We all know Reg Section 1.6662-2(c) limits the imposition of penalties to only one on the list, even when more than one would give rise to a chop. Thus substantial understatement (five-and-ten) and negligent disregard can only impose one 20% chop. So when Tax Court hands out chops, must they consider more than one?

Before you say “no, why should they?” read Oconee Landing Property, LLC, Oconee Landing Investors, LLC, Tax Matters Partner, T. C. Memo. 2024-73, filed 7/17/24. Judge Albert G. (“Scholar Al”) Lauber heeds IRS’ concern that partner-level adjustments based on the FPAA sustentation of five-and-ten might bail out some partners whose computational adjustments let them slide under the tag.

When Judge Scholar Al slugged the Oconees, he found them liable for the five-and-ten, but never mentioned negligence. IRS wants reconsideration, but the Oconees object: no change in law, no new facts.

“Respondent notes that the applicability of the substantial understatement penalty is based on a mathematical calculation, whereas the negligence penalty is not so conditioned.

“Our decision to forgo determination of the negligence penalty was premised on our understanding that the no-stacking rule prohibited the application of multiple penalties with respect to a given portion of Oconee’s underpayment. See Oconee, T.C. Memo. 2024-25, at *75 n.34. But Treasury Regulation § 1.6662-2(c) makes clear that the no-stacking rule relates to ‘the maximum accuracy-related penalty imposed.’ (Emphasis added.) This Court has jurisdiction to determine partnership items and the applicability of any penalty that relates to an adjustment to a partnership item. §§ 6221, 6226; United States v. Woods, 571 U.S. 31, 39–42 (2013). There is thus no limitation on our ability to determine the applicability of more than one accuracy-related penalty at the partnership level.” T. C. Memo. 2024-73, at p. 3.

As for reconsideration, Judge Scholar Al has a footnote at hand.

“Petitioner incorrectly characterizes respondent’s Motion as a request ‘to reverse [the Court’s] ruling on the negligence penalty.’ The Court in its prior opinion made no ruling on the negligence penalty; that is the error of which respondent complains. Petitioner urges that reconsideration is inappropriate because respondent cites ‘no intervening change in law’ and ‘no new evidence.’ That is true, but those are not the only grounds for seeking reconsideration. Another ground is to correct ‘substantial errors of law or fact,’ and that is the ground respondent urges. Petitioner contends that respondent failed to produce partner-level evidence showing that individual partners would not be subject to the substantial understatement penalty. This argument is silly: Respondent could not possibly know, in this TEFRA partnership proceeding, whether individual partners in future partner-level proceedings would have a ‘substantial understatement’ of tax, which will obviously depend on their individual tax circumstances. Respondent is simply arguing that the error in our prior opinion creates a risk of prejudice to him in future partner-level proceedings, and that is sufficient to justify his Motion.” T. C. Memo. 2024-73, at pp. 4-5, footnote 4. (Emphasis by the Court).

And this is yet another reason why I don’t mourn TEFRA.

Catherine L. LaRosa, 163 T. C. 2, filed 7/17/24, seeks innocent spousery from IRS’ collective activity to get back an erroneous refund of interest. Way back when, Catherine’s spouse got nailed for tax fraud by the MD authorities, whereupon IRS hit spouse with a jeopardy assessment. Spouse settled out with IRS, while reserving the right to fight the computation of interest. Apparently spouse had what a certain Nobel laureate in Literature called “high office relations in the politics of Maryland,” and IRS gave back the money, 163 T. C. 2, at p. 3.

IRS subsequently brought a Section 7405 action to get the money back. Catherine says include her out, per Section 6015(f) equity. IRS says negatory, Tax Court has no jurisdiction over refund of interest; no tax, no SNOD, no NOD.

Judge Ronald L. (“Ingenuity”) Buch, never one to check a flop, says all Catherine needs for Section 6015(f) is a set of Hamiltons and a timely petition, per the explicit terms of the statute.

