I am given to understand from commentators to this blog that the Ogden Sunseteers, more formally known as the Whistleblower Office, get every break when they come to Tax Court, and the whistleblowers get none.

The evidence to date is anecdotal, thus possibly not probative, but every so often a case arises that raises questions.

Here’s Whistleblower 8130-14W, filed 10/26/15, from Judge Kerrigan.

Blower wants info not in the admin file, namely and to wit, what happened in the two years between last exam of The Blown and the NOD from Ogden. Blower claims IRS continued investigating, notwithstanding claiming “case closed, no dough”, and dug up some cash from the Blown.

After the Branerton play-nice ends in stalemate, Blower seeks formal discovery.

IRS plays the Grecian Urn gambit: abuse of discretion, therefore admin file is “all ye know on earth and all ye need to know.”

But Judge Kerrigan isn’t so sure.

Judge Kerrigan: “Respondent’s response does include specific grounds for objection in relation to the information sought. Rather, he contends that the Court’s scope of review should be limited to the administrative record and the information that petitioner seeks is outside that record. Evidence related to whether there was a collection of proceeds and whether that collection was attributable to the whistleblower’s information should be part of the administrative record because it addresses the factual inquires section 7623(b) requires. See Whistleblower One 10683-13W v. Commissioner, 145 T.C. __, __ (slip op. at 6) (September 16, 2015).” Order, at pp. 1-2.

Judge, are you sure “Respondent’s response does include specific grounds for objection in relation to the information sought.”? Because if you read your next sentence, it seems that IRS’ response does not include specific grounds. If the response did include specific grounds, why didn’t you consider them?

All y’all must be familiar with Whistleblower One 10683-13W, natürlich? (Sorry, I’m writing this looking out my hotel room window at Cologne Cathedral.)

If not, check out my blogpost “The Flip Side,” 9/16/15, wherein Judge Halpern, writing for the Court, wrote thus: “Even were we to agree with respondent as to the scope of review, he cannot unilaterally decide what constitutes an administrative record. How could evidence related to whether there was a collection of proceeds and whether that collection was attributable to the whistleblower’s information not be part of any purported administrative record? Any such evidence goes to the very basic factual inquiries required by section 7623(b).” 145 T. C. 8, at p. 5-6.

Anyway, if the evidence Blower seeks should be part of the admin record, why not direct IRS to turn it over, or at least give it to the Judge for an in camera look-see? With all the good confidentiality protections Judge Halpern wrote back in September.

But all Blower gets is more play-nice. Judge Kerrigan orders (if that’s not too strong a word) “…that the parties shall convene to discuss the pending motions to compel in light of Whistleblower One 10683-13W v. Commissioner, 145 T.C. __ (September 16, 2015).” Order, at p. 2.

Oh yes, and file a joint status report in two weeks.

And Not Only On Your Tax Return

That’s the takeaway from David R. Stewart & Mary F. Stewart, Docket No. 29963-14L, filed 10/23/15, a designated hitter off the bat of STJ Daniel A. (“Yuda”) Guy.

Dave’s trusty attorney, whom I’ll call Davy, sent IRS a Form 12153 for the TFRPs arising from Dave’s business, and claims he also included a Form 12153 for Dave’s personal taxes as well. The RO contact swears he only got the Form 12153 for the TFRPs.

STJ Yuda: “On March 7, 2014, [Davy] sent a packge by certified mail addressed to RO X. There is no dispute that the package included [Davy’s] cover letter, dated March 7, 2014, which included a reference line stating “re: Stewart Environmental Consultants LLC”. The package was received by an IRS employee on March 10, 2014. The parties disagree as to the remaining contents of the package. [Davy] contends that the package included a Form 12153 requesting an administrative hearing under section 6330 in respect of the income tax notice issued to the Stewarts. RO X stated in a sworn declaration… that [Davy’s] March 7, 2014, letter was accompanied by a copy of an employment tax notice sent to SEC on March 5, 2014, and a Form 12153, signed by [Davy] requesting an administrative hearing for SEC in respect of employment tax due for the taxable period “1303”. Order, at p. 2. (Footnote and names omitted).

