Whether Maimonides or Schumacher is your guide, neither addresses the problem that has been occupying far too much of the US Tax Court’s Chief Judges’ time. And mine.

I refer, of course, to the non-admitteds attempting to represent petitioners in Tax Court, because they are welcome at Exam. Having a Form 2848 or a CAF number is not enough. I will not weary my readers’ patience with yet another citation to an Order embodying the mantra “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 petitioner before the Court. The Tax Court, unlike the Internal Revenue Service, does not recognize power of attorneys.”

Almost every working day, at least a couple Orders (hi, Judge Holmes) with this language are needed to toss the non-admitted.  Leaving aside the ungrammatical “power of attorneys,” why this language does not appear in the Guide for Petitioners, Form 2 instructions, or anywhere else on the Tax Court website, eludes me.

Does the Chief Judge require busywork?

Judge Elizabeth A. (“Tex”) Copeland has to deal with unsalable, untransportable, irreparable, and unrecyclable WD-40 cans in IQ Holdings, Inc., T. C. Memo. 2024-104, filed 11/7/24. IQ set up a 501(c)(3) to research medical aerosols, and gave it land and building, a bunch equipment (hi, Judge Holmes), some inventory (aerosol cans and raw packaging materials), and cash. While waiting for TE/GE to bless said 501(c)(3), the cans went bad. USDOT told IQ they couldn’t ship them, WD-40 became immoveable and rejected the stuff, and IQ concluded it would cost more to recycle them than they were worth. So IQ wrote the stuff off. IRS wants to fight about the calculation of the amount of loss.

Reg. Section 1.471-2(c) provides guidance, based upon bona fide sales price. IQ never offered the stuff for sale, claiming no one would buy the junk. IRS wants summary J, but won’t get it from Judge Tex Copeland.

“We agree with IQH that Treasury Regulation § 1.471-2(c) cannot be read to require a taxpayer to offer for sale items that, in their current condition, would be tortious or illegal to sell. Moreover, solely for purposes of ruling on the Commissioner’s Motion for Summary Judgment, we construe the record in the light most favorable to IQH. Consequently, we must assume that both the IQ-branded aerosol products and the WD–40 cans were tortious or illegal to sell in [year at issue], precluding us from resolving the issue summarily on the basis that the goods were not actually held out for sale.” T. C. Memo. 2024-104, at p. 9. (Citation omitted).

And there’s also the issue in what year the junk became junk. IRS says IQ knew two (count ’em, two) years earlier the cans were junk. But IQ’s good faith is a fact question.

Summary J is fact-finding, not fact-determining, but there are two (count ’em, two) facts not in dispute. The Contemporaneous Written Acknowledgement from the 5012(c)(3) doesn’t have the magic “no goods or service were provided” wording, so that sinks the charitable side. Substantial compliance can’t o’ercrow explicit statutory requirement.

Likewise, IQ’s claimed NOL founders for year at issue because of failure to check the box on line 11 of the 1120 IQ filed (IQ is a C Corp), thereby failing irrevocably to renounce timely carrying back its NOL. That’s necessary to prevent free-riding by taxpayers, who could claim a “whoops” later on, depending on what income they subsequently had or didn’t have.

There’s argy-bargy about Section 1314 mitigation, but the year for which IQ should get a refund because its NOL needed to be carried back two years is not before the Court.

Finally, the Section 6662(a) chops might be avoided if IQ can put in its accountants and “various corporate representatives” (T. C. Memo. 2024-104, at p. 20) on the stand to testify to IQ’s good faith, so no summary J on that.

Once again, summary J affords discovery of everybody’s case, and what the judge thinks of them.

