Maybe the easy times in Ogden, UT, are coming to an end, and the Ogden Sunseteers, a/k/a the Whistleblower Office, have to do more than say “we didn’t use the stuff” to blow off the blowers.

STJ Diana L. (“Sidewalks of New York”) Leyden thus instructs the Sunseteers in John R. Dee, Docket No. 12649-16W, filed 8/24/24. John claims the administrative record is deficient, as is the OS’ explanation of how they dealt with John’s blowing.

Front and center is John’s claim that he blew on Target’s expensing “expenses incurred for remodeling, enhancements, and asset replacements” rather than properly capitalizing same. Order, at p. 2. OS claim that Target submitting a Form 3115 change of accounting method around the time John sent in his Form 211, and that turned them on. But all the admin record shows is a disallowance of a deduction, no discussion of expense-vs-capital. Note that $130K of additional tax was collected after all adjustments were made as a result of the disallowed deduction.

Likewise OS claims that IRS didn’t audit Target’s income tax return. But John blew on Target’s employment tax shenanigans, which the Form 3115 didn’t mention. However, IRS did audit and found the FICA stuff OK for one year, but not for two (count ’em, two) succeeding years.

There’s already been one remand, but the copy of the supplemental notice that issued therefrom, which made it into the record, is undated, and anyway still doesn’t mention expense-vs-capital.

Now adding stuff to the admin record in whistleblower cases is the exception rather than the rule.

“We clarified that such supplementation is limited to three narrow circumstances: (1) if the agency ‘deliberately or negligently excluded documents that may have been adverse to its decision,’ (2) if background information was needed ‘to determine whether the agency considered all the relevant factors,’ or (3) if the ‘agency failed to explain administrative action so as to frustrate judicial review[.].'” Order, at p. 10. (Citations omitted).

A certified admin record is presumed complete, and the proponent of additions must provide clear evidence to show that OS considered the additions, although not including same in the admin record. The gaps between what OS said they did and what John shows they saw is enough to deny summary J to IRS.

So let the OS ” explain whether petitioner’s claim substantially contributed to the adjustment… regarding the reduced deduction for certain repairs; and (2) whether Taxpayer’s employment tax was examined for [Years Two and Three], if proceeds were collected with respect to any such examination, and if so, whether petitioner’s claim regarding Taxpayer’s FICA Tip Credit substantially contributed to the examination and collection of proceeds.” Order, at p. 14.

The Sunseteers get 60 (count ’em, 60) days to do it.

A docket search shows John is pro se. He gets a Taishoff “Good Job.”

No, not the 1970 Paul Williams’ – Roger Nichols’ booster rocket for The Carpenters, rather this is the story of Kwaku Eason and Ashley L. Leisner, T. C. Sum. Op. 2024-17, filed 8/13/24.

Ashley and Kwaku tried to make it big in real estate by giving $41K to one of those teach-you-to-make-a-fortune-in-real-estate courses, which didn’t, and cratered off the launchpad. Incidentally, taking Kwaku’s and Ashley’s Sub S and $41K with them.

Kwaku and Ashley filed an 1120S and Sched C, when they should just have flowed through whatever tax incidents there were to their 1040 MFJ. But CSTJ Lewis (“That Name Is The Best Thing in This Post”) Carluzzo won’t bother with technicalities.

“To keep things simple, however, we ignore the technicalities that govern the federal income taxation of an S corporation and its shareholders and focus on petitioners’ entitlement to the deductions as though the deductions were properly reportable as trade or business expenses on the Schedule C included with the return.” T. C. Sum. Op. 2024-17, at p. 3.

Anyway, Kwaku and Ashley only had stationery and business cards printed in year at issue, by which time the make-a-fortune dudes had folded, leaving Kwaku and Ashley both uneducated and out of business.

Unfeeling IRS disallowed all of Kwaku’s and Ashley’s Section 162 deductions. IRS had reasons, but CSTJ Lew only considers that the Sub S wasn’t a business yet.

