To the Constitution

Not landscape architecture, but another effort to get around Section 280E and get deductions for pottery. And Judge Goeke is buying none of it. But Judge David Gustafson obliges all and sundry with a rip-roaring dissent, to take the lead from Judge Holmes in The Great Dissenter stakes.

Here’s Northern California Small Business Assistants Inc., 153 T. C. 4, filed 10/23/19. The NoCals were potters who claimed Eighth Amendment “excessive fines” clause protects their deductions from IRS’ depredations.

No facts in dispute, so the NoCals want summary J. They get it; IRS wins, and all the judges say they should. The one common point of majority, concurrences and dissent is that the NoCalls didn’t establish excessivity as to them.

Preliminarily, does the Eighth Amendment apply to corporations? Well, the Supremes haven’t said, although maybe so some Justices thought it might could do. Anyhow, Judge Goeke ducks that one, because whether it does or not, disallowing those deductions isn’t an excessive fine.

The Sixteenth Amendment indisputably allows taxing gross income, from whatever source derived. Disallowing pottery deductions and credits taxes no more than gross.

“Deductions from gross income do not turn on equitable considerations; rather they are pure acts of legislative grace, the prudence of which is left to Congress.  Congress is free to grant, restrict, and deny deductions as it sees fit.” 153 T. C. 4, at p. 9 (Citations omitted).

This disallowance is not like the post-Prohibition Federal excise tax on sellers of liquor in States that banned alcoholic beverages via the local option clause in the Twenty-First Amendment. There, the Feds had no interest in punishing State law violators, so the Tenth Amendment put paid to that.

“In contrast, section 280E is enacted under Congress’ unquestionable authority to tax gross income pursuant to the Sixteenth Amendment and is directed at persons who operate a business in violation of State or Federal law.  See sec. 280E (‘[S]uch trade or business * * * consists of trafficking in controlled substances * * * which is prohibited by Federal law or the law of any State in which such trade or business is conducted.’).  Section 280E is directly tied to Congress’ policy objective to limit and deter trafficking in illegal controlled substances.” 153 T. C. 4, at pp. 10-11.

And the disallowance of credits and deductions to druggisti  goes back 37 (count ‘em, 37) years. Every attempt to let the deductions in, whether legislatively or judicially, has cratered.

Congress has the power and has Constitutionally used it.

The NoCals claim that only their Section 162 ordinary-and-necessary deductions are barred, not their Section 164 SALTs nor their Section 167 depreciation. But Judge Goeke says “Read line one of Section 280E. No deduction or credit shall be allowed.” No means no.

Finally, the NoCals say they aren’t “trafficking,” as that means something nefarious or sinister, and boo is legal in the Golden State. It might be CA-legal, says Judge Goeke, but you’re selling it, and that’s trafficking enough for him. And also for three (count ‘em, three) other Tax Court cases I’ve blogged, Martin Olive, Canna Care and PMAC.

“Our precedent is unambiguous.  Congress, rather than this Court, is the proper body to redress petitioner’s grievances.  We are constrained by the law, and Congress has not carved out an exception in section 280E for businesses that operate lawfully under State law.  Until then, petitioner is not entitled to deduct expenses incurred in the operation of its drug-related business.” 153 T. C. 4, at p. 16.

Judges Thornton, Marvel, Paris, Kerrigan, Buch, Lauber, Nega, Pugh, and Ashford agree.

Well, maybe not so unambiguous, because there are 33 (count ‘em, 33) pages of concurrences and dissents.

Judge Patrick J (“Scholar Pat”) Urda sits this dance out.

