What do you do when you discover that you took in $7.5 million in income that you’re not entitled to over seven (count ’em, seven) tax years? You give it back and deduct it, of course, says Norwich Commercial Group, Inc., T. C. Memo. 2025-43, filed 5/12/25. No, says IRS, because the money came from the line of credit {LOC} Norwich had with a CT bank, hence it was repayment of a loan. And Norwich had to collateralize the overdraft in year of discovery because they couldn’t repay it all at once.

Norwich was a mortgage originator, borrowing money from the CT bank to underwrite and fund home mortgages, unload mortgages to investors, send the payments from the investors to the CT bank, which would fund Norwich’s operating account. Norwich would send the info to the CT bank, who would transfer the money as directed. Except the CT bank didn’t.

Neither the CT bank nor Norwich’s trusty CPA found the mistakes. It took months to unscramble this frittata.

This kind of accounting garbuglio is a walk in the park for Judge Elizabeth A. (“Tex”) Copeland.

“What makes these cases particularly complicated is that Norwich was in the business of facilitating loans. In order to earn mortgage fee income, Norwich relied on borrowing from its LOCs. Thus, the Commissioner focuses on the origin of the funds rather than the origin of the transaction that caused Norwich to receive funds as income. It is that income that all now agree Norwich was not actually entitled to receive. Thus, we must step back and look at the full picture of what occurred. The lending transactions were legitimate transactions and there is no doubt that the… LOC draws deposited into Norwich’s clearing account were required to be repaid. The key to these cases is that because [CT bank] accidentally advanced more funds than it should have and failed to properly secure repayments from sales to investors; both parties (Norwich and [CT Bank]) operated under the assumption that Norwich was holding more collateral (assets) than existed; and Norwich was entitled to disbursement of more mortgage fee income than it had earned. Liberty transferred funds in error from the clearing account to the operating account, which were then accounted for as Norwich’s earned mortgage fee income. See Treas. Reg. §1.1341-1(a)(2) (defining ‘”income included under a claim of right” [as] an item included in gross  income because it appeared from all the facts available in the year of inclusion that the taxpayer had an unrestricted right to such item”). If the mortgage receivables had been correctly accounted for, the mortgage fee income disbursements would not have occurred.

“Important here is that Norwich incorrectly overreported its assets and its income and correctly reported its “Warehouse LOC Payable.'” T. C. Memo. 2025-43, at p. 18.

So the overstated income was received and reported under a claim of right, except Norwich was wrong. And when Norwich and CT bank finally got the numbers right, Norwich hocked whatever it had to CT bank to secure repayment, which it made over the next two years.

So when does Norwich deduct the repayment? Norwich is an accrual basis taxpayer, so the all-events test comes into sharp focus.

“Section 461(h) sets forth parameters for determining when economic performance occurs, and section 461(h)(2) outlines the timing rules for economic performance. Given that the claim of right doctrine effectively creates a liability for repayment of overstated income in the year of discovery, the most applicable timing provision is found in section 461(h)(2)(B), which establishes that ‘[i]f the liability of the taxpayer requires the taxpayer to provide property or services, economic performance occurs as the taxpayer provides such property or services.’” T. C. Memo. 2025-43, at p. 23. See also Reg. Section 1.1341-1(e). And Norwich and CT bank signed the collateralization agreement in year when Norwich claimed the deduction.

Norwich wins.

Interesting how this cascading mess evolved during the Great Mortgage Meltdown.

He Can’t Represent Her

It’s beyond a perennial, more like an invasive species. This is the representative (who would be an ‘Agent” under a State POA, but Form 2848 styles a “representative”) who signs a Form 2 petition.

The boilerplate rebuke is common, and probably resides in the Tax Court form file. But before a copy-and-paste hits the screen, someone should really eyeball the resulting Order one last time.

Here’s Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan in Camille Nini, Docket No. 5936-255 (sic), filed 5/9/25. Camille did sign the petition.

“The petition was also signed by Robert J. Bugdal who appears to be petitioner’s non-attorney representative. The record shows that Robert J. Bugdal is not admitted to practice before the Tax Court. The United States Tax Court, which is separate and independent from the Internal Revenue Service, has certain requirements that must be met before an individual can be recognized as representing a petitioner before the Court. Unlike the IRS, the Court does not recognize powers of attorneys and, thus, petitioner’s non-attorney representative may not represent it in this case.

