Judge Albert G (“Scholar Al”) Lauber adheres to the old saying when it comes to frivolite Jamillah Kamillah Muhammad, 2021 T. C. Memo. 77, filed 6/29/21.

Jamillah Kamillah tries the hackneyed protester jive about Sections 3104 and 3121, the FICA tax, rather than the income tax. And she otherwise strews the usual gibberish.

“Petitioner admitted at trial that she had received payments from the University during [year at issue] but insisted that these payments were not ‘wages.’ When asked whether she had performed services for the University during [year at issue], she refused to answer. When asked what kind of payment the University had made to her, if not wages, she refused to answer. When asked why she did not report the payments as taxable income, she replied that nothing she did in connection with the University was the ‘exercise of Federal privileges.’ When asked why that mattered in determining whether she had received taxable income, she professed reliance on sections 3401 and 3121.” 2021 T. C. Memo. 77, at p. 5.

Jamillah Kamillah also moved in limine to exclude the SNOD IRS gave her, and the wage and tax statement from the W-2 Samuel Merritt University gave her. “Petitioner filed a motion in limine seeking to exclude the first two documents from evidence on the grounds of ‘[h]earsay, lack of foundation, lack of personal knowledge, no opportunity to cross-examine, declaration not signed under penalty of perjury, declaration not dated, irrelevant, [and] calls for speculation.’ She asserted that the notice of deficiency was inadmissible as ‘needlessly presenting cumulative evidence.’ She asserted that her own Form 1040X should be excluded from evidence on the grounds of ‘[i]rrelevan[ce], unfair prejudice, confusing the issues, undue delay, wasting time, and needlessly presenting cumulative evidence.’” 2021 T. C. Memo. 77, at pp. 4-5.

Judge Scholar Al denied the motion. Surprise, surprise. He also spends time on “somber reasoning and copious citation of precedent,” perhaps to convince Jamillah Kamillah that it’s one thing to play the lawyer, but quite another to play the fool. Because anyone who does minimal investigation will discover that her argument is “a time-worn tax-protestor argument that no court has ever accepted.” 2021 T. C. Memo. 77, at p. 8.

 Of course, Jamillah Kamillah was shown the yellow card more than once. “We warned petitioner during the calendar call that she risked a penalty if she advanced frivolous arguments and that ‘wages are not income’ is a frivolous argument. Despite this warning, petitioner persisted throughout the trial on the path on which she had embarked. Counsel for respondent urged that a section 6673 penalty was appropriate, representing that she had repeatedly advised petitioner in pretrial communications that she was advancing a frivolous position.” 2021 T. C. Memo. 77, at p. 11.

So Judge Scholar Al is about to hand Jamillah Kamillah the Section 6673 frivolity chop, when she pleads poverty. And Judge Scholar Al tempers the wind to the allegedly shorn lamb.

“When we advised petitioner at trial that we would consider imposing such a penalty, she stated that she was now unemployed and that a penalty would cause her financial hardship. Taking her at her word, we will impose a modest penalty of $250. But we warn petitioner that she will risk a much more severe penalty if she advances frivolous positions in any future appearance before this Court.” 2021 T. C. Memo. 77, at p. 11.

Far be it from me to seek to curb Judge Scholar Al’s (or any judge’s) charitable impulses.

But there should be a level of consistency in the Section 6673 mulcts. I suggested a year ago that “let’s have a sliding scale. I propose one free kick, then a grand for each succeeding kick, cumulative. With an automatic press after four (Nassau, as the golfers say: bet doubles on the back nine).” See my blogpost “One Free Bite,” 8/28/20.

After all, we have Federal and State sentencing guidelines, whatever their faults (and I’m not going there; my last criminal case was more than thirty years ago, and it can stay that way). Anything else runs the risk of arbitrary-and-capricious or excessive-fines-and-penalties.

Here’s another item for Ch J Maurice B (“Mighty Mo”) Foley’s to-do list.