Judge Albert G (“Scholar Al”) Lauber concurs to man’splain to Judge Elizabeth A. (“Tex”) Copeland that Section 280E deterrence to pottery isn’t a penalty. There’s lots of deterrents in 26USC. Here’s a couple: “Sections 4911 and 4912, for example, impose excise taxes on improper expenditures by public charities.  Section 4941 imposes an excise tax on self-dealing by private foundations.  Sections 6671 through 6720 impose assessable penalties for such activities as promoting abusive tax shelters (sec. 6700), aiding and abetting understatements of tax (sec. 6701), failing to furnish information about reportable transactions (sec. 6707), and furnishing fraudulent statements to various parties (secs. 6690, 6720).  And section 6663(a) imposes a civil fraud penalty equal to 75% of an underpayment of tax due to fraud.  These penalties can be extremely large relative to the conduct meant to be deterred.  See, e.g., sec. 4941(b)(1) (imposing tax equal to 200% of amount involved); sec. 6700(a) (imposing penalty equal to $1,000 per occurrence or 100% of gross income derived from activity); sec. 6707(b) (imposing penalty of $200,000 or up to 75% of gross income derived from activity).” 153 T. C. 4, at p. 18. Nobody ever said any of these fell foul of the Eighth Amendment. Judges Goeke, ex-Ch J L Paige (“Iron Fist’) Marvel, and Judge Ashford agree.

But Taishoff says none of the misdeeds cited by Judge Scholar Al is expressly permitted by State law, and they all directly impact the integrity of the Federal fisc, Judge. Pot sales don’t.

Judge Morrison, backed up by Ch J Maurice B (“Mighty Mo”) Foley, concurs as to result, but doesn’t care if the Eighth Amendment applies to corporations, nor whether Section 280E is a fine, because even if it were, it isn’t excessive as to the NoCals. Therefore, they’re cool with summary J.

Judge Elizabeth A. (“Tex”) Copeland says substance over form. This is a fine because it’s punitive. It doesn’t matter what you call it. It’s overbroad, a sweeping denial, attacking every deduction, and expressly enacted to stifle the drug trade. It hasn’t anything to do with revenue-raising. And whether the Eighth Amendment applies to corporations is nothing to the point. Judges Gustafson and Gale agree.

David Gustafson, going for The Great Dissenter title that Judge Mark V Holmes (inexplicably absent from this throwdown) seems to be vacating, agrees that the NoCals didn’t show the pate-whanging they got was “excessive.”

But the Sixteenth Amendment doesn’t create a free-fire zone for Congress to blast whatever activity it doesn’t like. There’s still the Fifth Amendment, and the First. And definitely the Eighth.

Section 280E taxes more than income; while COGS and Section 481 slide under the tag, wiping out the 160s goes to the bottom line. Remember, taxable income equals accretion to wealth; if those deductions  are wiped out, the NoCals and their fellow potters are being taxed on more than the accretion to wealth.

The prohibition on excessive fines goes back to the English Bill of Rights of 1689, when they swapped Jamie Two for Dutch Billy. It’s there to prevent excessive punishment for an illegal act. That’s what this is, no matter what gloss you put on it. Protection against governmental piling-on is a basic right of a free people.

And prior appellate learning is wide of the mark: they never did a proper Eighth Amendment analysis.

“I would hold that this wholesale disallowance of all deductions transforms the ostensible income tax into something that is not an income tax at all, but rather a tax on an amount greater than a taxpayer’s ‘income’ within the meaning of the Sixteenth Amendment.  Accordingly, I would hold that the Sixteenth Amendment does not permit Congress to impose such a tax and that section 280E is therefore unconstitutional.” 153 T. C. 4, at p. 33. Judges Gale and Copeland are on board with this.

Remember, before you toss this as a dissent, it was Judge Gustafson’s dissent in Graev that triggered the famous Section 6751(b) Boss Hoss kerfuffle and silt-stir that has resounded down the corridors of time.

I hope the NoCals have enough money left to appeal. I’d love to see what the Supremes do with this.

Ya gotta give ‘em credit, Dave Greenberg and Will Goddard are stayin’ alive for fourteen (count ‘em, fourteen) years in USTC, even after they lost the trial, trying to relitigate their losses in other courts and making more motions than “a one-legged cat in a sandbox” (I cribbed that one from a judge in KY).

See my blogpost “Delay of the Game – On Steroids,” 9/27/19.

