Give IRS credit, they’ll keep trying. They’re still pushing the two-step transferee liability theory for Section 6901 cases, even after being repeatedly rebuffed; see my blogposts “A Good Day For Taxpayers”, 3/15/11 and “The Rappers’ Tale”, 5/29/14.

Judge James S. (“Big Jim”) Halpern has even more reasons why the two-step doesn’t work in William Scott Stuart, Jr., Transferee, et al, 144 T. C. 12, filed 4/1/15. It’s no April Fools’ joke, either for IRS or for W. Scott and the als, his fellow shareholders in Little Salt Development Corp.

The Little Salties were unloading their saline ponds, basis of naught and FMV of $472K. The buyer sent them a letter from (drumroll) Mid-Coast Financial. You know the rest. Mid-Coast bought the stock, resold it, put money in a Little Salt account overnight (but not in escrow as they claimed), took it out and gave Little Salt a note for the money, which Little Salt took as a bad debt, wiping out the gain. Then Mid-Coast deactivated Little Salt. Of course there was a promise to pay the tax, but the promise was that Mid-Coast “would cause Little Salt to pay the tax”, but Mid-Coast didn’t guarantee payment.

The Little Salties argue statute of limitations, but State law said Little Salt remained alive while its affairs were wound up. IRS claimed substance-over-form based on Federal tax cases, but that didn’t fly.

“While the definition of persons considered transferees for purposes of section 6901 is extensive, the section does not independently impose tax liability upon a transferee but provides a procedure through which the Commissioner may collect unpaid taxes owed by the transferor of the property from a transferee if an independent basis exists under applicable State law or State equity principles or, in some cases, Federal law for holding the transferee liable for the transferor’s debts.” 144 T. C. 12, at p. 20.

So the Starnes case and the Swords case, each cited in my respective blogposts hereinabove aforementioned, control.

However, as they say on late-night infomercials, wait, there’s more.

“Before the enactment of the original predecessor provision to section 6901, the rights of the Federal Government as creditor of a tax debt were enforceable against someone other than the taxpayer only through procedures cumbersome in comparison to the summary administrative remedy allowed against the taxpayer himself.  The purpose of the change in the law was to provide for the enforcement of such third-party liability to the Government by the procedures already in existence for the enforcement of tax deficiencies. H.R. Conf. Rept. No. 69-356, at 43 (1926), 1939-1 C.B. (Part 2) 361, 371. The procedures were to be effective against a transferee of property of the taxpayer, but ‘[w]ithout in any way changing the extent of such liability of the transferee under existing law’. Id. at 43, 1939-1 C.B. (Part 2) at 371. Moreover, notwithstanding Congress’ enactment of a summary method for collecting a transferee’s liability, section 6901 is not the exclusive method for the Commissioner to collect a transferee’s liability. For example, the section does not replace the older judicial remedies of instituting proceedings to collect a corporate tax from its shareholders or to set aside a fraudulent conveyance.” 144 T. C. 12, at pp. 33-34. (Footnote omitted).

Judge Big Jim goes on: “Nothing in section 6901 accords the Commissioner any right not enjoyed by other creditors seeking to use the judicial enforcement mechanisms if the Commissioner proceeds outside of section 6901 to set aside a fraudulent transfer or to enforce against a transferee of property the transferor’s liability for tax. And if the Commissioner so proceeds, the question of whether the person against whom the Commissioner proceeds is a transferee within the meaning of section 6901 is moot. Section 6901 merely identifies those persons (transferees of property) against whom the Commissioner may employ the summary collection authority afforded to him by section 6901(a) once, independent of that section, he has fixed the person’s substantive liability under State or Federal law as a transferee of the taxpayer’s property. If without invoking section 6901 he could not fix that liability, then he cannot resort to his summary collection authority to obtain a different result.” 144 T. C. 12, at pp. 34-35.

But The Little Salties aren’t off the hook.

Judge Big Jim cruises through the Nebraska fraudulent transfer statutes, with a side trip to Bankruptcy Court, and decides The Little Salties are on the hook, but not for the entire unpaid tax. Under State law, they are liable for any benefit they received or that inured to them arising out of the fraudulent transfer.

