Costa Rica 1A, Cayman 1B

Remembering the words of the late California Congressman Sonny Bono’s 1967 hit, Treasury works through the Thanksgiving holiday to spread the FATCA web farther and deeper.

Treasury announced that two havens have come into the fold. Costa Rica and Treasury will share information, while the Cayman Islands FFIs will provide info to Treasury.

Moreover, the Cayman-Treasury Tax Information Exchange Agreement of 2001 has been superseded by a new and improved model.

Meanwhile, Treasury claims 16 agreements “in substance” (the devil being you-know-where) have been reached. More to follow.

And the beat goes on.

I’m a fan of notices to admit; they can narrow issues, save trial time, and make one’s adversary think twice before advancing a doubtful claim.

But the very liberality which Tax Court accords to Rule 90 Requests for Admission (the Tax Court equivalent of our State Court notices) can create a trap for the requester. It’s too easy to try to prove your case that way, and in doing so, go a bridge too far and get a judicial slap.

An IRS attorney is the recipient of such a slap in Jody J. Cavis, Docket No. 1111-13S, filed 11/29/13.

Now both FRCP 36 and Rule 90 provide that merely because a requested admission presents a genuine issue for trial, the recipient of the request cannot object and refuse to respond. Maybe the response can obviate the need for a trial, or at least narrow what has to be tried.

But there are limits, and here The Judge With a Heart, STJ Armen, sets them down:

“Upon review, the Court regards the Request For Admissions as inappropriate, if not abusive, and shall therefore relieve petitioner of the obligation to respond to it.

“Respondent’s [IRS’] aforementioned Request For Admissions consists of 3 numbered paragraphs. The first numbered paragraph is a venue statement, but venue is already established by the Petition filed January 14, 2013. The second numbered paragraph incorporates a copy of the December 12, 2012 notice of deficiency from which petitioner appealed to this Court, but a copy of such notice is already in the record by virtue of the parties’ pleadings. The third numbered paragraph represents a conclusory statement that seeks petitioner’s concession of the sole substantive issue in this case, an issue that petitioner clearly raises in paragraphs 5 and 6 of the Petition filed January 14, 2013.” Order, at p. 1.

So, on his own motion, Judge Armen tosses IRS’ request and tells Jody to forget about it.

Takeaway- You can try to get your adversary to admit ultimate facts, if you use a certain amount of subtlety; but a frontal assault will only get you STJ Armen’s response: “Don’t ask.”

Best holiday wishes to all.

 So many questions, and so little time. Alas, we now have one more unanswered question, the impact of the immigration status of Lee Ang on his Tax Court Section 6330 review. See my blogpost “Angst”, 11/4/13, to which one styling him/herself “Lee” responded “wheres the answer??”

I of course replied “Ask Judge Laro. I haven’t got a clue.”

Well, Lee’s inquiry and my reply will have to remain buried among the mysteries of Tax Court, as Judge Laro’s pen apparently is sealed.

Judge Laro issues an order in Lee Ang, Docket No. 13309-12L, filed 11/26/13,  presumably after receiving the briefs (or the concessions) described in my blogpost aforesaid, in which he orders that the “parties shall by December 9, 2013, file with the Court a memorandum briefing the following issues:

“(1) On what date did the IRS provide petitioner with a written statement of the jeopardy levy, as required by section 7429(a)(1)(B); and,

“ (2) Whether petitioner’s letter dated September 20, 2011, entitled ‘Request for Administrative Relief of Jeopardy Levy’, is a proper request for administrative review of the jeopardy levy pursuant to section 7429(a)(2).” Order, at pp. 1-2.

Nothing about alien status or its impact on Tax Court litigation. Sorry Lee, in the immortal words of Robert Allen Zimmerman’s Number 14 all-time greatest hit “The answer, my friend, is blowin’ in the wind.”

Incidentally, Judge Laro finds enough fact questions to blow off IRS’ motion for summary judgment.

