I’ve often complimented Judge Holmes on his ability to write like a human being, not like a lawyer. But today Judge Paris has really gone to the other extreme, no fewer than three (count ‘em, three) times, although the cases are related.

Here’s the story. “ORDERED that the joint motion to submit case pursuant to rule 122 is held C.A.V.” Richard Liljeberg, et al, Docket No. 20796-14, filed 12/31/15, at p. 2, a heckuva way to end 2015.

“C.A.V.”? Until the cavalry shows up? Until Ceiling And Visibility clear for takeoff?

No, fellow unscholarly and unwashed practitioners, I had to hit the American Heritage Dictionary (a prescriptive, not descriptive, tome, for you lexicographical demons out there).

So here’s the skinny: “curia advisari vult (the court will be advised, will consider, will deliberate).”

Now I’ve been practicing law for three months shy of 49 years, and that’s a new one on me. Which is why I love this stuff.

I could play the grubbe yung, as my late grandmother would have phrased it, and suggest that “the joint motion to submit case pursuant to rule 122 is held in abeyance” might do the trick, and unconfuse those of us unfortunates who hadn’t gone to the University of Tulsa College of Law or the University of Denver College of Law, as did Judge Paris.

But I won’t.

Nor will I prolong the agony by mentioning STJ Lewis (“Forever Lew”) Carluzzo’s blast at another designated protester.

Rather, and more fittingly, I’ll wish all y’all (as my Texican daughters and granddaughters would say) a Happy New Year.

Peter Reilly, CPA and ace blogger for forbes.com, asked me this afternoon if I meant to comment on Estate of Barbara M. Purdue, Deceased, 2015 T. C. Memo. 249, filed 12/28/15.

I replied that I did not, as the principle that centralized management of assets by family members was a sufficient non-tax reason to avoid the toils of Section 2036(a) was well established. See my blogpost “Flip for FLP,” 2/23/12. The Purdue case adds nothing to that principle.

Mr. Reilly has said that he’ll be commenting on Purdue, wherefore I refer my readers to the Forbes website and Mr. Reilly’s no doubt exhaustive exegesis thereon.

I might have used the Purdue case as a springboard to a discussion of the New York Times’ special report, dated 12/29/15, discussing how the wealthiest have built their own private tax system.

But there was nothing new about round-tripping cash to Bermuda reinsurers to transmute ordinary income into capital gains (it was invented by Lloyds of London in the pre-Thatcher days, to duck Britain’s then-98% top tax bracket).

And the FLP maneuver is standard operating procedure.

The universal life insurance dodge was mentioned, but we knew all about that. See my blogpost “Keep Your Hand Upon the Dollar,” 6/30/15.

The annuity-for-assets dodge (see my blogpost “No’ Deid Yet,” 2/7/13) was not touched upon, but I’m sure the reporter was overwhelmed with the clichéd dodges aforementioned.

I could here launch into a diatribe, but I have done so elsewhere.

I’ll spare my readers.

Not in Tax Court

I was admonished by Salvatore Bochicchio, CPA, back in 2011, that what I thought was obvious maybe wasn’t so obvious. See my blogpost “Maybe Not So Obvious,” 8/28/11.

So today I post the story of Jesus Rodriguez & Juanita Rodriguez, Docket No. 1690-15S, filed 12/30/15. The result is obvious to me, but maybe not to all my readers, or those who casually come upon my website.

Here’s Ch J Michael B (“Iron Mike”) Thornton, who will doubtless rule the forthcoming annual Tax Court Judicial Conferences with a rod of iron, as suggested by a much more exalted source, to tell the story.

“…petitioner Jesus Rodriguez made an informal request for a jury trial.” Order, at p. 1.

Sorry, Jesus, it ain’t gonna happen.

Remember, when a judge says something is “well-settled,” with or without a hyphen, or in this case “well established,” start packing your litigation bag and heading for the door. And a double Grey Goose Gibson, up. You’ll need it.

“It is well established that a taxpayer who elects to bring suit in the Tax Court has no right, statutory or constitutional, to a trial by jury. The Seventh Amendment preserves the right to jury trial ‘in suits at common law,’ however, because there was no right of action at common law against a sovereign, enforceable by jury trial or otherwise, there is no constitutional right to a jury trial in a suit against the United States. Thus, there is a right to a jury trial in actions against the United States only if a statute so provides and Congress has not so provided where a taxpayer has elected not to pay the assessment and has sued for a redetermination in the Tax Court. If a taxpayer wishes for a trial by jury, he must pay the tax allegedly owed and sue for a refund in district court. 28 U.S.C. secs 2402 and 1346(a)(1).” Order, at p. 1. (Citations omitted).

Neither Perry Mason nor Matlock need apply.

But Then What?

