Football is back, so the metaphors turn toward the gridiron, as an attorney I’ll call Steve, a Tax Court regular, throws what is sometimes known as a “Hail Mary.” But Judge Cohen, playing at the Section 72(p) yardline, bats it down. The case is Dora Marie Martinez and Carlos Garcia, 2016 T. C. Memo. 182, filed 9/28/16, but it’s all about Dona Marie.

Facing foreclosure, Dora Marie borrows from her 401(b). After a couple payments (hi, Judge Holmes) she stops, overwhelmed by family problems. She gets a 1099-R, but never reports it.

Looking at a SNOD plus substantial underpayment chop, Steve argues that because the Plan kept billing Dora Marie for payments, the loan wasn’t in default. Therefore, says Steve, as the statute is clear, IRS’s regs about deemed distributions are out under Mayo.

No, says Judge Cohen: “Petitioners’ brief ignores the first five words of the text of section 72(p)(2)(C): ‘[e]xcept as provided in regulations’. These words plainly express Congress’ intent to have subparagraph (C) clarified through appropriate regulations, and petitioners offer no alternative explanation for that choice of words. See Mayo Found, 562 U.S. at 45 (‘Filling gaps in the Internal Revenue Code plainly requires the Treasury Department to make interpretive choices for statutory implementation[.]’). The regulations under section 72(p) establish the timing and amount of a deemed distribution, and this Court has heeded the final regulations for those determinations.” 2016 T. C. Memo. 182, at pp. 9-10.

But Steve is not daunted. He argues that, since Dora Marie used the money she drew to save her home from foreclosure, she gets the principal residence exception in Section 72(p)(2)(B)(ii). But all that says is that a loan to buy a principal residence need not be paid back within five years. Level payments of principal and interest are still required, and default triggers a deemed distribution. And Dora Marie wasn’t buying a principal residence.

The rationale for all this is that, since the borrower is borrowing their own money from a 401(b) (or any qualified plan), the plan administrator can’t sue them. But since the money is tax-deferred, if taken prematurely it becomes taxable.

I’d like to give Steve a Taishoff “good try,” I really would. But no; all I can do is wish him better luck next time.

Miner switch isn’t minor. And an IRS agent’s oral instruction to change your accounting method isn’t Commissioner’s consent. And that holds true even when you’re mining in the Alaskan wilderness.

Hear now the tale of Carey Clayton Mills, 2016 T. C. Memo. 180, filed 9/27/16, as told by Judge Goeke. IRS had three (count ‘em, three) attorneys on this case, which seems to savor of overlawyering.

IRS dropped the accuracy chops. “After concessions, the issue for decision is whether the allowable deduction for legal and professional services (legal fees) for [year at issue] should be $12,007 or $77,823.” 2016 T. C. Memo. 180, at p. 2.

Carey Clayton had legal and professionals, and they did match those amounts. The only question is, when were they incurred for tax purposes?

Carey Clayton was running his digging and delving via a disregarded LLC, so he used the cash method for the first five years of his operations. In year six, he first filed cash, showing $12,007, but then amended to show $77,823.

IRS pounced, but got the categories mixed up, claiming the $77,823 was for repairs and maintenance. When this got straightened out, it didn’t change the bottom line, so Carey Clayton petitions.

Basics. Section 446 says you pay taxes how you compute income. Once you pick it, you’re stuck, unless IRS lets you change. This you do by filing Form 3115 for year at issue, and awaiting the blessing from above.

There is a shortcut, Commissioner’s automatic (Rev. Proc. 2011-14, 2011-4 I.R.B. 330), and nonautomatic (Rev. Proc. 92-27, 1997-1 C.B. 680 97).

But if you use none of the foregoing, just saying “an IRS guy told me to do it” doesn’t cut it. Carey Clayton never got the go-ahead, neither automatic or nonautomatic.

No go-ahead means you go back to your previous method.

So it isn’t a minor switch, even if a miner did it.

