Like Judge Ruwe in my blogpost “Amen, Judge Posner,” 12/22/16, Judge Foley eschews factors, “somber reasoning and copious citation of precedent” and the usual laborious trudge through Reg. 1.183-2 (which Judge Posner characterized as “goofy”) in Joy Ford, 2018 T. C. Memo. 8, filed 1/25/18.

This my blog comes to you late due to hospitality at the annual meeting of the New York State Bar Association (thanks again, Steve), and intermittent connectivity breakdown from the Glasshouse website, being laboriously restored by the Second Street, NW Genius Bar.

Joy is a former country music recording artist, who, with late husband Sherman buys, and thereafter due to trust finds and brokerage account pours copious quantities of money into, Bell Cove Club in Hendersonville, TN. This is a country music showcase for songwriters and performers, to enable and invigorate the music Joy so much loves.

Admission charges and snack and beverage sales don’t begin to cover payments to the wannabes and headliners, and general operating costs. And her recordkeeping was a wee bit casual.

“Petitioner maintained incomplete handwritten ledgers and sporadically retained receipts relating to Bell Cove’s expenses. Her records, however, bore no relationship to the income and expenses reported on her returns.” 2018 T. C. Memo. 8, at p. 3.

Joy talked to a television producer to try to do a show from the club, but that was just talk, and Joy didn’t follow the advice of business experts who told her to run a proper seafood restaurant.

So Judge Foley don’t need no stinkin’ factors.

“In short, petitioner did not have the requisite intent to make a profit and thus may not deduct the losses in dispute. She had no expertise in club ownership, maintained inadequate records, disregarded expert business advice, nonchalantly accepted Bell Cove’s perpetual losses, and made no attempt to reduce expenses, increase revenue, or improve Bell Cove’s overall performance. Owning Bell Cove elevated petitioner’s status in the country music community, allowed her to further the careers of young performers, offered her weekly opportunities to interact with country music fans, and satiated her love for promoting country music. Petitioner earnestly devoted time and energy to Bell Cove but was primarily motivated by personal pleasure, not profit, and simply used the club’s losses to offset her trust and capital gain income.” 2018 T. C. Memo. 8, at pp. 5-6. (Citations and footnotes omitted).

Joy claimed some NOLs, but had no proof.

But Joy misses the chops, as IRS flunks the Graev Section 6751(b) Boss Hoss test; Judge Foley doesn’t play around with keeping the record open for IRS to dig for evidence.

It’s the straight-from-the-shoulder approach that Judge Posner would love.

Going to the mat doesn’t help James S. Plato, 2018 T. C. Memo. 7, filed 1/24/18, but IRS’ fumbles still save him some money. Plato, separated from Mrs. Plato (first name not stated), left the prepared tax return for year at issue, and check for payment of tax thereon shown “under the mat at the front door” of his wife’s residence, and told Mrs. Plato to mail same to IRS, 2018 T. C. Memo. 7, at p. 3. Plato also subsequently told Mrs. Plato to file for an extension.

IRS got none of the above, and no evidence was presented that the check was cashed. Plato filed Form 1040 MFS after audit, SFR and SNOD, and paid the amount shown on the belated (eight-year-old) 1040. IRS processed that, and stiped to the amount thereon as basis for the add-ons, like late filing, late payment and insufficient withholding.

Those are the only open issues.

Excusing late filing by agent has been a nonstarter since US v.Boyle, 469 U.S. 241 (1985). Each must bear his own burdens, as a much more exalted authority has stated. So Plato gets hit for that add-on.

Nonpayment of tax shown on return here is based on the SFR, and Section 6020(b), which sets forth the requirements for proper subscription thereof. IRS blows that one.

Judge Paris: “The Court has held that the requirements of section 6020(b) have been met where an SFR consists of Form 4549, Income Tax Examination Changes; Form 886-A, Explanation of Items; and Form 13496, IRC Section 6020(b) Certification.

“Respondent entered into evidence a Form 3623, Statement of Account, a Form 4549, and a Form 886-A.  The Form 3623 has the docket number for petitioner’s case typed at the top of the form.  Thus, the Form 3623 was not a part of the SFR prepared before petitioner filed a petition with the Court and was issued a docket number for his case.  The Forms 4549 and 886-A are both dated ‘12/15/2015’ and contain calculations based on petitioner’s separate return.  There is no Form 13496 in the record.  Respondent has failed to meet his burden of production with respect to the appropriateness of imposing the section 6651(a)(2) addition to tax.  Therefore, the determination in the notice of deficiency of the addition to tax for failure to pay the tax shown on the return is not sustained.” 2018 T. C. Memo. 7, at p. 9 (Citations omitted).

