Not a reprise of Erik McBride Thompson’s voyage of discovery, for which see my blogpost “Can Tax Court Be Habit-Forming?” 12/20/11.

Have I really been doing this for more than six years?

No, today’s seeker after wisdom and truth is Andrew Lee Stinson, 2016 T. C. Sum. Op. 82, filed 12/13/16.

Andrew Lee has a master’s degree in information science. But apparently in his part of North Carolina all he could find during the year at issue was indoor and outdoor odd jobs for an old acquaintance, ranging from dumping compost to editing Photoshop. This got him a big $13K, on which he paid tax but no SE.

IRS goes for the SE.

Judge Cohen tells it all in one paragraph.

“The petition alleged only petitioner’s dire financial circumstances and cited no error in respondent’s determination.  At trial petitioner stated that he was present ‘because I spent the $60 [filing fee] and for that amount of money I’d like to see how things work.’  Petitioner’s candor and credible testimony are appreciated but do not change the legal effect of the facts.”

It’s a shame Andrew Lee didn’t show up for a calendar call and maybe a trial. A trial in what the late lamented Professor Siegel called “S.E.C.” Someone Else’s Case. It’s a lot cheaper.

Well, not actually. It’s just that Tax Court again deals with farmers and the Section 263A capitalization rules, in Wasco Real Properties I, LLC, Gardiner Family Trust, Tax Matters Partner, et al., 2016 T. C. Memo. 224, filed 12/13/16.

I don’t know Judge Buch’s background for dealing with nuts, but in this case it’s an almond farm or two or three, that the Wasco gang picked up from the rose growers who were there before. Saying “nuts” to flowers, they borrowed the money to buy the parcels, planted almond trees, and wanted to deduct currently loan interest payments and real estate taxes.

Now trees aren’t row crops, like carrots, roses, corn and wheat. “Row crops are nonpermanent crops that have a specific growing season.” 2016 T. C. Memo. 224, at p. 11. And Judge Buch has a great deal to say about why trees are one with the land whereon they grow, and thus expenses of the land must be capitalized, and recovered accordingly, against income when the nuts are sold.

There’s no question the taxes and interest are deductible, even the interest for some intrafamily loans. The only question is when to deduct these.

And what would a T. C. Memo. be, without a quick flip through the digital dictionary?

“The entities’ growing of the almond trees is a production of those trees within the reach of section 263A.  The uniform capitalization rules apply to ‘[r]eal * * * property produced by the taxpayer’ for the taxpayer’s use in a trade or business or in an activity conducted for profit.  Sec. 263A(b)(1), (c)(1).  While the statute does not define the term “real property” for purposes of section 263A, section 1.263A-8(c)(1) and (2), Income Tax Regs., defines the term to include ‘land’ and ‘unsevered natural products of land’ and states further that ‘unsevered natural products of land’ generally include ‘[g]rowing crops and plants’ where the preproductive period of the crop or plant exceeds two years.  That definition, although included in the regulations explicitly made applicable to the capitalization of interest but not included in the regulations explicitly made applicable to the capitalization of other costs, is consistent with the term’s ‘ordinary meaning.’  See Nw. Forest Res. Council v. Glickman, 82 F.3d 825, 833 (9th Cir. 1996) (observing that a statutory term that the statute does not define may be construed in accordance with its ‘ordinary meaning’).  The ordinary meaning of the term ‘real property’ includes ‘property consisting of land, buildings, crops, or other resources still attached to or within the land’.  Merriam-Webster’s Online Dictionary, http://www.merriam-webster.com/dictionary/property (last visited Nov. 15, 2016); see also Black’s Law Dictionary 1412 (10th ed. 2014) (defining the term ‘real property’ to include ‘[l]and and anything growing on, attached to, or erected on it, excluding anything that may be severed without injury to the land’).  In that the almond trees grow on the land and otherwise fit within the ordinary meaning of the term ‘real property’, we conclude that the almond trees are “real property” for all purposes of section 263A.” 2016 T. C. Memo. 224, at pp. 25-26. (Footnote omitted).