Ch J L. Paige (“Iron Fist”) Marvel is at one and the same time grabbing the sixty buck filing fee with her signature Iron Fist, as in Harold B. Rhoney, Docket No. 30518-15S, filed 9/27/16, and handing it back with Iron Fist wide open in Ethel M. Stewart, Docket No. 9223-16, filed 9/27/16.

Ethel timely sent in one page of a SNOD, which served to get her a docket number and an order to file a proper petition and pay the filing fee. She didn’t, and got another chance. She then sent in the sixty bucks, and Ch J Iron Fist gave her an order, at no extra charge, telling her to file a proper petition.

She didn’t. So Ch J Iron Fist orders the Clerk of the Court to send Ethel her money back.

Now Harold also filed an imperfect petition, with no filing fee.

Ch J Iron Fist “…directed petitioner to file an Amended Petition and to pay the Court’s $60.00 filing fee or submit an application for waiver thereof. Subsequently, petitioner paid the filing fee. However, because no Amended Petition was received, the Court by Order dated August 16, 2016, afforded petitioner a final opportunity to file an Amended Petition and thereby to avoid dismissal of this case. Petitioner has failed to do so.” Order, at p. 1.

So does Harold get his money back, like Ethel?

No, the order only states his case is dismissed.

Now see my blogpost “New Sheriff In Town,” 6/7/16.

When does a petitioner get back a filing fee? When is a filing fee waived if no request for waiver is made? Where are the rules governing these matters to be found?

Look It Up In The Dictionary

IRS says no, but Judge Foley is prepared to give an estate a deduction for a loss suffered by the LLC, 99% of whose membership interests were held by the decedent.

Tax Court has grappled with this Protean creation of statute before. See my blogpost “Is An LLC A Person?” 9/11/15, where The Judge With a Heart, STJ Armen, fought that one out to a no-decision.

But now Judge Foley is writing for a unanimous Court in a full-dress T. C., Estate of James Heller, Deceased, Barbara H. Freitag, Harry H. Falk, and Steven P. Heller, Co-Executors, 147 T. C. 11, filed 9/26/16.

And if this post is a trifle late, I occasionally have to practice law.

Facts are stipped. The late James placed much wealth in a family LLC (his gross estate was $26 million, un bello spendere). But $16 million thereof was invested by co-ex’r Falk, who ran the LLC, in a well-known securities firm.

Falk and the co-ex’rs took out $11 million to pay estate taxes and divvied up the rest to the late James’ children, each of whom had an 0.5% membership interest.

Lucky Falk.

The well-known securities firm, which had paid such generous returns to the LLC, was run by Wall Street wizard, and more recently long-term guest of us taxpayers, Bernie Madoff.

The LLC’s holdings in the Madoff account went rapidly to zero. The estate claimed a $5 million loss, being whatever was left after they pulled the $11 million.

Of course, we don’t know what, if anything, Irving (“Captain”) Picard, Esq., and his next-generation co-voyagers, might have clawed back on behalf of others similarly swindled. Falk fired off a protective refund claim, just in case. See 147 T. C. 11, at p. 4, footnote 4.

As aforesaid, IRS said no. There was theft all right, but it was theft from the LLC. The LLC was not the estate.

But no one’s legal argument is safe in Tax Court when there’s a dictionary lying around at 400 Second Street, NW. See my blogpost “Revenez, Enfants de la Patrie,” 9/21/15.

The theft loss section, Section 2054, speaks of losses during estate administration “arising from theft.”

Going to the dictionary in this case of first impression, since the statute and regs don’t deal with this, here’s Judge Foley.

“The estate tax is imposed on the value of property transferred to beneficiaries. See secs. 2001, 2031(a), 2051. In that context, a loss refers to a reduction of the value of property held by an estate. See Black’s Law Dictionary 1087 (10th ed. 2014) (defining a loss as ‘the disappearance or diminution of value’). While [LLC] lost its sole asset as a result of the Ponzi scheme, the estate, during its settlement, also incurred a loss because the value of its interest in [LLC] decreased from $5,175,990 to zero.” 147 T. C. 11, at p. 5.

And if one dictionary isn’t enough, here’s another.

