It’s one thing to receive The Phone Call, whether the icy, hissing version or the profanity-laced scream, in either case from the client whose case you’ve blown, or at least concluded otherwise than to their utterly ecstatic satisfaction. It’s another to have to make the outgoing variety oneself, to broker or insurer or, preferably, to both, requesting a notice of claim form.

If you have never been there, bless whatever gods may be, and pray said gods ever hold you in the palms of whatever limbs they have.

But here is a warning to us all.

Joel A. Dilillo, Docket No. 14110-23, filed 11/27/23, has his petition tossed. It’s the usual Hallmark Rsch. Collective SNOD petition filed too late. Joel is in 1 Cir, so Culp is off the menu.

Here’s Ch J Kathleen (“T.B.S. = The Big Shillelagh”) Kerrigan.

“…petitioner appeared to take the position that the petition should be considered timely based on timely mailing to the Internal Revenue Service (IRS), as follows: ‘The Petition was filed timely on August 4, 2023. As a result of an administrative error, the envelope with the Petition was mailed to the Internal Revenue Service. My files include labels that have the IRS mailing address and also the U.S. Tax Court address. Obviously, I took the wrong label that had the IRS address rather than the U. S. Tax Court label.’ Attached to the objection was a bank statement reflecting a charge paid to the USPS on August 5, 2023, for an amount corresponding to the postage on the envelope addressed to the IRS (a charge of a different amount paid to the USPS on August 4, 2023, was also shown).” Order, at p. 2.

IRS of course forwarded the petition to The Glasshouse on Second Street, N.W., a couple weeks later (hi, Judge Holmes), but after the 90-day cutoff.

Clearly, the petitioner himself never wrote that. What client keeps her/his own files with bunches of IRS and USTC address labels?

Ch J TBS Kerrigan is sympathetic, and so am I.

Judge Travis A. (“Tag”) Greaves left me with a fascinating tidbit to spice up my Thanksgiving Day ruminations, in Amgen Inc. & Subsidiaries, Docket No. 16017-21, filed 11/22/23.

IRS moves for summary J on “HCR Fees Penalties.” Now I didn’t know what those were either, but I see that they arose under the much-contemned Affordable Care Act, more particularly bounded and described in Section 9008 of the ACA and amended by Section 1404 of the Health Care and Education Reconciliation Act of 2010.

Apparently there is some kind of fees imposed upon various drug manufacturers. But as Judge Tag Greaves has sealed all documents pertaining thereto, we are left to wonder, or surf the web and try to separate fact from whatever else is found thereon.

Amgen has been here before, jousting about discovery, but never have penalties been mentioned before now.

Are we about to get Boss Hoss on drugs?

No, not an undiscovered Brubeck classic, nor yet the batting coach’s familiar injunction. Tax Court is taking two (count ’em, two) days off to end the week and give thanks.

Here’s the scoop; “In addition to observing the Thanksgiving holiday on Thursday, November 23, 2023, the Court will be closed on Friday, November 24, 2023. DAWSON will remain available for electronic access and electronic filing.”

The Genius Baristas’ darling child never sleeps.

No, not a reduced-staff soap opera. Kunjlata J. Jadhav and Jalandar Y. Jadhav, T. C. Memo. 2023-140, filed 11/21/23, had a Plan. Actually, it was Jal’s Plan. Jal was a research chemist, employed full-time in what my Texan descendants would call “th’ awl bidniz.” In addition, he had a lucrative side hustle, KJ, which acted as broker between chemical producers and potential customers. A dodgeflogger hooked Jal into an “income tax plan,” the usual corporate give-and-go to siphon off income.

Judge Vasquez will tell you how IRS drained the siphon, but I’m here concerned with the 401(k)s Jal set up for his two sons. All IRS raised to thwart the 401(k) deductions was sons’ employee status in Year One.

“Petitioners viewed K J  as a family business and wished to pass it on to [sons]. Petitioner husband started training his sons when they were in high school. While [sons] were in college, he assigned them research tasks and oversaw their work.” T. C. Memo. 2023-140, at p. 3. [Names omitted.]

It’s the usual command-and-control test for qualification as an “employee” for 401(k) entitlement. For a rundown of factors, see T. C. Memo. 2023-140, at p. 16, footnote 16.