When IRS finally, as they claim, got Dave’s and Mary’s income tax petition, it was too late. Dave and Mary get an equivalency hearing, but the NOD from that they can’t petition. Dave and Mary claim they were timely as to their income tax.

STJ Yuda: “There is no dispute that [Davy] sent a package to RO X by certified mail on March 7, 2014, the IRS received the package on March 10, 2014, and the package included a cover letter from [Davy] that referred to ‘Stewart Environmental Consultants, LLC’. Beyond that, there is considerable uncertainty as to the remaining contents of the package. Whereas [Davy] asserts that he placed a Form 12153 related to the income tax notice in the package, RO X states that his records show that the package contained a Form 12153 making reference to the tax period ‘1203’ and a copy of the employment tax notice issued to SEC on March 5, 2014.

“The Court has reviewed the record in considerable detail and finds that petitioners have not produced persuasive evidence that the package in question contained a request for an administrative hearing in respect of the income tax notice. Without more, we are compelled to find–as RO X maintains and as indicated in [Davy’s] cover letter–that the package contained items related to proposed levy actions against SEC. We conclude that petitioners did not timely request an administrative hearing in respect of the income tax notice.” Order, at pp. 4-5. (Names omitted).

Better practice would have been to itemize in the body of the transmittal letter each item enclosed. Not only would it provide evidence, it would also serve as a checklist for attorney and staff of what should go into the package with the letter. And make STJ Yuda’s job, and my job, easier.

I mean Judge Haines, who is unswayed by the protestations, religious and secular, of Bryan and Lanette Davies.

Parents of six children and faced with economic adversity and high-priced tuition, Bry and Lan turned to their faith. “After much prayer, Mr. Davies was convinced that God wanted him to open a medical marijuana dispensary to solve his family’s financial woes.” 2015 T. C. Memo. 206, at p. 3.

Well, after nearly forty-nine (count ‘em, forty-nine) years during which I’ve practiced law in a highly-urban environment, I thought I’d heard it all, but Tax Court is an endless “medley of extemporanea.”

So today, my dears, we have the story of Canna Care, Inc., A California Not-For-Profit Corporation, 2015 T. C. Memo. 206, filed 10/22/15.

Bry and Lan did the work they were given to do with a will, hoping for the same happy result set forth in Genesis 15:6.

They rented 2,250 square feet of office space, were open to the public, and all one needed was a prescription (which their receptionist checked) and the requisite cash. Producing both thereof, the lucky contestant walked away with the vegetal good news.

Whereupon Bry’s and Lan’s economic problems were solved by their large salaries from their enterprise Canna Care.

Unfortunately, Section 280E prohibits deductions related to trafficking in controlled substances, which marijuana, medical or not, certainly is.

“Petitioner advances numerous arguments as to why marijuana should no longer be considered a schedule I controlled substance. We reject these arguments. Marijuana was a schedule I controlled substance during the years at issue. As recently stated by the Court of Appeals for the Ninth Circuit, to which an appeal in this case would lie: ‘[T]he only question Congress allows us to ask is whether marijuana is a controlled substance ‘prohibited by Federal law.’ * * * If Congress now thinks that the policy embodied in § 280E is unwise as applied to medical marijuana sold in conformance with state law, it can change the statute. We may not.’ Olive v. Commissioner, 792 F.3d 1146, 1150 (9th Cir. 2015), aff’g 139 T.C. 19 (2012).” 2015 T. C. Memo. 206, at p. 8.

You remember Martin Olive, dispenser of the needful, of course. No? Then see my blogpost “Everybody Must Get Stoned,” 8/3/12.

And Bry and Lan claim they weren’t trafficking in the good stuff. “Trafficking” is the magic word from Section 280E.

Trafficking is illegal dealing, and their dealing is legal, at least in Lala Land.

Judge Haines: “We have previously held the sale of medical marijuana pursuant to California law constitutes trafficking within the meaning of section 280E. Olive v. Commissioner, 139 T.C. at 38 (“[A] California medical marijuana dispensary’s dispensing of medical marijuana pursuant to the * * * [CUA] was ‘trafficking’ within the meaning of section 280E.”)…. DOJ memoranda and FinCEN guidance released after the years at issue that represent exercises of prosecutorial discretion do not change the result in this case. Petitioner regularly bought and sold marijuana. This activity constitutes trafficking within the meaning of section 280E even when permitted by State law.” 2015 T. C. Memo. 206, at p. 9.

