With neither opinion nor designated hitter today, I turn to an oldie-but-goody, the two-advisor rule. For backstory, see my blogpost thus entitled, 6/23/16.

Again I acknowledge the advisor, whose name I have forgotten, from whom I stole this mantra: “Every taxpayer needs two advisors: one to tell her what the law is, and the other to tell her what she wishes the law was. Then she can choose whose advice to follow.”

Today we have Jessie Daniel McDonald, Docket No. 24295-16, filed 10/9/18. No advisor is stated for Jessie, but her case sounds like one of the kind exemplified by the aforesaid.

Judge Albert G (“Scholar Al”) Lauber states Jessie’s case simply.

“The sole issue in this case is whether petitioner had unreported Social Security income…. After the IRS issued the notice of deficiency, petitioner filed an amended return…admitting receipt of taxable Social Security benefits. On the amended return she reported taxable Social Security benefits of $8,764 and additional tax owed of $1,313.” Order, at p. 1.

When IRS moved to toss Jessie for want of prosecution, and Judge Scholar Al ordered Jessie to respond, she responded thus: “… petitioner submitted a letter that we filed as Petitioner’s Response to Order…. She offered no explanation as to why she failed to appear for trial…. She asserts that she objects to the entering of a decision because she is over the age of 70 and thus ‘exempt’ from taxation of Social Security income.” Order, at p.1.

I caution my readers against relying on Jessie’s litigating position, however much I wish it were the law. Being on the downslope of the age of 70, it would brighten my declining years.

Judge Scholar Al, however, is not buying.

“There is no legal basis for petitioner’s assertion that her age entitles her to an exemption from taxation of Social Security income. See I.R.C.§§61(a),86(a). She admitted that she received taxable Social Security income by filing an amended return reporting it. And she admitted that she had a deficiency of $1,313… by showing on her amended return additional tax due in that amount.” Order, at p. 2.

He enters decision (minus chops) for IRS.

Inasmuch as United States Tax Court is closed today, 10/8/18, for a public holiday in the District of Columbia, the nomenclature of which has become politically controversial and therefore outside the scope of this avowedly nonpolitical blog, I am taking the day off. Barbecue, Blue Bell and bourbon will suffice, in the absence of full-dress T. C.s, learned Memos, Balzacian Sum. Op.s., and pithy designated hitters.

Enjoy the day off.

Giuseppe Verdi’s 1840 flop serves as the backdrop for a further look into the unsettling case of the unsettling partner. For reference, see my blogpost “Settle Order on Notice – To The Nonparticipant,” 10/26/17.

But here we have multiple nonsettlers, or maybe potential nonsettlers, because no one can find them. They were the TMP, each for a one-year term long since over, of the settling partnership some of whose eighteen (count ’em, 18) members are Capitol BC Restaurants, LLC, Banyan Equity Investors, Inc., Banyan Equity Investors II, Inc., Banyan Mezzanine Fund, LP, Banyan Mezzanine Fund II, LP, et al, Docket No.9281-17, filed 10/5/18.

Fortunately for the MIA TMPs, Judge David Gustafson, obliging as ever, is on the case, which is set for trial a week from Monday. IRS and the partners move to enter the decision document embodying the settlement.

Here’s the problem.

“To the motion is attached a certificate of service, alleging service on ‘petitioners and the following partners, including the Tax Matters Partner’, with a list of 18 names and addresses following. One of the names on the certificate of service is ‘Greg Morris / Tax Matters Partner’ (who the petition alleges is TMP for 2014) and another is ‘Richard Pawlowski’ (who the petition alleges is TMP for 2013).” Order, at p. 1.

But the trial reminders mailed by to Greg and Richard by the hardlaboring clerks at 400 Second Street, NW, came back “unable to forward.”

This troubles Judge Gustafson.

“Generally speaking, it is the duty of the TMP to apprise partners of events affecting their interests. The return of our mail to the TMPs suggests that the TMPs may similarly have not received the motion for entry of decision and may not be functioning in their capacity as TMPs.” Order, at p. 1.