“Respondent concedes that Madoff Securities defrauded [LLC] but contends that the estate is not entitled to a section 2054 deduction because [LLC] incurred the loss. In support of this contention, respondent emphasizes that pursuant to New York law, [LLC], not the estate, was the theft victim. Section 2054, however, allows for a broader nexus (i.e., between the theft and the incurred loss) than does respondent’s narrow interpretation. ‘Arise’ is generally defined as ‘to originate from a source’. See Merriam-Webster’s Collegiate Dictionary 62 (10th ed. 2001). Pursuant to the phrase ‘arising from’ in section 2054, the estate is entitled to a deduction if there is a sufficient nexus between the theft and the estate’s loss. See White v. Commissioner, 48 T.C. 430, 435 (1967) (finding a similarity between losses caused by direct and proximate damage of a section 165(c)(3) ‘other casualty’ and those arising from the specifically enumerated section 165(c)(3) causes). It is sufficient indeed. The nexus between the theft and the value of the estate’s [LLC] interest is direct and indisputable. The loss suffered by the estate relates directly to its [LLC] interest, the worthlessness of which arose from the theft.” 147 T. C. 11, at p. 6. (Emphasis by the Court). (Footnote omitted).

The aim of the estate tax is to tax whatever the legatees and distributes get. Here, what they got was $5 million less than what the late James had.

I got bounced from a tax review blog recently for suggesting an IRS appeal. So, with nothing to lose, I’ll suggest another.

This seems to be the newest CLE flavor-du-jour, and both sides are playing it for all it’s worth today.

The idea is to knock out your opponent’s expert on a motion in limine. But all it’s worth in Judge Holmes’ courtroom is a direction to go try the case.

So the designated hitter (thanks, Judge) is Oakbrook Land Holdings, LLC, William Duane Horton, Tax Matters Partner, Docket No. 5444-13, filed 9/23/16.

It’s a conservation easement case, so there’s the usual joy-forever motion to knock out the easement on the ground that the donor reserves the right to build some structures on the property post-donation, and get credit for them if the easement is extinguished.

IRS also claims the easement is void because indefinite, because where these structures are supposed to go is unclear.

But the property itself is set forth clearly enough, and the structures should only impinge on the value ascribed to the easement.

IRS wants to rely on “a couple conservation-easement cases in which we held that a reserved right to amend made the easements nonperpetual.” Order, at p. 2.

Judge, I had confidence in you; I was sure you’d exclude the partitive genitive at least once. And I’ve blogged both those cases, of course.

Howbeit, these objections are matters to be elaborated and expatiated upon at trial.

IRS wants an amendment to its answer, raising a 20% undervaluation chop. It’s past the thirty-day freebie, and IRS has no good reason for delay, but there’s no prejudice to Oakbrook. The value is whatever it is (or whatever can be proven that it is), and that’s the whole point of the trial. So The Great Dissenter gives IRS its amendment, with the burden of proof thrown in at no extra charge.

Oakbrook wants to toss an IRS expert for too much hindsight in valuing the easement. “Oakbrook is right that hindsight shouldn’t affect an appraisal, with the important caveat that an expert may consider reasonably foreseeable events as of the date of valuation. But its objection is based on suppositions that Barber did so — for example, that in a table of ‘outcomes’ the outcomes must have occurred after the date of valuation or that building-permit data from 2008 wouldn’t have affected values during 2008 because they would have been unknown at the time.” Order, at p. 3.

But this is a matter for cross-examination and argument, not exclusion.

Ditto IRS’s attempt to toss Oakbrook’s expert. He got the acreage wrong, so IRS claims he didn’t appraise the right parcel. Sloppy proofreading hurts credibility, says Judge Holmes, but let IRS sweat the appraiser on cross-examination.

Even less useful is IRS’ claim that the appraiser isn’t licensed to appraise in the State where the property is located. But there’s only one Tax Court opinion remotely on point, and IRS doesn’t cite it. Judge Holmes does, and it not only lets in the unlicensed appraiser’s report, but it accepts most of it.

