the first issue is whether some money that he received back in two thousand and three was received as a result of his being in a tree or business and the second issue is an issue that the tax court declined to address which was whether the commissioner satisfied his burden of production on the issue of whether mr cheney is liable for a penalty on the underpayment tax with respect to the first issue traitor to sit down we also have a question about the jurisdictional ruling or you will deal with that separately that that's on the cross coloring don't you concede though that it is ordinary income of two million dollars we do concede at this point that the two million dollars is including all income yes your honor we don't have any tax on it according to the tax court's ruling with the to mr chase two thousand and three terms over sheltered however it is the subject of a separate proceeding in the united states tax court so just to get to the end first with respect to the cross appeal the government did issue eight notice of deficiency appeal because it may directly impact the outcome of that case so with respect to the first issue which is whether or not mr changes in gauged in a trade or business we posit that the tax court completely misconstrued the guiding principles which are under the gross you know case in the first instance if i could just step back the findings of fact that the tax court reached indicated that mr cheney was actually an employee do so he didn't receive it as an employee id well so two million dollars in two thousand and three the what the evidence at the trial showed and it's in the record is that the the architect of these check shelter schemes interfere was the owner and the principal of basically three separate entities one was called brick homes called counterpoint capital in the third one as you mention your honor is a the delta currency trading and they each basically serve the same function but they sort of differ in the types of clients that they advised but in your initial your initial petition to the tax work did you say that he was not an determined and the tax court used this brick a large umbrella because what came out is that mr beard didn't care where the money came from he didn't care if it came from rick law she didn't care if it came from counterpoint he didn't care if it came from delta and in fact there were e mails that said we have enough money in delta to pay it but he never received the salary from delta and he never received a salary from delta directly so getting back to  sort of trader business he was in this was me in a continuous and regular way and motivated by my profit he set up a company to help him the old with some of these bur judged it was what motivated him right george i'm glad you asked question that way so let's see if i can answer the first part of the question first which is the continuity regularity which is one of the factors you look at under grossinger if if we look at grossinger itself there was a case involving a professional gambler and interestingly of course in that case the commissioner took the opposite position it wasn't a trade or business because they didn't want they didn't want him the taxpayer to be able to deduct his expens so if we look at the facts there the taxpayer gambled six days a week an average of fifty a sixty hours i think the case had a week forty eight weeks a year i did the math and it works out to be about twenty eight hundred hours per year that he was engaging this activity the evidence in this case is that mr cheney went to brickell lodges offices approximately six times for about an hour and a half each time a total of will go nine or ten hours to sign documents that he didn't prepare and that he didn't come up with for entities that he did not create that made it much more he made much more doing that didn't they then he did as an architect if you look at thousands income from architecture was fifty six thousand in two thousand and one it was eleven thousand six hundred forty if you compare that with what he was getting with respect to these dress i'm glad you asked the question that way too if we look at there's there's an interesting case which is levinson v commissioner you know a knack ace the taxpayer was he had a retail store he sold electronic goods and it is part time he was an inventor and he invented settled for a proximately five hundred thousand and the other he settled for over two hundred thousand so he received seven hundred seven hundred fifty thousand dollars in income from the market wave container and the tax court still held that  it was not a trader business because the his activity was too sporadic and very key to these cases because the taxpayer had other full time employment just as mr cheney did he was a full time architect if you look at some of the other cases that discuss profit motive they do you discuss this concept of other full time employment just as in levinson it's a recurring theme in grossinger for example the hard questions today but yes mr cheney absolutely sign returns but if again if we look at the reality in the totality of the situation those returns were prepared by greed fortan which was an accounting firm that was hired by mr beer and mr beers entities those returns to have this business that provided huge hedges and shelters for people with large amounts of in it it was a huge ordinarily successful must have been very creative because  your client got a one point two million dollars signing to just sign i mean his signature was worth a lot is his the job that he did was easy really easy i mean this is the kind of job does the signing for again judge that those are the facts however if we look at i own a ton of real estate i want to time a real