability unless a legitimate issue of fact or law is raised. Araya only raises the employment taxes mishmash about “wages” that has been denounced as frivolous for yeasrs. And Judge Nega spares us most of the somber reasoning and copious citation of precedent.