Memphian Appeals An Offer In Compromise

I am looking at a case dealing with an offer in compromise.

You know these from the late-night television and radio advertisements to “settle your IRS debts for pennies on the dollar.”

Yeah, right.

If it were so easy, I would use it myself.

Don’t get me wrong, there are fact patterns where you probably could settle for pennies on the dollar. Unfortunately, these fact patterns tend to involve permanent injury, loss of earning power, a debilitating illness or something similar.

I will just pay my dollar on the dollar, thank you.

What caught my attention is that the case involves a Memphian and was tried in Memphis, Tennessee. I have an interest in Memphis these days.

Let’s set it up.

Taxpayer filed tax returns for 2012 through 2014 but did not pay the full amount of tax due, which was about $40 grand. A big chunk of tax was for 2014, when he withdrew almost $90,000 from his retirement account.

Why did he do this?

He was sending his kids to a private high school.

I get it. I cannot tell you how many times I have heard from Memphians that one simply cannot send their kids to a public school, unless one lives in the suburbs.

In December, 2016 he received a letter from the IRS that they were going to lien.

He put the brakes on that by requesting a Collection Due Process (CDP) hearing.

Well done.

In January he sent an installment agreement to the IRS requesting payments of $300 per month until both sides could arrive at a settlement.

The following month (February) he submitted an Offer in Compromise (OIC) for $1,500.

That went to a hearing in April. The IRS transferred the OIC request to the appropriate unit.

In late August the IRS denied the OIC.

Let’s talk about an OIC for a moment. I am thinking about a full post (or two) about OICs in the future, but let’s hit a couple of high spots right now.

The IRS takes a look at a couple of things when reviewing an OIC:

(1)  Your net worth, defined as the value of assets less any liabilities thereon.

There are certain arcane rules. For example, the IRS will probably allow you to use 80% of an asset’s otherwise fair market value. The reason is that it is considered a forced sale, meaning that you might accept a lower price than otherwise.

(2) Your earning power

This is where those late-night IRS settlement mills dwell. Have no earning power and near-zero net worth and you get pennies on the dollar.

There are twists here. For example, the IRS is probably not going to spot you a monthly Lexus payment. That is not how it works. The IRS provides tables for certain categories of living expenses, and that is the number you use when calculating how much you have “left over” to pay the IRS.

Let’s elaborate what the above means. If the IRS spots you a lower amount than you are actually spending, then the IRS sees an ability to pay that you do not have in real life.

You can ask for more than the table amount, but you have to document and advocate your cause. It is far from automatic, and, in fact, I would say that the IRS is more inclined to turn you down than to approve any increase from the table amount. I had a client several years ago who was denied veterinary bills and prescriptions for his dog, for example.

The IRS workup showed that the taxpayer had monthly income of approximately $12,700 and allowable monthly expenses of approximately $11,000. That left approximately $1,700 monthly, and the IRS wanted to get paid.

But there was one expense that made up the largest share of the IRS difference. Can you guess what it was?

It was the private school.

The IRS will not spot you private school tuition, unless there is something about your child’s needs that requires that private school. A special school for the deaf, for example, would likely qualify.

That is not what we have here.

The IRS saw an ability to pay that the taxpayer did not have in real life.

Taxpayer proposed a one-time OIC of $5,000.

The IRS said No.

They went back and forth and agreed to $200 per month, eventually increasing to $700 per month.

COMMENT: This is not uncommon for OICs. The IRS will often give you a year to rework your finances, with the expectation that you will then be able to pay more.

The taxpayer then requested abatement of interest and penalties, which was denied. Generally, those requests require the taxpayer to have a clean filing history, and that was not the case here.

The mess ended up in Tax Court.

Being a court, there are rules. The rule at play here is that the Court was limited to reviewing whether the IRS exercised abuse of discretion.

Folks, that is a nearly impossible standard to meet.

Let me give you one fact: he had net assets worth approximately $43 thousand.

His tax was approximately $40 thousand.

Let’s set aside the 80% thing. It would not take a lot of earning power for the IRS to expect him to be able to repay the full $40 grand.

He lost. There really was no surprise, as least to me.

I do have a question, though.

His monthly income was closer to $13 grand than to $12 grand.

It fair to say that is well above the average American monthly household income.

Private school is expensive, granted.

But where was the money going?

Our case this time was Love v Commissioner, T.C. Memo 2019-92.