So put it all in, and The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Inveterate, Implacable, Indefatigable, Ineffable, Ineluctable, Irrefragable, Incontrovertible and Indispensable Foe of the Partitive Genitive, and Old China Hand, will sort it out.

And don’t forget: “The parties should also be aware that, although the Court’s rules presume that an expert’s report is his direct testimony, this division of the Court has had success with allowing 20 minutes or so of direct testimony to allow minor amendments to a report and to enable counsel to highlight the most important parts of the report in some concise way. It is very probable the Court will do that in this case as well.” Order, at p. 3.

Go try the case, guys.

STJ Lewis (“A Name That a Shame Never Has Been Connected With”) Carluzzo has a mutated employee expense account to deal with in Andrew Christopher Sanek, 2016 T. C. Sum. Op. 60, filed 9/22/16, a Special Day in this blogger’s household.

AC was a construction road warrior, managing construction jobs and spending a year living transiently in the Sunshine State. IRS concedes AC’s rent for his bed-sitter, but jousts about AC’s mileage log and tolls.

And I can tell you from personal experience those FL tolls are substantial, but you must use the toll roads to get anywhere within lives in being plus twenty-one years. Unhappily, all AC has is toll records for the wrong year, so he loses that one to Section 274 strict substantiation.

Just when you’d think AC was going down on mileage (he did concede about two-thirds of the miles he claimed on his Form 2106), STJ Lew finds AC’s employer really didn’t reimburse AC for his work mileage, notwithstanding the company’s manual says they do.

“[Employer’s] written mileage reimbursement policy notwithstanding, we find from petitioner’s credible testimony on the point that in practice the company reimbursed his employment-related mileage only to the extent of $350 per month, and that amount is included in the income shown on his 2010 return.  We further find that [Employer’s] practice, rather than its written policy, controls.  Under the circumstances, the applicable regulations provide that the vehicle and toll expenses, if properly substantiated, are allowable as miscellaneous itemized deductions.  See sec. 1.62-2(c)(5), Income Tax Regs.” 2016 T. C. Sum. Op. 60, at p. 10.

So AC’s employer, though they claimed they had an accountable plan (employee must produce receipts and get reimbursed for allowable expenditures dollar-for-dollar), really had a non-accountable plan (flat payment for expenses regardless of actual amounts spent).

AC’s cellphone expenses are out, since the year at issue was before the decoupling of cellphones from Section 274.

And AC’s workshirts are out because he can’t prove he couldn’t wear them as ordinary clothing.

But he does get his steel-toe workboots. See my blogpost “He Gave Her the Boot,” 11/11/14.

Finally, AC  avoids the negligence chop.

STJ Lew: “Petitioner, who is relatively unsophisticated as to tax matters, made a reasonable attempt to comply with the provisions of the Code and to exercise ordinary and reasonable care in the preparation of his 2010 return.  We are satisfied that petitioner had reasonable cause and acted in good faith with respect to the underpayment of tax that will remain.  See sec. 6664(c).  He is not liable for the section 6662(a) accuracy-related penalty.” 2016 T. C. Sum. Op.60, at p.13.

A welcome back to Ory Eshel and Linda Coryell Eshel, Docket No. 8055-12, filed 9/21/16, from Ch J L. Paige (“Iron Fist”) Marvel, as USCADC bounced Judge Lauber’s dictionary-driven analysis of the French social security system. For the bounced opinion, see my blogpost “Va T’En, Enfants de la Patrie,”4/2/14.

You remember that Ory’s and Linda’s bœuf with IRS concerned the French la contribution sociale généralisée (general social contribution or CSG) and la contribution pour le remboursement de la dette sociale (contribution for the repayment of social debt or CRDS). Ory and Linda wanted the foreign tax credit, but IRS said no, check the Totalization Agreement (the “tote”) between France and the USA. Properly, the tote is the Agreement on Social Security Between the United States of America and the French Republic, March 2, 1987, 2260 U.N.T.S. 145, available at https:// http://www.ssa.gov/international/Agreement_Texts/french.html.