The Tax Court homepage announces today the death of the designer of its homeplace, Vic Lundy, at the age of 101. For more, see here.*

Surprisingly, The Architect’s Newspaper fails to mention The Glasshouse among Vic’s many notable creations. To remedy that oversight, see my blogpost “Vic Lundy,” 11/27/20.**

* https://www.archpaper.com/2024/11/victor-lundy-architect-artist-dies-101/

** https://taishofflaw.com/2020/11/27/vic-lundy/

Judge Goeke sets up the Glasshouse mixmaster for IRS and Gary M. Schwarz & Marlee Schwarz, Docket No. 12347-20, filed 11/5/24, and gives them the recipe. Y’all will recall Doc Gary and his hunt-for-money operation, which foundered on Reg. Section 1.183-1(d)(1), another of the “goofy” hobby loss shootdowns.

What, no? I guess all this political stuff of late has addled everybody. So go vote (if you haven’t already), come back and read my blogpost “The Buck Stops Here,” 5/13/24.*

Doc Gary, Marlee, and IRS were working on the Rule 155 beancount when the Supremes unloaded Loper Bright Ent. v. Raimondo, 44 S. Ct. 2244, 219 L. Ed. 2d 832 (2024), which knocked over the Chevron station. Doc Gary wants a Rule 161 based on intervening change in controlling law, and gets it.

IRS says the opinion here never mentioned Chevron, and Doc Gary never challenged the Reg. So what, says Judge Goeke; the opinion here relies extensively on the Reg, unlike other cases where petitioners requested Loper-Brightery.

“Considering the parties’ filings, the issues in this case, and the relevant law, we will grant petitioners’ motion and consider whether Treasury Regulations §§1.183-1(d)(1) and 1.183-2(b) are valid. While petitioners’ motion was not filed within 30 days of the service of the Opinion in this case, that was excusable because Loper Bright was released after the 30-day period had expired. Considering the Rule 155 computations that were being worked on by the parties, we find petitioners’ motion to have been filed in a timely manner. Furthermore…, Chevron was clearly implicit controlling law at the time the Opinion was issued. Because Loper Bright overruled Chevron, we believe that reconsideration of the Opinion (in which we extensively relied on Treasury Regulations §§ 1.183-1(d)(1) and 1.183-2(b)) is appropriate.” Order, at p. 2.

So, chaps, since y’all didn’t consider the validity of the “goofy” regulation until now, Judge Goeke has seven (count ’em, seven) points to consider, including without in any way limiting the generality of the foregoing (as my high-priced colleagues would say), Congressional delegation of rulemaking authority in Section 7805(a); the Supremes’ statement in Loper Bright that merely following Chevron in a previous decision is not grounds for overturning that decision; that previous Tax Court opinions have said that the “goofy” regulation merely restated caselaw; and if Judge Goeke invalidates any part of the Reg., how that affects the outcome of the case.

“We are particularly interested in the parties’ arguments regarding the statement in Treasury Regulation § 1.183-1(d)(1) that ‘[w]here land is purchased or held primarily with the intent to profit from increase in its value, and the taxpayer also engages in farming on such land, the farming and the holding of the land will ordinarily be considered a single activity only if the farming activity reduces the net cost of carrying the land for its appreciation in value.’ The parties shall address whether this provision is arbitrary….” Order, at p. 3.

Oh, and if the parties have any other bright ideas, lay ’em on out.

And keep your coruscations to sixty (count ’em, sixty) pages.

Peter Reilly, CPA, please copy.

** https://taishofflaw.com/2024/05/13/the-buck-stops-here/

A couple items (hi, Judge Holmes) from the Glasshouse in the City At the Heart of the Storm.

First, Estate of Anne Milner Fields, Deceased, Bryan K. Milner, Executor, T. C. Memo. 2024-90, filed 11/4/24. And before you yell with one voice, readers, “Wait! Didn’t you cover this case back in September?” yes, I did, but this is a correction. The mathematical anfractuosities adumbrated by Judge Elizabeth A. (“Tex”) Copeland need a Rule 155 beancount to sort them out. Hence. that 9/26/24 opinion is toast, and the current version substituted.

Next, though it often falls to the deceased that they fall “to dumb Forgetfulness the prey,” as a much better writer than I put it, Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan finds anonymity of whistleblowers may vanish at their death. So it may be with Whistleblower 17543-19W Deceased, filed 11/4/24.

