Richard Brewster Main, 2016 T. C. Memo. 127, filed 7/5/16, certainly thought so. Those words were spoken in an advertisement for the 1955 Plymouth, and RB was a specialist in 1950s Plymouths,  trying to restore those old Detroit relics to their pristine glory.

Only it was too expensive.

IRS claimed his Plymouth restoration gig was a hobby, but Judge Foley didn’t see it that way.

“Petitioner undoubtedly enjoyed working with Plymouths. See sec.1.183-2(b)(9), Income Tax Regs. Although his manner of carrying on this activity was unsophisticated, it was businesslike. See id. subpara. (1). He had experience operating a business and expertise relating to Plymouths; advertised online, in print, and at live events; traveled outside California to acquire cars at bargain prices; contracted with third parties to manufacture parts for him to resell and use in restorations; and abandoned unprofitable aspects of his automobile activity (i.e., he downsized his inventory and stopped contracting for manufactured parts). See id. subparas. (1), (2), (5). Furthermore, he devoted considerable time to, and handled all material aspects of, his automobile activity. See id. subpara. (3). Lastly, petitioner’s patent business was undergoing a downturn during the year in issue, and petitioner, a prudent businessman, would not have squandered his hard-earned money on an expensive hobby. See id. subpara. (8). In short, petitioner’s automobile activity was a business, and his primary objective was to make a profit.” 2016 T. C. Memo. 127, at p. 5.

Note the last point. It probably won the day for RB. He had no great income from other sources. Most hobby loss cases blow up when the loss-seeker turns out to have plenty of other income.

Some of RB’s Schedule C deductions get allowed, but his camcorder and wireless router get disallowed because they were not used exclusively for his business or at his business location. Anyway, RB didn’t have Section 274 substantiation.

And his attempt to avoid Section 6651(a)(1) late filing chop doesn’t work, because claiming you were unaware you had a tax liability doesn’t get it.

Takeaway: Hobbyist, use the checklist, but remember: lots of other income is a tough fence to jump.

Habakkuk was lucky; he had Divine sponsorship. I make do with what little I’ve got.

But we both share a mandate: “Write the vision, and make it plain upon tables, that he may run that readeth it.”

With this blog, I’m trying to talk about taxes, principally as found in the US Tax Court, with clarity and brevity. I’m not writing law review articles. I’m not writing for the trade press. I presume anyone reading any blogpost here has the ability to read for themselves the decision, opinion, order or press release, which is the subject of the blogpost.

Therefore, I have no reason to expatiate on details. Likewise, I will not quote in extenso unless the quoted matter is essential. As aforesaid, y’all can read for yourselves.

Prof. Danshera Cords has nothing to fear from me: I have no intention of writing a treatise on Tax Court law and practice.

Nor am I trying to cover the entire spectrum of US taxation. It would take a Bloomberg to do that.

But a good deal of what happens in the Glasshouse at 400 Second Street, NW, and its far-flung outposts across this great land never makes it to the law reviews, the trade press and the blogosphere.

So I’m here. And I’m writing for the running readers.

Or, Judge Holmes’ Revenge

What’d I do to deserve this? C’mon, Judge, can’t ya take a joke (or two or three or fifty)?

A Friday afternoon, before a three-day week-end, the official start of the summer, and Judge Holmes unloads an 18 (count ‘em, 18) page dissertation on Ch 13 of the Bankruptcy Act in the guise of an order, and an undesignated one at that.

I, poor blogger, am left to deal with this megillah, after I read through 110 orders of the “pay the sixty bucks” or “yer auf’d, no jurisdiction” variety. Then I hit this gem. And the only designated hitter today was STJ Daniel A (“Yuda”) Guy unloading on a frivolous UPS driver while his spouse gets innocent spousery.

Gimme a break!

OK, so here’s Chang D. Bullock, Docket No. 11182-09L, filed 7/1/16.

IRS is trying to grab some of Chang’s $8K per month wages, but Chang got a Ch 13 wage earner plan confirmed. Chang yells automatic stay, but IRS says there’s wages not allocated to the plan to pay back the pre-petition creditors, like them. There’s a four-way split between various courts, a three-way split in the Circuits, and the Supremes were only partly helpful last year.

Ch 13 is a breathing-room help to struggling debtors. They keep their assets but have to pay back creditors over a limited timeframe. And get back whatever’s left at close of play if they have performed under the plan, whereas a Ch 7 liquidation is a sell-all-thou-hast.

