A couple old favorites show up in today’s T. C. Memo. No. 142, filed 7/18/17; it’s Block Developers, LLC, William J. Maxam, APC, Tax Matters Partner, et al., and once again it’s The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Inveterate, Industrious, Indefatigable, Irrefragable, Incontrovertible, Ineluctable, and Illustrious Foe of the Partitive Genitive, Old China Hand and Master Silt Stirrer, Judge Mark V. Holmes, back with our friends the Blocking Janssons, casting a sidewise glance at the Repettos.

Ah, the Janssons, inventors and vendors of concrete blocks that stop Californian landslides and sprout vegetation at the same time. You’ll find more about them in my blogposts “A Trust Is a Trust Is a Trust,” 2/26/14, and “Block That Motion,” 10/16/14. The Repettos show up in my blogpost “Waxing Roth,” 6/15/12.

Today it’s form over substance, as the LLC set up by the abovementioned William J. Maxam, now or formerly an attorney, is nothing but a conduit for shoveling money from the Janssons’ cash cow to their Roth IRAs.

IRS mucked up the NBAPs, the FPAAs, and the various SNODs, but Judge Holmes put them all right. And he winds up with the Janssons’ S Corp and the LLC as the only petitioners in this case.

“[S Corp]’s sale of the Verdura Block patents to [LLC] had no substantive effect on how Jansson operated his businesses.  Jansson’s companies continued to produce the blocks, test the blocks, and make sure the blocks were certified.  The Jansson family continued to attend trade shows and take on clients without any mention of [LLC]s.  And the expense of performing these tasks remained on Jansson–he was never reimbursed by [LLC].” 2017 T. C. Memo. 142, at pp. 28-29.

The LLC’s recordkeeping was spotty at best, it had no employees, and the excuse that it was meant to raise cash for the Janssons’ S Corp was “illogical” because the cash to pay for the Block patents came from the Janssons’ S Corp in the first place. 2017 T. C. Memo. 142, at p. 30.

And notwithstanding all the mathematical backing-and-filling about valuing the patents supposedly sold to the LLC, the figure for the price of the patents came months before the backing-and-filling. And whatever the price, there was no real sale.

“Even if the Janssons correctly valued the sale of the patents on paper, and even if they correctly set the royalty rates that they charged [S Corp] on paper, we cannot ignore the underlying reality of the transaction.  We find that [LLC] was just a conduit to shunt money to the Janssons’ Roth IRAs and was not engaged in any real business activity.  We therefore find that [LLC]’s transfers to the Janssons’ Roth IRAs were excess contributions that triggered the excise tax the Commissioner seeks.” 2017 T. C. Memo. 142, at p. 30.

However, lest IRS get too pixilated, Judge Holmes points out that not every Roth IRA tax dodge is a prohibited dodge. He cites Summa Holdings Inc., 848 F.3d 782 (6 Cir., 2017). But there the Roth-pumping dodge is legitimate because Congress said so. Summa was a DISC, and that’s a special case.

At the end for the Janssons, the LLC is just a conduit, and the 6% per year excess Roth contributions hit is sustained, plus the additions to tax.

Notwithstanding the exalted status of the speaker of the captioned phrase, the first in is the first out, when it comes to sellers of securities.

Here’s Kenan Turan, 2017 T. C. Memo. 141, filed 7/17/17, real estate agent, paid tax return preparer and day trader, who claims his broker did him wrong by not letting him use LIFO.

Judge Nega: “As a general rule, when taxpayers hold multiple lots or shares of identical stock, they must compute their gains or losses against the basis of those shares actually sold, not the shares the taxpayer intended to sell.  As this rule may prove onerous for high-volume or high-frequency traders, regulations have been promulgated to provide relief.  Under the regulations, by default, taxpayers owning blocks of identical stock acquired on different dates or for different prices determine their stock’s basis by using the FIFO method.  Sec. 1.1012-1(c)(1), Income Tax Regs.” 2017 T. C. Memo. 141, at pp. 4-5. (Citation omitted).

Kenan is an in-and-out trader. Even though he has only 51 trades for the year at issue, IRS lets him stay a day trader. Kenan claims he told his broker he wanted LIFO, but the broker’s website played him false.

So Kenan never bothered to disclose the trades, or the gains therefrom, on his 1040.