The review of a NOD from a CDP is always, or almost always, a recap of the record made at the CDP hearing. For that reason, a short but comprehensive checklist is a useful article in the practitioner’s toolkit.

Judge Mark V Holmes has a one-pager in Alan Courtney Preston, Docket No. 4050-20L, filed 6/29/21.

First, parties should stip to the contents of the record (s/a/k/a the “administrative record”). If they can’t, IRS should prepare an index of the documents they assert comprise the record, with a typical Judge Holmes addition: “The Court urges the IRS to make this index comprehensible to a nonlawyer.” Order, at p. 1.

Good luck with that one, Judge. Remember your eminent predecessor, the English Lord Chief Justice Campbell, writing in 1850: “There is nothing so dangerous as for one not of the craft to tamper with our freemasonry.”

Howbeit, once IRS delivers its index, petitioner has to “(1) provide the IRS with any evidence that he thinks should be added to the administrative record but is not in the IRS index and (2) list any documents in the IRS index that he thinks should not be in the administrative record.” Order, at p. 1.

Ultimately, if there’s no settlement, a trial will be limited to ascertaining the proper contents of the record, whether that shows IRS abused its discretion in sustaining the collection action, or whether to send it back to Appeals (“remand”) “because of new evidence or a change in circumstance since the collection due process hearing was held.” Order, at p. 1.

And not a dissed partitive genitive in sight.

Sometimes the wheeler-dealer’s long-established practice of treating all his controlled entities, even those co-owned with others, as different pockets in the same suit of clothes, while possibly fraud on his creditors, isn’t fraud on the IRS. Judge Goeke thus rings down the curtain on a couple years’ worth of tax troubles (hi, Judge Holmes) for Michael R. Kelly, 2021 T. C. Memo. 76, filed 6/28/21.

It takes 45 (count ’em, 45) pages of Judge Goeke’s prose to set forth some of Mike’s wheeling-dealing, from his start as a bad-debt stripminer (buying bad secured loans to foreclose and strip the collateral), to buying and selling business as diverse as linen rental and yacht-chartering. He used a plethora of SPEs (Single Purpose Entities), each of whose integrity he safeguarded to keep from being rolled up if any one business failed (as Joe Hooker should have done at Chancellorsville). But he reported all but his one publicly-held corporation on his own 1040, as they were all disregardeds. And he flipped cash back and forth with fine abandon, until The Black ’08.

IRS claims Mike missed filing two Forms 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations (Mike’s yacht SPE was Cayman Islands-based), and that means substantial understatement 6SOL sinks him, unless Section 6501(c)(8)(B) good-faith reliance on experts saves him.

And it does. Mike’s CPAs were pros, with no adverse disciplinary history. Mike, or his staff, told them everything (and Mike cooperated with IRS during the audit). “Respondent contends that it was not enough for Mr. Kelly to inform [CPAs] that [Yacht] was a foreign entity, and he implies that Mr. Kelly should have advised Mr. S [preparer] that Form 5471 was required. The failure to file the Forms 5471 does not present an obvious tax obligation which was negligently omitted from information that a taxpayer provided to the return preparer. Mr. Kelly, through his staff, provided the necessary information to [CPAs], identified [Yacht] as a foreign corporation, and stated that he was unsure of the reporting requirements. Having done this, Mr. Kelly reasonably relied on [CPAs] to prepare his returns properly. While it could be argued that [CPAs] should have done more to ascertain Mr. Kelly’s filing obligations, it was reasonable for Mr. Kelly to rely on [CPAs] do so. A taxpayer need not question the advice provided, obtain a second opinion, or monitor the advice received from the professional.” 2021 T. C. Memo. 76, at p. 50 (Citation and name omitted).