thing and i can make an analog to somebody who lives on  them i own a ton of real estate i have a median people go out praise the properties for me and they talk to the bankers and they develop with architects all the plans and everything and all i got a douche side show up and sign the deed on my job is to sign a deed i'm in the business a real estate development judge i think you're you're putting mr cheney in the position of misusing the years a supervising hundreds of millions of dollars tax write offs to investors who have income that they don't want to pay income tax that's his business or position is that that just doesn't qualify what sound like a hobby to what mr chay did i think you're you're you're mr chay did with what mr beer did ok mr chait was just the accommodating party it was a necessary element was enough that isn't necessary granted that's a necessary element to the tax shelter that the pops in the pico schemes that that mr beer came up with there's no question about it as i'm sure your honor understands that the client gets the last leg and the accommodating party g don't gain like i i guess so but it just doesn't rise to the level of the conduct and i'm sorry the continuity and the regularity of the conduct if it just doesn't rise to the level of some of these other cases if i can point to the bagley case so here's a case where the taxpayer prosecuted some key tam actions under the false claims act and he again the commissioner took the position not a trade or business because he had a nine million dollars will go bill in prosecuting these cases and he wanted to deduct it from i think the twenty seven million dollars that that he that he earned i wish you would you mind if i'm trying to move you to the law the last move against it did you move against it at the close of the government's case it was in our post trial briefs this is what it was post so it wasn't post cause you're on the government's case you look at the completion of submission of evidence it was at the completion of the submission of evidence so that both sides correct so they did the tax court works that way you you try to case and then the tax court has pushed trial briefing and then a decision is rendered either th could you have moved at the close of the government's case pointing out that they had failed to meet the statutory requirement for this we certainly could have done that but it's generally done in the post trial briefs argument is made in the post trowbridge's rather than making a post motion that's how the tax court generally operates the tax courts and it way the tax court declined to address the issue they said we didn't that we didn't raise it before the trial and the issue with that is there's no way to raise the failure to meet the burden of production before they actually meet the burden production we had a trial and they could have come forward with the evidence at trial of if he was the penalty first imposed though with wasn't there any prior communications use the deficiency used the penalty also generally what happens is that the sum employee of the internal revenue service determines to impose the penalty the taxpayer has the opportunity to contest that in this case that the penalty should not be applied based on reasonable cause the i r s employee reviewed that opposition to the penalty determined that reasonable cause was not a placebo and determined to assess the penalty and that was included in the notice of deficiency which gave mr chayes tax court rights and as well as the attachment to the notes of deficiency which is called explanation of items it's a form eighty six so this your position would be that that was invalid thus imposition of a penalty because you had not been presented with the signature approving of the imposition of the penalty at that point know that the commission of the internal revenue service is not required to furnish the taxpayer with evidence of compliance with sixty seven fifty one b one at that point what why do you say that statute says they can't impose the penalty absent the written approval of the supervisor right yes that is what the statute says but did it in the the in examination phase the i r s is not required to provide the taxpayer with that document so to speak it's not until there's a final resolution years but it would pain it becomes it's not until the commissioner fails his burden of production at trial to come forward so that under a lot of numbers sixty seven zero one d no no i'm sorry that's the ten ninety nine issue under  you know the commissioner has the burden of production with respect to the imposition of a penalty under seventy four ninety one c now part of that the elements of the claim for a penalty one of the elements is sixty seven fifty one b you have to have the written approval of the supervisor of the employee who first determine to assess that penalty it's an element of the claim i don't know how you can argue they didn't satisfy the elements of their claim until they don't satisfy the elements of their claim that would be like saying that if i were the plaintiff in a negligence case that that my adversary would be required before the trial even began to tell me that i had to prove duty breach causation and damages that just is not our jurisprudence works it's an adversary proceeding i don't have to tell him what the elements of his claim are and he doesn't have to tell me what the elements of my claim are when you when you when you come when you return on rebuttal on the walls or ask you some questions about jurisdiction as you as you deal with it in your in the reply brief but i guess for us we should hear the cr first let me let me reiterate what judge wesley pointed out and that is if this court accepts our