And IRS (and you practitioners out there) should remember that per Rule 50(a), if you want Tax Court to help you, make a motion, don’t send billets doux.

For more to that effect, see Gregory Lane Hartwell & Sharon Marlene Shiller Hartwell, Docket No. 19383-12, filed 11/26/13, wherein that Obliging Judge David Gustafson points out in a designated hitter: “The recent filing [a status report seeking a 30-day break to file decision documents] should have been a motion-not only because the rule requires it, but also because (a) the Court’s docketing system enables it to track “Motions” (to ensure that they are acted on), whereas a request in a report may fall between the cracks, and (b) where the Court is inclined to grant a request for relief, it can do so very easily where a motion is filed by simply stamping the  motion ‘Granted’, whereas respondent’s recent filing requires the Court to prepare a separate order. We do so, but would appreciate respondent’s future compliance with Rule 50(a).” Order, at p. 1.

It was an IRS lawyer who didn’t read the rules, not a pro se who might be forgiven.

The Judge Who Writes Like A Human Being, a/k/a The Great Dissenter, Mark V. Holmes, is a great fan of the remand to Appeals. See my blogpost “Back To The Future”, 8/1/11; although IRS isn’t happy with Judge Holmes’ liberal views. See my blogpost “Demand For Remand”, 12/3/12.

But that inveterate tax dodger William B. Meyer gets some judicial largesse from Judge Holmes in 2013 T. C. Memo. 268, filed 11/25/13.

Bill got nailed twice for frivolous filings, each time to the tune of $15K. Judge Holmes: “But for his 2000 tax year, Meyer decided not to file a return at all. Meyer told us at trial that he would not file a 2000 tax return unless he had a notice of deficiency and accompanying papers ‘to work from,’ because his records were ‘chaotic at best.’ The Commissioner believes Meyer earned more than more than $1 million in taxable income for 2000.” 2013 T. C. Memo. 268, at p. 2.

IRS gave Bill a SFR and a SNOD. But the USPS Form 3877 attesting to the certified mailing of the SNOD is dubious, and the SNOD itself is nowhere to be found. At least, not yet.

Bill never petitions the SNOD (which he claims he never got), but does petition the levy notice. Those things generally attract the notice even of persons whose view of the Code is somewhat casual.

The AO ordered a Form 4340 Certificate of Assessments, Payments And Other Specified Matters, but never finds the SNOD. “The Form 4340 had an entry which indicated that a $465,390 tax had been ‘assessed by examination’ and that there was an ‘audit deficiency per default of 90 day letter.’ Although that form apparently satisfied the Appeals Officer that a notice of deficiency existed, he was unable to find a copy of the notice before the CDP hearing.” 2013 T. C. Memo. 268, at p. 4.

When the AO asked Bill at the face-to-face CDP if there were any irregularities in the procedures IRS used, Bill said IRS never gave him a copy of the SNOD, even though he repeatedly asked and even filed a Freedom of Information request to get it.

“The Appeals officer was clearly aware that if he did not get verification that the Commissioner properly mailed a notice of deficiency to Meyer’s last known address, the assessment would be invalid; he wrote in his case activity record, ‘it is potentially possible that account will have to be abated & a new SNOD issued.’” 2013 T. C. Memo. 268, at p. 5.

Leaving out the tautological locution “potentially possible”, there’s a problem here. No SNOD, no mailing, no deficiency, no case.

The AO let Bill dispute his liability, but closes the case based on the dubious 3877 (the details of which you can read for yourself: a doubtful postmark, an illegible signature, and no number of items mailed filled in), that Bill discussed no collection alternatives (and couldn’t avail himself of any, as he hadn’t paid subsequent years’ taxes), and that the Form 4340 was close enough for jazz.

No, says Judge Holmes. While the Form 4340 is presumptive evidence, the taxpayer can identify any irregularity. Unless taxpayer does so, the Form 4340 is sufficient.