See my blogpost “Raspberries, Strawberries,” 2/22/13. Almonds didn’t make the Notice 2013-18 cut.

Joyce Kilmer may be right that “only God can make a tree,” but IRS can sure capitalize it.

So the Wasco gang gets a Section 481 adjustment, and must capitalize the taxes and interest.

No, not the TV cops-‘n’-robbers. Today it finally became clear to me why there cannot be refunds of the sixty buck filing fee.

It’s probably been clear to y’all from the getgo, so I’m waiting for the choir to sing the “Amen” from Messiah.

Every day the Tax Court is open, even when there are no opinions or designated hitters, there are dozens of orders telling petitioners to cough or cop.

Either cough up the sixty bucks or cop a waiver.  I don’t have the statistics on how many do neither, but intuition seasoned with plowing through this stuff says better than 90% do neither.

I wish the hard-laboring intake clerks and flailing datestampers would provide valid statistics.  I know it’s tangential to TAS’ mission at best, but the numbers could be part of Nina E. (“The Big O”) Olson’s annual weep to Congress.

Howbeit, each of those nonstarters takes the same amount of work to log in and create a file as a multi-billion-dollar deficiency filed by a trillion-dollar multinational, featuring white shoes in divisional strength, which takes ten years to get to trial with no time off for good behavior.  And the trillion-dollar multinational pays the same sixty bucks.

So the relatively few who cough or cop subsidize the rest.

No, don’t draw any political analogies. Not here.

Hit it, choir!

The Judge With a Heart, STJ Armen, has before him the revocation of the 501(c)(3) of Community Education Foundation, 2016 T. C. Memo. 223, filed 12/12/16.

CEF was formerly known as “ABF Educational Foundation, Inc., but since its incorporation has operated under the names Congressional Education Foundation, Congressional Education Foundation for Public Policy, and most recently Community Education Foundation.” 2016 T. C. Memo. 223, at p.  2.

The sole officer, director and representative of CEF timely petitioned, but did not engage fully thereafter, and did not file a brief when directed by STJ Armen.

Judges do get peeved when ignored, but STJ Armen, exercising his hearty discretion, elects not to toss CEF on that ground.

CEF did nothing for the first seven years of its life, but then tried to run a Veterans’ Inaugural Ball, which fizzled.

There’s a jumpball over why the fizzle. CEF’s sole officer, director and representative stiped to the administrative record.

The record contains an “…article in the Army Times stating that ‘sponsors, entertainers and ticketholders [were left] in the lurch when the Veterans’ Inaugural Ball was not held.  The article further stated that the Baltimore, Maryland, Department of Recreation and Parks did not have a permit request regarding petitioner’s promotion of a ‘star studded benefit concert’ at Carroll Park in Baltimore, nor were the featured entertainers officially scheduled to perform at any such concert. According to petitioner’s version of the events, the Veterans’ Inaugural Ball fell through because Mr. H found his cosponsor to be misleading and other unnamed cosponsors ‘could not get past the fact that’ (1) ‘we were all Republicans, supported President George W. Bush, and the war in Afghanistan and Iraqi [sic]” and (2) the ‘CEF [Community Education Foundation] former President * * * was indicted in Colorado on issues relating to money and the Kuwaiti Government’.  With respect to petitioner’s contemplated events for [the next year] it contends that it was not able to find corporate sponsors for those events because of an unflattering article in the Washington Post, as well as the… article in the Army Times.” 2016 T. C. Memo. 223, at p. 6, footnote 3.(Name omitted).

As this is a nonpolitical blog, I can only reiterate: Stipulate, don’t capitulate. Especially don’t stipulate to hearsay.

Howbeit, STJ Armen sees no need to figure out why CEF didn’t bring off the Veterans’ Inaugural Ball.

“Instead, the Court focuses on petitioner’s exempt purpose and the activities that it engaged in, or, more to the point, failed to engage in, with respect to that purpose.

