Jennifer A. Soler, T. C. Memo. 2022-78, filed 7/18/22, is a fashionista and the family breadwinner, while spouse Carlos ran some money-losing real estate. Carlos’ real estate losses triggered a couple audits (hi, Judge Holmes), unpetitioned deficiencies followed, and Jennifer found her pay being garnished by Collections. So she seeks innocent spousery.

Jennifer was still married to, and lived with, Carlos, so Section 6015(c) proportionate relief is off the table. Appeals says Jennifer has knowledge or reason to know that Carlos has income, even though she claims he was unemployed throughout and got money as gifts from his mother; except she has no proof. No statement that either Carlos or Mom testified on the trial.

Here’s ex-Ch J L Paige (“Iron Fist”) Marvel.

“Mrs. Soler contends that she did not have reason to know of the understatements on the dates she signed the returns. In her view she was an unsophisticated taxpayer who entrusted the family finances to Mr. Soler and did not participate in the Schedule C businesses. She further argues that Mr. Soler hid the existence of the bank accounts that he used for his Schedule C ventures and she, therefore, was not aware of enough facts to be put on notice that the understatements might exist.  Accordingly, she contends that a reasonable person in her position would not have inquired any further into the returns than she did.

“Mrs. Soler has not carried her burden of proving that she lacked reason to know of the understatements. Mrs. Soler is college educated, was the primary income earner for her household during the years at issue, and had some regular involvement in the household finances. On the dates she signed the returns for [the first three years], Mrs. Soler believed that Mr. Soler did not work and had no income. As a result, the mere attachment of Schedules C to the [first three years] returns would raise questions about the validity of the returns in the mind of a reasonably prudent person in Mrs. Soler’s position. This is particularly true in view of the fact that Mrs. Soler knew that her income alone was not sufficient to pay all of her family’s routine expenses. Additionally,  the Schedules C that Mr. Soler completed showed net losses for tax years [Two and Three]. The Solers were experiencing financial stress during the years at issue and were in the middle of a chapter 13 bankruptcy proceeding. Under those circumstances, a reasonably prudent person would certainly inquire about the loss-generating activity. Indeed, Mrs. Soler testified that, had she looked at the returns and noticed the  reported losses, she would have asked her husband about them. However, even if Mrs. Soler did not actually review the returns, she is nonetheless charged with constructive knowledge of their contents because she signed them. Because Mrs. Soler did not fulfill her duty of inquiry, we conclude that she had reason to know of the understatements on the [first three years’] tax returns.” T. C. Memo. 2022-78, at pp. 89. (Footnote omitted, but it’s the bit about Mom’s gifts).

Lack of knowledge protects the innocent, not the “intentionally ignorant.”

But wait, there’s more, as the midnight telehucksters say.

Jennifer and Carlos each took IRA draws in Year Four, never reported, never petitioned, assessed and chopped.

“Mrs. Soler claims that she did not review the [Year Four] return before signing it and was not aware that it contained an understatement. However, at the time Mrs. Soler signed the [Year Four] tax return, the IRS was examining the returns for [Years One, Two, and Three] and had issued proposed adjustments for those years. Although Mrs. Soler chose not to participate in the audit, she admittedly knew that it was happening and even briefly spoke to the examining RA in May [Year Four]. It is difficult to conceive of a more conspicuous notice that an understatement may exist or that some inquiry into the validity of a tax return is warranted than an audit of and proposed adjustment to the immediately preceding three years of tax returns. Because Mrs. Soler unreasonably and inexplicably failed to review the [Year Four] return, we conclude that she had reason to know of the understatement contained therein.” T. C. Memo. 2022-78, at p. 9.

Ex-Ch J Iron Fist trudges through the factors for equitable relief, but “reason to know” is enough to bar Jennifer.

Back in the early childhood development of this my blog, I discussed the sad case of Beverly Bernice Bang; see my blogpost “Bang – A Warning to Tax Matter Partners and Their Advisors,’ 1/5/11. Today Judge Ronald L. (“Ingenuity”) Buch needs small ingenuity to dispose of Trevor R. Pettennude, T. C. Memo. 2022-79, filed 7/18/22. Trev was a less-than-one-percenter in a coal shelter, which means Section 6223(b)(1) denudes him of notice or a chance to participate in contesting an FPAA at exam, Appeals, or Tax Court.