The question is what happens with assets (like wages) acquired while the Ch 13 plan is churning away.

Chang got dumped in a CDP over pre-petition taxes issued after Chang filed his Ch 13 petition. He claims his post-petition wages are his, not IRS’s, and IRS is prevented by the automatic stay from going after them.

There’s a hole between 11 USC 1306 and 11 USC 1327. There are four ways to unscramble this. One writes 1306 out of the Bankruptcy Code (termination), the other writes down 1327 to uselessness (preservation), another tries a Solomonic slice-the-baby that raises more questions than it answers (transformation), and finally (ta-da!) a mechanical approach called “reconciliation.”

The Supremes blew off both termination and preservation, but didn’t get to transformation or reconciliation. However, in order to bring some sort of conclusion to this case, notwithstanding the difficulties likely to arise in future cases, the flavor du jour is reconciliation.  The post-petition wages are part of the bankruptcy estate.

If discussing the number of Urim doing the mambo on the head of a proton floats your cliché, this is your kind of stuff. Or if you’re a law reviewnik who needs a winning headnote, stop in here.

But does Chang get summary J? He wants it, plus legals and admins. IRS wants it, but is clearly trailing down the stretch.

Here’s the finale.

“11 U.S.C. section 362’s automatic stay — the provision that fences in debtor’s property and handcuffs creditors — is what would render the Commissioner’s notice of determination null and void. It can trip up a creditor up in a number of ways. And while the Commissioner doesn’t have as many obstacles as other creditors — no matter the timing of the tax debt, 11 U.S.C. section 362(b)(9) permits him to issue a notice of deficiency, assess of tax [sic], and even demand payment — he too must navigate the automatic stay’s general prohibitions when issuing a notice of determination. Although most of these prohibitions apply to pre-petition debt, the bankruptcy petition also stays ‘any act to obtain possession of property of the estate * * *.” 11 U.S.C. § 362(a)(3). This is a two-part test; the first part easy, the second beguiling: The notice of determination is invalid if (1) it is ‘an act to obtain possession of property’ and (2) the property is ‘property of the estate.’

“We’ve previously held that under 11 U.S.C. section 362(a)(1), a notice of determination is a continuation of an administrative action against the debtor to recover a pre-petition claim. While it’s true that the tax at issue here is a post-petition claim and thus 11 U.S.C. section 362(a)(1) doesn’t apply, we are satisfied that a notice of determination is also an ‘act to obtain possession of property.’ The notice is no courtesy letter; it’s a step the Commissioner must take to get at Bullock’s wages. See I.R.C. § 6330(e) (‘In no event shall* * *[the Commissioner levy on property] before the 90th day after the day on which there is a final determination in* * * [a CDP hearing].’). Because we’ve concluded that Bullock’s post-confirmation wages are property of his chapter 13 bankruptcy estate, the Commissioner’s notice of determination is an act to obtain possession of estate property under 11 U.S.C. section 362(a)(3). It therefore violated the automatic stay. “ Order, at pp. 17-18. (Emphasis by the Court). (Citations omitted).

So summary J for Chang?

Nope. The NOD from the CDP is invalid as violative of the automatic stay, thus no jurisdiction.

I often hear from colleagues, whose practices take them far from the realms of gold that comprise taxation, how dull and drab it must be to follow and blog hypertechnical, dry-as-dust discussions, where statutes and regs become numbers, and names of cases are flung about, all creating a meaningless miasma.

Well, it is that at times, but then it has a moment like this, a designated hitter off the bat of Judge Holmes. And I was so stunned when I read this yesterday I saved it for today, and even omitted Judge Holmes’ honorifics.

It looked like a routine SNOD. David M. Sweetman & Laura L. Sweetman, Docket No. 20268-12, filed 6/30/16. There were a couple motions (hi, Judge Holmes) pending, to dismiss or continue.

I’ll just print the order. To clarify what follows, McFarlane is attorney for Laura E. Sweetman, and Marble (phonetically “Marvel” below) is attorney for IRS.

“This case was on the Court’s… trial calendar for Phoenix, Arizona. When it was called, Mr. Sweetman did not appear. Dr. Sweetman also did not appear, but a lawyer whom she’d retained before her untimely death did. When the Court asked him about whether an estate or intestate administration had been set up, he replied

“Yes. She was a young lady. She came in. She, you know, we met, and two weeks later I get a call from her divorce attorney and said she died. We think that there was foul play. It’s being investigated.

