Ryder’s Last Ride

A couple days ago (hi, Judge Holmes) I lamented that my sources of blogfodder were drying up (see my blogpost “Drying Up My Sources,” 7/7/21). Today it’s getting worse, as Judge Mark V. Holmes unloads 191 (count ’em, 191) pages on one of my better sources of blogfodder, Ernest S. Ryder & Associates, APLC, et al, 2021 T. C. Memo. 88, filed 7/14/21*.

But I will say this for him, Judge Holmes waits until page 115 to unload his first diss on the partitive genitive, and there are only two more.

Ernie is an accountant and an attorney, a pioneer ERISA pundit, and a Rounder First Class with Oak Leaves, Swords and Diamonds. Ernie’s multiple roundy-rounds with Son-of-Boss, microcaptive insurers, and employee leasing, culminate in a ten-year audit, Graev missteps by IRS, but massive deficiency to Ernie and a fraud chop to boot.

For some backstory, see my blogposts “ESOPs Fables,” 8/20/18, “Ryder Rides Again,” 9/21/16, and “Chopfallen – Part Deux,” 8/28/18.

Ernie flogged multiple dodges, skimming off variously denominated fees into the multifarious entities he created. WY should name a road after him; he incorporated enough phony shell corps there to pay the WY Sec’y of State’s pension.

“All of these fees paid by the clients of the different tax products were compensation to R&A for its services in spinning webs of entities and squirting barrels of ink to hide the connection between itself and the fees it charged. We of course recognize that Ryder diverted these payments through contracts and entities, and the accounts and divisions within entities. We also recognize the invocation of Moline Properties that corporate forms must be respected. But the assignment-of-income doctrine does not immunize assignments of income to corporations or other entities. The income that R&A produced from sales of these deals to its clients was income to R&A because it was R&A itself that did the work.” 2021 T. C. Memo. 88, at p. 118.

There are charts (oh, are there charts!), and bank deposit analyses. One can but marvel at Ernie’s inventiveness, as he tries to bamboozle government subsidies for his ranching hobby, paper over attempts by IRS to put his dodger merchandise on the no-fly list, and obfuscate his way through eight million (count ’em, because I won’t) pages of trial testimony.

Truly a Holmesian extravaganza.

*ernest s ryder & Assoc T. C. Memo. 2021-88

The follow-up to today’s account of the troubles of Blossom Day Care Centers, Inc., 2021 T. C. Memo. 86, filed 7/13/21, relate to the nonpayment of FICA/FUTA for the two officers of Blossom, Mr. and Mrs. H. Judge Paris has this one as well as the lead; see my blogpost “Headline News?” 7/13/21 for the corporate side.

Proving once again the truth of the headline hereof, “Petitioner has stipulated that the Hs were corporate officers during all of the calendar quarters and years [at issue]. Both provided substantial services far beyond minor services, and both directly and indirectly received remuneration for their services. Mrs. H was petitioner’s 51% shareholder and acted as president of the corporation and director of curriculum and education for all six childcare locations and supervised over 90 employees and students of those centers. Mr. H was 49% shareholder and acted as vice president, secretary, and treasurer; as director of Blossom Day Care Centers; and as director of accounting and finance for petitioner. Both Mr. and Mrs. H had check-signing authority over petitioner’s bank accounts and credit card authorization in their corporate capacity.” 2021 T. C. Memo. 86, at pp. 11-12. (Names omitted).

The Hs claim there was a management agreement with another corporation they owned, but produced no evidence of any agreement with Blossom, or directive from the other corp that would make Mr. or Mrs. H anything other than corporate officers of Blossom.

The Hs claim that what they were paid by the other corp should offset whatever Blossom should have paid them.

“Petitioner’s arguments are misguided in that wages paid by [other corp] do not offset reasonable compensation requirements for the services provided by petitioner’s corporate officers to petitioner. Whatever wages paid for whatever purposes by [other corp] to the Hs as employees of the [other corp] will be better addressed in relation to respondent’s notice of deficiency for the Hs’ individual income tax, in consideration that [other corp] is a wholly owned S corporation.” 2021 T. C. Memo. 86, at p. 14.