There’s no foreign tax credit for social security payments or foreign equivalents. The CSG and the CRDS were adopted after the French and we inked the tote, so the question was whether either or both was legislation that amends or supplements the previous French social security regime.

Judge Lauber went to the dictionary, and Judge Millett throws the book at him.

“The tax court’s conclusion that CSG and CRDS ‘amend[] or supplement[]’ the designated French laws was the product of asking the wrong legal question.  Rather than looking to the text of the Totalization Agreement or the signatory countries’ shared understanding, the tax court asked only what ‘amends or supplements’ means in domestic dictionaries, as it might do if construing a purely domestic statute.

“But the Totalization Agreement is not a domestic statute.  It is an executive agreement with a foreign country:  initiated by the State Department, negotiated by the Social Security Administration, signed by the President and a foreign government, and effective only after submission to Congress.” Eshel v. Com’r, 14-1215, decided August 5, 2016, at pp. 10-11.

There’s a specified set of French laws in the tote that comprised the French social security system for purposes of the tote. Judge Lauber looked at the general system, but that isn’t what the tote says.

“The central problem in this case is that the tax court’s resort to American dictionary definitions pretermitted the critical inquiry into the Agreement’s text and the signatory countries’ shared understanding of the Agreement.  The text strongly suggests that the question whether CSG and CRDS amend or supplement the designated French laws—which is fundamentally an inquiry into the content and meaning of the textually enumerated French laws—should have involved reference to  French law.  Instead of heeding this instruction, the tax court consulted outside sources that were not reliable expressions of either textual construction or the signatories’ intent.” 14-1215, at pp. 18-19.

Judge Lauber refused to listen to Ory and Linda’s French law expert, and that’s OK. Tax Court Rule 146 says foreign law is a question of law, not fact.  But IRS’s take is pure ipse dixit, and Ory and Linda’s documents from the French went in without context.

So, Tax Court, do a full-dress takeout on what the French and Americans thought they were doing.

It’s an adverb, showing that whatever agent is doing whatever the verb says, the agent is always doing it, right?

Well, The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Ineffable, Ineluctable, Indefatigable, Incontrovertible, Invigilant and Illustrious Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes, thinks there may be more to it than that.

So much more, that he denies summary J, and designates the order so doing, in Michael V. Shannon & Hope W. Shannon, Docket No. 16441-12, filed 9/21/16.

Speaking of consistency, I wonder why Judge Holmes designates this order, but not the off-the-bencher I just blogged, “The Dope on COGS,” 9/21/16. Some Judges designate everything, and some nothing. Really annoying to the blogger fighting a deadline.

Anyway, the ongoing saga of Mike & Hope goes on.

Mike & Hope claim aggregating their real estate activities makes them pros. And they claim they so elected, although IRS says their election wasn’t attached to their original return for the year at issue, as required by Reg. 1.469-9(g)(3).

Mike & Hope, apparently hip to the problem, try a Rev. Proc. 2011-34 retrofit.

“In this election, the Shannons sought to use the procedure that the IRS has created to retroactively treat all of a taxpayer’s rental real-estate interests as one activity. The Shannons wanted this election to be effective for all tax years from 2003 forward. Under that revenue procedure, the effectiveness of the election depends among other things on the taxpayers’ having filed consistently on any return that would have been affected. In this case that would be all returns from 2003 onward. These returns were not attached to the Shannons’ motion so they have not proven that part of the ‘consistency requirement.’

“The Court acknowledges a lurking issue here–namely, what does “consistently” mean? Does it mean that a taxpayer in the real-estate business can simply choose to aggregate all his properties even if there are changes in his portfolio from year to year? If so, what happens if his return omits a property (e.g. one that produced no income or deductions during that return year)–does it render the election invalid for all properties or simply throw the excluded property back into the passive-activity rules?

“This more interesting question is not one that has an obvious answer from the brief time in research the Court has had or in the Shannons’ motion papers. Without a clear answer the Court is loath to hold that they have shown entitlement to judgment as a matter of law on this key issue.” Order, at p. 2.