As this is all pre-2015 Bipartisan Budget Act, Trev’s guardian is the Tax Matters Partner, who is his agent for all the foregoing. If the TMP fails to tell Trev and his fellow fractionals, or fails to fight to the death for their interests, too bad. Trev’s bœuf is with the TMP…if he can find him (it’s usually him).

Alas, as Judge Ingenuity Buch quotes from an earlier case, “…the taxpayers were ‘not victims’ of the Commissioner or the Code but of ‘unscrupulous purveyors of tax shelters who, having sold [them] scam investments . . . , failed to follow procedures and disappeared with the funds.’” T. C. Memo. 2022-79, at p. 6.

Trev’s trusty attorney keeps arguing underlying liability, but that’s a non-starter. The TMP signed off on everything, hence game over.

Would an action against the TMP (assuming see above) in State Court or USDC survive SOL? If it could, could it succeed on the merits? And if it could do both, are there any getatable assets? Trev and trusty attorney may wish to ponder.

Meantime, all you highrollers in those GA boondock conservation easement syndicates, keep a close watch on your TMPs. If they look like heading for the airport and the flight to Lisbon with Letters of Transit in their hands, you know what to do. And tell ’em Bogie sent ya.

I’ve been on about the need for a form of Entry of Appearance for law firms in Tax Court for what seems like decades. There have been law firms in these United States since at least 1792; maybe even earlier. The complexities of modern practice virtually mandate a team approach. The computer has complicated rather than simplified; the “paperless office” may have arrived, but the forty million page document file came with it.

Enough. Another eminently sensible suggestion remains unheeded.

Here’s Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan lecturing an associate in a well-known and often-cited law firm, which maintains a constant presence in Tax. Court.

“…the petition to commence this case was electronically filed. When a petition is electronically filed with the Court, the combination of the username and password of the individual eFiling the petition serves as the signature of the individual filing the petition. If the petition is being filed by multiple practitioners, the Petition should be signed by the additional practitioners. However, review shows that the petition bears a stylized signature of counsel JD. The Tax Court’s procedures require at a minimum a digital image of an actual signature or use of an authentication program. See DAWSON User Guides on the Court’s website, http://www.ustaxcourt.gov. If petitioners’ counsel wishes to be recognized as counsel of record in this case, it will be necessary at this juncture to electronically file an entries of appearance on behalf of petitioners in accordance with Rule 24 Tax Court Rules of Practice and Procedure. Petitioners’ counsel may obtain an Entry of Appearance form under “Case Related Forms” on the Tax Court’s website at http://www.ustaxcourt.gov/case_related_forms.html.” Orsder, at p. 1. (Name omitted).

This ridiculous cybernetic hopscotch is not to be found in any other court of which I am aware.

If JD is admitted to US Tax Court, and if JD is an associate attorney in the well-known law firm sometimes hereinbefore known as and by the title and style of The Jersey Boys, “would it spoil  some vast eternal plan” to have a simple law firm notice of appearance, with a lead attorney designated for all communication and an easy form for adding or removing attorneys who join or leave the firm?

Btw, the order is Edward Khalily Charitable Remainder UniTrust, Edward Khalily, Trustee, Docket No. 15402-22, filed 7/15/22.

I’d ordinarily ignore Noel Christopher Knight, T. C. Memo. 2022-76, filed 7/14/22. It’s the usual ya-should’a-raised it-at-the-CDP. Noel C had a couple CDPs, each covering a couple years of the seven (count ’em, seven, and hi, Judge Holmes) years for which he had gotten NFTLs and NITLs, Noel C raised the one year he hadn’t had a prior chance to contest, but he raised it in the second CDP, although he had had the chance to raise it in the first, but didn’t.

For the rest, it’s the offered IA that Noel C rejects but doesn’t counter or file Form 433-A, and the promised returns that never got filed. The supervening COVID lockdown is of no help, either.

