Dear readers, I do not recommend trying that answer in the courtroom, or anywhere else.

But counsel for Taishan Investments, LLC, Bruce Elieff, Partner Other Than The Tax Matters Partner, Docket No. 8404-13, filed 11/15/16 does just that.

Now Judge Chiechi is not the most choleric of judges.  But counsel is pushing hard, and the result may be rather unpleasant.

Briefly to set the stage, IRS “…represents that respondent intends to send to petitioner on or before November 18, 2016, a final closing agreement. Respondent further represents in respondent’s supplement that ‘[p]etitioner’s counsel informed Respondent that she will be unable to review and/or have Petitioner Bruce Elieff sign the Closing Agreement until February 2017. Petitioner’s counsel informed Respondent that she is currently involved in significant litigation that she expects to last through January 2017.’” Order, at p. 1.

Judge Chiechi: “The Court is incredulous, and will not accept without further detailed, justifiable explanation, that the fact that petitioner’s counsel ‘is currently involved in significant litigation’ will preclude her from reviewing and/or petitioner from signing the closing agreement until February 2017.” Order, at p. 1.

If you tell a Judge that the case before him/her is not “significant” enough to merit your attention, your client may have to answer for your nonchalance. Until, of course, your client gets slammed and turns on you.

So, counsel, get on the keyboard with your “detailed, justifiable” reason why you can’t sign off on the final closing agreement until February, 2017.

And have it in Judge Chiechi’s extremely hot hands a week from today.

IRS’ counsel seems to have a limited grasp of how distributions from S Corps are taxed in Philip Joseph Franklin, 2016 T. C. Memo. 207, filed 11/14/16.

Phil’s various delictions take up 32 pages of Judge James S. (“Big Jim”) Halpern’s prose, but only one is of interest today.

At the behest of a creditor and his accountant, the books of one of Phil’s sub S Corps shows a loan to shareholder of $218K at the start of one of the years at issue, and zero at the end thereof. IRS claims that the release of the debt was an ordinary dividend. Phil claims that the $218K was money gotten from the sub S in prior years upon which he paid tax, which was mischaracterized as a loan.

“Respondent’s [IRS’] argument on brief raises principally an issue of timing and not one of character (i.e., whether the distribution constituted a dividend).  We say that because, unless an S corporation has accumulated earnings and profits, no distribution of property (including money) by the corporation to a shareholder with respect to his stock will constitute a dividend within the meaning of section 316(a).  Sec. 1368(b) and (c).  Instead, distributions by an S corporation with no accumulated earnings and profits to a shareholder with respect to his stock are excluded from the shareholder’s gross income to the extent that the distribution does not exceed the adjusted basis of the shareholder’s stock.  See sec. 1368(b)(1). Any excess is treated as gain from the sale or exchange of property.  See sec. 1368(b)(2).” 2016 T. C. Memo. 207, at p. 14.

Well, as sub S Corps are pass-throughs, how can there be accumulated earnings and profits?

Judge Big Jim tells us. The main source is what was still held by a C Corp when it converted to S, which goes into the AAA. That’s not the guys with the tow truck and jumper cables, that’s the accumulated adjustment account, wherein is held those leftover earnings and profits.

But Phil’s C Corp went S three days after it was incorporated, so no chance to pick up that kind of earnings and profits. And there is no evidence of any reorganizations that would trigger Section 1371(c)(2) adjustments.

IRS has no evidence of what Phil’s basis might have been.  But Phil has a demand from the aforesaid creditor, and testifies that he had guaranteed the S Corp’s debt. And Phil swears the creditor grabbed and sold Phil’s own property in partial satisfaction of the debt.

We all know that payment by guarantor subrogated guarantor to creditor, making guarantor creditor of debtor instanter (as the Supremes and the high-priced lawyers say). Corporate debt to shareholder is part of shareholder basis in S Corp stock. But there must be payment; Phil’s claim he guaranteed more than what the creditor seized from him doesn’t cut it. Pay to play, Phil.

However, Judge Big Jim has a bonus for Phil.