While Bry and Lan may have sold t-shirts and other items, and held some self-help groups, neither Bry nor Lan, nor any of their employees, was a healthcare pro. The “other business” they claim is a sideshow. Bry and Lan weren’t running two businesses, so they could deduct the expenses of the legal one at least. They were running a marijuana business.

The fact that their business was supposedly non-profit is also nothing to the point for Federal income tax law.

“California law prohibits the distribution of marijuana for profit, and it was emphasized at trial and on brief that petitioner was not operated for profit. See Cal. Health & Safety Code sec. 11362.765. Whether petitioner was operated in accordance with California law’s restrictions on profiting from the distribution of marijuana is not an issue before us, and it does not affect our finding that petitioner was engaged in the business of distributing marijuana for purposes of section 280E. There is no doubt that Mr. Davies incorporated petitioner to produce income. In fact, it was clear from Mr. Davies’ testimony that he entered into the medical marijuana business in order to cure his family’s financial difficulties. Mr. Davies and the other shareholders received wages well in excess of those paid to petitioner’s other employees, and the payment of such wages would not have been possible if petitioner had not had income.” 2015 T. C. Memo. 206, at pp. 12-13.

No deductions.

If So, Admit It – Or Maybe Not

No opinions or orders today, so all I have is gas.

And that’s to what Judge Laro is reduced, when IRS wants to withdraw its admission concerning gas in Green Gas Delaware Statutory Trust, Methane Bio, LLC, Tax Matters Partner, et al., Docket No. 26965-09, filed 10/21/15.

The Green Gassers wanted IRS to admit that “Landfill gas produced from biomass, also known as methane gas, is a ‘qualified fuel’ for purposes of I.R.C. Sec. 45K.” Order, at p. 2.

And IRS did, but now repents, and wants to modify its admission thus: “…the methane from landfill gas is qualified fuel after the landfill gas has been treated to remove non-methane components and the remaining methane has been made suitable for use as fuel. Denies that landfill gas is the same thing as, or is also known as, methane gas. Denies that landfill gas, in its raw state, is qualified fuel.” Order, at p. 3.

Clearly, precisely what this landfill gas stuff is, or is known as, is one of, if not the only, “sweet spot” in this case.

But once you admit you have gas, how do you get out of the admission?

Judge Laro will tell you, and then, like the late Duke of Windsor, “I am able to say a few words of my own.”

First, Judge Laro: “Rule 90(f) provides that the Court may permit withdrawal or modification of the admission when the presentation of the merits of the case will be subserved thereby, and the party who obtained the admission fails to satisfy the court that the withdrawal or modification will prejudice such party in prosecuting such party’s case or defense on the merits.” Order, at p. 1.

As to presenting the merits on the trial, “(B)ecause the issue of what constitutes qualified fuel for purposes of Section 45K is novel and important to the resolution of the case on the merits, granting respondent’s motion would satisfy the first prong of Rule 90(f) and will subserve the presentation of the merits of the case.” Order, at p. 2.

Now for the prejudice. “The party relying on an admission has the burden of proving that such admission will cause prejudice. Petitioners’ response alleges that petitioners will be prejudiced if the Court grants respondent’s motion because respondent kept changing the theories of what constitutes ‘qualified fuel’ for the purposes of Section 45K in different filings made in the case and because petitioners would have to incur additional expenses in litigating this issue. Pursuant to the order of the Court…the parties are bound by the theories and positions they advance in their respective memoranda of issues. Both parties filed their memoranda of issues…. Under the circumstances, there is no danger that respondent will further change his litigation position or advance new theories. As to the issue of additional expense in litigating the issue, petitioners in their memorandum of issues raise the question of whether methane produced from landfill gas is a ‘qualified fuel’ for purposes of Section 45K. Thus, granting respondent’s motion to modify the admission will not result in additional effort or expense to petitioners and satisfies the second prong of Rule 90(f).” Order, at p. 2. (Citation omitted).