So the trial is off, and IRS is directed to tell Judge Gustafson whether the Tax Matterers got served, and, if not, what to do.

May I suggest “last known address” mailing?

My colleague, correspondent and all-round good guy Peter Reilly, CPA, once again provides me with a heads-up, as Judge Urda’s mentor Judge Manion joins with Judge Barrett and District Judge Gettleman in affirming the late Judge David Laro’s thrashing of Exelon Corporation v. Com’r. The whole story is found as No. 17-2964, filed 10/3/18.

All y’all (I’m back in the Bayou City with nearest & dearest) will recall my blogpost “1031 and All That,” 9/19/16.

The deal was a much-slammed phony from the getgo, and Seventh Circuit goes 100% with the 175 pages of Tax Court’s exegesis after the 13-day trial.

Nice to see the 400 Second Street, NW, crew catch a break from Seventh Circuit. And again my thanks to Mr. Reilly.

Letitia Burns O’Connor and the late Dana Levy (before he became the late Dana Levy) properly reported the capital gain on the sale of “…family heirlooms, including art prints, wood bowls, and a handcrafted wooden rocking chair that Mr. Levy had purchased as a wedding present for his wife.” 2018 T. C. Sum. Op. 48, at p. 4.

Mr. Levy had Medicare and supplemental health insurance. Ms. O’Connor had not, so she availed herself of the much-contemned Affordable Care Act to the extent of $8K of advanced premium credit. Ms. O’Connor based her eligibility on the couple’s previous year’s tax posture.

Mr. Levy had terminal cancer and died during the year at issue. But between his Social Security payments (both the taxed and untaxed portions) and the capital gains (which Ms. O’Connor used to support herself and her son, as Mr. Levy clearly could not work), Ms. O’Connor blew past the 400% poverty lid for ACA advance premium credits.

Judge Goeke: “Petitioners’ [year-at-issue] return was prepared by their longtime return preparer. The return preparer did not prepare Form 8962, Premium Tax Credit (PTC), and petitioners did not attach Form 8962 to their return. Petitioners did not understand that they were required to determine the allowable premium assistance credit (allowable credit) on the basis of their income as reported on their [year at issue] return. They did not understand that they would have to increase their [year-at issue] tax liability if the advance payments of the credit exceeded the allowable credit as determined by their [year-at-issue] income. Petitioners qualified for the premium assistance credit for [the next two years].” 2018 T. C. Sum. Op. 48, at p. 5.

Ms. O’Connor claims she overstated the rocking chair by $3K. IRS says even if she did, she’d still be over the MAGI limit because of her late husband’s untaxed Social Security.

“Petitioners argue that we should exclude the capital gain from the one-time sale of the rocking chair from their modified AGI. They sold their family heirlooms to assist their son in paying his college tuition. The gain from that sale unfortunately made them ineligible for the premium assistance credit. However, section 36B(d)(2) does not provide an exclusion for a sale of a capital asset. Petitioners also argue for equitable relief from repayment of the credit. We are sympathetic to petitioners’ case. However, the Code provides no equitable relief in this instance.” 2018 T. C. Sum. Op. 48, at p. 8.

The ACA has received any amount of obloquy. It’s also received praise. In this place I won’t add more of either, except to say we have to do better than this.

Today’s installment of my “Don’t Ambush” series comes from Judge Cohen. Here’s Shane V. Robison & Robin S. Robison, Docket No. 25120-16, filed 10/3/18.

And as I’m about to go off to visit my nearest and dearest in the Bayou City, I wish Judge Cohen had designated this one, on a day when neither opinion nor designated hitter appears.

All y’all (I’m warming up) will remember Shane & Robin, of course. Well, if you don’t, see my blogpost “The ‘Goofy’ Regulation,” 6/19/18. Shane & Robin got tagged for passivity, so their heavy-duty ranching losses get suspended. Wherefore the deficiencies originally asserted by IRS get sustained.