That’s the difference between what they got once Mid-Coast got its cut for facilitating the charade, and what they would have had had they played the game straight. That’s less than the entire amount IRS wanted.

See 144 T. C. 12 at pp. 56-57, as Judge Big Jim does the numbers.

Judges, even Tax Court Judges, are, after all, human. So despite IRS’s inveighing against remands to Appeals (see my blogpost “Demand For Remand”, 12/3/12), judges may find an incomplete record sufficient to punt a particularly heartrending case back for another chance for relief to the overburdened taxpayer.

Today it’s Judge Marvel, with IRS’s redoubtable test-taker John Schmittdiel leading for IRS (for an account of Mr. Schmittdiel’s scholastic prowess, see my blogpost “Go To The Head of the Class”, 3/26/14), in Kevin R. Gurule and Dawn M. Gurule, 2015 T. C. Memo. 61, filed 3/31/15.

Briefly, Kev and Dawn went through many trials and tribulations. Dawn has a neurological problem that prevents her from working. Kev moved from Minnesota to Missouri, lost his job, moved back, and their home got foreclosed. Then one of their sons died, and they can’t afford to put his ashes in a columbarium.

Kev borrowed against his 401(k)s, couldn’t pay his taxes, so he wound up in front of an SO whose approach was somewhat casual.

Kev and Dawn wanted an OIC based upon doubt as to collectibility. Kev found a job but had to repay his 401(k) loans. The SO said that Kev was repaying himself, and therefore the 401(k) is a dissipated asset. So Kev’s RCP is greater than he claims, and his OIC and installment offer are too low, so:

“Respondent contends that petitioners are not entitled to any adjustment to their monthly net income because petitioners are essentially repaying a loan to themselves and allowing an adjustment would result in double counting the section 401(k) plan account encumbrances. Respondent further avers that petitioners may not receive a reduction in the net realizable equity of the section 401(k) plan account because the additional loans Mr. Gurule took are ‘dissipated assets.’ 2015 T. C. Memo. 61, at p. 29.

Now it’s OK for IRS to ignore 401(k) loans in figuring RCP, to prevent wiseguys (and gals) from draining their 401(k)s without paying tax, and dispersing the money. The SO relented, though, as to some of the 401(k) loans, because Kev needed them for Dawn’s medicals and his son’s final illness.

But the SO got the arithmetic wrong, and the case summary just throws the loans out without stating why there was dissipation.

And the SO apparently didn’t consider the special circumstances of Kev’s and Dawn’s plight.

The record is therefore too scanty for Judge Marvel to decide that IRS followed all the laws and regulations that Section 6330(c)(1) requires IRS to follow.

Besides, I have a feeling Judge Marvel didn’t want to cast Kev and Dawn into outer darkness of the NITL after recounting their tale of familial woe.

So Judge Marvel punts Kev and Dawn back to Appeals to consider hardship, special circumstances and make a clearer record.

The somewhat cryptic title of this blogpost will be more familiar to my nearest and dearest than to the general reader, but I can’t resist Judge James S. (“Big Jim”) Halpern’s designated hitter, admonishing an attorney I’ll call Wilf.

Wilf filed two notices of appearance electronically after Judge Big Jim tossed him from Emmanuel C. Acholonu & Shawn Y. Acholonu, Docket No. 17237-13, filed 3/30/15.

Wilf never bothered with status reports or showing up for calendar call. Last year, Judge Big Jim admonished Wilf to follow the ABA Model Rules.

“Tax Court Rule 202(a)(3) specifically identifies as a ground for discipline any conduct that violates the letter and spirit of the Model Rules. For example, Model Rule 1.1 requires a lawyer to provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation. Model Rule 1.3 requires a lawyer to act with reasonable diligence and promptness in representing a client. Model Rule 3.4(c) prohibits a lawyer from knowingly disobeying court rules and orders. Counsel’s conduct in this case seems to have been deficient on these and possibly other grounds.” Order, at pp. 1-2.

Although tossed, Wilf, nothing daunted, presses on. He never replies to Judge Big Jim’s objections.