Depression And Disability

I am reading a Tax Court case where the taxpayer represented himself. This is referred to as “pro se.” Technically, it does not mean that you cannot have an attorney or advisor with you; it rather means that the attorney or advisor is not admitted to practice before the Tax Court. If I was your CPA, for example, I would field the questions-and-answers on your behalf while you sat there silent and forlorn. You would still be considered to be “pro se,” as I do not practice before the Court. Had I practiced in the D.C. area or with the national tax office of a large firm, I might have been more interested in pursuing admission to practice.

The taxpayer’s name is Walter Kowsh, and he had an incredible string of misfortune. Walter lived in New York. His wife died at age 53, leaving him with two teenage children and an elderly parent.

Then he lost several friends on the 9/11 attacks on the World Trade Center. Some of those friends had gone to his wife’s funeral.

By 2002 he could longer work because of depression and anxiety attacks.

He started taking prescriptions, including Wellbutrin and Paxil.

His depression became debilitating.

He started collecting on his private disability insurance.

He did not however apply for Social Security disability. Too bad, as there is a case (Dwyer) that accepts social security as proof of disability.

He took an early distribution from his 401(k) or IRA in 2003. He did not however file a tax return for 2003.

So the IRS tentatively prepared one for him.

After a string of IRS notices, he finally prepared and filed his 2003 return.

The IRS next wanted penalties for late filing as well as the 10% penalty on the early distribution.

Walter needed an out from both penalties. Is there way to do it?

Yep.

Disability would do it. Disability is an exception to the 10% penalty and is also reasonable cause to abate a late filing penalty.

Walter argued that he was disabled.

Question is: did Walter’s depression rise to the level of a disability?

Incredible story, said the IRS. Get us a doctor’s letter, and let’s wrap this up.

Walter could not – or would not - get a doctor’s letter. His own doctor refused to provide one.

This was a bad start.

How about a prescription history from the pharmacy? asked the IRS. They might be able to print out your history for the whole year.

Nope, said Walter.

I am already collecting disability, continued Walter. What part of “disability” do you not understand?

Walter could really have used a tax advisor at this point.

You see, collecting disability from an insurance company lends strong credibility to Walter’s claim, but disability is a medical diagnosis. The insurance reinforces the diagnosis but is not a substitute for it.

Rest assured the Court was curious why Walter’s doctor would not provide a letter, or why he refused to have another doctor provide one…

… despite numerous requests from respondent.”

Respondent means the IRS.

And I am curious myself.

I do not doubt that he was depressed. I also do not doubt that he considered himself disabled. What I don’t understand is the big pushback on what appears to be a reasonable request.

It is not personal, Walter. Stop taking it that way.

Walter lost.

You see the downside to a true pro se.

I would have been screaming at Walter for sabotaging his own case. He would have gotten that doctor’s letter or I would have fired him.

But Walter made the tax literature for the point that collecting private disability insurance, by itself and without further substantiation, does not prove disability for purposes of the tax Code.

Tax geeks will remember Walter for decades.

Deducting Something You Did Not Pay For

What caught my eye was the amount of penalties at issue:

     Year                       Amount

     2002                       $  100,000

     2003                       $  105,000

     2004                       $1,822,000

     2005                       $1,785,000

     2006                       $1,355,000

The penalties total over $5.1 million. I had to look this case over, even though it weighs in at 123 pages.

It involves Martin Knapp, a CPA. He got his license in 1983.

He had worked at the IRS. He also taught accounting and taxation at Pepperdine and Los Angeles City College.

Not a bad resume, methinks.

He did something I never did: he specialized his practice. He focused on transportation workers, including airline pilots and railroad workers. He especially focused on mariners.

As of 2004 he employed 10 people.

Sounds successful to me.

He began his mariner practice around 1993. Two of his clients wound up in Tax Court, and it is there that our story begins.

The first client was Mr. Johnson, a deep-sea mariner. He would routinely work for four months and then take a two-month vacation.

The second was Mr. Westling, a tugboat captain in and around Alaska. He would work 30-day shifts on the tugboat.

Knapp amended Johnson’s return and prepared Mr. Westling’s return for 1996. He claimed a per diem for every day they were on the boat.

So what, right?

Here is the what: The per diem included a meal allowance, and their employers provided the meals.

I do not get it. How can someone get a deduction if that someone did not incur an expense in the first place?

The IRS flagged the returns, and both went to Tax Court.