jurisdictional argument then the taxpayer will low income tax on that two million dollars payment regardless of the outcome of his own appeal so let me get to the jurisdictional argument and i realize that all this technical jargon about partnership items in affected items is enough to make your eyes glaze over but on a conceptual level the jurisdictional issues not that difficult the result of a the mercato partnership proceeding became final while the taxpayers tax court case was still ongoing and everyone agrees that the proper means of applying the results of the macondo proceeding to the taxpayers returned is through what is called a computational adjustment and all that means is that the s adds back the eleven point one million dollar loss that the taxpayer claimed through merck on a and if if doing so if doing that results in additional income tax and the i r s assesses that amount making it immediately collectable without first having to give the taxpayer the opportunity to dispute the additional amount in the tax court your adversary says that you essentially have two options a understand it either the results if the results are purely computational then you have to issue a notice of computational adjustment or if they're not happy really competent computational you have to go through the standard deficiency and you're saying that neither is true here now we're saying that  applying the results of the mercato proceeding to the taxpayers return was purely computation that was a purely excuse me a purely computational exercise and the i r s performed that exercise what it did is it took the income figure that the taxpayer reported on his return which was about negative eleven point five million the i r s added back about four hundred thousand dollars to reflect an agreed upon adjustment  result relating to a loss from a another year carried carried forward and then added back the roughly eleven point one million dollar loss that the tax payer claimed through mercado and as the as the round numbers suggest the result was close to breakeven about fifty thousand dollars of tax will income resulting in about ten thousand dollars of income tax that's the amount the ten thousand dollars that was outside of the tax court's jurisdiction and the i r s assessed that amount as it was entitled to rather than asserting a claim for it in the taxpayer's ongoing tax court case so then you say ok so what was the effect of this mechanical exercise on the taxpayers ongoing tax court case before the results of the mercado proceeding became final the dispute over this two million dollars payment from delta did not give the i r s a claim to additional reduced his claimed loss by two million dollars it wouldn't have resulted in positive income but once the results of the merck ato partnership proceeding became final now the i r s no longer has to give effect to this  point one million dollar loss that the taxpayer claimed through mercado and now the ongoing dispute over the taxability of this two million dollars payment i envision it does give the i r s a claim to additional income tax thought there sure we don't see a lot of taxes and and so it i want to be very careful because i don't want to end up deciding something that alex is up a system that you folks understand a lot better than we do so but he he didn't list the two million on his return or act so you can't just added you have to get it from someplace and you have to figure out that it's income now is keep conceded from us that if it weren't it on its income would you have to get it from someplace don't you when you say get it well that you didn't have the two million dollars on as you would be right i two million bucks there is no longer protected right that sounds computationally me but when he didn't report that on his return you have to do something more than just a computation you have to understand what the two million dollars is don't you and that is his that's the whole basis of his separate tax court proceeding the i r s audit the taxpayer discovered this two million dollar payment and asserted the deficiency in self employment tax it couldn't asserted deficiency an income tax because the partnership laws offsets the two million dollars for purposes of income tax but not often point exactly oh exactly so so what you're saying  exactly see it couldn't have done so before the mcconnell proceeding record was complete and it couldn't have done so through a notice of computational adjustment direct if you think about it in those terms and the question is when could they have done it sheet with the tax and i don't know i mean all right times that is the case but you raise a valid point i mean they are risk can't just you know when the iras discovers this two main dollars payment you can't just say ok we're going to wait until the end of the partnership proceeding and then we'll as you know some deficiency you're exactly right there's a statue limitations for that but that struck me as kind of a structural problem and in terms of integrating the test for proceedings with the ordinary the regular tax deficiency proceedings  and there is a special procedure that deals with this problem and the only it didn't apply in this case because of this little self employment issue in order for there is a special procedure  tax you know even taking into account the partnership loss but here even taking into account the partnership loss there was a deficiency in self employment tax that's why the i r s couldn't use section sixty two thirty four were not nearly there is an integration yes this because the self employment tax was not eligible for the yes don't you isn't there or isn't there something that's even tighter fit for you and that sixty two thirty eight to