A phrase uttered much more earnestly than in Tax Court litigation sums up the characterization Judge Albert G. (“Scholar Al”) Lauber places on the much-amended and retitled aggregation of documents that sum up the property settlement agreement between Joseph Anthony Martino, Jr., T. C. Memo. 2024-18, filed 2/7/24, and his loved-once Ms. Roberts.

The facts are pre-TCJA, so alimony was still deductible.

Joe wants $600K of deductions for the last two years of this saga. Judge Scholar Al plows through the history of Joe’s defaults both in the property settlement agreement and other obligations, which led to mortgage foreclosure, bankruptcy, garnishees on Joe’s disability insurance proceeds, and continual visits to GA State courts to restart and ultimately unscramble this frittata.

At close of play, what started as “a marital settlement agreement (Settlement Agreement) addressing numerous issues, including the division of marital assets, child support, and ‘taxable periodic alimony’ to be paid by petitioner to Ms. Roberts,’ and which “specified an allocation of assets that was ‘meant to be an equitable division of the marital property, except as specifically provided herein, and said division is non-taxable to either party.,’” T. C. Memo. 2024-18, at p. 2, remained so.

For once, obligation to pay after death of payee is off the table. This time, it’s parsing the divorce or separation agreement per Section 71(b)(1)(B) to make sure its definition of alimony does “not designate such payment as a payment which is not includible in gross income under this section and not allowable as a deduction under section 215.” T. C. Memo. 2024-18, at p. 8.

Judge Scholar Al, a stickler for precise phraseology, winces slightly.

“Section 71(b)(1)(B) is drafted somewhat unartfully, containing as it does a double—indeed a triple—negative. Rephrased in simpler terms, this provision requires us to determine whether the instrument ‘contains a nonalimony designation.’ This inquiry is a practical, not a technical, one. The instrument ‘need not mimic the statutory language,’ e.g., by ‘specifically refer[ring] to sections 71 and 215.’ Rather, ‘the divorce or separation instrument contains a nonalimony designation if the substance of such a designation is reflected in the instrument.’” T. C. Memo. 2024-18, at p. 8 (Citations omitted).

Everything is coming up property, not alimony, until Joe tries arguing that the two (count ’em, two) State Court Income Deduction Orders (IDOs, which I called garnishees) on Joe’s disability insurance payments somehow converted those takeouts into alimony.

Not while Judge Scholar Al is on the case.

“Petitioner appears to equate the IDOs with ‘Domestic Relations Support Orders’ under Georgia law and says that IDOs cannot be used to effect an ‘equitable division of property.’ He offers no plausible support for this: The ‘equitable division of property’ was effected by the Settlement Agreement and the Divorce Decree. The IDOs did not divide any property. Rather, they were essentially orders of garnishment, i.e., a mechanism for ensuring that petitioner made the property settlement payments that the Superior Court had separately ordered him to make.” T. C. Memo. 2024-18, at p. 9, footnote 3.

Sorry, Joe, no go. As it was in the beginning, is now, and evermore shall be. Property without end.

Applying Count Basie’s terminology to repurpose an old favorite, that’s Judge Tamara Ashford’s suggestion to Christopher Crumedy, T. C. Memo. 2024-19, if he wishes to repent of frivolity and escape the Section 6702 $5K frivolity return chop.

Chris frivoled by filing two (count ’em, two) Forms 1040 for year at issue, claiming no salaries, wages, etc. (although he did have same), claiming some withholding, and trying to turn the 1040-V payment voucher into a draft on the withholders.  T. C. Memo. 2024-19, at p. 2. This got Chris the frivolity warning and an imposition of the Section 6702 chop, which Chris petitioned.

There was a remand to consider the underlying liability, as Section 6702 are assessable, no SNOD needed. But Chris only faxed copies of some correspondence with IRS without explanation to the AO.  Chris claims these were his attempts to withdraw his allegedly frivolous returns.

So the confirmation of the NITL stands as to the underlying liability, because Chris did not meaningfully contest it.