“THE COURT: Wow.

“MR. MC FARLANE: Yeah, I know.

“THE COURT: And they let the body out for cremation? She was a neurologist.

“MR. MARVEL: I thought this was a simple substantiation case, Your Honor.

“THE COURT: She was in divorce proceedings?

“MR. MC FARLANE: Yes.

“THE COURT: Oh, now I can see where that’s going then.” Order, at pp. 1-2.

Well, a couple years pass (hi again, Judge Holmes), there’s still no estate or conclusion to any criminal investigation into the death of Dr. Sweetman, so Judge Holmes holds the motions in abeyance and punts the case back to the general docket.

Wow, indeed.

Once upon a time, a well-known New York clothier had a slogan that said in substance, “Select, don’t settle.” That slogan, somewhat mutated, was developed by various jurists into “Select or settle.” That meant to counsel either pick a jury and go to trial, or come back with a stipulation of settlement.

Well, Tax Court has no juries, but The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Imperturbable, Indefatigable, Illustrious, Incontrovertible, Ineluctable, Impeccable and Ineffable Foe of the Partitive Genitive, His Honor Judge Mark V. Holmes, has similar advice for Linda J. Martin & John A. Martin, Docket No. 10115-15, filed 6/30/16, in a designated hitter, no less.

But what happened next is a surprise, although not as big a surprise as my next succeeding blogpost. Stay tuned.

“This case was on the Court’s…trial calendar for Los Angeles, California. The Martins were not prepared for trial, and the Court stressed to them that they needed to get their case moving. We imposed a pretrial order and they met the first deadline — one for an entry of appearance for their new counsel. “ Order, at p. 1.

So buckle down, new counsel.

Except clients, bless them, resemble certain sheep.

After new counsel was on board and headed up to the bridge, “…they filed a pro se motion to shift the burden of proof.” Order, at p. 1.

I once had a corporate officer, sitting beside me at counsel table to handle the voluminous exhibits, decide to ask a question of the witness in the middle of trial.

The Judicial Hearing Officer, with a sense of humor and rare aplomb, interjected sotto voce, “pro haec vice.”

I turned to the corporate officer and said calmly, “I’m going home.” This implied he could try the case.

He apologized.

Judge Holmes just tossed the motion, as IRS requested, “…because once a party is represented he must speak to the Court through his lawyer, who also becomes responsible for the quality of such filings as the Martin’s motion. See Traficant v. Commissioner, 884 F.2d 258, 264-65 (6th Cir. 1989).” Order, at p. 1.

That’s what CSTJ Peter Panuthos has for us today in a Summary Op (“don’t quote me”), Nayemul B. Chowdhury and Laila Banu, 2016 T. C. Sum. Op. 31, filed 6/30/16.

It’s a fight about a big $7800 deficiency, but add a zero to show the magnitude of the case for these taxpayers; they really got hit hard.

Nay and Laila bought a Häagen-Dazs franchise, which they coupled with a “Submarina” franchise (sounds like Subway on a bad day), and didn’t make a dime from either.

Their SBA loan was foreclosed, their landlord booted them for unpaid rent, their part-ownership of a gas station likewise tanked, and they saved their home in FL only by filing bankruptcy.

Their records were a mess and their tax return for the year at issue was late, and Nay and Laila put in no evidence why, so get hit with the late filing penalty.

CSTJ Panuthos gives us the basics.

“Petitioners seek to deduct losses from the sale of assets repossessed by their creditor. A sale in which the collateral is repossessed from the debtor constitutes a taxable sale or exchange by the debtor of the encumbered property. See Helvering v. Hammel, 311 U.S. 504, 506-511 (1941); Estate of Delman v. Commissioner, 73 T.C. 15, 28 (1979). The debtor’s gain or loss in the disposition is measured by the difference between the amount realized in the disposition of the property and the debtor’s adjusted basis in the property. Sec. 1001(a). In the case of recourse debt, the amount realized is the fair market value of the property repossessed. Frazier v. Commissioner, 111 T.C. 243, 245 (1998). In general, the debtor’s basis is cost. Sec. 1012. The debtor’s basis must be reduced by the amount of depreciation that was allowed or allowable during 2010 and 2011. Sec. 1016(a)(2).” 2016 T. C. Sum. Op. 31, at p. 7. (Footnote omitted, but I’m leaving in the citations for your next brief.)