Oh, and the SFR itself never got into evidence.

IRS does no better with failure to pay estimateds. Plato and Mrs. Plato reside in The Lone Star State, home of the most fabulous sister acts going (my daughters and my granddaughters), and also home of community property. Besides, the Platos filed jointly the year before the year at issue. Remember, Plato hisself filed MFS in the year at issue, triggering the Reg. 1.6654-2(e) special rule when marrieds go from J to S or vice versa, to compute 100% of prior year or 90% of present year’s tax to see if withholding was too low.

“An IRS account transcript for the [prior year] joint return was entered into evidence.  The transcript shows that petitioner and his spouse reported adjusted gross income of $74,717 and tax per the return of $5,144….  Although there were withholding payments of $7,458 made in [year at issue], community property law in the State of petitioner’s residence requires that amount to be allocated when the married spouses chose to file separately.  No information was entered into evidence that allocated the adjusted gross income and tax per return for [prior year] between petitioner and his spouse.  Therefore, the Court cannot complete its analysis to decide petitioner’s required annual payment under section 6654(d)(1)(B) for [year at issue] because, although it can calculate 90% of petitioner’s tax for [year at issue] under clause (i), it cannot identify the number equal to 100% of the tax shown on petitioner’s [prior year] return under clause (ii). Respondent has failed to carry his burden of production; thus, the addition to tax for failure to pay estimated tax for [year at issue] is not sustained.” 2018 T. C. Memo. 7, at pp. 11-12 (Footnote and citation omitted).

No opinions or decisions today from The Glasshouse at 400 Second Street, NW, but there are two undesignated orders from old cases that should be put out of their misery, but aren’t.

Here’s Ory Eshel & Linda Coryell Eshel, Docket No. 8055-12, filed 1/23/18. Ory & Lin are the battling enfants de la patrie from my blogpost “Reste Immobile, Enfants de la Patrie,” 8/3/17, and the other and further blogposts therein cited, as my Grey-Goose-Gibson-guzzling high-priced colleagues would say.

Well, after Judge Lauber’s dictionary-chaw was bounced right back at him by DC Cir, IRS went to State Department and asked them to parley-vous with the French socialist securitors as to the true meaning and effect of the Tote, that is, the United States – France Totalization Agreement. This diplomatic gem whacks up the tax moneys paid by Innocents Abroad here and there as to what is income tax (maybe creditable or deductible) and what is social security or FICA-style (neither).

Needless to say, if talk isn’t cheap where lawyers are concerned, time is of no value when diplomats start chatting diplomatically. Ory & Lin move Judge Lauber to hold a hearing and decide something, anything, so they can get on with what is left of their lives.

“While we understand petitioners’ frustration at the slow pace at which diplomatic wheels grind, this Court is in no position to set the schedule on which sovereign governments conduct their diplomacy. The Court of Appeals directed this Court on remand to do its best to ascertain the ‘shared understanding’ of the United States and France concerning the proper interpretation of the Totalization Agreement and its application to the two French laws at issue. The pending diplomatic exchanges may shed important light on whether there is a ‘shared understanding’ between these governments and (if so) what it is. We believe it would be inappropriate, and contrary to the spirit of the Court of Appeals’ remand, to decide, before the termination of these diplomatic proceedings, the question petitioners wish us to decide.” Order, at p. 1.

But if you want some busywork, file a status report by March 23.

Back again are that unfortunate pair, Gregory Raifman & Susan Raifman, 3897-14, filed 1/23/18. All y’all will remember Greg and Sue, first swindled by the improbably-named-but-larcenously-inclined Yuri Debevc Derivium (see my blogpost “We Wuz Robbed,” 8/7/12) and then by the ClassicStar horse thieves (see my blogpost “An Unerring Nose for Fraud,” 2/27/15).

Now fifteen (count ’em, fifteen) months-plus after trial with no decision, Judge Nega finds Graev doubts about the chops IRS wants to unload on Greg & Sue.

So Judge Nega gives IRS a week to lay these doubts in the grave (sorry, guys) by producing the Section 6751(b) Boss Hoss sign-off. And Greg and Sue get a week thereafter to come back, with any motion due by mid-February.

No justice, no peace.