And the Hs get hit with what amounts to a competency tax. “Additionally, petitioner contends that the notice of determination is flawed in that the determined compensation reflects requirements of higher educational qualifications than either Mr. H or Mrs. H has achieved, since Mr. H did not graduate from college and Mrs. H has only an associate’s degree in child development. While petitioner has not further developed this contention in its briefs and there was limited trial testimony on the topic, whatever higher educational qualifications might be required have been far eclipsed by the Hs’ practical experience, professional qualifications, success in running daycare centers, and ownership prerogatives.” 2021 T. C. Memo. 86, at p. 15.

There’s Boss Hossery enough to satisfy Judge Paris, as the Hs’ attorneys raise the Section 6751(b) issue too late (on brief) and put in nothing on the trial about when the Section 6656 nonfiling and Section 6662 negligence chops were first on the menu.

Just lately there has been a lot of news around this Minor U.S. Outlying Island concerning payment of personal expenses from corporate sources. I’d commented elsewhere that such delictions might be alleged against any number of corporate entities and their controlling persons. Today we have proof of my assertion, in fifty-nine (count ’em, fifty-nine) pages of Judge Elizabeth Crewson Paris’ prose; read all about it in Blossom Day Care Centers, Inc., 2021 T. C. Memo. 87, filed 7/13/21. Except the docket for the case is blocked, and says it’s sealed; exactly why I can’t tell*.

The case is the usual. Officers and their family members used AMEX and CitiCards issued in the corporate name, with all charges paid for by the corporation, for personal expenses and more. And there’s unreported income and self-rentals, but nothing new there either.

“In addition to routine personal purchases, such as restaurant meals, auto expenses, and personal medical expenses, the Hs either used the corporate credit card to pay or had petitioner pay their personal credit cards for such expenses as college tuition, vacations, jewelry, and other luxury items. The H children continued to make personal purchases with the credit cards even during periods when they were not employees of petitioner or H Corp.” 20-21 T. C. Memo. 97, at pp. 10-11. (Names omitted).

But the Hs are spared Section 6663 fraud chops because their trusty CPA and later their equally trusty employee bookkeeper made  “Note Receivable from Officers” entries.

“Regarding the inappropriate deductions, respondent is correct that petitioner claimed large deductions for expenses either that were personal or that lacked a demonstrated business purpose, and the Court has sustained respondent’s disallowance of such deductions in large part. However, petitioner maintained a running balance, reported on its returns as ‘Note Receivable from Officers.’ The balance of the purported note increased from $236,189 at the beginning of 2004 to $1,332,006 at the end of 2007, an increase that closely tracks the credit card expenditures respondent determined to be personal expenses. Petitioner’s recording and reporting of the expenses indicates an acknowledgment of their personal nature and an intention to repay or recognize as dividends the deemed distributed amounts at some point in the future, albeit an unspecified and indeterminate one.” 2021 T. C. Memo. 87, at p. 55.

So while the “Note Receivable” isn’t a note (or at least none was proffered on the trial), and maybe doesn’t truly evidence a debt, for want of documentation, stated maturity, interest, stated events of default, and suchlike, reporting it on the returns might just be enough to dodge “clear and convincing” proof of fraud. And the corp did overstate receipts in two years, while understating same in two others. After all, maybe sloppy saves the day. Except maybe it’s a guaranty you’ll be audited. Don’t try this at home (or anywhere else).

There’s no need for Boss Hossery for the Section 6662a chops when a corp is the target, and IRS came up with a Boss Hoss signed-off copy of the answer before first asserting chops. However, I question Judge Paris’ reliance on Koh unless it has been established that the first mention of chops did not occur until after the Boss Hoss signed-off answer had been served; see my blogpost “Greaves on Graev,” 6/4/20.