“Respondent’s list [of badges of fraud] depends totally on the premise that Mr. Kelly’s intercompany transfers or withdrawals recorded as loans were not properly treated as loans and were concealed with intent to defraud the United States. While we do not presume the accounting by Mr. Kelly and his companies is always accurate regarding the ‘loans’, we do not believe the record establishes by clear and convincing evidence that the ‘loans’ were the basis of a fraudulent tax scheme; rather they were the products of two decades of Mr. Kelly’s business practices. As we discuss later herein, we agree with respondent that by 2008 there was no reasonable expectation the ‘loans’ would be repaid when incurred, and they should be treated as distributions. This conclusion does not in itself lead to a finding of fraud.” 2021 T. C. Memo. 76, at p. 55.

Howbeit, maybe some pre-Black ’08 transfers were loans, but after the subprime meltdown, game over.

So a major league Rule 155 bangers-and-mashed to follow.

I’ve often blogged Judge David Gustafson’s obliging nature; see, e.g., my blogposts “Obliging? This Beats All,” 3/6/19, and “Obliging – Even Though He’s Only Passing Through,” 8/10/18. Today, however, Judge Courtney D. (“CD”) Jones is much less obliging.

Unlike Judge Gustafson, she won’t help out IRS’ counsel, as IRS’ summary J motion prevails only in part, in Paul Edwin Johnson, Docket No. 16077-19, filed 6/28/21. Paul Edwin is a candidate for a Section 6673 chop, but his petition is timely and he loses the deficiency. So he only gets the yellow card.

Judge CD faults IRS counsel on misplaying the Boss Hoss underpinning of the Section 6662 accuracy chop they bestowed on Paul Edwin.

The AUR issued a CP2000 to Paul Edwin, when his retirement drawdown hit IRS’ computer but missed Paul Edwin’s 1040. Paul Edwin replied to the CP2000.

“…the AUR program received a response to the CP2000 Notice from Mr. Johnson in which he appeared to agree with the changes but argued that he should be eligible for increased credits. … CW, an AUR Tax Examiner, considered Mr. Johnson’s response to the AUR and found that he was eligible for increased credits but determined that the IRS should impose a penalty. JB was CW’s immediate supervisor and approved, in writing, CW’s initial determination of the penalty….” Order, at p. 7. (Names and dates omitted).

So the AUR issued the SNOD with the accuracy chop in it.

Now comes a silt-stir that would gladden Judge Holmes’ heart.

“Respondent contends that respondent obtained supervisory approval prior to the issuance of the notice of deficiency…and the record seems to support this conclusion. But it appears to the Court that the CP2000 Notice… was the IRS’ first formal communication of the initial determination to assert penalties pursuant to section 6662(a). Therefore, respondent has the burden of production with respect to its compliance with section 6751(b)(1) regarding the CP2000 Notice, not the notice of deficiency. As there is no evidence in the record to support that written supervisory approval was obtained prior to the issuance of the CP2000 Notice, we hold that there is a genuine dispute of material fact regarding whether respondent carried respondent’s burden of production pursuant to 6751(b)(1) with regard to the section 6662(a) penalties for this case.” Order, at p. 6 (Citation and footnote omitted, but the footnote says it all).

OK, so my ultra-sophisticated readers all just shouted “Section 6751(b)(2)! AUR untouched by human hands! Boss Hoss irrelevant!”

Now for everybody else, here’s Judge CD being unobliging.

“We note that it appears that the CP2000 Notice was issued through the AUR program. Managerial approval pursuant to sec. 6751(b)(1) is not required for penalties calculated through electronic means. See sec. 6751(b)(2)(B); It is curious that respondent did not address the potential application of sec. 6751(b)(2)(B) to this case, but we will not argue it for him. See Rule 151(e)(5). As we have said before, our job is to consider the issues advanced by the parties, not to craft alternative arguments never raised.” Order, at p. 6, footnote 5. (Citations omitted).

Takeaway- As IRS’ resources are stretched without further Congressional appropriations, expect more computerization to replace humanity, and perhaps unhorse the Boss Hoss.

In the current roster of Tax Court rounders (frequent litigators with specious or frivolous arguments), Gregory J. Podlucky, lead in Gregory J. Podlucky & Karla S. Podlucky, Docket No. 453-17, filed 6/25/21, has earned the coveted (?) Rounder First Class With Oak Leaf Cluster award.