“Petitioner argues that respondent and [broker] both erred in failing to use the last-in-first-out (LIFO) method to determine the bases of his FNMA shares. Petitioner testified that in mid-2013 he attempted to inform [broker] of his desire to use LIFO instead of FIFO, by way of their internet client portal, but was unable to do so because of an error on [broker]’s website.  He stated that he phoned the firm in an attempt to work around this error, but received no assistance.  Petitioner did not testify as to whether he ever again attempted to make this election for [year at issue] or otherwise contacted [broker] during the seven months that followed his initial attempt.

“Petitioner offered no documentation or other objective indicia to corroborate his claim of a computer error or any misfeasance on the part of [broker].”  2017 T. C. Memo. 143, at p. 6. (Name omitted).

I can’t say I’m surprised. The broker in this case is a well-known online outfit, and even though Judge Nega seems to think the FIFO rule was promulgated for the trader’s benefit, my bet is that the brokers wanted a hard-and-fast rule, so they could deal with the multiple customers, all trading their heads off at seven bucks a throw, on a one-size-fits-all basis. I’m no day trader, but I doubt anyone who isn’t a mega-whale can get an online broker to modify their software so as to switch from FIFO to LIFO just for him/her.

Howbeit, I’m open to correction if anybody has written evidence.

But Kenan’s little omission doesn’t sit well with Judge Nega. He doubts the credibility of Kenan’s testimony about his interaction (or lack thereof) with the broker. And Kenan’s argument about using average basis falls flat, as he wasn’t trading mutual fund shares or shares from a dividend reinvestment plan.

Finally, “When we consider his sophistication and–more concerning–his training and employment as a paid preparer of income tax returns, we find his failure characteristic of an unreasonably insufficient effort to ascertain his proper tax liability.“  2017 T. C. Memo. 143, at p. 10.

The latest issue of our New York State Bar Association Journal’s cover story involves the anomalous status of the law of domestic companion animals; these enjoy an ability to confer immunity upon their human companions from liability, even when they “weaponize” a bicycle rack and drag it like a great trawl down a street. No cow, calf or bull has the like cloaking device.

Anomalous or not, and though the tortists gnash their incisors, each domestic companion animal (the word “pet” is so demeaning and politically-incorrect) is entitled to one bite.

Well, today Judge Gerber extends an animal companionship cloak over Mark S. Siegel, 2017 T. C. Sum. Op. 53, filed 7/17/17.

Mark S., like Michael Craig Worsham, star of my blogpost “Pay the Man,” 7/31/12, found without seeking the reasons why the income tax does not apply to him.

Generally (love that word!), in such a voyage of discovery that comes ashore at 400 Second Street, NW, there’s a quick cite to Crain or Wnuck, and march out petitioner.

Judge Gerber gets absolutely chummy.

“Petitioner has been formulating his position with respect to the income tax laws over a period of years on the basis of his personal research.  Each time he approaches respondent with his ideas, his position is perfunctorily labeled ‘frivolous’ and he receives no response.  Petitioner believes that average American citizens should be able to question their Government about the tax laws, and he refuses to give up merely because he did not receive a response to his questions.” 2017 T. C. Sum. Op. 53, at p. 5.

“Somber reasoning and copious citation of precedent” are avoided, however, as Judge Gerber cuts to the clichê. “More than 100 years of tax jurisprudence refute petitioner’s position that he is not a taxpayer who is required to file a return and/or pay tax.” 2017 T. C. Sum. Op. 53, at p. 6.

Still, Judge Gerber gave Mark S. a chance. But he gets only one.

“Petitioner has been given an opportunity to present his position in court, and we hold that it is without support in the cases or statutes proffered.  We hold that respondent’s determination was not in error and that petitioner is liable for the income tax deficiency and section 6651 and 6654 additions to tax as determined. We caution petitioner that future advancement of this or similar arguments may well result in penalties of up to $25,000 under section 6673.” 2017 T. C. Sum. Op. 53, at p. 8.

One bite, Mark S.

In this my blog, I sometimes come down hard on Judges. I maintain I do so only when I see manifest injustice; I’m like a fan howling at the official for blowing a call (and I’ve done that too; my nearest and dearest have often cringed when I bellow “Enjoying the game, ump? You should watch it!”).

Today, though, I want to commend Ch J L Paige (“Iron Fist”) Marvel, who puts a petitioner wise when IRS tries the spider-and-fly routine.

Here’s the story of Caleb Tang, 13367-17, filed 7/14/17.