“At trial petitioner husband credibly testified that he viewed K J…as a family business. He also credibly testified that he wished to pass his business on to [sons]. The record establishes that petitioners pursued that goal. Although [sons] were in college in [Year One], petitioner husband credibly recounted assigning them research tasks and overseeing their work while they were in school. Upon {S Corp]’s incorporation, [sons] became employees of the S corporation, which issued them Forms W–2, Wage and Tax Statement, for [Years Two, Three, and Four]. [No. 1 son] was a full-time employee of [S Corp] at the time of trial. These facts support a finding of an employment relationship, as they demonstrate petitioner husband’s control over his sons’ work, his investment in the business, a lengthy employment relationship, and an intention to create an employer-employee relationship.” T. C. Memo. 20-23-140, at pp. 16-17. (Names omitted).

IRS doesn’t contest Years Two, Three, and Four 401(k) deductions, but claims sons weren’t employees in Year One, and as sons didn’t testify on the trial IRS claims the benefit of an adverse inference, to wit, that the sons’ testimony would sink Jal.

Negatory, says Judge Vasquez, blowing IRS off in a footnote.

“…where both parties have equal access to the evidence, we do not apply an adverse inference. Respondent could have subpoenaed [sons]; thus both parties had equal access to the potential witnesses. We therefore decline to draw a negative presumption against petitioners on this issue. Even if we did, we would still find that the weight of the evidence favors petitioners here.” T. C. Memo. 2023-140, at p. 17, footnote 17. (Citations omitted, but get them for your memo of law file).

And Judge Vasquez gets to trot out his trusty warhorse cite. “See Diaz v. Commissioner, 58 T.C. 560, 564 (1972) (observing that the process of distilling truth from the testimony of witnesses, whose demeanor we observe and whose credibility we evaluate, ‘is the daily grist of judicial life’).” Idem, as my expensive colleagues would say.

There’s a BoP skirmish when IRS tries to up the SNOD, claiming clerical error in the SNOD.

“Where the increase in deficiency is based on a clerical or mathematical error in the notice of deficiency, the Commissioner bears only the burden of establishing the clerical or mathematical error….

“In his First and Second Amended Answers, respondent asserts increased deficiencies and accuracy-related penalties for [Years Two, Three, and Four] on the ground that the SNODs contain clerical errors for those years. In his Simultaneous Opening Brief, respondent described those errors and directed the Court to several Exhibits showing how they occurred. Besides disputing respondent’s Motion for Leave, petitioners did not address the clerical errors on brief. They have therefore conceded that the errors in the SNODs are clerical.  Thus, having established clerical errors in the SNODs for [Years Two, Three, and Four] respondent has met his burden as to the increased deficiencies.” T. C. Memo. 2023-140, at p. 14. (Citations omitted, but get them for your memo of law file.)

As for the shot-down deductions generated by the Plan, they might have worked, if the economic reality and the trial evidence matched the Plan.

I give Jal’s trusty attorneys a Taishoff “Good Job, Second Class” on the 401(k)s; they had a good witness and told a good story. I won’t deduct points for not attacking the clerical error argument, not having seen IRS’ story; IRS can tell a good story, too.

But IRS misses the additional Section 6662 chops for the increased deficiency for want of Boss Hossery. Now Jal is in 5 Cir (TX), and only 9 Cir and the Elevenses have so far endorsed ex-Ch J Michael B. (“Iron Mike”) Thornton’s dictionary chaw anent “assessment.”  But if I were IRS, I’d move to reconsider, do the Boss Hossing now (if I could dig up examiner and supe, and supe still had charge over examiner), and argue the 9 Cir and Elevenses case. See my blogpopst “Beating the Dead (Boss) Hoss,” 10/26/23.

I won’t go into the policy pros and cons of the captioned enactment, as that trespasses into the political no-go. Rather, I’ll address the statute as Judge Mark V. (“Vittorio Emanuele”) Holmes does in Jie Gao & Chengdu Wang, Docket No. 23405-21, filed 11/21/23.

It’s Jie’s story; Chengdu was salaried throughout year at issue. Jie was a computer wiz who had her own operation for part of 2018 (the year is significant), and part working for some kind of entity she created, which in the same year became part of a corporate chain with an offshore whale who was putting up cash.

The types of entities are unclear,so however they are taxed is unclear. Jie’s T&E deductions, ordinarily an IRS free-fire killing zone for the poorly documented, survive intact. Jie is obsessive-compulsive when it comes to recordkeeping. But a bunch lose, because they occurred either in 2017 (time-barred), or were done while Jie was part of the chain, thus paid to further the chain’s business, not Jie’s own operation. And Jie of course cannot claim unreimbursed employee business expense deduction for work done for the chain; Section 67(g) put paid to that for years ending after 12/31/17 until 1/1/26.