Juan Herrera lost a Tax Court case over his bad debt deduction for 2006, and his partial carryforward thereof in 2007, back in 2012 (and no, I didn’t blog it, too fact-specific). Juan does no better with his 2008 carryforward of a portion thereof in Juan M. Herrera and Susana M. Herrera, 2015 T. C. Memo. 251, filed 12/29/15, Judge Swift deciding that Juan had his chance and blew it.

The issue is identical for the 2008 carryforward; if the bad debt wasn’t Juan’s, there’s nothing to carry forward.

The bank statement Juan claims is new evidence that his disregarded LLC was liable for the debt of his consulting company, which the LLC paid, only shows the LLC and his consulting company had the same office address. And Juan offers no reason why this bank statement, in existence at time of trial, wasn’t put in evidence. Probably it wasn’t introduced because Judge Swift found it proved nothing, and so would Judge Wherry have done back in 2012.

So why am I blogging this routine T. C. Memo.?

It’s the chops.

IRS wants summary J on the chop as well as the deficiency. After all, the five-and-ten substantial understatement is a slam dunk, and Juan is out on his bad debt.

But Juan claims reasonable cause for the understatement, and Judge Swift buys it.

“On the penalty issue for 2008 and in opposition to respondent’s motion for summary judgment thereon petitioners assert a reasonable basis for claiming the carryover bad debt deduction and the resulting understatement of income tax. See sec. 6662(d)(2)(B)(ii)(II). Petitioners correctly note that respondent never determined a section 6662 penalty against them relating to the tax deficiencies for 2006 and 2007, even though the facts relating to those claimed bad debt deductions were essentially the same as they are for 2008. Additionally, petitioners note that their 2008 Federal income tax return was filed before the Tax Court’s prior opinion was filed on November 5, 2012.

“Petitioners argue that respondent’s failure to determine section 6662 penalties for 2006 and 2007 establishes, or at the least provides significant support for, the reasonableness of their claim of essentially the same bad debt deductions for 2008.” 2015 T. C. Memo. 251, at pp. 7-8.

OK, no summary J. But is there to be a trial? Is there a fact question about the 2006 or 2007 chops, or lack thereof? And if there isn’t, is there a question about Juan’s (and maybe Susana’s) level of sophistication, so they might deduce that their claim wasn’t totally out to lunch? Or is there a question about Juan’s tax advisers? In either such case, as my high-priced colleagues would say, when Juan opposed summary J on his reasonable basis, why didn’t IRS ask to provide a reply, even though it’s unlikely they’d get it. Rule 50(b)(3) gives a motion judge latitude to “…take such action as the Court in its discretion deems appropriate, on such prior notice, if any, which the Court may consider reasonable.”

So does there need to be a trial?

No, not Konrad Korzeniowski’s (that’s Joseph Conrad’s) classic novel, rather it’s the claim of Michael Tseytin and Ella Tseytin, 2015 T. C. Memo. 247, filed 12/28/15*. Ella is out of joint-and-several, per stip, so this is Mike’s story.

Mike was running two LLCs in Mother Russia via a NJ C Corp, spreading American values via Pizza Hut and KFC franchises. Mike’s C Corp had a 91% interest in the LLCs, and the rest were held by “unidentified key employees” of the C Corp. Please pardon an old cynic if he suggests that the “key employees” were stationed far from the Jersey Shore and might have obscure connections with the Russian government.

Howbeit, an unrelated BVI entity owns 25% of the C Corp, and Mike owns the rest. Personally. And yet another unrelated corporation “organized under the laws of the Netherlands and the shares of which were publicly traded on the Warsaw Stock Exchange, owned and operated Pizza Hut, Kentucky Fried Chicken, Burger King, and Starbucks franchises throughout Central and Eastern Europe.” Now the unrelated cast longing eyes on Mike’s Russian operation, with promises of mucho diñero.

They make a deal whereby Mike has to buy out his BVI partner, and transfer their shares and his shares in the NJ C Corp to the Dutchmen in a Section 356 tax-free merger. Mike got stock in the acquiring Dutch corp, and that everyone agrees is tax-free, but Mike picks up cash to the extent of $23 million.

Now comes the accounting. Mike claims a short-term capital loss on the BVI stock he bought, based upon an allocation of the cash he got. IRS wants the allocation based on total consideration, that is, FMV of all the Dutch corp stock Mike got plus the cash.

Mike wants to offset the short-term loss against the long-term gain he got on his own C Corp shares. Section 356(c) loss disallowance ends that. And Mike’s ingenious arguments go nowhere; he can’t offset his realized but unrecognized loss against his realized and recognized gain.

Mike first treated the transaction as sale of a single block of stock, but admits there are two blocks, his own and the BVIs.

Now comes the reason for the title of this blogpost.