Since they presented the same issue, the cases were consolidated.

In September, 2000 the Tax Court decided that neither could deduct meal expenses but they could deduct incidental expenses.

COMMENT: The incidental portion of a per diem is for tips and miscellaneous stuff, such as mouthwash. It is only a few bucks per day and nowhere near the amount allowed for meals. In short, there was a (very) minor victory and a very large defeat.

Mr Kapp did not represent in the Tax Court case, but he did read the decisions. He contacted the attorney who represented the IRS to request a face-to-face meeting. The attorney could not do this, as Kapp was an “interested” party. I could (hypothetically) have met with the attorney (as I had nothing to do with either Johnson or Westling), but Kapp was the CPA and therefore very much an interested party.

Kapp doubled down. He kept advising his clients that they could deduct meals even if meals were provided by their employer.

He tripled down. He created websites promoting his services to mariners and asserting that he could obtain tax refunds for them.

He quadrupled down. He wrote articles for Professional Mariner and The National Public Accountant. Here is an example:

The exciting news for mariners is that two U.S. Tax Court decisions last year settled the legal issue of allowing mariners to claim an almost unlimited amount of travel deductions while working away from home, without ever having to show the IRS any receipts, just like other transportation workers.”

Enter Examining Officer Tiffany Smith, who informed Kapp that he was the target of an IRS investigation for tax shelter promotion.

He sent her a 9-page letter detailing the relevant authority for the mariner deduction and arguing that the IRS does not oppose his position.

Does not oppose…?

Kapp wrote a letter he titled “Why is IRS Harassing Me for Twice Winning in U.S. Tax Court?”

This is going south ….

The investigation was transferred to George Campos, a revenue agent investigating tax promoters and abusive tax return preparers.

There is back and forth with Kapp and his attorney. In August, 2005 Campos and Kapp meet. Campos points out that there is no deduction for something one has not paid. Kapp asserts that “it does not matter if *** receive a meal or not, they’re still entitled to a deduction.”

Campos prepared an injunction.

Kapp’s attorney started to worry. He had an associate research the issue of mariners and meal deductions and memo the same. The result was pretty much the same as the IRS position, which was a bad place to be when you represent Kapp.

In early 2006 the Department of Justice sent Kapp a letter informing him that it was considering filing a lawsuit and providing him an opportunity to call and discuss the matter.

For all that is holy, Kapp, please STOP ….

At this point we are on page 55 of a 123-page court decision, and I am going to end it.

The IRS wanted him to stop. If he stops, he may yet walk away with all limbs still attached. Continue this quixotic quest, however, and he might lose it all.

The Court decided he was wrong and hardheaded. Not being without compassion, however, the Court reduced the penalties to $3,218,000.

There goes a lifetime of savings.

Oh, why, Kapp, why?

Driving To South Africa

Our protagonist this time is Donald Durden. He is a pastor with the Seventh Day Adventist Church, and he was based out of Columbus, Ohio for the tax year at issue. His territory included part of Maryland, Ohio, western Pennsylvania, West Virginia, and a part of Virginia.

Got it. I am guessing the case has something to do with travel expenses.

The Church reimbursed his business-related travel expenses using both an accountable and nonaccountable plan.

I guessed right.

COMMENT: The big difference between an accountable and nonaccountable plan is whether you have to provide your employer with receipts and other paperwork. If you do, the plan is accountable and the employer can leave the reimbursement off your W-2. Fail to turn in paperwork and the plan becomes nonaccountable. The reimbursement then goes on your W-2. That used to mean that one would have to itemize and claim employee business expenses. The new tax law disallows employee business expenses, meaning that – beginning with 2018 - one has income with no offsetting deduction.

Pastor Burden claimed $41,950 of unreimbursed employee expenses when he filed his 2013 tax return.

Good grief!

The IRS wanted to know what made up this number. Actually, so do I. There were all kinds of travel in there as well as vehicle expenses and other stuff, including “special shoes.”

Let’s talk about his South Africa visit.

He claimed travel expenses of $10,897. When pressed, he did not present receipts or records, opting to explain that he was away from home on ministerial duties for 100 days. At $180 per day – which he described as the “conservative high-low method” - that comes to $18,000 and was way more than he actually deducted. Why was there an issue?

