For backstory, see my blogpost “As Such,” 11/28/23. For the outcome of the trial foretold therein, Judge Buch tells the story in Soroban Capital Partners LP, Soroban Capital Partners GP LLC, Tax Matters Partner, T. C. Memo. 2025-52, filed 5/28/25.

Judge Buch dissects the private placement memo and investor due diligence questionnaire for this hedge fund, and finds that the three (count ’em, three) Principals of Soroban were, during years at issue “essential to the operation of the business. Soroban explained to its investors that, if all three Principals were unavailable, the funds would liquidate. Materials provided to investors explain that in the event Mr. M were incapacitated, Messrs. K and F would manage the funds. However, in the event all three Principals were ‘temporarily or permanently absent from overseeing the investment of the assets of the Funds, the Analysts and COO/CFO would manage the liquidation of the Funds.’ But for the three Principals, Soroban would not exist.” T. C. Memo. 2025-52, at p. 13. (Names omitted).

Federal tax law controls, not our broad-spectrum NY  Revised Limited Partnership Act, which, standing the usual law school definition of limited partner on its head, would let the Principals slide under the Section 1402(a)(13) tag. For the Feds, their distributions are SE, not investor returns on capital.

And Too Far Away

When IRS tries the Luke 5:4-8 number on the current CEO of the 501(c)(3) in Ogeechee Plantation Property, LLC, Ogeechee Plantation Manager, LLC, Tax Matters Partner, Docket No. 6585-21, filed 5/27/25 (Happy Palindrome Week!), Judge Mark V. (“Vittorio Emanuele”) Holmes echoes the words of an even higher authority than United States Tax Court, and tells them to go away.

It’s a duces tecum (because current CEO wasn’t CEO when the conservation easement was signed). IRS wants only the documents and an affidavit showing chain of custody.

“The problem is that the documents requested – as part of a trial subpoena for cases set to be tried only about a month after the subpoena was served – are ‘any and all documents relating to conservation easements owned, managed, or supervised by [501(c)(3)] that reflect [any of several types of broadly defined information].’” Order, at p. 1. And IRS wants the stuff for seven (count ’em, seven) years.

“We would be hard-pressed to enforce this kind of ‘any and all’ request to a party months before trial when the easements at issue here were granted in December 2017 and December 2018. This is a fishing expedition seeking not just a few nibbles on carefully baited hooks but entire nets’ full of information. We determine it to be overbroad and burdensome on a third party and will grant the motion to quash.” Order, at p. 1. (Emphasis by the Court).

Likewise Judge Holmes will let the former CEO, who was in command at the time of the easement grant, but who now lives hundreds of miles from trial venue and must care for a small child, to testify remotely. On-the-stand testimony is what Rule 143(b) mandates, but there are exceptions. Whatever would we do without exceptions?

“We don’t doubt the importance of Ms. Q’s testimony – it is at least arguable that the description of the properties on which the easements were placed somehow changed after the time of the donation. But it’s also true that neither party is alleging that Ms. Q or her former employer did the changing. This makes her an important witness, and maybe even a background-facts witness, but not one whose testimony the Court would expect to take very long or be marked by any great deal of the tense cross-examination that makes live testimony so compelling. We think the expected duration of her testimony (based on the Court’s own experience with donee testimony in many other conservation-easement cases) is not long. Forcing her to abandon her parental responsibilities is under the circumstances a good cause and compelling.” Order, at p. 2. (Name omitted).

Tax Court is closed.

History is never closed. Remember always.

Like the heroine in Dorothy Fields’ 1936 evergreen, Raju J. Mukhi, Docket No. 4329-22L, filed 5/23/25, isn’t having a fine romance. His out-of-time Rule 161 reconsideration motion gets filed, but Judge Travis A. (“Tag”) Greaves isn’t buying 11 Cir’s rationale that the Section 6677 nonreporting of foreign trusts chops visited on Raju are fines, hence subject to Eighth Amendment Excessive Fines bar.

Even if they are fines, they’re not excessive.

For the backstory, see my blogpost “FBAR = FUBAR,” 4/8/24.

Tax Court has been here before, and Judge Tag Greaves has the stare decisis story.