Mike claims, for the first time, that he acted as agent for the BVI, and that he was a mere conduit for cash he paid the BVI, as he got reimbursed the cash by the Dutchmen. That crashes at the Nat’l Alfalfa fence: choose whatever form you want to do your business, but once you choose you’re stuck with it. The BVI never were part of the acquisition deal with the Dutchmen; they negotiated nothing and signed nothing.

And Mike gets a 20% negligence chop. Mike claims his amended return cures the defect in his original return, where he treated all the shares as single block, but repented in his 1040X.

No go, says Judge Swift. “For penalty purposes, petitioner points us to some authority that he argues supports his amended return and his alternative argument to the effect that related gains and losses in a merger transaction should be allowed to offset each other. Therefrom petitioner argues that the acknowledged error in his original tax return should be overlooked. However, respondent’s penalty is based on petitioner’s position on his original return, not on his amended return. The cited authority does not support the error petitioner acknowledges was made in his original … return.” 2015 T. C. Memo. 247, at pp. 22-23. (Footnote omitted).

Mike was not an agent for the BVI corp, secret or otherwise. And his repentance comes too late.

*Michael Tseytin 2015-247

Returning from my break in the Magnolia City and the great hospitality of nearest and dearest, I find Judge Lauber so admonishing Samuel Striker, 2015 T. C. Memo. 248, filed 12/28/15.

Sam, a social scientist, desires to serve his country and “breathe short-winded accents of new broils to be commenced in strands afar remote,” as a far better writer than I put it. Sam gets his wish, and signs up as what we used to call a DAC (Department of the Army Civilian).

Only instead of broiling, Sam serves two successive hitches, first as a GS12 and next as a GS13, with the usual DoD fringe benefits, putting his social science to work helping the Afghan government and NATO, to which organization Sam was attached.

“Petitioner’s mission as a social science expert was to act as a liaison between the NATO command and the local people of Kandahar and its surrounding area. He sought to help military officers gain a better cultural understanding of this population. He also gathered and analyzed information concerning local commerce (including illicit commerce) with the aim of helping NATO create a successful local security apparatus. Petitioner regularly participated in NATO- sponsored training and workshops, some of which were mandatory.

“Petitioner wore a NATO-ISAF civilian name tag and a NATO badge when rendering these services, which he performed as part of a Human Terrain Team (HTT). The HTT was composed of citizens from various NATO countries, and the team’s composition changed as personnel came and went.” 2015 T. C. Memo. 248, at p. 5.

Sam was never employed directly by NATO, although a NATO officer evaluated his performance. While the NATO officer could throw him off the HTT, only the US Army could fire him. Sam never knew where he would be deployed or what he would be doing until the Army told him when he landed at Bagram.

So why is Sam in Tax Court? He wanted the foreign earned income exclusion, claiming he was out of the country the requisite days (IRS agrees) and working for NATO (not! says IRS, and wins).

The US Army had hired Sam, and had hire-fire power over him. Sam’s claim about IC-EE status is not to the point. Even without day-to-day supervision or evaluation by a US Army person, his employment fate was in the hands of the US Army, not NATO.

And his paychecks came from Defense Finance & Accounting Services.

Section 911(b)(1(B)(ii) puts paid to Sam’s exclusions. He was in the Army.

Yet another chapter in the ongoing battle between form(s) and substance, just before Tax Court takes its Christmas break, shutting down for December 24 and December 25, is written by Ch J Michael B. (“Iron Mike”) Thornton, in Latrina Gray, Docket No. 27996-15, filed 12/23/15.

IRS proffers a PS Form 3800, Receipt for Certified Mail, that green thingy that the post office windowperson runs through the register to show you paid the postage and fee and hits with the red stamp, to show when they mailed the SNOD to Latrina. And of course IRS claims Latrina’s petition therefrom is late.

But all the PS Form 3800 established is that something got mailed by a certified mail to a certain address. “It does not establish that the contents of that certified mailing was the notice of deficiency upon which this case is based.” Order, at p. 1.

So let IRS supplement its motion to dismiss by coming up with documents that show what was in the envelope.

Form does not overrule substance.

OK, but when we do, how will Tax Court deal with it? And that’s not Berry Gordy, Hal Davis and Willie Hutch asking, but rather Usman Bhutta, 145 T. C. 14, filed 12/22/15.

Usman claims benefit of the U.S. – Pakistan Tax Treaty, because his purpose in coming to the Land of the Free was to teach; IRS says it was to advance his medical training, and Judge Marvel agrees. The treaty makes tax-free (for US purposes) earnings by foreign teachers, which Usman wasn’t, although he did do some incidental teaching, because teaching wasn’t his principal purpose.

And the University of Oklahoma, where Usman was studying during the year at issue, is not a US instrumentality for purposes of the treaty (or at least Usman can’t prove it was), so Usman doesn’t get the $10K free kick a student-trainee at such an instrumentality gets from the treaty. Aside to a son-in-law: no “Boomer Sooner” for Usman.

