David H. Hoffmann and Jerrilynn Hoffmann, 2016 T. C. Memo. 69, filed 4/19/16, but especially David, to whom this little story is dedicated, would have done well to have read my blogpost “What Not To Say,” 11/3/11. Had David done so, he might have profited from the examples of Perry Browning and Viggo (“Wiggy”) Carstensen.

Dave claimed he was running his high-priced private jet for profit, but could show nothing but offsetting losses to his substantial income from other sources.

Judge Halpern walks through the Section 183 factors, and David doesn’t score a hit on any of them; not even a “neutral.”

He could have gotten out of the burdensome lease he signed for his plane when his business was still a highflyer (sorry guys), but claims he never read the lease and thought he was locked in.

But the point of this story is not the fact-specific ins and outs, but rather David on the witness stand.

“Mr. Hoffmann testified that he intended to make a profit from his jet service activity.  He admitted, however, that he ‘wasn’t astute on the recordkeeping’ involved in allocating costs between business and personal use of his aircraft.  He viewed any such allocation as ‘irrelevant’.  Because he ‘owned all the Company’, he said, ‘it really didn’t seem to make much difference to me.’  2016 T. C. Memo. 69, at p. 14 (Two, count ‘em, two, footnotes omitted, but one says David only owned 75% of the Company and no evidence about who owned the rest, and the other says David claims he was concerned not to bill his personal use to the minority owners).

It may not have made much difference to David, and maybe not to the minority owners, but it sure did to IRS.

And it definitely did to Judge Halpern.

Takeaway—Woodshed your client. Thoroughly. Loose cannons belong, if anywhere, only on the gundeck; never on the witness stand.

I said a long time ago that a blogger is a journalist, and that’s true even of a blogger who limits his coverage to an area as arcane as United States Tax Court.

So today, with only an unsubstantiated deduction T. C. Memo and no designated hitters, I had to dig and keep digging, lest readers in 135 countries be disappointed.

It didn’t sound like much, Michael L. Rakestaw & Kathleen M. Rakestraw, Docket No. 4213-13, filed 4/18/16, known to tax practitioners far and wide as D-Day.

Mike & Kath want to toss their attorney, whom I’ll call Tom. They so move; IRS responds. Exactly what IRS’s response was doesn’t appear, but whatever it was, coupled with Tom’s failure to say anything (even though Judge Chiechi ordered him to bukh, as they say Somewhere East of Suez), Mike’s & Kath’s motion to toss gets tossed.

No mention of impending trial (the usual reason why motions to toss counsel get short shrift, mostly “OK, but try the case your own selves”).

So my curiosity was piqued, and I did a docket search. You never can tell what you’ll find. Well, a year ago, Judge Chiechi entered a stipulated judgment aggregating about $150K against Mike & Kath.

Two months ago Mike & Kath tried to vacate, a wee bit late. And Tom’s response apparently didn’t discuss a lot of what Mike & Kath had to say about Tom’s performance to the satisfaction of Judge Chiechi.

So between IRS’ response (hidden from online public view) and Tom’s nonresponse, Tom is still in, the decision is still unvacated, and I’m left in suspense.

I thought there was a general principle that Tax Court proceedings were to be public.

STJ Lewis (“What a Great Name!”) Carluzzo has a simple message for his designated hitter, as we ready ourselves for the weekend. See Alan M. Berkun, Docket No. 18437-15L, filed 4/15/16.

IRS wants to toss Alan M.’s petition because he petitioned from an equivalency hearing, and that’s not a Section 6320 or Section 6330 NOD. Alan M. got the equivalency hearing because IRS claimed he hadn’t sent in this Form 12153 to Appeals within the magic thirty-day window after mailing of the NITL, which Alan M. wants to contest.

Six months before the NITL was mailed, Alan M. sent in his Form 1040, showing an address. IRS says it sent the NITL to that address.

Alan M. says that wasn’t his last known address, because he sent in his next year’s 1040 and a letter stating his address was a P. O. Box at Miami Federal Prisoner Camp.

But the NITL was mailed before IRS got that letter. So the previous year’s address was the “last known address.”

STJ Lew: “Generally, a levy notice properly sent to the taxpayer’s last known address by certified or registered mail is sufficient to start the 30-day period within which an Appeals hearing maybe requested, and actual receipt of such levy notice is not a prerequisite to the validity of that notice. Neither the Internal Revenue Code nor the regulations promulgated thereunder define the phrase ‘last known address’. However, this Court has defined the phrase to mean ‘the taxpayer’s last permanent address or legal residence known by the Commissioner, or the last known temporary address of a definite duration to which the taxpayer has directed the Commissioner to send all communications during such period.’ In general, that address will be the address reflected on the taxpayer’s most recently filed Federal income tax return, absent clear and concise notification of a different address. The taxpayer has the burden of proving that a notice sent by respondent was not sent to the taxpayer’s last known address.” Order, at pp. 2-3. (Citations omitted).