The corp’s Section 45A Indian employment tax credit fails for illegible records. And while Mrs. H is an Indian, she owns 51% of the business, and that sinks her claimed credit. (Name omitted).

So despite our local prosecutors’ proclamations that they have trodden new ground, or at any rate have found a novel dodge, this story and theirs are both many-times-told tales.

*Edited to add, 4/5/22: Though sealed on the Tax Court website, despite the Genius Baristas’ averments that they would unseal whatever they could (yeah, roger that, most F affirmative (the F is for emphasis)), the opinion is all over the internet.

As a well-known online gearjammer would say. Direct linkage to orders is back on DAWSON! Somebody must have given the Genius Baristas a triple-shot espresso mocha frappacino with extra sugar. Or kicked in the F-18 afterburner at 18F.

Complaints about “the law’s delay” long predate Hamlet’s list of “these fardels.” Sometimes the slow pace of Tax Court litigation makes its way onto the list.

Today we have something completely different, and yet the same. The star of the show is Larry A. (“Swing for the Fences”) Campagna, Esq., (see my blogpost “The Great Dissenter – Redivivus,” 9/3/13, for Larry’s story).

I’ll let Judge Alina I. Marshall tell the story, in Gregory M. Fischer & Karen S. Fischer, Docket No. 28718-15, filed 7/12/21. Note the dates; they are important.

“On June 16, 2021 at 4:45 p.m., Larry A. Campagna and Peter A. Lowy, counsel for petitioners, filed a notice of death of counsel for Donovan Hamm. On the same day at 5:35 p.m., Mr. Campagna and Mr. Lowy filed an additional notice of death of counsel for Donovan Hamm. Upon review of each of those filings, it appears to the Court that the notice of death filed June 16, 2021, at 5:35 p.m. is identical to the notice filed at 4:45 p.m. with the exception of Exhibit A attached thereto.” Order, at p. 1.

Refiling an entire document when the first attempt at filing omitted an exhibit or attachment is not uncommon. Scanners jam, papers stick together on a hot, humid day even with air conditioning, and the internet sometimes takes a two-second break.

OK, so Judge AIM orders the first, incomplete filing stricken. No biggie.

Except.

My sources tell me that the late Donovan M. Hamm, Esq., distinguished USVI attorney, died in May of 2019.

Reminds me of Mark Twain’s story of one of the Mississippi sternwheelers on which he served as a “cub” pilot. Twain said the boat was very slow. “For a long time I was on a boat that was so slow we used to forget what year it was we left port in. But of course this was at rare intervals.” And when that same vessel finally sank, it took five years for the owners to get the news.

No, I’ve not taken up paleontology; I’ve discovered how to link to the text of certain orders and opinions, since DAWSON obliterated the links I’d carefully embedded in my blogposts over ten (count ’em, ten) years.

However, the process is laborious, and is no substitute for the pre-DAWSON method that was simplicity personified. My colleague Peter Reilly, CPA, once suggested that I might hire some impecunious undergraduate to figure out how to do an Ezekiel on the dry bones of several thousand blogposts thus afflicted, and do it. I replied I had neither money for the purpose, nor the inclination to undo damage not of my making.

I await the fulfillment of the Genius Baristas’ promise to make orders and opinions searchable without the need to memorize names and docket numbers. It can be done.

See my blogpost “Behind That Curtain,” 7/6/21. I was beyond astonished to discover the role played by a crew of freelance Genius Baristas, operating under the name and style “18F”, in the creation (if that is the correct term) of the DAWSON system, the current Tax Court portal. Were these dudes the authors of DAWSON?

Well, as I said at the conclusion of my blogpost hereinabove-cited, “I think I may have to seek further illumination from Tax Court my own self.” Suiting the action to the word, I sent today, by first-class USPS mail, postage prepaid, the following request to the Clerk.