Folks, it does work like that. I presume that he was referring to a per diem, but a per diem refers to hotels, meals and incidental expenses; it does not mean the air fare to get there in the first place. Additionally, one still has to substantiate the business reason for the trip and document the number of days against which to multiply the per diem. I cannot vacation for two weeks in Europe and make it deductible just by wandering into an accountants’ office one afternoon in Budapest.  

Our pastor had a receipt or two. He elaborated that he visited the Apartheid Museum, the Robben Island Museum, Nelson Mandela’s and Bishop Tutu’s residences, and the botanical gardens.

Sounds like a vacation, murmured the IRS.

Not at all, corrected the pastor. I was working.

How were you working, asked the IRS hopefully.

I said a prayer of dedication during a ceremony.

And …?

I led daily devotions with the parishioners who travelled with me. There was also a naming ceremony. I chose Chloe for my name.

Can you get to any records? Daily schedules, appointments, anything to substantiate ….

For international travel to be deductible, the primary purpose of the trip has to be business related. It is somewhat harsh, but that is the rule. If the trip is 45% business, there is no deduction. You do not get to multiply the cost of the trip by 45 percent.

It was a really good prayer, gleamed the pastor.

He also went to the Dominican Republic. Twice. Turns out his wife has family there.

Of course, sighed the IRS. Let’s go over those records. Let’s start with how you got there.

I drove there, said the pastor.

Whaa…?

I have a log. You see, right here, yeah, in January, I drove there. I left on a Sunday and returned the next Wednesday. In September I also left on a Sunday and came back eight days later.

You can’t drive to …

Ah, here it is. You see, my log shows that I drove to South Africa too. That was in December, added the pastor, squinting his eyes while remembering.

And so it continued, including other items that we cannot discuss without sounding like The Onion.

The Court bounced pretty much everything.

The Court also kept the penalty.

This time we discussed Burden and Torres v Commissioner.

It may be my favorite case so far in 2019.

IRS Notices And Waiting To The Last Minute

We have been fighting a penalty with the IRS for a while.

What set it up was quite bland.

We have a client. The business had cash flow issues, so both the owner and his wife took withdrawals from their 401(k) to put into the business.

They each took the same amount – say $100,000 for discussion purposes.

OK.

They did this twice.

Folks, if you want to confuse your tax preparer, this is a good way to do it.

At least they clued us that the second trip was the same as the first.

They told us nothing.

The preparer thought the forms had been issued in duplicate. It happens; I’ve seen it. Unfortunately, the partner thought the same.

Oh oh.

Eventually came the IRS notices.

I got it. The client owes tax. And interest.

And a big old penalty.

Here at CTG galactic command, yours truly seems to be the dropbox for almost all penalty notices we receive as a firm. In a way it is vote of confidence. In another way it is a pain.

I talked to the client, as I wanted to hear the story.

It is a common story: I do not know what all those forms mean. You guys know; that is why I use you.

Got it. However, we are not talking about forms; we are talking about events – like tapping into retirement accounts four times for the exact amount each time. Perhaps a heads up would have been in order.

But yeah, we should have asked why we had so many 1099s.

So now I am battling the penalty.

Far as I am concerned there is reasonable cause to abate. Perhaps that reasonable cause reflects poorly on us, but so be it. I have been at this for over three decades. Guess what? CPA firms make mistakes. Really. This profession can be an odd stew of technicality, endurance and mindreading.

However, the IRS likes to use the Boyle decision as a magic wand to refuse penalty abatement for taxpayer reliance on a tax professional.

Boyle is a Supreme Court case that differentiated reliance on a tax professional into two categories: crazy stuff, like whether a forward contract with an offshore disregarded entity holding Huffenpuffian cryptocurrency will trigger Subpart F income recognition; and more prosaic stuff, like extending the return on April 15th.

Boyle said the crazy stuff is eligible for abatement but the routine stuff is not. The Court reasoned that even a dummy could “check up” on the routine stuff if he/she wanted to.

Talk about a Rodney Dangerfield moment. No respect from that direction.

So I distinguish the client from Boyle. My argument? The client relied on us for … crazy stuff. Withdrawals can be rolled within 60 days. Loans are available from 401(k)s. Brokerages sometimes issue enough copies of Form 1099 to wallpaper a home office.

I was taking the issue through IRS penalty appeal.

The IRS interrupted the party by sending a statutory notice of deficiency, also known as the 90-day letter.

Class act, IRS.

