Tax Court in Order Denying Petitioner's Hail Mary § 6751(b) Pass Cautions Counsel About Speculative Claims, Particularly Those Impugning IRS Counsel (2/3/26)

I write again on another “Hail Mary” attempt by a taxpayer to get out of penalty to avoid the consequences of their own conduct/misconduct. The setting is the ubiquitous issue in penalty cases as to whether the IRS foot-faulted in the written supervisor approval requirement in § 6751(b). Not surprisingly, the setting is a conservation easement case with what appears to have been an excessive valuation claim—$44,937,000. (It is not clear from the Order whether it is a syndicated conservation easement, but that makes no difference for excessive valuation claims.) Usually, in those cases, a fair inference is that the promoters and those reporting the claim knew the valuation was excessive and thereby intended to report fraudulently within the meaning of § 6663 civil fraud penalty.

In Palmwood Holdings, LLC v. Commissioner (T.C. No. 17489-23, here, Order at # 54 dated 2/3/26), the IRS asserted the civil fraud penalty, § 6663, in the Answer to the Petition. Judge Urda briskly goes through the relevant facts that compel rejection of the petitioner’s Hail Mary pass. Judge Urda rejects petitioner’s wild speculations about some of the proffered summary judgment record. Judge Urda concludes (Slip Op.  4-5) with this cautionary advice directed to the tax matters partner's (Investment's) Counsel):

          We have time and again rejected the argument that penalties in fact [*5] recommended by the relevant IRS official were in substance determined by someone else. See, e.g., Sand Valley Holdings, LLC v. Commissioner, T.C. Memo. 2025-74, at *7–8; Cattail Holdings, LLC v. Commissioner, T.C. Memo. 2023-17, at *9–11. The “‘initial determination’ of a penalty assessment” is a formal action directed to a particular taxpayer. See Frost v. Commissioner, 154 T.C. 23, 32 (2020) (quoting Belair Woods, 154 T.C. at 15). The word “determination” has “an established meaning in the tax context” and denotes an action “with a high degree of concreteness and formality.” Nassau River Stone, LLC v. Commissioner, T.C. Memo. 2023-36, at *6 (quoting Belair Woods, 154 T.C. at 15). The record before us conclusively establishes that Mr. Wooldridge made the “initial determination” to assert the fraud penalty set forth in that pleading. Communications three years prior, even if they involved this case, would be neither here nor there.

Appellate Lawyer Tips (1/29/26; 1/30/26)

David Lat has this offering today on tips from Paul Clement, a prominent Supreme Court advocate. David Lat, 3 Tips For Appellate Advocates—From Paul Clement (Original Jurisdiction 1/29/26), here. The first tip is: 1. Listen, listen, listen. Lat expands on that tip, quoting another prominent transactional lawyer: “a critical skill for attorneys of all types is “the ability to listen, whether to your client or to the other side, so you really understand what is going on.” Of course, that was from a transactional lawyer. The point I want to address here for appellate lawyers is listening to the court and the opposing counsel. That is what Lat describes in detail in the blog.

I have shared an anecdote previously from my DOJ Tax Appellate experience about how listening closely to the interaction of the Appellate Panel with the Appellant’s counsel during the opening argument can inform how I make the appellee argument. Second Circuit NonTax Opinion on Glitches in the Appellate Process with JAT War Story (9/11/22), here.

The key point is that both the Appellant’s lawyer and the Appellee’s lawyer have to go into oral argument with a planned argument outline. Then the lawyers need to adapt based on what happens at oral argument, even casting aside their planned presentation that they worked so hard on; the hard work is not wasted because it should help the Appellate Lawyer roll with the punches. I would say that I rarely completed an oral argument going through the outline I prepared going in. I went one time to the Ninth Circuit in San Francisco and, although I had an outline and had worked hard, it was clear from the interaction of the Appellant attorney and the Panel, that I could not add anything of real value to the Panel, so I just said that it was clear the Panel understands the parties positions, so if there were no questions, the Government rested. I did something similar in my first Appellee oral argument in the Second Circuit where it was clear to me the Panel was not really engaged in my argument and appeared to be reading something else (perhaps the briefs or the clerk's memo on the next case) at the bench. So, after about 4 minutes of  a 30-minute argument, I brought my argument to a close. I was disappointed because I want to display my oral advocacy, but I made the right decision. 