No Section 6662(a) chop for Barry G. Conner and Bridget H. Conner, 2018 T. C. Memo. 8, filed 1/22/18, because they were unsophisticated, and told everything to their CPA (34 years’ experience and numerous real estate clients).

It’s Barry G’s story. Barry G was a homebuilder who came a cropper in the Meltdown of ’08. He hung onto his multifarious raw lands, unloading one to an unsolicited bidder, giving another to a church, refinancing and riding with the rest. He did have some plans drawn and permits pulled, but dug not one shovelful of earth.

Now all my super-sophisticated readers know preliminaries aren’t the “rill estet bidniz,” whether by classic factors or facts-and-circumstances. Even though Barry G. lumped them all, throwing in a Sub S with a bunch of LLCs is a nonstarter (disregarded cannot merge with pass-through), and no business activity for years is enough to bury Barry G.’s pro status. And of course Barry G. can’t establish his hours for pro status by any test.

Judge Kerrigan allows Barry G. ordinary losses for sales of 1231 property (model homes and sales centers). Barry G.’s trusty CPA showed depreciation schedules and testified how the returns were prepared.

And trusty CPA spares Barry G. the Section 662(a) chop.

“Mr. M was in charge of preparing petitioners’ income tax returns and [Sub S]’s income tax returns. He testified that petitioners were relying upon him to prepare an accurate return and he decided which forms should be used for the reporting of various entities. Mr. M was a competent professional who had sufficient expertise to justify reliance.

“Petitioners provided complete and accurate records to [Mr. M’s firm] and relied on [Mr. M.’s firm] to properly prepare their returns. Mr. M testified that he had all the necessary information to prepare petitioners’ income tax returns. Petitioners relied on [Mr. M.’s firm]’s advice and took positions on their returns consistent with its advice. Because of the complexity of petitioners’ income tax returns and the experience of Mr. M and [Mr. M’s firm], it was reasonable for petitioners to rely upon their advice. We find that petitioners are not liable for the accuracy-related penalties under section 6662(a).” 2018 T. C. Memo. 8, at p. 47. (Names omitted.)

Mr. M and his firm pushed the envelope a little too hard. But that’s one of the risks we advisers run in this tough calling.

Nice to see stand-up advisers, after a day of CLE at opening day of the New York State Bar Association annual meeting.

It took seven-plus years and 2261 blogposts, but this my blog finally got to 50,000 viewers, sometime during the night of 1/18/18. No prize for the fifty-thousandth viewer, alas.

Oh, I know the blogs of the rich-and-famous get that many viewers every nanosecond every time they post.

But I’m neither rich nor famous, and the doings of the United States Tax Court are hardly of enthralling interest to any but the very, very few.

Nevertheless and notwithstanding, to those few, I have to say, paraphrasing the 1929 Broadway musical, “50,000 viewers can’t be wrong.”

The unpleasant memory lingers on, as we have two undesignated TEFRA orders that should have been designated.

I’m back in the office post-flu, but I don’t need to hunt through 150 orders for the good stuff.

First up, Ellen L. Palm-Leis, Docket No. 166-17, filed 1/19/18, an important date for pre-TEFRA reasons.

Ellen wants to assert SOL on her Section 6662(a) accuracy chops for affected items, but that’s an affirmative defense that should have been raised at the FPAA. Ch J L Paige (“Iron Fist”) Marvel also finds IRS mailed the NBAP and FPAA notices to the right address by the right means, even though Ellen claims her mail was stolen.

So no Tax Court jurisdiction, and Ellen is out.

Next is Fourth Ship, LLC, Francis A. Martin, III, Tax Matters Partner, et al., Docket No. 20418-15, filed 1/19/18. Judge Nega has this one, and it’s a blown-up Son-of-Boss sham options-trading partnership. The issue is jurisdiction, and the leading case is the miller-and-the-tugboat, American Milling. For the scoop, see my blogpost “Jumping Through the Mill,” 9/28/15,

The Fourth Shippers, heirs to the SF Chronicle fortune, want to shut down the mill, but Judge Nega says “Nega-tory.” (Sorry, guys.)