Though I haven’t read the memoranda of issues (they’re not online), I think Judge Laro and IRS pulled a fast one. Of course petitioner mentioned the issue; if it’s the “sweet spot” of the case, and it seems that it is, they had to mention it. But if IRS admitted the issue before the memoranda, then mentioning it and saying IRS agreed takes the issue off the table.

To put it back on the table does prejudice the petitioner.

I’d move to reconsider, if I hadn’t given the game away in my memo.

Anyway, IRS gets to withdraw its admission and put in the aforecited language.

I’m a great fan of the Notice to Admit. While admissions of ultimate facts are rare birds indeed, you might just catch an adversary napping. Quoting myself, “We all learned on Day One of practice, when you serve the answer, simultaneously serve the notice to admit, the notice to produce, the notice to inspect, the demand for a bill of particulars, and deposition notices of all and sundry.” From my blogpost “Don’t Suppose You Can Depose,” 12/2/13.

Takeaway–Don’t be discouraged by the Green Gassers’ loss here; keep the Notice to Admit form handy.

Really, He Isn’t

On a day bereft of opinions or designated orders, I’m scraping the bottom of the cliché to find some blogfodder.

After museum-trudging around Munich, I’d like to open that half-litre of Löwenbräu Dunkel, sip it slowly and get some sleep. But stern attention to duty forbids, so here’s the aforesaid scraping.

A lawyer, whom I’ll designate as LD, is subbed in to James R. Koncilja & Monica Koncilja, et al., Docket No. 26204-11, filed 10/20/15. No biggie, right? We’ve all been subbed in, or subbed in others, and it’s usually handing over, or receiving, the file, and filing and serving the sub notice (in Tax Court the Form 8, but only one per customer; see my blogpost “Separate Checks,” 9/1/15). I’ll leave the fee issues to one side, lest the intro be longer than the subject.

So LD comes in, but the subbers-in only represented Jim and not Monica. And so does LD.

But Monica files an Amendment to Petition pro se, fully ratifying the petition.

LD makes some filings thereafter, but he says they’re for Jim only. However, the case is still captioned in both names.

LD never represented Monica, and never said he did. To the contrary, LD always said he was filing for Jim and no one else.

There are five (count ‘em, five) docket numbers related to this case, so LD files a motion to withdraw as Monica’s counsel in all of them.

But Monica’s name appears on 26204-11 only.

Judge Paris quickly sorts this out.

LD’s motion is stricken as to the four cases in which Monica isn’t a party; it’s irrelevant. His motion is moot in the case in which Monica is a party, for the obvious reason that one cannot withdraw as counsel if one never was counsel to begin with.

Judge Paris takes a leaf from Alex Pope, poet and didact, whose 1711 Essay on Criticism contains this sound advice: “Men must be taught as if you taught them not; And Things unknown propos’d as Things forgot.”

Of course this goes for women too, so she counsels Monica: “Petitioner Monica Koncilja is reminded that she has ratified the petition pro se and that the attorneys representing the other parties in these consolidated cases cannot respond to Orders of the Court on her behalf without entering an appearance on her behalf.” Order, at p. 3.

He’s not your lawyer, really he isn’t.

I really had to dig to find Troy D. Hardy, Sr. & Emily K. Hardy, Docket No. 25543-15S, filed 10/19/15, because Ch J Michael B. (“Iron Mike”) Thornton doesn’t designate his orders, even the good ones like this.

The Hardys are in a correspondence duel with IRS, who hits them with a Form 4569 Info Doc, four (count ‘em, four) Forms 4549 blowing up some deductions per Section 183, a Form 886-A Explanation, and finally a Notice CP504 grab-your-State-refund notice. And the Hardys attach all same to their petition.

Now the combat-hardened preparers I’m writing for know that none of these types are anything to the point for Tax Court jurisdiction. While the CP504 grab is issued per Section 6320 or Section 6330, Section 6330(f) expressly states it’s not a NOD.

So the Hardys, who promptly petitioned, and attached all this paper to their petition, are out, right?

Well, yes.

IRS moves to dismiss, but at the same time hits the Hardys with a SNOD.