CSTJ Panuthos goes through the property sold at the foreclosure of the SBA loan, works out cost, depreciation, and FMV at sale, and sends the parties off to a Rule 155 beancount based upon same.

What wasn’t foreclosed was abandoned when the landlord tossed Nay and Laila, and though IRS wants capital loss treatment, CSTJ Panuthos gives Nay and Laila Section 1231 business property largesse, although it wasn’t much of a business, and goes through the computations to arrive at the loss, giving it the Cohan shuffle. And it also goes to the Rule 155 mix-and-match.

IRS wants to slice off some of the aforesaid largesse based upon the bankruptcy discharge Nay and Laila got, but that was the year after the year at issue. That’s not on the table. I note it might be closed year, unless IRS plays the mitigation gambit.

As for the 20% negligence chop, “(P)etitioners provided no evidence of expenses underlying either their Schedule E deductions or their itemized deductions. Petitioners conceded that they claimed losses on their Schedule C to which they are not entitled. Petitioners’ records did not support the loss reported on Form 4797. Petitioners have not demonstrated that they acted with reasonable cause and in good faith with respect to the recordkeeping requirements; therefore, the Court sustains respondent’s determinations on this issue.” 2016 T. C. Sum. Op. 31, at p. 18.

I offer this for the B-Schoolers as a case study. Much to learn here.

A truly dull day in Tax Court, but a great performance of Sleeping Beauty by the American Ballet Theatre, so I’m ahead.

Aside from loan proceeds not being income in the only T. C. Memo. today, and tax protester drivel not earning a Section 6673 chop in the only designated hitter, all I could find with which to entertain you is a reprise by Ch J L. Paige (“Iron Fist”) Marvel of my blogpost “CPA = USTCP?” 6/6/16.

Here’s the whole story. “On June 27, 2016, respondent filed a Response to the Motion for Entry of Decision filed on behalf of petitioner by E., C.P.A. on May 31, 2016. In that response, respondent states that the parties have agreed to a stipulated decision and that he expects to submit executed stipulated decision documents for the Court’s consideration very soon.” John E. Cox, Docket No. 10207-16S, filed 6/29/16, at p.1. (Name omitted).

And a docket search still shows John as pro se.

So CPA’s can file motions in Tax Court, without an Entry of Appearance, or even a power of attorney, and even if not admitted to practice?

As I have received no response to my previous inquiry above noted, I’ll try again.

“So, as I have heard it expressed in certain circles, whassup wit’ that?”

I don’t know whether Keith A. Newman, Jr., 2016 T. C. Memo. 125, filed 6/28/16, is going to lift up his head and shout “There’s Gonna Be a Great Day,” as Billy Rose, Vincent Youmans and Edward Eliscu adjured him to do back in 1929.

But he beats a $7800 rap for COD from a bounced check on a BOA account years ago because he was down and out (insolvent) at the time, and Section 108(a)(1)(b), plus his truthful testimony, rescue him.

Briefly, just before the 36-month lookback of Reg. Section 1.6050P-1(b)(2)(iv) began, Keith bounced a check. BOA never chased him for it, and sent him a Form 1099-C. Keith never reported the COD, which earned him a SNOD.

Keith was unemployed, and testified believably that he then owed big on his wheels and his student loans.

“Section 108(a)(1)(B) excludes COD income from gross income if the discharge of indebtedness occurs when the taxpayer is insolvent.  The amount by which the taxpayer is insolvent is defined as the excess of the taxpayer’s liabilities over the fair market value of the taxpayer’s assets.  Sec. 108(d)(3).  Whether a taxpayer is insolvent and by what amount is ‘determined on the basis of the taxpayer’s assets and liabilities immediately before the discharge.’  Id.  The amount of income excluded under section 108(a)(1)(B) cannot exceed the amount by which the taxpayer is insolvent.  Sec. 108(a)(3).” 2016 T. C. Memo. 125, at p. 6.

Keith was discharged when BOA sent the 1099-C. Now a 1099-C, by itself, isn’t dispositive.

But Keith paid nothing, and BOA got nothing from Keith, during the 36-month lookback ending when BOA sent the 1099-C. The creditor had ceased to pursue Keith on the debt (thus COD), except Keith was insolvent at the magic moment, hence off the hook.

