K. Slaughter, 2019 T. C. Memo. 65, filed 6/4/19, claims she is a “brand author.” That doesn’t mean someone who invents the name and attributes of merchandise. K is an author whose name alone sells books; the book buyer doesn’t ask by title. The book buyer wants “the latest Slaughter.”

Judge Wells has to deal with eight (count ‘em, eight) lawyers, three for K and five for IRS, none of whom cites to Sergio Garcia or Retief Goosen (see my blogpost “Icon vs. Iceman, 3/15/13).

The split, of course, is between earnings from trade or business (K writes books), and earnings as a “brand author,” one whose persona adds value to words on paper. The earnings from trade or business of writing attract SE, but somehow the persona component is like an investment which throws off a non-business increase in wealth. Thus spake K’s trusty CPA, with whom K had worked for thirty years, and who had a plethora of qualifications. So no chops.

K had media coaches, did events, and promoted herself. “Petitioner’s promotional activities and writing have created a very successful brand and body of work.  In petitioner’s case, her brand includes her name and likeness as well as her reputation, goodwill, and existing readership. Book buyers walk into book stores and request petitioner’s books using her name rather than the title.  Petitioner has developed good relationships with booksellers and librarians, which help to sell her books.  She also maintains contact with her readership through social media, websites, and a newsletter.” 2019 T. C. Memo. 65, at p. 6.

So the question is whether, pursuant to the publishing contracts into which K entered over the years, the income she derived had a sufficient nexus with writing to make it subject to SE, as part of K’s trade or business.

K’s deductions for her promotional endeavors showed up on Schedule C.

But ultimately, no books, no brand. Perhaps a more carefully drafted publishing contract might differentiate between royalties for brand enhancement, and just plain literature.

And tell ‘em Sergio Garcia sent ya.

Edited to add, 6/5/19: An e-mail exchange with counsel for K Slaughter informs me that both IRS and said counsel cited Sergio Garcia, but Judge Wells didn’t discuss the case. Maybe so K Slaughter’s team might consider reconsideration.

Edited to add, 8/3/21: Thanks to my colleague Peter Reilly, CPA, for catching 11 Cir’s affirmance of Judge Wells’ opinion, and passing along the news. 11 Cir goes off on “trade or business”; the book writing and brand promotion are inseparable.

The taxi dispatcher of the Marne, Gen. Joseph Simon Galieni, once again hoists his celebrated remark to my masthead, as we revisit Management Concepts, PLC, of Phoenix, AZ, and their repurposing of client SNODs. Today it’s Steven E. Ayers & Donna J. Ayers, Docket No. 15315-18, filed 6/4/19.

Steve & Donna were also investors in Clean Energy Systems. For the backstory on Clean Energy Systems and its associates, see my blogpost “Eh Bien, Voila Au Moins Qui N’est Pas Banal – Deuxième,” 10/11/18. And it seems Ryan M. Richardson does a reprise of his role from last October, when he testifies at the evidentiary hearing Judge Buch orders.

The Management Concepts sent in a petition with a SNOD attached for Steve & Donna.

Believe it or not, the SNOD had two (count ‘em, two) cover pages. SNODs don’t have two cover pages. But this one had one with a date that would get the petition tossed for lateness, and one that would render the petition timely.

IRS has the PS3817 certified mailing list showing only the earlier, so claims Steve & Donna should get tossed.

But Judge Buch is after bigger game.

“The Court conducted an evidentiary hearing in this case with the aim of developing a record that would explain why there were two cover pages with the notice of deficiency attached to the petition. Respondent duly served a subpoena on Carl Rex Olson, the principal officer of Management Concepts, PLC, directing him to appear and testify at the evidentiary hearing. Mr. Olson did not appear at the evidentiary hearing.” Order, at p. 2.

You don’t need to be a special counsel or a Cabinet member to know this is a hearing you don’t want to attend.

But Ryan M. Richardson shows, and dishes in extenso.

Ryan M. says he never doctored the SNOD in his case, which featured in my blogpost above-cited. Ryan M. “…testified at the evidentiary hearing that he believes that Mr. Olson was responsible for altering the notice of deficiency attached to the petition in his case.” Order, at p. 3.