Ch J Iron Mike: “Petitioners were served with a copy of respondent’s motion to dismiss and… filed a notice of objection. Therein, petitioners recounted the convoluted nature of the underlying examination of their… returns, which involved issuance of four Forms 4549. They further explained that a notice of deficiency had only recently been sent. Consistent therewith, attached to the objection was a copy of the referenced notice of deficiency… issued to petitioners….” Order, at p. 2.

“Thus, a parsing of the record in this case reveals that, while it is clear petitioners have been engaged in an extensive and ongoing correspondence with the IRS regarding multiple taxable years, respondent’s jurisdictional allegations stand unrebutted. Critically, none of the communications reflected in the record of this case constitutes, or can substitute for, a notice of deficiency issued pursuant to sections 6213, I.R.C., or a notice of determination issued pursuant to sections 6320 and/or 6330, I.R.C., as of the date the petition herein was filed.” Order, at p. 3 (Emphasis by the Court).

And we all know that a subsequent SNOD or NOD cannot validate a previously-filed petition. The SNOD or NOD is the ticket to Tax Court. You can’t get in without a ticket.

So the Hardys are out.

But what if you get a late, but still timely, ticket, and send in an objection to the motion to dismiss with the ticket attached?

Ch J Iron Mike gets inventive, and his takeaway is well worth noting.

“However, in the interests of justice and to preserve an available remedy for petitioners, because the … notice of objection was mailed and received by the Court within the period during which a timely petition as to the notice of deficiency… could have been filed, the Court will direct that such document should be filed as a petition to commence a new case at Docket No. 25543-15S.” Order, at p. 3.

Even better, Ch J Iron Mike waives the filing fee.

Takeaway: Object. Object loudly. Object often.

But not able to mark-to-market, although William F. Poppe, 2015 T. C. Memo. 205, filed 10/19/15, is really a day trader, not an investor. Still, Judge Laro is sympathetic, though he disallows Poppe’s ordinary loss treatment and hits him with late filing chops.

Poppe is a school teacher, but his real job is day trading. Between classes and summers he racks up better than 700 trades during the years at issue, and most of his income comes from the swings and roundabouts.

But he files his return electing Section 475 treatment two years late, and never puts in the Form 3115 wherein he claims he elected the Section 475 largesse.

Judge Laro insists upon strict rules of golf. “This Court has on several occasions held that a securities trader failed to make an election under section 475(f) where the trader did not follow the election requirements of Rev. Proc. 99-17….

“We find that petitioner failed to comply with the requirements for the mark- to-market election set out in Rev. Proc. 99-17, supra. The evidence does not show conclusively whether petitioner signed or mailed a Form 3115 in 2003. Petitioner did not submit a copy of any executed version of Form 3115 or any evidence of mailing it. Respondent did not find any record of petitioner’s Form 3115 in his electronic database, but also admitted that in some years not all Forms 3115 received were actually entered in the database. Next, petitioner filed his Federal income tax return for 2003 on July 25, 2005, failing to comply with the filing deadlines. The 2003 tax return contained a statement that petitioner made an election pursuant to section 475(f), but did not have a Form 3115 attached to it. Thus, petitioner did not comply with the requirements of Rev. Proc. 99-17, supra.

“Petitioner argues we should find that he made a valid section 475(f) election under the substantial compliance doctrine. The substantial compliance doctrine has no place in determining whether a timely section 475 (f) election has been made. Rev. Proc. 99-17, supra, fixes a deadline by which the election must be made and the requirements for the election. Because petitioner failed to comply with the requirements of Rev. Proc. 99-17, he did not make an effective mark-to-market election in 2003.” 2015 T. C. Memo. 202, at pp. 16-17. (Citations and footnotes omitted).

Mark-to-market means the trader can take profits and losses on securities held at each calendar year’s end as if said securities were sold for their FMV, even if the securities in question never left the trader’s account. No wonder IRS insists upon strict rules of golf.

Poppe is out on ordinary gains and losses, and only has whatever capital gains and losses, short or long, actually realized, and gains offset losses. Any excess loss gets the $3K limitation.

