[Author's note: This will be my last new post until January. Next Monday, December 18, my annual Year Of Lessons From The Tax Court will appear in this space. It is a chronological listing of all the Lessons I posted in 2023, with links to each Lesson, the primary case discussed, and the judge who wrote the opinion. You can find last year's edition here.

I will be spending my days (except for Christmas Day) grading exams.  Grades are due Monday, January 2nd and then I resume teaching on January 8th, so you will see my next post on Monday January 22nd, when I will have some news to share.] 

Once again my last new post of the year presents cases where something in the facts made me just shake my head (SMH in texting parlance).  You can find the previous lists here (for 2018), here (for 2019), here (for 2020), here (for 2021) and here (for 2022).

This year I have six to share with you.  I present them in chronological order.  I invite you to consider which of theme may be examples of just an empty head and which are examples of something worse.  In addition, I once again have found a worthy recipient for the Norm Peterson award. 

(1) Magically Appreciating Conservation Easements
Kenneth M. Brooks et al. v. Commissioner, T.C. Memo. 2022-122 (Dec. 19, 2022) (Judge Wells) (yes, it's a December 2022 case but still within the past year).

The taxpayer here created an LLC.  It owned some 85 acres of land in southeastern coastal Georgia.  In December 2007 it granted a conservation easement over 41 of the acres to Liberty County, Georgia, in December 2007.

On its 2007 tax return the LLC claimed a charitable contribution deduction of $5,100,000.  The attached Form 8283 reported that the entire 87 acres had been purchased on December 15, 2006 and had a cost basis of $1,350,000.  Nonetheless, the Form 8283 claimed the value of the donated conservation easement over about half the acreage was $5.1 million.

At trial, the taxpayers’ expert, Mr. Miller, testified that before the donation, the 85 acres could be developed into 42 lots, sold over a period of several years at $400,000 per lot. Mr. Miller then calculated that the donated property's value in December 2007 was $7,660,000.

Which takes us to …

SMH Moment:  You can just see Judge Wells shaking his head as he wrote the following:  “Mr. Miller’s ultimate conclusion appears incredible as a practical matter. He determined a fair market value for the conservation easement, a subset of property rights, nearly six times the per-acre amount for which the LLC had purchased the fee simple interest in Cotton Row Farm just 377 days earlier.” Op. at p. 22 (emphasis supplied).

(2) The $50,000 Car Decal
James William Avery v. Commissioner, T.C. Memo. 2023-18 (Feb. 21, 2023) (Judge Lauber).

SMH Moment:  For each of the six years at issue, Mr. Avery (an attorney who also raced cars) not only reported suspiciously large advertising expenses, but reported them as impossibly rounded numbers in ludicrously smooth $5,000 incremental increases: $50,000, $50,000, $60,000, $60,000, $65,000, and $70,000.  His claim was that he paid to put his business decals on the cars used for racing.  On audit he was able to substantiate only about 14.5% of the claimed expenses.

(3) The Unreliable Narrator: I Need Evidence?  Ok I’ll Make Some Up
The first lesson I teach my first year civil procedure students is our very first class is that clients lie.  And it's a theme throughout the course.  Most clients don't lie with any bad intent.  They just might try and fill in some blanks "to be helpful" or they might omit some information they find embarrassing.  Still, the lesson is that clients are unreliable narrators.

Two cases from this past year illustrate that big time.  Thomas Laronn Mitchell v. Commissioner, T.C. Summ. Op. 2023-9 (Mar. 14, 2023) (Judge Landy), and Benjamin Soleimani and Sharyn Soleimani v. Commissioner, T.C. Memo. 2023-60 (May 15, 2023)(Judge Gale).

In Mitchell, the taxpayer was trying to substantiate deductions of $22,000 for car and truck expenses, $11,000 for business travel expenses, and $8,000 for other business expenses.  But he was unable to provide adequate documentation for any of those amounts.  As to the car and truck expenses, he submitted mileage logs.  They showed a beginning odometer reading 50,000 miles and an ending odometer reading of 132,205.  He claimed 82,205 miles as business miles.  But the IRS pulled his state car inspection reports that showed odometer readings of 182,291 and 204,107.  Judge Landy found the taxpayer’s mileage logs unpersuasive.