hardship return so you had an attorney and whether they were legitimate or not once you determine that they were no longer legitimate that determination that significantly impacts you were a sussing the self and i i just you know i don't think it's as technically strong i mean that the tax court phrase that caps this in terms of whether the additional deficiency was an affected item and that's wrong that's just wrong made wrong because the fact that you know already assess the on the self employment tax against well no it's made wrong it's technically wrong because the statute talks about deficiencies that are attributable to affected items the deficiency itself is not an affected item so our alternative argument is that the two million dollars payment isn't affected item but that's i mean that's kind of a strain as well because the two million dollars payment has losses has has nothing to do with the merits of the mercado partnership or see it's two completely different so you know we did make that argument and you know maybe maybe that appeals to you more more so than than the than the primary argument i'm just saying that it's it's technically if the computational is subject to this section sixty seven fifty one b requirement if the taxpayer raises a reasonable cause defense in response to the initial determination we suggested otherwise in our brief and i apologize for the  confusion really was that in the simultaneous answering brief to the tax court you said exactly what you just said and it seemed that the brief was a departure from that  position and that that's my mistake so just to be clear so if it is a prerequisite a statutory yes the the sixty seven fifty one b and as i understand it in the way this usually works you know ira sends out a thirty day letter with a cloth thirty day letter and says we're you know we're proposing to make these adjustments and then the taxpayer responds you know files a protest or what have you  it's my understanding and you know i don't know the completely what happened but it's my understanding that they did raise the reasonable cause defense and certainly at that point it's no longer you know just a mechanical determination and and we and  as to when is the proper time to you know when does the duty key again to present the approval approval well to make the end to make the claim i mean usually  taxpayers make these claims after the tax is already been assessed and so what they are asking the i r s to do is to abate that prior assessment there's some question as to exactly you know if you can even raise this in the tax court there's a case called leg l n g g versus commissioner one forty five t c three forty four where the iris i believe takes the position that the sixty seven one i'm sorry sixty seven fifty one b issue was not even properly before properly a part of a deficiency proceeding that the time to raise it is is the overarching issue is whether the tax court abused its discretion and declining to consider this argument what i'm saying is that as a substantive matter in general section sixty seven fifty one  raise this before or during the trial you can't brazen afterwards and i mean that's one question i have i'm not not i'm not your adversary points out that you can't know whether the government has failed reach the issue so if you decide that the tax court well then ok so if you reach the issue then i think the issue becomes you know when does the tax payer i mean is it part of the irises burden of production and i would think if if it is you know then then we have a problem  of the of the of the irises case and again i don't know exactly how the the tax court procedure works but that was one of my thoughts was why didn't they just say you know when they are as close it's case why don't they just make a motion right there now counsel represents that that's not how the way things are done and he's in the tax court a lot i'm never in the tax court so i don't i don't know the exact procedure how that works thank you so with respect to the jurisdiction issue on the on the increased efficiency it strangely i agree with almost everything that mr carroll said and the computations that your own are made up however the statute tory scheme on how the test for the results of a temperate proceeding are imposed upon individual partners is pretty clear and there are two avenues even i drew a picture to remind myself it's like a flow chart so here you have the partnership item at the top and now that's been determined in the tepper proceeding there are two ways to now translate that something else has to be done to take it from the partnership level to the partner level and there are two avenues to get there one avenue is a computational adjustment when it's a purely computational matter the i r s issues a notice of computational adjustment and what happens is if the tax payer wants to challenge that there are no tax court rights because there is no deficiency jurisdiction for the computational adjustment under sixty two thirty it limits the tax court's deficiency jurisdiction so what you have to do is pay the tax and then sue for a refund what can i ask you please yeah i saw what i'm trying to figure out is once the the done it before the the task or an obviously determined that the characterization of the two million but they think they could if they could have done it before that they should have it's not an assessment your honor it's a computational adjustment so it's purely computational all it does is basically take the taxpayer's return and let's make it you know fairly simple with numbers i had a million dollar loss from  ok and now i'm going to recruit huge that return absent a million dollar loss and it's going to show me what the bottom line