Cal petitioned a SNOD, but the petition was unsigned and he didn’t send in the sixty bucks. Ch J Iron Fist told Cal to file a proper petition and pay up. Here’s what followed.

“… petitioner filed a Letter…stating therein that he has filed an amended tax return for [year at issue] with the IRS and wishes to have this case dismissed. In support of petitioner’s request, he states: ‘I contacted IRS and was informed that they will not be able to review my case unless the US Tax Court approves the withdrawal of the petition * * * and dismiss[es] the case’.” Order, at p. 1.

Nice, huh? If Cal drops the petition by not paying and amending, his 90 day window to petition the SNOD has gone. So IRS can tell Cal to take a hike, and he can either pay and sue in USDC or USCFC, or pay. A CDP won’t help because he had a chance to contest, and didn’t.

Ch J Iron Fist is wise to this game, and she throws Cal a lifeline.

“Because the petition was not properly executed and the Court’s filing fee has not been paid, this case could be dismissed for lack of jurisdiction. However, petitioner is advised that, if this case is dismissed, he may be unable to file another case with this Court with respect to [year at issue]. Accordingly, we will provide petitioner the opportunity to file a Ratification of Petition and pay the Court’s filing fee.” Order, at p. 1.

I’m sure if Cal does file and pay (and Ch J Iron Fist sends along the ratification form), IRS counsel will be happy to review Cal’s papers as part of the Branerton swap meet. And even maybe talk about the case. At worst, if they can’t agree, Cal gets a chance to tell his story in Court.

And Ch J Iron Fist’s second chance language should get into every order when a pro se asks to drop the case to talk to IRS. This “drop the case and we’ll talk” stuff should be retitled “come into my parlor, said the spider to the fly.”

Good call, Ch Judge.

Though this blogpost is about one who dealt with pharmaceuticals and not cosmetics, they’re close enough for a quick headline. And the point of this little tale (“Is there one, now?” as my readers may remark) is that, when it comes to deductibility of legal fees as business expenses, it’s the origin of the claim and not the outcome (real or potential) that counts.

Here’s CSTJ Panuthos to tell us about Arthur Dulik, Jr. and Ellen B. Kugler Dulik, 2017 T. C. Sum. Op. 51, filed 7/13/17, but it’s Art’s story.

Art was a high-level type at a Moderately Big Pharma (MBP). As a new employee in the last millennium, he signed a secrecy and a non-compete. Fast forward thirty-five years, and Art wants out. MBP gives him a Confidential Separation Agreement and Release to sign, whereat Art calls in a couple law firms (hi, Judge Holmes) to renegotiate the deal.

MBP tells him to take it or leave it. Art does, having paid $26K to the law firms. A month after clearing the jump door, Art cranks up a Sub S wherewith to do consulting in the pharma field. He claims he has fears of legal issues arising out of his consulting.

Like maybe perchance he might violate the noncompete? Or lay a prohibited blast on his former employer?

Howbeit, CSTJ Panuthos is succinct. “Mr. Dulik’s claim arose from his status as a former employee of MBP, not from his consulting business.  He hired attorneys because he was trying to negotiate the terms of the severance agreement proffered in connection with the termination of his employment at MBP.  See Gilmore, 372 U.S. at 49; Kenton v. Commissioner, 2006 WL 237112, at *2-*3; Test v. Commissioner, 2000 WL 1738858, at *4.  We conclude that petitioners are not permitted to deduct the legal fees as ordinary and necessary business expenses of Mr. Dulik’s consulting business as a flowthrough from [his Sub S].  However, petitioners are entitled to $26,325 as a miscellaneous itemized deduction on Schedule A, subject to the limitations set forth supra.  See secs. 56(b)(1)(A)(i), 67(a) and (b), 68, 211, 212(1).” 2017 T. C. Sum. Op. 51, at pp. 12-13. (Footnote omitted.

The limitations are the famous 2% AGI limitation, Sched A phaseouts, AMIT, production-of-income rather than trade-or-business, and all that jazz.

And even though Art was a CPA and CFO, he got his numbers wrong. Art’s legal; fees as claimed were $26,781. “Petitioners provided substantiation for legal fees totaling $26,325, and did not provide an explanation for the discrepancy of $456 ($26,781 – $26,325 = $456).” 2017 T. C. Sum. Op. 51, at p. 13, footnote 6.

Art avoids the add-ons, except for $1700 in dividends he forgot to put on the return.