But Poppe claims he has or had Asperger’s syndrome, so he couldn’t file timely, and brings in his trusty psychologist so to testify.

“Petitioner alleges that his mental impairment–an ASD previously known as Asperger’s Syndrome–constitutes reasonable cause for purposes of section 6651(a)(1) and (2). Petitioner offered testimony of a fact witness, L. G., Ph.D., to confirm his diagnosis. Mrs. G. [no, Judge, Doctor G.] is a licensed psychologist in the State of New York but is not a medical doctor. Mrs. G. has been petitioner’s psychologist since June 2013 and has been seeing petitioner approximately once a month. Mrs. G. testified that the condition petitioner suffered from was a chronic, pervasive, lifelong neurological disorder that manifests itself in impairment of some executive functions, poor social cognition, and high dependence on routines. Mrs. G. also opined that petitioner did not fully appreciate the seriousness of his failure to file his tax returns. We note that Mrs. G. was not petitioner’s treating healthcare provider in 2003 or 2007, the years at issue, and is not a medical doctor. For these reasons, we give her testimony minimal weight.” 2015 T. C. Memo. 202, at pp. 22-23. (Name omitted).

This being a nonpolitical blog, I will not comment on “Mrs.” as opposed to “Dr.,” nor the slighting reference to licensed psychologists in the State of New York. I am, however, thinking very loudly.

Anyway, during the years at issue Poppe was looking at six video screens, trading away, so despite Judge Laro’s sympathy, Poppe gets the chop.

Poppe did try the “financially disabled” gambit, Section 6511(h), but that fails, as he’s not talking about a refund or credit for overpayment of taxes while disabled. If you want the dope on financially disabled, see my blogpost “Elected, Depressed and Disabled,” 11/12/14. And note Sarah Kurko was claiming a credit from one year to offset a liability for another year, not a late filing or late payment situation.

Apparently the USDCDAZ thought IRS could not vary Congress’ SOL for the Section 6707A chop, but IRS is taking an appeal. But this came up after Appeals bounced Laidlaw’s Harley Davidson Sales, Inc., Docket No. 14616-14L, filed 10/16/15.

So we have a designated hitter off the bat of that Obliging Jurist, Judge David Gustafson.

Apparently the biker fell foul of the Sterling Benefit Plan, a dodge more particularly bounded and described in my blogpost “Splitsville,” 7/14/15.

IRS hit biker with the chop at audit, and biker went to Appeals. Remember, the Section 6707A is non-assessable, so no SNOD necessary.

Biker claims SOL bars all but $10K of the $95K IRS wants. Biker also contests the liability.

Biker is out on liability. He had his chance at Appeals, put in evidence and participated.

Judge Gustafson: “It is true that petitioner’s first appearance before IRS Appeals was in a context that did not afford judicial review. However, with or without an opportunity for judicial review, ‘[a] conference with the Appeals Office provides a taxpayer a meaningful opportunity to dispute an underlying tax liability.’ Lewis v. Commissioner, 128 T.C. 48, 61 (2007). If petitioner contends that this regime violates the Constitution, then that contention fails: ‘It has long been established, moreover, that there is no constitutional requirement for a prepayment forum to adjudicate a dispute over the collection of a tax.’ Laing v. United States,423 U.S. 161, 210 (1976), citing Phillips v. Commissioner, 283 U.S. 589, 595-596 (1931). Petitioner is not foreclosed from hereafter litigating its liability in a refund claim context, either in Federal district court or in the Court of Federal Claims.” Order, at p. 4.

The magic words are, of course, “prepayment forum.” Pay first, sue later is the rule.

But in May v United States, CV-14-00910-PHX-NVW (D. Ariz., Jun 15, 2015), Judge Wake waved off the chop, claiming no extension of the SOL.

So Judge Gustafson sends biker back to Appeals, so that Appeals can consider the impact of the May decision. And also biker’s argument that Section 6707A(d)(2), which bars judicial review of IRS’ decision to rescind the penalty (or not), is unconstitutional.