“According to its application petitioner intended to further its exempt purpose by organizing monthly town hall meetings, 20 national workshops yearly, and quarterly congressional forums in addition to a nationwide media campaign.  The application allocates petitioner’s time and resources as follows:  (1) 25% to town hall meetings…; (2) 55% to national workshops…; (3) 10% to congressional forums…; and (4) 10% to its nationwide media campaign.  Notably, petitioner did not over time meaningfully organize or allocate resources to any of the aforementioned activities.  Accordingly, on the basis of the record before us, the Court concludes that petitioner failed to satisfy the operational test because it did not engage in any activity that accomplished one or more of the exempt purposes in section 501(c)(3).  The Court therefore holds that regardless of the applicable standard of review, see supra note 5, respondent properly revoked petitioner’s tax-exempt status… because it was not operated exclusively for an exempt purpose.” 2016 T. C. Memo. 223, at pp. 11-12.

Remember, in the 501(c)3 context, “operated exclusively” means operated primarily, with only an insubstantial noncharitable activity. STJ Armen has lots of cases cited for your brief file.

But To Whom Is It Due?

STJ Panuthos, again modestly omitting his Chiefdom, has to deal with giving credit. No, Tax Court is not Lending Tree. Jennifer Zuch, 25125-14L, filed 12/12/16, claims the two checks aggregating $50K she and her now-ex-spouse Patrick Gennardo paid to IRS as 1040-ES payments are hers. One was drawn on their joint account and that 1040-ES listed both of them. The other named only Pat, although the cash came from Jen.

IRS put both checks in their joint account, but each filed MFS for that year, as they parted ways. Jennifer claims she was so broken up by Pat’s bailout she filed late.

After not mentioning the $50K in either return, Jen and Pat filed 1040Xs, giving Jen the $50K credit.

Then Pat offers an OIC for that year and some unspecified other years, IRS takes him up on it, and applies the $50K to Pat’s OIC. Then IRS hits Jen with a NITL.

Now STJ Panuthos again conflates paper with person. Enter “petitioner’s POA Frank Agostino,” who files the 12153 for Jen. Petitioner’s “POA” is no paper tiger. He’s the Boss Hoss of the well-known law firm sometimes herein and elsewhere referred to as The Jersey Boys.

Judges, Chiefs or not, must remember a Form 2848 qualifies a “representative” to act for taxpayers before IRS. The Form 2848 is entitled “Power of Attorney and Declaration of Representative.” It names the representative, and most commonly does so on a piece of paper.

Back to our game. Appeals says “So sorry, applied the money to Pat’s OIC, and BTW, we’re not abating the late-filing chop despite your tearful bust-up with Pat.”

Jen petitions, and IRS, after answering, seeks summary J.

Not today, says STJ Panuthos.

Since check no. 1 was accompanied by 1040-ES with both names and both SSANs, it’s a joint payment, so how come Pat got it all?

The second check had no 1040-ES with it, and the cover letter to an IRS employee named both Jen and Pat. “It is also not clear from the record as to when petitioner and Mr. Gennardo decided to file their…Form 1040s separately.” Order, at p. 6.

And as for the OIC that covers both the year at issue “and other years,” were any payments subsumed in the OIC for joint liabilities of Jen and Pat?

As for standard of review, STJ Panuthos has a footnote worth reading: “See Freije v. Commissioner, 125 T.C. 14, 23, 26-27 (2005) (applying abuse of discretion standard where taxpayer in CDP case challenged IRS’ failure to credit overpayments). Compare Landry v. Commissioner, 116 T.C. 60, 62 (2001) (applying de novo standard where taxpayer challenged application of overpayment credits, reasoning that “the validity of the underlying tax liability, i.e., the amount unpaid after application of credits to which petitioner is entitled, [was] properly at issue”), with Kovacevich v. Commissioner, T.C. Memo. 2009-160, 98 T.C.M. (CCH) 1, 4 & n.10 (applying abuse of discretion standard where taxpayer challenged application of tax payments, reasoning that ‘questions about whether a particular check was properly credited to a particular taxpayer’s account for a particular tax year are not challenges to his underlying tax liability’), and Orian v. Commissioner, T.C. Memo. 2010-234, 100 T.C.M. (CCH) 356, 359 (same).” Order, at p. 6, footnote 7.