“Indeed, it may be that, as indicated by [Sub S’] negative accumulated adjustments account, petitioner could…deduct an increased passthrough loss….  See sec. 1366(d)(2).  Petitioner, however, has made no such claim, and the issue is not before us to decide.” 2016 T. C. Memo. 207, at p. 22. (Footnote omitted, but read it. Phil could make a Rule 41(b) motion to conform pleadings to proof and claim a bigger loss than the $218K, based on how much the creditor took from Phil personally).

In short, it’s time for IRS’ counsel to reread Eustice, Kunz & Bogdanski’s tome on taxation of S Corps. The 2015 edition.

That well-known immunologist James Haber is back in the spotlight, as CCAFed blows away his partial payments of the Section 6707 unregistered shelter chop in Diversified Group Incorporated, James Haber, v. US, 2016-1014, decided 11/10/16.

Thanks to a long-time follower of this my blog for the heads-up. And thanks to Jim for some really good blogfodder.

Ya gotta give Jim credit, he goes down fighting. He claims by paying the chop for two of his customers, he gets to challenge the whole enchilada. So he pays $34K to challenge $42.1 million. Jim’s claim is that the penalty is divisible, as IRS toted his tab based on the 192 shelters he flogged.

Jim is using the test-case play I recently described in my blogpost “It’s My Party,” 11/10/16.

Nope, says Ch J Prost.

First, Section 6707 says you have to register before you offer. And the penalty is imposed on failure to register before offering, not selling.

So IRS’ footing up the bill is merely aggregating what the customers invested and taking one percent thereof, per Section 6707(a)(2)(A). They must have ponied up half a billion.

Second, the Supremes don’t allow part payment in a money claim against the US of A. It’s the so-called “full payment” rule; cough up or shut up.

And USCFC’s mistake on which version of Sections 6111 and 6707 to apply was a mere clerical error, and didn’t divest USCFC of jurisdiction to insert the right versions in an opinion subsequent to Jim’s notice of appeal.

I hope Jim doesn’t quit after this. I need good copy on a Friday, which is also a Federal holiday, and after which I’ll be too weary after having marched two miles in America’s parade.

Blogging Tax Court is so much fun. I sometimes pity those law review writers and trade-press types, with their festoons of footnotes and “somber reasoning and copious citation of precedent,” plowing agonizingly through the dustbowl of appellate jurisprudence.

I’m more of a freelance vagabond, driftin’ along with the tumblin’ cliché.

Here’s the kind of thing that wrings a guffaw from my gnarled visage, Louis J. Baumgartner & Beth A. Baumgartner, Docket No. 23018-16, filed 11/10/16.

Lou (“Too Bad About the Spelling”) & Beth sent in what Ch J L. Paige (“Iron Fist”) Marvel denominates as an imperfect petition. So she tells them to send in an amendment and the sixty bucks, please.

Lou (“TBATS”) & Beth denounce the crafty invitation to join the Tax Court promenade.

“Recently, you sent a request for me to submit to your jurisdiction by: (1) filing an Amended Petition and (2) sending a filing fee on or before December 15, 2016. It would be an Order if I were subject to the limited jurisdiction the USTC and IRS are only authorized to operate within. Your request had a sub silentio design in its intent to draw me into your territorial jurisdiction for the express purpose to allow the USTC and by extension, the IRS, to impose the federal income tax that has been levied only upon the National Government per The Legislative Intent of the 16th Amendment, written by former POTUS William H. Taft on June 16, 1909. Therefore, the federal income tax is only applicable within the jurisdiction of the statutory ‘United States’ meaning the District of Columbia.

“I exist ‘outside the statutory United States’ as an American National [nonresident alien non US person] with no taxation nexus to the jurisdiction of the US Tax Court, the statutory ‘United States’ [26 USC§7408(d)].” Order, at p. 1. (Some emphasis in original omitted).

Oh, Ch J Iron Fist, you crafty devil you!

Nothing daunted, Ch J Iron Fist: “…it appearing that petitioners do not intend to file an amended petition and pay the filing fee as directed in the Court’s Order,” the case is dismissed for lack of jurisdiction.