“The Tax Court adheres to the doctrine of stare decisis and thus affords precedential weight to our prior reviewed and division opinions. See Analog Devices, Inc. & Subs. v. Commissioner, 147 T.C. 429, 443 (2016). Because of our nationwide jurisdiction, the Court takes seriously its obligation to facilitate uniformity in the tax law. See Bankers Union Life Ins. Co. v. Commissioner, 62 T.C. 661, 675 (1974). When one of our decisions is reversed by an appellate court, the Court will ‘thoroughly reconsider the problem in the light of the reasoning of the reversing appellate court and, if convinced thereby, . . . follow the higher court.’ Lawrence v. Commissioner, 27 T.C. 713, 716–17 (1957), rev’d per curiam on other grounds, 258 F.2d 562 (9th Cir. 1958). But if the Court remains convinced that our original decision was right, the proper course is to ‘follow [our] own honest beliefs until the Supreme Court decides the point’ and thus continue to apply our own precedent. Id. Our decision in Golsen v. Commissioner, 54 T.C. 742 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971), created ‘a narrow exception” to this approach. Lardas v. Commissioner, 99 T.C. 490, 494 (1992). In a given case, when a squarely on point decision of the appellate court to which an appeal would lie contradicts our own precedent, we will follow the appellate court’s decision. See Golsen, 54 T.C. at 757. To do otherwise would be ‘futile and wasteful’ given the inevitable reversal from the appellate court. See Lardas, 99 T.C.at 494–95.” Order, at p. 2.

Raju is Golsenized to 8 Cir, which hasn’t spoken, and the 11 Cir case which birthed Raju’s change-in-law argument for late filing wasn’t a reversal of a Tax Court decision. That might have given Raju a leg up, but even 11 Cir didn’t find the chops excessive on the facts.

I do give Raju’s trusty attorneys a Taishoff “Good Try, Second Class.” A good chip from a bunker.

Judge Emin (“Eminent”) Toro is far too well-bred to address James M. Root and Valerie K. Root, T. C. Memo. 2025-51, filed 5/22/25, in such terms, but his findings of fact and opinion come to much the same thing.

Jim and Val wanted to build and operate a multi-purpose natural resource lodge which could provide exclusive upmarket lodging for paying guests. Jim and Val owned and operated a nationally-known fruit packing and processing operation they sold two years after they say they started the hospitality gig.

I’ll spare you the sad tale of the condemned construction project and the litigation that followed. Jim and Val paid $4 million in fees to recover $3 million. The property wasn’t zoned for commercial use.  Nobody could live there. Jim and Val didn’t have advertising, employees, or hospitality software, but they did have various times they claimed they started the hospitality gig, over a fifteen-year span.

Lest I be misunderstood, I understand a good deal of this is the work of Jim’s & Val’s trusty attorneys, trying to salvage an already-sunken ship. Jim and Val got took.

At the end, Judge Eminent has much somber reasoning and copious citation of precedent to the effect that to be a business, you have to be in shape to perform the activities the business demands. Just buying a site isn’t enough; even starting construction isn’t enough. At least you have to advertise and seek renters. And running freebies doesn’t get it.

Nor does getting a license to operate. There has to be activity.

“To summarize, although the Roots hosted some events on their property between 1995 and 2009, none of them included overnight stays at the lodge. Even when the Roots donated an overnight stay at their lodge, the guests ultimately stayed on another location on the property. Hosting on the property was occasional and isolated and insufficient to demonstrate the operation of a guest lodge.” T. C. Memo. 2025-51, at p. 16.

In short, for an NOL, you need a business and a loss.

Transfer pricing Section 482 geeks have been breathlessly awaiting Judge Cary Douglas Pugh’s exegeses of Temp. Reg. § 1.482-7T(a)(2), (b)(1)(ii), (c)(1), Reg. § 1.482-1(e), and Reg. §§ 1.482-7T(g)(4) and (i)(6). Here  they are at last, Facebook, Inc. & Subsidiaries, 164 T.C. 9, filed 5/22/25.

Spoiler alert: IRS wins, except, as we say in the computer world, GIGO (garbage in equals garbage out).