His clients twice ask Judge Big Jim to let Wilf back in, saying they’re satisfied with his representation of them. So would I be, if my attorney stalled IRS when I owed money.

But that doesn’t fly with Judge Big Jim. Wilf’s clients may be happy, but Wilf’s conduct is never explained, so Wilf is tossed again.

However, Judge Big Jim offers Wilf a chance to cross the metaphorical Jordan into the Promised Land at 400 Second Street, NW.

“Without limiting his options for showing us how he intends to insure his compliance with the Model Rules and the Tax Court Rules of Practice and Procedure, we invite him to show us that, since he was first withdrawn as counsel in this case, he has taken and satisfactorily completed continuing education courses addressing compliance with the Model Rules or other continuing education courses addressing practice management or similar subjects concerning the efficient and responsible practice of law. While petitioners may be satisfied with [Wilf’s] performance, we need not rely on their belief as to whether [Wilf] has represented them in an efficient, competent, and ethical manner. To comply with our suggestion as to what [Wilf] must show, petitioners may move the Court for permission for [Wilf] to file an entry of appearance on their behalf, accompanied by an affidavit of [Wilf’s] establishing grounds justifying our giving him permission to enter his appearance.” Order, at p. 3.

Until then, Wilf is tossed yet again.

I was admitted to the Bar of Our Fair State on March 27, 1967. As today is the forty-eighth anniversary thereof, I offer myself a toast: “Here’s tae us, wha’s like us, dom’ few, and they’re a’ deid.”

Slainte!

Ch J Michael B. (“Iron Mike”) Thornton is the object of the question first above set forth at the head hereof (as my Turnbull & Asser-shirted colleagues would say).

The multitude of open docket numbers in Caylor Land & Development, Inc., et  al., for example 17204-13, filed 3/27/15, causes me a certain level of puzzlement.

I quote:

“ORDERED that jurisdiction of the above-referenced cases is no longer retained by Judge Mark V. Holmes. It is further

“ORDERED that the above-referenced cases are assigned to Judge Mark V. Holmes for trial or other disposition.” Order, at p. 1.

Remember the Caylors? No? Ah, the fallibility of human memory. Well, see my blogpost “Don’t Suppose You Can Depose – Part Deux”, 9/2/14.

That’s Judge Morrison’s admonition to the trusty CPA who sent in the appeal for Olin Glenn Smith, 2015 T. C. Memo. 60, filed 3/26/15.

Except that on a trial of whether said trusty CPA actually mailed the letter which embodied the appeal, said trusty CPA came off second-best. And this is a contest where there is no second-place winner.

The issue, of course, is whether OG had a chance to contest the underlying liability and, having had same, blew the sixty-day cutoff. So this is a TFRP, where the Letter 1153, if received, starts the clock.

Everyone agrees OG got the Letter 1153 and handed it to his trusty CPA. Trusty CPA claims he wrote to the IRS examiner designated in the Letter 1153 to deal with, stating therein that OG had bailed from the partnership that owed the TFRPs in the year prior to periods in question, and handed it to an office assistant to mail.

But: two years go by, IRS proposes to levy upon OG for $36K, and trusty CPA fires off letters and faxes, and claims he called IRS examiner who never returned his calls. Trusty CPA files another appeal letter, but doesn’t suggest collection alternatives, wanting to contest the liability.

Appeals claims, “you had your chance and blew it.” Judge Morrison agrees.

Though OG’s attorney has some other arguments, he saves them until his answering brief (too late), and anyway he stipulated on the record that, if he lost on whether trusty CPA actually sent letter, OG had his chance and blew it.

I’ve said it so many times: there but for the grace of you-know-Whom goes any one of us. So no gloating here.

Judge Morrison gives the preponderance-of-evidence lecture, so burden of proof is off the table.