Now, as the Rule 155 beancount is chuggin’ along, David B. Greenberg, et al., Docket No. 1143-05, filed 10/23/19, has Dave and Will and the bunch of als trying on a fresh conundrum for Judge Mark V Holmes.

Once again, TEFRA raises its ghostly head.

Dave and Will and the als want Judge Holmes to bukh “…on a supposed distinction between ‘converted items’ (partnership items originally, but converted under TEFRA into nonpartnership items), and ‘Excluded Items’ in a ‘converted items notice of deficiency’ (items that aren’t converted into nonpartnership items by a converted items notice of deficiency because they are already nonpartnership items). Their latest motion would have us distinguish between ‘Excluded Items’ in a nonpartnership item notice of deficiency and ‘Excluded Items’ in a converted items notice of deficiency.” Order, at p. 1.

Like I said, give ‘em credit. While the rest of us were watching Yanks v ‘Stros, or Sugimoto Bunraku Sonezaki Shinju at Jazz at Lincoln Center, or just having a couple frosties with our chums (hi, Judge, sorry I can’t buy you one), Dave and Will and their trusty attorney SRM were dreaming up this stuff.

Judge Holmes excludes the Excludeds.

“This is something we won’t do without some precedent, Code section, or regulation that tells us to do so. The late TEFRA procedural rules were complicated enough without trying to tease out a jurisdictionally significant distinction between nonpartnership items that became nonpartnership items because they were converted into nonpartnership items, and nonpartnership items that were always nonpartnership items because the Code and regs defined them to be nonpartnership items. One way or another in these consolidated cases we had jurisdiction to redetermine all the contested items because, one way or another, they were all nonpartnership items.” Order, at p. 2.

Seems that formerly partnership items became nonpartnership when some of the crew got indicted. But whatever, they’re nonpartnership, so show your numbers.

But whatever, the story will go on. And on.

“The Court notes that petitioners have now more than adequately preserved this issue for appellate review.” Order, at p. 2.

Now let’s see if they can post a Section 7485 bond.

That’s Peter E. Hendrickson, MF (Master Frivoler), trying it on once again with Judge Buch in Peter E. Hendrickson & Doreen M. Hendrickson, Docket No. 6863-14, filed 10/22/19. Pete wants a Rule 162 vacation of the decision Judge Buch laid on him, nailing him for deficiencies and chops.

Pete claims IRS is precluded from hitting him for deficiencies, because they slugged him in USDCEDMI for an erroneous refund and enjoined him from further frivolity. That was a roaring success. No, Pete, two different claims, no claim preclusion.

Next Pete claims IRS never asserted Section 6651(f) fraudulent nonfiling, except they did in the Letter 886A that accompanied the SNOD.

Pete claims the SFRs that gave rise to the SNOD were a fraud on Tax Court. That gets Pete the good old “somber reasoning and copious citation of precedent” wave-off.

While most pitchers by this point would have handed the manager the baseball, left the mound, showered, put on the glamour vines, and headed downtown to chat up the local talent, Pete is still in there pitchin’.

Pete claims he should’a gotten dependency exemptions for Doreen and the little Hendricksons. Judge Buch saved the best for last.

“The Hendricksons are not entitled to dependency exemptions because they never preserved the issue. The Hendricksons never pled dependency exemptions and may not do so now. New issues that are not based on fraud, mistake, or lack of consent are not sufficient to vacate or revise a decision. Federal Rule of Civil Procedure 60(b) provides that a court may relieve a party of judgment upon the finding of newly discovered evidence. The presence of the Hendricksons’ minor dependent children during the relevant tax years is not newly discovered evidence to the couple. Nor is Mrs. Hendrickson newly discovered to Mr. Hendrickson.” Order, at p. 6. (Footnote omitted).

Sirius XM Connected Vehicle Services Holdings Inc. and Subsidiaries f.k.a. Agero Holdings Inc. F.K.A. CCAS Holdings, Inc. and Subsidiaries Consolidated Group, Docket No. 17641-18, filed 10/22/19, has worked out a way to resolve most or all of the key issues in its current dust-up with IRS. And Judge Albert G (“Scholar Al”) Lauber is down with this.