“We consider American Milling, LP Unlimited v. Commissioner, T.C. Memo. 2015-192, to be instructive to our analysis. There, the tax matters partners argued that the adjustments in the FPAA of an upper-tier partnership (American Milling) were computational adjustments that did not require a partner-level determination. Respondent argued that the adjustments were both partnership items of the upper-tier partnership and affected items flowing from the FPAA of the lower-tier partnership (American Boat). The Court agreed with respondent that the Court had jurisdiction over the case, noting the section 6231(a)(6) definition of the term ‘computational adjustments’ and finding that the FPAA for the upper-tier partnership determined adjustments to the upper-tier partnership’s partnership items. The Court noted that the court in the lower-tier partnership proceeding did not determine the upper-tier partnership’s basis in the lower-tier partnership. The Court further noted that determining the bases of the distributed assets and the resulting depreciation deductions and capital losses claimed by the upper-tier partnership required the Court to make specific factual findings at the upper-tier partnership’s level relating to the correct basis in the assets. Here, in the district court proceeding, the district court determined, among other things, that First Ship’s basis was artificially inflated by the short option premiums and must be reduced by that amount. The district court did not specifically determine the amount of First Ship’s basis, the bases of the assets the proceeds of which were distributed by 2000-A to the subject partnerships, or the amount of the subject partnerships’ claimed capital losses on the termination of [pseudo-partnership] 2000-A.” Order, at pp. 8-9 (Footnote omitted).

Despite various gyrations, the Fourth Shippers are stuck with American Milling, and Judge Nega gives IRS summary J at no extra charge.

Can’t hardly wait to see how the new post-TEFRA partnership regime works out.

The Beach Boys’ 1963 classic is all the rage on the Tax Court website, as the Glasshouse Gang solemnly affirms that they will hang out, trying cases, issuing orders, opinions and decisions as long as their cash holds out, notwithstanding the shutdown threatened for midnight. Note that deadlines for filing, etc., aren’t mentioned, so assume no extensions. File those petitions, guys.

Here’s the skinny:

“In the event of a Federal Government shutdown at midnight January 19, 2018, the United States Tax Court will remain open for business as usual on Monday, January 22, 2018, and will continue normal operations for as long as funding permits.

“Trial sessions scheduled for the week of January 22 will proceed as scheduled at the locations listed in the notices of trial sent to all litigants. The Court expects that all trial locations will be accessible for use during the week of January 22.

“Please check this website often for updates on Tax Court operating status and trial information. If you have questions about a scheduled trial session during any Government shutdown, please call 202-521-0700 during normal business hours (8 a.m. to 4:30 p.m. Eastern time).”

State Farm Isn’t There

That’s Motor Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto Ins. Co., 463 U.S. 29 (1983). And while that case holds administrative agencies’ feet to the cliché when it comes to finding a rational basis, and statutory authority, for its regulation, especially when the regulation is “legislative,” that is, has the force of law, it doesn’t help SIH Partners LLLP, Explorer Partner Corporation, Tax Matters Partner, 150 T. C. 3, filed 1/18/18.

SIH is a gaggle of offshore LLC cash-stashes, hanging out in Luxembourg, the Emerald Isle, and the Caymans. The high-rolling quartet who own this stuff use the LLCs to guarantee loans made by Merrill Lynch in aid of their stock-trading and cash-stashing. The LLCs are never called upon to pay up, of course, despite cross-default and contribution clauses in their amended, restated, and recombobulated promissory notes and aggregated, sublimated and bloviated guarantees.

Judge Cohen sustains IRS’ Section 956(d) $2 million income inclusion to the onshore partakers in the goodies. The SIH quartet claims arbitrary, capricious and in violation of law.

The statute is clear: if your CFC guarantees, you’re deemed to get their E&P. And if the regulations (1.956-2(c)(1) and 1.956-1(e)(2)) might lead to onshore owners of multiple offshore LLCs getting charged in the aggregate more than is owed, it’s not the Court’s place to rewrite the regs, and anyway, that’s not the case here.

“Put simply, the statute at issue and the rules adopted did not require Treasury to engage in the level of detailed empirical analysis that the Court in State Farm found was integral to the rulemaking. Petitioner’s focus on the ‘reasoned decisionmaking and reasoned explanation requirements’ as it understands those requirements to be taken from State Farm is misplaced.

“Treasury’s rulemaking complied with the requirements of notice and comment under APA sec. 553(b). APA sec. 706(2)(A) imposes in addition a ‘general “procedural” requirement of sorts by mandating that an agency take whatever steps it needs to provide an explanation that will enable the court to evaluate the agency’s rationale at the time of decision.’ Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S. 633, 654 (1990). We conclude that Treasury’s procedures in this case satisfied this general requirement and were not arbitrary or capricious. The agency’s path ‘may reasonably be discerned’. 150 T. C. 3, at pp. 29-30 (Citation omitted).