Then comes the nub: “In evaluating the question of whether the … letter [the appeal] was actually sent…, we consider [CPA’s] testimony that he gave the letter to his ‘staff for processing and sending to Treasury.’ While this testimony is relevant, we have little idea of how [CPA’s] firm processed [CPA’s] outgoing letter. We did not hear firsthand testimony, for example, from the staff member who would have handled and effected the mailing of the… letter. We therefore are not inclined to presume, on the basis of petitioner’s suggestion of the reliability of [CPA’s] firm’s system for processing outgoing mail, that the … letter in question was actually deposited into the U.S. mail for delivery to the addressee. Furthermore, what little evidence there is about what happened to the letter after [CPA] signed it indicates that the letter was not sent. [CPA] testified that no certified or registered mail receipt for the letter was found in his files at his firm. Had the … letter been sent to the IRS as [CPA] mentioned, most likely it would have been sent by certified or registered mail. We infer this from the importance of the letter and from the fact that [CPA] and his firm searched for a copy of a certified or registered mail receipt. We further believe that had any certified or registered mail receipt existed, [CPA] would have instructed, and his firm’s staff would have understood, that this receipt should be retained in [CPA’s] files. Therefore, the lack of such a receipt in [CPA’s] files is an indication that the letter was not mailed.” 2015 T. C. Memo. at pp. 17-18. (Footnotes omitted).

IRS says “no have”, but admits it hasn’t searched every file. However, OG’s counsel doesn’t ask for adverse inference, so Judge Morrison doesn’t draw one.

And although CPA faxed a copy of the letter to IRS long after the sixty days had run, nothing showed whether it was a retained copy or the original that never got mailed.

I know that in a high-volume office it’s not possible to track every piece of paper. But there are times when the cost of tracking is far less than the cost of not tracking.

Takeaway–Find a post office with a self-service machine, and run your certified mail through that. Keep every receipt, and use USPS online Track & Confirm.

No, I didn’t, but Eugenio Espinoza Martinez, Docket No. 29472-12, filed 3/26/15, gets a ticket in the Taishoff no-prize “good excuse” sweepstakes. Eugenio is going for the superfecta.

For those of my readers, that small but mighty band, who are strangers to the dirt and turf, the superfecta is a wager wherein the bettor must choose the precise order of finish of the first four horses to finish the race.

And from whom else should he get his ticket but The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a the Indomitable, Irrefragable, Illustrious, Indefatigable, Incomparable, Implacable (but never Inconsiderate or Impetuous) Foe of the Partitive Genitive, Judge Mark V. Holmes?

Eugenio was supposed to show up before Judge Holmes in the Alamo City last Fall, but couldn’t make it. “(Since he will be an inmate in the Texas State prison system for the next decade his nonappearance is understandable.)” Order, at p. 1.

So IRS hits Eugenio with a Rule 91(f) “we declare these truths to be self-evident” motion, requiring Eugenio to dispute, rebut, counter and otherwise deal with the asserted facts therein.

Eugenio replies that the warden took his documents and won’t give them back. Not bad.

As they say on late-night television commercials, “But wait–there’s more!”

Judge Holmes searches the record and finds Eugenio has asserted the following during the last three years.

“…the records necessary to decide this case on the merits were either (a) nowhere to be found; (b) waiting for him when he returned to his unit of assignment when he was released from a mental health unit; (c) lost when his mother died; and (d) seized by guards from his cell.” Order, at p. 2.

Oh yes, Eugenio never provided one piece of evidence as to any of the foregoing.

Nevertheless, I give Eugenio an entry in the Taishoff no-prize “best excuse” sweepstakes Superfecta.

Kindly Judge Holmes gives him one last chance, because it’s tough to litigate from the slammer. So Eugenio, respond to the Rule 91(f) in early May, or you may find that the facts will be deemed established.

Footnote– Eugenio tried yet another stall, but Judge Holmes forestalled him, and “deems these truths to be self-evident.”  See Eugenio Espinoza Martinez, Docket No. 29472-12, filed 9/8/15. Oh yes, and IRS should move for summary J based upon said facts.

The immortal words of Robert Allen Zimmerman, from his 1966 Blonde on Blonde album, redound in the orders of Judge Kathleen Kerrigan, who was doubtless a mere babe when Rainy Day Women #12 and 35 was unleashed upon the world.