So why do I mention this case, aside from the fact that today’s orders are mostly standing regular and small-claimer pretrials, 99% of which will never go to trial?

Judge Albert G (“Scholar Al”) Lauber provides the answer. “Petitioner is a lawyer who resided in California when he filed his Petition.” T. C. Memo. 2022-76, at p. 2.

Without having independently verified, I infer that Noel C is admitted to the CA Bar, or at least was so when the petition was filed in 2020. He thus could have been automatically admitted to practice in US Tax Court.

“In opposing summary judgment petitioner contends that there is a dispute of fact as to whether he authorized his representative during the CDP hearing to forgo an underlying liability challenge by relying exclusively on the filing of amended returns. Because the [second] CDP hearing barred petitioner from challenging his [earlier year] liability on any ground, this factual dispute (assuming it to exist) is immaterial. In any event petitioner’s representative did not submit to the SO—despite the SO’s request by letter…—either a copy of an amended [earlier year] return or any other evidence regarding petitioner’s [earlier year] liability. That issue therefore was not ‘properly raised in the taxpayer’s CDP hearing,’ Treas. Reg. § 301.6330-1(e)(3), Q&A–F3, and it could not properly be advanced in this Court, see Thompson v. Commissioner, 140 T.C. 173, 178 (2013).” T. C. Memo. 2022-76, at pp. 5-6, footnote 2.

For the George Thompson story, see my blogpost “Losing My Religion – Part Deux,” 3/4/13.

More troubling is this line: “He asserted that the IRS erroneously attributed to him ‘nearly $100,000+ of separation/divorce related income,’ funds that he alleged were not his income but were held in a client trust account.” T. C. Memo. 2022-76, at pp. 3-4. I’ve had a lot more than that in various client trust accounts (my own or the firms’ with which I was then affiliated), and every such account was clearly labeled as a trust account, precise records were kept of every transaction, and NY mandates that every such account bear an appropriate title and a TIN separate from one’s own. I’m not licensed in CA, so I can’t say what CA requires; I’d be surprised if it were any less stringent.

So it should be easy enough to show what funds are clients’, and what are one’s own, and never the twain shall meet.

Gregory Bernard Colbert II and Simone P. Colbert, T. C. Memo. 2022-74, filed 7/13/22, are trying to fight about interest on their two years’ worth of conceded deficiencies, but that a non-starter.

Judge Wells man-‘splains.

“Finally, we agree with respondent that interest is not at issue in this case, and we otherwise conclude that we lack jurisdiction to consider the issue. The Tax Court is a court of limited jurisdiction, and we may exercise our jurisdiction only to the extent authorized by Congress. In deficiency proceedings such as this case, our jurisdiction does not extend to interest imposed by section 6601. In limited circumstances that are not present here, this Court does have jurisdiction to redetermine interest. Pursuant to section 7481(c)(1) and (2) we have jurisdiction to redetermine an overpayment of interest when certain requirements are met, including an assessment made by the Commissioner under section 6215 which includes interest. Interest has not yet been assessed in this case. Consequently, we do not have jurisdiction to redetermine interest pursuant to section 7481(c).” T. C. Memo. 2022-74, at p. 4.

OK, so the deficiencies themselves are conceded, and interest is off the menu, so why are we here?

Well, there are the Section 6662(a) chops for substantial understatement. And all GB and Simone (who gets some innocent spousery) have is “…they were unaware that an individual who assisted them in preparing their taxes ‘[was] submitting and declaring certain  ‘write-offs.’” T. C. Memo. 2022-74, at p. 2.

Judge Wells is about to sink that one. “We note here that there was no tax return preparer signature on either the [Year One] or the [Year Two] income tax return.” Idem, as my expensive colleagues would say.

I wonder what they paid the aforesaid individual, and whether it was a piece of the refund action.

But to the rescue comes The Graev Illegibility.