But IRS claims they proved more on the trial, and want to conform pleadings to proof. IRS claims that Judge Cohen bought IRS’ alternative passivity (Section 469) argument, but not their hobby loss (Section 183), which was “unforeseeable.” Order, at p. 1.

No, says Judge Cohen, I did warn y’all that passivity was in play.

“That opinion was consistent with the Court’s comments and directions regarding briefing made at the conclusion of the trial on September 20, 2017, page 290 of the transcript of proceedings. Although the Court is not suggesting bad faith on the part of respondent, justice in this instance favors petitioners in that increasing the deficiency and the associated penalties unfairly and belatedly raises the stakes of the litigation.” Order, at p. 1.

So Shane’s & Robin’s numbers are what the decision says. And those numbers aren’t small, around $480K, without interest, even though IRS conceded the chops.

I can’t see why it’s “unforeseeable” that a court will buy any of your arguments, unless the argument is totally unsupportable. In which case you may have more problems than conforming your pleadings to the proof.

I’m sure the phrase set forth at the foot hereof has long since been discarded, and anyone using it marked as antique, but it’s all I can use for Ch J Maurice B (“Mighty Mo”) Foley’s disposition of two nonpayments today.

No, these aren’t landlord-tenant cases; those are found in State court. This is nonpayment of the sixty buck small blind in Tax Court.

First up, Michaeljon Murphy, Docket No. 12755-18, filed 10/2/18. Michaeljon was told back at the end of June to amend his petition and pony up, but didn’t. So Ch J Mighty Mo tells Michaeljon to throw in the sixty Georges or a waiver, and the amended petition, by 10/22/18, or get tossed.

And he sends Michaeljon a Form 2 amended petition blank to speed him on his way.

Compare and contrast with Guy Michael Strohbeen, Docket No. 18716-18, filed 10/2/18.

“The petition in this case was filed on September 21, 2018. The Court’s $60.00 filing fee in this case was not paid. See I.R.C. sec. 7451. Because petitioner has failed to pay the filing fee, it is ORDERED that this case is dismissed.” Order, at p. 1.

Michaeljon gets four months plus a form, and Guy Michael gets less than two weeks?

Judge, whass up wit’ dis?

Were I a punster (Heaven forfend!) I might suggest we sing a chorus of Das Lied von der Urda to welcome the newest designee to the Tax Court bench, Judge Patrick J. Urda.

The Tax Court website, apparently taken unaware by Judge Urda’s appointment last week, has no biography, so I will crib one from the Internet to try to make amends for the first sentence hereinabove set forth.

Judge Patrick J. Urda, was born August 29, 1976, and received his Bachelor of Arts degree in classics, summa cum laude, from the University of Notre Dame, where he was inducted into Phi Beta Kappa. He received his Juris Doctor from Harvard Law School. He spent three years in private practice and clerked for Judge Daniel Anthony Manion on the Seventh Circuit Court of Appeals.

Note Judge Albert G (“Scholar Al”) Lauber is also an honors graduate in classics.

Judge Urda served as counsel to the Deputy Assistant Attorney General in DOJ Tax Division, litigated over eighty (count ‘em, eighty) tax appeals, appearing in all CCAs, appeared before the Supremes, and was a five-time winner of DOJ Tax Division’s distinguished attorney award. He received IRS’ Michael Rogovin award.

Let’s all give a hearty welcome to Judge Patrick J. (“Scholar Pat”) Urda. I look forward to great opinions.

Well, that’s the question for Richard M. Hellmann & Dianna G. Hellmann, et al., Docket No. 8486-17, filed 10/1/18.

The issue for Rich, Di and the als is whether their family investment operation (hereinafter “Hellmannco”) is a Lender; that is, entitled to the same treatment as Lender Management, LLC.

If you’ve forgotten Lender and the Section 162 vs Section 212 deduction issue for family investment operations, see my blogpost “All in the Family – Part Deux,” 12/13/17.

Hellmannco claims it’s in the trade or business of running a mutual fund. IRS says the operation is not a trade or business, but an “activity ‘for the production or collection of income’ or ‘for the management, conservation, or maintenance of property held for the production of income,’ within the meaning of section 212.” Order, at p. 2.