The story can be found in Neil Feinberg & Andrea E. Feinberg, et al, Docket No. 10083-13, filed 3/25/15. The “al.” is Kellie McDonald, who features in Docket No. 10084-13, of even date therewith (as my single-malt swilling, but non-inhaling, colleagues would say).

These designated hitters tell the story, in idem verba (see supra), of the “…disallowed business deductions of petitioners’ company Total Health Concepts, LLC (THC), a medical marijuana dispensary, because section 280E disallows expenses incurred in trafficking in controlled substances in violation of the Controlled Substances Act. See sec. 280E.” Order, at p. 1.

Brings back memories, this. No, not of inhaling, rather my blogpost “Everybody Must Get Stoned”, 8/3/12, retailing the tale of Martin Olive in 139 T. C. 2, filed same date therewith (see supra).

Well, whoever’s representing Neil and Andrea E., and presumably Kellie, should dig Judge Kroupa’s opinion abovecited. And of course my eloquent exegesis thereof (see supra).

Neil and Andrea E., and presumably Kellie, want summary J.

“Petitioners contend that they are entitled to summary judgment on the following grounds: the Commissioner does not have jurisdiction to administratively determine whether petitioners committed a federal crime outside of the U.S. tax code; section 280E as applied by the Commissioner is unconstitutional as it violates petitioners [sic; should be petitioners’] rights against self-incrimination under the Fifth Amendment of the Constitution; and section 280E exceeds the authority granted to Congress under the Sixteenth Amendment of the Constitution. Respondent contends that respondent has the authority and jurisdiction to determine whether section 280E applies to petitioners and THC.” Order, at p. 1.

Judge Kerrigan thinks there are substantial questions of fact, but doesn’t say what they might be.

And if Neil and Andrea E., and presumably Kellie, claim it’s all cost of goods sold, which isn’t a deduction but a subtraction from gross revenue to determine gross income, then maybe so Judge Kroupa’s legacy saves the day.

Speaking of cost of goods sold, IRS and petitioners routinely get this one wrong.

Check out Alla I Musa, 2015 T. C. Memo. 58, filed 3/25/15, a fraud case wherein Judge Nega puts both Alla and IRS wise. It’s all there at 2015 T. C. Memo. 58, at p. 3, Footnote 2.

“Both petitioner and respondent refer to the proper treatment of additional cost of goods sold (COGS) as ‘deductions’. The Court notes that COGS is not treated as a deduction from gross income but is rather subtracted from gross receipts in order to arrive at gross income. Metra Chem Corp. v. Commissioner, 88 T.C. 654, 661 (1987); sec. 1.61-3(a), Income Tax Regs.”

Howbeit, Judge Kerrigan sends the gang out for trial when June busts out all over the Mile-High City.

Cain’t hardly wait.

Despite two T. C. Memos dealing with unreported income today, I’m blogging about powers of attorney (POAs), as the principle there is of greater general application than another bank deposits reconstruction or a diversion of funds that falls short of absolute fraud.

The people I’m writing for are more likely to see the Form 2848 in peace and war.

So we have the designated hitter, Merlene Godfrey, Docket No. 21507-13L, filed 3/24/15, from STJ Daniel A. (“Yuda”) Guy.

Merlene claims IRS never sent her an NITL so she couldn’t challenge IRS’s determination at Appeals, so no jurisdiction. IRS agrees no jurisdiction, but they did send an NITL to Merlene. However, Merlene’s AIF (attorney in fact; that’s the person authorized by as power of attorney to act for the principal. A power of attorney is a piece of paper, not a person) petitioned a year too late.

Here’s the chronology: “In September 2011, Tax Defense Network (TDN) submitted to the IRS two Forms 8821, Tax Information Authorization, executed by petitioner, identifying TDN as her representative for the years in issue. In early March 2012, the IRS received from petitioner a Form 2848, Power of Attomey and Declaration of Representative, appointing John J. Genova, petitioner’s counsel of record in this case, as her attorney in fact for the years in issue. Petitioner did not check the box on the Form 2848 directing respondent to send copies of notices and communications to Mr. Genova. Thereafter, petitioner received correspondence from the IRS which she then forwarded to Mr. Genova. Realizing that the Form 2848 did not direct respondent to send copies of notices and communications to him, Mr. Genova checked the ‘notice’ box on the original Form 2848 and sent a copy of it by facsimile transmission to the IRS on May 19, 2012.” Order, at p. 1 (Footnote omitted, but read it; Merlene didn’t re-sign the Form 2848 after Mr G checked the box, so IRS claims it’s ineffective).