“The Court has prepared Q&A’s on the subject ‘Representing a Taxpayer Before the U.S. Tax Court’. The Court also encourages practitioners and non-attorneys seeking admission to practice before the Court to consult ‘Guidance for Practitioners’ on the Court’s website at http://www.ustaxcourt.gov/practitioners.html. At this juncture James E. Wilson will not be associated with this case and we encourage petitioner’s representative to review the Court’s admissions requirements.” Order, at p. 1.

Taishoff respectfully suggests that Messrs. Bugdal and Wilson, and any other non-attorney who wants to jump into the Adult Swim on Second Street, NW, check out my blogpost “Coming in November,” 5/6/25. And hit those study resources hard; if you’re expecting an easy trip, you won’t get it.

Come to think of it, maybe so y’all should check out my blog every working day.

Paulette Shomo, Docket No. 9309-21L, filed 5/8/25, has truly reprised Strickland W. Gillian’s classic. Even that Obliging Jurist, Judge David Gustafson, could not put Pauline on the compliance track.

Pauline would file late and underpay, year after year, because she chronically underwithheld. After a CDP and remand, when she repeated the process, Judge David Gustafson threw in the cliché.

“This case involves the circumstance of a taxpayer being non-compliant, becoming compliant, and relapsing into non-compliance—a risk inherent in the passage of time during the CDP process. We sometimes criticize IRS Appeals when we think it the CDP hearing too hastily to the disadvantage of the taxpayer, but IRS Appeals must no doubt keep an eye on the consequences of its patience and forbearance: A taxpayer in the CDP process might propose an OIC or an IA when she is up-to-date on her return-filing and payment obligations; but if her CDP proceeding is not complete before the next April 15 rolls around, and if she fails to file her return, then IRS Appeals would have to evaluate her collection alternative in the absence of important information—her mounting liabilities.” Order, at pp. 10-11. (Footnote omitted).

And it’s been seven (count ’em, seven) years since the years-at-issue underpaid taxes have been sitting uncollected. IRS’ forbearance collides with the need to collect the revenue. And Pauline could pay.

But Judge David Gustafson is thorough. IRS bounced the supplemental CDP because of Pauline’s nonfiling, but she subsequently did file. Chenery mandates judging what the agency did and said it did, not what it might have done or said.

“We do not construe the Chenery rule to require that tunnel vision. In the first place, IRS Appeals eschewed such tunnel vision when it moved for a remand (for Ms. Shomo’s benefit) and refrained from asking us to sustain the initial NOD on the basis of the non-compliance that, as of that time, was still uncured. More important, compliance with tax-payment and tax-filing requirements is an ongoing obligation of the CDP petitioner who seeks a collection alternative. Ms. Shomo’s failure to file her returns and correct her under-withholding for 2023 and 2024 are simply the continuation of the non-compliance that rendered her CDP hearings fruitless. It would be perverse if IRS Appeals forfeited its non-compliance contentions by granting latitude to the taxpayer, and if we were to invoke the Chenery rule to punish IRS Appeals for its forbearance, we would discourage the patience we hope that IRS Appeals will extend. In taking 2023 and 2024 into account to sustain the supplemental NOD in this case, we are not inventing new grounds to sustain the supplemental NOD but rather are addressing the same principles that IRS Appeals invoked to deny collection alternatives and sustain the proposed levy.” Order, at pp. 12-13. (Emphasis by the Court).

A DC lobbying group, which routinely bombards me with money requests, calls itself the National Whistleblower Center. It seems to have acted in one matter I blogged, although I thought at the time its efforts were counterproductive, due to its misunderstanding of the Section 7623 process and its misuse by the cottage industry public info sweepers. See my blogpost “A. Nonymous, Serial Blower – Anonymous,” 7/31/19.

Anyway, since March there’s apparently legislation proposed to make things better. Here’s their screed.

“The IRS has admitted a staggering statistic: Whistleblowers who report wealthy tax cheats wait, on average, 10 years to receive awards. These unacceptable delays affect whistleblowers and the average taxpayer, as tax evaders continue to exploit the system. This is just one of several issues with the IRS Whistleblower Program.

“Since its inception, the program has recovered over $6 billion from tax evaders. Without urgent reform, brave whistleblowers are left unprotected, and the integrity of our tax system is at risk.

“Now is the time to act.

“Senators Mike Crapo and Ron Wyden have released a bipartisan discussion draft of the Taxpayer Assistance and Service Act, which aims to fix longstanding problems with the IRS Whistleblower Program. This long-overdue legislation offers reasonable solutions to the flaws in the IRS Whistleblower Program.”

I suppose my ultra-sophisticated readers are already clued-in, but anyone else can weigh in.