To answer the question that leads off this blogpost, here’s Judge Marvel: “When interpreting a treaty, we begin with the text of the treaty and the context in which the written words are used. E. Airlines, Inc. v. Floyd, 499 U.S. 530, 534 (1991); Sumitomo Shoji Am., Inc. v. Avagliano, 457 U.S. 176, 179-180 (1982). The plain meaning of the language of a treaty controls unless its effect is contrary to the intent or expectations of the signatories. Sanchez-Llamas v. Oregon, 548 U.S. 331, 346 (2006) (citing 1 Restatement (Third) of Foreign Relations Law of the United States sec. 325(1) (1986)); Sumitomo Shoji Am., Inc., 457 U.S. at 180; Amaral v. Commissioner, 90 T.C. 802, 812 (1988). Because treaties are contracts between sovereigns, we construe them more liberally than private agreements to give effect to the signatories’ intent. See United States v. Stuart, 489 U.S. 353, 365-366 (1989); Air France v. Saks, 470 U.S. 392, 396 (1985); Factor v. Laubenheimer, 290 U.S. 276, 293 (1933); Estate of Silver v. Commissioner, 120 T.C. 430, 434 (2003) (citing Nw. Life Assurance Co. of Can. v. Commissioner, 107 T.C. 363, 378-379 (1996)). Where appropriate, we may ascertain the meaning of a treaty with an eye toward the treaty’s legislative history and the parties’ negotiations, diplomatic correspondence, and practical construction they have adopted. See Air France, 470 U.S. at 396; Factor, 290 U.S. at 294-295; Estate of Silver v. Commissioner, 120 T.C. at 434; Rust v. Commissioner, 85 T.C. 284, 288-289 (1985). We also give weight to how the departments of the respective governments charged with negotiating and enforcing a treaty interpret that treaty. See Kolovrat v. Oregon, 366 U.S. 187, 194 (1961); Rust v. Commissioner, 85 T.C. at 288.” 145 T. C. 14, at pp. 16-17.

Of course, the only part of this learned disquisition that appears at all relevant in Judge Marvel’s opinion is the plain meaning of the word “purpose,” and for that we go to Hank Black and Merriam-Webster. Neither the treaty itself nor the legislative history, diplomatic correspondence and departments of the respective governments say anything to the point except “plain meaning.”

So I include all these tips to interpreting treaties solely as a checklist. And, of course, for string-cites in your memoranda of law.

It’s called Protecting Americans from Tax Hikes Act of 2015, effective 12/18/15. I call it the Revenue Act of 2015. Effectively there is no Internal Revenue Code.

Its 233 pages do contain some interesting points.

As for where Tax Court gets its rules of evidence, now it’s from the FRE. So says Section 425. See my blogpost “Paraphrasing Mark Twain,” 12/12/12.

Section 431. Tax Court is authorized to provide a complaint mechanism for those claiming judges and STJs done them wrong, and applies to all proceedings commenced 180 days after enactment. Watch all the protesters line up.

Section 432 provides for an annual Tax Court judicial conference, with reasonable fees for attendees. Maybe somebody in Congress reads this blog.

And Section 441 is the famous declaration of independence for Tax Court. So Tax Court is independent of the Executive Branch. It is also not an Article III court. And a legislative court is an oxymoron. So what is poor old little orphan Tax Court?

One day before trial, IRS moves to amend its answer to up the deficiency by $268K in Phyllis E. McGrady & Christopher R. Antoniacci, Docket No. 20602-12, filed 12/21/15.

They’re a wee bit late, as their answer was filed two-and-a-half years before IRS made the motion last February. IRS claims they only got a copy of the 2007 tax return in question in January, 2015. That’s a wee bit thin for Judge Lauber, even though Rule 41(a) suggests that requests to amend pleadings should be liberally granted.

It’s another big-ticket scenic easement case.

“We think that respondent has unduly delayed in moving to amend his answers. The administrative case file makes clear that the IRS examination team was aware of the $268,000 contribution and made an explicit decision not to disallow it. The rationale that respondent now asserts for disallowing that deduction seems to be the same as its rationale for disallowing the deduction for the $4.7 million contribution. If respondent’s trial counsel believed that the examination team had erred in failing to disallow a deduction for the $268,000 contribution, it is unclear to the Court why respondent waited two and one-half years after filing his answer in docket no. 20602-12 before seeking leave to amend his answers. Since petitioners’ 2007 tax year was the principal tax year under audit, the assertion that petitioners’ 2007 tax return was not previously available does not strike the Court as a sufficient excuse for this delay.” Order, at p. 2.

I cannot very well say how it strikes me in a blog meant for family reading.

Motions denied.