“More likely than not, [make-a-fortune’]’s failure to fulfil its contractual obligations to petitioners frustrated their intention to start the business they had expected to conduct through [Sub S]. Whatever the reason, petitioners have failed to demonstrate that they were carrying on a trade or business themselves or through [Sub S] by the close of [year at issue]. That being so, they are not entitled to the deductions claimed on the Schedule C, and respondent’s disallowance of those deductions is sustained.” T. C. Memo. 2024-17, at p. 4.

Worse, IRS wanted a Section 6662(a) five-and-ten chop.  And on the face of it, IRS has checked the boxes. But CSTJ Lew says “no, Kwaku and Ashley acted in good faith.”

“Unlike countless other cases where the imposition of a section 6662(a) penalty is supported, at least in part, by the taxpayer’s claiming deductions that could not be substantiated, here there is no dispute that the expenses to which the disallowed deductions relate were paid.”  T. C. Sum. Op. 2024-17, at p. 5.

Not making money in Year One of a new business isn’t conclusive that you’re not trying.

“Further, reasonable minds could differ over the point in time, and/or the specific actions that establish when a business not subject to a licensing obligation begins. The Internal Revenue Code touches on the point, but little guidance is offered. For example, section 195(c)(2) provides, in relevant part, that ‘the determination of when an active trade or business begins shall be made in accordance with such regulations as the Secretary may prescribe,’ but there are no such regulations.” T. C. Sum. Op. 2024-17, at p. 5.

Taishoff says maybe there are no regs because it’s all facts-and-circumstances; every story is different. But this story is sad enough for CSTJ Lew to cut Kwaku and Ashley a wee bit slack.

“Petitioners spent a considerable amount to enroll in [make-a-fortune]’s courses during [year at issue]. They had business cards and stationery printed during [year at issue]. But for the failure of Education to honor its contractual obligations to them, they might very well have taken additional actions to allow for a finding that the business started during [year at issue]. We are satisfied that they believed in good faith that it did. They are not liable for a section 6662(a) penalty.”

Takeaway: If you’re starting up, get whatever licensure you need, print those business cards and stationery (even if all you send out are texts and e-mails), save and annotate your receipts, credit card and bank statements; and open that business bank account, even if you don’t get a toaster any more. And tell ’em Kwaku and Ashley sent ya.

If You Can’t Prove You Mailed It

Thus Judge Travis A. (“Tag”) Greaves admonishes three I(count ’em, three) IRS attorneys, who can allege only a NAMES transcript provided the last known address of Mark F. Coble, T. C. Sum. Op. 2024-16, filed 8/12/24. Except that address is in Seattle, WA, and Mark says he lived in Santa Fe, NM.

Alas, “…respondent did not include a copy of the NAMES transcript. The CEAS transcript lists petitioner’s address as the [Santa Fe] address.” T. C. Sum. Op. 2024-16, at p. 2.

Judge Tag Greaves judge-‘splains. “The IRS CEAS system is a web-based application. See Internal Revenue Manual (IRM) 4.10.15.1 (Sept. 21, 2018). IRS employees use the CEAS system to assist in examining individual returns, among other purposes.” T. C. Sum. Op. 2024-16, at p.4, footnote 5.

NAMES is a command code in the Integrated Data Retrieval System, which ties into the Name Search Facility, which is updated daily; unhappily, the NSF lists multiple addresses, and this time IRS guessed wrong.

However, mox nix.

“Respondent has failed to carry his burden of establishing that the notice of deficiency was properly mailed. Respondent has not presented any testimony regarding the mailing procedures used with respect to this notice of deficiency—such as through submitting an affidavit. Respondent must therefore establish proper mailing through presenting documentary evidence. To that point, respondent has not produced Form 3877 and cannot rely on the presumption of official regularity to establish proper mailing. As a result, respondent must present sufficient other evidence to establish proper mailing. To meet this threshold, respondent merely directs the Court to the tracking number stamped at the top of the notice of deficiency and an entry on the CEAS transcript. This type of documentary evidence falls short of what we have accepted in the past to show proper mailing in situations where the Commissioner does not present a Form 3877.” T. C. Sum. Op. 2024-16, at p. 6. (Citations omitted, but get them for your memo of law file.)