Only I, an humble blogger, an outsider looking in, have got a question.

The parties think a motion for summary J would do it, and each party should make one. Only Sirius goes first, and when IRS responds, as Rule 121(b) mandates, IRS can cross-move for summary J.

Now it is well-known that I am a great fan of summary J, so much that I will not cross-reference all my blogposts wherein I waxed lyrical on the subject.

But cross-motion? The Rules never mention cross motions, although it would be a good thing if they did. Rule 121 seems to require separate motions, individually labeled.

But I applaud Judge Scholar Al for cutting through an ambiguity, even though he does so only in an order that cannot be used as precedent.

Doesn’t Work for Whistleblowers

Vincent J. Apruzzese, 2019 T. C. Memo. 141, filed 10/21/19, claims that, in the course of suing the adm’rs/ex’rs of a certain estate, he turned up substantial undervaluation of estate assets, which had been sold for invalid installment notes.

IRS was about to “No Change” the 706, which was under audit, when Vince’s Form 211 swam into their ken.

IRS took Vince’s ammo and fired it, to the tune of $424K disgorged by the adm’rs/ex’rs. And IRS stumped up 22% thereof to Vince, admitting that, without Vince connecting the dots and shining the flashlight, the fisc would have folded.

So why is Vince suing? He’s not grousing about how much he got on this award. He’s claiming IRS could have gotten a lot more. So Vince wants Judge Vasquez to order IRS to squeeze the adm’rs/ex’rs harder, so that more goodies would fall to the fisc (and maybe a small piece to Vince).

Nonstarter.

Judge Vasquez: “While we have jurisdiction to review the Commissioner’s award determination, we do not have authority to ‘review the Commissioner’s determinations of the alleged tax liability to which the claim pertains.’  Nor do we have authority ‘to direct the Secretary to proceed with an administrative or judicial action.’ 2019 T. C. Memo. 141, at p. 9 (Citations omitted).

Vince got his award, and had no quarrel with the amount thereof.

It may be that the IRS attorney on the estate audit was a wee bit less than ultimately aggressive, but Judge Vasquez cannot second-guess him.

Of course, since IRS put five (count ‘em, five) attorneys on this barrel-shoot of a case, against Vince, who was pro se, mayhap IRS might want to consider putting a few more horses in harness on the Estate & Gift Stagecoach, and leave such cases as this to one attorney.

I can’t stress it often enough: THIS IS A NON-POLITICAL BLOG.

But sometimes keeping it that way makes my head ache.

I’ve been accused of making sardonic comments in the past. I neither affirm nor deny, and can only tell my accusers that, if the cliché fits, you know what to do.

But today Ch J Maurice B (“Mighty Mo”) Foley has, I’m sure unintentionally, pushed my long-standing resolution nearer the breaking point than it has gone in many a day.

Here’s State of New Hampshire, Docket No. 18493-19, filed 10/21/19. Yes, that’s the one and only Granite State, one of the Original Thirteen Stars on the Oriflamme of Our Great Republic. I haven’t a clue why the sovereign State has paid the sixty bucks at the 400 Second Street, NW, turnstile.

Anyway, Ch J Mighty Mo, no doubt overtaxed with inept pro ses and counsel of imperfect knowledge, and with a certain want of attention on the part of the flailing datestampers and hard-laboring intake clerks who guard the aforementioned turnstile, issued an order that must now be withdrawn.

“On October 11, 2019, petitioner filed a petition in this case. Due to an inadvertent clerical error the Order dated on October 16, 2019, ordered petitioner to file an Ownership Disclosure Statement by December 2, 2019.” Order, at p. 1.

Today, said order is “vacated and set aside.”

Who owns New Hampshire?

I wish Ch J Mighty Mo left that order in place. I think more than a few of the Granite State’s citizens, and even citizens far afield, might be interested in the disclosure statement. Perhaps it might be well to extend the reach of the order, so that we might get Form 6 for our own Empire State. Let’s see what parent companies, publicly held corporations, large partnerships, and limited liability companies own 10% or more of our State.