“The executrix indicates that she still wishes to proceed anonymously. We will order the executrix to show cause why, following petitioner’s death, we should not modify or lift our order allowing petitioner to proceed anonymously and change the caption of this case to reflect the real names of petitioner and the executrix. See Tax Court Rule 63(a).

“In support of petitioner’s Motion to Proceed Anonymously … petitioner represented that he would face adverse professional consequences if his identity as a whistleblower were revealed. We granted his motion for that reason.” Order, at p. 1. (Citation omitted).

However, anonymity is not perpetual. Circumstances change, but the public’s right to know does not. So let the executrix show cause why the veil must remain undisturbed, and incidentally, what her authority is to act as executrix.

Finally, another stamped approval of change of venue in a Dixieland Boondocker, over IRS’ objection. Here’s Cedar Creek Corner, LLC, Piedmont Private Equity Manager, LLC, Tax Matters Partner, Docket No. 22218-22, changing venue from Birmingham, AL to you-know-where. The tactic marches on? See my blogpost “The Lowest Bidder,” 10/28/24.*

* https://taishofflaw.com/2024/10/28/the-lowest-bidder/

I will not comment on the quality of the officiating at the recent World Series, at least not in print. I comment instead on Judge Emin (“Eminent”) Toro’s rebuke to the dilatory counsel in Sheriadia Thomas, Docket No. 11474-20, filed 11/1/24.

“Motion for Continuance DENIED – The case has already been continued four times.” Order, at p. 1.

A docket search shows each of the previous four (count ’em, four) continuances was requested by petitioner’s trusty attorney, but none of the three (count ’em, three) IRS counsel assigned to the case chose to object.

Judge Eminent Toro is apparently the only one not allergic to work. But why should it fall to the assigned judge to waste time, however minimal, on such stuff? Here in State court we have administrative judges, who ride herd on the calendar, encourage the diligent and rebuke the dilatory. Tax Court should have one, reprising the role of convoy commodore, those brave wartime captains who, through storm, shot, and torpedo, shepherded those who delivered to the battlefields the products of the “great arsenal of democracy.”

When appointed, the administrative STJ should take as his/her motto: “No litigant left behind.” Or perhaps “Marche où crève, mes enfants.”

Speaking of which, consider Maureece Parker, Docket No. 13390-23L, filed 11/1/24. Maureece never submitted the Form 656 and backups for the OIC he wanted during the four months Appeals gave him to do so, so Judge Tamara W. Ashford has no choice but to sustain the levy.

But read Maureece’s story.” I was in touch with two people regarding the IRS. One of which was sending me letters and another on the phone. I was originally on a payment plan but whom ever [sic] I was in contact with said my income and bills were too much so I can pause payments and just pay what I could. Then I’m getting letters from someone else who doesn’t seem to know anything I’m talking about and just telling a bunch of stuff and no one is giving me any clarification. I tried submitting an offer in compromise and it was rejected stating I needed a 1040. I’m confused on this process[.” Order, at p. 4.

How is it that no one at IRS, whether customer service or Appeals, thought to send Maureece to a LITC? Trial was scheduled in Philadelphia, PA (now not happening because summary J to IRS). Both Temple University and Villanova University boast prestigious law schools, with LITCs standing by, in that city.

IRM 13.8.1.1.1 (4) (10-01-2021) provides, in pertinent part: “IRS employees may refer taxpayers to LITCs, per section 1402 of the Taxpayer First Act. LITCs are independent from the IRS and represent individuals whose income is below a certain level and need to resolve tax problems with the IRS. This may include audits, appeals, and collection alternatives or U.S. Tax Court.”

Get with the program, guys.

Ch J Kathleen (“TBS = The Big Shillelagh”) should appoint me administrative STJ to sort this stuff out. Heaven forbid!

No, not a poker player’s hard luck story; this is the current condition of the Tax Court Bench, with 18 (count ‘em, 18) highly-qualified, hardlaboring judges, “each and every one keen in their vocation,” as the Man From Mumbai put it.