“The Commissioner is mistaken when he argues that we lack jurisdiction over Mrs. LaRosa’s request for innocent spouse relief. Mrs. LaRosa satisfied both requirements for our jurisdiction: She submitted to the Commissioner a request for equitable relief pursuant to section 6015(f), and she timely filed a Petition with the Tax Court. For this purpose, we consider the Commissioner’s letter… to be ‘the Secretary’s final determination of relief available to the individual’ because it explicitly set forth the Commissioner’s final determination that ‘[i]nnocent spouse doesn’t consider relief for erroneous refunds.’” 163 T. C. 2, at p. 6.

But Catherine hasn’t got the nuts. True, IRS sued under Section 7405, which allows suit for taxes erroneously refunded; those are rebates of tax. But not every refund is a rebate of tax.

“Section 7405(b) provides an avenue to recover an erroneously refunded tax. But the mere fact that the Commissioner prevails in an erroneous refund suit does not give rise to an unpaid tax. Courts have held that once a tax liability is paid in full, that tax liability is extinguished unless it is revived by an erroneous rebate refund. And while the government can recover an erroneous rebate refund by filing suit under section 7405(b), it can also recover through an erroneous refund suit erroneous nonrebate refunds, which are not considered tax. Thus, determining whether an erroneous refund gives rise to an unpaid tax turns on whether the erroneous refund is a rebate or nonrebate refund.” 163 T. C. 2, at p. 10. (Citations omitted).

There are refunds arising out of miscalculated tax; those are rebates. But Catherine’s spouse paid all the tax due before IRS sued for the erroneously refunded interest. There’s no miscalculated tax, overpaid tax or underpaid tax.

While IRS can issue a SNOD to assess an underpaid (because erroneously refunded) tax, there is no underpaid tax here.

No innocent spousery for Catherine. But her trusty attorneys, including without in any way limiting the generality of the foregoing (as my expensive colleagues say), the Harvard Fierce Fighters and Georgetown’s finest, s/a/k/a The Right Catherine, get a Taishoff “Good Job, Second Class.”

See my blogpost “Unfogged,” 3/26/24.

Edited to add, 5/22/26: Courtesy of my former colleague Peter Reilly, CPA, 4 Cir reversed and remanded, saying Tax Court has equitable jurisdiction, because attemmt to get back erroneously refunded interest creates a deficiency. So make that a Taishoff “Good Job, First Class, with Unit Citation” to the Harvard Fierce Fighters and The Right Catherine.

A week back from my visit to my nearest and dearest in East Texas, in which I got a ringside seat at a Cat 1 hurricane at no extra charge (and you can have my next one for free), I am reminded of the old East Texas wisdom “Pigs git fed, hogs git et.” See my blogpost “Cullifer’s Travails,” 10/8/14.

Corning Place Ohio, LLC, Corning Place Ohio Investment, LLC, Tax Matters Partner, T. C. Memo. 2024-72, filed 7/17/24, puts Judge Albert G. (“Scholar Al”) in mind of Dixieland Boondockery at its finest, although the Cornings are dealing with a Cleveland, OH, historic structure.

But the Cornings do it in right Dixieland style.

They “acquired a historic office building in downtown Cleveland, Ohio, and proceeded to renovate it into luxury apartments. The renovation was undertaken pursuant to a ‘rehabilitation plan’ approved by the National Park Service (NPS) and the State of Ohio, both of which awarded historic preservation tax credits. The partnership used the tax credits to finance the renovation.” T. C. Memo. 2024-72, at pp. 2-3.

But why stop there? That only leaves them, with no cash in the deal, and a high-priced rental operation, or a condo sellout. Au contraire, the Cornings go for the gold, or, as Judge Scholar Al puts it, they gild the lily.

“Gilding the lily, the partnership then granted a conservation easement over the very same property, claiming a $22.6 million charitable contribution deduction on the theory that it had relinquished valuable development rights. The ‘lost development rights’ allegedly consisted of the notional opportunity to add a 34-story vertical addition ontop of the historic building. Apart from being structurally implausible and economically unsound, adding 34 floors of steel and concrete atop the building would have required the partnership to forfeit the Federal and Ohio tax credits upon which it relied to finance the renovation. As a condition of receiving those credits, it had pledged that the rehabilitation plan would entail no rooftop improvements ‘visible from the street.’ Needless to say, a 34-story addition on top of the building would have been visible from the street. Finding that the 34-story tower was a chimerical concept ginned up solely to support a wildly inflated appraisal, we will sustain the Commissioner’s disallowance of the charitable contribution deduction and his imposition of a 40% penalty under section 6662(h)1 for a ‘gross valuation misstatement.’” T. C. Memo. 2024-72, at p. 3.