A month later, Mr G got Merlene to sign the revised Form 2848, but IRS had mailed the NITL three days earlier to Merlene and TDN per the Forms 8821 on file, but not to Mr G.

Merlene never picked up the NITL, and it was returned “unclaimed” to IRS.

A year later, Mr G discovers what happened and filed Form 11253, which IRS bounces as too late, so Mr G petitions.

But everyone agrees there’s no jurisdiction in Tax Court. The only question is, why not?

“The only issue for decision is the proper basis for dismissal (i.e., the lack of a notice of determination (as respondent contends) or the lack of a valid levy notice (as petitioner contends).” Order, at p. 2.

Of course, if no valid NITL, then no lien. If valid NITL but no NOD, too bad, lien stands.

Bad news, Merlene (and you taxpayer representatives, read and heed).

“The record shows that respondent mailed the levy notice for the years in issue to petitioner’s last known address by certified mail. Petitioner failed to claim the notice, and it was returned to the IRS undelivered. The fact that petitioner did not actually receive the levy notice does not render the notice invalid. Petitioner nevertheless contends that the levy notice is invalid because respondent failed to mail a copy to Mr. Genova. Respondent asserts that the Form 2848 appointing Mr. Genova as petitioner’s representative was ineffective to revoke or override the Form 8821 that petitioner previously submitted to the IRS appointing TDN as her representative. As respondent sees it, he properly mailed copies of the levy notice to petitioner (at her last known address) and to TDN. We agree.” Order, at pp. 2-3.

Relying on deficiency cases rather than lien or levy, STJ Yuda says “It is established law that ‘the failure of the respondent to send a copy of the notice of deficiency to the taxpayer’s counsel, pursuant to a request contained in a power of attorney filed with the respondent, does not affect the time within which the taxpayer must file a petition with this Court if a notice of deficiency has been sent to the taxpayer by * * [certified] mail to his last known address.’” Order, at p. 3. (Citations omitted).

So whether the amended POA was valid or not, “Regardless of whether Mr. Genova should have received copies of IRS correspondence, respondent mailed the levy notice to petitioner at her last known address. Respondent therefore met the mailing requirements under section 6330, and the levy notice is valid. No notice of determination sufficient to confer jurisdiction upon this Court has been issued to petitioner.” Order, at p. 3.

So there’s no NOD, because the petition was way too late, and thus there’s no Tax Court jurisdiction, but the lien stands.

But what if Merlene checked the box on the Form 2848 to Mr G to begin with?

Maybe the same result, but try it.

Takeaway–Double check those POAs before you fax them to CAF.

Judge Wherry Tells it Like It Is

No, not a law firm, but a summary of Judge Wherry’s unwhimsical, but very illuminating, exegesis of the 6SOL, the sham-transaction-economic-substance-step-transaction thicket that courts have encountered since the days of Gregory v. Helvering, 293 U.S. 465 (1935), and the interplay of United States v. Woods, 571 U.S. ___, 134 S. Ct. 557 (2013) with United States v. Home Concrete Supply, LLC, 566 U.S. ___, 132 S. Ct. 1836 (2012).

All this is yours to enjoy (if you’re unusually warped mentally) in CNT Investors, LLC, Charles C. Carroll, Tax Matters Partner, 144 T. C. 11, filed 3/23/15.

Don’t panic, I won’t give a detailed recital of the 119 pages of Judge Wherry’s prose. I will only hit a few high points.

The deal was a backhand son-of-BOSS, concocted by Jenkins & Gilchrest, hawkers of dubious basis-builders. The aim was to separate land from buildings and business operations of Charlie’s funeral parlor empire, in order to sell the business to a big operator who didn’t want to buy the land. By keeping and net-leasing the land, Charlie could get continuing income.