Judge Cohen shucks SIH’s argument about the guarantee. “Neither section 956(d) nor the regulations inquire into the relative importance that a creditor attaches to a guaranty. Crestek, Inc. v. Commissioner, 149 T.C. at __ (slip op. at 25-26). A guarantor’s precise financial condition or the likelihood that it would be able to make good on its guaranty are irrelevant in determining under the regulations whether the guaranty gives rise to an investment in United States property. Id. at __ (slip op. at 28). The regulations applicable in this case provide categorically that any obligation of a United States person with respect to which the CFC is a guarantor shall be considered United States property held by the CFC in the amount equal to the unpaid principal. They make no provision for reducing the section 956 inclusion by reference to the guarantor’s financial strength or its relative creditworthiness. Id. at __ & n.8 (slip op. at 29-30).” 150 T. C. 3, at pp. 44-45.

For more about Crestek, see my blogpost “At Home Abroad – Redivivus,” 7/27/17.

The SIH quartet, with their nuanced arguments, go the way of most nuanced arguments.

I’m grateful to the litigants and Judge Cohen for getting me back into my game with this meaty full-dress T.C. After three days fighting the flu from a hospital room, and being cooped up at home, it’s great to come back.

I’m sure Judge Lauber agrees with the exalted author of that statement. Today, however, he wants to make sure that not only did the laborer receive compensation, but that the Forms W-2 got filed for the laborers at Pantano Baptist Church, 2018 T. C. Sum. Op. 3, filed 1/17/18.

And so, fresh from ex-Chief Whistler and now head of OPR Stephen A. Whitlock’s CPE jaunt through Circ 230, I turn to the Section 6721(e). Apparently the Pantanos didn’t bother to file W-2s; reason not stated, but said to be willful.

Although the chops are assessable (no SNOD necessary) and the Pantanos got a CP215, the Pantanos stood mute. So IRS hand-delivered Letter 1058 (NITL). Again no Pantano reply. So IRS unloaded a Letter 3172 (NFTL).

This caught the Patanos’ attention, wherefore they invoked the crew at the Taxpayer Advocate Service.

The Pantanos want to contest, but they blew it by not going to Appeals from the NITL. They were also behind with their latest filing and never submitted Form 433-B.

“The regulations specifically provide, in the case of a section 6320 challenge to an NFTL filing: ‘If the taxpayer previously received a CDP Notice under section 6330 with respect to the same tax and tax period and did not request a CDP hearing with respect to that earlier CDP Notice, the taxpayer had a prior opportunity to dispute the existence or amount of the underlying tax liability.’ Sec. 301.6320-1(e)(3), Q&A E-7, Proced. and Admin. Regs. The taxpayer therefore cannot challenge its underlying liability when it receives the second CDP notice. The same rule applies in reverse, i.e., where the taxpayer receives a lien notice, to which it does not respond, and later receives a levy notice.” 2018 T. C. Sum. Op. 3, at pp. 8-9 (Citations omitted).

The Pantanos got a Form 9297 Statement of Taxpayer Contact when the RO swung by to drop off the NITL, which they claim was all they got, except the IRS has a signed receipt for the NITL too.

The Procrastinator’s Toolbox

STJ Diana J. (“The Taxpayer’s Friend”) Leyden has a designated hitter today, John Lucian, Docket No. 16456-17L, filed 1/16/18. But it really isn’t John’s story.

John is represented by a senior local attorney, whom I’ll designate “SLA.”

John hadn’t filed for three (count ‘em, three) years, got SFRs, never petitioned and got a CP90, threatening fire and slaughter. SLA files a Letter 12153, saying John is sick and can’t pay.

The SO asks for the usual Form 433-A. SLA shows at the CDP without one, and is given a week to get it. He doesn’t, and on the day the clock runs out asks for more time.

The SO says “time’s up, and you can call collections when you have the Form 433-A.”And issues a NOD sustaining.

STJ Di affirms the NOD. IRS doesn’t need to wait an indefinite time to get a Form 433-A.

Here’s the point: “[SLA] did not ask for more than seven days when the first extension was approved. [SLA], as an attomey, understands the importance of filing due dates and has a professional responsibility to exercise due diligence. Instead, on the last day of the extended period he called the SO and requested an additional extension. The SO explained that she had already allowed more time and denied his request for an additional extension.” Order, at p. 6.

The old State Court gambit of “adjourn it again” doesn’t always work in State Court, either. It’s a nonstarter with STJ Di.

Leave it out of your toolbox.