But here the letter is not notice of last known address, as it was sent after the NITL had been mailed.

Alan M. is clearly not a happy camper.

To begin with, I’m not seeking to exculpate the hapless TK, who bore the brunt of STJ Daniel A. (“Yuda”) Guy’s ire at her disregard of his order. See my blogpost “Reopening Slammed,” 4/14/16. She was wrong.

But STJ Yuda hit her a lot harder than any Tax Court Judge I can recall hit any other lawyer who strayed from the strait gate and narrow way.

I’ll proffer just a few examples of what other Judges didn’t call “unethical and unprofessional,” as STJ Yuda termed TK’s deliction.

See the following blogposts: “Channeling Freddie,” 9/16/13, Judge Cohen dealing with Yeff; “The Price of Frivolity,” 3/4/16, Judge Haines dealing with Donny (to whom Judge Haines hands a $12K frivolity chop); “Wilf,” 3/30/15, Judge Halpern being positively douce; and “Do I Hear a Waltz?,” 7/1/12, then-Judge Kroupa dealing (or not dealing, depending upon your point of view; I didn’t think she had, and said so) with an attorney I’ll call SJS.

I invite my readers’ (few though they be) attention to the cited blogposts, and the text of the opinions which they describe.

In none of those cases, wherein attorneys displayed conduct that was worthy of sanctions, whether or not imposed, were these attorneys (all men, must I note?) called “unethical and unprofessional.”

I suggest that a mutual apology is in order.

STJ Daniel A (“Yuda”) Guy is not a member of the kid-glove school of judge-lawyer relations. “Testy” is hardly strong enough an adjective for the wordprocessor lashing he bestows on hapless attorney TK (it used to be a “tongue lashing” when people spoke to one another; now it’s all electronic).

I use initials or made-up names, as always, when practitioners are involved in an even marginally-negative sense. They’ve suffered enough.

The case was stip’d for a Rule 122 on-the-papers. One week before her opening brief was due, TK moves to reopen the record, stating IRS objects, but nothing happens.

STJ Yuda gives IRS a due date for a written objection. Five days before that due date, TK calls chambers to ask about the due date for TK’s opening brief.

Bad move, TK. And, unlike the celebrated Fort Worth City Councilor’s moving youtube declamation, it doesn’t get better.

“The undersigned’s judicial assistant informed [TK] that ex parte communications with the Court should be avoided and that she should file an appropriate motion related to the filing of petitioner’s brief.” Order, at p. 1.

TK, when you’re told something along those lines, remember the sneaker ad: Just Do It.

TK blows it big time (cringe).

“…petitioner filed an opening brief which includes references to the exhibits that are the subject of petitioner’s pending motion to reopen the record. Petitioner’s brief states in pertinent part that ‘For our purposes, we assume the exhibits [that are subject of petitioner’s motion to reopen the record] were admitted, and that they are now part of the Second Stipulation of Facts.’ On [due date], respondent filed an Opposition to petitioner’s motion to reopen the record and a motion to strike the portions of petitioner’s brief that refer to the disputed exhibits.” Order, at p. 2.

STJ Yuda lays as heavy a blast on poor TK as I’ve seen in many a moon.

“Petitioner’s opening brief includes multiple references to two exhibits that are not part of the stipulated record in this case. Ex parte declarations and statements in briefs do not constitute evidence. Rule 143(c), Tax Court Rules of Practice and Procedure. Suffice it to say, petitioner’s counsels’ conduct in unilaterally treating their motion to reopen the record as having been granted by the Court was both unprofessional and unethical.” Order, at p. 2.

As my elder daughter’s classmate was heard to say years ago, “Oooh, what a diss!”

But STJ Yuda, maybe feeling he placed the aforesaid blast a wee bit too hard, says “Considering all the circumstances, the Court will strike petitioner’s opening brief. The Court will grant petitioner time to file either a motion for leave to submit a proper opening brief or another appropriate motion.” Order, at p. 2. (Footnote omitted, but it says TK can go to trial if she doesn’t like the Rule 122 route.).

And the two exhibits were apparently in the “public domain.”

The order is Ivan Nikolskiy, Docket No. 26163-14, filed 4/14/16.