(Added 1/30/26 11:00 am): This strategy of Appellee counsel making a short or no argument based on the dynamics of the Appellant's opening argument probably will not work in the Supreme Court because Appellee's (aka Respondent's) counsel want to put on their "stuff" and, in any event, the Justices will want to perform with thrusts and parries (performing either to counsel, the spectators in the room, or larger audiences who may listen to the oral arguments or read the transcripts or read newspaper reports; by contrast, there is rarely a significant number of spectators in tax appellate cases and, in any event, the panel judges can perform by engaging Appellee counsel who might otherwise make a short or no argument.)

I speculate, however, that if I had a Supreme Court respondent's argument and, based on the dynamics of petitioner's counsel's opening argument, I was fairly certain that I had a significant majority of the court, I might do a truncated argument of my full planned argument and, if I got no questions from the Justices, I might close out pretty fast (e.g., 5 or 10 minutes), hitting only the highest of the high points and addressing some points brought out in petititioner's counsel's opening argument. Again, however, I can't imagine that ever happening because of the Justice's real or perceived need for performance for audiences beyond counsel making oral arguments (other audiences including, of course, the other Justices).

In this sense, oral argument may be analogized to battle planning in wartime: one must have the plan going one but one must always be alert to modify or divert from the plan to deal with the battle as it actually engages.

I asked Gemini AI about the war plan analogy: 

Tax Court Addresses the Requirements for Substantial Compliance Relief (1/29/26)

In Aventis, Inc. v. Commissioners, 166 T.C. 1, No. 1 (1/28/26), TC here at Dkt 178 and GS here, the Court held against the taxpayer’s claim of qualification for financial asset securitization investment trust (FASIT) status. I don’t intend to address what FASIT status actually is or why Aventis fought so hard to qualify. Digging into the underlying merits would require more time and mental energy than I can devote right now. I address solely the portion of the opinion dealing with the substantial compliance doctrine, which is the issue  of interest to most tax procedure enthusiasts.

The discussion of substantial compliance is at Slip Op. 33-35; I quote here only the portion stating a general rule that might be used in other contexts (Slip Op. 34-35, cleaned up by (i) omitting most for each sentence in the first paragraph and (ii) omittinig one case citation and shortening the next two paragraphs):

           When there is a failure to comply with the essential requirements of the governing statute, no defense of substantial compliance is available. When requirements relate “to the substance or essence of the statute,” we require “strict adherence to all statutory and regulatory requirements.” On the other hand, if requirements are “procedural or directory in that they are not of the essence of the thing to be done but are given with a view to the orderly conduct of business, they may be fulfilled by substantial, if not strict compliance.”

           We have held that if a taxpayer wished to take advantage of subchapter S provisions, the taxpayer must comply with all of the statutorily mandated requirements.

             In Dirks v. Commissioner, T.C. Memo. 2004-138, aff’d, 154 F. App’x 614 (9th Cir. 2005), the Court declined to apply the substantial compliance doctrine to the statutory 60-day deadline applicable to individual retirement account rollovers under section 408(d)(3)(A) because “the 60-day rule is not regulatory but is found in the statute itself.”

Fifth Circuit Claims a Pro-Taxpayer Canon When the Court Should have Interpreted the Exemption in the Statute Fairly or Applied the Anti-Taxpayer Canon (1/27/26)

I posted much of the information in this blog entry at the bottom of the immediately preceding blog: Fifth Circuit Knows a Limited Partner When Reads It (1/24/26; 1/27/26), here. I decided that the information should not be buried in the prior blog but should be lifted into it’s own blog entry. So here it is. For context, yesterday’s blog was about the Fifth Circuit’s opinions in Sirius Solutions, L.L.L.P v. Commissioner, ___ F.4th ___ (5th Cir. 2025), CA5 here and GS here, which held that the limited partner exception in § 1402(a)(13) does not apply to earnings allocated to a nominal limited partner even though providing services to a limited partnership. Please note that I bold-faced exception because that the majority and the dissenting opinions agree it is an exception to the general rule of taxation. (In view of this blog entry, I have eliminated the information from the bottom of the prior blog entry.)

