Image by Grok

This piece completes the resolution I made to clean out all the things I haven’t been able to get to. I am hoping that I can pick up my pace and not develop this sort of backlog again, but we will see.

Ranching And Oil Don’t Mix

The first is Kolar v Commissioner.  At issue were $205,000 in ranching expenses.  The taxpayer lost on the attempt to group the ranching activity with oil and gas revenue. Given the size of the loss, the taxpayer could also not consider appreciation of land. It looked pretty grim.

That led to a march through the nine regulatory factors.  In terms of being businesslike there were  good accounting records and Mr. Kolar’s informal business plan of building up the herd. Kolar won strongly on expertise and time and effort.  Appreciation was rated neutral as was success in other activities. There had been large losses relative to revenue for several years, which Mr. Kolar attributed to rebuilding  Accepting the explanation but still daunted by the losses Judge Way held that factor slightly against him along with the amount of occasional profits factor. Kolar also lost on financial status due to significant oil and gas income. Judge Way ruled in Kolar’s favor on elements of personal pleasure and recreation, although I did not find the discussion very convincing.  The factor count is not supposed to be determinative, but I find that it pretty much always aligns with the outcome.  And the outcome almost always aligns with the finding on the first factor.  And it was a tie when we get to the ninth factor, so Judge Way might have fudged it a bit.

The conclusion was:

“In the Court’s view, the largest factor weighing against a profit motive is the financial status of Mr. Kolar. The fact that Mr. Kolar had substantial oil and gas royalty income which could be offset by ranching losses weighs against a profit motive. However, this factor simply does not outweigh the other factors in favor of a profit motive. Consequently, the Court concludes that, for 2016, the section 183 limitation on activity not engaged in for profit does not apply to petitioner’s ranching activities.”

Another Hobby Loss Taxpayer Win – And Loss

James and Colleen Sullivan were keeping busy.  They actually  had four activities that were considered under the hobby loss rules. There was software development and construction activity on two different parcels which were considered separate activities.  Finally there was a leaf mulching business which was disallowed without marching through the factors.  The software development was for an app that would help with pornography addiction called SelfChanger. Mr. Sullivan thought that there was a real need there when he learned that half the bandwidth of the cable company he worked for was absorbed by pornography.

I was essentially required to cover this thanks to Hard Work Beats The Goofy Reg by Lew Taishoff which opens:

“My good friend Peter Reilly, CPA, will want to add James D. Sullivan and Colleen M. Sullivan, T. C. Memo. 2026-13, filed 2/5/26, to his collection of successful Section 183 taxpayer wins.”

Glad I Am Not A SALT Guy

Every once in a while I got fascinated by something that is beyond arcane. Beeline.Com Inc. describes itself as have a “range of solutions for managing today’s external workforce”.   It is not altogether clear to me exactly what they are doing but to the State of New York, it appeared they were selling licensees to use prewritten software.  That would mean sales tax.  They argued otherwise. The Appellate Division of the Supreme Court of New York upheld the Tax Appeals decision that had gone against Beeline.Com.

Sketchy Charity Scheme

LAFA 20260401 had an aspect that I overlooked until I saw commentary on it.  It was made public on January 23, 2026 (my 74th birthday as it happens), but it is dated November 28, 2022.  As far as I know no one has figured out the reason for the delay. A married couple formed a single-member LLC as an investment vehicle.  They loaded it up with marketable securities and other assets.  Then they “donated” a non-voting membership interest to a charity that they founded. They got an upfront deduction and income allocated to charity.  There turned out to not be anything charitable about the whole thing.  Don’t try this at home.

Dixieland Boondockery

North Donald LA Property is another conservation easement case decided by Judge Lauber. Nobody says it better than Scholar Al, so I will just quote him.

“On its Federal income tax return for 2017, North Donald claimed for this donation a charitable contribution deduction of $115,391,000. It asserted that the “before value” of the farmland—its value before being  encumbered by the easement—was $439,492 per acre. It thus took the position that the land had appreciated by more than 14,000% in 21 months.”

“We conclude here, as we did in J L Minerals, LLC v. Commissioner, T.C. Memo. 2024-93, at *3, that the valuation of the conservation easement “was an outrageous overstatement,” wholly untethered from reality. Employing the comparable sales method, as backstopped by the price actually paid to acquire the property in March 2016, we find that its “before value” was $2,975 per acre and that its “after value” was $2,300 per acre. The delta between these figures—the reduction in value attributable to the easement—is $675 per acre. The value of the easement—and hence the allowable charitable contribution deduction— is thus $175,824 ($675 × 260.48 = $175,824).

North Donald claimed $1,157,469 of “other deductions” on its 2017 return. This sum included a $1,055,000 “consulting fee” paid to the promoter that marketed the conservation easement to investors and $50,000 paid to a law firm that served as a “material advisor” to the SCE transaction. We find that these expenses constituted nondeductible syndication costs and that the rest of the “other deductions” must also be disallowed.”

IRS was going for the 75% fraud penalty in this case.  Judge Lauber agreed that there was some disreputable conduct going on, but the “unambiguous disclosure” ruled out the fraud penalty.