“The record in this case includes copies of Civil Penalty Approval Forms, signed by the immediate supervisor of the examiner who examined petitioners’ returns, approving imposition of section 6662(a) penalties against petitioners for [Year One] and {Year Two]. However, the date provided on each Civil Penalty Approval Form is illegible, and we are unable to discern whether the initial determination of the assessment was made before the mailing of the notice of deficiency upon which this case is based. Thus, we cannot reliably conclude on the basis of the penalty approval forms that respondent satisfied the requirements of section 6751(b)(1) before issuing the notice of deficiency determining the penalties at issue. Consequently, we find that respondent has not satisfied his burden of production to show compliance with section 6751(b)(1), and we therefore hold that petitioners are not liable for accuracy-related penalties for underpayments due to substantial understatements of income tax for [Year One] and {Year Two].” T. C. Memo. 2022-74, at p. 4.

Great silt stir, eh, Judge Holmes?

A lawyer’s won-lost record doesn’t tell the whole story. A lawyer may be at the top of the league, but gets the toughest cases, so he has a lot of losses. But those are the cases no one could win. The Great Chieftain of the Jersey Boys definitely qualifies. By way of illustration of the foregoing, as my expensive colleagues would say, here’s Thomas E. Kelly, T. C. Memo. 2022-71, filed 7/13/22.

Tom was a character out of a Michael Lewis tell-all, a Wall Street broker with three years’ worth of million-dollar earnings, but no returns filed until long after due dates, showing liabilities north of $2.9 million. IRS gave Tom both a NFTL and a NITL. Tom wants a CDP, but COVID stalled the process.

Tom wanted “first-time abatement” of the late filing, late paying, and no estimateds add-ons, but he’d got that for the year immediately preceding the first of the years at issue.

Tom claimed reasonable cause for nonfiling, nonpaying, etc. ” He alleged that his wife…had been spending lavishly on luxury goods, causing marital and financial problems. He stated that in [last of years at issue] his wife filed for divorce, necessitating that he pay an ‘exorbitant’ amount of money on legal fees and spousal support. These events, petitioner said, caused ‘financial hardship, emotional problems, and depression.’ SO2 rejected his request for abatement on this ground, noting his history of nonfiling, his ‘consistent high income,’ and his ‘lack of payment protocol.’” T. C. Memo. 2022-71, at p. 3. (Name omitted; SO2 is a Settlement Officer, not a gas).

Tom claims the NFTL would make FINRA tag his broker’s license, making it hard for him to earn the money he needs to pay. That fails for want of substantiation.

Tom claims the NFTL was late-filed, but IRS has the proof.

Tom wants a PPIA, but all that does is cause his present taxes to remain unpaid while he pays his past due taxes.

However, his reasonable cause defense, though shaky, may survive for trial, as his adroit counsel gets Judge Albert G (“Scholar Al”) Lauber to give Tom the benefit of every favorable inference. Unless the case settles, of course (nudge nudge, wink wink).

Frantic Frankie gets the tough ones. And maybe even gets a partial win.

Ogden Sunseteer obstructionism got a boost from DC Cir’s shootdown of Mandy Mobley Li, another pro se non-litigated case that resulted in a travesty. Now the OS are trotting out Section 6103 to stall discovery in Whistleblower 972-17W, 159 T. C. 1, filed 7/13/22. But Judge Emin (“Eminent”) Toro isn’t buying. 17W has been scuffling with the OS for four (count ’em, four) years over the admin record. IRS will hand over some redacted stuff, but claims sacred taxpayer info bars the rest.

No doubt the stuff here is Section 6103 taxpayer info; no doubt the IRS conducted proceedings and got money, although they claim 17W didn’t help. And no doubt the info sought is “in connection with” determining as taxpayer’s civil or criminal tax liability. So no doubt 17W crossed the Li threshold-declination barrier.

But when it comes to “goofy,” IRS counsels’ contortions are worth reading.

“Based on certain statements in Li, one might argue that all the elements of section 7623(b)(1)—including the requirement that any action be in fact ‘based on the whistleblower’s information’—are jurisdictional. But that’s not what the D.C. Circuit decided in Li; rather, its holding is confined to threshold rejections in which the IRS takes no action. See Li v. Commissioner, 22 F.4th at 1017. A case like this one,  where the IRS has both acted and collected proceeds, raises jurisdictional considerations not present in Li.