I ask readers to consider seriously footnote 8 of the majority Sirius majority opinion  spanning Slip Op. 23-24):

  n8 Even if the IRS and Tax Court’s arguments had persuasive authority, they would at most establish ambiguity. But that is not enough for the Government’s passive investor rule to prevail. It is a “longstanding canon of construction that if the words of a tax statute are doubtful, the doubt must be resolved against the government and in favor of the taxpayer.” United States v. Marshall, 798 F.3d 296, 318 (5th Cir. 2015) (quotation omitted).

First, Loper Bright claims (I think nonsensically) that courts can always interpret out ambiguity in the statute. See e.g., Chevron, Loper Bright, and Statutory Ambiguity (Federal Tax Procedure Blog 1/8/26; 1/9/26), here.  If there is genuine ambiguity where the court is unable to determine the best interpretation between two or more interpretations within the zone of ambiguity, the court will need a tie-breaker which artificially resolves the ambiguity to decide the case. Chevron offered such a tie-breaker, but Loper Bright rejected Chevron without substituting any other tie-breaker. Of course, the alleged "longstanding canon of construction the majority claims in footnote 8 could supply a tie-breaker in the majority's imagination. I address here the validity of the majority's claim of this "pro-taxpayer" canon of construction.

Canons of statutory construction  are “rules of thumb that help courts determine the meaning of legislation.”  They are said to “limit judicial discretion and render statutory meaning more predictable.”  E.g., Jonathan H. Choi, The Substantive Canons of Tax Law, 72 Stan. L. Rev. 195, 228-229 (2020), here. On the other hand, they are said to be “readily manipulable and [frustrate] the policy preferences of Congress.”  Karl Llewellyn famously observed that “there are two opposing canons on almost every point.”  

A variation on the theme is that maxims, which may function like canons, might be viewed as minims because they reveal so little and are "singularly unhelpful when it comes to deciding cases." United States v. Ingredient Technology Corp., 698 F.2d 88, 94 (2d Cir. 1983)

Professor Choi notes that the opposing canon  (called an anti-taxpayer canon) is to construe exemptions from tax against the taxpayer who cannot show that the statute requires the exemption. (See Choi, pp. 251-254.) Furthermore, Choi notes that the pro-taxpayer canon is not now in vogue. (See Choi, pp. 253-254, quoting Scalia and Garner arguing for applying the fair meaning of statutes; in any event, the anti--taxpayer rule for tax exemptions, "has been sufficiently widely validated and cited that, in my view, its place among the substantive canons is secure" and "the courts have widely embraced this canon." So, the mere fact that the majority felt the need, albeit in a footnote, to use the dubiously applicable pro-taxpayer canon instead of a fair meaning of the statutory exemption or the anti-taxpayer rule, is suspect.

Fifth Circuit Knows a Limited Partner When Reads It (1/24/26; 1/20/26)

Most readers of this blog will already have heard of or even read the opinions (majority and dissenting) in Sirius Solutions, L.L.L.P v. Commissioner, ___ F.4th ___ (5th Cir. 2025), CA5 here and GS here, Basically, the majority held that the limited partner exception in § 1402(a)(13) does not apply to earnings allocated to a nominal limited partner. Bottom-line that interpretation means that partners providing services to a partnership can escape the Social Security and Medicare tax on income they allocate to their limited partner interests even though that income is really the return on their personal services. The Tax Court held otherwise in the Tax Court phase of Sirius, based on Soroban Capital Partners LP v. Commissioner, 161 T.C. 310 (2023).

I do not plan to get deeply into the merits of the majority and dissenting opinions. Two reasonable articles are Jon Endean, Reflections on the Fifth Circuit’s Ruling on Limited Partner Exception (TaxProf Blog 1/21/26), here; and Maureen Leedy, Fifth Circuit Reverses Tax Court on Limited Partner Self-Employment Tax (ThomsonReuters 1/21/26), here.

On the merits, I do say that, it seems to me, the difference between the majority and the minority is that the majority is not practical in being a faithful agent to Congress and the minority, like the Tax Court, is more practical in being the faithful agent.