Judge Gustafson: “Even if Appeals has discretion to rescind penalty or not rescind, it would seem that Appeals does not have discretion simply to ignore the rescinding request and to fail to rule on it. And even if we are barred from reviewing Appeals’ determination as to rescinding penalty (and even if that bar is constitutional), it would seem that in a CDP case we can review a wholesale failure to make any determination whatsoever as to rescinding penalty.” Order, at p. 5.

So IRS wins; biker had his chance to contest liability, and gets no second prepayment bite. But he goes back to Appeals on SOL and judicial review.

That’s been a good move for travelers, we’ve discovered, as we enjoy the end of our stay in Vienna and prepare for the trip to Munich.

And it’s also a good move for Jose Espaillat and Mirian Lizardo, 2015 T. C. Memo. 202, filed 10/15/15.

Jose got involved with Rocky Scrap Metal, Inc. (Rocky Scrap Metal), a scrap metal C corp owned and operated by brother Leoncio. Rocky was rocky, all right. Leoncio put Rocky into bankruptcy, taking with it $285K that Jose put into that business.

Jose had a landscaping business that did just fine, but when he tried to take the $285K as a capital loss, or maybe a worthless security (he was supposed to get stock but apparently he never did), or maybe a bad debt, to offset his landscaping income, IRS said “none of the above,” and Judge Buch agreed.

There’s much detail about how working for a corporation, or providing capital, doesn’t give rise to individual deductions.

Jose’s claim of partnership with the corporation doesn’t work, and his bad debt/worthless security gambit fails on timing. Jose can’t show whatever he had, be it stock or loan, became worthless in the year at issue. Just because a corporation is bankrupt doesn’t mean its stock is worthless. And Leoncio kept the place going after bankruptcy.

“On each of their joint Federal income tax returns…, Mr. Espaillat and Ms. Lizardo included a Schedule C for [landscaping] and also a second Schedule C. The [landscaping] Schedule C for [year at issue] reflects a successful landscaping and maintenance business…. The second Schedule C… relates to a business named ‘Jose Espaillat’, which is characterized as a ‘second hand metal dealer’ and for which Mr. Espaillat and Ms. Lizardo claimed a $359,000 loss deduction for 2008. The loss is reported as ‘Other expenses’ on line 27 of the Schedule C. All other lines on the ‘Jose Espaillat’ Schedule C are blank.” 2015 T. C. Memo. 202, at p. 3. This loss more than offset Jose’s landscaping gains.

Of course, it set off the alarm bells at the IRS. Why am I not surprised?

As aforedescribed, Jose’s deduction, however denominated, gets blown up. IRS even gets to conform pleadings to proof and disallow the $3K short-term capital loss it gave Jose when it thought he might have a bad debt claim.

My point? There is one, and it is the reason for the title of this sad tale.

IRS wants the 20% negligence chop. But Judge Buch will have none of that.

While Jose was good at gardening, he was no tax whiz.

“For the years in issue Mr. Espaillat and Ms. Lizardo enlisted Mr. Golomb, their C.P.A. of over a decade, to prepare their returns. Mr. Golomb had Mr. Espaillat and Ms. Lizardo each fill out a questionnaire before preparing their return for each year. He testified that Mr. Espaillat and Ms. Lizardo provided all the requisite information and were otherwise thorough in completing the questionnaires. Mr. Golomb credibly testified that he held a conversation discussing the facts of the situation with Mr. Espaillat and Ms. Lizardo about the different places to report their loss on the returns and that he thought a Schedule C was ‘the best place to put it.’

“While the facts at hand do not lend themselves to such a position, Mr. Espaillat and Ms. Lizardo have retained Mr. Golomb for at least 10 years without incident. Mr. Golomb is a C.P.A. with over 30 years of experience. Moreover, because Mr. Espaillat and Ms. Lizardo had always used a Schedule C in relation to [landscaping], they had every reason to believe that a Schedule C was the appropriate place to report their financial dealings with Rocky Scrap Metal. While Mr. Espaillat and Ms. Lizardo’s trust in Mr. Golomb was misplaced, they believed in good faith that he was accurately and correctly preparing their returns.” 2015 T. C. Memo. 202, at p. 28.

So stick to your Schedule. It might well save you money. Even if your Schedule isn’t the “right place to put it.”