“Petitioner seems to question only whether the IRS made a lawful assessment of the section 6702(a) penalties because in his view he was entitled to withdraw the [year at issue] returns that the IRS received… and in fact had attempted to do so. In support of his position, petitioner relies on section 6702(b)(3) and the two exhibits attached to his CDP hearing request, which were copies of the two assessment notices on which he had added a typed statement requesting withdrawal of each return the IRS had received….” T. C. 2024-19, at p. 11. (Footnote omitted, but it says Chris unsuccessfully tried the Section 6751(b) Boss Hoss gambit.)

The attempted withdrawal doesn’t work. Section 6702(b)(3) only allows withdrawal of “‘specified frivolous submissions,’ which are defined in section 6702(b)(2)(B) as CDP hearing requests and applications under section 6159 (relating to written installment payment agreements), section 7122 (relating to compromises), and section 7811 (relating to taxpayer assistance orders); and (2) section 6702(b)(3) provides a circumstance, i.e., allowing a taxpayer to withdraw his ‘specified frivolous submission,’ which results in the section 6702(b) penalty not applying with respect to that submission. The penalties against petitioner were not assessed under section 6702(b) but rather under section 6702(a) for having filed frivolous tax returns for 2017. Petitioner never made a ‘specified frivolous submission’ as that term is defined in section 6702(b)(2)(B).” T. C. Memo. 2024-19, at pp. 11-12.

If you’re going to frivol, be specific.

Justin C. Cloar, T. C. Memo. 2024-17, filed 2/6/24, asserts his RCP is minuscule because he is permanently unemployed (not having worked for the last two years and survived on borrowings “from friends and family and was performing occasional contract work for a national law firm.” T. C.  Memo 2024-17, at p. 8, footnote 5). And true, the SO on the remand probably didn’t get the IRM 5.8.5.20 calculation of future earnings right.

“However,  we find this potential error by SO R to be harmless in this case. Even if Mr. Cloar cannot secure work with the same wages as his previous employment, he could surely be re-employed at some point in the future, considering his education. Therefore, it is not unreasonable to conclude that Mr. Cloar has the potential to pay more than the nominal amount of $25 towards his total unpaid tax liabilities. In sum, we conclude that SO R acted appropriately and within her discretion in determining Mr. Cloar’s RCP.

“Our role is not to redetermine the RCP of the taxpayer and whether it is 100% accurate as determined by the COIC unit.” T. C. Memo. 2024-17, at p. 9. (Name omitted).

A source tells me Justin is a lawyer and a long-distance runner in AR. Judge Christian N. (“Speedy”) Weiler states “Mr. Cloar has unpaid individual income tax liabilities for the years at issue along with penalties and interest, totaling $107,410. Mr. Cloar filed income tax returns for the years at issue but failed to remit full payment of the tax due on the respective returns. Mr. Cloar does not contest the amounts of his underlying tax liabilities.” T. C. Memo. 2024-17, at p. 2.

Justin offers a $25 per month IA or going CNC.  Judge Speedy Weiler accepts neither.

Lonnie Wayne Hubbard, T. C. Memo. 2024-16, filed 2/6/24, certainly caused Judge Alina I. (“AIM”) Marshall to employ a lot of somber reasoning and copious citation of precedent to establish that the IRA grab resulted in constructive receipt of the proceeds to satisfy the criminal forfeiture following Lonnie’s conviction in USDCEDKY for “various crimes related to the distribution of controlled substances and listed chemicals in violation of 21 U.S.C. §§ 841(a)(1), 841(c)(2), 846, 856(a)(1), and 18 U.S.C. §§ 2 1956(h), and 1957.,”. T. C. Memo. 2024-16, at p. 2.

Lonnie was a KY pharmacist; a source tells me Lonnie was selling pseudoephedrine, which can be a cold medicine but also can be used to make methamphetamine. Speed kills. Lonnie also was divorced, his ex-wife got their house and contents and their joint bank accounts, and refused to communicate with him. Wherefore he claims he never got the 1099-R from his IRA custodian when the Feds grabbed his IRA. And he made no money while in jail.

Lonnie’s argument is he never had constructive receipt of the $400K of IRA funds.