And we have to act within 90 days, as the otherwise the presently proposed penalty becomes very much assessed. That means the IRS can shift the file over to Collections. Trust me, Collections is not going to abate anything. I would have to pull the case back to Appeals or Examination, and my options for pulling off that bright shiny dwindle mightily.

You have to file with the Tax Court within 90 days. Make it 91 and you are out of luck.

I am looking at a case where someone used a private postage label from Endicia.com when filing with the Tax Court. She responded on the last day, which is to say on the 90^th day. Then she dropped the envelope off at the post office, which date stamped it the following day.

I get it.

That envelope has an Endicia.com postmark. Then it has a U.S. Postal Service postmark dated the following day.

Then there is another USPS postmark 13 days later.

And the envelope does not get delivered until 20 days after the date on the Endicia.com label.

Who knows what happened here.

But there are rules with the Tax Court. One is allowed to use a delivery service or a postmark other than the U.S. Post Office. If the mail has both, however, the USPS postmark trumps.

In this case, the USPS postmark was dated on the 91^st day. 

You are allowed 90.

She never got to Tax Court. Her petition was not timely mailed.

Sheeeessshhh.

BTW always use certified mail when dealing with time-sensitive issues like this. In fact, it is not a bad idea to use certified mail for any communication with the IRS.

And - please - never wait to the last day.

Like-Kind Exchange? Bulk Up Your Files

I met with a client a couple of weeks ago. He owns undeveloped land that someone has taken an interest in. He initially dismissed their overtures, saying that the land was not for sale or – if it were – it would require a higher price than the potential buyer would be interested in paying.

Turns out they are interested.

The client and I met. We cranked a few numbers to see what the projected taxes would be. Then we talked about like-kind exchanges.

It used to be that one could do a like-kind exchange with both real property and personal property. The tax law changed recently and personal property no longer qualifies. This doesn’t sound like much, but consider that the trade-in of a car is technically a like-kind exchange. The tax change defused that issue by allowing 100% depreciation (hopefully) on a business vehicle in the year of purchase. Eventually Congress will again change the depreciation rules, and trade-ins of business vehicles will present a tax issue.

There are big-picture issues with a like-kind exchange:

(1)  Trade-down, for example, and you will have income.

(2)  Walk away with cash and you will have income.

(3)  Reduce the size of the loan and (without additional planning) you will have income.

I was looking at a case that presented another potential trap.

The Brelands owned a shopping center in Alabama.

In 2003 they sold the shopping center. They rolled-over the proceeds in a like-kind exchange involving 3 replacement properties. One of those properties was in Pensacola and becomes important to our story.

In 2004 they sold Pensacola. Again using a like-kind, they rolled-over the proceeds into 2 properties in Alabama. One of those properties was on Dauphin Island.

They must have liked Dauphin Island, as they bought a second property there.

Then they refinanced the two Dauphin Island properties together.

Fast forward to 2009 and they defaulted on the Dauphin Island loan. The bank foreclosed. The two properties were sold to repay the bank

This can create a tax issue, depending on whether one is personally liable for the loan. Our taxpayers were. When this happens, the tax Code sees two related but separate transactions:

(1) One sells the property. There could be gain, calculated as:

Sales price – cost (that is, basis) in the property

(2) There is cancellation of indebtedness income, calculated as:

Loan amount – sales price

There are tax breaks for transaction (2) – such as bankruptcy or insolvency – but there is no break for transaction (1). However, if one is being foreclosed, how often will the fair market value (that is, sales price) be greater than cost? If that were the case, wouldn’t one just sell the property oneself and repay the bank, skipping the foreclosure?

Now think about the effect of a like-kind exchange and one’s cost or basis in the property. If you keep exchanging and the properties keep appreciating, there will come a point where the relationship between the price and the cost/basis will become laughingly dated. You are going to have something priced in 2019 dollars but having basis from …. well, whenever you did the like-kind exchange.

Heck, that could be decades ago.

For the Brelands, there was a 2009 sales price and cost or basis from … whenever they acquired the shopping center that started their string of like-kind exchanges.

The IRS challenged their basis.

Let’s talk about it.

The Brelands would have basis in Dauphin Island as follows:

(1)  Whatever they paid in cash

(2)  Plus whatever they paid via a mortgage

(3)  Plus whatever basis they rolled over from the shopping center back in 2003

(4)  Less whatever depreciation they took over the years

The IRS challenged (3).  Show us proof of the rolled-over basis, they demanded.

The taxpayers provided a depreciation schedule from 2003. They had nothing else.