Of course, Ryan’s petition got tossed.

So does Steve’s & Donna’s.

Judge Buch didn’t send the U. S. Marshal to escort Mr. Olson to The Glasshouse. “Considering all of the circumstances, including the necessary commitment of additional time and resources, the Court determined that it was not worthwhile to compel Mr. Olson to appear at the evidentiary hearing.” Order, at p. 5, footnote 3.

But Judge Buch is not amused by Mr. Olson’s shenanigans. “The Court finds on this record that Mr. Olson was responsible for altering the notice of deficiency attached to the petition in this case and that he did so in a deliberate attempt to mislead the Court and the Commissioner. He engaged in similar misconduct in several other cases. His dishonest and misguided efforts have harmed the petitioners in this case and others and wasted the resources of the Court and the IRS. Should Mr. Olson engage in similar conduct in the future, the Court would strongly consider referring him to the U.S. Department of Justice for prosecution.” Order, at pp. 4-5. (Footnote omitted, but it says 18 USC Sec. 1001 makes it a crime to knowingly and willfully submit a materially false document to a Court.)

But if you’re going to do it, at least don’t send in both cover pages.

Judge Buch is faced with IRS’ numerate shortcomings, just as he’s trying to finish up with master frivols Peter E. Hendrickson & Doreen M. Hendrickson, Docket No. 6863-14, filed 6/3/19.

See my blogpost “Cracked,” 2/11/19, for the lead-in to today’s episode. So Pete & Doreen face off on the Rule 155 beancount for the Section 6651(a) chops, because IRS got Pete’s filing status wrong in the SFRs, and the Section 6663(a) fraudulent filing chop doesn’t apply, because what Pete & Doreen filed wasn’t a return. Their nonfiling, however, was fraudulent.

OK, so it seems IRS got the multipliers right. For Section 6651(a) fraudulent nonfiling – nonpaying, it’s the monthly .15 (15%) fraudulent nonfiling, minus the regular .05 (5%) nonpaying, where both nonfiling and nonpaying, and fraud is in play, per Section 6651(a)(1) and (a)(2). And the chop maxes out at five months, thus 72.5% (15% – 0.5% times 5 months = 72.5%).

“Although the Commissioner used the correct multiplier, it is unclear whether he applied that multiplier to the correct amount. The Commissioner’s calculation as to the amount of the section 6651(a)(1) and (f) addition to tax matches the amount of the penalty shown on the notice of deficiency. But the fraud penalty is applied to the amount of an underpayment (sec. 6663) whereas an addition to tax for a fraudulent failure to file is applied to the tax required to be shown on the return (sec. 6651(a)(1)). The Commissioner’s computation of the addition to tax for fraudulent failure to file contains the conclusory statement ‘Manually Computed Penalty’ with no computations shown. And from the amount of the addition to tax, it is not readily apparent that the Commissioner applied the multiplier to the tax required to be shown on the return. It is also unclear whether the Commissioner took into account payments or withholding as required by section 6651(b)(1). Accordingly, the Commissioner will need to resubmit computations of the section 6651(a)(1) and (f) addition to tax….” Order, at pp. 3-4.

And although IRS omitted the tax Pete & Doreen paid for one of the years at issue, it didn’t affect the underpayment amount, so that error was harmless. But for two (count ‘em, two) other years, IRS seems to have left off withholding, without explaining why it was proper so to do.

So it’s a Mulligan all around.

The slang term, not the 1932 Marx Bros. extravaganza, figures in Mitchel Skolnick and Leslie Skolnick, et al., 2019 T. C. Memo. 64, filed 6/3/19. Mitch and Les and the als stand accused by IRS of hobbyhorsing around with Bluestone Farms, Inc.

Word to a colleague: Peter Reilly, CPA, here’s another Section 183 hobby loss case for ya.

It falls to Judge Albert G (“Scholar Al”) Lauber, one-time schoolmate of Mr. Reilly’s at a distinguished boys’ high school in Our Fair City, to decide whether Mitch’s and Les’ expert can expound his expertise on their behalf at trial.