Greg has appeared so often in this my blog that I no longer catalogue these. And today’s efforts show Greg has lost none of the moves and maneuvers that have brought him to the heights of rounderdom.

Here’s that patient jurist, Judge Albert G. (“Scholar Al”) Lauber to explain. Greg wants summary J and IRS’ papers stricken. And his trial continued (that’s “adjourned,” for us State courtiers).

“In their Motions petitioners urge that respondent ‘has perpetrated fraud upon this Court by alleging that the Petitioners have evaded taxes for the years 2003, 2004, and 2006.’ They ask us to strike ‘all briefs, documents, and other papers’ relating to those tax years and to dismiss the case with respect to those years.” Order, at p. 1.

Judge Scholar Al isn’t even looking, much less buying.

“We will deny both Motions. Petitioners’ assertion that respondent has ‘perpetrated fraud upon this Court’ is frivolous. Petitioners appear to contend that they cannot be liable for tax deficiencies for 2003, 2004, or 2006 because the Government, in petitioner husband’s criminal case, withdrew the counts that alleged tax evasion under I.R.C. sec. 7201 for those years, in exchange for a guilty plea by petitioner husband with respect to 2005.” Order, at p. 1.

So just maybe Greg was playing the Fiore gambit, for which see my blogpost “Lawyers Can’t Add,” 1/17/13, by copping to one year only so as to duck issue preclusion for “pattern of fraud” to support civil fraud chops per Section 6663. I told you Greg is a top-drawer rounder.

Judge Scholar Al plays what I will call the Scholar’s countergambit to the Fiore gambit.

“Needless to say, a taxpayer need not have been convicted of a tax crime in order to be liable for a tax deficiency. Respondent does not allege that either petitioner ‘evaded taxes’ for 2003, 2004, 2006, the gravamen of a criminal offense under I.R.C. sec. 7201. Rather, respondent contends that petitioners underpaid their income tax for those years and that petitioner husband is liable for civil fraud penalties under I.R.C. sec. 6663(a).” Order, at pp. 1-2.

But la partie continue, because Greg isn’t done yet. As the COVID reshuffle caused trials to go remote, Greg’s trial was first set for Los Angeles, then moved at Greg’s request to Denver, and then moved for administrative purposes only back to Los Angeles.

“Petitioners now assert ‘that the place of trial is improper’ and that they ‘cannot proceed until this egregious occurrence is corrected.’ To the extent petitioners are seeking a continuance of their October 4 trial date, that request is denied. Because the calendar call and any ensuing trial during that session will be conducted remotely, it is immaterial whether petitioners are physically located in Denver, Los Angeles, or some other city in which they happen to be.” Order, at p. 2.

I regret I cannot furnish an actual decoration for Greg to pin on his battledress. He certainly earned Rounder First Class With Oak Leaf Cluster.

Periodic real estate meltdowns furnish the grittier grist that comes to the practitioner’s mill. Even those with thirty (count ‘erm, thirty) years’ experience can get it wrong. Witness Richard S. Hussey, 156 T. C. 12, filed 6/24/21, and his highly-credentialed adviser, whom I’ll call Mike the K.

Richard had twenty-seven (count ’em, twenty-seven) investment properties, and had to unload most of them. He short sold a bunch over a couple years (hi, Judge Holmes).

A “short sale” is one where the purchaser pays less than the outstanding balance of the mortgage for the property, also known as “underwater” property. All the mortgages on the properties were held by the same lender, who issued 1099-Cs for some, but charged off others and treated those unpaid balances as a loan loss reserve. Maybe Richard was personally liable on the notes as restated, and deficiency judgments were possible, hence the reserve. But that reserve was created in Year Two, so no discharge of debt in that year. Also no 1099-Cs for Year Two, although that isn’t necessarily dispositive.