Lou (TBATS”) & Beth, take a look at Section 6673, before you have your next bright idea.

Judge Lauber has a good one today in Whistleblower 26876-15W, 147 T. C. 12, filed 11/9/16. The blower claims no jurisdiction and wants his petition tossed.

Blower put in a claim, but the audit crew gave a “no change” to the blown, so no proceeds, no award.

The Form 11369 bouncing the blower was prepared by a senior tax analyst, who signed the letter telling blower he (masculine pronoun used without designating actual gender of blower, as Judge Lauber is at pains to point out) was out of luck. The Form 11369 was also signed by Mr Chief Whistler.

The letter went to the (admittedly) wrong address.

Now while Section 7623 mandates no specific form of claim rejection, or even that it be written or communicated to the blower, Tax Court has held that the rejection must be written and sent to blower’s last known address.

Of course, there’s the battle of the letters (see my blogpost “Contra Proferentem,” 10/2/14), and the Comparinis’ epistolary duel with the Ogden Sunseteers is retold.

But the petition came during the thirty-day window after Letter No. Two, which went to the right address.

Oh, the Boss Hoss Rule? Well, the denial letter that got to the blower was signed by the senior tax analyst aforesaid. And blower says the analyst’s not covered by Delegation Order 25-7 (Rev. 1), Internal Revenue Manual pt. 1.2.52.8(2) and (3) (July 1, 2008). So the second letter is also a dud.

Judge Lauber is unimpressed: “We find no merit in this argument.  Delegation Order 25-7 delegated to Mr. [Chief Whistler] the authority to approve or disapprove awards under section 7623.  Mr. [Chief Whistler] exercised that authority…when he signed the Form 11369 adopting his staff’s recommendation that petitioner’s claim be disallowed in full because no ‘proceeds’ had been collected.  The following day, the Office sent petitioner a final determination letter informing him of this decision.  There is nothing in Delegation Order 25-7 (or anywhere else) that required this letter to be signed by Mr. [Chief Whistler] personally rather than by a member of his staff.” 147 T. C. 12, at p. 7.

So there’s jurisdiction. And you know this isn’t going to end well for the blower.

David B. Greenberg, Esq., claims that he’s the real party in interest in the Section 7430 claim  he’s making after his client prevailed.

No dice, says Judge Pugh, in 147 T. C. 13, filed 11/9/16. Dave’s client prevailed, and Dave claims he has the right to collect the admins for the work he did. As his claimed assignment from his client crashes under the Anti-Assignment Act, 31 USC §3727(b), he says that he’s the real party in interest because he did the work.

Lawyers are endlessly inventive. Check out my blogpost “We Don’t Need No Stinkin’ Badges,” 4/2/14.

Dave’s Problem One is who is a “party.” The only case where the courts look behind the caption is when there’s a test case situation, where numerous petitioners band together in a cost-sharing arrangement and use one case from among them to resolve all of their cases. There, however, every member of the band has skin in the cliché.

Problem Two is the statutory language awarding admins to the party who incurred the fees, not the one who had the claim to be reimbursed. Dave was the payee, not the payor.

The idea is that the fee award is a waiver of sovereign immunity, and must be narrowly construed, lest the fisc be plundered by inventive lawyers.

“Here, petitioner was acting as his client’s representative pursuant to a power of attorney and was not a party in the underlying dispute.  He seeks to recover fees he charged (but has not received from) his client, not costs he incurred.  Because he was not a party to the underlying dispute and therefore cannot be a prevailing party, he is not the proper party to petition the Court for review of respondent’s denial of an award for administrative costs, and we lack jurisdiction to decide this case.” 147 T. C. 13, at pp. 14-15.

Dave, it’s not your party, but you can sure cry if you want to.

And so it shall stay. Of course, it remains to be seen how long it will continue to be a blog, once net neutrality is gone.

A busy day for CSTJ Panuthos, as he deals with shilling for dollars and hustlers at the Hustler.

To clarify: Peter Phuong K. Pham and Bach T. Nguyen, 2016 T. C. Sum. Op. 73, filed 11/8/16, hereinafter sometimes referred to as “Pete & Bach,” worked for the Hustler Casino. And they hustled.