What role does guilty knowledge play in a voidable (fraudulent) transaction? My colleague, Joel E. Miller, Esq., canvassed the issue extensively, and decided that the term “fraudulent conveyance” was a misnomer. The proper nomenclature is “voidable conveyance,” as it is the creditor(s) that is the injured party. The transferor may have guilty knowledge; the transferee may be pure as the driven cliché, but the creditor(s) may still avoid the transaction and grab the boodle.

Where the issue gets messy is where the transferee is really in cahoots with, or a stooge for, the transferor. This is the Billyhawk story. I’ve blogged the Billyhawk story extensively, but for some backstory, see my blogpost “Game Ends In No Score,” 5/30/12.

Well, today Judge Lauber, besieged by eight (count ‘em, eight) lawyers, three for the taxpayer and five for IRS, is dealing with Michael A. Tricarichi, Transferee, 2015 T. C. Memo. 201, filed 10/14/15. Plenty of knowledge here.

Mike was a cellphone starter-upper who formed a C Corp because he expected more shareholders than S Corpery would allow, except he was a solo and won a big antitrust lawsuit against Big Telecom. This means double taxation, and a major hit to Mike’s takeaway from the Big Telecomers.

So his trusty lawyers get our old chums MidCoast to gin up one of their MidCo deals, with the usual Dutch lender who is fully cash-collateralized on Day One, and a Cayman Islands phony thrown in. Trusty lawyers get reps and warranties, but of course none of these is honored, either in the breach or the observance.

And Mike asks PwC for an opinion, doctoring their retainer letter, which doesn’t go over either with PwC or Judge Lauber.

Mike’s a Buckeye, so Judge Lauber hits the Ohio Uniform Fraudulent Transfer Act. Remember, all Section 6901 does is give IRS an accelerated shot at collecting if State law would treat IRS as any creditor of the transferor.

There is an actual fraud provision in Ohio State law, plus three constructive fraud provisions, and IRS claims Mike hit the whole cycle.

Mike claims there was no transfer from his C Corp, as the cash involved came from the Dutch loan. But the “loan” was an in-and-out in one day, and was fully collateralized. In any case, the fee the Dutch got was way more than interest, and was a fee for facilitating the deal.

The loan was a sham.

And Mike had plenty of guilty knowledge. “Finding that a person had constructive knowledge does not require that he have actual knowledge of the plan’s minute details. It is sufficient if, under the totality of the surrounding circumstances, he ‘should have known’ about the tax-avoidance scheme.” 2015 T. C. Memo. 201, at p. 47 (Citation omitted).

And ordinary diligence plays a role in constructive knowledge. You can’t turn a blind eye to something that looks fishy. Striking the sentence in the PwC retainer that would have required Mike to state he wasn’t engaging in a listed transaction before he sent the signed retainer back to PwC shows Mike knew he wasn’t on the up-and-up.

And the shill insisted Mike strip his C Corp of every asset but cash before doing the shenanigans. “Petitioner was a sophisticated entrepreneur who had built a company and knew how to value a business. It should have provoked tremendous skepticism to discover that [the shill] was willing to pay a 47% premium to acquire cash, which by definition cannot be worth more than its face value.” 2015 T. C. Memo. 201, at pp. 50-51.

Judge Lauber comes down on the duty to inquire.

Now the shill stayed in business for some years, filing tax returns and keeping a nominal cash balance in the bank. So it wasn’t a classic bust-out, where the shill collapses immediately after doing the deal.

Judge Lauber isn’t impressed.

“At the insistence of petitioner’s lawyers, [shill] was kept in formal existence for several years. It filed tax returns; it cut checks to [MidCoast] affiliates; and it maintained a nominal cash balance. But keeping [shill] in notional existence was simply a charade designed to create a defense to the precise argument the IRS is advancing here, an argument that petitioner and his attorneys knew the IRS would advance if this Midco transaction came to its attention. Such lawyerly stratagems cannot hide the fact that [shill] had been liquidated in substance. It continued as a Potemkin village intended to deceive the IRS, just as the original was designed to fool Catherine the Great.” 2015 T. C. Memo. 201, at p. 55.

I love “lawyerly stratagems,” but only if they work. These didn’t.