So why is Judge Ronald L. (“Ingenuity”) Buch taxed with poking through the embers of twenty-five (count ‘em, twenty-five) consolidated document subpoena jousts between IRS and Skylab Series of Fortress Insurance, LLC, et al., Docket No. 25669-16, filed 10/31/24?

I’ve asked before now why a law secretary or a magistrate could not sort this out. After all, does it require such heavy artillery as Judge Ingenuity Buch brings to the battlefield to conclude that “(T)he insurance claims accepted or denied by the insurance risk pools that the petitioners participated in is relevant to determine if petitioners were insurance companies.” Order, at p. 4.

For the backstory on Terry L. Wright and Cheryl A. Wright, T. C. Memo. 2024-100, filed 10/30/24, check out my blogpost “‘You’d Better Not Pout’- Part Deux,” 3/15/16*. Terry and Cheryl had a big capital gain when Terry’s business was sold for stock, which he later unloaded. Some dodgefloggers got him into foreign currency exchange options, which he testified on the trial he did to get some tax deductions.

Though his trusty attorneys argue he wanted to make a profit, ex-Ch J L. Paige (“Iron Fist”) Marvel isn’t having any. Section 165(c) bars any non-casualty loss deduction not connected to trade, business, or profit-seeking activity.

“The Wrights realized substantial capital gains on the sale of Mr. Wright’s…stock in the first half of [year at issue]. Mr. Wright credibly testified that in [year at issue] his estate planning attorney and his accountant ‘realized that we could use some tax losses.’ Mr. Wright also credibly testified that he first understood that the foreign currency option transactions at issue would generate a tax loss based on an explanation from his estate planning attorney in fall [year at issue]. [Terry’s and Cheryl’s LLC] then entered into the foreign currency option transactions at issue, which generated a valuable capital loss, just before the end of the Wrights’ [year at issue] taxable year.” T. C. Memo. 2024-100, at p. 10.

IRS’ expert dissects the USD-EUR straddle offset by the EUR-DKK (Danish krone) straddle with a digital kicker, and kicks the kicker to the curb, unsaddling the straddles. It’s the usual Bialystok, a deal that cannot make money but generates a deductible loss offset by an unrecognized gain.

Y’all will recall that 6 Cir knocked out IRS’ argument that the straddles weren’t Section 1256 mark-to-market option contracts. Terry and Cheryl argue that’s “game over.”

“The Wrights also argue that the Sixth Circuit’s opinion in Wright III somehow precludes us from considering any issues other than economic substance. They state that the Sixth Circuit ‘determined that there was one remaining issue on which the Tax Court had failed to rule, the question of economic substance.’ While it is true that ‘[a] holding on an issue by an appellate court must be followed in all subsequent proceedings in the same case in the trial court or on a later appeal in the appellate court,” Pollei v. Commissioner, 94 T.C. 595, 601 (1990), the Wrights’ description of what the Sixth Circuit held in Wright III is highly inaccurate. The Sixth Circuit held that we should not have granted partial summary judgment to respondent because our determination that a foreign currency option could not be a foreign currency contract within the meaning of section 1256 was incorrect as a matter of law. Wright III, 809 F.3d at 881, 883–85. It therefore ‘remanded for further proceedings consistent with [its] opinion.’ Id. at 885. The Sixth Circuit did not state that it was limiting our consideration of any issues on remand.” T.  C. Memo. 2024-100, at p. 20.

Section 165 disallows these tax-motivated losses.

Taishoff notes that the year at issue is more than twenty (count ’em, twenty) years ago. With $603K in deficiency, even though IRS waived the Section 6662(a) chops, when you reckon in the interest, Terry and Cheryl would have done better to pay the tax.

* https://taishofflaw.com/2016/03/15/youd-better-not-pout-part-deux/

If outside basis and closed year excess losses are your thing, read Judge Goeke’s opinion in Surk, LLC, Syrkadian Ventures, LLC, A Partner Other Than the Tax Matters Partner, T. C. Memo. 2024-99, filed 10/29/24. Although this is a TEFRA holdover, the Sections 704 and 705 rules haven’t changed.