“…casinos sometimes hire house players to ensure that there are enough players to start and maintain card games or to gain an additional source of revenue from the player’s winnings. Petitioners explained that as house players for Hustler Casino they would start a game of ‘Texas Hold ‘Em’ poker (Texas Hold ‘Em). The goal was to attract other players/customers. Petitioners each received an hourly wage.” 2016 T. C. Sum. Op. 73, at pp. 2-3. (Footnotes omitted).

But there was a hitch (isn’t there always?).

“…they were required by Hustler Casino to use their own funds for betting in the games of poker, including paying the same table fees as customers not employed by that casino. The table fees included a regular table fee of $5 per hand and a collection for a “bad beat jackpot”, which was $1 per hand. Hustler Casino set aside one dollar from each hand for the bad beat jackpot. Under certain circumstances not described in this record, Hustler Casino would decide that a player had ‘hit the jackpot’. Hustler Casino would then redistribute the accumulated bad beat jackpot funds to the winner of that jackpot.” 2016 T. C. Sum. Op. 73, at pp. 3-4. (Footnotes omitted).

Hustler didn’t train Pete & Bach, or require them to exhibit or maintain any skillsets, just to present a neat appearance and keep playing.

Pete & Bach “…assert that initially they tried to keep track of their poker winnings and losses by writing down the amount won or lost at the end of each day, but after a while they gave up that practice because it is ‘bad for your psyche * * * you need to be strong mentally’ when playing cards.” 2016 T. C. Sum.Op. 73, at p. 4.

A strong psyche doesn’t help when you’re trying to deduct your losses, even if you can claim professional gambler status. In this case, you can deduct your losses against all income to get to AGI. If not a pro, all you get is a miscellaneous itemized deduction to offset losses against winnings; losses in excess of winnings are truly lost.

“The Commissioner has suggested that gamblers regularly maintain a diary, supplemented by verifiable documentation, of gambling winnings and losses. See Rev. Proc. 77-29, 1977-2 C.B. 538. A taxpayer’s ‘contention that it was too difficult for him to maintain contemporaneous records of his gambling activities is without merit.’ Kalisch v. Commissioner, T.C. Memo. 1986-541, 52 T.C.M. (CCH) 991, 995 (1987); see also Schooler v. Commissioner, 68 T.C. 867, 870-871 (1977).” 2016 T. C. Sum. Op. 73, at p. 10.

And Cohan doesn’t help, because Pete & Bach have nothing.

Fans of C. S. Forester’s fictional hero Horatio Hornblower will remember that Horatio was reduced to shilling for shillings at whist on his return from the West Indies in 1802, in the Long Rooms at the Keppel’s Head in Portsmouth, on the same terms as Pete & Bach two centuries later.

But Horatio got to command a sloop of war as a result. Whereas Pete & Bach are just sunk.

This was (and still is) an often-heard phrase in the dirt lawyer community. It refers to the practice of a mortgagor, whose property is worth less than the balance due on the mortgage debt, mailing the keys to the mortgagee (or more likely, mortgagee’s servicing agent) and walking away.

An unpleasant alternative is the mortgagor’s scorched-earth interposition of numerous defenses to foreclosure proceedings, including without limitation standing to sue, fraud in the inducement, oral modifications, and an occasional visit to bankruptcy court.

But the more hip among the servicing agents, deciding that peace is worth the price, and getting back the property untrashed and with taxes paid beats facing off with debtor-friendly courts and pro bono bulldogs, have reversed the process.

If the mortgagor plays nice and hands over title and clean property (both physically and legally clean), the servicing agent might fork over some of the cash that would otherwise go to their hard-laboring and underpaid foreclosure attorneys. Trust me, it isn’t easy being one thereof.

What has this to do with tax? Well, we know that cancellation of debt is income, a residence is generally a capital asset, foreclosure or deed in lieu thereof is a sale or exchange, and to the extent basis is greater than debt forgiven, there is a capital loss and the usual short-vs-long debate follows.

But how about the forked-over cash?

