Specifically to Mr. J. P. Finet, now or formerly legal editor of BNA Daily Tax Report (n/k/a Bloomberg BNA, as our Mayor’s corporate octopus has entangled BNA), who brought the Coffey case to my attention back in December, 2011. See my blogpost “Somebody Does Read This Blog”, 12/4/11.

Well, my comment on Coffey may have been short-lived, but not the case, as witness Melissa Coffey Hulett a.k.a. Melissa Coffey, Et Al., Docket No. 30676-09, filed 7/3/13, a designated hitter. And who is more fit to wade through the silt stirred up by this latest tale from our insolvent Islands in the Sun but The Great Dissenter, a.k.a The Judge Who Writes Like a Human Being, His Honor Mark V. Holmes?

Yes, it’s back to the Virgin Islands and Section 932. You’ll remember my exegesis anent Arthur I. Appleton, Jr., Petitioner, and The Government of The United States Virgin Islands, Intervenor, 140 T. C. 14, filed 5/22/13, when IRS lost on SOL grounds.

Mr Finet thought back in December, 2011, that Coffey’s case differed from Appleton’s in point of the Virgin Islands government’s right to intervention. It didn’t, but Judge Holmes says it differs based on whether la famille Coffey were bona fide residents of the VI.

See my blogpost “The Non-Virgin Islanders”, 3/13/11, the tale of la famille Vento, whose plight was confirmed by Third Circuit earlier this year.

Judge Holmes, once again disdaining the partitive genitive: “A very considerable chunk of the stack of motion papers from the Coffeys, the Commissioner, the Government of the Virgin Islands, and a couple amici curiae is made up of arguments about whether the Coffeys fit within the exception of section 932(c) that would let them file with the Virgin Islands alone. That argument focuses on section 932(c)(4)–the Commissioner contends that 932(c) makes a taxpayer who fails to perfectly report her income tax liability or fully pay her income-tax bill or correctly conclude that she’s a bona fide Virgin Islands resident have to file with both the IRS and the Virgin Islands, just as she would if she wasn’t a Virgin Islander at all. Everybody else who filed papers disagrees with the Commissioner, and just over a month ago, so did we. In Appleton v. Commissioner, 140 T.C.__,__(slip op. at 31-32)(May 22, 2013), we held that although the Commissioner was correct in arguing that a taxpayer who doesn’t meet all the requirements of section 932(c)(4) ‘falls back into the Federal reporting and payment regime,’ that regime directs him to file his return with the Virgin Islands Bureau of Internal Revenue, not the IRS.

“There’s one big difference between Appleton and the Coffeys’ cases: Everyone agreed that Appleton was a bona fide Virgin Islands resident. That is not true here: The Commissioner specifically determined in the notice of deficiency that Judith Coffey was not a bona fide resident for the 2003 and 2004 tax year.” Order, at p. 2 (Footnote omitted, but it says that since Judy has the higher AGI, her residence is the one that counts for tax residence on a joint return).

Since the Form 1040 instructions for the years at issue told the Coffeys to file both with IRS and BIV if not bona fide VI residents, SOL hasn’t run against IRS if Judy wasn’t bona fide.

But bona fide depends, as Vento teaches us, upon an eleven-factor test, divided into four groups, which said groups are “taxpayer’s intent; taxpayer’s physical presence; taxpayer’s social, family, and professional relationships; and taxpayer’s own representations; see also Appleton, slip op. at 11 n.9 (citing Vento); cf Huff v. Commissioner, 135 T.C. 222, 227 n.1.” Order, at p. 3.

But neither the Coffeys nor IRS put anything about Judy’s bona fides in their moving papers. Now that’s not their fault, as they were fighting the Appleton battle before Appleton was decided, so they couldn’t know.

But since summary judgment, which is what the parties are asking for, is issue-finding and not issue-determination, there is a big materially-factual issue. Was Judy a bona fide VI resident during the years at issue? So it’s time for the drivers’ licenses, the library cards, the club memberships and all that jazz.

Mr Finet, please copy.