No need to decide now which standard to use; too many questions.

W. S. Gilbert’s immortal words certainly do not describe STJ Daniel A (“Yuda”) Guy. Although Daniel A. Colon, Docket No. 13933-16L, filed 12/9/16, has “…theories may be susceptible to summary adjudication, the current record is insufficient to support such a disposition.” Order, at p. 2.

Dan wants judgment on the pleadings. IRS says there are facts in dispute. Dan attached some documents to his motion, but with no covering affidavit.

That’s a standard pro se mistake.

IRS counsel has the affidavit and some documents of their own.

A refresher for civilians. “A judgment on the pleadings is a judgment based solely on the allegations and information contained in the pleadings and not on any outside matters. See Rule 120(a) and (b), Tax Court Rules of Practice and Procedure. The movant has the burden of showing entitlement to judgment on the pleadings. See Nis Family Trust v. Commissioner, 115 T.C. 523, 537 (2000). He must show that the pleadings do not raise a genuine issue of material fact and that he is entitled to a judgment as a matter of law. See id.” Order, at pp. 1-2.

Except Tax Court doesn’t award judgments, of course. Tax Court renders reports and issues decisions. See Section 7459.

Tonight was held the last meeting of the Bloomberg BNA Tax Advisory Committee. It was, as always, stimulating and educational.

I will miss the colleagiality, the informality, and the intellectual honesty.

Best wishes to all my fellow members for every success in their future endeavors, and thanks to BNA and its successor for the opportunity to serve the profession I love.

And She Also Got the Deduction

Judge Laro tells the story of Estate of Steve K. Backemeyer, Deceased, Julie K. Backemeyer, Personal Representative, and Julie K. Backemeyer, 147 T.C. 17, filed 12/8/16.

The late Steve farmed in Cass County, NE, and in the year prior to the year at issue, bought a lot of inputs, like seed, fertilizer, insecticide and diesel fuel, which would help him transform Cass County soil, rain and sunshine into corn and soybeans. Being a cash basis sole proprietor, the late Steve wrote off all the costs thereof on his Schedule F for that year.

In the next succeeding year, being the year at issue, but before he could use any thereof, the late Steve bought the farm. The inputs aforesaid turned up on the estate inventory, at cost. The late Steve had a bushelbasketful of receipts for all but $203 thereof.

The farmland and inputs passed to Julie via the family trust. Julie took the inputs as an in-kind distribution from the trust and promptly took up farming. And wrote off the inputs she had gotten against the income from the sales of corn and soybeans.

IRS yells a lot of things, but settles on tax-benefit rule: if you took a deduction in one year, but a fundamental change took place inconsistent with the premise upon which the deduction was taken, and no nonrecognition provision applies, that item is income in the next year. IRS says this is fundamental.

Yes it is. But Julie got a stepped-up basis in the inputs because of Steve’s death. And estate tax and income tax are two separate things.

Steve’s deduction of the inputs is OK even though he didn’t use them in the year he bought them. See my blogpost “The Field Pack Question,” 7/30/15.

And Julie’s deduction is OK, too.

“…neither Mr. Backemeyer’s death nor the distribution of the farm inputs to and their use by Mrs. Backemeyer was fundamentally inconsistent with the premises on which the initial section 162 deduction for tax year 2010 was based.  “A current event is considered fundamentally inconsistent with the premises on which the deduction was originally based when the current event would have foreclosed the deduction if that event had occurred within the year that the deduction was taken.’  Frederick v. Commissioner, 101 T.C. at 41.  Had Mr. Backemeyer died and Mrs. Backemeyer inherited and used the farm inputs in [year preceding death], the initial section 162 deduction would not have been recaptured for purposes of the income tax.