I submit the consistency requirement can’t mean that a real estate pro can’t buy or sell for every year for which a Rev Proc 2011-34 retrofit applies. If that’s what the retrofit means, it’s totally worthless. Every operator has to respond to market conditions: cut losses and seek profit, not embalm defeats and forego victories. Between 2003 and now there have been at least two boom-and-bust cycles; requiring a real estate pro to do nothing, in order to aggregate activities, is ridiculous.

The only questions are whether, when all real estate activities are combined, there’s sufficient engagement by the pros to prove that the pros are pros, and whether they have a good excuse for using the retrofit.

Y’all remember the ingenious move by Judge Kroupa (of tattered memory), when she loaded Marty Olive’s boo-pushing expenses into cost of goods sold (COGS), hence an adjustment and not a deduction to avoid Section 280E traffic.

If not, see my blogpost “Everybody Must Get Stoned,” 8/3/12. And if this is more about marijuana than you wanted to know, I got an e-mail the other day from a reader who is doing extensive research; so I’m trying to keep my readers satisfied.

Well, the capitalization rules latterly adopted in Section 263A and the regs thereto were claimed to hurt business by requiring capitalization of that which was formerly expensed, thus boosting inventory and raising COGS.

But the Imp of Unintended Consequences might help out the bigger boo-pushers, who are non-deductible under Section 280E. They want COGS, since their deductions are useless.

This is only theoretical, of course. In the case of Golden State Cooperative, Inc., Docket No. 2502-15, filed 9/21/16, they’re below the three-year-average $10 million annual gross receipts cutoff for the capitalizing COGS-enhancer.

However, and notwithstanding anything to the contrary or at variance with the foregoing (as my high-priced colleagues would say), the Golden Staters have a friend in The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Invariable, Incontrovertible, Indefatigable, Ineluctable, Ineffable, Imperturbable, and Illustrious Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes. And he even finds “a couple issues” not dealt with by the parties in this off-the-bencher.

The Golden Staters understated income for the year at issue by 0.55%, because they counted in credit card payments (and how they got a bank to let them accept credit cards must be an interesting story, what with PATRIOT acts and money-laundering laws) on the swipe and not when the cash hit a few days later. At the end of the tax year, this is a problem. Golden State concedes, so Judge Holmes gives IRS a win on the tax, but wait for the penalty phase.

Golden State was a consignee, meaning it sold what growers gave it and paid the growers. So Golden State never owned the stuff. Still, since the total of payments would be the same whether Golden State bought the stuff (presumably on credit), took title, and resold, or just hawked the stuff without owning, there’s no difference as regards using COGS. Golden State gets no greater tax benefit one way or the other.

“So the first issue that was actually argued by the parties was the potential allocation of indirect costs to this inventory under Section 263A. This section is relatively new — it’s certainly newer than Section 280E — and was actually designed to increase the cost-of-goods-sold adjustment for many businesses. This was actually harmful to most businesses because it is a form of capitalization rather than immediate expensing. But in the marijuana trade, the incentive to argue that indirect costs are included in COGS is much greater because COGS are an adjustment that medical marijuana dispensaries can take; deductions they cannot.” Order, at pp. 9-10.

But even relegating Golden State to Section 471 standard inventory methods, Judge Holmes finds a few bucks of COGS for Golden State, after giving them a big scare.

Golden State is a cooperative; it never owns the boo it’s flogging. “This means that the marijuana involved is not technically, or at least is arguably not technically, part of the inventory of the seller, and thus the seller might not be entitled to a cost-of-goods-sold adjustment for goods sold on consignment. Instead, as we said in cases decided before, 280E, such a consignee might have to take account of the cost of purchasing or rather reimbursing the gardeners or suppliers of the marijuana not as a cost-of-goods-sold adjustment but as another ordinary business expense, which means, in the end, that it might be the case that a cooperative that is working on the consignment model will have even the costs of its inventory swept up under Section 280E.” Order, at p. 12.

Just before Golden State’s hardworking counsel has a seizure, Judge Holmes drops that one.