IRS’ Answer increased the deficiency, thus picking up BoP, on mortgage interest for a warehouse Jie bought to store stuff she was working on, and contract labor. Jie shows she paid all the contract labor while still on her own, so IRS fails on BoP. As for the warehouse, she paid it all, but part would be barred by Section 67(g).

As for the splits between Jie’s solo time and her chain time, that requires a Rule 155 beancount, to which Judge Holmes volunteers to lend his aid if the parties get stuck, and check their arithmetic. Also, Judge Holmes thinks there’s a Rev. Proc. that might help when converting Chinese yuan to $USD, but Taishoff suggests this handy-dandy item from LB&I might do the trick.

Then there’s the start-up vs. ordinary-and-necessary jumpball, but Jie wins that.  New businesses like Jie’s computerization need a lot of runway prior to takeoff, they are profit-motivated, and we don’t want to stifle the pioneers. Best of all, Jie did make a wee bit of cash. See my blogpost “Opening Day,” 6/14/22, for more.

Unhappily, the Genius Baristas posted this off-the-bencher in a PDF that doesn’t let me drag-and-drop Judge Holmes’ deathless prose. So y’all will need to deskew and process it all for your next memo of law.

Allen R. Davison and Sharon L. Davison, T. C. Memo. 2023-139, filed 11/20/23, can’t substantiate the NOL that they claim wipes out all their tax liabilities. Besides, they can’t fight about their flock contract deduction either, because they didn’t raise it at the CDP; I’m not sure if it’s to do with chickens or software.

And their claim for Section 6601(d)(1) restrictive interest treatment founders when their NOL claim goes down. Judge Elizabeth Crewson Paris explains: “In the case of an income tax deficiency that is later reduced by the carryback of an NOL, section 6601(d)(1) authorizes the Commissioner to collect deficiency interest from taxpayers such as petitioners whose deficiencies are eliminated by NOL carrybacks. Section 6601(d)(1), which codifies the principle… that a taxpayer is liable for interest on a deficiency until the deficiency is paid or otherwise abated, provides that a reduction in tax by reason of a carryback of an NOL does not affect the computation of statutory interest due for the period ending with the filing date for the taxable year in which the NOL arose.” T. C. Memo. 2023-139, at pp. 20-21. (Citations omitted).

Sharon wants innocent spousery, but fails. “The evidence showed that Mrs. Davison received income that gave rise to the deficiencies, was involved in the business activities, and meaningfully participated in the prior cases. The Court will not further address this issue.” T. C. Memo. 2023-139, at p. 13-14, footnote 16.

Is this the end of the Davisons’ twenty-year Tax Court safari? I did get two blogposts out of it, although I’m sure I missed more. See my blogposts “Maybe Not Over,” 4/3/19, and “What Kind of Tool Am I?” 5/14/20.

One might hardly believe that a barren waste of Australian scrubland could furnish forth such abundance of blogfodder, but the hush-hush Pine Ridge joint US-Australian defense installation has done just that. See my blogposts “A Town Like Alice,” 1/12/23, “Not Even His Hairdresser Knows For Sure – Part Deux,” 6/8/23, and “I’ve Heard That Song Before,” 10/30/23.

Seems like the Raytheon braintrusters while away their time on-station thinking up ways to avoid the Section 7122 closing agreements they signed, and parse obscure tax treaties, to try to get Section 911 foreign earned income credits, while Tax Court Judges employ scarce judicial resources to thwart them.

Today, we have Andrew P. Mattson & Lindsey J. Mattson, Docket No. 6501-20, filed 11/20/23. Judge Ronald L. (“Ingenuity”) Buch need expend little ingenuity.

If you’re intrigued by the history of US-Australian tax treaties, see Order, at pp. 4-5.

Judge Ingenuity Buch has this to say about the closing agreement.

“The Mattsons filed a Motion for Partial Summary Judgment on the validity of the Closing Agreement they entered into with the Commissioner. Most arguments the Mattsons raise have been directly addressed in one or more of several cases addressing nearly identical motions premised on nearly identical facts. See Smith. 159 T.C. 33, Henaire, T.C. Memo. 2023-131, and Baney v. United States, 2023 WL 6564028. For the same reasons enunciated in these other cases, we will deny the Mattsons’ motion.” Order, at p. 6.