“The funds from petitioner’s T. Rowe Price IRA were forfeited to the USA as an involuntary distribution. Though they were not under his control, petitioner constructively received the funds by having received the economic benefit of the funds through satisfaction of his forfeiture liability to the USA. See Old Colony Tr. Co., 279 U.S. at 729; Larotonda, 89 T.C. at 291; Carione, 96 T.C.M. (CCH) at 358. Moreover, the fact that petitioner did not willfully or purposefully cause the distribution is irrelevant. See Rodrigues, T.C. Memo. 2015-178, at *11; Schroeder, 78 T.C.M. (CCH) at 568. Petitioner constructively received and must include in his gross income a taxable distribution of $427,518 from his retirement account with T. Rowe Price.” T. C. Memo. 2024-16, at p. 14.

Judge AIM Marshall does fall for Lonnie’s plight, somewhat. But she sticks Lonnie for late-filing and late-paying add-ons.

“While we are sympathetic to petitioner’s difficulties, we decline to conclude that his failure to timely file and timely pay were justified by reasonable cause. In petitioner’s declaration… petitioner alleged that (i) he never received the Form 1099–R from T. Rowe Price, (ii) he had not earned any income since 2015, (iii) he was unaware of any filing obligation, and (iv) as a result of the criminal forfeiture and his divorce… he was unable to pay the tax due.

“Petitioner knew of a general duty to file his tax return as he stated in his declaration that he had ‘habitually’ done so in previous years. He was also aware of the forfeiture that was part of the judgment in his criminal case. Nonetheless, petitioner asserts that he did not know that he had to file a tax return because he did not receive the Form 1099–R. Nonreceipt of tax information forms, such as a Form 1099, does not excuse a taxpayer from his or her duty to report income.” T. C. Memo. 2024-16, at p. 19.

So Lonnie has a Rule 155 beancount on tap, with $500K of deficiency and add-ons at the end. But it gets worse, as my source tells me Lonnie also got a civil judgment against him and his pharmacy from USDCEDKY of $4,474,000.

So why is Lonnie fighting about $500K in Tax Court (and doing a good research and briefwriting job, at that)?

Well, Judge AIM Marshall says USDCEDKY also gave Lonnie, at no extra charge, a “term of imprisonment for a term of 360 months, three years of supervised release, and a criminal monetary penalty of $7,100.” T. C. Memo. 2024-16, at p. 2. So see the title of this blogpost first written at the head hereof.

No, I’m not pitching a charity. I’m repeating an ancient cliché, the one about the shoemaker’s children never having shoes (see infra, as my high-priced colleagues say). I don’t know what the parents of Paulette Thompson, T. C. Memo. 2024-14, filed 2/5/24, did for a living, or what shoes Paulette’s three adult children may have. But I do know that Judge Christian N. (“Speedy”) Weiler tells us that “Mrs. Thompson confirmed that she had acted as a paid return preparer and that she had prepared dozens of tax returns during the tax years at issue—just not her own.” T. C. Memo. 2024-14, at p. 15. In fact, in each of the three (count ’em, three) years at issue, Mrs. Thompson grossed north of $50K from tax prep, aside from her farming operations.

She didn’t file Sched C for any such year, but put the tax prep on her late-filed and unprocessed Sched F as “Custom Hire (Machine Work).” T. C. 2024-14, at p. 8.

Needless to say, Mrs. Thompson isn’t a great witness on the trial, and doesn’t fare so well in the substantiation stakes.  And the returns she did file, she filed late. Pro se, of course, so there are some painful “own goals” here..

I’ve said it before: “Often the shoemaker’s children have no shoes. Preparers often do what they’d berate their clients for doing.” See my blogpost “The Snitches and the Fiction Writer,” 6/1/16.

I wish I could buy stock in discovery; it is surely a growth industry, spread across numerous tax sectors, from Dixieland Boondockery to the popularly-viewed sunsets in Ogden, UT. Here’s Judge Christian N. (“Speedy”) Weiler’s take on the former, Longwood Preserve Holdings, LLC, Longwood Preserve Investors, LLC, Tax Matters Partner, Docket No. 12421-19, filed 2/2/24.

First, the Longwoods want a list of IRS’ third-party contacts. IRS says no, Greenberg Express [sic; should be Greenberg’s Express] and attorney work product for trial. Judge Speedy Weiler: “We disagree; and do not find the mere disclosure of names or identities of third parties that respondent has contacted to be privileged or otherwise in violation of Greenberg Express [sic].” Order, at p. 1. But as for what the above third parties told IRS, that’s out. Order, at p.2.