JAT Comments:

1. I think it relevant, at least at the margins, that the two judges in the majority are Trump appointees and the judge in the minority is an Obama appointee.

2. The differences in statutory interpretation driven by ideologies and, for the majority, simplisms is stark. A good example is the majority’s claim “legislative history is generally of dubious value in statutory interpretation” and the follow-through that “where, as here, textual arguments yield a clear answer, judges must stop.” (Slip Op. 19; cleaned up with internal quotations marks and citations omitted.) I think originalists have beat that horse beyond its ability to persuade; why is not Congress’ view of the legislation it enacted relevant to interpreting the legislation? If one takes the view, as I do, that interpreting the law is an exercise like fact-finding (see Chevron, Loper Bright, and Statutory Ambiguity (Federal Tax Procedure Blog 1/8/26; 1/9/26), here)), then why would not relevant evidence be considered for whatever persuasive value it might have?

Tax Court Dawson Access to Simultaneous Opening Briefs in Syndicated Conservation Easement (1/12/26)

Readers of this blog may know that the Tax Court’s Dawson tool shows the docket entries for cases but has historically included for public view by link only documents prepared and filed by the Court. Dawson is now showing some documents prepared and filed by the parties. For an example, I point to the Simultaneous Opening Briefs in Capitol Places II Owner, LLC v. Commissioner (T.C. No. 16536-23 here at ## 264-265) involving a syndicated conservation easement. (Simultaneous Opening Briefs are acronymed or initialized to SIOB in the system and I use that convention here.) Readers might particularly be interested in the Petitioner’s SIOB, at #265 (note that the Dawson system does not have permanent links, so those wanting to see or download the documents must do so from the docket entries which I link above). Added 1/12/26 @ 10:00pm: I have been reminded that, on 5/5/23, the Tax Court entered Administrative Order No. 2023-02, here, that PostTrial Briefs and Amicus Briefs would be available on Dawson to view and download.

Petitioner’s SIOB is 372 pages; the IRS’s is 221 pages. I have made no attempt to read either of those briefs, but I have paged through the table of contents of both briefs and some of the briefs (as discussed below). The Petitioner's table of contents is 12 pages long and indicates that the body of the brief is 339 pages long.

Judging from Petitioner's table of contents, Petitioner offers a generous smorgasbord of all imaginable claims, many of which appear to be Hail Mary arguments.  Gemini AI says a Hail Mary argument in a legal brief is an argument “highly unlikely to succeed but is included as a last resort, in the desperate hope that a court might accept it.” I am not opining that some of the arguments are weak on merits but merely offering my gut reaction. Of course, ultimately the fatal weakness in these shelters are the bullshit valuations that often accompany the syndications to justify the return reporting positions.

Some points I noted:

 1. IRS statement (p. 11):

 55. The 2014 Form 1065 claimed a noncash charitable contribution deduction in the amount of $23,909,000 for the façade easement contribution. Ex. 32-J.

 2. IRS ultimate findings of fact (pp 92-93):

ULTIMATE FINDINGS OF FACT

1. The FMV of the Subject Property prior to the donation of the easement was $2,770,000. Entire record.

2. The FMV of the Subject Property after the donation of the easement was $2,710,000. Entire record.

3. The FMV of the easement donation was $60,000. Entire record. 4. CP II Owner is not entitled to deduct (1) the $10,000 paid for the Clark Appraisal, (2) the $70,333 paid for the LDS, or (3) the $800,000 paid to GBX for “Tax Consulting” as rental real estate expenses, and those expenses were  properly reclassified as Other Deductions at Schedule K, Line 13d in the FPAA. Entire record.

5. The FPAA was issued timely and the assessment statute expiration date has not passed. Entire record.

6. The accuracy-related penalties asserted with respect to CP II Owner received timely  supervisory approval pursuant to I.R.C. § 6751(b). Entire record.

7. Penalties under I.R.C. § 6662 for gross valuation misstatement, substantial valuation misstatement, negligence,3 and substantial understatement of income tax apply; reasonable cause defenses do not apply. Entire record.