“I am informed by a representative of Tax Court Public Affairs that I must address requests for information to you. Therefore, I address to you the following requests for information. Please be advised that I will publish your responses in my blog taishofflaw.com in full, without alteration, but with such editorial commentary as I alone see fit.

All terms used herein have their ordinary meanings, except as expressly otherwise herein stated. The singular includes the plural, and each gender includes the others as the context may require.

If any privilege is asserted, state the basis for such assertion with reasonable particularity in each instance.

Concerning the preparation for, and launch, of the current Tax Court DAWSON system (hereinafter, the “system”):

1) Was the system prepared by past or present Tax Court employees?

2) If the system was so prepared, state names and job titles of those employees at the time the system was first prepared, and those still employed as at the date first written at the head hereof.

3) If the system was prepared by persons other than past or present Tax Court employees, state the names and job titles of those persons; if employees, state the name or names of their employer or employers. State whether any such persons are independent contractors, and state any d/b/a used by any of them.

4) Was any contract for preparation and launch of the system awarded as the result of competitive bidding?

5) If the award of any such contract was to be the subject of competitive bidding, provide the text of any request for proposals or solicitation of bids.

6) If no such contract was solicited, why was it not?

7) If any such contract was solicited but not awarded, why was it not?

8) Was any preliminary or “beta” version of the system prepared?

9) If any preliminary or “beta” version of the system was prepared, was it made public?

10) If no such preliminary or “beta” version of the system was prepared, why was it not?

11) If any such preliminary or “beta” version was prepared, but not made generally available to the public, to whom was it shown? State the names and affiliations of all such persons.

12) If any such preliminary or “beta” version was prepared, but not made generally available to the public, what criteria were used to determine to whom it would be shown?

13) If any such preliminary or “beta” version was prepared, but not made generally available to the public, why was it not shown to the public generally?

14) What was the total cost of the system, from preparation to launch?

15) Did any contract entered into provide for payment to be made, in progress payments as the work progressed?

16) Has the entire contract price, or otherwise agreed price, of the system been paid to date?

17) Was any portion of the entire price of the system held back to assure proper completion?

18) Is any preparer of the system obligated in respect of any warranties or guarantees with respect to such preparer’s work or contributions to the system?

19) If any preparer of the system is obligated in respect of any warranties or guarantees with respect to such preparer’s work or contributions to the system, what are the terms of any warranties or guarantees giving rise to such obligation?

20) Is there any ongoing maintenance or repair obligation on the part of any preparer of the system, other than any such warranty or guarantee?

21) If there is any ongoing maintenance or repair obligation on the part of any preparer of the system, other than under the terms of any of such aforesaid warranty or guarantee, what payments have been made, and remain to be paid, if any, in respect thereof?

I reserve the right to submit further requests from time to time and at any time.”

I’ll post any reply I receive in full, without alteration. And make any comments I deem appropriate.

Cain’t hardly wait.

The well-known line from the great tragedy immortalized by a cigar brand gives me the text for Richard C. Mathews, 2021 T. C. Memo. 85, filed 7/8/21.

Richard has more beefs than a McDonald’s, but I’ll only focus on one, because I missed John Hobart Zentmyer, 2017 T. C. Memo. 197, filed 10/4/17, where the same issue was canvassed by HHBJJJIJ, a/k/a His Honor Big Julie Judge Julian I Jacobs, and later affirmed by 9 Cir.

Judge Patrick J. (“Scholar Pat”) Urda has this one, and sends Richard off with a footnote.

“Mr. Mathews also observes that his name was misspelled on the notice of deficiency in that it was addressed to ‘Richard Matthews’ rather than ‘Richard Mathews’ and argues that this error invalidated the notice. We do not believe that this typographical error rises to the level that might call the validity of the notice into question, as the notice was sent to Mr. Mathews’ correct address and was also addressed to his wife, with the correct spelling of their last name. Cf. Zentmyer v. Commissioner, T.C. Memo. 2017-197, at *12 (finding that the taxpayer was a party to the examination despite the misspelling of his name on the Form 4549-A, Income Tax Examination Changes, attached to the notice of deficiency), aff’d, 781 F. App’x 621 (9th Cir. 2019).” 2021 T. C. Memo. 85, at p. 6, footnote 4.