Next, the Longwoods want legal opinions and/or attorney work product, which they don’t get. They have BoP.

The Longwoods want an appraiser’s complete appraisal review report and work file, copies of all other appraisals of the property at issue, and all other valuations used as comparable for the conservation easement at issue here. IRS “objects to this request on the grounds of relevance, in violation of Rule 143(g) and on the grounds of privilege under the attorney work product doctrine. Finally, respondent notes how all responsive documents were furnished….” Order, at p. 2. Sustained.

Finally, “petitioner seeks an email from Mr. R [appraiser]…, which was referenced in documents received pursuant to a FOIA request. Respondent objects to the Request arguing the email is irrelevant to the proceeding and contains third party return information protected under section 6103. Since section 6103 protects third party tax information, including return information, respondent contends the exception under section 6103(h)(4)(B) does not apply here. Petitioner, on the other hand, contends an email is not a ‘return’ as protected under section 6103. In addition, petitioner argues the email is relevant because it contains a general discussion of ‘business use’ of donated property by respondent.

“The court does not find an email from Mr. Robertson to be a ‘return’ as contemplated under section 6103; however, the email may very well contain a taxpayer’s ‘return information’ as described in section 6103(b)(2). The Court notes how ‘return information’ does not include ‘data in a form which cannot be associated with, or otherwise identify, directly or indirectly, a particular taxpayer.’ See I.R.C. §6103(b)(2). Accordingly, the Court will sustain in part, and overrule, in part, respondent’s objections to petitioner’s Document Request 5, and order that respondent produce the responsive email, after redacting any third-party taxpayer’s ‘return information’ contained in the email and as described in section 6103(b)(2).” Order, at p. 2. (Name omitted).

Happy hunting ground for discovery geeks.

Judge Gale drops a ten-page blockbuster in Whistleblower 4792-19W, filed 2/2/24, that will delight fans of blowerdom and win-your-case-at-discovery CLEfloggers alike, and perk up your dull-and-grey Groundhog Day.

9219 wants to depose a bunch IRS exam employees (hi, Judge Holmes) who oversaw the auf’ing of a couple exam types who saw tainted (privileged) material that 9219 cribbed from Target (the blown, not the store). IRS claims no jurisdiction, admin record only, and Section 6103 taxpayer info.

9219 wants Rule 74(c)(3) general deposition of a party without that party’s consent, but Judge Gale blows that off in a footnote. “Although petitioner’s Motion is styled as if it were made under Rule 74(c)(3), which relates to depositions of a party opponent without that party’s consent, the notices of deposition…cite Rule 74(c)(2), which relates to depositions of nonparties without the consent of the opposing party. Among the reasons that the distinction between Rule 74(c)(2) and (3) is significant is that a deposition of a nonparty under Rule 74(c)(2) generally may be used during a Tax Court trial or other proceeding only for impeachment of the deponent as a witness, whereas a deposition of a party opponent under Rule 74(c)(3) may be used for any purpose. See Rules 74(f), 81(i). Furthermore, because the Commissioner speaks only through formal policy pronouncements, informal statements of his employees do not bind him and are not properly treated as his statements as a party to a case before the Tax Court.  We will therefore treat petitioner’s Motion as seeking to compel nonparty depositions under Rule 74(c)(2), as indicated in the notices of deposition, and we will recharacterize it accordingly.” Order, at p. 1, footnote 2. (Citations omitted).

Taishoff says, “Hey Congress, y’all limited Section 6015(e)(7) innocent spousery to the admin record, but added ‘newly-discovered evidence,’ which let in testimony that neither CCISO nor Appeals could take nor have opposing parties cross-examined. How ’bout doing the same for Section 7623? The Ogden Sunseteers have no way of taking testimony either.”