That was a problem. You see, a depreciation schedule is a taxpayer-created (truthfully, more like a taxpayer’s-accountant-created) document. It is considered self-serving and would not constitute documentation for this purpose.

The Tax Court bounced item (3) for that reason.

What would have constituted documentation?

How about the closing statement from the sale of the shopping center?

As well as the closing statement when they bought the shopping center.

And maybe the depreciation schedules for the years in between, as depreciation reduces one’s basis in the property.

You are keeping a lot of paperwork for Dauphin Island.

You should also do the same for any and all other properties you acquired using a like-kind exchange.

And there is your trap. Do enough of these exchanges and you are going to have to rent a self-storage place just to house your paperwork.

Our case this time was Breland v Commissioner, T.C. Memo 2019-59.

Can You Really Be Working If You Work Remotely?

Have you ever thought of working remotely?

Whether it is possible of course depends on what one does. It is unlikely a nurse could pull it off, but could an experienced tax CPA…?  I admit there have been moments over the years when I would have appreciated the flexibility, especially with out-of-state family.

I am looking at a case where someone pulled it off.

Fred lived in Chicago. He sold his company for tens of millions of dollars.

COMMENT: I probably would pull the (at least semi-) retirement trigger right there.

He used some of the proceeds to start a money-lending business. He was capitalizing on all the contacts he had made during the years he owned the previous company. He kept an office downtown at Archer Avenue and Canal Street, and he kept two employees on payroll.

Fred called all the shots: when to make loans, how to handle defaulted loans. He kept over 40 loans outstanding for the years under discussion.

Chicago has winters. Fred and his wife spent 60% of the year in Florida. Fred was no one’s fool.

But Fred racked up some big losses. The IRS came a-looking, and they wanted the following:

                   Year                          Tax

                   2009                     $336,666

                   2011                     $  90,699

                   2012                     $109,355

The IRS said that Fred was not materially participating in the business.

What sets this up are the passive activity rules that entered the Code in 1986. The IRS had been chasing tax-shelter and related activities for years. The effort introduced levels of incoherence into the tax Code (Section 465 at risk rules, Section 704(b) economic substance rules), but in 1986 Congress changed the playing field. One was to analyze an owner’s involvement in the business. If involvement was substantial, then one set of rules would apply. If involvement was not substantial, the another set of rules would.

The term for substantial was “material participation.”

And the key to the dichotomy was the handling of losses. After all, if the business was profitable, then the IRS was getting its vig whether there was material participation or not.

But if there were losses….

And the overall concept is that non-material participation losses would only be allowed to the extent one had non-material participation income. If one went net negative, then the net negative would be suspended and carryover to next year, to again await non-material participation income.

In truth, it has worked relatively well in addressing tax-shelter and related activities. It might in fact one argued that it has worked too well, sometimes pulling non-shelter activities into its wake.

The IRS argued that Fred was not materially participating in 2009, 2011 and 2012. I presume he made money in 2010.

Well, that would keep Fred from using the net losses in those respective years. The losses would suspend and carryover to the next year, and then the next.

Problem: Sounds to me like Fred is a one-man gang. He kept two employees in Chicago, but one was an accountant and the other the secretary.

The Tax Court observed that Fred worked at the office a little less than 6 hours per day while in Chicago. When in Florida he would call, fax, e-mail or whatever was required. The Court estimated he worked 460 hours in Chicago and 240 hours in Florida. I tally 700 hours between the two.

The IRS said that wasn’t enough.

Initially I presumed that Barney Fife was working this case for the IRS, as the answer seemed self-evident to me. Then I noticed that the IRS was using a relatively-unused Regulation in its challenge:

          Reg § 1.469-5T. Material participation (temporary).

(a)  (7)  Based on all of the facts and circumstances (taking into account the rules in paragraph (b) of this section), the individual participates in the activity on a regular, continuous, and substantial basis during such year.

The common rules under this Regulation are the 500 hours test of (a)(1), the substantially-all-the-activity test of (a)(2) and 100-hours-and-not-less-than-anyone-else test of (a)(3). There are only so many cases under (a)(7).

Still, it was a bad call, IRS. There was never any question that Fred was the business, and the business was Fred. If Fred was not materially participating, then no one was. The business ran itself without human intervention. When looked at in such light, the absurdity of the IRS position becomes evident.

Our case this time was Barbara, TC Memo 2019-50.