IRS’ experts used wrong inputs in figuring income method valuations for present value of arms’-length Platform Contribution Transactions. Facebook (parent) divided the world between USA and Canada (parent kept it) and rest of the world (given to wholly-owned Irish subsidiary). Parent handed Irish all its IP and hardware. They made cost sharing and technology development agreements, but had to value the present worth of what they gave the Irish, so the Irish could pay parent back over time (IRS has no problem with the payback schedule). The payback, of course, is US-taxable to parent.

Parent claims the NPV of the stuff at transfer in 2009 was $6.3 billion; IRS claims $19.945 billion.

You can see why Judge Pugh needs 130 (count ’em, 130) pages to send the parties off for a Rule 155 beancount, and nine (count ’em, nine) pages to set forth the expert witnesses’ CVs at dates of their testimony.

There are 23 (count ’em, 23, and I have) attorneys appearing for Parent, and 17 (count ’em, 17) for IRS. The noise of all those meters ticking must have been deafening.

IRS used a $1.9 billion plug figure (“Other Revenue”) but that flunks the presently-existing test of the regs. And Judge Pugh finds IRS’ expert fudged Acquisition Costs. Another IRS failing is a miscalculated beta (volatility). “We find that Dr. N’s discount rate is not a reliable reflection of the market-correlated risks of participating in the actual CSA because he failed to provide empirical support for his selected percentage premia (2% for its pre-IPO stage and 1% for its early monetization stage).” 164 T. C. 9, at p. 92. (Name omitted).

Judge Pugh almost throws up her hands when reckoning the discount rate, but finally buys something that varies but .02 from Facebook’s. 164 T. C. 9, at p. 100.

Judge, I feel your pain.

Amongst my ultra-sophisticated readers there are no doubt not a few who can answer the nine (count ’em, nine) conundrums posed by Judge David Gustafson to IRS and Consolidated Sportsmen of Lycoming County, Docket No. 18549-23X, filed 5/22/25 (Happy Palindrome Day!), without batting a cliché.

I, unhappily, am a stranger to Section 501(c)(7), never having encountered in the wild a social club “’substantially all of the activities of [a social club] are for [‘pleasure, recreation, and other nonprofitable’ purposes.” Order, at p. 2. The Sports were incorporated in 1931 and got a 501(c)(7) exemption letter in 1981.

But sometime before 2011, the Sports struck oil, and more than 35% of their gross receipts came from nonmember royalties. So IRS retroactively bounces the 501(c)(7) exemption (for which years is not clear; see infra, as my expensive colleagues would say). That 35% number is part of the conundrum barrage, as same appears neither in statute nor regulation but in some kind of legislative history; son of the infamous Primoli memorandum? Judge Gustafson suggests giving this the Loper Bright treatment.

So what about activities? Does that mean members’ activities, or the entity’s? Is inurement to individuals’ benefit an issue? If so, was there any?

The Sports’ 501(c)(7) letter said “If your purposes, character or method of operation change, please let us know so we can consider the effect of the change on your exempt status.” Order, at pp. 3-4. The Sports did put the oil money they got on their 990s each year. Is that “letting us know?” Does the fact that IRS got the 990s and gave the Sports a pass each year have any effect on retroactivity?

More about retroactivity. See Order, at pp. 3-5. Judge Gustafson is on a tear again. He must have been the best cross-examiner the Palmetto State produced since John Calhoun, because his attack on IRS’ somewhat casual process and pleading will have IRS scrambling in its own end. Briefly, if the 990s told the story, what is IRS’ basis for retroactivity? Did they explicate their reasons for bouncing retroactively per Rev. Proc. 2024-5, sec. 12.03, whether in NOD or pretrial brief? If not, is the retroactivity new matter, giving IRS BoP? Note this is a Rule 122 stiped facts, so it’s all gotta be in the supplemental briefs Judge Gustafson orders.

And if what the Sports did wasn’t letting IRS know, let IRS tell Judge Gustafson what would be.

Finally, let both sides throw in anything else on point.

Remember, guys “(T)his order states the facts as they appear, upon first reading of the parties’ papers, to a judge who has much to learn about this case and about the applicable law. This order makes no findings or holdings, and we invite the parties’ corrections of any factual or legal errors, whether explicit or implicit, that they perceive.” Order, at p. 1.