He kept good records, and testified credibly that he was concerned about running his own business. Anyway, origin-of-claim for deductibility is tough stuff. “The origin of the claim doctrine, regarding treatment of this particular type of expense for legal fees, is a technical area of law, is fact intensive, and required a reference to and analysis of caselaw as more fully discussed in this opinion.” 2017 T. C. Sum. Op. 51, at p. 16.

“When I get drunk I make deals in mines”: Aristophanes, The Knights, 424 B.C.

At first I was hoping for enlightenment on a thirty-seven (count ‘em, thirty-seven) year old statute that has shown up at every closing I’ve done since 1980, the Foreign Investment in Real Property Tax Act of 1980. But not even that Obliging Jurist, Judge David Gustafson, can help me.

Grecian Magnesite Mining, Industrial & Shipping Co., SA, 149 T. C. 3, filed 7/13/17, concedes the FIRPTA hit, even though their trusty attorney turned them onto an equally-trusty and widely-experienced CPA (who had neither an LL.M. in Tax nor did he claim international tax expertise) who claimed they owed nothing.

I think maybe so I ran across said trusty attorney around thirty years ago, but in what context I haven’t a clue.

Inasmuch at Grecian Mag hadn’t a clue about US tax law, they dodge the additions for underreporting and underpaying.

And best of all, since the FIRPTA hit was only one-third of the $6.2 million Grecian Mag picked up in the years at issue, they owe zippo on the back end.

Grecian Mag is in the mag-mining business, but strictly in Greece. My geology-while-you-wait department tells me that the stuff is known as MgCO_3, a/k/a magnesium carbonate, when it’s at home. It’s useful for lining blast furnaces, making flooring, and all kinds other stuff (hi, Judge Holmes).

Cutting to the cliché, Grecian Mag partners with a US miner and some other like-mined dudes. One of the dudes decides to bail, invoking the everybody-bails clause in the LLC operating agreement, so the managing member of the LLC buys out Grecian Mag and distributes its share of the noncash goodies.

Trusty accountant picks up the goodies, but doesn’t report the cash gain on the buyout of Grecian Mag’s membership interest.

Well, the US LLC owned real property (mines, as the above-cited Greek playwright wrote),  so the part of the buyout relating to the mines involved interests in an entity owning US real property. Thus the tax.

But the buyout included other stuff. Grecian Mag had no business in the US of A except via the LLC deal.

It’s the old Section 882 effectively-connected US business. The buyout certainly wasn’t “fixed, determinable, annual or periodic” (FDAP), so Section 881 is out.

IRS claims that the partners in a partnership own interests in the partnership assets, so that when redeemed out, the partner sells its interest (either to the partnership or the other partners), it realizes gain on a sale of its partnership assets, not partnership interests.

Good try, IRS, except Section 897(g), the famous special partnership sale-of-real-property assets that FIRPTA tacked on, only applies to realty, not anything else.

Section 741 says sale of the partnership interest is a capital asset sale of the partnership interest, not the partnership’s property. IRS says that conflicts with Section 897(g), but that’s a special rule.

In short, generally (love that word!) sale of a partnership interest in redemption of that interest is sale of a single asset, not a sale of partnership assets.

So what, says IRS; Section 864(c)(3) makes the distribution Grecian Mag got effectively-connected with US trade or business, hence taxable. And IRS trots out Rev Rul. 91-32, 1991-1 C. B. 107, which nails Grecian Mag and to which IRS respectfully invites deference.

“The ruling holds that the gain realized by a foreign partner upon disposing of its interest in a U.S. partnership should be analyzed asset by asset, and that, to the extent the assets of the partnership would give rise to effectively connected income if sold by the entity, the departing partner’s pro rata share of such gain should be treated as effectively connected income.  In other words, the ruling essentially adopts the same analysis Congress prescribed in section 751 for inventory and receivables, except that the ruling applies that approach for a category of assets (i.e., effectively connected income-generating assets) different from the assets addressed in section 751.” 149 T. C. 3, at p. 33.

Now there are two types of deference. When an agency interprets its own ambiguous ruling, courts defer. But when the agency tries to rewrite the statute, it doesn’t even get “meh!” Here, IRS is trying to rewrite Section 751 to cover everything and it doesn’t. In any case, between deference and “meh!” falls the shadow “power to persuade,” and Rev. Rul. 91-32 gets left at the starting gate.

IRS then claims Grecian Mag’s gains comes from the “office” of the LLC. But the IRS conflates the ongoing mining operation income that derives from the “office” rather than the one-shot sale of the partnership interest.