Karl D. Bobo & Kimberly D. Bobo, 2016 T. C. Sum. Op. 74, filed 11/8/16, say that $20K jingle they got was sales proceeds and therefore included in their computation of their capital loss.

IRS claims what K&K got was ordinary income. And the servicing agent did give K&K a 1099-MISC non-employee compensation for the $20K, in addition to the 1099-A abandonment. But of course neither K nor K worked for the servicing agent, so the 1099-MISC is strictly for the jingle money.

K&K’s trusty CPA filed their return showing the whole thing as COD.

CSTJ Panuthos, recovered from his recent display of modesty and displaying his full title, holds for K&K.

IRS’ claim that the jingle was an incentive payment falls flat.

Too bad this is non-precedential.

But the principle isn’t. The deed in lieu and the jingle are all one transaction. No way would the servicing agent have given K&K Penny One unless K&K handed over clean title and possession.

“Looking at the substance of the transaction the two agreements are inseparable; [servicer] would not have issued the cash for keys payment but for petitioners’ agreeing to sign over the deed to the property. Thus the cash for keys payment should be treated as part of the deed in lieu of foreclosure transaction and included in the amount realized….

“As a result, we calculate the gross proceeds from the transaction by adding the cash for keys incentive payment to the amount of loan forgiveness. Petitioners’ basis in the property is their cost basis. See secs. 1001(a) and (b), 1012(a); sec. 1.1001-2(a)(1), Income Tax Regs.” 2016 T. C. Sum. Op. 74, at pp. 10-11. (Citation and footnotes omitted).

K&K were pro se. They get a Taishoff “Good job!”

Correction, 3/17/17: Thanks to Mr Peter Reilly, CPA (happy St Patrick’s Day, sir!) for pointing out a misstatement. K&K’s trusty CPA didn’t list the jingle as COD; I should have read my own comment above. The CPA reported the entire amount as sales proceeds, as the mortgaged property was deemed sold for the outstanding debt balance plus the jingle.

The Great Dissenter, a/k/a The Judge Who Writes like a Human Being, s/a/k/a The Implacable, Incontrovertible, Irrefragable, Indefatigable, Insuperable, Ineffable, Ineluctable, and Illustrious Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes, cleans up an unresolved oldie that proves an old adage.

If you owe somebody money, stall. They might forget.

Unhappily, Judge Holmes’ elephantine memory digs through the soil of days gone by, and comes up with James A. Cavanaugh, Jr., Docket No. 30825-09, filed 11/7/16.*

On a day with no decisions and no designated orders, when I just got back from visiting my nearest and dearest in the Bayou City, I find this hangover from what a certain Nobel laureate called “the foggy ruins of time.”

All y’all (remember I’m just back this evening) will remember Big Jim Cavanaugh, Jr., the Clean-up King, his trusty sidekicks Rock Walker and Erica Fortner, and the late Claire (“Colony Anne”) Robinson.

What, no?!

Then read my blogpost “Well-Settled – No Deduction – Part Deux,” 11/27/12.

I thought Big Jim’s attempt to write off his legal fees settling with Mrs. Robinson was long gone, historical.

Wrong! Big Jim moved for reconsideration, and he was timely. Judge Holmes never dealt with the motion.

Well, there isn’t much to deal with. “The deductibility of legal expenses is governed by the same ‘origin of the claim’ test as is the deductibility of the cost of settling the lawsuit in which they arose. Respondent [IRS] had the burden of proof, because he challenged the deductibility of those expenses only in his answer. But he met it by stipulating to the amount of those expenses and that they were incurred because of the lawsuit, and then showing by a preponderance of the evidence that the origin of that lawsuit made the cost of settling it nondeductible.” Order, at p. 2.

Big Jim wanted to deduct the legal fees in settling the case, but as the claim originated in a non-business environment, no deduction for settlement or costs of procuring same.

So, guys, do the Rule 155 beancount.

Better late than never.

Edited to add, 9/6/21: 5 Cir affirmed. Note origin-of-claim vs effect-of-litigation analysis.

*James A Cavanaugh Jr 30825-09 11 7 16