Surk had a boxed-checked lower-tier LLC, Outerknown. Outerknown threw up a couple seven-figure losses (hi, Judge Holmes) to Surk. The losses were well in excess of Surk’s outside basis in Outerknown, but Surk deducted them anyway.  IRS passed Surk’s 1065s for both those years, and by the time this case gets to Tax Court, those years are closed. Now IRS issued a FPAA for year at issue.

IRS claims Surk has to limit its deduction for the latest round of Outerknown’s passed-through loss, but folds because Surk got a cash distribution in Year Before Year At Issue which it didn’t add to its outside basis in that year. “Accordingly, respondent concedes that Surk is entitled to the loss deduction that he disallowed in the FPAA. However, respondent continues to assert that Surk must decrease its [Year At Issue] yearend outside basis by the excess losses as he determined in the FPAA.” T. C. Memo. 2024-99, at p. 2

Surk’s trusty attorneys claim that when IRS folded Surk’s loss deduction, game over. Hence the issue about Surk’s increasing its outside basis is new matter per Rule 142, and not properly before the Court.

Judge Goeke has somber reasoning and copious citation otherwise.

“Our caselaw establishes that the Court has jurisdiction to resolve all partnership items even though resolution does not result in a readjustment to the partnership return. We see no reason to distinguish this case where respondent has conceded the loss disallowed in the FPAA but a partnership item adjusted in the FPAA remains at issue. Thus, it is immaterial that respondent has conceded the loss disallowance in the FPAA. We retain jurisdiction so long as an adjustment to a partnership item remains at issue. Outside basis is determined at the partner level.  Thus, it is proper to determine Surk’s outside basis in Outerknown, a lower tier partnership, in this case. Respondent recomputed Surk’s [Year At Issue] outside basis in the FPAA. Accordingly, we have jurisdiction to determine how Surk must calculate its outside basis in Outerknown, and we do so in this case.” T. C. Memo. 2024-99, at p. 4. (Citations omitted).

This case is a Rule 122 fully-stipulated; both sides laid out this issue in the petition and summary judgment motion. True, “(R)espondent changed his reading of the statute and regulations from the one stated in the FPAA and in his previous filings with this Court. However, such a change does not render the basis computation a new matter. The proper interpretation of a statute or regulations is not a new matter. It is the Court’s job to interpret the law irrespective of how respondent did so in the FPAA or how the parties do so in their briefs. Moreover, petitioner had an opportunity to respond to respondent’s argument in its reply brief.” T. C. Memo. 2024-99, at p. 5. Anyway, if it were new matter, then IRS would have BoP, but this is a fully-stiped case, so all facts agreed, no proof needed.

Section 705 requires partners to reduce outside basis (Section 722 says outside basis equals cash and adjusted basis of property contributed to partnership) to extent of flowed-through losses, but not below zero. Any excess losses are carried forward until partners buy fresh basis with taxable distributions or further contributions.

“Specifically, section 705(a) provides that a partner’s outside basis increases by the sum of its distributive share of taxable income ‘for the taxable year and prior taxable years” and decreases by the sum of its distributive share of partnership loss ‘for the taxable year and prior taxable years.’ § 705(a)(1) and (2). Thus, the plain wording of the statute requires that a partner decrease its outside basis by the sum of all current and prior losses. However, in their annual calculation partners cannot reduce their outside bases below zero. §705(a)(2).” T. C. Memo. 2024-99, at pp. 5-6.

Partners must calculate outside basis annually, taking into account all increases and decreases, except for disallowed losses, from formation of the partnership onward. But here, IRS allowed the two closed-year losses, erroneously or not.

Surk’s trusty attorneys  argue that IRS’ only remedy was to issue FPAAs for the closed years.