Anyway, I think that the word “office” is misleading: maybe the EU idea of “establishment,” a business footprint that materially assists, even if not the major factor, in the trade or business, better suits today’s business world.

Grecian Mag doesn’t buy and sell partnership interests. It bought in once and sold out once, and that took place over seven (count ‘em, seven) years. So it’s not in the business of trading partnership interests. It paid US tax on the mining income.

And IRS gave up on the Section 864(c)(4)(B) specialty list of effectively-connected income types.

But whatever miscues Grecian Mag’s initial tax team may have made, their litigation team, from a very well-known and respected NYC law firm, really did a top-class job. Well done, R&H.

I am reminded of the famous 1898 cartoon by Emmanuel Poiré (better known by his pen name Caran d’Ache, of colored pencil fame). The first panel shows a large family at the dinner table, proper and decorous. The father, obviously the head of the house, referring to the Dreyfus Affair, then roiling France, stands and intones impressively, “We shall not speak of it.”

The next panel shows the table upset, family members rolling on the floor, cutlery used as weapons, family members punching, stabbing, strangling and kicking each other.

The caption reads “They Spoke of It.”

The present fight about health insurance and healthcare is similar.  But as this will remain, in spite of all temptation, a non-partisan and nonpolitical blog, I shall merely report a small-claimer, which will hardly merit discussion in the trade press or the blogosphere.

Carol Sue Walker and Theodore Paul Walker, 2017 T. C. Sum. Op. 50, filed 7/12/17, are informed by CSTJ Panuthos that they must pay the fisc $12K.

They were not part of a Midco scam, or an overvalued LLC membership charitable deduction dodge; didn’t donate a façade easement already protected by local law or a golf course ringed with high-priced houses, write off their horsing around or hunting excursions, play mix-and-match with digital options trades wIth tax-indifferents in Germany, the Netherlands or Liechtenstein; or take phony deductions like a former Judge of this illustrious Court.

No, all they did was get advanced premium tax credits for the year at issue because their health insurer told them they could. For health insurance.

But they weren’t eligible.

CSTJ Panuthos: “In the notice of deficiency respondent determined that petitioners were ineligible for the PTC because their MAGI for 2014, $75,199, exceeded 400% of the Federal poverty line amount for their family size.  Petitioners timely filed a petition in which they asserted that they were informed by Covered California that they qualified for insurance coverage through Anthem Blue Cross for 2014.  Petitioners also assert that they would not have purchased insurance through Covered California if they had known that they did not qualify for the PTC.” 2017 T. C. Sum. Op. 50, at p. 4.

Now I freely confess I know rather less than bortscht, and not even so much as bupkis, about this subject. I sedulously avoided all the CPE and CLE merchants who were trumpeting their know-it-all snore-sessions thereupon as essential to tax practice. I’ve not a clue how much Carol Sue or Theodore Paul, or both of them, knew about Reg. Section 1.36B-1(h). But I’ll wager seven obsolete Austrian schillings it wasn’t a whole lot.

CSTJ Panuthos tells us their AGI for the year at issue consisted of wages of $17K, pension or annuity of $27K, and taxable Social Security of $19K. But their MAGI added another $11K of untaxed Social Security, which threw them over the 400% of poverty end line.

Anyway, here’s the skinny from CSTJ Panuthos.

“In 2010 the Patient Protection and Affordable Care Act (ACA), Pub. L. No. 111-148, 124 Stat. 119 (2010), became law.  ACA sec. 1401(a), 124 Stat. at 213, enacted section 36B, which allows a refundable tax credit, known as the PTC. The PTC assists eligible taxpayers with the costs of their premiums for health insurance purchased through an Exchange.  See id.

“A taxpayer generally qualifies for the PTC if he has household income that is equal to an amount that is at least 100%, but not greater than 400%, of the Federal poverty line amount for the taxpayer’s family size for the taxable year. Sec. 36B(c)(1)(A); sec. 1.36B-2(b)(1), Income Tax Regs.  The Federal poverty line amount is established by the most recently published poverty guidelines in effect on the first day of the open enrollment period preceding that taxable year. Sec. 36B(d)(3); sec. 1.36B-1(h), Income Tax Regs.” 2017 T. C. Sum. Op. 50, at p. 5. (Footnotes omitted, but one footnote, number 7, says there are exceptions that don’t apply. Does my heart good to know there are exceptions.).