The late Clara wanted to keep the family moving company moving in the family. So she has her own trust buy split-dollar universal life insurance policies for the trusts of each of her three sons, so at the death of any of them, the remaining sons could buy out the decedent’s interest.

Big question: Does the economic benefit régime of Reg. 1-61.22 apply? It does if the only benefit to the heirs was the current life insurance cover; the greater of the cash surrender value (CSV) or the total amount of premiums paid had to remain with the late Clara (or her trust) and not go to the sons’ trusts.

Answer (per Judge Goeke): It did. The economic benefit régime applies. But he isn’t deciding whether the late Clara’s trust’s valuation of the CSV in the late Clara’s trust at DoD is correct.

The whole story is found in Estate of Clara M. Morrissette, Deceased, Kenneth Morrissette, Donald J. Morrissette, and Arthur E. Morrissette, Personal Representatives, 146 T. C. 11, filed 4/13/16.

To fund the intrafamily buyouts, the late Clara’s trust poured $29 million into the three sons’ trusts, which bought universal life insurance cover on each son in favor of the other two sons. Universal life means the purchaser of the policy can pay upfront, over time, or stop paying and then start again, a real roll-your-own.

“Under the split-dollar life insurance arrangements, upon the death of the insured the [late Clara’s] Trust would receive a portion of the death benefit from the respective policy insuring the life of the deceased equal to the greater of (i) the cash surrender value (CSV) of that policy, or (ii) the aggregate premium payments on that policy (each a receivable, and collectively, receivables). Each Dynasty [son’s] Trust would receive the balance of the death benefit under the policy it owns on the life of the deceased, which would be available to fund the purchase of the stock owned by or for the benefit of the deceased. If a split-dollar life insurance arrangement terminates for any reason during the lifetime of the insured, the [late Clara’s] Trust would have the unqualified right to receive the greater of (i) the total amount of the premiums paid or (ii) the CSV of the policy, and the Dynasty Trust would not receive anything from the policy.” 146 T. C. 11, at p. 7.

The deal was crafted expressly to comply with economic régime regs, and the sons assigned the policies back to the late Clara’s trust as collateral security for the repayment to the late Clara’s trust of the right to receive premiums paid or CSV. And the late Clara’s trust reported gifts per Table 2001, IRS’ numbers for economic benefit.

IRS claims the whole $29 million was a gift, and loses. The late Clara’s estate claims $7 million, but that’s for another day.

The deal is subject to the split-dollar regs; no dispute there. The outcome depends upon who owns the policy. As each of the sons’ trusts owns the policies on the other sons, it looks like the loan régime is the key.

Except.

“As an exception to the general rule, the final regulations include a special ownership rule that provides that if the only economic benefit provided under the split-dollar life insurance arrangement to the donee is current life insurance protection, then the donor will be the deemed owner of the life insurance contract, irrespective of actual policy ownership, and the economic benefit regime will apply. Id. subpara. (1)(ii)(A)(2).” 146 T. C. 112, at p. 14.

Now the preamble to the reg aforesaid distinguishes between the case where all the sons’ trust would get is the current death benefit (less the greater of CSV or premiums paid), and one where sons’ trusts get the death benefit (less the lesser of CSV or premiums paid). In the latter case, there’s excess benefit to the sons’ trusts.

So if the lesser, then loan. If the greater, economic benefit, and that’s only the insurance cover.

Now Tax Court doesn’t really like preambles to regs. They aren’t legislative history, and have little weight. But anyhow, Judge Goeke gives Skidmore deference (one degree above “meh”) to the preamble, even though he goes into the rationale further.

The trusts have no present right to CSV or premiums paid. Whether at death of insured or rollout (pre-death termination), the late Clara’s trust gets it all–greater of CSV or premiums paid.

IRS says that the late Clara’s trust provided the sons would get it all when the late Clara became the late Clara. But, says Judge Goeke, the late Clara’s trust was a revocable trust. The sons’ trusts had no legal right to any of it. And anyway, even when the late Clara became the late Clara, the CSV or premiums paid went into her trust, not to the sons’ trusts, and there was no direction that the trustee pay the sons’ trusts.

And the sons’ trusts had no obligation to pay any premiums. They had the right, but not the obligation. If the late Clara’s trust front-loaded the premiums, that gave the sons’ trusts no greater benefit than the policies provided.

A Taishoff “Good Job, First Class” goes to James Egbert McNair III, Esq., and Kelley C. Miller, Esq., and their colleagues at Reed Smith, counsel for the petitioners.