is ok that's what they should have done at the conclusion of the computational adjustment from for a tougher item but this was in fall through the year which there is a tax payer level to terminations about the treatment business well generally they all are going to be involved with the same year because the partnership item is going to be adjusted in the individual partner's return is going to have to be adjusted for that same year so they all involve the same year they also had the statue taishan zisha right in terms of assessing the tax yes i was not involved in the case at that early stage so i don't recall whether there was but it is often the i r s does have a certain amount of time to make an assessment and as i think mr carroll pointed out it is also often that the taxpayer and i r s will enter into an all the time that's what they should have done and they should have still continued efficiency proceeding and they did not if the taxpayer and the commissioner entering into an extension and then there's no noticeable deficiency issued until the commissioner figures out right but when they don't enter into that and they're growing up against the statute for assessment of tax the i r s often just issues a notice of deficiency because it needs to get in under the wire and then the taxpayer will file in tax work to redetermine that deficiency but just getting back to that to the test for issue so sixty two thirty restricts the deficiency jurisdiction of the tax court to only affected items as you want to point out which this is not as the as the government agrees and two non partnership items and this is neither of those is not affected item because the t could easily make a determination with respect to the two million dollars without any without looking at the macondo issue at all because the question in that case is is the two million dollars including an income and if so how is it includ the characterization of the receipt of the funds and it determined that it was income so that the characterization of that money whether is income whether was return of investment whether as a gift the tax court can make that determination without any without having to wait for the macarthur decision the fact that mr chase returns over shelter to that point is irrelevant because it's the result the bottom line is going to ultimately be affected by the fact that item was them to depreciate the losses and not the two million dollars because the two million dollars doesn't really have anything to do them or that's money coming out of the two million dollars does  it has a certain basis in that property which again is calculated ok and and now that the individual partner has an outside basis in the property which mirrors the the determination of the decayed one and he now reports his gain on that portion of whatever the item is sold now the commission comes in and he says ok we're going to challenge the basis in the property ok so you have to do it in the partnership you're seeing now the partners again individual partners gain is in effect an item because it is directly affected by the determination of the tougher because now he's got his base is going to change which change the computation again a loss that's been affected item in this case that two million dollars that came from delta it could be determined whether it was income a gift return on investment anything without reference to them or caught a been stripped out of his it out of his tax return he does so where does he face that so the i r s issued a notice of deficiency with respect to the two thousand and three tax year based on the mercato elimination of the new notice of deficiency filed the tax court petition and as i mentioned before that's currently pending before the united states tax court has actually been counted for trial twice we've had it continue generally pending the outcome of this appeal and i ask b issue with what the government's trying to do is they're trying to transfer their burden onto mr cheney the taxpayer to to ask for evidence which is part of the their burden of production and carol brought up there might be an issue of timing well i don't really think there's an issue of timing because trial is the time if there's no other time it's a trial you have to you have to come forward with your evidence at trial that's the last opportunity so to suggest that we had to ask for it in discovery or in some other earlier time and that it was our burden to ask the government to produce their own evidence for which they actually have a statutory burden of production makes no sense thank you judge proceeding to the taxpayers return was through a computational adjustment that's what the i r s did when it did that it couldn't take into account it couldn't add back the two million dollars because the taxability of that two million dollars was actively being contested in the tax court i mean it's almost as if they're saying in this proceeding or and yes th proceeding i mean it's almost as if they're saying you know the additional deficiency was something like five hundred sixty thousand dollars it's almost like they're saying the irish are just assess that can you imagine the hue and cry that would that would happen if  irish just assesses income tax on a disputed two million dollar payment so again the question is how does the i r s assert its corning and it's exactly the way it did it it augmented its claim in the ongoing deficiency proceeding and regarding this there there is the iris filed a particular or issued a protective notice of deficiency for two thousand  three you know in case this case does not come out favorably but my understanding is that there's all sorts of jurisdictional jurisdictional issues with that proceeding i mean