Once again my last new blog 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), here (for 2022) and here (for 2023).

This year I have three to share with you.  I present them in chronological order.  I invite you to consider which of these behaviors result from just an empty head and which result from something worse.

This year I also continue my tradition of giving out the Norm Peterson Award.  This year the award is shared by two members of Congress.

Next week will be the yearly compilation of all the Lessons this past year.  A big thanks to Kellie Kamimoto for putting that together each year!  I hope to have my next new Lesson posted on January 6th.

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1. Comfortably Numb
Lisa M. Holley v. Commissioner, T.C. Memo. 2024-54 (May 5, 2024) (Judge Lauber)

Dr. Holley (apparently an anesthesiologist) owed over $2.8 million in taxes for a whole bunch of years.  Yowsa!  That’s a pretty big liability.  When the IRS started collection action she caught the CDP butterfly.  In her filings, she admitted to having over $2 million of assets.  Given the magnitude of petitioner’s total outstanding tax liability, however, the IRS Settlement Officer thought she might qualify for a Partial Pay Installment Agreement (PPIA).  The SO noted that Dr. Holley would need to use equity in assets to pay down her tax liabilities before a PPIA could be considered.  She would also need to come into compliance in making estimated tax payments.

Apparently Dr. Holley was unable or unwilling to take either action.  But when the SO approved the continuation of IRS collection actions, she did find time to petition Tax Court.

SMH.  Dr. Holley was apparently numb to the idea of truth-telling.

First, she fudged her reported assets: “In particular, the SO questioned the zero values petitioner had reported for Holley Anesthesia, her S corporation, and for LH Anesthesia, Inc., a related C corporation.”  Op. at 3.

Second, and worse, the SO discovered that Dr. Holley had filed multiple bankruptcies, each of which were apparently dismissed as bad faith filings.

“Upon review of publicly accessible court records, the SO ascertained that petitioner had filed for bankruptcy four times between 2016 and 2020. Each case was dismissed by the court, which determined that petitioner was seeking to delay collection efforts by the IRS and by United Healthcare, a judgment creditor. In her case activity record the SO noted the determinations by the bankruptcy court that petitioner had filed for bankruptcy in bad faith, had submitted false and misleading documents to the court, had made unauthorized payments during the bankruptcy case, and had engaged in efforts to hide income and assets.”

2. Honey I’m Not Just Cheating on You:  I’m Also Cheating the IRS
Schnackel v. Commissioner, T.C. Memo. 2024-76 (July 20, 2024) (Judge Kerrigan)

Mr. Schnackel was sole shareholder of a company, Schnackel Engineering Inc (SEI) that did business in Omaha and Manhattan.  In 2005 he bought a Manhattan condo (for some $3.2 million) and then leased it to his company for a flat $28,000 per month.  His testimony in Tax Court was that he bought the condo to use lodging when he traveled to New York on business and for other employees to use when they traveled to New York on business.

Mr. Schnackel was cheating the IRS.  Both the IRS and Tax Court noted that he used the condo for personal reasons each year, allowed his daughter to live in it for a semester, and had no substantiation of any business use.  For example, while he claimed employees used the condo, in his Tax Court testimony “he declined to provide examples of employees or potential clients other than himself and his immediate family using the New York condominium.”  Op. at 9.

SMH: “Petitioners used the SEI credit card to purchase furniture for the condominium. These purchases occurred over several years and totaled $326,190. For example SEI claimed depreciation deductions in various amounts for each year at issue relating to a Steinway & Sons baby grand piano, nonoffice artwork, luxury sheets and table linens, furniture, rugs, and other miscellaneous home items.”  Op. at 10.

SMH: Mr. Schnackel was also cheating on his wife.  It was not just business that took Mr. Schnackel to New York.

“In 2010 petitioner husband met a woman with whom he had an affair while in New York. He met regularly with her for meals in 2010 to 2013. During this time petitioner husband stayed in hotels because he did not want to have her in the New York condominium. To further conceal the affair petitioner husband opened a JPMorgan credit card to hide spending related to the affair. ….from 2013 to 2017 petitioner husband made $2,967,717 in payments to the secret credit account and $566,050 in cash support to the extramarital partner sourced from marital funds.”  Op. at 5.

As you might expect Mrs. Schnackel asked for Spousal Relief.  The Court granted equitable relief under §6105(f).  The rules for that relief are what I call a “Wobbly Table of Factors” (WTF) test.  Yes, the acronym is deliberate.  You never know what factor will be important to the relevant decision-maker, either at the IRS or in Tax Court.  See e.g. Lesson From The Tax Court: The Role Of Abuse In Spousal Relief Claims, TaxProf Blog (July 22, 2019).

A key factor is whether the requesting spouse knew or had reason to know of the reason for the understatement of taxes.  In this case, Mr. Schnackel’s cheating was the key fact for the Court:

“Petitioner husband was deceitful in his relationship with his wife. He hid his affair and opened a secret credit card to hide spending associated with it. He funded the affair by diverting marital assets unbeknownst to petitioner wife. Considering all the facts and circumstances, petitioner wife did not have reason to know of the understatements.”

3.  The Teacher Who Couldn’t Learn
Brian Dean Swanson v. Commissioner, T.C. Memo. 2024-105 (Nov. 12, 2024) (Judge Marshall).