“However, that was not argued in this case, and I will not decide this case on that basis. I note that, by doing this as a bench opinion, I raise the subject but this bench opinion has no precedential value.” Order, at pp. 12-13.

Judge Holmes gives the Golden Staters the price of a latte or two for the bags, the cost of which they can substantiate, wherein they packed the good stuff. And he gives them the grow supplies, as they are called in the industry (I hasten to add that I am paraphrasing the decision here, and know nothing of this of my own knowledge), the plant food, water and such that the Golden Staters used to mature young plants handed over by the growers. And the cones, which Judge Holmes tells us is another form of container for marijuana, nets them a few bucks (I will not make the obvious pun about a Saturday Night Live sketch from decades ago).

The Golden Staters had great records, and Judge Holmes lauds them, but has to follow Ninth Circuit and the Martin Olive case, above referred to. Golden State’s lawyer, recovered from the shock, says he wants to preserve the issue of deductions for appeal, and Judge Holmes is down with that.

Golden State wants the multiple-businesses dodge, but that doesn’t work, as the amenities they offer aren’t separately charged for. All the Golden Staters are doing is pushing the good stuff.

If their deductions are knocked out by Section 280E, then the Golden Staters are clearly in the five-and-ten penalty zone.

But the year at issue is pre-Olive in Tax Court, and definitely pre-Olive in Ninth Circuit. So the big item, the disallowed deductions, are a good faith mistake. Judge Holmes gave the Golden Staters a few pennies on COGS, so no penalty there. And the tiny understatement was a timing error, not an attempt to fiddle.

Good stuff.

Ernie Ryder, Esq., is in IRS’ sights as a dodge-flogger, selling variations on employer-sponsored insurance deals, which IRS claims are non-deductible deferred compensation, taxable to the employee.

I’ve blogged the ongoing saga elsewhere.

In this episode, IRS confronts the redoubtable Marnie W. Barnhorst, Esq., widow of the late Howard, in Estate of Howard J. Barnhorst, II, Deceased, Marnie W. Barnhorst, Successor in Interest and Marnie W. Barnhorst, 2016 T. C. Memo. 177, filed 9/20/16.

Ernie sold the late Howard’s law firm an insurance policy from Ernie’s client, a Turks and Caicos based insurance company never licensed in the US of A. The policy is a supposed health-and-accident, alleged to be compliant with Section 105.

Marnie strives mightily to prove that it is, but Ernie’s deft draftsmanship thwarts her,

The problems are that the policy’s payout has nothing to do with actual medicals, and that a 97% payout is guaranteed, no matter what happens. The remaining 3% just happens to be Ernie’s fee.

And here’s The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Indomitable, Illustrious and Incontrovertible Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes, to undo Ernie’s handiwork.

The late Howard had cancer, and suffered much, so no doubt he met the triggering event for payment under the policy. But the guaranteed payout is where the deal unravels.

“He would, for example, be entitled to the same amount if he lost hearing in one ear or the use of both his kidneys. Medical expenses for these two conditions would quite likely be different, but payout under the policy would be the same.

“That’s a crucial distinction. The cases tell us to ask whether a plan pays for actual medical expenses, not whether its payee suffers from some triggering condition.” 2016 T. C. Memo. 177, at p. 12.

And Judge Holmes pounds the essential point. “Most important, Howard (or his beneficiaries in the event of death) was guaranteed to get the 98% cash value no matter what happened.” 2016 T. C. Memo. 177, at p. 16. (Emphasis by the Court).

Even if he was never ill, Howard could convert the policy to a life insurance policy with the same 98% cash value. And the payout wasn’t determined by the nature of the injury.

So although the late Howard’s cancer and surgery would qualify his payout to be excluded from taxable income, permanency of injury is not the deciding factor; the amount of the payout must vary with the injury. If he got paid no matter what happened, it’s deferred compensation.

IRS drops the Section 6662(i) economic substance chop, but Marnie gets hit with substantial understatement.

Ernie’s handiwork is an example of really clever dodging. Don’t do it.