The land was put into a phony partnership, the counterparty to Charlie teaming up with Deutsche Bank (well-known facilitator of tax dodges for a fee) to run a no-real-loss T-note short sale, with an immediate repo.

Land has basis of bupkis, FMV in seven figures, so short-sale generates huge paper loss because repo is not recognized as offsetting.

Everyone agrees this is a sham, but does the 6SOL apply? Charlie says no, because he’s Californian and the Keller case applies. You can’t have a substantial understatement of value in a sham transaction.

But Woods, supra, put paid to that argument.

What about Home Concrete? Overstated basis is not an omission of income, said the Supremes.

No good, says Judge Wherry, because Charlie’s unwinding of the phony partnership didn’t even mention the miniscule Section 311(b) pick-up from Charlie’s Sub S, created to hold the land and later dump it off to Charlie and kids, which is an omission of income entirely separate from the phony partnership.

“Under section 311(b), if a corporation distributes appreciated property to a shareholder, the corporation must recognize gain as if it had sold the property for fair market value. Where the corporation is an S corporation, that gain passes through and is taxable to the corporation’s shareholders pursuant to section 1366(a)(1). Yet neither [Charlie’s Sub S] nor its shareholders reported any of this gain. Hence, an item of gross income was omitted from … Form 1120S and from its three shareholders’ …Forms 1040. By respondent’s computations, because this omission amounted to more than 25% of gross income for each partner, section 6501(e)(1)(A) applies.” 144 T. C., 11, at p. 43.

That’s the 6SOL 25% omission test, except on the math it doesn’t as to two of the three [Charlie’s kids], but Charlie gets nailed.

Charlie objects that the FPAA that triggers this fight has to do with an entity other than the one from which Charlie got the gain, but that doesn’t matter. The issue here is that Charlie didn’t report what he got.

But Charlie says he really got nothing, because the whole transaction was a sham, and that he really has what he started with, namely the land, buildings and business. No, say IRS and Judge Wherry, the last step wasn’t a sham: you wanted to separate land from buildings and business, and you did. That you couldn‘t do it tax-free is your problem.

Now sham, economic substance and step transaction are all in play here. But what do those terms mean?

“The doctrines’ substantive similarities would not, alone, generate uncertainty for taxpayers (or tenure opportunities for tax academics) if courts applying the doctrines did so using consistent terminology. We have not.” 144 T. C. 11, at p. 51 (Footnote omitted).

There are two goals in play here. “On one hand, having clear, concrete rules embodied in a written Code and regulations that exclusively define a taxpayer’s obligations (1) facilitates smooth operation of our voluntary compliance system, (2) helps to render that system transparent and administrable, and (3) furthers the free market economy by permitting taxpayers to know in advance the tax consequences of their transactions. On the other side of the scales, the Code’s and the regulations’ fiendish complexity necessarily creates space for attempts to achieve tax results that Congress and the Treasury plainly never contemplated, while nevertheless complying strictly with the letter of the rules, at the expense of the fisc (and other taxpayers).” 144 T. C. 11, at pp. 58-59.

But all attempts to reduce the tax dodges to formulae will fail.

“Attempts to parse and define the doctrines merely intellectualize what is, ultimately, an equitable exercise. Those who favor transparency might prefer a strictly circumscribed taxonomy of judicial doctrines, to include exclusive definitions of the circumstances in which they should be applied. Those who favor administrability, protection of the fisc, and respect for congressional purpose might prefer that courts exercise carte blanche in disallowing results of transactions perceived as abusive.” 144 T. C. 11, at p 59.

Finally, Judge Wherry eschews academic sesquipedelianisms, and lays it on the line: “Litigants and courts employ specialized terminology to make this effort appear more rigorous, but candidly, underneath, we are simply engaged in the difficult, commonsense task of judging.” 144 T. C. 11, at pp. 59-60.

But some good news for Charlie. Though he is in the zone for the 40% chop, he wasn’t particularly hip, his G. I. Bill advanced degree was in mortuary science, he never owned stock or bonds, traded anything, and relied on his attorney of thirty years (who had some vague tax credentials). So Charlie escapes the chop.

But this is a T. C. well worth reading. Much good stuff here.