You can read Judge Scholar Al’s 45 (count ’em, 45) page gelding the lily. The appraisal is based on stock plans, never used. The same appraiser was working on the NPS credits and the conservation easement. All the experts were part of ” a cottage industry in Cleveland that specialized in supplying data for ‘lost development rights’ appraisals of historic buildings. As of the date of trial, H and L had worked with S on 50–60 ‘vertical expansion’ projects, all of which were connected to conservation easements, and none of which was ever built.” T. C. 2024-72, at p. 12. (Names omitted).

And of course their plans and appraisals were done after the NPS-Ohio State credits were given, the terms of which guaranteed that the proposed vertical expansion could never be built. They had nothing to lose, literally.

Once again, leg-before-wicket, as the single-member (disregarded) LLC, parent of the Cornings, contributed the property before the new member came on board. The new member created Corning, which improperly claimed the deduction. See T. C. Memo. 2024-72, at p. 22-26.

The usual shredding of the petitioner’s appraisers follows.  And the chop.

Judge Gale has a blast from the past for us today, as Edward L. Berman and Ellen L. Berman team up with Cousin Annie Berman in 163 T. C. 1, filed 7/16/24, to explore the interface between Section 1042 deferral of ESOP stock gains with Section 453 installment sale reporting. Into that statutory goulash jumps the improbably-named but larcenously-inclined Yuri Debevc Derivium, the alchemist who claimed to turn capital gains into non-taxable debt; long-time readers of this my blog will recall Greg and Sue Raifman, entrapped by ol’ Yuri in my blogpost “We Wuz Robbed,” 8/7/12.

Briefly, the Bermen had $4 million in ESOP stock they wanted to turn to cash. Yuri got them to sell same back to the ESOP for the ESOP’s promissory notes, and buy some A-rated variable rate notes from listed outfits on margin, which they sold to him for 90% of face (he selling same at par and keeping the change). The variable notes were Qualified Replacement Property, so would defer gain from sale back to ESOP until sale or payoff of the ESOP’s notes. Except Yuri and the Bermen tried to disguise the sale of the variable notes as a loan, which triggered gain. The ESOP couldn’t pay the notes they gave the Bermen.

OK, the Bermen have gain. And Section 1042(e) says gain must be picked up in year of disposition of QRP, which would be year when the Bermen did the “loan” deal with Yuri. But the Bermen got nothing that year, and only got paid something in the next.

The Bermen claim their 1042 election was defective because of their defective opt-out from Sub S status to C Corp (only C Corp stock qualifies for Section 1042 treatment), but they’re a day late per Section 1362(e)(2)(B), and anyway duty of consistency means their position, taken for a year now closed, bars them from revoking it now. Likewise, their claim that their Section 1042 election was induced by fraud fails, because there was no mistake as to then-existing fact, only as to legal consequences.

But the Bermen can use Section 453 to throw gain into the next year, because any payment received after the year of sale automatically invokes Section 453 installment sale reporting.

See 163 T. C. 1, at pp. 27-32 for the rundown. It’s a technician’s delight.

Judge Gale has been here before; see my blogpost “Expedite Litigation and Avoid Unnecessary Trials,” 9/25/20.

It must be vacay time in Our Nation’s Capital, because no opinions from Tax Court today. But the hardlaboring clerks and flailing datestampers are going all out, as the paper and electrons keep flying.

North Donald LA Property, LLC, North Donald LA Investors, LLC, Tax Matters Partner, Docket No. 24703-21, filed 7/12/24 but served today, has unleashed a barrage of expert reports worthy of the pen of a Francis Scott Key. Judge Albert G. (“Scholar Al”) Lauber has generously lodged them all at the Glasshouse Guest House.

Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan is less hospitable toward Marsha Francina Constantine, Docket No. 9722-24, filed 7/15/24. Marsha Francina wants to file a CPAF, which Ch J TBS says is mistitled, and a Certificate of Service of Motion for an Order under Federal Rule of Evidence 502(d), likewise misnamed. Ch J TBS says these are Exhibits, and Marsha Francina should talk to IRS’ counsel, whose identity and whereabouts will be made plain when IRS counsel answers her petition, due by 8/16/24. Meantime, their fate is unknown.

But not so Marsha Francina’s separate Motion for an Order under Federal Rule of Evidence 502(d) and a Motion to Enforce a Refund of Overpayment Pursuant to Rule 260 that appear to be the same document filed as a Civil Penalty Approval Form. Those get tossed.

In another development, discussion is starting up on IRS’ settlement offer for non-petitioned SCEs (that’s taxspeak for Dixieland Boondockery). My colleague Peter Reilly CPA thinks it’s a sweet deal; I think there’s a thorn or two amongst the proffered roses. I do hope IRS publishes a Notice as to how successful the program is when the results starting coming in. The proof of the pudding, and all that.

The trust form of ownership is popular and problematic, especially when sole trustees forget formalities. I can’t say that Richard K. Archer, MD, forgot or neglected appropriate formalities when running Richard K. Archer M.D. P.A. Profit Sharing Plan & Trust, acting through its sole Trustee and Administrator Richard K. Archer. And I can’t ask him, because he’s dead.

Howbeit, the late Richard petitioned a retirement plan disqualification, before becoming the late Richard. But he petitioned sub nom. Richard K. Archer, Docket No. 11375-20R, filed 7/12/24. IRS objects, saying the trustee is the real party in interest, acting for the trust, and Judge Elizabeth A. (“Tex”) Copeland agrees.

When an individual dies, Rule 63(a) lets a duly authorized successor substitute in and prosecute the case. Burt the late Richard is a trustee, not an individual, and the trust itself is facing the consequences. Still, the individual decedent situation is the nearest analogy Judge Tax Copeland can find. And the late Richard’s adm’r says they can’t represent the trust.

“Most retirement plans, as entities, have other individuals who can represent their interests before this Court in the event one of the representatives or fiduciaries passes away. The same is true with most employers that sponsor retirement plans. However, that is not the case here. Dr. Archer, the plan trustee and administrator when the Petition in this case was filed, was the only individual with capacity to act on behalf of Petitioner and had complete control over the retirement plan.

“Without a representative who can further Petitioner’s interest, this case must be dismissed, and the determinations made in Respondent’s … Final Revocation Letter must be upheld.” Order, at p. 2.

Trust disqualified for years commencing after 12/31/11. Could be very expensive.

Warning to those with self-settled trusts of whatever kind: get a backup. And tell ’em Richard sent ya.

STJ Diana L. (“Sidewalks of New York”) Leyden shows us the truth of G. B. Shaw’s saying “A thing that nobody believes cannot be proved too often.” I don’t know that nobody believes in the necessity of keeping meticulous records, but too many people don’t do it.

And that hurts them, especially records of time actually spent, when Section 469 material participation is on the menu. And it’s even more the case when one has been “workin’ on the rairoad.”

Second case first. I’ve blogged the interplay between Social Security and Railroad Retirement Board benefits before now. See my blogposts “I’ve Been Workin’ On the Railroad,” 4/27/15, and “I’ve Been Workin’ On the Railroad – Part Deux,” 11/22/22.

Although Judge Alina I. (“AIM”) Marshall uses Kenneth Steven Tuma, Sr., and Deborah Ann Tuma, T. C. Memo. 2024-71, filed 7/11/24, to run a how-to-do-it CPE course for preparers confronted with retired or disabled, or both, benefitted railroaders, I want to focus on one area where a slightly obsessive paperkeeping might’ve helped. Ken claims he made contributions to his retirement plan for which the SNODs (not, Judge AIM Marshall, the “NOD”s) did not credit him.