Of course, what chance is there that the IRS exam crew will testify on the nonexistent trial under present law? Anyway, Judge Gale delivers a Super Bowl-worthy punt: let petitioner show “whether and on what grounds an order compelling depositions under Rule 74(c)(2) is appropriate in this case in view of Berenblatt v. Commissioner, No. 7208-17W, 160 T.C. (May 24, 2023), Van Bemmelen v. Commissioner, 155 T.C. 64 (2020), and any other authorities pertinent to the proper application in this context of the precedent of the U.S. Court of Appeals for the District of Columbia Circuit.” Order, at p. 10. May the luck of the Irish attend ye, boyo, as you read these cases. I’ve already blogged them.

As for jurisdiction, IRS examined 9219’s claim, didn’t reject it out of hand, and did collect money. The only issue is whether IRS used 9219’s stuff. That’s not jurisdictional, otherwise Tax Court would have to try the whole case on the merits to see if it had jurisdiction. See Whistleblower 972-17W, 159 T.C. at 7–10; see also Lissack v. Commissioner, 68 F.4th at 1321; McCrory v. Commissioner, T.C. Memo. 2023-98, at *6.” Better yet, read my blog; I’ve blogged all these for your reading pleasure.

As for Section 6103 (a hot item in recent news, as a violator just took a five-year fall), if 9219 is trying to supplement the admin record, let 9219 show same, and let the parties dish on what Whistleblower 972-17W adds to the mix.

I can’t close without drawing attention to Judge Gale’s tour d’horizon of blower discovery at Order, pp. 6-8. It’s a ready-made drag-and-drop for your memo of law file. A tip of the battered Stetson to His Honor; battle-weary practitioners will thank you. Sir.

Judge Patrick J (“Scholar Pat”) Urda weighs up both the venial and mortal sins of Bernard T. Swift, Jr. and Kathy L. Swift, T. C. Memo. 2024-13, filed 2/1/24, their microcaptive insurers, and the reinsurance pools into which same was plunged, and finds same did not operate an insurance business as commonly understood. Rather, the whole thing was a roundy-round untaxed cash stash, courtesy of Section 831(b).

To get the tax shield, the microcaptive has to have less than $1.2 million annual premium (hence micro) and, though owned by the ownership of the captor, must diversify its risk so as to satisfy the age-old principle that “by said mischaunce shall no man be undone, but that the losse fall lightlie upon manye, and not heavily upon fewe,” as the Act of Queen Elizabeth the First (1601) put it.

BT (that’s Doc BT) owned a string of urgent care walk-in clinics, of the “usual litany of sprained ankles, sore throats, runny noses, eye injuries, and whatnot” variety. T. C. Memo. 2024-13, at p. 3. Many doctors passed through the system, but tort-reforming Texas kept malpractice recoveries low. So Doc BT had a lot of taxable cash, and rising commercial malpractice premiums. So he did the cruise-destination number, setting up offshore microcaptives (in the BVI) electing onshore Section 953 tax treatment, with supposed pool reinsurers staying in friendly offshore islands (St. Kitts), and writing exotic policies, purportedly to spread the risks.

There’s fifty (count ’em, fifty) pages of deconstruction, but the bottom line is no one not terminally insane would pay the premiums the reinsurers were getting, unless they were getting back better than 97% as retrocessionaire, and paying almost no losses and no taxes.

Judge Scholar Pat quotes Avrahami, Caylor Land, Szyzgy, Rent-A-Center, and hoc genus omne to hit the microcaptives and Doc BT with deficiencies and the five-and-ten 20% substantial understatement chop.

At first glance, why a motion to change caption in Arthur M. Bialer, 6983-19W, filed 2/1/24, should require five (count ’em, five) attorneys from IRS counsel to reply is truly befuddling. But the motion is unique, in that it seeks to erase Art from 4-1/2 years and 152 docket entries by simply giving him a nom de guerre in lieu of the name by which he has been known in Tax Court and on this my blog the while.

As to the latter, see my blogpost “The Whistle Blown on Summary J,” 12/2/19, “All Those Old Familiar Faces – One Mo’ Time,” 1/31/23, and “Slamming The Window,” 10/11/23.

As to the five attorneys, Judge David Gustafson elaborates why he can’t oblige.