I’m sure Mark’s trusty attorney from NM Legal Aid’s LITC, whom I’ll call GA, has the citations; and now, as the petition is tossed for want of a valid SNOD and  3SOL has run on the year at issue, she also has a Taishoff “Good Job.”

It’s a year to the day since ex-STJ Eunkyong Choi departed US Tax Court with neither bang nor whimper. The chirp of the crickets is deafening as ever; the silence is as the roaring of mighty waters.

Why, oh why, is not a simple answer forthcoming? Tax Notes, a trade press stalwart, had a piece from no less than Keith Fogg, Esq., professor emeritus and retired honcho of the Harvard LITC, chronicling the event but not the why and wherefore. My request to Prof. Fogg for explication brought a cordial reply, but he could furnish no more than “what I have written, I have written.”

So I must join Inspector Lestrade, and ask “But what is the object of this deep deception, Mr. Holmes?” That’s Sherlock, not Judge Mark V.

Yes, I’m thinking about lunch, but more to the point, the victory of my long-ago client Michael Lissack, Docket No. 399-18W, filed 8/9/24. He picked up a quick $300 in costs from the Supremes back on 7/2/24, as they tossed DC Cir and IRS on Loper Bright grounds, kicking Chevron to the curb and taking Mayo Foundation with it sub silentio.

And his arguments about the Ogden Sunseteers’ selective reading of Section 7623 get a fresh look from DC Cir.

As I asked back on 7/2/24, in my blogpost “Taking the Fifth – Part Deux,” of even date therewith, “post-Loper Bright and post-Boechler, P. C,  exactly what is any Rev. Proc. worth? Is Mayo Foundation still good law? What is any IRS Reg. worth? The Supremes are bringing ‘discipline’ to tax law, all right all right. Yeah, roger that.”

A Taishoff “Good Job,” goes to Mike’s three (count ’em, three) trusty attorneys.

Reading Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan’s latest order in “James Lindor,” Docket No. 217-23P, filed 8/8/24, wherein she ships “James” back to CSTJ Lewis (“His Real Name”) Carluzzo to dispose of IRS’ motion to toss  “James'” petition as moot, brought back memories.

I recall a younger, slimmer me, clad in olive-green in a distant suburb of Columbia, SC, crawling under barbed wire, trying to keep the sand out of my M-14, while an M-60 threw 7.62 ball a yard over my head. Forsan et hæc olim meminisse iuvabit? Seated as I am in my comfy livingroom on this Minor Outlying Island off the Coast of North America, I can employ the local argot: Fuggedaboutit!

“James Lindor” has retained his assumed name. Though CSTJ Lew said he’d unmask “James” if he didn’t make a Rule 27 motion to seal, a brief docket search doesn’t reveal such a motion, and today’s order from Ch J TBS doesn’t mention seals.

So, one might conclude that, notwithstanding CSTJ Lew’s Order, more particularly bounded and described in my blogpost “Call Me By My Rightful Name,” 7/1/24, “James Lindor” has managed to crawl under the wire, unknown, unmarked.

Is this the new tactic for those seeking to crawl under the wire of Section 7461, Willie Nelson Music, and Rule 23(a) to anonymity?

YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, Yorkville Advisors, GP LLC, Tax Matters Partner and YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, Yorkville Advisors, LLC, Tax Matters Partner, T. C. Memo. 2024-78, filed 8/8/24, get hit with Section 1446 withholding for their foreign partners (who are partners whatever they or YA thought they were), and find that the interest they accrued on debentures from their various investments was income, despite the dodgy nature of said investments.

This is an old case, going back nearly fifteen (count ’em, fifteen) years, so Judge James S. (“Big Jim”) Halpern has to resurrect some long-gone law. I’m going to leave the explications thereof to the legal necromancers, such as still have these antiques hanging around.

Suffice it to say that effective connectivity and partnership identity remain very much facts- and-circumstances, whatever the statutes of the time say. And defeating the “all events” test requires more than casual doubt as to collectability; hard contemporary evidence is needed.

In medieval England, knights bachelor (doesn’t mean they weren’t married; they were just ordinary knights) served under a superior knight and couldn’t have subordinate knights serving under them. They were entitled, however, to fly an identifying pennon, a triangular flag. If they were promoted, they could cut the tail off the pennon to create a square or rectangle, known as a banner, and thus become a knight banneret (later transposed to the meaningless term “knight baronet”), able to serve on his own account and to have knights bachelor serve under him.

Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan announces the swearing-in of former STJ Adam B. (“Sport”) Landy as Judge of the United States Tax Court, the first such promotion in more than twenty-five (count  ’em, twenty-five) years. So pass Judge Sport Landy the shears to cut the tails off the pennon.

Judge Kashi Way comes to US Tax Court bench from the Joint Congressional Committee on Taxation, that august body whose Miltonian function is to “justifye the wayes” of Congress to man. I haven’t yet found an appropriate cognomen for Judge Way, but I’m accepting suggestions.

And while we’re about it, don’t forget to let me know if Judge Landy should continue to bear the jazzy, Great Gatsby nickname of “Sport,” or transition to the old Navy moniker for an enlisted sailor who gets an officer’s commission, “Mustang,” with its rough-and-ready, hard-riding allusions.

Finally, of course, congratulations and best wishes to the new Judges. I’m sure we all look forward to great opinions.

Bowing to the Supremes’ Protean metaphysical efforts to “bring some discipline” to tax law and practice, with a couple USCCAs joining in (hi, Judge Holmes), Ch J Kathleen (“TBS = The Big Shillelagh”) Kerrigan promulgates some “final” amendments to US Tax Court Rules of Practice and Procedure, effective today, 8/8/24.

I use inverted commas, because I fully expect the Supremes to launch other and further bouleversées at us practitioners, who never did them any harm.

Hence, I deem that which is “final” to be at best provisional.

Even If You Wuz Robbed

Despite his claims that his former fellow shareholders LL and WJ (Court’s nomenclature) looted the S Corp he cofounded, and ripped him off by stealing his share of corporate passthroughs, James J. Maggard, star of James J. Maggard and Szu-Yi Chang, T. C. Memo.  2024-77, filed 8/7/24, is still taxable on his share of the corporate income, deductions, and credits.

JJ claims, when he blew the whistle on the looters,  the Ogden Sunseteers suggested the unequal division of goodies might’ve forfeited the corporation’s S status, relegating it to C Corp and negating any poassthrough. The disproportionate grabs might violate the one-class-of-stock requirement in Section 1361(b)(1)(D), in the absence of which a corporation cannot elect or maintain Sub S status.

However, the caselaw and Reg. Section Reg.§ 1.1361-1(l)(1) tell us that unless the organic corporate documents (certificate of incorporation and bylaws) provide for unequal rights to distributions and liquidation proceeds, anything goes. JJ and his fellow shareholders, past and present, never changed those documents to provide otherwise than for a single class of stock with identical rights.

“The IRS has said it won’t treat any disproportionate distributions made by a corporation as violating the one-class-of-stock requirement if the governing provisions provide for identical rights. Rev. Proc. 2022-19, § 3.02, 2022-41 I.R.B. 282, 286.” T. C. Memo. 2024-77, at pp. 8-9. The idea is that, if the shareholders aren’t trying to duck the one-class rule (on which IRS will not opine), they can make what deals they like.

Judge Mark V. (“Vittorio Emanuele”) Holmes is sympathetic to JJ, who was well and truly plundered, but the law is the law.

“The regulation plainly states that uneven distributions don’t mean that the corporation has more than one class of stock. Treas. Reg. § 1.1361-1(l)(2) (‘[A] corporation is not treated as having more than one class of stock so long as the governing provisions provide for identical distribution and liquidation rights . . . .’). We recognize that this can create a serious problem for a taxpayer who winds up on the hook for taxes owed on an S corporation’s income without actually receiving his just share of its distributions. This is especially problematic when the taxpayer relies on the S corporation distributions to pay these taxes. Worse yet is when a shareholder fails to receive information from the corporation that he needs to accurately report his income.” T. C. Memo. 2024-77, at p. 9.

And of course the looters gave JJ bogus information, based upon which he filed his taxes, and made sure he couldn’t see the real books.

Hard though it is, the “law is ironclad” on this issue. JJ must pay tax on cash he never got, because it was stolen by his fellow shareholders.