Mitch’s and Les’ (and the als’) expert is R (name omitted), supposedly the North American continent’s leading bloodstock valuation expert.

“Mr. R’s proposed testimony consists of a 3-1/2-page report with a pair of attached spreadsheets.  The substance of his report (putting aside paragraphs devoted to formal aspects and his qualifications) consists of three paragraphs that take up less than two pages.  He opines that ‘the appraisal of horses is not an exact science and is greatly influenced by numerous economic and social factors.’  In particular, he states that the valuation of horses ‘can be affected in a volatile way as a result of any natural disaster, disease  outbreaks, global crisis or governmental actions.’”  Order, at p. 3.

And R has two (count ‘em, two) spreadsheets, valuing 153 (count ‘em, 153) ponies Bluestone owned at one or another material time.  These list just name, rank, serial number and valuation.

“Because the written report serves as the direct testimony of the expert witness, the report must comply with the requirements for expert testimony set forth in Fed. R. Evid. 702.  Rule 143(g)(1) accordingly requires that an expert witness report ‘shall contain” (among other things) the following:  “(A) a complete statement of all opinions the witness expresses and the basis and reasons for them; (B) the facts or data considered by the witness in forming * * * [his opinions]; [and] (C) any exhibits used to summarize or support * * * [his opinions.]’

“We conclude that [R’s] report does not satisfy the requirements of the Federal Rules of Evidence or this Court’s Rules.  His report does not set forth any ‘facts or data’ on which he relied.  Fed. R. Evid. 702(b); Rule 143(g)(1)(B).  Although he avers that he consulted an in-house database, his report includes no data from that database, and he does not attach a printout of the database as an exhibit to his report.  He does not identify the valuation ‘principles and methods’ that he employed in performing his appraisal.  See Fed. R. Evid. 702(c).  Although his ‘brief guidelines’ list nine factors that he believes affect valuation, he does not explain how he applied or weighted those factors when attaching a dollar figure to each horse.  His report thus fails to establish that he ‘reliably applied the principles and methods to the facts of the case.’  See Fed. R. Evid. 702(d).” 2019 T. C. Memo. 64, at pp. 6-7.

True, Mitch and Les handed over a thumbdrive with R’s database, which included thousands of horses. But which of those was owned by Bluestone when was left for IRS’ counsel to sort out four days before trial. No go with that. Can’t provide evidence so close to trial that effective cross-examination isn’t possible.

But experts can testify based on their experience, can’t they? Sure, says Judge Scholar Al. But “While an expert can be qualified on the basis of his experience, he cannot cite his experience as the sole basis for putting a dollar value on a horse.  He must show his work, viz., the data he considered and the methodology he applied to produce his results.” Order, at p. 11. (Citation omitted).

Unlike Sylvia Plath’s “Mad Girl,” the expert can’t testify “I must have made it up within my head.”

Mitch and Les say R “…regularly used spreadsheets resembling those attached to his expert report to supply information to clients of his bloodstock agency.  But what is acceptable in a commercial context is not necessarily reliable as expert testimony in Federal court.  A person intending to bid on a horse may rely on a dollar estimate supplied by his blood stock agent, much as a person intending to bid on a house may rely on a dollar estimate supplied by his realtor.  In neither case may the customer be interested in how his agent came up with that number.  But under our adversarial system, the Federal Rules of Evidence impose higher standards for expert witness testimony in Federal court.  See Fed. R. Evid. 702, Adv. Comm. Note to 2000 Amendment (‘The trial court’s gatekeeping function requires more than simply “taking the expert’s word for it.”’ (Citation omitted). Order, at p. 11-12.

Finally, the immortal aphorism of the late Justice Potter Stewart, which appeared on this site just a couple weeks ago (hi, Judge Holmes), gets a play. But it doesn’t get it for Judge Scholar Al.