Richard and Mike the K want to throw the basis adjustment to offset immediate CoD taxable gain one year forward into Year Two, using Section 1017(a). There’s no doubt Section 108(c)(2)(B) allows the treatment, if Section 1017(b)(3)(f)(iii) doesn’t anchor it to year of sale.

Judge Colvin finds that it does.

“Petitioner points out that section 1017(a) states generally that  basis reductions resulting from the discharge of QRPBI [Qualified Real Property Busines Indebtedness, and this is] are made the year after the debt is discharged. If section 1017(a) applies here, the basis adjustments at issue would, as petitioner contends, be made in [Year One]. However, section 1017(b)(3)(F) provides three additional rules which govern reduction of basis following discharge of QRPBI. First, real property, the aggregate bases of which are considered under section 108(c)(2)(B), includes only depreciable real property. Sec. 1017(b)(3)(F)(i). Second, the depreciable real property may not be held as inventory. Sec. 1017(b)(3)(F)(ii).” 156 T. C. 12, at pp. 10-11. (Footnote omitted, but it says specifics override generals).

OK so far.

But when Richard sold the properties, the debt was discharged. And that’s what Section 1017(b)(3(F)(iii) says mandates basis reduction in year of sale.

Judge Colvin checks out the House Report, to make sure.

“If the taxpayer disposes of real property (in the transaction that gave rise to the discharge or otherwise) prior to the first day of the next taxable year, then the reduction in basis of such property is made as of the time immediately before the disposition. 15-H.R. Rept. No. 103-111, at 623-624 (1993), 1993 U.S.C.C.A.N. 378, 854-855 (emphasis added).” 156 T. C. 12, at pp. 14-15. (Footnotes omitted).

Note the cited House Report is online behind some kind of subscription wall. Here’s the link; use at your own risk. I make no guaranty, warranty, or representation of any kind whatsoever, however denominated, as to safety, accuracy, adequacy, fitness for purpose, merchantability, quality, or anything else. Sue them, not me.

No forwarding of basis reduction for Richard. And IRS wants accuracy chops.

Richard claims he knows nothing of tax or accounting, and Judge Colvin buys it. He didn’t like the return his usual preparer did, so found a CPA who turned him onto to Mike the K, thirty-year veteran tax attorney. And he gave Mike the K everything he asked for. So Richard claims good faith reliance.

IRS claims Mike the K was less than spectacular.

“Respondent points out that there are errors on petitioner’s returns prepared by the K Firm. For example, the bases in real properties retained by petitioner in 2013 had not been reduced on petitioner’s 2013 return even though they should have been under Mr. K’s analysis. Respondent also points out that petitioner’s home was erroneously listed as an investment property sold in 2013 and then recorded that it had been sold again in 2014 when reporting debt cancellation on a Form 982. Respondent contends these errors show that petitioner was not acting in good faith. We disagree. We do not believe petitioner is responsible for detecting errors of this nature in the reporting of complicated tax transactions.” 156 T. C. 12, at p. 23.

And IRS argues, with no basis in the record, that Richard went shopping for tax advice to suit, and that Richard should have realized that Mike the K’s advice was too good to be true. Yes, but; the latter assumes Richard was sharp enough to know about Section 1017(b)(3)(f)(iii), which he wasn’t.

No chops for Richard.

To get the picture here, see my blogpost “Old-Time Head-Banging – Part Deux” 9/4/20. To save your time, here’s what I said: “When I was a young man (and had, contrary to the late great Pete Seeger, been kissed), there were old-school judges, men (sorry ladies, this was in the Bad Old Days) who dragged into chambers and robing rooms recalcitrant litigants and badgered settlements out of them.

“We called it ‘banging heads.’”

Today STJ Peter (“HB”) Panuthos follows up on the story told in my blogpost hereinabove particularly bounded and described, with Peter Brancovich Turek, Docket No. 15447-19S, filed 6/24/21. Although pro se, PB is “highly educated (Dr. Turek is a psychiatrist and psychoanalyst)”. Order, at p. 4.