Baney is a USCFC case, so I didn’t blog it, but if you must have it, here it is, sans Taishoff gloss; it’s much of a muchness. Henaire and Smith are covered in my above-cited blogposts.

I thought ex-Ch J Maurice B. (“Mighty Mo”) Foley put paid to stealth after his epic amendment to Rule 147(a) ditched The Stealth Subpoena. But today we have William A. DePietri & Beth Ann DePietri, Docket No. 7936-22, filed 11/17/23, and Estate of Kevin Giblin, Deceased, Catherine Giblin, Personal Representative, Docket No. 2182-22, of even date therewith.

Both are routine Rule 37(c) denials of IRS motion to deem admitted undenied allegations in the (amended) Answer. I blogged neither STJ Adam B. (“Sport”) Landy’s order permitting said amendment nor the order granting the joint motion to consolidate; pretty much run of the mill.

So I was going to pass on these two otherwise routine orders, until I read the last sentence in each: “Respondent is advised that in the future such motions should not bear more than one docket number and should not be filed in more than one case.”

Before I said “Huh?” I checked to make sure the cases had not been severed. Nothing on either docket to that effect.

Rule 141(a) was my next stop, but the Tax Court website still had the last sentence as it had always been. “Unless otherwise ordered, the caption of all documents subsequently filed in consolidated cases shall include all of the docket numbers arranged in chronological order, but may include only the name of the oldest case with an appropriate indication of other parties.”

I couldn’t find any otherwise order either.

Do we now have stealth severance or stealth amendments to the Rules?

Note I’m quick enough to jump on counsel when they seriously get it wrong, but I think here IRS’ counsel got an undeserved admonition.

And Stir That Boechler Silt

That’s Judge Goeke’s word to the notice partners in Island Shoals Henry 430, LLC, Island Shoals Investments, LLC, A Partner Other Than The Tax Matters Partner, et al., Docket No. 30074-21, filed 11/16/23. The notice partners (NPs) are claiming their FPAA notices were improperly addressed, as well as the TMP FPAA notice.

And of course the validity of the TMP FPAA is the key to the Tax Court door: if that is defective, then there’s nothing for the NPs to contest.

Involved here are extra names (correct name and address but additional names added) and the addresses of individual NP and indirect partner (also a NP). Judge Goeke, invoking the usual somber reasoning, etc., says IRS can use additional info like individual income tax returns to get correct addresses, and TMPs and NPs should let their mailroom people know how to deal with incoming IRS mail, especially when their office receives mail for several different entities.

This all goes off on BoP. If IRS has a correct Certified Mail Log, or can fill in enough blanks on a missing one, then the TMP FPAA was properly mailed, even if not received.

“USPS Form 3877 or CML that is incomplete or defective in some way does not create a rebuttable presumption. Where the presumption does not apply, respondent is subject to a burden of production without the presumption. USPS Form 3877 or CML with omissions or defects is probative of proper mailing and may be combined with additional evidence to meet respondent’s burden. Additional evidence can be evidence of the IRS’s mailing practices corroborated by direct testimony or documentary evidence that the FPAA was placed in the USPS’s custody. Thus, the IRS’s failure to comply precisely with established procedures may not be fatal if respondent presents evidence that is otherwise sufficient to prove mailing. Where the taxpayer has rebutted the presumption, we weigh the evidence and determine on the basis of the preponderance of the evidence whether respondent mailed the FPAA.” Order, at p. 10. (Citations omitted).

Another TEFRA legacy is notice partner addresses. Judge Goeke delivers the following homily for historians (or those cleaning up leftover messes).

“Section 6223(c) does not mandate use of the Schedule K-1 address when that subsection is read in its entirety. Petitioners cite only subsection (c)(1). Section 6223(c)(1) provides that respondent shall use the names, addresses, and profits interests shown on the partnership return ‘except as provided in paragraphs (2) and (3).’ Relevant for purposes of Mr. W’s notice partner FPAA, section 6223(c)(2) allows respondent to prescribe regulations for the use of additional information that the TMP or any other person furnishes to him. It states that respondent ‘shall use additional information’ that is furnished to him in accordance with the regulations.” Order, at pp. 18-19. (Name omitted).

Judge Goeke trudges through the Regs, finds most recent individual income tax return addresses satisfy same. Ditto for indirect partner (sole member of a pass-through which is a partner).