Just yesterday I applauded the bipartisan Congressional initiative (doubtless inspired by you and your predecessors) to require proof of competency and continuing professional education on all PTIN holders; see my blogpost “Drying Up My Sources,” 7/7/21.

Well, Mr. Rettig, you might want to call up your Congressional allies and suggest they add a few of your own coadjutors to the shape-up and brush-up squad. Starting with Paul Warque, whose story Judge Elizabeth A. (“Tex”) Copeland tells in Paul Warque and Marie Warque, 2021 T. C. Sum.  Op. 18, filed 7/8/21.

Now it’s not want of resources that’s the cause of Paul’s difficulties.  “…Mr. Warque had access to many tax law research resources, including Westlaw, that would enable him to research tax laws.” 2021 T. C. Sum. Op. 18, at p. 4.

Paul’s homestead was in Sin City, but his “post of duty” was in Laguna Niguel, CA. Paul asked for a PCS, and was placed on the eligible list twice in the three (count ’em, three) years at issue. He got a TDY hardship for the last year, but it was strictly temporary. If you don’t know what a PCS, or TDY, is, consider yourself lucky. And you’ll still be lucky when I tell you that PCS is “Permanent Change of Station,” and TDY is “Temporary Duty.”

But making the eligible list guaranteed nothing. “Mr. Warque’s approval letter stated: This is to inform you that your hardship application has been approved. Your name has been updated in the Special Programs database…. This does not mean you have a job placement offer at this time. However, you will be considered for future vacancies in your desired post of duty with the status of a hardship eligible.” 2021 T. C. Sum. Op. 18, at pp. 4-5.

Nowise deterred by the conditional mood of such billets doux, Paul deducted his travel expenses, housing and meal expenses, and miscellaneous office supplies he used in NV as unreimbursed employee business expenses, claiming his home base was Sin City and CA was TDY because he reasonably believed he had been approved for transfer.

Judge Tex Copeland shreds that.

“On this record, applying either the test of this Court or that of the Court of Appeals for the Ninth Circuit, we hold that Mr. Warque was not “away from home” within the meaning of section 162(a)(2). Mr. Warque traveled from his personal residence in Las Vegas to his place of employment in Laguna Niguel. Mr. Warque began working in Laguna Niguel…knowing that it was a full-time non temporary position. This situation did not change when he applied for the hardship relocation. The hardship relocation approval letter clearly stated that there was no certainty that his duty station would be changed to Las Vegas. The approval was one of eligibility. The letter clearly stated that there was no guaranty he would be transferred. In fact he was not transferred. There could be no reasonable belief that the Laguna Niguel duty station changed to a temporary one…. Mr. Warque’s tax home for purposes of section 162(a)(2) was his Laguna Niguel place of employment. It was Mr. Warque’s personal preference to maintain a personal residence in Las Vegas. Consequently, the traveling expenses Mr. Warque incurred for mileage, rent, car repair and maintenance, car inspection, and meals were not covered by the exception in section 162(a)(2) and are not deductible.” 2021 T. C. Sum. Op. 18, at p. 13.

Paul also wrote off his office clothes (suitable for nonwork wear, so out), haircuts, “deodorant, mouthwash, and floss.” 2021 T. C. Sum Op. 18, at p. 15. And Paul never showed the office supplies he wrote off were not reimbursable by his employer.

No mention of chops, so maybe there were none.

So why should Commissioner Rettig add Paul to the list?