Pat Henry’s famous House of Burgesses 1765 showstopper gives rise to yet another dust-up about stamps and taxes. King George III would get a real good laugh out of this, since stamps and taxes were rather a specialty of his.

Veronica Lynn Hicks, Docket No. 9829-19S, filed 10/21/19, may be only running in a small-claimer, and IRS wants to toss her petition for late filing, but Ch J Maurice B (“Mighty Mo”) Foley would like to hear more about Veronica and her Stamp Act.

Unlike King George’s Stamp Act, Veronica utilized a computer. And she didn’t use Stamps.com or another private postageflogger. Veronica used USPS Click-N-Ship. But IRS’ answer didn’t discuss Pearson. My astute and wide-awake readers will of course remember Linc & Vic Pearson, and 7 Cir’s kick-out of Tax Court’s “only USPS postmark” rule for Section 7502 mailed-is-filed cases. What, no?

Then see my blogpost “Does Not The Wild Boar Break Cover Just As You’re Lighting A Weed?” 11/30/17.

OK, says Ch J Mighty Mo, IRS, discuss Pearson in the USPS Click-N-Ship context in your response to Veronica’s objection to your motion to toss.

Hint: Connect-Ya Communications won’t help you. They used USPS Click-N-Ship, but their label showed a date one (count it, one) day late. See my blogpost “Last Minute Fails to Connect,” 9/28/18.

As long as Tax Court refuses to allow online filing of petitions and amendments thereto, the Stamp Act will give me plenty of blogfodder.

References to the Taxpayer Bill of Rights (TBOR) are immaterial and maybe frivolous, right? Isn’t that what Judge Halpern said, as more particularly bounded and described in my blogpost “The Taxpayer Bill of Goods,” 4/17/19? And as repeated, realleged and restated in my blogpost “The Taxpayer Bill of Goods – Part Deux,” 6/20/19, wherein Judge Goeke berated The Jersey Boys for raising TBOR, no?

Well, comes now Ch J Maurice B (“Mighty Mo”) Foley, who allows that maybe one can mention the TBOR, which hitherto dared not speak its name in the precincts of 400 Second Street, NW.

Here’s Estate of John Hajdukovich, Deceased, Robert M. Hajdukovich, Personal Representative, Docket No. 13752-18, filed 10/18/19.

The PersRep’s intrepid Colorado counsel “… asserts that this Court has authority to consider violations of 5 U.S.C. section 706(2) and I.R.C. section 7803(a)(3) in the course of redetermining the deficiency asserted by respondent.” Order, at p. 1. That’s the Administrative Procedures Act for one thing, and TBOR for another.

IRS has the by-now-boilerplate response. “…even if the references to 5 U.S.C. section 706(2) and I.R.C. section 7803(a)(3) are merely part of petitioner’s claim under I.R.C. section 6213(a), any references to them should be stricken from the petition on the grounds that they are immaterial or frivolous.” Order, at p. 1. So when TBOR is mentioned even in passing, IRS has gone beyond arguing “mere recapitulation of existing rights” to “immaterial or frivolous.”

Taxpayer Bill of Goods on steroids.

Ch J Mighty Mo isn’t buying…yet. A Rule 52 strike needs showing of no possible connection to case and prejudice to wannabe striker.

“Respondent did not identify any prejudice from the references in the petition to 5 U.S.C. section 706(2) and I.R.C. section 7803(a)(3). At this stage of the proceedings, we cannot clearly conclude that these references have no possible relation to the controversy. In light of the high standard governing this matter, we will deny respondent’s motion without prejudice.” Order, at p. 2.

However, lest Colorado counsel celebrate by lighting up vegetation legal in that State, thereby developing a Rocky Mountain high, Ch J Mighty Mo counsels prudence.