As to the business travel, Judge Landy found that the various receipts offered were “altered and are simply not credible or reliable.” Op. at 6.  But that’s not the worst of it.

SMH Moment:  In attempting to substantiate his claimed other business expenses, Mr. Mitchell apparently went to Walgreens or somewhere and created his own receipts.  Writes Judge Landy:

“The receipts were handwritten, partially executed, and displayed receipt numbers that were mostly sequential. Respondent objected to the Court accepting the receipts on the basis of authenticity.  Upon inquiry, Mr. Mitchell was unable to authenticate the receipts or explain the alterations to the receipts. The Court sustained respondent's objection and did not admit the receipts into evidence.”

—

In Soleimani the taxpayers reported a very large capital loss of $2.7 million on their 2007 return.  Then they filed an amended return to increase the loss to $5.6 million.

They needed to prove up the loss.  The story they told the Court was that Mr. S. had to flee Iran in 1976 after the overthrow of the Shah, but that in 1981 he learned his uncle had purchased three parcels of land in his name in 1976, 1977, and 1978.  In 2006 Mr. S. decided to sell the properties and engaged the help of a man who was able to travel to and from Iran.  The man testified at the Tax Court trial, but the Court redacted his name and referred to him only as Witness 1.  Witness 1 testified that he located the properties in 2006 and determined they were still titled in Mr. S’s name.  However, when he hired a real estate broker to sell the properties in 2007, the broker said that the Iranian government had taken title.  So the properties had been lost.

To prove the loss, the taxpayers relied on an expert in Iranian law and on Witness 1.  Witness 1 testified that he had hired an Iranian attorney, one Mr. Soltanpour, to obtain the necessary documentation to prove the confiscation.  Mr. Soltanpour came through and gave Witness 1 various Iranian legal documents identifying the properties and Mr. S’s ownership and the Iranian government’s action in confiscating them.  The taxpayers presented those documents to the Court.

The government, however, put on an expert who testified that there was no Iranian attorney named Soltanpour and that the documents introduced by the taxpayers were fakes.  At that Witness 1 shifted his testimony to explain that the name was fictitious, because the attorney feared reprisals from the Iranian government.  But that shift led Judge Gale to find Witness 1 not credible. In addition: “Neither respondent’s expert nor petitioner’s expert believed that an attorney using an alias and a fictional bar number would have been able to obtain such documents from Iranian government officials. Thus, even petitioners’ own expert effectively concedes that there is significant doubt as to [the document’s] authenticity.” Op. at 8.

SMH Moment:  Whoever created the Iranian legal documents was not well versed in Iranian legal practice.  The documents stated the value of the properties in both Iranian rials and U.S. dollars.  However, has Judge Gale notes: “Both respondent’s expert and petitioner’s expert testified that it would be highly unusual for Iranian government documents of this nature to state any values in U.S. dollars. Neither had seen any similar document do so in their experience.”  Op. at 8.

(4) The Serial Hobbyist
Patricia Hyde v. Commissioner, T.C. Memo. 2023-76 (June 21, 2023) (Judge Paris).

It appears that Ms. Hyde started her hobby in 2010 during an audit of her 2005 tax returns.  See Hyde v. Commissioner, T.C. Memo. 2011-131.  There Ms. Hyde had timely filed her 2005 return, reporting her wage and invest income, but had not reported her independent contractor income.  That was caught by the IRS matching program based on a 1099 filing.  In her back-and-forth with the IRS Ms. Hyde attempted to pay the asserted deficiency, sending in two checks.

But then she drank the kool aid and became what I call a hobbyist.  See Lesson From The Tax Court: Tax Protesting Is a Hobby That Eats, TaxProf Blog (August 21, 2023).  She started to contest the proposed deficiency and even though she had sent in two checks, she did not sign the consent to have those amount assessed.  She then attempted to “rescind” her return.  When the IRS sent her an NOD, she filed her Tax Court petition (Oct. 17, 2008) and Judge Marvel issued an opinion in June 21, 2011.