Carol Sue and Theodore Paul owe the money. IRS, in a burst of generosity, conceded the 20% chop.

Oh yes, Carol Sue and Theodore Paul understated their taxable Social Security by $3.00 (count ‘em, three bucks), and as they don’t dispute that, it’s deemed conceded.

Oh yeah, I guess the insurance company got to keep the premiums they got.

How many EAs, auto-admitted attorneys, CPAs, RTRPs, or USTCPs could name the current Federal poverty level for their neighborhood?

Now, I don’t know how many of y’all want to repeal the entire statute, or clean it up, or adopt something entirely different, or just leave it be. I have stated my own views in extenso elsewhere, and will continue to do so. To anyone who will listen, and to the politicians that won’t.

As far as this blog is concerned, however, I shall not speak of it.

This one is a Midco in two parts, with a head-spinning roundy-round of cash and a platoon of characters, that ends up with “a couple other escrow accounts,” and a lot more about MN voidable transaction, tax and corporate law than you’d want to know.

And if after that you can’t guess which Judge wrote the opinion in Donald J. Buckrey, et al, 2017 T. C. Memo 138, filed 7/11/17, you haven’t been paying attention.

Buck and the als have stock in a C Corp, basis bupkis, built-in gain exponential, and a buyer who wants assets, not stock. Buck and the als sell the operating assets to buyer via a Midcoast shill. There’s some window-dressing due diligence, but a lot of that never makes it into the record.

Buck and the als distribute the remaining non-cash assets to themselves: “accounts receivable from the three owners, tax refunds, prepaid insurance refunds, and future cash from [buyer] from the earlier asset sale–to the shareholders in redemption of approximately 36% of their total shares.” 2017 T. C. Memo. 138, at p. 6.

The C Corp has only the cash from the asset sale and a yuge tax liability. Money gets wired from Midcoast (maybe; it’s a question of fact where the money came from) into an escrow account where also is kept the money from the asset sale. MidCoast gets paid, Buck and the als get a premium over the ex-tax price, and some sits against future claims but eventually mostly gets paid to Buck and the als.

Comes the usual Son-of-BOSS mix-and-match, featuring the shill.

Judge Holmes: “Son-of-BOSS deals were generally used to artificially inflate someone’s basis in a partnership interest by contributing assets with large contingent liabilities (which were ignored in computing basis) and then selling this interest at fair market value for a huge tax (but no economic) loss. See, e.g., RJT Invs. X v. Commissioner, 491 F.3d 732 (8th Cir. 2007) (involving typical Son-of-BOSS transaction); Kligfeld Holdings v. Commissioner, 128 T.C. 192 (2007). There are other variations, see, e.g., Home Concrete & Supply, LLC v. United States, 634 F.3d 249 (4th Cir. 2011). We’ve never found a Son-of-BOSS transaction that worked.” 2107 T. C. Memo. 138, at p. 11, footnote 5.

IRS wants to collapse everything, but that fails as MN Uniform Fraudulent Transfer Act (MUFTA) says each transfer stands on its own. And if the deal were to be collapsed and treated as a liquidation and distribution, MN corporate law says that creditors get no rights to fight a distribution, only the corporation, receivers and shareholders. Though strange, other States do likewise, and Judge Holmes isn’t fighting with them.

IRS claims the escrow arrangement, where money from buyer and shill was lumped together, was itself a fraudulent transfer. “We agree with the shareholders that the escrow agreement unambiguously identified which money was coming from whom and where the escrow agent should send it. The agreement required the escrow agent to transfer the exact amount of money that it received from MidCoast to three different accounts and the exact amount of money received from [shill] to MidCoast’s operating account. The escrow agent’s contractual duties trump the fact that the funds were very briefly placed in the same account.” 2017 T. C. Memo. 138, at p. 36.

In the end, though, these are motions for summary J, and since the money trail isn’t clear, transferee-of-a-transferee and for-the-benefit-of theories won’t work.

Here’s the story: “There are material facts in dispute that prevent us from ruling on whether the shareholders are liable under the transferee-of-a-transferee or for-the-benefit of theories because it’s unclear at the moment which entity actually paid for the stock and which entity actually received the stock. There are also material facts in dispute concerning the shareholders’ actual intent to enter into fraudulent transfers. To the extent that we hold that Minnesota law prevents us from collapsing the transfers and finding that the shareholders received a transfer directly from BNP, we will grant the shareholders’ motion. We also will grant the shareholders’ motion to the extent we find that the partial stock redemption wasn’t a fraudulent transfer. The rest of the shareholders’ motion will be denied, and the Commissioner’s motion will be denied.” 2017 T. C. Memo. 138, at p. 53.