I have some little vanity about this blog. True, popularity is hardly likely to come this way. Blogs of the rich and famous (or their ghostwriters) get more views from more places in ten seconds than I have gotten in five years.

However, I still keep track of how many countries, colonies, territories and semi-autonomies have viewed my efforts.

The latest count is 135. While Canadian Club is still ahead by 32 (is anybody old enough to remember “the best in the house in 167 countries”?), I’m impressed.

But in the South American continent, no one from Bolivia has yet viewed this site. Now one would think few countries there would care about US Tax Court; they have their own taxes with which to deal, and I don’t see many of their nationals on the LinkedIn tax discussion board I co-moderate.

However, I have had at least one view from each country in South America save Bolivia. Of course, I have had none from French Guyana, but I expect that. The local nationals, the French Foreign Legion and the rocket scientists they protect, pardonably have other concerns than US taxes.

But Bolivia? What’s up with that?

As there is no opinion out of Tax Court today, and as the one designated hitter ships a case back to Appeals to tidy up an incomplete file (but how incomplete STJ Daniel A. (“Yuda”) Guy doesn’t tell us), I am relegated to the run-of-the-mill.

So I take my text from Benny Goodman’s chart-topper from my natal year, and pick up two bounced documents.

First is a repeat guest, Annabelle Limited Partnership, 915 Broadway Realty Associates, Tax Matters Partner, Docket No. 17523-13, filed 4/12/16. Annabelle and its lead tax matterer Earle Altman featured in my blogpost “Those Old, Familiar Faces – Redivivus,” 3/24/16, when Judge Kerrigan echoed the words of George Kelly’s loudmouth character Aubrey Piper: “Sign on the dotted line.” Earle was supposed to do so, preferably in blue ink; but he didn’t.

Judge Kerrigan: “In cases where a ratification of petition is required, counsel’s signature does not ratify an imperfect petition to correct any defects in execution of the original document.” Order, at p. 1.

Though distinguished counsel signed the ratification, it gets bounced back to 915 Broadway and Earle.

Next is an even more irritating flub, and Judge Laro turns a wee bit peevish thereat. It’s CR-MERC, LLC, Daniel Benson, Tax Matters Partner, Docket No. 3921-13, filed 4./12/16.

The takeaway here is simple: if you want a Judge to do something, make it very, very easy for the Judge to do it.

Judge Laro: “…, the parties submitted to the Court an improper Decision document that did not contain a signature block for the Court.” Order, at p. 1.

So Judge Laro continues (adjourns, for you State courtiers) the trial, and tells counsel to resubmit with a signature block on page 1.

As is my practice, I will not name the attorneys involved. There but for the grace of you-know-Whom goes any of us.

It is a tax truism that a partner must report his/her distributive share of partnership taxable income, whether or not the partner got anything, whether cash, money’s worth, or even a K-1. That’s why any properly drafted partnership agreement or organic documents of any entity taxable as a partnership will always contain a provision that the partnership must distribute to all partners enough cash to pay taxes.

If it doesn’t, things can get dirty.

And that’s the story of Nik Lamas-Richie and Shayne Lamas-Richie, 2016 T. C. Memo. 63, filed 4/11/16.

Nik was a blogger, but his blog, unlike mine, was fantastically successful. He posted local gossip and then branched out nationally. As his gossip blog took off, Nik finally went into partnership with Investor Jim, and formed an entity taxable as a partnership and fetchingly named Dirty World, LLC. If there was a written agreement, it never got into the record.

Judge Lauber dishes: “To reflect the venture’s intended breadth of scope, the URL for the Web site was changed to ‘thedirty.com.’ Petitioner operated the Web site much as he had before, essentially functioning as an editor.  People would upload gossip to the site for posting, and petitioner would filter out material he deemed salacious or otherwise unfit for publication.  He would often append amusing notations to the gossip he published.  Not infrequently, Dirty World was sued by the people who were the subject of this gossip, and petitioner spent a fair amount of time dealing with these lawsuits.” 2016 T. C. Memo. 63, at p. 3.

Nik finally entered into an employment agreement with another of Investor Jim’s pocket LLCs, and used a competent tax preparer to report his salary and wages. He missed $300 of unemployment, $9 of wages he forgot, and $13 of interest, and he concedes that, but wants to fight over the $25K that was his share of the Dirty World dirty money.

True, Investor Jim was a wee bit casual when it came time to file a Form 1065 and send out K-1s. But that avails not Nik.

Nik owes the tax, but he does escape the 20% five-and-ten chop on the dirty $25K.