This time it’s tax insurance, for which the co-ex’r-beneficiaries want to deduct the premiums ($14 million) on the 706, with which Judge Adam B. (“Sport”) Landy must deal in Estate of Stanley E. Fulton, Deceased, Michael B. Fulton and Elizabeth Fulton Jones, Co-Executors, Docket No. 7200-22, filed 5/7/25. The co-ex’rs claim the premiums are Debts of the Decedent.

The co-ex’rs also claim reasonable reliance “on the tax advice received ‘from two preeminent global law firms.'” Order, at p. 2.

This is the usual documents discovery jumpball.

Judge Sport Landy says hand over the insurance info, despite the co-ex’rs’ claim that the insurance is not relevant. IRS amended its Answer to raise co-ex’rs’ nonliability for tax. What and whom does the insurance cover?

As to the rest of IRS’ request, “respondent maintains that, because petitioners have claimed a reasonable reliance defense against the accuracy-related penalty, petitioners have placed their states of mind at issue and all tax-related communications with petitioners’ prior counsel are therefore at issue and discoverable. However, the only relevant information is that information available to petitioners at the time they filed the estate tax return or at the time they acquired the Aon insurance policies, whichever is later.” Order, at pp. 4-5.

The 706 came first, the insurance about two weeks later. So IRS gets nothing earlier than date of death or later than insurance policy purchase.

And if privilege claimed, provide a contemporaneous privilege log.

Tim Kent & Wendi Kent, Docket No. 14884-23, filed 5/6/25 had to move when Wendi “received official orders, a DD Form 1614, directing her to move,” Transcript, at p. 4.  Wendi was a civilian contractor of the United States Air Force and deducted her moving expenses.

But the Tax Cuts and Jobs Act of 2017 puts that deduction on hold.

STJ Jennifer E. (“Publius”) Siegel has bad news for Wendi in this off-the-bencher.

“Subsection (k) suspended this deduction for 2018 through 2025, which period includes the year at issue, except ‘in the case of an individual to whom subsection (g) applies.’

“Subsection (g) specifies that ‘a member of the Armed Forces of the United States on active duty who moves pursuant to a military order and incident to a permanent change of station’ may still claim the deduction.” Transcript, at pp. 5-6.

Wendi isn’t among those defined by Section 7701(a)(15), “all regular and reserve components of the uniformed services including commissioned officers and personnel below the grade of commissioned officers in such forces.”

“This Court has previously ruled that civilians, including members of the civil service of any military branch, are not entitled to exclusions reserved solely for the military. See §112; Eram v. Commissioner, T.C. Memo. 2014-60 fn. 7….” Transcript, at p. 6. (Further citations omitted). For the story of Amad Zaker Eram, see my blogpost “We Are Family,” 4/7/14.

So even though Tim & Wendi had to move under direct orders during the pandemic, no deduction.

STJ Publius “can appreciate that this is disappointing, but we are obligated to apply the law as written.” Transcript, at p. 6.

Once again, United States Tax Court is gearing up to hand out the Matthew 2:16 treatment via ExamSoft to aspirants seeking admission to practice at the homeplace of the “sixty buck ticket to justice.” See Rule 200(a)(3).

You don’t have to be a lawyer to get admitted; in fact, although you should be required to demonstrate a basic knowledge of tax law and Tax Court procedure, you can’t take the test if you are a lawyer. I know; I tried, years ago.

So hit those study sources hard, and see if The Great Chieftain of the Jersey Boys Frank Agostino, Esq., is still giving his celebrated cram course. And best of luck.

Here’s the official stuff.

I’ve blogged about this before, but it’s been a while, so a refresher might could be in order. Restitution does not determine tax liability; what the defendant in the criminal case must pay the government (the nominal victim) is the government’s estimate. The actual liability might be more or less, and that needs a trial.

Plea bargains in tax cases invariably provide that nothing in it limits petitioner’s civil liability, “including but not limited to remedies regarding . . . taxation.” Likewise, plea bargains have no claim preclusive effect as to the exact amount of any deficiency, so Tax Court will not grant summary J on the amount of the deficiency.

You can find all this, and more, in Thomas S. Miller, T. C. Memo. 2025-41, filed 5/5/25. All IRS gets is partial summary J that petitioner owes Section 6651(f) fraudulent failure to file chops for two (count ’em, two) of the six years at issue, on whatever deficiencies are finally determined.

I won’t name the firm or the attorneys, but this is certainly a strange tale. It’s nothing to do with the clients, Yaroslav Kirik & Galina Kirik, Docket No. 5898-23L, filed 5/5/25, at least not initially.