In the Summer of ’56, I was fourteen years old, callow beyond description, desperately in puppylove and enthralled by The King and his magnificent 197th best song of all time. Oh, those were the days (and thanks to whatever gods may be that they’re over).

But there’s a new conundrum percolating through the halls of The Glasshouse at 400 Second Street, NW, and whom else to send to the mound to pitch his way out of this one but The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Inveterate, Industrious, Illustrious, Irrefragable, Indefatigable, Ineluctable, Incontrovertible and Incomparable Foe of the Partitive Genitive, Old China Hand and Master Silt Stirrer, Judge Mark V. Holmes?

Is an S Corp a taxpayer? Well, it’s a passthrough, so it doesn’t itself pay taxes, and maybe it isn’t. IRS claims if it isn’t an accrual basis taxpayer, it isn’t a taxpayer at all, so no Section 468 goodies for Bob Gregory and Kay Gregory, 149 T. C. 2, filed 7/11/17, leading off Palindrome Week and T. C. Tuesday, as the hard-laboring clerks at the Glasshouse seem to have picked Tuesdays to unleash their T. C.s upon the world.

Bob and Kay have a Sub S that’s been cash basis from the getgo, and elected Section 468 treatment. This is one that could torpedo many an aspiring EA, as I doubt too many of my readers have a clue that Section 468 allows a landfill operator to write off closing and reclamation costs, if they so elect, many years before they must pay the same.

Don’tcha love the Code, so full of special interest giveaways? And fodder for fees to us hardworking tax pros. Well, if corporations have free speech and religious freedom, why not a few small extras? Sorry, nonpolitical blog.

Judge Holmes: “A current deduction for a future expense is a good deal for most taxpayers, and the disagreement between the parties here is simple–who counts as a ‘taxpayer’ under section 468? “ 149 T. C. 2, at pp. 2-3.

Bob and Kay have an integrated service dump. Politely, a landfill. And the TX public wasters require Bob and Kay to keep a $2 million standby L/C to cover the costs when the land will accept no more fill, Bob and Kay have to wind it up, and the clean-up costs will be substantial. Bob and Kay might scamper, leaving the people of TX to do the dirty work.

Now Bob and Kay didn’t pull their numbers from wherever, they had a professional engineer do the guesstimate. And IRS doesn’t quarrel with the numbers, or that Bob and Kay can use accrual for reporting and cash for taxpaying. And Section 448(a) doesn’t preclude Bob and Kay from using cash basis; they aren’t a partnership, large C Corp or a tax shelter. IRS only says cash basis types can’t use Section 468 at all.

Section 468(a) says “taxpayer,” tout court; and there are no Regs, surprise surprise. And 5 Cir, where Bob and Kay are Golsenized, say when a statute uses a word that everyone understands, who needs legislative history?

“Even though section 468 doesn’t define “taxpayer”, we are not left without textual help. The Code has a small dictionary toward its end, and in it we find a default definition of “taxpayer”. Sec. 7701(a)(14); see, e.g., Rothkamm v. United States, 802 F.3d 699, 704 (5th Cir. 2015). It says: ‘SEC. 7701(a). When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof–

(1) Person.–The term “person” shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation.

*******

(14) Taxpayer.–The term ‘taxpayer’ means any person subject to any internal revenue tax.” 149 T. C. 2, at pp. 9-10.

Game over, right? Well, maybe for Section 468 purposes, but Judge Holmes curbs everyone’s enthusiasm.

“Our Opinion today reaches only the question of whether an S corporation is a taxpayer for the purposes of section 468. We are not deciding whether an S corporation is a taxpayer for every section of the Code.” 149 T.C. 2, at p. 10, footnote 7.

And Sub S corps like Bob and Kay’s do pay FICA/FUTA, so the S Corp is a taxpayer, just not a Title A taxpayer.

There’s much argy-bargy about noscitur a sociis, but there is no sociis, and anyway, Judge Holmes blows off IRS with “As they say at the IRS: Ab his sociis publicanus non adjuvatur.”149 T. C. 2, at p. 16. I need not, of course, translate.