“The denial of respondent’s motion without prejudice should not be interpreted as an evaluation of the merits of petitioner’s assertions regarding violations of5 U.S.C. section 706(2) and I.R.C. section 7803(a)(3). The Court has recently addressed 5 U.S.C. section 706(2) in Ax v. Commissioner, 146 T.C. 153 (2016) and the Taxpayer Bill of Rights in Moya v. Commissioner, 152 T.C. __ (Apr. 17, 2019) and in Atlantic Pacific Management Group, LLC v. Commissioner, 152 T.C. __ (June 20, 2019).” Order, at p. 2.

Moya and Atlantic Pacific are covered in my blogposts above captioned. You can find the Ax case in my blogpost “A Retrieved Reformation,” 4/11/16.

Motion to strike denied without prejudice.

Don’t Ask Tax Court For Help

Derrick Tartt needs to go to the Dominican Republic next month, and to the Cayman Islands in January. But Ch J Maurice B (”Mighty Mo”) Foley is not the one to ask for help in letting Derrick go.

Derrick has a wee problem. Readers of this my blog might recall that Derrick, sub nom (as my expensively-schooled colleagues say) Derrick Barron Tartt, owes the fisc a hefty bunch of income tax plus additions, against which Judge Lauber told him he could not offset his employment discrimination claims against the US gov’t. See my blogpost “Penalty Shots,” 9/3/19.

So when Derrick Tartt, Docket No. 16879-19P, filed 10/18/19, moves to speed up his Tax Court hearing so as to pry his passport from the grasp of the State Department, Ch J Mighty Mo isn’t the one to ask.

“Petitioner’s motion is most analogous to a Motion To Calendar and we will treat it as such.

“Petitioner’s request cannot be granted. The record in this case reflects that respondent (the IRS) has not yet filed an answer to the petition, and this case is not yet at issue. See Rule 38,Tax Court Rules of Practice and Procedure.” Order, at p. 1.

Of course, if he’s gotta go, Derrick can stump up the cash and spring his passport.

“Petitioner may wish to contact the IRS at the address and/or phone number listed in the letter attached to the petition to inquire about expediting payment of his seriously delinquent tax debt in order to secure his passport for his planned travels. Petitioner is further advised that general information concerning the litigation of a Tax Court case is posted in the Taxpayer Information section of the Court’s website at www.ustaxcourt.gov.” Order, at pp. 1-2.

So if you gotta go, but your passport is hung up, don’t try 400 Second Street, NW.

Edited to add, 11/1/19: Looks like Derrick is gonna go, after all. See Derrick B.Tartt, Docket No. 16879P, filed 11/1/19.

On a personal level, I liked Judge Mark V. Holmes before I ever met him. And when I met him at the Tax Court Judicial Conference a couple years ago (hi), I liked him even more, despite his grammatical lapses. But I can comment on a Judge’s orders in an impersonal way, being sure the comments are made and taken in good part.

Today I am surprised that Judge Holmes is not surprised by the behavior (or rather, non-behavior) of Yaroslav Kirik & Galina Kirik, Docket No. 21292-13, filed 10/17/19.* Seems like a corporation owned or controlled by Yar & Galina, and Yar & Galina themselves, were the subject of some criminal investigation. Since 2014, said criminal investigation seems to be on hold, no explanation given.

But after Yar’s & Galina’s counsel bailed a year ago, the lines of communication went dead.

“We have not been able to speak with petitioners since then, and they have not submitted updated contact information. We have no phone number or email address for either petitioner, and we ordered each petitioner to file updated contact information by April 19, 2019. They did not do so. In May we ordered them to show cause why we should not dismiss the cases for failure to prosecute. A check of the Court’s docket in this case shows that petitioners have still not responded to our order….” Order, at p. 1.

So Judge Holmes tosses Yar & Galina for want of prosecution.

Judge, with a $3.5 million decision, including Section 6663 fraud chops, plus interest from 2007-2009, hanging over them, are you surprised that Yar & Galina took off?

Reminds me of the old joke. If I owe you $500, I gotta worry; If I owe you $5 million, you gotta worry.

*Yaroslav Kirik 21292-13 10 17 19

Edited to add, 9/2/21: “Yar & Gal hired new counsel, and appealed the toss to 2 Cir. They lost.