I cannot close without a tip of the battered Taishoff Stetson to James R. Monroe, Esq., Keith’s attorney, for taking on and winning a $4k deficiency. That’s the stuff that gets sent to the law school low-income tax clinics in most places. If James R. Monroe, Esq., did this one pro bono, he honors the profession.

This is, as I have repeatedly and consistently stated, a non-political blog. My political views are no secret; but I air them in a different place. Therefore I make no mention here of the Supremes’ decision in Whole Woman’s Health v. Hellerstedt.

That said,  woman’s health is of great interest to me, as I have a sister, a wife, two daughters, two granddaughters, and my other relatives and friends who are women number in the dozens.

But here’s the sad tale of Ashley R. Kruse & Jeffery W. Kruse. Docket No. 7166-16S, filed 6/27/16.

Ashley’s and Jeff’s petition is a day late and more than a dollar short.

It’s Ashley’s situation that gave rise to the blown SOL.

Ch J L. Paige (“Iron Fist”) Marvel tells the tale: “…(1) due to her pregnancy, Mrs. Kruse incorrectly calculated the last date to file a timely petition as to the deficiency notice issued to petitioners…upon which this case is based; and (2) petitioners waited until the 90-day filing period expired in order to recover as much of their records as possible so as to better prepare their Tax Court case.” Order, at p. 1.

What Jeff was doing while Ashley was trying to gather documents and file their petition is not stated.

As for the effects of pregnancy upon mind and body, I defer to those who have experienced it. I have heard descriptions from my nearest-and-dearest, and while I am delighted with the results, I am told it’s not always a pleasure, to say the least.

Howbeit, the law is inflexible. Ashley and Jeff are out of Tax Court.

Perhaps Congress might wish to amend Section 6213(a)  to help women in Ashley’s situation.

Courts aren’t infallible (and I can hear my colleagues one Bloody Mary ahead of me saying “You can say that again, chum”), but there are two main judicial errors to compare and contrast in this evening’s chat. These are harmless error and prejudicial error.

Prejudicial error is what keeps appellate judges in business. They call the off-sides, legs before wicket and suchlike, that deprive one party of a truly fair shake.

It’s the other I wish to speak of just now.

Yes, the Judge let in evidence she shouldn’t have, or the Judge left out evidence he should have let in, but at close of play the party making the squawk got a fair shake.

Now Judge James S. (“Big Jim”) Halpern confronts what to do post-decision when an expert witness’ testimony was admittedly false. The case is AD Investment 2000 Fund LLC, Community Media, Inc., A Partner Other Than The Tax Matters Partner, et al., Docket No. 9177-08, filed 6/24/16. And if this seems to jog your memory, it jogged mine.

See my blogpost “Haber-Dashery,” 11/19/15.

This is one of the celebrated immunologist James (“Little Jim”) Haber’s Bialystoks. For those who tuned in late, a Bialystok (noun form) is a deal where the counterparty is guaranteed a huge recognized loss offset by an equally huge unrecognized gain. I call it so in honor of the celebrated producer Max Bialystok, whose deals, if they made any money, would land Max in jail.

Well, here one of the IRS’s expert witnesses, whom I’ll call Murph, was a wee bit casual about his resume and the cases in which he had testified.

When Murph was shown up post-trial as a Fibber First Class, “(W)e concluded that his report did not accord with the requirements of Rule 143(g), Tax Court Rules of Practice and Procedure, addressing expert witnesses and we excluded it. Rule 143(g)(2) provides that an expert’s testimony will be excluded for failure to comply with Rule 143(g) unless the failure is shown to be due to good cause and unless the failure does not unduly prejudice the opposing party. Since [Murph] has already testified, we cannot at this point not allow him to testify. Petitioners argue that, in the present cases, [Murph]’s testimony was material and that the Court’s decisions in these cases should be vacated.” Order, at p. 1.

As the late great Ed MacMahon would have said “How material was it?”

That’s what Judge Big Jim wants to know.

IRS is down with vacating the prior decisions and going into Murph’s credentials.

Judge Big Jim has a lengthy laundry list of questions for petitioners and IRS, but the bottom line is simple: had Murph not testified at all, would there have been any evidence that Little Jim’s mix-and-match was anything other than a Bialystok?

And if all the remaining evidence was that the deal was a Bialystok, what does Judge Big Jim do?

Harmless error?