“The reason for this is that the estate tax effectively ‘recaptures’ section 162 deductions by way of its normal operation, obviating any need to separately apply the tax benefit rule.  When Mr. Backemeyer died, all of his assets, including the farm inputs, became subject to the estate tax, which operates similarly to a mark -to-market tax when the mark-to-market tax is imposed on zero-basis assets.” 147 T. C. 17, at pp. 26-27.

Requiring Julie to relinquish the deduction on the inputs would mean double taxation…estate and income.

While it may be beneficial for tax purposes, death is not generally recommended for tax planning purposes.

Judge Laro doesn’t state whether estate tax was actually paid, but the Section 1014 step-up doesn’t require that tax be paid.

IRS says that Julie is getting a double deduction, one on the 1040 MFJ she and Steve filed for Steve’s last full tax year, and one on her own the next year.

OK, says Judge Laro, but Congress has monkeyed with Section 1014 as recently as last year (2015), and presumably knows the laws they are amending. Wanna bet, Judge?

“It is hardly unforeseeable that taxpayers would attempt to deduct previously expensed inherited assets for which they received a stepped-up basis, yet at no point has  Congress acted to prevent it.” 147 T. C. 17, at pp. 30-31.

A classic tax benefit rule is recapture depreciation in Sections 1245 and 1250. But they don’t apply at death.

Finally, a nonrecognition statute blocks the tax benefit rule, and nonrecognition of stepped-up gain at death is a fundamental nonrecognition statute.

So no deficiency, except for the tax on the $203 Julie concedes. And that’s way below the radar for the substantial understatement chop IRS was looking for.

Some mothers do ‘ave ‘em, as the old English slogan goes, but the STJs at 400 Second Street, NW, get more than their share.

And today STJ Lewis (“The Name”) Carluzzo has a pair of designated hitters.

Start with a return by Bruce Edward Haddix & Rae Anne Haddix, Docket No. 7385-16L, filed 12/7/16. Bruce & Rae were last here in my blogpost “No Deus, Much Machina,” 11/18/15.

I’m rather surprised Bruce & Rae are back, as you can see from the abovecited blogpost they had accused Tax Court of participating in a fraud. Howbeit, they seem to have discovered the subpoena, and have served the same far and wide, even before the Branerton play-nice, interrogs and document productions.

Apparently there’s less than a billion bucks on the table, and the third parties subpoenaed seem to have little to do with the matter at hand.

“More problematic, however, is petitioners’ attempts to use the Court’s Rules to obtain information that seems to have no bearing on the issues typically involved in proceedings such as this one. This is true with respect to each moving party. The individuals/moving parties apparently have some prior employment related connection with at least one of the petitioners, but the relationship of each of those individuals with respect to the underlying liabilities or the proposed collection action here in dispute is hardly apparent. As demonstrated in this case and at least one other previously dismissed Tax Court case, petitioners’ apparent propensity to issue and have served subpoenas upon individuals for information that hardly seems reasonably calculated to lead to admissible evidence in a Tax Court proceeding is an abuse of the Court’s Rules. See Rule 70(b). It would be improper for the Court to allow this practice to continue unchecked.” Order, at p. 2.

So no subpoenas on third parties without leave of Court, whether or not IRS agrees, with sanctions and costs to follow.

Next up is Chastity Kirven, Docket No. 30393-15W, filed 12/7/16, again a repeat performance (see my blogpost “Honey, I Shrunk the Kids,” 6/17/16).

As Chas won’t stip with IRS for a protective order before IRS gives her the Section 6103 material she wants, STJ Lew decides that allowing limited discovery is premature.

“…the Court indicated that it was inclined to allow petitioner limited discovery as requested in her opposition to respondent’s motion for summary judgment…and her motion for discovery…. However, upon further consideration…allowing discovery at this stage of the proceedings without some suggestion of a factual dispute would seem to be little more than an inappropriate ‘fishing expedition’, not to mention contrary to the Court’s requirement that the parties informally consult or communicate before discovery is initiated. See Rule 70(a); Branerton Corp. v. Commissioner, 64 T.C. 191 (1975). Petitioner is entitled to present information that challenges the statements contained in the declaration, and she will be given an opportunity to do so.” Order, at pp.1-2.