Fn 3 As discussed in respondent’s pre-trial memorandum filed on April 11, 2025, respondent is no longer asserting the negligence or disregard of rules or regulations penalty with respect to the noncash charitable contribution deduction adjustment.

Chevron, Loper Bright, and Statutory Ambiguity (1/8/26; 1/9/26)

Added 1/9/26 9:00pm: I would really appreciate readers notifying me of any case(s) they have read where the court said that it determined the best interpretation and nevertheless deferred under Chevron to a not best agency interpretation. Please respond either by comment or by email to me at jack@tjtaxlaw.com.

I start with two opposing statements:

“Chevron requires a federal court to accept the agency's construction of the statute, even if the agency's reading differs from what the court believes is the best statutory interpretation.” National Cable & Telecommunications Assn. v. Brand X Internet Services, 545 U.S. 967, 980 (2005) (Thomas, J. for the Court).

ChatGPT’s response to the following question: “Can you find me a United States case where the court determined the best interpretation of a statute but nevertheless applied Chevron to defer to a not best agency interpretation?”:

No United States case is identified in the provided search results where a court explicitly determined the best interpretation of a statute but nevertheless applied Chevron deference to a non-best agency interpretation. * * * * The results highlight Chevron's requirement for courts to defer to reasonable agency views of ambiguous statutes but provide no instance where a court labeled its own view "best" yet deferred anyway, likely because such language would contradict Step One's mandate to enforce unambiguous meanings.”

[JAT Note in support of ChatGPT’s response: I have read many Chevron cases and do not recall that a court ever said it had determined than interpretation other than the agency's was best but deferred to the agency interpretation. At an anecdotal level, I read cases identified by other scholars as Chevron cases and found that not one of the cases said the court determined the best interpretation was other than the agency interpretation and nevertheless deferred to the agency interpretation. See Is Chevron on Life Support; Does It Matter? (Federal Tax Procedure Blog 4/2/22; 4/3/22), here (focus on Category 5); and  Chevron Step Two Reasonableness and Agency Best Interpretations in Courts of Appeals (Federal Tax Procedure Blog 2/9/23), here (again focus on category 5). In not of those cases did a court state or fairly imply that it had determined a best interpretation and was deferring to the agency interpretation instead. Not one.]

I propose that (i) Chevron deference, properly applied, was a tie-breaker rule when a court found statutory text ambiguous as required to get past Step One (meaning that the court could not determine the best interpretation) and (ii) that Loper Bright’s rejection of Chevron deference leaves courts without guidance to resolve ambiguous statutory text. Of course, the phenomenon of statutory interpretive ambiguity is not unique to agency interpretations of statutes they administer, but at least Chevron offered a consistent and, in a sense, principled way to resolve ambiguity to reach a decision in the case at hand.

Statutory Interpretation as a Continuum and Equipoise in the Continuum (12/20/25)

Continuing on my exploration of AI (I am still a novice), I asked several AI tools about ambiguity and continuum of confidence in statutory interpretation as a way to think about when ambiguity does not permit a court to determine the best interpretation to the required confidence level (in percentages say 51%, 60%, 67%, etc.). I offer here the best of the AI outcomes (from MS CoPilot) with both text and footnotes indented and then make a few comments.

Below is a polished, law‑review‑style Part II that builds naturally on your Part I. It is structured, argumentative, and footnoted in proper Bluebook form. If you want, I can later add subparts (A, B, C), case studies, or integrate it into a full article.

II. The Ambiguity Continuum in Judicial Practice

Courts frequently describe statutory text as either “clear” or “ambiguous,” but this binary framing masks the far more nuanced reality of interpretive practice. In actual adjudication, judges encounter not a dichotomy but a continuum of ambiguity, ranging from provisions whose meaning is overwhelmingly apparent to those whose linguistic indeterminacy leaves multiple interpretations equally plausible.¹ Judicial methodology—whether textualist, purposivist, or something else—does not eliminate this continuum; rather, it structures how judges navigate it. Understanding this spectrum is essential to explaining why interpretive disputes persist even when judges purport to apply the same tools.