He’s “jest a country lawyer.” Yeah, right, roger that.

Danny wrote The Shortest Way With Dissenters in 1702 using 29 pages, but Judge Goeke needs only five (count ’em, five) to send off the latest dissenters in JC Aggregates, LLC, Ornstein-Schuler, LLC, Tax Matters Partner, Docket No. 29327-21, filed 5/21/25.

See my blogpost “The Perpetuity Punt – Part Deux,” 5/1/25, for backstory.

This is the latest iteration of last-minute wannabe intervenors in one of the 34 (count ’em, 34) consolidated cases in the Dixieland Boondockery trainwreck. The settlement terms have been agreed, but unlike others where this cottage industry is involved, footnote 3 at p. 2 tells why this motion to intervene is timely. IRS blew the 60-day Rule 248(b) cutoff, and the holders of 1.94% of JC Aggregates are in.

Except.

They still need to make a substantial showing why. They don’t. They’re out.

“In short, (1) Putative Participants own only 1.94% of JC Aggregates and the overwhelming majority of partners have shown no disagreement with the proposed settlement; (2) Putative Participants have made no showing that any investigation regarding Messrs. Ornstein and Schuler, or any related entity, has affected OS’s ability to act in the best interests of JC Aggregate’s partners; (3) the terms of the settlement appear to be reasonable; (4) there has been little showing that Putative Participants are prepared to litigate the case and/or shoulder the financial burden of doing so; and (5) Putative Participants’ other claims are of little merit or relevance.” Order, at p. 4. (Footnote omitted, but it says the settlement is “all or nothing.” If everyone in JC Aggregates doesn’t settle, nobody settles.)

Reminds me of a couple local Americans with Disabilities Act stick-ups (hi, Judge Holmes).

I have to give Hale E. Sheppard, Esq., and his stalwart squad a Taishoff “Good Try, Second Class” for their ingenious Boss Hossery in Hancock County Land Acquisitions, LLC, Southeastern Argive Investments, LLC, Tax Matters Partner, T.C. Memo. 2025-50, filed 5/20/25. Whoever amongst Hale and his five (count ’em, five) compañeros came up with this one deserves it.

Malheureusement, Judge Albert G. (“Scholar Al”) Lauber, ace basher of Dixieland Boondockeries, will have none of it.

 It’s the IRS summary J classical gambit for Section 6751(b) Boss Hossery on the 20%-40% Section 6662 chops. Classical defense: was there proper delegation from Secretary; need discovery to see who did what; was Boss Hossery timely; wasn’t the real determination made by IRS High Command; Notice 2017-10 was the real determination.  The usual ripostes: CPAFs duly e-signed; Kroner and Laidlaw Harley Davidson supe was supervising when chops announced; general pronouncements from on high and notices not directed to any particular taxpayer for any particular transaction or year.

OK, im Westen nichts neues.

Except.

“Alternatively, at least with respect to the valuation misstatement penalties, petitioner asserts that HK and STH made the ‘initial determination of the penalty assessment.’ See §6751(b)(1). Messrs. K and H, senior in-house appraisers employed by the IRS, prepared an ‘appraisal review report’ that evaluated the appraisal submitted with Hancock’s return. Their report, which RA S received in August 2019, concluded that the fair market value of the donated easement was $5,169,400 rather than $180,177,000.

“’Once [an easement’s] value is determined,’ petitioner says, ‘the application of section 6662(h) is simple arithmetic.’ If Messrs. K and H made the ‘initial determination of [the penalty] assessment,’ see § 6751(b)(1), their supervisor, not RA S’s supervisor, would supposedly have been the proper person to consider penalty approval. Petitioner contends that uncertainty on this point creates a genuine dispute of material fact precluding summary judgment.” T. C. Memo. 2025-50, at p. 10. (Names omitted).

Judge Scholar Al clears that puck to the boards.