Some of us who were born in the first half of the last century of the previous millennium may remember reading of “the Regiment in ‘ollow square”  as the Rogues’ March was played and the soon-to-be dishonorably discharged were marched in to be degraded. And which of us can forget José Ferrer’s impassioned cries in the 1958 film classic “I Accuse!”, as “France degrades an innocent man!”?

Well, today Tax Court’s Committee on Admissions, Ethics, and Discipline suspends or disbars nine attorneys, all of them on reciprocals from Federal or State Courts.

And only one of them, a many-times-decreed vexatious litigant, proclaims his innocence, and it falls flat.

So there but for the grace of you-know-Whom go any of us. And may none of my readers ever hear the Rogues’ March played for them or any of their colleagues.

If you’re interested, here the link to these sad tales.

Or rather, closing the book on Securitas Holdings, Inc. and Subsidiaries, Docket No. 21206-10, this iteration filed 7/2/13, Judge Buch confirming the conclusion of STJ Lew (What a Great Name!) Carluzzo back on 5/29/13 that Securitas, for itself, its holdings and its subsidiaries, waived its Section 7525 privilege, and must lay down all its communications with its tax adviser.

For the run-up, see my blogpost “Privilege Lost”, 5/29/13.

STJ Lew was in only to decide the evidentiary question: were the documents privileged per Section 7525, and, if so, had Securitas waived the privilege by spilling some of the beans to the Illinois State Department of Insurance? STJ Lew said yes, you’ll recall, the documents were privileged but the Illinois letter waived subject matter privilege, that is, every document dealing with the subject matter was unprivileged.

Judge Buch gets the reconsideration motion because he’s going to try the main case later on this month.

Judge Buch: “Subject matter waiver occurs when a party discloses privileged information to its advantage, such that fairness dictates that other privileged information concerning the same subject matter should fairly be considered to place the disclosed information in context.” Order, at p. 1, footnote 2.

Securitas, obviously less than convulsed with delight at STJ Lew’s stripping of the veil over their hush-hush discussions with said adviser, moves for reconsideration.

They lose.

Securitas argues that FRE Section 502 would keep the documents privileged. No it wouldn’t, says Judge Buch, and anyway Securitas never raised Section 502 before, and reconsideration is not the place to argue what you should have argued before.

Section 502 only protects disclosures made in state proceedings. But the letter that made the disclosure wasn’t part of any proceeding, that is, “‘the regular and orderly progression of a lawsuit, including all acts and events between the time of commencement and the entry of judgment’. Black’s Law Dictionary 1324 (9th ed. 2009).” Order, at p. 6, footnote 12. The letter was part of an application required by Illinois law whether or not there was a proceeding.

Centaur, the Securitas subsidiary in question, was in a rehabilitation proceeding, a species of insolvency proceeding, but the letter would have had to have been written, proceeding or no proceeding, if Centaur wanted to do whatever it was asking Illinois for permission to do.

Frankly, I don’t think much of this argument. There was a proceeding, akin to a bankruptcy, and it involved rehabilitating Centaur. And even though the Committee report on Section 502 says it wasn’t intended to change settled law on waiver of privilege, it does speak to the waiver in the State proceeding context, so I suppose it merely repeats the settled law. Whether the letter would have been required without a proceeding is beside the point, as if there hadn’t been a proceeding there never would have been a letter.

Finally, Securitas claims STJ Lew didn’t have authority to render a “decision” per Section 7443A)(c), as Section 7443A(b)(7) only gives him the right to hear, not decide, a case other than those specifically listed in Section 7443A(b)(1) through (6), not the catch-all provision (7). And this is a (b)(7) case.

Judge Buch: “Securitas correctly observes that section 7443A(c) limits the authority of a special trial judge to make a decision of the court in matters assigned under section 7443A(b)(7); however, in this instance, Special Trial Judge Carluzzo did not make a ‘decision’ as that term is used in section 7443A.

“In the Tax Court, ‘decision’ is a term of art. In a deficiency proceeding such as this, the ‘decision’ is the document that is entered showing the amount of the deficiency (if any) that the Court has determined. Special Trial Judge Carluzzo issued an interlocutory order, not a decision.” Order, p. 7.