So Chas gets to put in credible information why IRS is wrong.

But STJ Lew has some advice for Chas that it would be well to heed.

“…petitioner objected to scheduling multiple motions for hearing on the same day, and she has repeatedly challenged the jurisdiction of a special trial judge to act in this case. At the hearing the Court noted for the record the provisions of I.R.C. §7443A(b)(6) and (c), which upon assignment by the chief judge, specifically grants jurisdiction in cases such as this one to a special trial judge. In many of her filings petitioner has also relied upon inapplicable provisions of the Federal Rules of Civil Procedure in her opposition to the assignment of the motions here under consideration to the undersigned. She would be well advised to review the transcript of the hearing so as to be better informed as to the merits, or lack thereof, of many of her positions.” Order, at p. 1, footnote 1.

A tip of the battered Stetson to a long-time reader of this my blog (a poor thing, but mine own) for pointing out Estate Of Michael J. Jackson, Deceased, John G. Branca, Co-Executor and John McClain, Co- Executor, Docket No. 17152-13, filed 12/5/16.

I’d told the long-time reader that there wasn’t anything new in this rehash of a “Win Your Case at Discovery” CLE, but upon re-reading and ruminating, this order seems worthy of a note, even though it echoes previous learning. So I retract my previous opinion, Mr B.

For background, see my blogposts “Letter to the Editor,” 11/19/13, and “The Real McCoy,” 4/27/16.

We all know the Rule 74(c)(1)(B) truism: “The taking of a deposition of a party, a nonparty witness, or an expert witness…is an extraordinary method of discovery….”

Well, IRS wants depositions (what we NYS practitioners call “EBTs”, examinations before trial) of both co-ex’rs, a paralegal who worked on the 706, and an accountant who was the late King’s business manager.

Seems like a lot, especially when the play-nice Branerton informals, interrogs and document productions are all available. And Tax Court doesn’t play referee in discovery jousts, except to tell the players to play nice.

But there is here a key fact, which appeared also in the second of my blogposts above cited. And I’ll let The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Illustrious, Indefatigable, Imperturbable, Ineffable, Ineluctable and Incontrovertible Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes, tell us.

“The key fact here is that the stakes in this case exceed $1 billion. The Court acknowledges the parties’ disagreements about how cooperative each has been in informal discovery, but in a case of this size there is bound to be toing-and-froing between two highly qualified teams of lawyers. It is reasonable to lock down the testimony of a central witness on the key underlying facts, which should shorten the trial and better focus it on what are likely to be quite complicated valuation issues. Respondent’s motion is reasonable, and the marginal cost small in relation to the stakes.” Order, at p. 3 (misnumbered as p. 2 in original).

And to tie in the title of this little essay, I quote from the late Senator from IL, E. McKinley Dirksen: “A billion here, a billion there, and pretty soon you’re talking about real money.”

So the win-your-case-at-discovery gang get a bye.

Except. What would tax law be without “except”?

One co-ex’r is ill. “He is also described as very seriously ill and subject to very poor reactions to stress — descriptions buttressed by specifics from his doctors that the Court will seal out of respect for his privacy — that would seem inconsistent with the ability to manage a complex enterprise in an industry not widely known for the placidity with which its commercial activity is carried out.” Order, at p. 3 (misnumbered as p. 2 in original).

“Very poor reactions to stress” definitely take one out of the profession I love.

However, lest the co-ex’r grow too elated, Judge Holmes, like a much more exalted personage, has a thorn for his flesh.

“…should respondent [IRS] issue a trial subpoena for his testimony, and should petitioner or [co-ex’r] object to it, the Court would expect to hold a brief hearing to determine if [co-ex’r’s] health has interfered with his ability to tend to the estate’s day-to-day business.” Order, at p. 3 (misnumbered as aforesaid in original.)(Name omitted).