“In 2009 he began working as a revenue agent for the IRS. His ‘post of duty’ was the IRS examination office in Laguna Niguel, California; it was a permanent, not seasonal, position. Mr. Warque remained employed in this position through the years in issue. He worked in the Tax Exempt and Government Entities examination division. His duties included examining employee pension and retirement plans to determine whether the plans met the qualifications of section 401(a). He was also charged with making ‘discrepancy adjustments,’ which are adjustments to Federal income tax returns to correct a discrepancy between facts developed during an examination of an employer’s pension or retirement plan return and the line items on related income.” 2021 T. C. Memo. 18, at p. 3. (Footnote omitted).

Cross-training always helps.

His elaborately-nuanced prose delighted me as a young aspirant on The Hill Far Above. I remember putting on those judicial robes when I sat on the Moot Court Board too many years ago, wishing I could be the real thing, and write like that, someday.

Ah, our youthful follies and dreams. But Big Ben Cardozo (that’s Benjamin Nathan Cardozo, first on Our Fair State’s highest court, and later a luminary amongst the Supremes) is still my hero, as today I recall his famous remark in People v. Defore, 242 N. Y. 13, at p. 21 (1926). “There has been no blinking the consequences. The criminal is to go free because the constable has blundered.”

This is what Judge Holmes pointed out when Tax Court engraved Graev on every man-made chop, wheresoever situated. See my blogpost “Stir, Baby, Stir – That Silt,” 12/20/17.

Judge Gale is in line with the well-settled (I had almost said well-silted) precedent in Dustin S. Whitfield, Docket No. 6546-19S, filed 7/8/21. IRS moved to toss Dustin back in March for non-prosecution, after the Standing Pretrial Order has issued last November, and Dustin did nothing.

Judge Gale takes up the story.

“During the period after this case was set for trial, respondent’s counsel made multiple attempts to contact petitioner by letter and by telephone in order to attempt to resolve this case or prepare it for trial. However, petitioner has not responded to respondent’s counsel’s repeated attempts at communication. Consequently, the parties have not filed a status report or a stipulation of facts. Nor has petitioner filed a pretrial memorandum or motion to dismiss, or any proposed trial exhibits.” Order, at p. 2. (Footnote omitted, but it says IRS tried letters and phonecalls, and got nothing).

And Judge Gale gives us the usual “somber reasoning and copious citation of precedent” about “clear record of delay” and “contumacious conduct.” Order, at p. 3. With waste of IRS resources thrown in.

I note Dustin failed to report $172 of income, and that’s enough to sustain the presumption of correctness for the whole $7444 deficiency. Dustin disputed other parts of the deficiency in his petition, but not the $172.

“Moreover, a notice of deficiency alone may satisfy the Commissioner’s evidentiary burden if it indicates that a third party has paid the taxpayer the amount in question and reported the payment to the Commissioner. The notice of deficiency in this case identifies the name of a third-party payor that evidently reported the payment to the Commissioner. The Commissioner’s burden of production with respect to the $172 payment therefore would be satisfied even if the Petition could be construed to dispute the unreported income determination. The presumption of correctness thus attaches to the notice of deficiency.” Order, at p. 5.

But Dustin dodges the Section 6662(a) chop, even though he never challenged it in his petition.

“While the petition in this case does not explicitly assign error to respondent’s penalty determination, it does assign error to other adjustments in the notice of deficiency (including respondent’s disallowance of relatively large refundable credits), and it further alleges that petitioner should have no tax liability for the year at issue. A petition prepared without the assistance of counsel, as in this case, should be liberally construed. As noted above, section 6662(a) imposes a penalty only in cases involving an underpayment of tax. Petitioner thus could not be liable for such a penalty if he were to prevail on his claim that, after correction of the disputed adjustments in the notice of deficiency, he would have no tax liability for the year at issue. Accordingly, in view of petitioner’s pro se status, we conclude that the Petition adequately assigns error to the penalty determination. We therefore must determine whether respondent has satisfied his burden of production with respect thereto.” Order, at p. 6 (Citation omitted, but see my blogpost “Too Late But Still Timely,” 3/28/12, for the indulgence to pro se pleadings).

IRS has only the Michael Corleone gambit, so Dustin walks on the chop.

No blinking the consequences.