“Finally, petitioners assert that the valuation of horses is more art than science, citing Justice Stewart’s famous apothegm from a different context: ‘I know it when I see it.’.  This may be a practical approach to identifying pornography, but it is not, for the reasons we have stated, an acceptable approach to formulating expert appraisal testimony under the Federal Rules.  We accept petitioners’ point that an expert appraising a herd of horses need not necessarily supply, for each horse, the massive volume of data that courts customarily receive from experts appraising real estate.  But the horse appraiser must still explain how he got to his results, which requires that he show the data he considered, the methodology he applied, and the manner in which he applied his methodology to reach his valuation outcomes.  Without that information, the Court has no means of examining whether the report ‘rests on a reliable foundation and is relevant to the task at hand.’” Order, at pp. 12-13 (Citations omitted).

R gets left at the starting gate.

I long ago entitled a blogpost “Lawyers Can’t Add,” and I plead guilty. Perhaps some numerate reader can verify my arithmetic, but the triennial enrollment fee for EA’s and ERPAs has been increased from $30 to $67.

Granted, that won’t break the bank. Only two people bothered to comment, one pro, one con. But ya gotta love RPO’s accounting. Take a look.

Those who register and operate motor vehicles in Our Nation’s Capital display the above caption on said vehicles as required by law. And even though a quick docket search of Fritz Steven Schwager, Docket No. 17954-18L, filed May 31, 2019, reveals that he requested trial in MI, where presumably he registers whatever motor vehicles he has, he might wish to adopt the DC motto.

But Judge Patrick J. (“Scholar Pat”) Urda isn’t having it in his courtroom.

Fritz sent in a document “… styled as ‘petitioner’s attorney in fact appearance.’ That document purported to be an entry of appearance by Edwin Victor Nassar, who is not an attorney, on behalf of Mr. Schwager to act as Mr. Schwager’s representative in this case.” Order, at p. 1.

Scholar Pat did some quick research, found Mr. Nassar wasn’t a Tax Court admittee, and bounced Fritz’s paper.

Fritz, following the well-known but often deleterious “blue pill” formula (“if one doesn’t work, try three”), ripostes as follows.

“In three filings…, Mr. Schwager asserted that he had a constitutional right to counsel of his choice, that he was confident in Mr. Nassar’s ability to represent him, and that our decision worked a deprivation of his due process rights.” Order, at p. 2.

As I’m sure my ultra-sophisticated readers are well aware, brilliance is not the standard for representation. Ya gotta be admitted.

“Mr. Schwager’s arguments are meritless. The Sixth Amendment right to counsel does not extend to Tax Court proceedings.” Order, at p. 2. (“Somber reasoning and copious citation of precedent” omitted).

Nothing stops Mr. Nassar from taking the exam next November, finding two (count ’em, two) sponsors, and stumping up the $30 registration fee if he passes. But absent that, nuthin’ doin’.

“Moreover, Congress has explicitly equipped this Court with the authority to govern those who practice before it. See sec. 7452 (providing that the representation of taxpayers before this Court is to be conducted ‘in accordance with the rules of practice prescribed by the Court’). This statutory provision comes against the backdrop of federal courts’ broad (and oft-recognized) authority to regulate those before them. See, e.g., Goldsmith v. U.S. Bd. of Tax Appeals, 270 U.S. 117, 122-123 (1926) (concluding that predecessor to the Tax Court possessed the implied authority to regulate the admission to practice before it); Pappas v. Philip Morris, Inc., 915 F.3d 889, 894-895 (2d Cir. 2019) (noting that ‘[f]ederal courts have discretion to adopt such rules as are necessary to carry out the business of the courts * * * includ[ing] the regulation of admissions to a court’s own bar”); Matter of Abrams, 521 F.2d 1094, 1099 (3d Cir. 1975) (discussing the ‘unquestioned principle’ that federal courts have the power ‘to prescribe requirements for admission to practice before that court’).” Order, at p. 2.

Judge Scholar Pat assures Fritz that he ”…will have a full opportunity to be heard. But because Mr. Nassar has not been admitted to practice in this Court, he cannot serve as Mr. Schwager’s representative in this case.” Order, at p. 2. And Fritz can file his own papers.