“Here, however, Meyer plainly did identify an irregularity in the assessment procedure–he argued that he never received the notice of deficiency. See Hoyle v. Commissioner, 131 T.C. at 205 n.7 (‘[W]here a taxpayer alleges no notice of deficiency was mailed he has * * * “[identified] an irregularity”, thereby requiring the Appeals officer to do more than consult the computerized records’ (quoting Chief Counsel Notice CC-2006-19 (Aug. 18, 2006))). Thus, the Appeals officer could not rely on ‘computerized records’ like the Form 4340. Instead, we have said that ‘[t]he Appeals officer may be required “to examine underlying documents in addition to the tax transcripts, such as the taxpayer’s return, a copy of the notice of deficiency, and the certified mailing list.’” Id. (quoting Chief Counsel Notice CC-2006-19). Therefore, the Appeals officer had a duty to dig deeper; at the very least, he had to examine other evidence to verify that the notice was properly mailed.” 2013 T. C. Memo. 268, at pp. 15-16. (Footnotes omitted, but read them: Judge Holmes’ best lines are in the footnotes).

And here’s the gist of one omitted footnote. “The Commissioner argues that Meyer disputed only his receipt of the notice of deficiency, and not its existence, during the CDP hearing. Thus, says the Commissioner, since the challenge to the existence of the notice is not part of the administrative record, it was never in dispute before the Appeals officer and we should not consider it. We think that’s splitting hairs a bit too fine–especially in a pro se setting. As an initial matter, we think Meyer did put the existence of the notice at issue at the CDP hearing. The declaration he gave to the Appeals officer at the CDP hearing says not only that he didn’t receive a notice of deficiency, but also that he had been unable to obtain a copy from the IRS after several requests. And that was on top of the fact that the Appeals officer himself was unable to find a copy of it. Even if Meyer’s declaration didn’t say the magic word ‘existence’, we have indicated that challenging receipt is also a challenge to a notice’s existence.” 2013 T. C. Memo. 268, at p. 15, footnote 10.

But is the dicey USPS Form 3877 a stronger a ledge for IRS to stand on? Even though this is a CDP and not a deficiency case, deficiency case principles rule.

“In deficiency cases, we have acknowledged that a failure to precisely comply with the Form 3877 mailing procedures may not be fatal if the Commissioner can come forward with other evidence that the mailing procedures were followed. See Clough, 119 T.C. at 188; Coleman, 94 T.C. at 91-92. Likewise, in a CDP case we want to stress that an Appeals Officer’s reliance on a defective Form 3877 to verify that the IRS had fulfilled its requirements to mail out a notice of deficiency is not an abuse of discretion per se–if the administrative record shows that he relied on other evidence that corrects or explains the defects, he could meet his verification obligation regarding the mailing issue.” 2013 T. C. Memo. 268, at pp. 25-26.

Except the AO didn’t. “The Appeals officer could’ve sought a declaration or some other kind of verification from an IRS employee involved in preparing the Form 3877 (or, if there was one, the USPS employee signing off on that form)…or obtained other habit or documentary evidence…to verify proper mailing. The administrative record, however, doesn’t indicate he sought any of these alternatives.” 2013 T. C. Memo. 268, at pp. 26-27. (Citations omitted).

And the administrative record is what governs here, where Ninth Circuit is the forum for appeals.

So does Judge Holmes toss IRS or send the case back to Appeals?

It’s close call, but Judge Holmes remands. Several Tax Court opinions came down between the CDP and the Tax Court trial, which the AO couldn’t have known about, showing what he should have done. So the case goes back to Appeals, not merely on the present administrative record but to complete it.

Especially to come up with the SNOD and proof that it was properly mailed.

Takeaway- If you dispute receipt, dispute existence (unless, of course, the SNOD is attached to the IRS’ answer).