This one is short, although not so sweet.  Mr. Swanson was a high school teacher who received about $80k in wages and another $6,000 in rental income in 2018.  in reporting zero taxable income, Mr. Swanson attempted to submit “corrected” W-2’s and 1099’s where he claimed that his teaching job “is my source of capital. This capital does not qualify as “wages” as defined in 26 USC.”  The rental income likewise “merely represents the restoration of capital for tax purposes and should not be reported on a 1099–MISC.”

Section 6673(a)(1)(B) gives the Tax Court authority to penalize a taxpayer who petitions the Court up to $25,000 when “the taxpayer’s position in such proceeding is frivolous or groundless.” 

Now, normally, the Tax Court is highly reluctant to impost §6673 penalties on taxpayers, particularly unrepresented taxpayers who, when God was giving out brains, thought he said trains and asked for a one-track mind.

A typical example of the usual reluctance is Morino v. Commissioner, T.C. Summ. Op. 2024-12 (July 2, 2024) (Judge Landy), where the taxpayer spouted frivolous nonsense in a pre-trial telephone conference.  The Court then sent him an Order warning that it would impose sanctions under §6673 if he kept up his foolishness.  Undeterred, he kept chugging down that single track during his trial, even though the Court “briefly interrupted him to warn him that we might impose a penalty if he continued to make frivolous or groundless statements.”  But even then, “after the reminder, Mr. Morino continued with such statements.”

Despite all that, the Court did not impose a penalty: “Since this is Mr. Morino’s first time proceeding before this Court, we will not impose a penalty now.”

Mr. Swanson, the teacher, was different.  It was not his first time before the courts.

SMH:  Judge Marshall took judicial notice that Mr. Swanson’s positions been rejected by multiple courts multiple times (the Tax Court, the District Court for the Southern District of Georgia and the 11th Circuit).  Moreover, he had been penalized under §6673 by all of those courts.  To top it off, the District Court in Georgia had become so frustrated with Mr. Swanson that it had actually issued an order forbidding Mr. Swanson from filing suit for any tax year in which he failed to report his wages as income.

After all that, you would think the lesson would sink in.  Nope.  Mr. Swanson may be a teacher, but he does not learn.  So Judge Marshall hit him with the full $25,000 penalty.  Time will tell whether that’s enough to get his train of thought off it’s one track.  

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, a very smart U. Chicago law school grad who invested in a really stupid solar energy shelter, and a tax return preparer who is now a convicted felon.

This year the award goes to two members of the U.S. House of Representatives: Adrian Smith (R-NE) and Chuck Edwards (R-NC).  They wrote this letter to incoming President Trump urging Trump to nuke the IRS Direct File program. 

The letter is unimpressive, to put it mildly.  First, the letter fundamentally misunderstands the Direct File program.  That program was a pilot project for the 2024 filing season (2023 returns) to comply with the Inflation Reduction Act’s requirement that the IRS study the feasibility of creating a national direct filing program.  The pilot project was limited to a certain number of states and a certain limited population of taxpayers.  For details, read this September 2024 report from the Treasury Inspector General For Tax Administration (TIGTA).  That report notes several problems and makes recommendations for improvement, all of which the IRS agreed to do.  For the 2025 filing season the IRS is expanding the program to 24 states.

Second, the letter contains this SMH statement:  “The IRS asserts itself as the tax assessor, collector, preparer, and enforcer—all in one… This is deeply concerning and a clear conflict of interest” 

Apparently the authors have not read §6201 where Congress (you know, the legislative body to which these folks belong) requires the IRS “to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title.” Nor have the authors read §6301 where Congress mandates that the IRS “shall collect the taxes imposed by the internal revenue laws.”  If the authors really don’t want the IRS to perform these functions, they could revise the statutes.

The complaint, of course, is that the IRS Direct File program is somehow rigged to fool taxpayers into overpaying taxes by taking away taxpayer “autonomy” in preparing their own returns.  The letter asserts: “The IRS has little incentive to ensure hardworking Americans do not pay more than they owe in taxes and may instead benefit from families and small businesses paying greater amounts than they are required by law.” 

That assertion is a fantasy borne of ignorance and distrust.  The program allows taxpayers to create their own returns for free.  Taxpayers have always had the responsibility for accurately reporting their financial transactions on returns they prepare, using government-supplied forms.  Direct File helps them do that.  It’s a government-supplied form that also does the math.  Taxpayers still must ensure the accuracy of the information they are reporting on Direct File.  And the program shows taxpayers the math and gives taxpayers access to help-lines, both human and chatbots, to walk the user through the math calculations.  And the IRS does all that without urging eligible taxpayers to “upgrade” to a paid service, like the “Free File” private vendors seem to do.

My daughter used Direct File last year.  I reviewed it.  It was great.  It is not rigged to promote over-reporting.  It was just like H&R Block software, only a lot easier for her.  I’ve been trying to teach both my kids to use H&R Block (which is the software I use), but that program’s “interview” format is now so intimidating that neither of my kids wanted to put the time and attention into answering the questions, almost 90% of which simply do not apply to their very simple situations.  So my son went to a VITA site and my daughter used Direct File.

Direct File is not right for all taxpayers and I hope the IRS follows the KISS philosophy on it by limiting it to the basic returns filed by the vast majority of taxpayers.  Folks like me (and many of TaxProf Blog readers) don’t really need it.  But truly I tell you, this letter is something that would come from the fevered brain of Norm Peterson. 

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.  He invites readers to check out TaxProf Blog on the first Monday of each month (or Tuesday if Monday is a federal holiday) for the latest in his his Lessons From The Tax Court series. 

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