PB, refusing STJ Panuthos’ suggestion that he settle with IRS, ripostes with a “Motion to Concede Deficit Assessment”. Order, at p. 2. Problem is, IRS wants to raise the deficiency for the second of the two (count ’em, two) years at issue, and PB isn’t buying.

So IRS moves out of time to amend the answer to assert an increased deficiency. STJ Panuthos goes through the Rule 41 foxtrot, continuing the trial so that PB has time to deal with the amended answer, and grants the motion to amend the answer.

“In his motion for leave respondent indicates that the bases for seeking an increased deficiency were not evident at the time of filing his answer. Respondent also asserts that there is a voluminous administrative file, available only in paper and that shortly after March 13, 2020, it was no longer available because of the closure of offices due to COVID-19. Finally, respondent asserts that the files did not become available until about July 13, 2020, when restrictions were eased allowing access to the documents and opportunity for review and analysis.” Order, at p. 4.

Since PB knew that the higher deficiency was in the cards for some time, he isn’t ambushed. And STJ Panuthos allows for further discovery on the increased deficiency, so the parties can talk.

Translated from Judgespeak, that means “PB, settle this case. Please settle this case.”

And to move matters along, STJ HB Panuthos kicks PB’s S.

“As noted above, petitioner elected, and the Court granted, small tax case status. The deficiencies and penalties determined in the notice of deficiency for each of the tax years [X] and [Y] did not exceed $50,000 and thus this case qualified for small tax case procedures. See sec. 7463(a); Rules 170-174. Considering the claim made by respondent in his First Amendment to Answer, the deficiency and penalty in issue for [Y] exceed $50,000. It is thus clear that this case no longer qualifies for small tax case status. Sec. 7463(d)…. Accordingly, the Court will strike the ‘S’ designation from the docket in this case and this matter will be proceed on the regular docket of the Court.” Order, at p. 5. (Citation and dates omitted).

Now that’s what I call old-time head-banging.

The worker on extended assignment is like the turtle. He carries his home with him, “howe’er so far he roam.” Such is the story of Robert J. Sherman & Catherine Sherman, Docket No. 21094-17S, filed 6/24/21. Or rather, it’s Rob’s story.

Rob lives in one place, but for the year at issue, and more, works in another. Unlike the hero of my blogpost “I’m Stickin’ to th’ Union,” 9/21/11, Rob doesn’t seem to have a business affiliation with his hometown sufficient to keep it as his tax home.

Judge Buch: “The term ‘home” for these purposes means the location of a taxpayer’s principal place of employment, not the location of his personal residence. Generally, if the location of the taxpayer’s place of business changes for an extended period, so does his tax home. More specifically, if a person works in a location for more than one year, then that person is not treated as being temporarily away from home when at that location. Sec. 162(a) (flush language).” Transcript, at pp. 10-11. (Citations omitted).

Rob also got a flat per diem for his expenses from his employer, which he didn’t report for the year at issue. His substantiation was the usual back-of-the-envelope.

Another many-times-told tale. But note the word “generally” in Judge Buch’s off-the-bencher; there may be a business reason why your client needs his home to stay put while s/he wanders far and wide.

Unlike his Hall of Fame namesake, who was one of only five (count ’em, five) players to steal home in a World Series game, Monty Ervin, 2021 T. C. Memo. 75, filed 6/23/21, gets late filing, late paying, no estimateds and fraudulent non-filing add-ons on top of the revised deficiency that finally got paid via the restitution order bestowed upon him by USDCMDAL as part of the fall he took for tax evasion.

Monty claims he doesn’t owe add-ons, because the sale of his gold coins two years after IRS hit him with the SNOD they later revised paid his taxes in full. Anyway, now he’s back in the free world, Monty is CNC.

Judge Albert G (“Scholar Al”) Lauber points out that add-ons do not arise the moment that restitution is imposed, but only after assessment of tax. It’s our old friend “as if”; restitution is collected as if it were tax, except it isn’t. But once IRS assesses the tax, it’s open season for add-ons.