“Specifically, if we were to read Li as requiring our Court to make a factual determination that the IRS proceeded against a target and collected proceeds from that target ‘based on’ the whistleblower’s information simply to establish our jurisdiction over the appeal of the WBO decision, then every case in which the WBO denies a claim on the ground that the information provided by the whistleblower was not useful to the IRS would require a full determination of the merits before we would know whether we had jurisdiction to begin with. Put a different way, if our jurisdiction to review the WBO’s decision not to make an award in a case that involved both an examination of the taxpayer and the collection of proceeds exists only if it turns out (contrary to the WBO’s conclusion) that the recovery was in fact ‘based on’ the whistleblower’s information, then (in cases involving the fact pattern now before us) the whistleblower would win on the merits in virtually every case over which we have jurisdiction (except perhaps those subject to section 7623(b)(3)), and we would have no jurisdiction in virtually every case that the whistleblower would otherwise lose on the merits. See I.R.C. § 7623(b)(1) (providing that if the Secretary proceeds with an action based on the whistleblower’s information, the whistleblower ‘shall’ receive an award).” 159 T. C. 1, at p. 9.

There’s a lot more, including without in any way limiting the generality of the following, a dictionary chaw, a discussion of what “in connection with” means, where it begins and ends, the legislative history of tax whistleblowing, “somber reasoning and copious citation of precedent” from DC Cir and the Supremes.

In the end, IRS has to fork over.

Judge Travis A. (“Tag”) Greaves has to deal with the Section 41 Qualified Research Expenses of J.G. Boswell Company and Subsidiaries, Docket No. 2408-19, filed 7/12/22. Are they expenses to produce more cotton or safflower, better cotton or safflower, or just cotton and safflower (in which case they don’t qualify at all)?

“Section 41(d)(2)(C) distinguishes between research designed to improve a taxpayer’s commercial product, on the one hand, and research that seeks a better process for producing the taxpayer’s existing product, on the other. Respondent argues that petitioner engaged in only the latter kind of research, testing new ways of growing the same crops.” Order, at p. 1. Therefore, says IRS, any expenses that JG would incur just to grow the stuff anyway is not QRE.

Judge Tag Greaves says OK, but the record doesn’t show that product improvement wasn’t on the JG menu. But the cost of just producing product to show the method didn’t degrade quality isn’t research at all, must less Qualified Research.

But more facts are needed, and neither side can get summary J on this record.

“If petitioner demonstrates that its tests of the viability of improved crops are section 41(d) qualified research, therefore, the trial crops it produced were experimental models, and the associated costs are QREs to the extent permitted by section 41(b). Respondent cannot defeat any such argument simply by demonstrating that petitioner would have incurred the expenditures had it used its standard production processes on the research acres.” Order, at p. 8.

Nevertheless, here the summary J motions fulfilled very useful purposes. It permitted discovery of JG’s case, IRS’ case, and, most importantly, Judge Tag Greaves’ view of the case.

“We deny both Motions so we may determine (1) which of petitioner’s 55 research trials sought to improve petitioner’s production process alone, as opposed to one of its products, (2) which disallowed QREs associated with these research trials petitioner would not have incurred had it cultivated the research acres as production acres, and (3) the amount of QREs incurred in the remaining research trials.” Order, at p. 8.

Judge Courtney D (“CD”) Jones’ opinion in Estate of William E. DeMuth, Jr., Deceased, Donald L. DeMuth, Executor, T. C. Memo. 2022-71, filed 7/12/22, brought back to my memory the tragic 1981 murder of Prof. (formerly Dean) Norman S. Penney, who taught me negotiable instruments 57 (count ’em, 57) years ago, on The Hill Far Above. Oh, was I clueless, until I finished typing an outline of my course notes at 2:00 a.m. the morning of the final. I got a “B” in a course I should have failed. Bless his memory.