Just when my intrepid band of readers thought they had finished the slog through The Great Uncoupling of understatement and deficiency, more particularly bounded and described in my blogpost “The Rebate Debate – Part Deux”, 11/18/13, comes now Judge Gale, who upsets a stipulated decision document because of the fallout from Rand v. Com’r., 141 T. C. 12, filed 11/18/13.

You can read all about it in Rivka Faecher, Docket No. 16049-12, filed 11/22/13.

Riv, like Yitz and Shul in the Rand case, got aggressive with the Additional Child Tax Credit (also known as a rebate) for a couple of years, and folded when IRS called her out.

So she and IRS stipulated to entry of decision (that’s what most lawyers would call a “judgment”, stating who owes who what), with understatement penalties computed pre-Rand, that is, with understatements based on the rebates taking Riv’s deficiencies below zero, so the 20% chop was applied to the negative numbers.

Judge Gale says no, it’s true y’all did your numbers pre-Rand, but post-Rand they don’t fly, and the understatements and penalties associated therewith should all be zero.

So he tells IRS: “Because the stipulated decision was executed by the parties before the Court issued its opinion in Rand, the Court is concerned that imposition of penalties in this case may not be appropriate. If the understatements for the years in issue were computed in accordance with Rand, they–and the resulting accuracy-related penalties–would all be $0.” Order, at p. 2.

Under Section 7491(c), IRS has the burden of coming forward with evidence to support the imposition of the penalty.

So IRS can either concede the understatement penalties and treat the stipulated decision document as settling everything else, or else can show cause why IRS has come forward with evidence sufficient to impose the penalties (notwithstanding they just lost the Rand case).

 Nothing exciting out of Tax Court today, 11/21, but there is one useful item for the lawyers out there.

If you’re looking to craft a heavy-duty motion for a protective order, cast your eyes over Judge Lauber’s eleven-page magnum opus in Amazon.Com, Inc.  & Subsidiaries, Docket No. 31197-12, filed 11/21/13.

As one would expect, Amazon.Com, Inc. has the first team on the field for this one. I count eight lawyers on the roster so far, doubtless with the meters merrily ticking away.

I’m sure my wife’s Amazon Prime account is safe.

Just signing a contract isn’t enough. That’s Judge Marvel’s word to VECO Corporation and Subsidiaries, 141 T. C. 14, filed 11/20/13.

VECO and its bushelbasketful of subsidiaries echo the Beach Boys’ 1964 hit: they get around. From Wyoming to Alaska to Colorado to Washington, VECO was busy with “oil and gas field services, newspaper publishing, manufacturing, construction, equipment rental, wholesale sales, leasing, and engineering.” 141 T. C. 14, at p. 5, and entered into numerous contracts in furtherance of all the foregoing, as the expensive lawyers say.

VECO’s tax problem? They want to shunt the tax incidents of their 2006 contracting into 2005. So VECO attaches to their 2005 return Form 3115, Application for Change in Accounting Method, for their 2005 tax year, requesting an accounting method change pursuant to Rev. Proc. 2005-9, 2005-1 C.B. 303.

Rev. Proc. 2005-9 provides an automatic change of accounting method for the second tax year following 2003, which just happens to be 2005. Except IRS says no.

VECO of course is an accrual basis taxpayer. So it’s “all events”, reasonably ascertainable amount, and economic performance.

Just signing a contract isn’t enough, though. Judge Marvel: “The execution of a contract contemplating payment, without more, is not an event that fixes the payor’s liability. See Spencer, White & Prentis v. Commissioner, 144 F.2d 45, 47 (2d Cir. 1944) (‘It is well settled that deductions may only be taken for the year in which the taxpayer’s liability to pay becomes definite and certain, even though the transactions (such as the contract in the present case) which occasioned the liability, may have taken place in an earlier year.’). In particular, where a contract ‘contains mutually dependent promises, liability under it is contingent upon performance or tendered performance’, and is not fixed by merely entering into the contract. Levin v. Commissioner, 219 F.2d 588, 589 (3d Cir. 1955), aff’g 21 T.C. 996 (1954); see also Gulf Oil Corp. v. Commissioner, 914 F.2d 396, 409 (3d Cir. 1990) (‘Unconditional liability under an executory contract is not created until at least one party performs.’), aff’g 86 T.C. 115 (1986).” 141 T. C. 14, at p. 37.