“It made the assessment after the restitution order became final. It subsequently commenced a civil examination of petitioner’s individual liabilities for 2002-2007 and prepared SFRs, allocating him a portion of the relevant income and deductions. It then calculated additions to tax based on the deficiencies so determined.” 2021 T. C. Memo. 75, at p. 9.

Monty agrees he owes what IRS says, but he paid it via restitution. And IRS can’t collect twice. No issue there.

But all, or almost all, the add-ons accrued prior to Monty making any restitution payment. So he neither filed nor paid when tax was assessed.

Monty’s economic woes do not help him.

“Petitioner’s second argument is no better. Inability to pay is not a defense, on the merits, to the additions to tax. Petitioner represents that the IRS has placed his…accounts in ‘currently not collectible’ status. If that should change and the IRS should seek to collect additions to tax…petitioner may request a collection due process hearing and urge inability to pay as a proper ground for a collection alternative. See sec. 6330(c)(2)(A)(iii).” 2021 T. C. Memo. 75, at p. 12.

Judge Scholar Al cruises through the add-ons, finds IRS carried BProd, and hits Monty with the full boat.

Monty is out at the plate.

I’m adding Sandy Lee Rowe & Sylvia Marie Rowe, Docket No. 6432-20, filed 6/23/21, to my “Don’t Ambush” series, which began with my blogpost “Don’t Ambush the Indians,” 4/7/11. They’re neither accountants nor ranchers nor yet the IRS, but Judge Buch rightly shuts down IRS when they try to wildcard in the “goofy regulation” on the trial of S&S’ unsubstantiated business deductions for their travel agency.

You can read for yourselves Judge Buch’s attempted scrape of S&S’ palimpsest of pieced-together spreadsheets and credit card slips, no two of which seem to jibe. So S&S are out on substantiation, especially since the stuff is travel and therefore Section 274 heavy-duty substantiation is needed.

On the trial, however, Sandy Lee testifies as follows: “‘The income was secondary to us, because we like to see people travel, family and other acquaintances.” He continued, ‘So it’s not to make money; it’s for the pleasure of inspiring people to travel.'” Transcript, at pp. 4-5.

One can only imagine IRS counsel’s feeling when Sandy Lee thus expatiates. Rather like watching one’s foe pause as the front sight blade lines up with the rear sight reticle, and one’s finger slowly eases the trigger back. Sandy Lee is pro se, of course, so we are spared the sweet smile of his attorney watching the case do a Coriolis.

But IRS counsel only adverts to this testimony at the very end of trial.

“Mr. Rowe’s statements suggest that the business losses may be non-deductible hobby losses. However, the Commissioner did not raise this issue in the notice of deficiency, pleadings, or pre-trial memorandum. In his closing, the Commissioner mentioned the nondeductibility of hobby losses in an apparent invitation for the Court to disallow the losses on those grounds.” Transcript, at pp. 12-13.

Tried by consent, per Rule 41? Not with a pro se, who obviously wouldn’t know Section 162 from Section 183.

“We will decline the Commissioner’s invitation.

“Our Rules are designed to give the parties fair notice of the matters in controversy. Rule 31(a). To that end, the Commissioner is required to ‘advise the petitioner * * * fully of the nature of the defense’ and provide a ‘specific admission or denial of each material allegation in the petition.’ Rule 36(b). The Commissioner may raise a new matter provided the taxpayer receives fair warning. If a previously unraised issue is tried ‘by express or implied consent’ of the parties, we will treat it as though it had been raised in the pleadings. Rule 41(b)(1). To determine whether it is appropriate to apply the principle of implied consent, we consider whether sustaining the issue would result in unfair surprise or prejudice to the opposing party and limit the evidence that party might have otherwise introduced if the issue had been timely raised.” Transcript, at p. 13. (Citations omitted.)

Of course it would surprise S&S. Hobby loss might require evidence of profitability in years other than those at issue. And bringing in hobby loss might increase the deficiency above that set forth in the SNOD, with a BoP knock-on.

So don’t ambush the travel agents, either.