And of course Hellmannco gets all its business deductions if it is a trade or business, but if it’s a mere “activity” the members (and Hellmannco is an LLC, presumably box-checked as a partnership) get hit with the 2% AGI floor for the Schedule A miscellany, the Schedule A phaseout, and AMIT.

And with the 2017 Jobs Creation and Tax Act, Schedule A miscellaneous deductions don’t look so good for this year and out to 2026. You can’t take them until 2026, so the suspension of the Schedule A phaseout doesn’t help the Hellmannco crowd. They won’t figure in AMIT either.

“These cases appear to resemble Lender Management in some respects, but not in others. [Hellmannco] is a family office that managed investment assets for four family members. All four family members resided in the Atlanta metropolitan area and appear to have been on good terms. [Hellmannco] received performance-based compensation keyed to the success of the investments it made. One investor… appears to have had authority over day-to-day investment decisions. But here, unlike in Lender Management, all of the other investors were also owners of the management company, with each investor holding a 25% profits interest in [Hellmannco].” Order, at p. 3. (Name omitted).

Remember, the Lender crowd was spread out, and hated one another. And the Boss Hoss of the Lender mutual fund got 99% of the profits therefrom, but only had a small piece of the action in the portfolio.

In the end it’s facts & circumstances. Did the management entity add value, and personalize investment advice to the individual members (“know your customer”)? Most importantly, were the profits from the management arm paid over to the members of the investment arm in the same proportion as their interests in the investment arm?

“In cases such as these, an important question is whether the owners of the family office are ‘actively engaged in providing services to others,’ Lender Management, at *26, or are simply providing services to themselves. See Dagres, 136 T.C. at 281 (‘Selling one’s investment expertise to others is as much a business as selling one’s legal expertise.’). Here, each family member had a 25% profits interest in [Hellmannco]. If each family member (for example) also had an aggregate 25% interest in the assets under management, there would be perfect proportionality between the two streams of income. In that event, it would not matter how [Hellmannco] was compensated, because that compensation, once distributed ratably to the four owners, would simply replace investment income that each person would otherwise have derived from the investment portfolios. That was not the case in Lender Management, where one family member had a 99% profits interest in the management company, but held only minority interests in the assets under management. The facts currently in the record do not enable the Court to assess the degree or proportionality (or lack thereof) here.” Order, at p. 4.

So while Judge Albert G (“Scholar Al”) Lauber lays out a laundry list of questions for Hellmannco and IRS to answer, as to ownership, management, operation, services, and portfolio composition of Hellmannco, the real question is the old question: “Who got the money?”

This well-known rhetorical technique does not serve IRS very well in Semere Misgina Hagos, Docket No. 2018 T. C. Memo. 166, filed 10/1/18.

Judge Goeke shreds Seme’s deductions for nonsubstantiation. But back in April he told Seme and IRS to do a Branerton-style play-nice to resolve the Section 6751(b) Boss Hoss reopener IRS wanted so as to stick Seme with the Section 6662(a) accuracy chops. And let him know how it all comes out.

Seme’s attorney bails at this point, and no one objects, so Judge Goeke lets him out. I might mention Seme or his attorney tried a Battat recusal that flunked. For Battat, see my blogpost “Necessity Knows No Law,” 2/6/17.

But neither IRS nor Seme tells Judge Goeke anything about their efforts to resolve the reopener.

“The Court issued a second order seeking a response on the Graev issue.  In response to this second order respondent simply asserts that the Court should reopen the record.  Given respondent’s failure to respond to our order of April 4, 2018, to seriously seek an agreed resolution of the evidentiary issue, and to address the issues raised in petitioner’s objection filed to the motion to reopen the record, we decline to reopen the record and hold that respondent has failed to carry the threshold burden for the Court to sustain the penalty.” 2018 T. C. Memo. at pp. 8-9.

Play-nice beats dogmatic assertion every time in Judge Goeke’s courtroom. And I wouldn’t bet too many quatloos that it works too well in any other courtroom.