“We disagree. As stated above, under section 705(a) a partner must calculate outside basis annually and must decrease its outside basis for the current-year loss as well as all prior-year losses since the partnership began. Treasury Regulation § 1.704-1(d)(2) adopts the section 705 basis adjustment rules although it limits the negative basis adjustment to allowed losses. Thus, it is immaterial that respondent did not issue an FPAA for [closed years] or that those years are closed. Respondent is calculating Surk’s outside basis for yearend [Year At Issue]. For this same reason, we also reject petitioner’s argument that respondent’s position decreases Surk’s outside basis below zero. Respondent’s calculation of Surk’s [Year At Issue] yearend outside basis does not result in an outside basis below zero.” T. C. Memo. 2024-99, at p. 7.

IRS is not trying an end-run around SOL. There’s no attempt to assess tax for the closed years.

“Petitioner concedes that Surk improperly deducted the excess losses for[closed years]. Surk now seeks to disregard its own reporting to claim future tax benefits. If Surk were not required to decrease its outside basis by the previously allowed excess losses, its outside basis would be overstated and would permit loss deductions in excess of Surk’s investment in its Outerknown partnership interest. We hold that for purposes of section 704(d) Surk must decrease its outside basis in Outerknown by all previously allowed losses including the $3,308,767 of excess losses that it deducted for [closed years].” T. C. Memo. 2024-99, at p. 8.

IRS claims Surk is positive $500K in outside basis in Outerknown. But trusty attorneys haven’t done numbers, so let’s have a Rule 155 beancount.

Incidentally, Syrkadian comes in via Rule 248(a) participating partner.

Dixieland Boondockery means valuation trials. Valuation trials mean expert witnesses. Expert witnesses, unlike the butterflies in the 1969 play, aren’t free. For IRS to find expert witnesses means competitive bidding.

So when Boulder Pines Land Holdings, LLC, Boulder Pines Fund Manager, LLC, Partnership Representative, Docket No. 8479-23, filed 10/28/24, want to shift venue from Jacksonville, FL to Atlanta, GA , IRS objects, claiming they “will be prejudiced by changing the place of trial because he has already entered into contracts with experts for this case. Those experts submitted bids and were awarded contracts based on Jacksonville as the place of trial.” Order, at p. 1.

The Boulder Pines claim their fact witnesses will come from around Atlanta, GA, and the boondocks in question are in Green County, GA (and no, I don’t know where that is, either).

Of course, as Judge Elizabeth Crewson Paris points out, both IRS and the Boulder Pines’ trusty and high-priced attorneys have offices in Atlanta, GA. Taishoff says, if googlemaps are telling the truth, it’s a fifteen-minute walk from one to the other.

So, Section 7446 says the Ch J shall prescribe place of trial, giving petitioners the best shot at a trial with as little inconvenience or expense as possible. And Tax Court’s Form 5 obligingly lets petitioners choose their own, as does Tax Court precedent.

So Judge Elizabeth Crewson Paris brushes aside IRS’ objection, and sets venue at The A.

Taishoff says, strange that the aforesaid trusty attorneys, who have almost a luxury box at Tax Court since they practice there so often, chose Jacksonville, FL, for place of trial. I seem to remember, long ago and definitely far away, when canny petitioners picked off-the-wall trial venues as a stall. See my blogpost “Same Time, Next Year” 3/3/17.*

But here trial is set for a couple months from now (hi, Judge Holmes). How come trusty attorneys didn’t notice the inconvenient venue before now?

Poor pro ses get confused by Form 5, simple as it is. The ABA Tax Section, to which august body I do not belong, in a show of solicitude for said poor pro ses, laid a whuppin’ on me when I suggested modifying Form 5 to require petitioners show some nexus between place chosen and the issues for determination at trial. Their high-and-mightinesses said poor pro ses can’t get even the simplest forms right.

Well, as I said another time, maybe the ABA Tax Section was right, as even high-priced trusty attorneys can’t get it right. See my blogpost thus entitled.**

Or maybe, just maybe, the Dixieland Boondockers have found a new tactic.

* https://taishofflaw.com/2017/03/03/same-time-next-year/

** https://taishofflaw.com/2017/12/15/maybe-the-aba-tax-section-was-right/