Yar & Gal petition a CDP NOD. The petition is signed by trusty attorney, a principal of the firm, whom I’ll call Harry. Eight (count ’em, eight) months later, two attorneys from that firm enter appearances and stip to the CDP administrative record. Trial date was set, but a scant 26 days before the scheduled date the two attorneys move to withdraw.

The problem is that Harry, who signed the petition, died ten months before scheduled trial date. STJ Jennifer E. (“Publius”) Siegel takes up the tale.

“We granted the motion, believing that petitioners remained represented by counsel. As it turns out, they were not; unbeknownst to the Court, [Harry] had passed away….” Order, at p.1. (Footnote omitted, but see infra, as my expensive colleagues would say.).

“No one—not petitioners, not petitioners’ counsel, not the law firm…, not respondent’s counsel—had informed the Court that [Harry] passed away. DAWSON, the Court’s case management system, received no service errors when making electronic service to [Harry]’s e-mail address. [Harry] remained listed as petitioners’ counsel of record until he was withdrawn by the Court on April 1, 2025.” Order, at p. 1, footnote 1.

Note that Entry of Appearance, Form 7, requires the practitioner to give her/his office address, but nowhere to give her/his firm affiliation, if any. As far as DAWSON is concerned, every practitioner is a single-shingle, although s/he may be a partner or associate in a thousand-attorney multinational.

In the meantime, Yar & Gal go off-radar, IRS moves for summary J and to toss for nonappearance at trial. STJ Publius Siegel tosses Yar & Gal, but advises them to move to vacate and respond to IRS’ summary J.

I’ve argued for law firm EoAs for years. Had there been a single EoA for the firm, withdrawal of any individual attorney would not effect a change in representation, but a withdrawal of the firm would terminate all representation.

Lest I be misunderstood, I am not suggesting that the responsibility for informing the Court, and obtaining required Court approval, of practitioner personnel changes should be altered in any way. There was clearly law office failure here, and responsibility therefor should remain where it belongs.

Edited to add, 5/5/25: My indefatigable correspondent, Bob Kamman, Esq., noted Yar’s & Gal’s previous appearance in this my blog, which I missed. Guess I’m getting old. See my blogpost “Are You Surprised?” 10/17/19. Yar & Gal are quite a pair.

Overbroad and overly general discovery requests are styled “fishing expeditions” by lawyers and judges, but in Capitol Places II Owner, LLC, Historic Preservation Fund 2014 LLC, A Partner Other Than the Tax Matters Partner, Docket No. 16536-23, filed 5/2/25, Ch J-elect Patrick J. (“Scholar Pat”) Urda quashes a subpoena that’s a trawling expedition.

Petitioners want all documents relating to 2022 purchase of property unrelated to the case at issue; (2) any and all appraisals thereof; (3) any and all documents reflecting the development and construction costs thereof prior to its sale; (4) financial statements and operating documents for the property before the sale; and (5) all correspondence, emails, memoranda, and communications relating to the negotiation and purchase of the property, determination of sale price, and communications with brokers or agents regarding the sale.

Except.

Petitioners served a subpoena for these goodies on a nonparty, in a case involving different property, different parties, in a transaction that took place ” nearly 8 years (and one worldwide pandemic with considerable knock-on economic effects) after Cap Places II’s easement donation.” Order, at p. 4.

So Ch J-elect Scholar Pat quashes the trawl.

“We see little relevant information to be derived from the documents relating to the 2022 purchase, including appraisals. As to historic documents regarding the development and the operations before [third party] purchased the property, we see no indication why these documents should be requested (if at all) from [third [party], which did not own or operate the property, rather than the seller, which did.” Order, at p. 4.

The JL Minerals order (nonprecedential, btw) involved how a highly-restricted industry with very few players valued mining sites, and was restricted to helping the Court understand the process. Developing student housing, the issue here, has many players, and whose methodology is no secret.

But third party doesn’t get legals, despite Rule 147(d) allowing same if subpoena is unduly burdensome.

“In determining whether the financial burden is unreasonable, we consider, inter alia, whether the expenses incurred in producing the records are reasonably incident to the party’s normal business, and ‘whether the subpoena is vague or overbroad or impossible to perform.’

“After considering the facts in this case, we will deny [third party]’s request for attorney’s fees. Although we will quash 2014 Fund’s subpoena, 2014 Fund’s actions to date were not unreasonable and the compliance costs to [third party] are not excessive given the nature of its business.” Order, at p. 5. (Citation omitted).