“Where proceeding anonymously is permitted, Rule 345 requires the public filing of redacted versions of the documents. Petitioner proposes no procedure by which his name might be redacted from all prior documents in the record and replaced with a pseudonym. Theoretically one would submit redacted copies of all 152 filings in this case, on which petitioner’s name would be obscured every time it appears, and then the originally filed documents would all be sealed, and the new redacted versions would be filed, so that the Tax Court’s public record in this case would no longer disclose petitioner’s identity. But petitioner has not submitted (nor proposed a process for submitting) such redacted versions.” Order, at p. 6.

Apparently Art discovered that prospective employers could find out he was a blower with a simple online search, four-and-one-half years into the process. Blowers do get special protections from possible bad effects of blowing via Tax Court Rule unavailable to the ordinary petitioner, but blowers have to ask for them upfront. Tax Court can’t unring bells.

Mike’s trusty attorney doesn’t help. “We cannot ascribe any weight to petitioner’s counsel’s assertion that he has only just learned that Tax Court orders are publicly accessible on the Court’s website, if this is proposed as a reason that the delay should be excused. Whether he knew the particular means by which our orders can be publicly accessed on the internet, he must have known (and his first request to proceed anonymously shows that in fact he did know) that one way or another the Tax Court is a ‘court of record’ (sec. 7441) and its records are public records (sec. 7461) to which the public has access (see Rule 27(b)(2). At numerous times throughout the pendency of this case, the parties have filed and objected to, and the Court has ruled on, requests to seal specific documents.” Order, at p. 4. If these documents weren’t public, why fight over sealing or unsealing them?

And that ten (count ’em, ten) items were sealed back in June, 2021, doesn’t mean everything was sealed. Or so says Judge Gustafson, although steady readers of this my blog will recollect that back in 2021 sealing one document sealed them all. See my blogpost “Beeves,”  7/16/21.

Better the dude should read my blog; most of the time he wouldn’t even have to read the Tax Court website. Apparently his client does read somebody’s blog.

“Petitioner expresses concern that blog posts on the internet reveal information about this case. That is, he acknowledges that such information is already available on the internet, and our own simple internet search using his name yielded links to copies of orders that we issued in this case (i.e., links on non-Tax Court websites that, of course, we do not control). The toothpaste is out of the tube.” Order, at p. 5.

Modesty forbids my speculating on whether Judge Gustafson reads my blog.

Motion denied.

Takeaway, a classic “Those who read it don’t need it, and those who need it won’t read it”: Like the hockey players say, “Ya step on the ice, ya gonna get hit.” If you want anonymity, ask for it from the getgo, and tell a real good story, as clear and convincing as you can make it.

Intrafamily buyouts get “extra scrutiny,” which is taxspeak for flyspecking, nitpicking, and full-body-searching, so it is rare for any friends-and-family deal to emerge without many plucked feathers. So Cynthia L. Huffman and Estate of Chet S. Huffman, Deceased, Cynthia L. Huffman, Executor, et al., T.C. Memo. 2024-12, filed 1/31/24, manage to dodge some of IRS’ box-barrage.

And a Taishoff “Good Job” to Cindy’s trusty attorneys; no Beverly Hillbillies they, although I wonder why an arms’-length agreement that would have satisfied Section 2703(b)’s one-off safe harbor never got into evidence, although they ultimately do shoot the Section 2703(b)(2) rapids. See T. C. Memo. 2024-12, at pp. 18-20. True, this is ultra-fact-specific, but aren’t all of these?

There is the obligatory valuation joust, with a well-known valuation firm taking a major gut-punch: why choose comparables from the bottom quartile for key-person discount? IRS’ expert chooses the median, and that carries the day, bar one adjustment. I’ll wager an ale or two that the Rule 155 beancount proves this an expensive miscue. T. C. 2024-12, at p. 27.

The real homerun for Cindy’s trusty attorneys is avoiding chops on the gift tax on the bargain sale from parents to son. Parents’ long-time accountant bailed when this deal was going down, getting papers was a tooth-pull, and parents reasonably relied on advice that gift tax not due, satisfying all the Neonatology boobytraps.  Son and family C Corp do get some late-filings and late-paying add-ons. See T. C. Memo. 2024-12, at pp,. 44.

Takeaway- When families get ready to do the torch-throw, they’d best get appraisals lined up, comparables on deck, accountants and attorneys at the ready. And tell ’em Cindy sent ya’.