Nik”… credibly testified that he viewed himself as an employee of Dirty World, and he properly reported the wages…that he received…for his editorial and related services.  He had not received a Schedule K-1 from Dirty World at the time petitioners filed their…return, and he credibly testified that Dirty World had not previously earned income that he would have been required to report.  Petitioners supplied their return preparer with all tax-related documents relevant to this issue, and we find that they reasonably relied on his assurance that the return in that respect was correct as filed.” 2016 T. C. Memo. 63, at p. 11.

I console myself with the thought that, once again, virtue is its own reward.

However, I cannot in good conscience entitle this blog “Dirty Taxes.”

No, not Wm. S. Porter’s 1903 classic that stormed the New York stage in 1910 as Alias Jimmy Valentine. Rather, this is the story of IRS retrieving what petitioner claims is a grievously deficient Statutory Notice of Deficiency, with that Obliging Jurist, Judge David Gustafson, obliging IRS for a change with a full-dress T.C.

It’s the story of Peter L. Ax and Beverly B. Ax, 146 T. C. 10, filed 4/11/16, and their best little insurance company in captivity.

Pete was an on-line legend drug peddler, according to his pleadings. I think he meant “legacy drugs,” that is, good stuff off-patent or where the expiring patent could be bought up cheap. But flogging on-line with a new business model meant regulatory risk, political risk, terrorism risk, and computer mishaps. No regular insurer would touch Pete’s alleged timebomb, so he formed a captive subsidiary, onto which he unloaded buckets of deductible cash against the evil days to come.

IRS hit Pete with a SNOD, but all they said was this wasn’t an insurance expense and therefore not deductible.

Pete says “oh yes, It is,” and timely petitions the SNOD.

“The answer generally denied the allegations in the petition, but it did not make any affirmative allegations as to the disallowed insurance expense deductions.  Petitioners’ counsel provided respondent’s counsel with substantial information about the case….” 146 T. C. 10, at p. 6.

As the aroma of coffee wafts into IRS’ counsel’s nostrils, counsel moves “…pursuant to Tax Court Rule 41(a), for leave to file an Amendment to Answer to affirmatively allege facts in support of new issues. Specifically, in the Amendment to Answer, lodged with the Court at the same time as the filing of this motion, respondent raises the issue of whether petitioners’ use of the micro-captive insurance arrangement lacked economic substance. Additionally, out of an abundance of caution, respondent affirmatively alleges that premiums that funded the micro-captive arrangement were neither ordinary nor necessary expenses, even though this issue is implicit in the notice of deficiency.” 146 T. C. 10, at p. 7.

IRS agrees it has burden of proof, as this is new matter, but Pete ripostes that IRS is dodging dear old Chenery, the blogger’s delight, by introducing new grounds for the SNOD, that weren’t relied upon by IRS to begin with. Now I’ve blogged Chenery extensively, so I won’t cite to all of them. Just read my blogpost “He Loves Chenery,” 12/17/14, and you’ll be up to speed.

Looks like Pete has some good ammo.

But Judge Gustafson says Pete has taken Chenery one step too far.

“…where Congress has committed an action solely to agency discretion, a reviewing court can only review the decision that the agency made; a court cannot perform a pseudo-review of a hypothetical decision that was not made by the agency but that the court might have made if it were the agency.  Chenery I says nothing about circumstances in which Congress has authorized a court to make its own determinations–which is precisely the circumstance of the Tax Court’s jurisdiction over deficiency cases, as we now show.” 146 T. C. 10, at p. 11. (Footnote omitted).

Section 6212 says Tax Court redetermines the deficiency; Tax Court can find a greater amount than the SNOD stated (see Section 6214(a)) or determine petitioner is due a refund (Section 6215).

Section 7522 doesn’t help Pete either. An inadequate description of the basis for the SNOD doesn’t invalidate the SNOD.

“The Internal Revenue Code thus reflects Congress’s intention that the Tax Court will decide deficiency cases not by reviewing the agency’s determinations for abuses of discretion but by deciding issues according to the evidence.” 146 T. C. 10, at p. 13.

And the Administrative Procedures Act doesn’t help either. Going back to 1939, Judge Gustafson finds that Tax Court is the place established by Congress for redetermination, and trial de novo is available to Pete, thus satisfying 5USC§703. Besides, Fourth Circuit held Tax Court isn’t subject to APA.

Pete has plenty of time to prepare for trial, so no prejudice here.

And the argument that the language of the SNOD only requires proof of payment to a self-styled insurance company doesn’t answer whether the arrangement is insurance, that is, a shifting of risk. That’s not “new matter.”

IRS can amend.