A. The Myth of Binary Clarity

The conventional judicial rhetoric of “plain meaning” suggests that statutory clarity is a threshold condition: either the text speaks for itself or it does not.² Yet linguistic theory and empirical studies of judicial behavior demonstrate that clarity is rarely self‑evident.³ Even seemingly straightforward provisions often contain latent ambiguities that become visible only when applied to specific factual contexts.⁴ As Justice Kagan has observed, “we’re all textualists now,” but textualism itself requires judges to make fine‑grained judgments about how much clarity is enough.⁵

These judgments are not mechanical. They depend on context, background assumptions, and the judge’s own interpretive priors.⁶ A provision may appear clear to one judge because she reads it against a particular linguistic or structural backdrop, while another judge—equally committed to textual fidelity—may find the same provision ambiguous.⁷ The very act of declaring a statute “clear” is thus an interpretive conclusion, not an objective fact.

B. Degrees of Ambiguity and the Use of Interpretive Tools

As ambiguity increases along the continuum, courts predictably rely more heavily on interpretive tools to resolve uncertainty. Textual canons, for example, function as probability‑adjusting heuristics: they shift the likelihood of one interpretation over another by appealing to linguistic conventions, structural coherence, or background norms.⁸ Legislative history, when used, serves a similar function by providing additional evidence about how Congress likely understood the statutory language.⁹ Substantive canons—such as the rule of lenity, the presumption against retroactivity, or federalism clear‑statement rules—operate at the far end of the continuum, where ambiguity is so deep that ordinary interpretive tools fail to produce a dominant reading.¹⁰

Conservation Easement Case Set for Trial Only on Valuation (and No Other Issue) with No Post-Trial Briefs (12/29/25)

I note that today, among the orders released, the following Order was issued setting a trial of the valuation issue (and no other issue) in a conservation easement case. (I copy and paste the full order below, but readers may access the original order for case # 8669-20, here, at docket entry 86.)

Since gross overvaluation is the common flaw of many bullshit tax shelters, Judge Lauber is cutting to the chase. Any other flaws in the legal structure of the shelter may not matter after this limited trial.

The wording of the order to reject post-trial briefs suggests that Judge Lauber will issue a bench opinion. See Tax Court Rejects a Bullshit Tax Shelter False Valuation Claim with Warning of Sanctions for Taxpayers, their Counsel, and Expert Witness Proffering the Bullshit (7/16/25; 9/10/25), here. As suggested in that prior blog, one issue that may arise is whether the petitioner’s submission of a bullshit valuation may draw sanctions.

United States Tax Court
Washington, DC 20217

MORGAN RUN PARTNERS, LLC,
OVERFLOW MARKETING, LLC, TAX
MATTERS PARTNER,

Petitioner

v.

COMMISSIONER OF INTERNAL
REVENUE,

Respondent

Docket No. 8669-20.

Brockman Civil Case with Civil Fraud Penalties Settled (12/26/25)

 I have written before on the Brockman multi-year tax evasion scheme. See here. Brockman was indicted but, before he could be tried, he died, thereby resolving the criminal case without a verdict of guilty or not guilty.

The civil case was settled with entry of the Tax Court decision in Brockman Estate v. Commissioner (T.C. Case No. 764-22 Dkt. # 33 Order Dtd. 12/23/25), here. The decision document addresses the deficiencies and civil fraud penalties under § 6663. As is the nature of decision documents, the decision document does not address the interest on the tax and the penalties. The principal amounts of deficiencies and penalty are major, aggregating $750 MM; the interest which I roughly calculate to 12/24/25 at $782MM brings the total due to over $1.5 billion. I prepared a spreadsheet which I offer for review and download here. (Note that the interest calculations are rough and ready but should be in the ballpark.)

One small error in the Tax Court decision document is that the 2006 civil fraud penalty (§ 6663) is stated as $35,00,000.00 which I infer to be $35,000,000.00.

Obviously, given the numbers in the spreadsheet there is a facial anomaly because for the years 2006 and 2015 the civil fraud penalty amount exceeds 75% of the deficiency. I suppose there can be an explanation. There was a jeopardy assessment which may have applied some of the tax, but more likely there may have been an advance payment(s) that reduced the deficiency amounts (but not the civil fraud penalty amount). I just have not dug into that issue.

This blog entry is cross-posted on my Federal Tax Crimes Blog here.