Judge Goeke has inherited the ongoing never-ending story of John E. Rogers and Frances L. Rogers, et al., 2019 T. C. Memo. 61, filed 5/30/19. Now the story appears to be nearing its end, as we have to do today with the never-ending penalties which IRS wishes to bestow on Mr. and Mrs. Rogers.

Tax Court already blew off the Rogers’ phony deals; see my blogpost “Will It Never End?” 4/17/18, wherein I was reduced to silence by Judge Goeke’s 134-page deconstruction of the Rogers’ neighborhood. But the 20% chops (accuracy and negligence) remained.

Frances wanted innocent spousery, but this went down, as more particularly bounded and described in my blogpost “When All Else Fails – Redivivus,” 7/3/17, and Frances paid. But there were penalties assessed at partnership level, and on brief this time Frances claims Section 6751(b) Boss Hossery, which IRS doesn’t have. So Frances wants out from that set of chops.

No dice, says Judge Goeke.

“However, Mrs. Rogers now seeks to raise section 6751(b) noncompliance against penalties determined in a partnership-level case.  We lack jurisdiction to consider penalties in a partner-level case that were determined at the partnership level.  The Commissioner’s noncompliance with section 6751(b) is a partnership-level defense.  Parties in a partnership-level case may raise noncompliance with section 6751(b) as a defense.  However, a partner may not raise section 6751(b) noncompliance as a defense at the partner level for penalties previously determined at the partnership level.  Under section 6230, partner-level defenses are ‘those that are personal to the partner or are dependent upon the partner’s separate return and cannot be determined at the partnership level.’  Sec. 301.6221-1(d), Proced. & Admin. Regs.  The tax treatment of partnership items and the applicability of any penalty, addition to tax, or additional amount that relates to an adjustment to a partnership item is determined at the partnership level.  Secs. 6221, 6226(f).  Accordingly, Mrs. Rogers is not entitled to a refund of penalties paid with respect to the partnership item adjustments.” 2019 T. C. Memo. 61, at pp. 22-23 (Citations and footnote omitted).

But the footnote is very interesting, because it states (in pertinent part, as my expensive colleagues say), “Sec. 6015 assumes that there is an existing joint tax liability; it does not consider whether the underlying joint tax liability exists.  The requesting spouse cannot seek review of preassessment procedures. Id.  Accordingly, it is unclear whether we would have jurisdiction under sec. 6015(e) to consider sec. 6751(b) compliance.” 2019 T. C. Memo. 61, at p. 23, footnote 8. Will the Graev never close?

Now IRS has eight (count ‘em, eight) lawyers on this case at present, and the number of RAs, SOs, and various supervisors would make up a full-strength infantry platoon, so Judge Goeke has to mix-and-match the Boss Hosses, and sift the lot.

The point of my headline (and my readers will doubtless say “There is a point? How quaint.”) is that a penalty to do with COGS on one of the Rogers’ real estate deals was brought in by IRS’ various counsel.

“The record also establishes section 6751(b) compliance for the section 6662 penalty on …COGS adjustment and the section 6662A penalty for the …adjustment initially determined by respondent’s trial attorneys.  Respondent asserted the penalty attributable to the COGS adjustment for the first time in the amendment to the answer.  Both Attorneys C and P worked on the amendment, but the record does not identify which attorney made the initial determination.  Petitioners did not address this lack of clarity on brief.  AAC C approved the penalty in writing by initialing and dating a draft of the amendment to the answer.  AAC C was both attorneys’ supervisor. Accordingly, we find that respondent satisfied his burden of production for section 6751(b) compliance regardless of which attorney initially determined the penalty.

“AAC C also approved Attorney C’s initial determination of the section 6662A penalty through her emails to the IRS Technical Services Unit.  Section 6751(b) does not require written supervisory approval in any particular form. Moreover, it does not explicitly require a signature; it requires the penalty be ‘personally approved (in writing)’.  Sec. 6751(b)(1); see Graev III, 149 T.C. at 488-489 & n.3 (a supervisor’s initials were sufficient writing).  Accordingly, we find that AAC C’s emails satisfied respondent’s burden of production of section 6751(b) compliance.” 2019 T. C. Memo. 61, at pp.24-25 (Citations omitted).