OK, so the TMP FPAAs were properly mailed. But does Tax Court have jurisdiction over NP FPAA beeves? NPs have the right to be heard that their NP FPAAs were improperly mailed when they get a SNOD for an affected item (that is, an individual item on their personal return that passes through from their partnership interest).  Here apparently no SNOD.

So Judge Goeke invites them to a show-and-tell.

“We will treat our conclusion that respondent actually and properly mailed the notice partner FPAAs to petitioners as a preliminary determination and invite the parties to brief the issue of whether the Court has jurisdiction in a partnership case to decide whether respondent mailed a notice partner FPAA. The parties should address whether our jurisdiction to do so should be affected by the fact that the Petitions were filed by notice partners and were untimely filed in the absence of equitable tolling. To clarify, we do not want the parties to address further any factual or legal issues relating to our preliminary determination that the notice partner FPAAs were actually and correctly mailed. We will not consider any further arguments on the issues relating to the notice partner FPAAs‘ mailing that we have already determined herein. The parties should also address petitioners’ argument that the section 6226(b) period for filing a petition in a partnership case is a nonjurisdictional deadline that is subject to equitable tolling where the circumstances of the untimely filing warrant it.” Order, at pp. 21-22. (Footnote omitted, but it says this preliminary determination is non-preclusive unless it turns out Judge Goeke did have jurisdiction so to find.)

Good old TEFRA. Cain’t hardly wait for the postal pushbacks post-BBA, when only representatives are in play.

Oh, the title? At the poker table, when there is a designated dealer, the normal rotation of dealer between each hand is shown by a circular token, called “the button” placed before the player who would be the dealer. That player is said to be “on the button.”

I’ve gotten lots of blogfodder from 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, 161 T. C. 11, filed 11/15/23. But it looks like we’re nearing the end of the trail. And YA is on the button.

Of course, with Judge James S. (“Big Jim”) Halpern taking us on the trail, we have 133 (count ’em, 133) pages of somber reasoning and copious citation of precedent. But that’s not all; at the end of the opinion, Judge Big Jim promises us another opinion on the last of the four (count ’em, four) years at issue.

Briefly, can the activities of the TMP be attributed to YA? If so, was the TMP engaged in a trade or business in (or effectively connected with) the US of A, so as to rope YA into Section 1446 withholding requirements for its offshore partners?

Spoiler alert: the answers are yes.

YA had enough command and control to rope in TMP, who ran its onshore investments, as its agent. YA was a hedgefund, and TMP did its finding, buying and selling, enough to rope YA into the mark-to-market regime of Section 475(a)(2).

YA claims TMP was a service provider. OK, merely acting for the benefit of an offshore doesn’t bring the offshore onshore. But a service provider gets instructions at inception, and is not under day-to-day control. And though a POA from YA to TMP, stated to be irrevocable and coupled with an interest, could be a security device that doesn’t create a true agency, here there is no identifiable interest that the POA protects.

TMP was buying stock in start-ups and special situations as a hedgefund does, and Judge Big Jim tells us how these deals are done, 161 T. C. 11, at pp. 14-19. And the deals TMP made weren’t options, 161 T. C. 11, at pp. 33-35.

TMP was doing more than just investing and making a profit from investments, It was seeking deals, structuring deals, and providing services to the target companies. And TMP was doing this on a regular, continuous, for-profit basis.

The Reg. Section 1.864-2(c)(2)(i)(c) safe harbor for traders and investors is unavailable to YA, because its agent TMP did more than that.

YA, via TMP, was a dealer in securities, because it bought the stock or other securities of the target companies, who were its customers.

YA, via TMP, had to mark its records to show that a security was purchased for investment when acquired, specifically citing Section 475, to avoid mark-to-market, lest YA get a free ride to decide at year-end whether to mark-to-market or not.

Section 1446 withholding for offshores extends to all YA’s income, as its source is its onshore operations. The withholding obligation may well exceed the offshore partner’s actual liability, but that’s the breaks, and doesn’t result in an overpayment of tax. Deductions from income tax have no bearing on liability for withholding.

SOL founders on failure by YA to file Form 8804 with its 1065s. IRS needs the information from the unfiled Forms 8804 that it couldn’t get from the 1065s.

Finally, if you’re going to rely on expert advice for a reasonable cause defense, make sure you can prove you reasonably relied (had no adverse knowledge) before you sue your expert when their advice proves wrong. Watch the testimony of YA’s experts on the trial (after the lawsuit); don’t be surprised if you get the same in like circumstances. And that there is much uncertainty and no clear guidance from IRS is no excuse when you rely on experts.

YA loses.