Judge CD Jones must have gotten at least a “B” at Harvard when she took the course, because she knows the difference between a drawee bank and a depositary bank, and that the final payment rule can only be satisfied by the drawee bank, not the depositary bank.

For the civilians among you, when you write a negotiable instrument, like a check, the “drawee” bank is the bank where your money is. You are drawing on your balance at that bank. If the person you named in the check (the “payee”) deposits the check in their account at the same bank, the depositary bank is also the drawee bank. But if that person deposits your check in another bank, that bank is the depositary bank, so that deposit is not “cleared” (“paid”) until the drawee bank pays the depositary bank the amount of the check. Forget about “available” funds; that’s a fiction. And electronics have different rules.

Judge CD Jones calls out both IRS counsel (for giving away $70K of taxable estate by not knowing the difference and thereby conceding checks deposited by the payees in depositary banks, not the drawee bank, were out of the estate), and the ex’r’s counsel for not knowing the difference either.

Ex’r had POA for his late Dad. As Dad’s life was near its end, ex’r wrote a bunch checks (hi, Judge Holmes) to family members as he had done for some years, as the POA entitled him to do. But only one (count it, one) got paid by the drawee bank before Dad died.

Judge CD Jones checks out the PA UCC (Uniform Commercial Code), an enactment that covers bank stuff in a uniform framework. Ex’r could stop the checks any time before final payment by drawee; the issue is could, not would or did. Section 2033 and Reg. Section 25.2511-(2)(b) include in a decedent’s estate all cash on hand and in bank at death. The cash was there in drawee bank until drawee bank paid it out.

And Judge CD Jones knows that the distinction between a gift inter vivos and a gift causa mortis plays no part here, because until the check is finally paid, there is no completed gift. See T.C. Memo. 2022-71, at p. 8, footnote 10. “…the distinction made by the parties between causa mortis and inter vivos gifts is improper and irrelevant.”

I recommend Judge CD Jones’ opinion to anyone struggling with negotiable instruments law. I’m sure Norm Penney would have given her an “A”.

The latest entry in my “ambush” sequence is the most important. Judge James S (“Big Jim”) Halpern has a lot to say about unexplained delay by petitioner seeking to amend their petition six-plus years after telling IRS’ counsel they wouldn’t seek to amend on that issue, in TBL Licensing LLC f.k.a. The Timberland Company, and Subsidiaries (A Consolidated Group), T. C. Memo. 2022-71, filed 7/12/22.

But the bottom line is “(P)etitioner acknowledges that we have ‘denied motions to amend pleadings that were filed after a trial based upon “the established policy of this Court to try all the issues raised in a case in one proceeding.’” The prospect that a posttrial motion for leave can properly be denied does not establish that we have no choice but to grant a motion for leave made in any case in which no trial has yet been held. Although we resolved without trial the section 367(d) issues the parties presented on summary judgment, the case required extensive proceedings up to that point. The parties submitted thousands of pages of stipulated documents in connection with their Motions for Summary Judgment.  The burden on the Court of resolving the section 367(d) issues was not materially different because the parties submitted those documents by stipulation rather than in a trial. In positing that respondent be given ‘as much time as he needs to consider [its] entitlement to tax credits,’ petitioner, in effect, asks that we put on indefinite hold a case we have already decided and require respondent to open, conduct, and complete an examination of a previously unexamined issue. Our caselaw does not establish that parties are, in all events, entitled to one trial.” T. C. Memo. 2022-71, at pp. 14-15.

All y’all will recall that Judge Big Jim handled the Section 367(d) income pickups of Timberland’s inversion on submitted facts, more particularly bounded and described in my blogpost “Into the Woods – Part Deux,” 1/31/22, as corrected 2/8/22.

The Timberlands’ claim that IRS accepted the Section 41 research credits in years prior to year at issue evokes Judge Big Jim’s Einsteinian reply that you don’t do identical research year after year, leaving out that expecting different results is crazy. When one experiment fails, you try another.

And stale facts are a fresh problem, especially when dealing with research credits, which require an item-by-item drilldown.

The Timberlands’ trusty attorneys barely avoid a Taishoff “Oh, Please.”