In simple English, an agreement that you’ll do this if I do that doesn’t establish liability for accrual purposes unless one of us does something.

And the three-and-a-half month test doesn’t help VECO. Forgot the three-and-a half-month test? See my blogpost “Drill, Baby, Drill”, 1/12/12. No way could the contemplated performances be completed within three-and-a-half months after the end of VECO’s tax year.

Finally, VECO wants the recurring item treatment. Now watch this closely:

“Under the recurring item exception, a taxpayer may treat an item as incurred during any taxable year if:

(i)            the all events test with respect to such item is met during such taxable year (determined without regard to * * * [section 461(h)(1)]),

(ii)            economic performance with respect to such item occurs within the shorter of–

(I)            a reasonable period after the close of such taxable year, or

(II)            8 1/2 months after the close of such taxable year,

(iii)            such item is recurring in nature and the taxpayer consistently treats items of such kind as incurred in the taxable year in which the requirements of clause (i) are met, and

(iv) either–

(I)            such item is not a material item, or

(II)            the accrual of such item in the taxable year in which the requirements of clause (i) are met results in a more proper match against income than accruing such item in the taxable year in which economic performance occurs.” 141 T. C. 14, at p. 53.

You can accrue a recurring item. But VECO can’t, because they flunk economic performance on a lot of their deductions, and materiality, as determined under GAAP, goes against them.

Here’s FASB’s take: materiality is “ ‘[t]he magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.’ Statement of Financial Accounting Concepts No. 2, “Qualitative Characteristics of Accounting Information” (1980) (SFAC No. 2).” 141 T. C. 14, at p. 55, footnote 53.

Taishoff’s Rule of Footnotes: when there are almost as many footnotes as pages, or more footnotes than pages, someone is in trouble.

Of course, everything is material. VECO was inconsistent in reporting for financial and for tax purposes, and that makes whatever it is material, regardless of size.

I think I deserve at least a small kudo for not referring to Otis Blackwell’s fifth best song of 1956 and 92nd on the all-time list.

The latest issue of our State’s Bar Association Journal carried a story with the fetching title “Jackson Estate Says, ‘Beat It, IRS’.”

I fired off a letter to the editor, but my e-mails kept bouncing because the e-address given is inactive.

So I posted this to the Association’s LinkedIn page. And if that doesn’t give it sufficient publicity, here it is again.

Sir, Robert W. Wood, Esq., is rather more sanguine than I about the outcome in Estate of Michael J. Jackson, Deceased, John G. Branca, Co-Executor and John McClain, Co-Executor v. Com’r., Docket No. 017152-13, in his article “Jackson Estate Says ‘Beat It, IRS’.”, Nov/Dec 2013.

While I haven’t any hard statistical evidence to give independent support to this conclusion, I must agree with James Edward Maule, who stated the case almost 15 years ago in Instant Replay, Weak Teams, and Disputed Calls: An Empirical Study of Alleged Tax Court Judge Bias, 66 Tenn. L. Rev. 351, 353, 401 (1999). According to Mr. Maule, the IRS rarely loses in Tax Court, opinions are rarely appealed (in Tax Court, an opinion states the law, or what non-Tax Court practitioners would call a decision; a Tax Court decision fixes the amount of tax due, if any, or what the non-Tax Court practitioner would call a judgment), and even if appealed, are rarely overturned in the Circuit Courts of Appeal.

Few courts see more valuation cases than Tax Court. And the sums involved run into the hundreds of millions. See, for example, Eaton Corporation (transfer pricing; arms’-length valuation), 140 T. C. 18, 6/25/13 ($368 million, plus interest); and the plethora of façade easement cases (e.g., Dunlap; Scheidelman; Gorra). Although Second Circuit did overturn Scheidelman I, taxpayer lost in Scheidelman II.