So beware the amended answer, practitioner. Just be prepared for an off-the-cuff Boss Hoss sign-off.

If tracing basis through a daisy-chain of 1031 like-kind exchanges involving multiple properties is your kind of amusement, check out Charles K. Breland, 2019 T. C. Memo. 59, filed 5/29/19. Judge Pugh shows you what happens if you don’t.

Unfortunately, with burden of proof not shifted from Chas to IRS, Chas’ claimed basis of bortscht (please pardon this arcane technical term) gives way to what was actually paid (even though Chas apparently jumped all the hurdles that Section 1031 imposes).

Judge Pugh: “Respondent does not dispute that petitioners paid $322,720 in cash and borrowed $6,720,000 for their acquisition of Dauphin Island 1 or that their cost basis in Dauphin Island 2 was $5,613,287.  Respondent contends that petitioners have not substantiated their $751,953 basis in Dauphin Island 1, carried over from [relinquished property they swapped for the Dauphins] through two successive like-kind exchanges.  The only evidence of petitioners’ basis in [relinquished property] is an excerpt of a depreciation schedule from petitioners’ 2003 Form 1040; they did not offer a settlement statement or deed. But taxpayers cannot rely on tax returns to substantiate a tax item.  The parties’ stipulation also expressly noted that the 2003 return was not audited; thus, this is not a situation where respondent has already reviewed the underlying transaction.  We conclude that petitioners have not adequately substantiated their basis in [relinquished property] or, in turn, the basis that they carried over to Dauphin Island 1.” 2019 T. C. Memo. 59, at p. 12. (Citation omitted).

Well, Chas got foreclosed and went bankrupt, but as this was in 2008, he wasn’t alone.  IRS wants to claim COD for the deficiency between what Chas’ lender got on the “public outcry” at the Courthouse door in Mobile County, AL, and the balance due on Chas’ defaulted mortgage note.

If nonrecourse, that would be a snap. But this loan was recourse, the lender put in a claim on Chas’ post-foreclosure bankruptcy, and Chas claims the lender’s claim got paid in the Ch 11 bankruptcy. Judge Pugh takes as much judicial notice as she can, but the whole bankruptcy file isn’t in evidence, so at best all she can find is that the lender made a claim.

But IRS founders on the “clear and convincing evidence” test to prove the amount publicly outcried wasn’t FMV, and therefore the amount paid was the amount realized by Chas was the outcried.

Chas’ capital loss is a lot less than he claimed.

Takeaway- Doing basis calculations on a multi-property 1031 daisy-chain is a real pain. But not doing them, and not preserving them, is worse.

This is the third trip to USTC for Robert A. Oliveri, 2019 T. C. Memo. 57, 5/28/19, the flying evangelist. I will skip Judge Colvin’s exposition of the numerous defects in Robert O’s alleged deductions, to focus on a requisite for a trip to evangelize or otherwise spread the good news.

“To be deductible under section 170, a contribution must be ‘to or for the use of’ a charitable organization.  In order to meet this requirement, the expense must be subject to coordination, supervision, or oversight by the organization.” 2019 T. C. Memo. 57, at p. 24. And Judge Colvin quotes The Catwoman, Jan Elizabeth Van Dusen. See my blogpost “The $250 Misunderstanding,” 6/3/11.

Well, Robert O’s outfit, the Brothers and Sisters of the Divine Mercy (BSDM) is a 501(c)(3), and is “…responsible to the Pontifical Council of the Laity, a dicastery of the Catholic Church.  Nothing in the record shows that the Catholic Church recognized or had any formal relationship to BSDM.” 2019 T. C. Memo. 57, at p. 4.

But Robert O’s flying evangelism founders on his logbook (which shows “Training”), his personal expenditures, and the want of a commission from BSDM to go forth to wherever. Like an illustrious predecessor, he needs a commission from his high command to go forth. He doesn’t have it.

Very Much Off-Topic

Spoiler Alert: This is a rant,  off-topic, and perhaps even quasi-political.