There’s a case that mentions Section 468 out of USDCWDMI, but the taxpayer there was already accrual basis. And the legislative history doesn’t prove what IRS wants it to prove.

Ultimately, though, “Taxpayers like [Bob and Kay’s Sub S] must comply with numerous environmental-protection laws at the federal, state, and local levels. These costs can be large, and they continue after a landfill, mine, or nuclear-power plant stops earning income. Section 468 lessens the burden of compliance by helping to match income and expenses better in an era where businesses that are messy to run must clean up after themselves and maintain proof that they have the means to do so.” 149 T. C. 2, at p. 24.

Judge Lauber reluctantly concurs. And Ch J L Paige (“Iron Fist”), and Judges Nega, Ashford and Gale join him.

Shirley M. Cotter, Docket No. 7644-15L, filed 7/11/17, is convinced that income taxes are sinful, even though she paid all but $350 of her self-reported liability for year at issue. IRS wants a Section 6702 frivolity chop.

Here’s Shirley: “People of the Light serving The Creator God of America’s Declaration of Independence who gives life, liberty, and the pursuit ‘virtuous’ happiness, know we can only pay taxes to legitimate governments who are God’s servants (Romans13). Taxes are gifts from We The People for God’s glory and the common good. Of course, tyrants, as tools of the Devil and traitors of God, our country, and fellow citizens will try to get tribute money for Satan’s Kingdom. However, in the United States of America tax departments can only collect taxes to produce fruits of the Holy Spirit * * *.” Order, at p. 2.

If you’re interested, there’s more at p. 3, and even more at pp. 4-5.

IRS wants summary J on the NOD from the CDP, wherein IRS invoked “a moral, religious, political, constitutional, conscientious, or similar objection to the imposition or payment of federal taxes that reflects a desire to delay or impede the administration of federal tax laws.” Order, at p. 3.

What’s wrong with this picture?

Well, if you’re a reader of this my blog, you’ll doubtless recall my blopost “The Jersey Bounce – Part Deux,” 3/22/17, wherein 2 Cir. blew off the anytime Boss Hoss, and insisted that the Boss Hoss pre-imposition signoff on penalties was de rigueur.

Unhappily for IRS, here it’s de novo review, as the chop was asserted after the CDP hearing. And Shirley didn’t raise Boss Hoss in her petition.

So what, says The Taxpayer’s Friend, STJ Diana L. Leyden.

“Respondent’s motion asserts that petitioner did not allege in her petition that SO J failed to obtain the requisite verification under section 6330(c)(1) and therefore she has conceded this issue pursuant to Rule 331(b)(4). However, the settlement officer is required by statute to verify that the requirements of any applicable law or administrative procedure have been met and must do so regardless of whether the taxpayer raised it at the CDP hearing.” Order, at p. 8. (Name and citations omitted).

IRS’ summary J motion never mentions the Section 6751(b) Boss Hoss. And it’s an interesting question who is the right Boss Hoss.

“According to the Internal Revenue Manual (IRM) in effect when the section 6702(b) penalty was assessed, the ‘Appeals [Office] will not make a determination regarding assessment of the IRC section 6702(b) penalty. However, it will identify when the [CDP] request meets the criteria for penalty assessment.’ IRM pt. 5.1.9.3.16(5) (Apr.6,2010). The CDP hearing request is then returned by the Appeals Office to the collection function of the IRS, who verifies that the criteria for penalty assessment is met. See IRM pt. 5.1.9.3.16(5) and (6) (Apr. 6, 2010). The IRM further instructs the IRS collection employee to prepare a Form 3210, Document Transmittal, and states that the ‘group manager will document approval of the penalty assessment by writing [‘] Determination to assess penalty pursuant to section 6702(b) approved [‘] on Form 3210 and sign the Form 3210.’ IRM pt. 5.1.9.3.16(7) (Apr. 6, 2010); see IRM pt. 5.19.8.4.7.7(9) (Sept. 2, 2009).” Order, at pp. 8-9, footnote 7.

Collection group manager? Appeals group manager? Will the real Boss Hoss please stand up?

Now the IRM confers no rights on taxpayers, and it doesn’t necessarily have the force of law on IRS. But there’s the procedure to be followed, and it might be, could be, maybe arbitrary if it wasn’t followed. And note also that the IRM passages quoted are seven years old; YMMV.

Of course, Shirley might catch a Section 6673 frivolity chop on the trial. If the case gets that far. But I’m not betting large bucks.