And of course a case that settled, but excited considerable interest in the art world, Estate of Ileana Sonnabend, Docket No. 649-12, which settled a $65 million deficiency for $1.3 million, the case of the prohibited eagle. There the issue for trial would have been the worth of a work of art that could not be sold, bartered or exchanged without incurring criminal penalties.

Moreover, Tax Court is no stranger to valuing a person’s image. See Retief Goosen, 137 T. C. 1, 6/9/11; cf. Sergio Garcia, 140 T. C. 6, filed 3/14/13. Garcia is interesting for its contrast with Goosen, a “global icon” as contrasted with a “brand image”.

I will await the outcome of Jackson with interest, but much less certainty than Mr. Woods’ article suggests.

The cases cited can all be found on the Tax Court website, www.ustaxcourt.gov. Use either the link for Opinion Search or Docket Search. Tax Court’s website is user-friendly.

But while it’s still legal, you might as well tax it.  New York State, which at one time billed itself as The State That Has Everything, certainly has taxes.

And echoing King George III, specifically 5 George III, c. 12, 1765, New York State has a stamp tax, this one on cigarettes. Each package of the weed must bear the colophon of the Empire State, thereby verifying that the contents have been duly subjected thereto.

Comes now City Line Candy & Tobacco Corp., 141 T. C. 13, filed 11/19/13, a stamper. City Line buys the stamps from the State (or from New York City), buys packages of cigarettes in enormous bulk, affixes the stamps to the packages, and sells them to subjobbers, licensed retailers and vending machine operators.

Of course, the price paid by the subjobbers and others includes the stamp tax. And while the consumer ultimately pays the price, the stamper is in some sense responsible for the tax.

City Line is a licensed reseller, and thereby hangs the tale. City Line wants to be a small reseller, so as to avail itself of the Section 263A(b)(2)(B) exemption from the Section 263A UNICAP rules. To do so, City Line must show gross receipts less than $10 million.

But should the stamp tax amounts included in the price City Line receives be part of gross proceeds?

It falls to Judge Marvel to smoke out (sorry guys) the answer. And it doesn’t help City Line; they must capitalize the cost of the stamps, and include any leftovers in year-end inventory. And that kicks them over the $10 million barrier.

City Line’s problem: “For all relevant years petitioner used the accrual method of accounting for income and expenses and the first-in, first-out method of accounting for inventory. Petitioner did not introduce its financial statements for each of the relevant years into evidence. However, the profit and loss statement for 2004 that is in the record confirms that for financial statement purposes petitioner calculated its gross receipts from cigarette sales by totaling the gross sale prices of cigarettes sold without any reduction for the cost of the cigarette tax stamps that was included in the sale prices.” 141 T. C. 13, at pp. 5-6.

And of course, one of City Line’s witnesses drives the nail in even deeper: “Mr. Kun Sang Ruy, one of petitioner’s shareholders, testified that the amount reported as gross receipts on its tax returns reflected a ‘net’ amount.” 141 T. C. 13, at pp. 18-19.

There’s much accounting byplay, involving storage and handling costs as against administrative costs, and cost absorption ratio. And discussion about the deductibility of the stamps, but that’s not gross proceeds, that’s net taxable income.

Bottom line: “For tax and financial accounting purposes a taxpayer must first calculate total sales revenue determined in accordance with its method of accounting. For financial accounting purposes petitioner did just that. For income tax reporting purposes, however, petitioner reduced its total gross receipts from cigarette sales by the cost of the cigarette tax stamps it purchased during the taxable year to arrive at a gross receipts figure that was substantially lower than the figure used for financial accounting purposes.” 141 T. C. 13, at p. 19.

You gotta tell the same story. Or your case goes up in smoke (sorry, guys).