And Securitas’ argument that Rule 183, which applies to cases “tried” by an STJ, wasn’t followed is irrelevant. There was no “trial”; there was a hearing on a motion.

Securitas loses. But if I were them, and if an appeal is possible, I’d appeal.

As always, I welcome comments from practitioners.

One of the most often requested (if not the most often requested) relief in a CDP is to contest the underlying tax liability. Taxpayers’ batting averages in Tax Court are far from encouraging in that respect.

Most often the response from Tax Court is “you didn’t petition the SNOD.” And where the amount sought to be collected comes straight from the taxpayer’s own return, the response is “you said it and you’re stuck with it.”

But here’s one where the taxpayer said it, and gets a chance to contest it. It’s George H. & Felomina F. Patton, Docket No. 16365-12L, filed 7/1/13, another Judge Laro off-the-bencher.

I am indebted to Judge Laro for printing the transcripts of the off-the-benchers. I know you can’t cite them and they aren’t precedent, but they offer a valuable insight into what Tax Court Judges think.

Anyway, George & Felomina filed their returns for the years at issue, but didn’t pay the taxes shown. IRS filed an NFTL, and George & Felomina asked for a CDP.

Here’s George’s story, in his own words, as told to Judge Laro: “I am 67 yrs. In August 2011, permanently disabled public safety officer since 1984 living on pension. paid medical insurance since retired not given credit for. Spouse paid withholding not given credit for. Government placed us in a hardship condition with its continuous trespass with water on our commercial property. it destroyed our tax record and made us unable to ascertain our deductions and correct amount of tax. File states abatement being considered. (emphasis added). “Decision, at p. 5.

George & Felomina claimed the NFTL should be withdrawn because “Responsible [sic] for correct amount of tax never ascertained.”  Decision, at p. 5.

George & Felomina got their CDP, but “(T)he settlement officer’s Case Activity Record, which would contain the settlement officer’s notes of what transpired during the CDP hearing, is not part of the record.” Decision, at p. 5. Of course, this is a motion  for summary judgment, so IRS claims George and Felomina never gave the SO the financial information requested until after the CDP, but when the SO tried to contact them with an installment offer, they didn’t respond.

Thus IRS’ position is the usual: they had their chance and they blew it, so abuse-of-discretion is the only thing to decide.

Judge Laro: “Contrary to respondent’s assertion, petitioners contested their underlying liabilities in their CDP request. The CDP request clearly stated that petitioners believed they were not given credits or deductions for certain tax withholdings and medical payments. The CDP request also claimed that petitioners’ tax records were destroyed by the ‘continuous trespass with water’, preventing petitioners from ascertaining their deductions and correct amount of tax. These statements together clearly show that petitioners believed the tax liabilities that they reported on their returns to be incorrect. Because ‘underlying tax liability’ referred to in section 6330 (c) (2) (B) encompasses self-assessed tax liability, petitioners were entitled to challenge the liabilities underlying respondent’s NFTL even though they had reported them on their own returns. Montgomery v. Commissioner, 122 T.C. 1, 7-8 (2004).

“Even when a taxpayer has made the underlying liability an issue in his CDP request, he is deemed to have abandoned the claim if he fails to pursue it in his CDP hearing. Schwartz v.  Commissioner, T.C. M:emo. 2008-117, 95 T.C.M. (CCH) 1427, 1430 n.9, aff’d, 348 Fed. Appx. 806 (3d. Cir., 2009). Here, respondent has failed to submit the Case Activity Record as an exhibit to his motion. This is problematic because the Case Activity Record would have allowed us to determine whether petitioners pursued the liability issue and presented evidence to support their claim during their CDP hearing. Viewing the facts in the light most favorable to petitioners as the nonmoving party here, we conclude petitioners properly raised the issue at their CDP hearing.”  Decision, at pp. 8-9.

Looks good for George & Felomina, right? Not quite.

They were late with their financial information and didn’t get back to the SO to discuss collection alternatives. So IRS wasn’t wrong when they refused to consider removing the NFTL or giving George & Felomina any collection alternatives. Those are off the table.

So, George & Felomina, it’s all about liability.