Something For The Subchapter K Nerds

Spending most of my career in a large local firm which morphed into a regional through merger and gobbling up smaller firms, I did not rub elbows with the intellectually elite of the profession all that much.  I had my moment in the sun, sort of.  We were undergoing peer review.  It was painful.  There was this bright moment though when one of the reviewers noted that one of our partners had been on an AICPA technical committee.  That would be I.  That would be me.  That would be the author of this blog.  It was partnership tax and I was amazed to find I could keep up with the Big ? (Some number less than 8 and greater than 4) guys.  We each got out own section to watch over and I had 754.  After our presentation an old timer told me he liked mine the best.

So I couldn’t resist Otay Project LP which was about a $743 million basis step up.  There had to be somebody with a nerdy sense of humor involved because the basis step-up was under 743(b). Resistance built up as I read the thing though.  Maybe it would have been different when I was younger.  As I looked at it one more time, though I did see something interesting. Judge Weiler wrote:

“After considering section 743(b) and Treasury Regulation § 1.743-1(d), we find respondent’s arguments made in his briefing to be compelling. In this case the foregoing calculation resulting in the section 743(b) basis adjustment to OPLLC is illogical. The balance sheet of OPLP, which was used to make these calculations, reflects assets of only $28 million, liabilities of $71 million, and a total negative capital of $848 million. More specifically, OPLLC—the 99.9% partner in OPLP— reflects negative capital of $911,595,423 ($912 million). Petitioner provided no explanation as to these figures other than rejecting respondent’s proposed changes to how the section 743(b) adjustment was made.

We find respondent’s arguments compelling, since the contortion of this balance sheet was the result of prior distributions made by OPLP. OPLLC’s negative capital balance is the result of the distribution of tax-deferred profits along with the distribution of OPLP’s interest in the Finco entities. These prior distributions of cash (or cash equivalents) were ignored by petitioner when it calculated OPLLC’s section 743(b) basis adjustment.”

I was really impressed to see that kind of thinking coming from a Tax Court judge.  Sure enough, when I looked up his bio, I found that Judge Christian N. Weiler has a B.S. in accounting from Louisiana State University.  Taxpayer, EY opinion to the contrary not withstanding loses.

“The transactions at issue are exceedingly complex and contrived by outside tax advisors in furtherance of one goal: elimination of deferred taxable gain. Accordingly, after considering these subjective factors we cannot conclude that the transactions at issue contain a useful nontax business purpose.”

This made me think about my time on the AICPA Tax Partnership Committee. In general when we were discussing things, we were really behaving like good citizens who wanted things to be better. But then something kind of obscure that I didn’t get came up and one of the Big Whatever Number It Was Then guys said “We would just as soon have the regulation not be clear”.  Likely in that room were a couple of guys who help usher in the X-Rated tax shelters that my former editor Janet Novack exposed in 1998.  They never permeated into my practice so I only learned about them during the clean-up phase when I started blogging.

The Never Ending Story

Early in my blogging career, not long after I had been picked up by a prestigious publication, I came on the Harry Stonehill story, which I later dubbed America’s Jarndyce v Jarndyce.  Harry Stonehill was an American who became a business mogul in the Philippines.  In 1962 a raid by the Philippine National Bureau of Investigation uncovered numerous documents that were turned over to IRS. The documents formed the basis for an enormous tax assessment.  There continues to be litigation about this matter. In the last few years it has been FOIA cases.  The plaintiff in several of them is Harry’s fourth wife Pauline Dale Stonehill and the attorney is Robert E. Heggestad.  This time it is Dr. Patrick Lenz, Executor of the Estate of Harry S. Stonehill.  Heggestad is also the attorney in this one, which is against the Internal Revenue Service.  There is a case against the CIA that was closed in 2025 and one still open against the FBI.

Harry Stonehill died in 2002.  Pauline Dale Stonehill died on October 4, 2023 in Spain, which is when Dr. Paul Lenz takes over.  I’ve asked Grok about Dr. Lenz and managed to induce hallucinations, so I will leave it at that.  It doesn’t look like anybody else is covering this drama.  I keep asking Attorney Heggestad what his endgame is.  Here is his most recent answer on February 26.

“Peter- they really ignored the facts on this and didn’t even address the IRS Manager who sent boxes back and forward between the Records Center for a decade.  This doesn’t significantly impact my ultimate goal because I can still get the documents in the missing boxes. I have another 1 ½ years to finish the ongoing effort – and then you will be the first to know where all this is headed.   I am getting old Peter- but I am dedicated to finishing this unfortunate saga- successfully  The unredacted top secret CIA information and related unredacted information from the FBI is quite amazing.  Ties the whole story together.  More to come.  Hope all is well.  Bob”

Reflection

Well that is pretty much it.  When I first started blogging, I would generally knock things out pretty quickly.  I am somewhat amazed at the number of pieces I put out while I was still working and then touring the country. To be somewhat fair to my self, I will say that I didn’t dig as much in the early days. But really I think it is mainly me getting older.  Attorney Heggestad notes that he is getting old in his email.  From what I can make of his bio he is a few years older than I.  I can’t resolve to hang on till the Stonehill story is complete, but as long as Mr. Heggestad is in I will be in, God willing.

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