“With respect to this argument, respondent conceded at trial that an employee contribution amount of $51,393 was reported on Mr. Tuma’s 2015 and 2016 Forms RRB–1099–R. He also conceded that this amount ‘is recovered ratably over the period of time that Mr. Tuma receives the benefit. And so that’ll be a computation that is done once we determine what is or isn’t gross income. And that recovery will be computed.’ On posttrial brief, however, respondent asserted that, although Mr. Tuma would ‘ordinarily be permitted to exclude a portion of’ the contributory amounts shown on his Forms RRB–1099–R from his gross income, Mr. Tuma failed to provide information with respect to his annuity starting date and his age on that date needed to compute the proper recovery. And on this ground, respondent further asserted that Mr. Tuma should therefore be allowed no offset for contributions or, ‘[a]ssuming the Court is inclined to provide some offset,’ an offset that assumes the facts most favorable to respondent.

“Mr. Tuma generally testified that that he was entitled to receive benefits from the RRB as early as 2009 but that he did not receive any payments until sometime in 2010. Mr. Tuma did not testify to any specific dates, however, or introduce any documentary evidence to support the testimony that he did provide.” T.C. Memo. 2024-71, at p. 18.

Wherefore, Ken gets the longest spread-out of the $51K (30 years), when he could have gotten more sooner with a couple pieces of paper (hi, Judge Holmes).

Ditto Timothy L. Foradis and Jessica L. Moore, T. C. Sum. Op. 2024-13, filed 7/11/24. Tim claims he built his carriage house to rent out and worked at renting it in his spare time while working forty (count ’em, forty) hours a week at his regular job. STJ Diana L. (“Sidewalks of New York”) Leyden finds Tim’s testimony that his construction and renting out hours are more than half of all his working hours fails the Tokarski test, and therefore “the Court need not address the reasonableness of the receipts or logs and whether Mr. Foradis performed more than 750 hours of services during the taxable year in real property trades or businesses in which he materially participated.” T. C. Sum. Op. 2024-71, at p. 5

Apparently those logs didn’t show dates and hours worked, including time of day and activities performed. I had pointed out, as had many of my colleagues before me, that relatively cheap and generally accepted software is available to track those matters contemporaneously. If Tim had proffered such, would STJ Di have been so quick to toss his case?

And even if Tim took more time to perform such tasks than a skilled professional would have done, that is not necessarily fatal. See my blogpost “Disabled Veteran – Part Deux,” 12/23/14.

Back last October, Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan warned Pradeep Kumar Xplorer Pulappatta, Docket No. 17427-23, filed 7/10/24, in Docket No. 15791-23, filed 10/24/23, that he could lose his e-filing privileges if he continues with frivolity.

Today, CSTJ Lewis (“The Great Name”) Carluzzo does revoke Pradeep’s privileges “(B)ecause of petitioner’s continual submission of documents that contain impertinent matter.” Order, at p. 1.

Scarce judicial resources, anyone? How about a few Section 6673 frivolity chops, pour encourager les autres?

“Dear readers, I do not recommend trying that answer in the courtroom, or anywhere else.”

Nigh on nine (count ’em, nine) years ago, I opined thus in my blogpost “‘Tell the Judge I’m Busy,'” 11/15/16. IIRC, it did not end well for either attorney or petitioner.

The trusty attorney for Ginel Coeuranour, Docket No. 9270-24, filed 7/9/24, whom I’ll call JW, takes a similar tack. Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan is more friendly than Judge Chiechi was back in the day.

“…petitioner’s counsel [JW] filed a Notice of Unavailability. In that filing, [JW] indicates that he will be unavailable in connection with this case from July 17, 2024, through July 25, 2024, and requests that no hearings or other matters be scheduled during that time.” Order, at p. 1.

In fact, Ch J TBS is positively genteel.

“If the Court should set this case for hearing or trial, the parties will be notified in advance of such hearing or trial date. If a party is unable to appear for such scheduled hearing or trial, that party may file an appropriate motion for continuance. The Court will then rule on that motion or take other appropriate action.” Order, at p. 1.

Taishoff makes so bold as to suggest to JW, Esq., that, given the leisurely pace of Tax Court litigation and the facts that (a) the petition was filed barely a month ago, and (b) the answer was filed today, he need have little fear that anything will happen in the next two weeks.

For Tax Court, but not for me. No opinions, and no orders worth noting.

But visiting nearest and dearest in TX, I got a ringside seat on Hurricane Beryl. Don’t ask.