Meanwhile, bloated with Kool-Aid, Ms. Hyde now failed to file any return for 2006 and the IRS prepared an SFR.  She again petitioned the Tax Court (Mar. 7, 2010) and this time received a much quicker disposition.  Judge Laro issued his opinion in May 19, 2011.  Hyde v. Commissioner, T.C. Memo. 2011-104.  He also hit her with §6673 penalties.

But still … Now the IRS needed to collect the 2006 deficiency and it did not attempt to file an NFTL until 2019.  Ms. Hyde timely filed a petition to contest the CDP result (November 2, 2020), but still had only tax protestor drivel to offer.  But she buy 2.5 more years of delay as Judge Paris issued her opinion on June 21, 2023.

SMH Moment:  Folks, we are talking about a tax year that is almost old enough to vote.  This is truly one committed hobbyist.

(5) Let’s Hide My Stock Option Gain With Fictitious Company!
Neel Kamal and Preeti Sharma v. Commissioner, T.C. Memo. 2023-80 (June 22, 2023) (Judge Pugh).

In 2016 Mr. Kamal realized some massive gains from exercising stock options and then selling the stock.  To reduce that income, Mr. Kamal incorporated a company in 2016 called “Aarya Consulting.”  The business address listed was Mr. Kamal’s and Ms. Sharma’s home address.  On their Schedule C for 2016 they claimed massive business expense deductions.

It was all made up.

Concludes Judge Pugh:

“Mr. Kamal understated income, failed to maintain adequate records, offered implausible and inconsistent explanations, failed to cooperate with the IRS or respondent’s counsel, and offered vague, conflicting, defensive, and unbelievable testimony. Mr. Kamal failed to report a substantial amount of long-term capital gain income and deducted fictitious business expenses for a phantom business. To support his implausible story, Mr. Kamal submitted numerous documents that bear hallmarks of fabrication, he could not explain who drafted those documents, and he became increasingly uncomfortable and defensive every time he was asked direct questions related to their drafting or signing. His theories were inconsistent and illogical, designed to offset the income he received from Cisco.” Op. at 27.

SMH Momement:  Mr. Kamal created a bank account for the new business.  But the only deposits were personal checks from him and from Ms. Sharma.  And the only withdrawals appear to have been for personal expenses, such as child care.  Op. at 6.

(6) Radiologist Lacked X-Ray Vision
Arlin G. Hatfield III  and Jennifer Hatfield v. Commissionerv, T.C. Memo. 2023-82 (July 24, 2023) (Judge Weiler).

Dr. Hatfield earned wages of over $300,000 in 2018 and decided he did not need to pay any income tax on it. Why?  ‘Cause wages are not income!

SMH Moment:  This was not Dr. Hatfield’s first tussle with the IRS.  “The frivolous arguments and circumstances being raised by petitioners are identical to those found in our prior opinion.”  Op. at 2.  Not only had he previously lost in Tax Court but he also lost in his appeal to the 5th Circuit.  Why he therefore continued to be stupid makes me SMH.  It does not take X-Ray vision to see the outcome. 

Norm Peterson Award

Norm Peterson was a character on the sitcom Cheers.  In the early years of the show, Norm was a sleazy tax accountant who regularly gave really bad tax advice.  In honor of Norm, I give this award to whatever tax position I see reported in any court case (not just Tax Court) or news item that appears to me to be so crazy that it could only have come from Norm.  Past winners include the advisor who told Trump to deduct the costs of maintaining his hair and a very smart U. Chicago law school grad who invested in a really stupid solar energy shelter.

This year’s winner is attorney Michael L. Meyer.  He came up with a scheme he called “The Ultimate Plan: the Ultimate Tax, Estate and Charitable Plan.”  It is described in Calvin A. Lim and Helen K. Chu, v. Commissioner, T.C. Memo 2023-11 (January 23, 2023)(Judge Lauber) where the unlucky taxpayers were persuaded by his presentation and took his advice.  Op. at 1.  Based on his scheme they claimed a §170 charitable contribution of $1.6 million in 2016 (of that, they attempted to deduct about $1.2 million with a $400k carryforward). 