“In-house IRS appraisers do not have the authority to ‘determine’ penalties; they simply offer an opinion as to value. During an IRS examination it is the duty of the revenue agent to determine penalties, taking into account (among other things) the value of the property contributed and possible defenses the taxpayer may have. The word ‘determination’ has “an established meaning in the tax context and denotes a communication with a high degree of concreteness and formality.’ Belair Woods, 154 T.C. at 15. An ‘initial determination’ signifies a ‘consequential moment’ of IRS action. Ibid. (quoting Chai v. Commissioner, 851 F.2d at 221).” T. C. Memo. 2025-50, at p. 11.

A preliminary analysis by an in-house appraiser isn’t that.

Taishoff says, that quote from Chai reminds me ya gotta love what The Jersey Boys unleashed on the world so many years ago; such a fabulous cornucopia of blogfodder. In a world plagued with war, hatred, drug addiction, population collapse and overpopulation, half the world obese and the other half starving, and deadly diseases, some our best minds are occupied with trying to find ways to undermine Section 6751(b).

Sorry, my bad. Off the soapbox.

Maybe the fact that the Federal indictment for mail fraud, wire fraud, and money laundering was tossed, and his allegations that his boss conspired with “former disgraced FBI agents to seize substantial funds from [petitioner] and to convict him of non-existent crimes” to steal $642K from his wholly-owned LLC might have suggested to Appeals to do a better job building an NEH-ETA record, rather than relying upon a doubt-as-to-collectability shootdown in John Joseph Bauche, T. C.  Memo. 2025-48, filed 5/20/25. The quoted matter is from p. 15.

Ex-Ch J L. Paige (“Iron Fist”) Marvel stresses she isn’t buying JJ’s story, but Appeals should have built a better record, especially after a remand to Appeals and a Supplemental NOD.

While JJ’s representatives filed the OIC asserting economic hardship (hence raising doubt-as-to-collectability), and since taxpayer can raise only one reason for each OIC, was Appeals right not to consider NEH-ETA?

“We will make our point plainly: An alleged corrupt public-private conspiracy to loot [JJ’s LLC]’s bank account, which allegedly resulted in petitioner’s inability to pay his tax liabilities, is a public policy or equity issue that needed to receive due consideration. We take no position on the merits of those allegations, but they needed to be appropriately considered in accordance with the IRM. The current administrative record is insufficient to permit us to review this matter adequately, necessitating a remand. We do not hold that an immediate referral [to  NEH-ETA Austin] was required but only that a referral (or at least consideration of how petitioner’s ETA OIC might receive appropriate review on NEH grounds) should have taken place once Appeals exhausted its consideration of petitioner’s ETA OIC on economic hardship grounds. Cf. IRM 5.8.11.5.1(3) (providing that generally ‘all cases must have been completely developed under all other bases before transfer will be accepted by the Austin [Office]’). This case is akin to Bogart, T.C. Memo. 2014-46, at *11, in which we concluded that the Commissioner ‘did not adequately consider’ NEH grounds where the taxpayers ‘requested relief on public policy and equity grounds’ but the Appeals officer ‘merely concluded that the ETA OIC did not merit consideration under public policy or equity grounds.’” T. C. Memo. 2025-48, at p. 37.

For the Bogart story, see my blogpost “Leftovers,” 3/19/14.

Remember, Appeals goes to Austin only with a fully-completed record. So Back to Appeals.

“We will specifically direct Appeals to consider (1) whether petitioner should be allowed the standard local housing expense because of special circumstances, (2) whether petitioner’s use of line of credit proceeds for legal fees meets the necessary expense test, (3) petitioner’s recent claim… that part of his time is now occupied assisting with caregiving for his elderly father, who has significant health problems, and (4) how to classify petitioner’s current employment or unemployment status for purposes of calculating his future income value (e.g., whether petitioner is still properly classified as temporarily or recently unemployed).” T. C. Memo. 2025-48, at p. 34.

Now I don’t buy, or reject, JJ’s story either. From what I know of asset forfeiture cases, there’s a great temptation for law enforcement to grab first and let the owner sue to get it back; they needn’t convict, or indict, or even get a warrant.

So while the toss of JJ’s indictment is just circumstantial evidence of the need for NEH-ETA public policy consideration, as Hank Thoreau said, circumstantial evidence can be strong when you find a trout in the milk.