The Scheme was basically as follows. The Lims created an S Corporation called Integra Capital Group, Inc. (Integra), doing business in California.  They were its sole shareholders, officers and employees.  The Lims, acting through their S Corp Integra, then created a “Charitable Limited Liability Company” (CLLC) as a charitable giving vehicle.  Integra would be the sole shareholder.  They then “funded” the CLLC with five promissory notes totaling $2,000,000.  The notes would become due in seven years.  The CLLC then donated “units” to a registered 501(c)(3) organization and that, in theory, allowed the Lims to take a deduction for an amount determined by an appraisal of the “units.”  And who would do that appraisal?  Why, Mr. Meyer would!  Oh, and who was the listed as the charity’s registered agent?  Why, Mr. Meyer!

Yes, Mr. Meyer did it all!  He created all the relevant documents and entities needed for the plan, including documents transferring  assets to the CLLC, documents transferring CLLC units to a charity, and documents supporting the valuation claimed for the gift.  He also agreed to represent the Lims should they get audited.  Since Mr. Meyer sold this scheme to many taxpayers, he created form documents that he would alter for each client by inserting the client-specific information in a bolded font.

In this case, Mr. Meyer set up with CLLC for the Lims with the generic name of “ABC Foundation Legacy, LLC.”  How imaginative.  In 2017 they at least changed the name of their CCLC to “The C&H Family LLC.”  But that actually worked against them in Court because, remember, the tax years at issue was 2016.

Which leads us to …

SMH Moment 1:  The Contemporary Written Acknowledgement (CWA).

The CWA was obviously a fake.  And a bad one.  It was a purported letter from the supposed charity, something called the Indiana Endowment Foundation.  Good luck finding it on Google.  Judge Lauber explains:

“petitioners rely solely on the purported “acknowledgment letter” allegedly issued by the Foundation on January 1, 2017. But this letter suffers from several obvious defects. It is not addressed to Integra, the alleged donor, at its address in Irvine but to petitioner wife at her residence in Encinitas. The letter does not bear the signature of an officer or employee of the Foundation but is signed “Sincerely, Indiana Endowment Foundation, Inc.” The format of the letter—a form letter into which the taxpayer-specific items appear in bold font—suggests that it may have been prepared by Mr. Meyer, not by the Foundation.

Most critically, the January 1, 2017, letter fails to describe any property that existed on that date or during the 2016 tax year. The letter recites that the Foundation received during 2016 “one thousand (1,000) units in C&H Family LLC.” But no such entity existed until February 16, 2017, when ABC filed articles of amendment changing its name to C&H Family LLC. The Foundation could not have acknowledged receipt, on January 1, 2017, of property that did not exist on that date.”

However, Judge Lauber does not based his decision on that point.  Which takes us to …

SMH Moment 2:  The Appraisal.

Naturally, Mr. Meyer took a fee for all this work.  And the fee was calculated as a percentage of the deduction the taxpayers would take on their return.  The value of the donated “units” of the CCLC, of course, had to be supported by a qualified appraisal.  And who did that appraisal?  Why, Mr. Meyer!  Putting aside how this violated Circular 230 § 10.27 Fees, it also disqualifies the appraisal!

Wrote Judge Lauber: “Mr. Meyer’s fee was clearly based, directly or indirectly, on the appraised value of the ABC units allegedly donated to the Foundation on December 31, 2016. His agreement with petitioners thus constituted a prohibited fee arrangement.”

Again, note that the tax year at issue here was 2016.  Mr. Meyer’s scheme was shut down by the Department of Justice in 2019.  See its April 26, 2019 press release “Federal Court Shuts Down Alleged Nationwide Tax Scheme Involving Charitable LLCs and Charitable Limited Partnerships.”

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.  He invites readers to return in this space next Monday, December 18th, for my annual Year Of Lessons From The Tax Court; and Monday, January 22nd, for another Lesson From The Tax Court.

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